For the transition period from to
Commission File NumberNo. 000-20501
AXA EQUITABLE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
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| New York | | 13-5570651 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| 1290 Avenue of the Americas, New York, New York | | 10104 |
| (Address of principal executive offices) | | (Zip Code) |
(212) 554-1234
(Registrant’s telephone number, including area code (212) 554-1234code)
Securities registered pursuant to Section 12(b) of the Act: None
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Title of each class | | Name of each exchange on
which registered
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None | | None |
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ¨No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨No x
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes xNo ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes xNo ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.company or an “emerging growth company”. See definitionsdefinition of “accelerated filer,” “large accelerated filer,” accelerated filer”“smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Non-accelerated filer | x (do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| Emerging growth company | ¨ | | |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ Yes¨ No x
No voting or non-voting common equity of the registrant is held by non-affiliates of the registrant as of June 30, 2016.
As of March 24, 2017,28, 2019, 2,000,000 shares of the registrant’s $1.25 par value Common Stock were outstanding.outstanding, all of which were owned indirectly by AXA Equitable Holdings, Inc.
REDUCED DISCLOSURE FORMAT
AXA Equitable Life Insurance Company meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE:REFERENCE
Portions of AllianceBernstein L.P.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 are incorporated by reference into Part I hereof.None.
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Part I | | Page |
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Item 7A. | | |
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Part IV | | |
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Item 15. | | |
Item 16. | | |
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FORWARD-LOOKING STATEMENTS
Certain of the statements included or incorporated by reference in this Annual Report on Form 10-K including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,“intends,” “seeks,” “aims,” “plans,” “assumes,” “estimates,” “projects,” “intends,“should,” “should,“would,” “could,” “may,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon AXA Equitable Life Insurance Company and its subsidiaries (“AXA Equitable”). and its consolidated subsidiaries. “We,” “us” and “our” refer to AXA Equitable and its consolidated subsidiaries, unless the context refers only to AXA Equitable as a corporate entity. There can be no assurance that future developments affecting AXA Equitable will be those anticipated by management. Forward-looking statements include, without limitation, all matters that are not historical facts.
These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (i) difficult conditions in the global capitalfinancial markets and economy; (ii)economy, including equity market declines and volatility, causing, among other things, a reduction in the demand for our products, a reduction in the revenue derived from asset-based fees, a reduction in the value of securities held for investment, including the investment in AllianceBernstein L.P. (“AB”), an acceleration in deferred acquisition cost amortization and an increase in the liabilities related to annuity contracts offering enhanced guarantee features, which may lead to changes in the fair value of our guaranteed minimum income benefit reinsurance contracts, causing our earnings to be volatile; (iii) interest rate fluctuations and changes in liquidity and access to and cost of capital; (ii) operational factors, remediation of our material weaknesses, indebtedness, elements of our business strategy not being effective in accomplishing our objectives, protection of confidential customer information or prolonged periodsproprietary business information, information systems failing or being compromised and strong industry competition; (iii) credit, counterparties and investments, including counterparty default on derivative contracts, failure of low interest rates causing, among other things, a reduction in our portfolio earnings, a reduction in the marginsfinancial institutions, defaults, errors or omissions by third parties and affiliates and gross unrealized losses on interest sensitive annuityfixed maturity and life insurance contracts and an increase in the reserve requirements for such products, and a reduction in the demand for the types of products we offer;equity securities; (iv) ineffectiveness of our reinsurance and hedging programs to protect against the full extentprograms; (v) our products, structure and product distribution, including variable annuity guaranteed benefits features within certain of the exposure or loss we seek to mitigate; (v) changesour products, complex regulation and administration of our products, variations in policyholder assumptions, the performance of AXA RE Arizona Company (“AXA Arizona”) hedge program, its liquidity needs and changes in regulatory requirements could adversely impact our reinsurance arrangements with AXA Arizona; (vi) regulatory or legislative changes, including government actions in response to the stress experienced by the global financial markets; (vii) changes to statutory capital requirements; (viii) our requirements, to pledge collateral or make payments related to declines in estimated fair value of certain assets may impact our liquidity or expose us to counterparty credit risk; (ix) counterparty non-performance; (x) changes in statutory reserve requirements; (xi) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates or market returnsfinancial strength and the assumptions used in pricing products, establishing liabilitiesclaims-paying ratings and reserves or for other purposes; (xii) changes in assumptions related to deferred policy acquisition costs; (xiii) our use of numerous financial models, which rely onkey product distribution relationships; (vi) estimates, assumptions and projections that are inherently uncertain and involve the exercise of significant judgment; (xiv) market conditions could adversely affect our goodwill; (xv) investment losses and defaults, and changes to investment valuations; (xvi) liquidity of certain investments; (xvii) changes in claims-paying or credit ratings; (xviii) adverse determinations in litigation or regulatory matters; (xix) changes in tax law or interpretation thereof; (xx) heightened competition,valuations, including with respect to pricing, entry of new competitors, consolidation of distributors, the development of new products by new and existing competitors and personnel; (xxi) our inability to recruit, motivate and retain experienced and productive financial professionals and key employees and the ability of our financial professionals to sell competitors’ products; (xxii) changes in accounting standards, practices and/or policies; (xxiii) our computer systems failing or their security being compromised; (xxiv) the effects of business disruption or economic contraction due to terrorism, other hostilities, pandemics, or natural or man-made catastrophes; (xxv) ineffectiveness of risk management policies and procedures, in identifying, monitoringpotential inadequacy of reserves, actual mortality, longevity and managing risks; (xxvi) the perceptionmorbidity experience differing from pricing expectations or reserves, amortization of deferred acquisition costs and financial models; (vii) legal and regulatory risks, including federal and state legislation affecting financial institutions, insurance regulation and tax reform; and (viii) risks related to our brandseparation and reputation in the marketplace; (xxvii) the impactrebranding.
You should read this Annual Report on our business resulting from changes in the demographics of our client base, as baby-boomers move from the asset-accumulation to the asset-distribution stage of life; (xxviii) the impact of acquisitionsForm 10-K completely and divestitures, restructurings, product withdrawals and other unusual items, including our ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions; (xxix) significant changes in securities market valuations affecting fee income, poor investment performance resulting in a loss of clients or other factors affecting the performance of AB; and (xxx) other risks and uncertainties described from time to time in AXA Equitable’s filings with the United States Securitiesunderstanding that actual future results may be materially different from expectations. All forward-looking statements made in this Annual Report on Form 10-K are qualified by these cautionary statements. Further, any forward-looking statement speaks only as of the date on which it is made, and Exchange Commission.
AXA Equitable does not intend, and is underwe undertake no obligation to update or revise any particular forward-looking statement includedto reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by law.
Other risks, uncertainties and factors, including those discussed under “Risk Factors,” could cause our actual results to differ materially from those projected in any forward-looking statements we make. Readers should read carefully the factors described in “Risk Factors” to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.
CERTAIN IMPORTANT TERMS
As used in this document. See “Risk Factors” included elsewhere herein for discussionForm 10-K, the term “AXA Equitable” refers to AXA Equitable Life Insurance Company, a New York stock life insurance corporation established in 1859. “We,” “our,” “us” and the “Company” refer to AXA Equitable and its consolidated subsidiaries, unless the context refers only to AXA Equitable. The term “Holdings” refers to AXA Equitable Holdings, Inc., a Delaware corporation. The term “AXA Distributors” refers to our subsidiary, AXA Distributors, LLC, a Delaware limited liability company, “AXA Advisors” refers to our affiliate, AXA Advisors, LLC, a Delaware limited liability company, “AXA Network” refers to our affiliate, AXA Network, LLC, a Delaware limited liability company and its subsidiary, “AXA Equitable FMG” refers to our subsidiary, AXA Equitable Funds Management Group, LLC, a Delaware limited liability company, “AXA RE Arizona” refers to our affiliate, AXA RE Arizona Company, an Arizona corporation, and “EQ AZ Life Re” refers to our affiliate, EQ AZ Life Re Company, an Arizona corporation. The term “MONY America” refers to our affiliate, MONY Life Insurance Company of America, an Arizona life insurance corporation and wholly owned subsidiary of Holdings. The term “AXA” refers to AXA S.A., a société anonyme organized under the laws of France. The term “General Account” refers to the assets held in the general account of AXA Equitable and all of the investment assets held in certain risks relatingof AXA Equitable’s separate accounts on which AXA Equitable bears the investment risk. The term “Separate Accounts” refers to its businesses.
the separate account investment assets of AXA Equitable excluding the assets held in those separate accounts on which AXA Equitable bears the investment risk.
Part I, Item 1.
BUSINESS1
GENERAL
AXA Equitable, established in the State of New York in 1859, is among the largest life insurance companies in the United States. We are partone of a diversifiedAmerica’s leading financial services organization offering a broad spectrum of insurance, financial advisorycompanies, providing advice and investment management productssolutions for helping Americans set and services. Together with our subsidiaries, including AB, we are a leading asset manager, with total assets under management of approximately $582.7 billion at December 31, 2016, of which approximately $480.2 billion were managed by AB. meet their retirement goals and protect and transfer their wealth across generations.
We are an indirect, wholly-owned subsidiary of Holdings. On May 14, 2018, Holdings completed the initial public offering (“Holdings IPO”) in which AXA sold shares of Holdings common stock to the public. On March 25, 2019, AXA completed a follow-on secondary offering of 46 million shares of common stock of Holdings and the sale to Holdings of 30 million shares common stock. Following the completion of this secondary offering and the share buyback by Holdings, AXA owns 48.3% of the shares of common stock of Holdings. As a result, Holdings is no longer a “controlled company” within the meaning of the corporate governance standards of the NYSE and is no longer a majority owned subsidiary of AXA.
RECENT DEVELOPMENTS
AllianceBernstein Transfer
In December 2018, we entered into a series of transactions whereby we transferred our ownership interests in AllianceBernstein L.P. (“ABLP”), AllianceBernstein Holding L.P. (“AB Holding” and together with ABLP, “AB”) and AllianceBernstein Corporation to a wholly-owned subsidiary of Holdings. For additional information, see Note 19 of the Notes to the Consolidated Financial Statements.
As a result of these transactions, we now operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources.
GMxB Unwind
In April 2018, we completed an unwind of the reinsurance provided to the Company by AXA RE Arizona for certain variable annuities with GMxB features (the “GMxB Unwind”). Accordingly, all business previously reinsured to AXA RE Arizona, with the exception of variable annuities with GMxB riders issued on or after January 1, 2006 and in-force on September 30, 2008 (the “GMxB business”), was novated to EQ AZ Life Re, a newly formed captive insurance company organized under the laws of Arizona, which is an indirect wholly-ownedwholly owned subsidiary of AXA. For additional information regardingHoldings. Following the novation of this business to EQ AZ Life Re, AXA see “Business - Parent Company.”
RE Arizona was merged with and into AXA Equitable. Following AXA RE Arizona’s merger with and into AXA Equitable, the GMxB business is not subject to any new internal or third-party reinsurance arrangements, though in the future AXA Equitable may reinsure the GMxB Business with third parties. See “Products — Individual Variable Annuities — Risk Management — Reinsurance — Captive Reinsurance” and Note 12 of the Notes to the Consolidated Financial Statements for further details of the GMxB Unwind.
SEGMENT INFORMATION
We conduct our operations in two business segments, the Insurance segment and the Investment Management segment.
Insurance. The Insurance segment is principally comprised of the insurance business of AXA Equitable.
Investment Management. The Investment Management segment is principally comprised of the investment management business of AB. For additional information about AB, see AB’s Annual Report on Form 10-K for the year-ended December 31, 2016 filed with the United States Securities and Exchange Commission (the “SEC”) on February 14, 2017 (the “AB 10-K”), the AB Risk Factors in Exhibit 13.1 hereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
At December 31, 2016, our economic interest in AB was 29.0%. At December 31, 2016, AXA and its subsidiaries’ total economic interest in AB was approximately 63.7%.
For additional information on business segments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results Of Continuing Operations By Segment” and Note 19 of Notes to Consolidated Financial Statements.
Insurance
General
We seek to be a recognized leader for providing solutions to our clients by offering an innovative, competitive and diversified product portfolio that serves the needs of existing and new markets, expanding and leveraging our distribution channels to effectively deliver these products to a wide array of clients, and effectively managing our in-force business.
PRODUCTS
We offer a variety of variable annuity products, term, variable and universal life insurance products, variable annuity products, employee benefit products, and investment products including mutual funds, principally to individuals, small and medium-sizemedium-sized businesses and professional and trade associations. Our product approach is to ensure that design characteristics are attractive to both our customers and our company’s capital approach. We currently focus on products across our business that expose us to less market and customer behavior risk, are more easily hedged and, overall, are less capital intensive than many traditional products.
Individual Variable annuity and variable life insurance products continue to account for the majority of our new sales. Variable annuity and variable life insurance products offer policyholders the opportunity to invest some or all of their account values in various Separate Account investment options. The growth of Separate Account assets under management remains a strategic objective, as we seek to increase fee-based revenues derived from managing funds for our clients.
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1 As used in this Form 10-K, the terms “AXA Equitable”, “we”, “our” and/or “us” refers to AXA Equitable Life Insurance Company, a New York stock life insurance corporation, “AXA Financial” refers to AXA Financial, Inc., a Delaware corporation incorporated in 1991, “AXA Financial Group” refers to AXA Financial and its consolidated subsidiaries, and the “Company” refers to AXA Equitable and its consolidated subsidiaries. The term “AXA Distributors” refers to our subsidiary, AXA Distributors, LLC, “AXA Advisors” refers to our affiliate, AXA Advisors, LLC, a Delaware limited liability company, “AXA Network” refers to our affiliate, AXA Network, LLC, a Delaware limited liability company and its subsidiary, “AXA Equitable FMG” refers to our subsidiary, AXA Equitable Funds Management Group, LLC, a Delaware limited liability company and “AXA Arizona” refers to our affiliate, AXA RE Arizona Company, an Arizona corporation. The term “AB” refers to AllianceBernstein L.P., a Delaware limited partnership, and its subsidiaries and “AB Holding” refers to AllianceBernstein Holding L.P., a Delaware limited partnership. The term “MONY America” refers to our affiliate, MONY Life Insurance Company of America, an Arizona life insurance corporation and wholly-owned subsidiary of AXA Financial. The term “AXA” refers to AXA S.A., a société anonyme organized under the laws of France. The term “General Account” refers to the assets held in the general account of AXA Equitable and all of the investment assets held in certain of AXA Equitable’s separate accounts on which AXA Equitable bears the investment risk. The term “Separate Accounts” refers to the separate account investment assets of AXA Equitable excluding the assets held in those separate accounts on which AXA Equitable bears the investment risk.
Products
Annuities
We offerare a balanced and diversified product portfolio that takes into account the macroeconomic environment and customer preferences and drives profitable growth while appropriately managing risk. For additional information, see “Risk Factors” and “Management’s Discussion and Analysisleading provider of Financial Condition and Results of Operations.”
Life Insurance Products. We offer a broad range of life insuranceindividual variable annuity products, and services, which are aimed at serving the financial needs of our customers throughout their lives. Our primary life insurance product offerings include:
Term Life. Term life is a simple form of life insurance. Term life products provide a guaranteed benefit upon the death of the insured for a specific time period (the term) in return for the periodic payment of premiums. Some of our term products include, within certain policy limits, a conversion feature that allows the policyholder to convert the policy into permanent life insurance coverage.
Universal Life. Universal life is a form of permanent life insurance that provides protection in case of death, as well as a savings or cash value component. The cash value of a universal life policy is based on the amount of premiums paid, the declared interest crediting rate and the policy charges. Unlike term life insurance, flexible premium universal life policies permit flexibility in the amount and timing of premium payments (within limits), and they generally offer the policyholder the ability to choose one of two death benefit options: a level benefit equal to the policy’s original face amount or a variable benefit equal to the original face amount plus any existing policy account value.
We also offer an indexed universal life product. Indexed universal life insurance combines life insurance with equity-linked accumulation potential. The equity linked option(s) provide upside potential for cash value accumulation up to certain growth cap rates and downside protection through a floor for certain investment periods. This floor will limit the impact of decreases over the investment period in the values of the indices selected.
Variable Universal Life. Variable universal life is a form of permanent life insurance that combines the premium and death benefit flexibility of universal life insurance with investment opportunity. A policyholder can invest premiums in one or more underlying portfolios offering different levels of risk and growth potential. The investment portfolios provide long-term growth potential, tax deferred earnings and the ability to make tax free transfers among the investment portfolios. A policyholder can choose one of two death benefit options: level benefit equal to the policy’s original face amount or a variable benefit equal to the original face amount plus any existing policy account value. Variable universal life insurance products offered by us include single-life products, second-to-die policies (which pay death benefits following the death of both insureds) and products for the corporate-owned life insurance (“COLI”) market.
We offer an investment option, on our variable universal life product that offers a policyholder growth potential (up to a cap) and downside protection through a buffer. Through the use of the upside caps and a downside buffer, this investment option helps a policyholder manage volatility in his/her variable universal life policy, which may reduce or potentially eliminate losses.
Life insurance products accounted for 2.0% of our total first year premiums and deposits in 2016.
As part of AXA Financial’s ongoing efforts to efficiently manage capital amongst its subsidiaries, improve the quality of the product line-up of its insurance subsidiaries and enhance the overall profitability of AXA Financial Group, most sales of indexed universal life insurance products to policyholders located outside of New York are being issued through MONY America, another life insurance subsidiary of AXA Financial, instead of AXA Equitable. We expect that AXA Financial will continue to issue newly developed life insurance products to policyholders located outside of New York through MONY America instead of AXA Equitable. Since future decisions regarding product development and availability depend on factors and considerations not yet known, management is unable to predict the extent to which additional products will be offered through MONY America or another subsidiary of AXA Financial instead of or in addition to AXA Equitable, or what the impact to AXA Equitable will be. For additional information, see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Continuing Operations by Segment - Insurance.”
Annuity Products. We offer a variety of variable annuities which are primarily marketedsold to affluent and sold tohigh net worth individuals saving for retirement or seeking guaranteed retirement income and employers seeking to offer retirement savings programs suchincome. We have a long history of innovation, as 401(k) or 403(b) plans. Our primary annuity product offerings include:one of the
first companies, in 1968, to enter the variable annuity market, as the first company, in 1996, to provide variable annuities with living benefits, and as the first company, in 2010, to bring to market an index-linked variable annuity product. We continue to innovate our offering, periodically updating our product benefits and introducing new variable annuity products to meet the evolving needs of our clients while managing the risk and return of these variable annuity products to our company. We sell our variable annuity products through AXA Advisors and a wide network of over 600 third-party firms, including banks, broker-dealers and insurance partners, reaching more than 100,000 advisors.
Variable Annuities. Variable annuities provide for both asset accumulation and asset distribution needs. Policy Feature Overview
Variable annuities allow the policyholder to make deposits into variousaccounts offering variable investment accounts, as determined byoptions. For deposits allocated to Separate Accounts, the policyholder. The investment accounts are separate accounts and risks associated with such investmentsthe investment options are borne entirely by the policyholder, except where enhanced
guarantee features have been electedthe policyholder elects guaranteed minimum death benefits (“GMDB”) and/or guaranteed minimum living benefits (“GMLB,” and together with GMDB, “GMxB features”) in certain variable annuities, for which additional fees are charged. Additionally, certain variable annuity products permit policyholders to allocate a portion of their account to investment options backed by the General Account and are credited with interest rates that we determine, subject to certain limitations.
Certain of our variable annuity products offer one or more enhanced guaranteeGMxB features in addition to the standard return of principalpremium death benefit guarantee. Such enhanced guaranteeGMxB features (other than the return of premium death benefit guarantee) provide the policyholder a minimum return based on their initial deposit adjusted for withdrawals (i.e., the benefit base), thus guarding against a downturn in the markets. The rate of this return may includeincrease the specified benefit base at a guaranteed minimum living benefits and/rate (i.e., a fixed roll-up rate) or an enhanced guaranteed minimum deathmay increase the benefit (“GMDB”)base at a rate tied to interest rates (i.e., a floating roll-up rate). Guaranteed minimum living benefitsGMxB riders must be chosen by the policyholder no later than at the issuance of the contract.
GMLBs principally include guaranteed minimum income benefits (“GMIB”) and guaranteed income benefits (“GIB”). We have issued variableVariable annuities withmay also offer a guaranteed minimum accumulation benefit and(“GMAB”) or a guaranteed withdrawal benefit for life (“GWBL”) rider. For additional information regarding theseA GMIB is an optional benefit where an annuitant is entitled to annuitize the policy and receive a minimum payment stream based on the benefit base, which could be greater than the underlying account value (“AV”). A GMDB is an optional benefit that guarantees an annuitant’s beneficiaries are entitled to a minimum payment based on the benefit base, which could be greater than the underlying AV, upon the death of the annuitant. A GIB is an optional benefit which provides the policyholder with a guaranteed minimumlifetime annuity based on predetermined annuity purchase rates applied to a GIB benefit features, see Notes 2, 8base, with annuitization automatically triggered if and 9when the contract AV falls to zero. A GWBL is an optional benefit where an annuitant is entitled to withdraw a maximum amount of Notestheir benefit base each year, for the duration of the policyholder’s life, regardless of account performance. “GMxB” is a general reference to Consolidated Financial Statements and “Management’s Discussion and Analysisall forms of Financial Condition and Results of Operations - Critical Accounting Estimates.”
In furtherance of our efforts to develop an innovative and diversified variable annuity product offering, over the past several years, we have introduced several new and/or enhanced variable annuities. Certain of these variable annuities do not offer enhanced guarantee features.guaranteed benefits.
Current Variable Annuities Offered
For example, we offerWe primarily sell three variable annuity products, each providing policyholders with distinct features and return profiles. Our current primary product offering includes:
Structured Capital Strategies (“SCS”). Our index-linked features. These variable and index-linked annuities provide for asset accumulation and distribution needs. The index-linked featureannuity product allows the policyholder to make deposits intoinvest in various segments, as determined by the policyholder. The segments are separate accountsinvestment options, whose performance is tied to that ofone or more securities indices, commodities indices or exchange traded funds (“ETFs”), subject to a securities index, a commodities index, or exchange-traded fund that tracks an index forperformance cap, over a set period (e.g. 1, 3, or 5 years).of time. The risks associated with such segmentsinvestment options are borne entirely by the policyholder, except the portion of any negative performance that we absorb (a buffer) upon segmentinvestment maturity. We currently offer segment buffers ranging from -10% to -30%. TheseThis variable annuity products dodoes not offer enhanced guaranteeGMxB features, and they are general account obligations.
Variable annuity products continue to account for the majorityother than an optional return of our sales, with 97.8% of our total first year premium and deposits in 2016 attributable to variable annuities. For additional information, see “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
death benefit that we have introduced on some versions.
Employee Benefit Products.Retirement Cornerstone. In 2016, we entered the group employeeOur Retirement Cornerstone product offers two platforms: (i) RC Performance, which offers access to over 100 funds with annuitization benefits business. We currently offerbased solely on non-guaranteed account investment performance and (ii) RC Protection, which offers access to a suitefocused selection of insurance products to smallfunds and medium-size businesses located in New York. Sales of employee benefit products to businesses located outside of New York are being issued through MONY America.
Our primary employee benefit product offerings include:
Dental. We have partneredan optional floating-rate GMxB feature providing guaranteed income for life, with a leading national PPO network to provide flexible, comprehensive dental coverage, as well as access to an extensive network with approximately 200,000 dental access points and over 80,000 unique dental providers. Our plans cover routine cleanings, fillings and major dental procedures, as well as optional orthodontia and teeth whitening benefits.
Vision. We have partnered with a leading vision network with over 71,000 access points and nearly 4,500 participating retail chain locations. Our plans cover eye exams, glasses, and contact lenses as well as discounts on laser vision correction surgery.
Life Insurance. Life insurance can provide security and help offset financial burdens in the event of death. Additional benefits options can include supplemental life, voluntary life, or family protection.
Short- and Long-Term Disability. Disability insurance provides partial replacement of lost earnings for insured employees who become disabled, as defined by their plan provisions. Our products include both short- and long-term disability coveragechoice between two floating roll-up rate options.
Deductible Insurance. Deductible insurance provides employees with access to additional coverage that can relieve the expenses of high out-of-pocket medical costs and help cover deductibles, coinsurance and copays.
Hospital-Plus. Hospital Plus (aka Hospital Indemnity) provides employees with coverage for a variety of expenses, including hospital stays, emergency room visits, rehabilitation and even childcare during hospitalization.
Critical Illness. Critical illness coverage protects employees from expenses that can arise from a serious illness, such as a heart attack, stroke, or cancer. Payments are made directly to employees and can be used for items not covered by their medical plans, such as paying for childcare or making necessary modifications to their home.
Sales of employee benefit products were not significant in 2016.
Retail Mutual Funds. AXA Equitable FMG (in this respect, d/b/a 1290 Asset Managers) serves as investment adviser and administrator to 1290 Funds, an open-end investment company currently consisting of eight retail mutual funds. At December 31, 2016, 1290 Funds had total net assets of $228.7 million. Portfolio management services for the retail mutual funds may be provided, on a sub-advisory basis, by various affiliated and unaffiliated sub-advisers. AXA Investment Managers, Inc. and AXA Rosenberg Investment Management LLC provided sub-advisory services to the retail mutual funds representing approximately 27% of the total net assets in the retail mutual funds at December 31, 2016, and unaffiliated investment sub-advisers provided sub-advisory services in respect of the balance of the assets in the retail mutual funds.
Funding Agreements. We offer a funding agreement that offers an alternative to an escrow account used in a merger or acquisition transaction. These funding agreements provides acquiring and selling parties with the ability to preserve the principal value of escrow payments while earning a competitive crediting rate. We also issue funding agreements to receive advances from the Federal Home Loan Bank of New York (“FHLBNY”). The funding agreements issued to the FHLBNY require us to pledge qualified mortgage-backed assets and/or government securities as collateral. For additional information of funding agreements see “Management Discussion and Analysis of Financial Condition and Results of Operations” and Note 2, 7 and 16 of Notes to Consolidated Financial Statements.
For additional information regarding products, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Premiums and Deposits.”
Separate Account Assets
As noted above, variable annuity and variable life products offer purchasers the opportunity to direct the investment of their account values into various Separate Account investment options. Separate Account assets for individual variable annuities and variable life insurance policies totaled $111.4 billion at December 31, 2016. Of the 2016 year-end amount, approximately $99.4 billion was invested in EQ Advisors Trust (“EQAT”) and AXA Premier VIP Trust (“VIP Trust”), each of which are mutual funds for which our subsidiary, AXA Equitable FMG, serves as the investment manager and administrator. The balance of such Separate Account assets is invested through various other mutual funds for which third parties serve as investment manager.
EQAT is a mutual fund offering variable life and annuity policyholders a choice of single or multi-advised equity, bond and money market investment portfolios that employ either passively managed or actively managed strategies, “hybrid” portfolios that employ both passively managed and actively managed strategies and whose assets are allocated among multiple sub-advisers, and thirteen asset allocation portfolios that invest in other portfolios of EQAT and other unaffiliated mutual funds or exchange traded funds. VIP Trust is a mutual fund offering variable life and annuity policyholders a choice of twenty-three asset allocation portfolios that invest in other portfolios of EQAT and other unaffiliated mutual funds or exchange traded funds. Certain of the EQAT portfolios employ a managed volatility strategy that seeks to reduce equity exposure during periods in which market volatility has increased to levels that are meaningfully higher than long-term historic averages.
As of December 31, 2016, policyholders allocated $46.0 billion to the allocation portfolios of EQAT and VIP Trust and $53.4 billion to the individual portfolios of EQAT. Of the $99.4 billion invested in EQAT and VIP Trust, approximately 71% of these assets are passively managed and seek to replicate the returns of an applicable index and approximately 29% of these assets are actively managed.
Markets
We primarily target affluent and emerging affluent individuals and families, employees of public school systems, universities, not-for-profit entities and certain other tax-exempt organizations, small business owners and existing clients. Variable annuity products are primarily targeted to individuals saving for retirement or seeking retirement income (using either qualified programs, such as individual retirement annuities, or non-qualified investments), as well as employers (including, among others, educational and not-for-profit entities, and small and medium-sized businesses) seeking to offer retirement savings programs such as 401(k) or 403(b) plans. Variable and universal life insurance is targeted to individuals for protection and estate planning purposes, and at business owners to assist in, among other things, business continuation planning and funding for executive benefits. Our employee benefit products are targeted to small and medium-size businesses located in New York seeking to streamline employee benefits management. Mutual funds and other investment products are intended for a broad spectrum of clients to meet a variety of asset accumulation and investment needs. Mutual funds and other investment products add breadth and depth to the range of needs-based services and products we are able to provide.
Distribution
We distribute our products through retail and wholesale distribution channels.
Retail DistributionEdge. Our products are offered on a retail basis by financial professionals associated with AXA Advisors, an affiliated broker-dealer, and AXA Network, an affiliated insurance general agency. These financial professionals also have access to and can offer a broad array of annuity, life insurance, employee benefits products and investment products and services from unaffiliated insurers and other financial service providers.
We have entered into agreements pursuant to which we compensate AXA Advisors and AXA Network for distributing and servicing our products. The agreements provide that compensation will not exceed any limitations imposed by applicable law. Under separate agreements, we also provide to each of AXA Advisors and AXA Network personnel, property and services reasonably necessary for their operations. AXA Advisors and AXA Network reimburse us for their actual costs (direct and indirect) and expenses under the respective agreements.
Wholesale Distribution. AXA Distributors, our broker-dealer and insurance general agency subsidiary, distributes our annuity products on a wholesale basis through national and regional securities firms, independent financial planning and other broker-dealers, banks, property and casualty insurers, and brokerage general agencies. AXA Distributors also distributes our life insurance products on a wholesale basis principally through brokerage general agencies and property and casualty insurers.
For our employee benefits business we have developed targeted partnerships with influential regional, national and local brokers and general agents across the country. We have also developed strategic partnerships with other types of employee benefits distributors in the market - including private exchanges, health plans, and professional employer organizations.
For additional information on premiums and deposits by the retail and wholesale channels, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Premium and Deposits.”
Reinsurance and Hedging
We have in place reinsurance and hedging programs to reduce our exposure to mortality, equity market fluctuations, interest rate fluctuations and certain other product features.
Reinsurance. We utilize reinsurance to mitigate a portion of the risks that we face, principally in certain of our in-force life insurance and annuity products with regard to mortality, and in certain of our annuity products with regard to a portion of the enhanced guarantee features. Under our reinsurance arrangements, other insurers assume a portion of the obligation to pay claims and related expenses to which we are subject. However, we remain liable as the direct insurer on all risks we reinsure and, therefore, are subject to the risk that our reinsurer is unable or unwilling to pay or reimburse claims at the time demand is made. We evaluate the financial condition of our reinsurers in an effort to minimize our exposure to significant losses from reinsurer insolvencies. We are not a party to any risk reinsurance arrangement with any non-affiliated reinsurer pursuant to which the amount of reserves on reinsurance ceded to such reinsurer equals more than approximately 1.0% of our total policy reserves (including Separate Accounts).
In 2016, we generally retained up to $25 million of mortality risk on single-life policies and $30 million of mortality risk on second-to-die policies. For amounts issued in excess of those limits, and for certain lower amounts, we typically obtained reinsurance from unaffiliated third parties. The reinsurance arrangements obligate the reinsurer to pay a portion of any death claim in excess of the amount retained by us in exchange for an agreed-upon premium.
We also have reinsured to non-affiliated reinsurers a portion of our exposure oninvestment-only variable annuity productsis a wealth accumulation variable annuity that offer a GMIB and/or GMDB feature issueddefers current taxes during accumulation and provides tax-efficient distributions on non-qualified assets through February 2005. At December 31, 2016, we had reinsured to non-affiliated reinsurers, subject to certain maximum amounts or caps in any one period, approximately 18.2% of our net amount at risk resulting from the GMIB feature and approximately 3.8% of our net amount at risk to the GMDB obligation on annuity contracts in force as of December 31, 2016.
In addition to non-affiliated reinsurance, we have ceded to our affiliate, AXA Arizona, a captive reinsurance company established by AXA Financial in 2003, a 100% quota share of all liabilities for variable annuities with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. The GMDB/GMIB reinsurance transaction currently allows for a more efficient use of our capital and design of our hedging programs. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under universal life insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007.
For additional information on reinsurance, see “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources” and Notes 9 and 11 of Notes to Consolidated Financial Statements.
Hedging. We have adopted certain hedging programs that are designed to mitigate certain risks associated with the GMDB, GMIB, GWBL, and GIB liabilities and some associated fee revenue that have not been reinsured. A wide range of derivative contracts are used in these hedging programs. For GMDB, GMIB, GWBL and GIB, we retain certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected assumptions for mortality, lapse and surrender, withdrawal and contract-holder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMDB, GMIB, GWBL and GIB features that result from financial markets movements. A portion of exposure to realized equity volatility is hedged using equity options and variance swaps and a portion of exposure to credit risk is hedged using total return swaps and fixed income indices.
We also hedge crediting rates to mitigate certain risks associated with certain of our products and investment options that permit the contract owner to participate in the performance of an index, ETF or a commodity price movement up to a cap forscheduled payments over a set period of time while we absorb, up towith a certain percentage, the lossportion of value ineach payment being a return of cost basis, thus excludable from taxes. Investment Edge does not offer any GMxB feature other than an index, ETF or commodity price. In order to support the returns associated with these products and features, we enter into derivative contracts whose payouts, in combination with fixed income investments, emulate thoseoptional return of the index, ETF or commodity price, subject to caps and buffers.premium death benefit.
We also use derivatives contracts and other financial instruments for other asset and liability management purposes. This includes, among other things, the management of interest rate risks in the General Account, the hedging of interest rate risks in anticipated sales of variable annuities and the hedging of equity linked and commodity indexed crediting rates in life and annuity products.2
For additional information about reinsurance and hedging strategies, see “Risk Factors,” “Management’s Discussion and Analysis
Reinsurance AssumedOther products.. We also actoffer other products which offer optional GMxB benefits. These other products do not contribute significantly to our sales.
We work with AXA Equitable FMG to identify and include appropriate underlying investment options in its products, as a retrocessionaire by assuming life reinsurance from non-affiliated reinsurers. Mortality risk through reinsurance assumed is managed usingwell as to control the same corporate retention limits noted above (i.e., $25 million on single-life policies and $30 million on second-to-die policies), although in practice, we currently use lower internal retention limits for life reinsurance assumed. We have also assumed accident, health, aviation and space risks by participating in or reinsuring various reinsurance pools and arrangements. We generally discontinued our participation in new accident, health, aviation and space reinsurance pools and arrangements for years following 2000, but continue to be exposed to claims in connection with pools we participated in prior to that time. We audit or otherwise review the records of manycosts of these reinsurance poolsoptions and arrangements as partincrease profitability of our ongoing efforts to manage our claims risk.the products. For additional information on reinsurance assumed,a discussion of AXA Equitable FMG, see Notes 9 and 11 of Notes to Consolidated Financial Statements.
Policyholder Liabilities and Reserves
We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet our policy obligations when a policy matures or is surrendered, an insured dies or becomes disabled or upon the occurrence of other covered events, or to provide for future annuity payments. Our reserve requirements are calculated based on a number of estimates and assumptions, including estimates and assumptions related to future mortality, morbidity, interest rates, future equity performance, reinvestment rates, persistency, claims experience and policyholder elections (i.e., lapses and surrenders, withdrawals and amounts of withdrawals, contributions and the allocation thereof, etc.) which we modify to reflect our actual experience and/or refined assumptions when appropriate.
Pursuant to state insurance laws, we establish statutory reserves, reported as liabilities, to meet our obligations on our policies. These statutory reserves are established in amounts sufficient to meet policy and contract obligations, when taken together with expected future premiums and interest at assumed rates. Statutory reserves generally differ from actuarial liabilities for future policy benefits determined using U.S. GAAP.
State insurance laws and regulations require that we submit to state insurance departments, with each annual report, an opinion and memorandum of a “qualified actuary” that the statutory reserves and related actuarial amounts recorded in support of specified policies and contracts, and the assets supporting such statutory reserves and related actuarial amounts, make adequate provision for its statutory liabilities with respect to these obligations.
For additional information on Policyholder Liabilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Continuing Operations by Segment - Insurance” and “Risk Factors.below “ —AXA Equitable FMG.”
Underwriting and Pricing
We generally do not underwrite our variable annuity products on an individual-by-individual basis. Instead, we price our products based upon our expected investment returns and assumptions regarding mortality, longevity and persistency for our policyholders collectively, while taking into account historical experience. We price annuities by analyzing longevity and persistency risk, volatility of expected earnings on our AV and the expected time to retirement. Our product pricing models also take into account capital requirements, hedging costs and operating expenses. Investment-oriented products are priced based on various factors, which may include investment return, expenses, persistency and optionality.
Our variable annuity products generally include penalties for early withdrawals. From time to time, we reevaluate the type and level of GMxB and other features we offer. We have previously changed the nature and pricing of the features we offer and will likely do so from time to time in the future as the needs of our clients, the economic environment and our risk appetite evolve.
Risk Management
To actively manage and protect against the economic risks associated with our in-force variable annuity products, our management team has taken a multi-pronged approach. Our in-force variable annuity risk management programs include:
Hedging
We use a dynamic hedging strategy supplemented by static hedges to offset changes in our economic liability from changes in equity markets and interest rates. In addition to our dynamic hedging strategy, in the fourth quarter of 2017 and first quarter of 2018, we implemented static hedge positions to maintain a target asset level for all variable annuities at a CTE98 level under most economic scenarios, and to maintain a CTE95 level even in extreme scenarios. The term “CTE” refers to “conditional tail expectation,” which is calculated as the average amount of total assets required to satisfy obligations over the life of the contract or policy in the worst x% of scenarios and is represented as CTE (100 less x). E.g., CTE95 represents the worst five percent of scenarios. We expect to adjust from time to time our static equity hedge positions to maintain our target level of CTE protection over time. A wide range of derivatives contracts are used in these hedging programs, such as futures and total return swaps (both equity and fixed income), options and variance swaps, as well as, to a lesser extent, bond investments and repurchase agreements. For GMxB features, we retain certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected assumptions for mortality, lapse and surrender, withdrawal and contract-holder election rates, among other things.
Reinsurance
We have used reinsurance to mitigate a portion of the risks that we face in certain of our variable annuity products with regard to a portion of the GMxB features. Under our reinsurance arrangements, other insurers assume a portion of the obligation to pay claims and related expenses to which we are subject. However, we remain liable as the direct insurer on all risks we reinsure and, therefore, are subject to the risk that our reinsurer is unable or unwilling to pay or reimburse claims at the time demand is made. We evaluate the financial condition of our reinsurers in an effort to minimize our exposure to significant losses from reinsurer insolvencies.
Non-affiliate Reinsurance. We have reinsured to non-affiliated reinsurers a portion of our exposure on variable annuity products that offer a GMxB feature issued through February 2005. At December 31, 2018, we had reinsured to non-affiliated reinsurers, subject to certain maximum amounts or caps in any one period, approximately 15.5% of our net amount at risk resulting from the GMIB feature and approximately 2.9% of our net amount at risk (“NAR”) to the GMDB obligation on variable annuity contracts in force as of December 31, 2018.
Captive Reinsurance. In addition to non-affiliated reinsurance, we ceded to AXA RE Arizona, a captive reinsurance company, a 100% quota share of all liabilities for variable annuities with GMxB riders other than return of premium death
benefit issued on or after January 1, 2006 and in-force on September 30, 2008 and a 100% quota share of all liabilities for variable annuities with GMIB riders issued on or after May 1, 1999 through August 31, 2005 in excess of the liability assumed by two unaffiliated reinsurers, which are subject to certain maximum amounts or limitations on aggregate claims (the “Excess Risks”). Upon completion of the GMxB Unwind, we have assumed all of the liabilities of the GMxB business that were previously ceded to AXA RE Arizona and the Excess Risks were novated to EQ AZ Life Re. For more detail on the GMxB Unwind and its associated risks, see “Risk Factors—Risks Relating to Our Business—Risks Relating to Our Reinsurance and Hedging Programs—Our reinsurance arrangements with affiliated captives may be adversely impacted by changes to policyholder behavior assumptions under the reinsured contracts, the performance of their hedging program, their liquidity needs, their overall financial results and changes in regulatory requirements regarding the use of captives.”
Other Programs
We have introduced several other programs that reduced gross reserves and reduced the risk in our in-force block and, in many cases, offered a benefit to our clients by offering liquidity or flexibility:
Investment Option Changes. We made several changes to our investment options within our variable annuity products over the years to manage risk, employ more passive strategies and offer our clients attractive risk-adjusted investment returns. To reduce the differential between hedging instruments performance and fund performance, we added many passive investment strategies and reduced the credit risk of some of the bond portfolios, which is designed to provide a better risk adjusted return to clients. We also introduced managed volatility funds in 2009. Our volatility management strategy seeks to reduce the portfolio’s equity exposure during periods when certain market indicators indicate that market volatility is above specific thresholds set for the portfolio. Historically when market volatility is high, equity markets generally are trending down, and therefore this strategy is intended to reduce the overall risk of investing in the portfolio for clients.
Optional Buyouts. Since 2012, we have implemented several successful buyout programs that benefited clients whose needs had changed since buying the initial contract and reduced our exposure to certain types of GMxB features. We have executed buyout programs since 2012, offering buyouts to contracts issued between 2002 and 2009.
Premium Suspension Programs. We have suspended the acceptance of subsequent premiums to certain GMxB contracts.
Lump Sum Option. Since 2015, we have provided certain policyholders with the optional benefit to receive a one-time lump sum payment rather than systematic lifetime payments if their AV falls to zero. This option provides the same advantages as a buyout. However, because the availability of this option is contingent on future events, their actual effectiveness will only be known over a long-term horizon.
Employer-Sponsored Products and Services
We also offer tax-deferred investment and retirement services or products to plans sponsored by educational entities, municipalities and not-for-profit entities, as well as small and medium-sized businesses. We primarily operate in the 403(b), 401(k) and 457(b) markets where we sell variable annuity and mutual fund-based products. As of December 31, 2018, we had relationships with approximately 26,000 employers and served more than one million participants, of which approximately 758,000 were educators. A specialized division of AXA Advisors, the Retirement Benefits Group (“RBG”), is the primary distributor of our products and related solutions to the education market with more than 1,000 advisors dedicated to helping educators prepare for retirement as of December 31, 2018.
Our products offer teachers, municipal employees and corporate employees a savings opportunity that provides tax-deferred wealth accumulation coupled with industry award-winning customer service. Our innovative product offerings address all retirement phases with diverse investment options.
UnderwritingVariable Annuities. Our variable annuities offer defined contribution plan record-keeping, as well as administrative and participant services combined with a variety of proprietary and non-proprietary investment options. Our variable annuity investment lineup mostly consists of proprietary variable investment options that are managed by AXA Equitable FMG. AXA Equitable FMG provides discretionary investment management services for these investment options that include developing and executing asset allocation strategies and providing rigorous oversight of sub-advisors for the investment options. This helps to ensure that we retain high quality managers and that we leverage our scale across our products. In addition, our variable annuity products offer the following features:
Guaranteed Interest Option (“GIO”)—Provides a fixed interest rate and guaranteed AV.
Structured Investment Option (“SIO”)—Provides upside market participation that tracks either the S&P 500, Russell 2000 or the MSCI EAFE index subject to a performance cap, with a downside buffer that limits losses in the investment over a one, three or five year investment horizon. This option leverages our innovative SCS individual annuity offering, and we believe that we are the only provider that offers this type of guarantee in the defined contribution markets today.
Personal Income Benefit—An optional GMxB feature that enables participants to obtain a guaranteed withdrawal benefit for life for an additional fee.
Open Architecture Mutual Fund Platform. We employ detailed underwriting policies, guidelinesrecently launched a mutual fund-based product to complement our variable annuity products. This platform provides a similar service offering to our variable annuities from the same award-winning service team. The program allows plan sponsors to select from approximately 15,000 mutual funds. The platform also offers a group fixed annuity that operates very similarly to the GIO as an available investment option on this platform.
Services. Both our variable annuity and proceduresopen architecture mutual fund products offer a suite of tools and services to enable plan participants to obtain education and guidance on their contributions and investment decisions and plan fiduciary services. Education and guidance is available on-line or in person from a team of plan relationship and enrollment specialists and/or the advisor that sold the product. Our clients’ retirement contributions come through payroll deductions, which contribute significantly to stable and recurring sources of renewals.
Underwriting and Pricing
We generally do not underwrite our annuity products on an individual-by-individual basis. Instead, we price our products based upon our expected investment returns and assumptions regarding mortality, longevity and persistency for our policyholders collectively, while taking into account historical experience. We price variable annuities by analyzing longevity and persistency risk, volatility of expected earnings on our AV and the expected time to retirement. Our product pricing models also take into account capital requirements, hedging costs and operating expenses. Investment-oriented products are priced based on various factors, which may include investment return, expenses, persistency and optionality.
Our variable annuity products generally include penalties for early withdrawals. From time to time, we reevaluate the type and level of guarantees and other features we offer. We have previously changed the nature and pricing of the features we offer and will likely do so from time to time in the future as the needs of our clients, the economic environment and our risk appetite evolve.
Risk Management
We design our employer-sponsored products with the goal of providing attractive features to clients that also minimize risks to us. To mitigate risks to our General Account from fluctuations in interest rates, we apply a variety of techniques that align well with a given product type. We designed our GIO to comply with the National Association of Insurance Commissioners (the “NAIC”) minimum rate (1.75% for new issues), and our 403(b) products that we currently sell include a contractual provision that enables us to limit transfers into the GIO. As most defined contribution plans allow participants to borrow against their accounts, we have made changes to our loan repayment processes to minimize participant loan defaults and to facilitate loan repayments to the participant’s current investment allocation as opposed to requiring repayments only to the GIO. In the 401(k) and 457(b) markets, we may charge a market value adjustment on the assets of the GIO when a plan sponsor terminates its agreement with us. We also prohibit direct transfers to fixed income products that compete with the GIO, which protects the principal in the General Account in a rising interest rate environment.
In the Tax-Exempt market, the benefits include a minimum guaranteed interest rate on our GIO, return of premium death benefits and limited optional GMxB features. The utilization of GMxB features is low. In the Corporate market, the products that we sell today we do not offer death benefits in excess of the AV.
We use a committee of subject matter experts and business leaders that meet periodically to set crediting rates for our guaranteed interest options. The committee evaluates macroeconomic and business factors to determine prudent interest rates in excess of the contract minimum when appropriate.
We also monitor the behavior of our clients who have the ability to transfer assets between the GIO and various Separate Account investment options. We have not historically observed a material shift of assets moving into guarantees during times of higher market volatility.
Hedging
We hedge crediting rates to mitigate certain risks associated with the SIO. In order to support the returns associated with the SIO, we enter into derivatives contracts whose payouts, in combination with fixed income investments, emulate those of the S&P 500, Russell 2000 or MSCI EAFE index, subject to caps and buffers.
Life Insurance Products
We have a long history of providing life insurance products to affluent and high net worth individuals and small and medium-sized business markets. We are currently focused on the relatively less capital intensive asset accumulation segments of the market, with leading offerings in the VUL and IUL markets.
We offer a targeted range of life insurance products aimed at serving the financial needs of our clients throughout their lives. Specifically, our products are designed to align mortality resultshelp affluent and high net worth individuals as well as small and medium-sized business owners protect and transfer their wealth. Our product offerings include VUL, IUL and term life products. Our products are distributed through AXA Advisors and select third-party firms. We benefit from a long-term, stable distribution relationship with AXA Advisors.
Our life insurance products are primarily designed to help individuals and small and medium-sized businesses with protection, wealth accumulation and transfer, as well as corporate planning solutions. We target select segments of the assumptions used inlife insurance market: permanent life insurance, including IUL and VUL products and term insurance. As part of a strategic shift over the past several years, we evolved our product pricing while providing for competitive risk selection. The risk selection process is carried out by underwriters who evaluate policy applications based on information provided by the applicantdesign to be less capital-intensive and other sources. Specific tests, such as blood analysis,more accumulation-focused.
Permanent Life Insurance. Our permanent life insurance offerings are used to evaluate policy applications basedbuilt on the sizepremise that all clients expect to receive a benefit from the policy. The benefit may take the form of a life insurance death benefit paid at time of death no matter the age or duration of the policy or the ageform of access to cash that has accumulated in the applicantpolicy on a tax-favored basis. In each case, the value to the client comes from access to a broad spectrum of investments that accumulate the policy value at attractive rates of return.
We have three permanent life insurance offerings built upon a universal life (“UL”) insurance framework: IUL, VUL and other factors.corporate-owned life insurance targeting the small and medium-sized business market, which is a subset of VUL products. Universal life policies offer flexible premiums, and generally offer the policyholder the ability to choose one of two death benefit options: a level benefit equal to the policy’s original face amount or a variable benefit equal to the original face amount plus any existing policy AV. Our universal life insurance products include single-life products and second-to-die (i.e., survivorship) products, which pay death benefits following the death of both insureds.
IUL. IUL uses an equity-linked approach for generating policy investment returns. The purpose ofequity linked options provide upside return based on an external equity based index (e.g., S&P 500) subject to a cap. In exchange for this processcap on investment returns, the policy provides downside protection in that annual investment returns are guaranteed to never be less than zero, even if the relevant index is to determine the type and amount of risk that we are willing to accept.down. In addition, we continuethere is an option to utilizereceive a higher cap on certain investment returns in exchange for a fee. As noted above, the performance of any universal life insurance policy also depends on the level of policy charges. For further discussion, see “—Pricing and further develop alternative underwriting methods that rely on predictive modeling.Fees.”
VUL. VUL uses a series of investment options to generate the investment return allocated to the cash value. The sub-accounts are similar to retail mutual funds: a policyholder can invest premiums in one or more underlying investment options
offering varying levels of risk and growth potential. These provide long-term growth opportunities, tax-deferred earnings and the ability to make tax-free transfers among the various sub-accounts. In addition, the policyholder can invest premiums in a guaranteed interest option, as well as an investment option we call the Market Stabilizer Option (“MSO”), which provides downside protection from losses in the index up to a specified percentage. We also offer corporate-owned life insurance, which is a VUL insurance product tailored specifically to support executive benefits in the small business market.
We work with AXA Equitable FMG to identify and include appropriate underlying investment options in our variable life products, as well as to control the costs of these options.
Term Life. Term life provides basic life insurance protection for a specified period of time, and is typically a client’s first life insurance purchase due to its relatively low cost. Life insurance benefits are paid if death occurs during the term period, as long as required premiums have been paid. The required premiums are guaranteed not to increase during the term period, otherwise known as a level pay or fixed premium. Our term products include competitive conversion features that allow the policyholder to convert their term life insurance policy to permanent life insurance within policy limits and the ability to add certain riders. Our term life portfolio includes 1, 10, 15 and 20-year term products.
Other Benefits. We offer a portfolio of riders to provide clients with additional flexibility to protect the value of their investments and overcome challenges. Our Long-Term Care Services Rider provides an acceleration of the policy death benefit in the event of a chronic illness. The MSO, referred to above and offered via a policy rider on our variable life products, provides policyholders with the opportunity to manage volatility. The return of premium rider provides a guarantee that the death benefit payable will be no less than the amount invested in the policy.
As part of Holdings’ ongoing efforts to efficiently manage capital amongst its subsidiaries, improve the quality of the product line-up of its insurance subsidiaries and enhance the overall profitability of Holdings, most sales of IUL insurance products to policyholders located outside of New York are being issued through MONY America, another life insurance subsidiary of Holdings, instead of AXA Equitable. We expect that Holdings will continue to issue newly developed life insurance products to policyholders located outside of New York through MONY America instead of AXA Equitable. Since future decisions regarding product development and availability depend on factors and considerations not yet known, management is unable to predict the extent to which additional products will be offered through MONY America or another subsidiary of Holdings instead of or in addition to AXA Equitable, or what the impact to AXA Equitable will be.
Underwriting
Our underwriting process, built around extensive underwriting guidelines, is designed to assign prospective insureds to risk classes in a manner that is consistent with our business and financial objectives, including our risk appetite and pricing expectations.
As part of making an underwriting decision, our underwriters evaluate information disclosed as part of the application process as well as information obtained from other sources after the application. This information includes, but is not limited to, the insured’s age and sex, results from medical exams and financial information.
We continue to research and develop guideline changes to increase the efficiency of our underwriting process (e.g., through the use of predictive models), both from an internal cost perspective and our customer experience perspective. We manage changes to our underwriting guidelines though a robust governance process that ensures that our underwriting decisions continue to align with our business and financial objectives, including risk appetite and pricing expectations. We continuously monitor our underwriting decisions through internal audits and other quality control processes, to ensure accurate and consistent application of our underwriting guidelines.
We use reinsurance to manage our mortality risk and volatility. Our reinsurer partners regularly review our underwriting practices and mortality and lapse experience through audits and experience studies, the outcome of which have consistently validated the high-quality underwriting process and decisions.
Pricing and Fees
Life insurance products are priced based upon assumptions including, but not limited to, expected future premium payments, surrender rates, mortality and morbidity rates, investment returns, hedging costs, equity returns, expenses and inflation and capital requirements. The primary source of revenue from our life insurance business is premiums, investment
income, asset-based fees (including investment management and 12b-1 fees) and policy charges (expense loads, surrender charges, mortality charges and other policy charges).
Risk Management
Reinsurance
We use reinsurance to mitigate a portion of our risk and optimize the capital efficiency and operating returns of our life insurance portfolio. As part of our risk management function, we continuously monitor the financial condition of our reinsurers in an effort to minimize our exposure to significant losses from reinsurer insolvencies.
Non-affiliate Reinsurance. We generally obtain reinsurance for the portion of a life insurance policy that exceeds $10 million. We have set up reinsurance pools with highly rated unaffiliated reinsurers that obligate the pool participants to pay death claim amounts in excess of our retention limits for an agreed-upon premium.
Captive Reinsurance. EQ AZ Life Re Company reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and 90% of the risk of the lapse protection riders under UL insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007 (collectively, the “Life Business”).
Hedging
We hedge the exposure contained in our IUL products and the MSO rider we offer on our VUL products. These products and riders allow the policyholder to participate in the performance of an index price movement up to certain caps and/or protect the policyholder in a movement down to a certain buffer for a set period of time. In order to support our obligations under these investment options, we enter into derivatives contracts whose payouts, in combination with returns from the underlying fixed income investments, seek to replicate those of the index price, subject to prescribed caps and buffers.
Employee Benefits Products
Our employee benefits business focuses on serving small and medium-sized businesses located in New York, offering these businesses a differentiated technology platform and competitive suite of group insurance products. Though we only entered the market in 2015, we now offer coverage nationally. We believe our employee benefits business will further augment our solution for small and medium-sized businesses which we believe is differentiated by a high-quality technology platform. Leveraging our innovative technology platform, we have formed strategic partnerships with large insurance and health carriers as their primary group benefits provider. As a new entrant in the employee benefits market we were able to build a platform from the ground up, without reliance on legacy systems.
Our products are designed to provide valuable protection for employees as well as help employers attract employees and control costs. We currently offer a suite of life, short and long-term disability, dental and vision insurance products to small and medium-sized businesses located in New York. Sales of employee benefit products that do not require submissionto businesses located outside of medical evidence, risk is assessed at the group level. We will set appropriate plans for the group based on demographic information and, on larger groups, will also evaluate the experience of the group. For group employee benefit products that require submission of medical evidence, risk is assessed at the individual level. For individual employee benefit products, guarantee issue is offered based on plan design and/or achievement of minimum participation requirements.New York are being issued through MONY America.
Underwriting
We have senior level oversight ofmanage the underwriting process in order to facilitate quality sales and serve the needs of our customers, while supporting our financial strength and business objectives. The application of our underwriting guidelines is continuously monitored through internal underwriting audits in order to achieve high standards of underwriting and consistency.
Pricing and Fees
Employee benefits pricing reflects the claims experience and the risk characteristics of each group. We set appropriate plans for the group based on demographic information and, for larger groups, also evaluate the experience of the group. The claims experience is reviewed at the time of policy issuance and during the renewal timeframes, resulting in periodic pricing adjustments at the group level.
Reinsurance
Group Reinsurance Plus provides reinsurance on our short and long-term disability products. Our current arrangement provides quota share reinsurance at 50% for disability products.
MARKETS
PricingVariable Annuity Products.We target sales of our variable annuity products to affluent and high net worth individuals and families saving for retirement or seeking retirement income. Within our target customer base, customers prioritize certain features based on their life-stage and investment needs. In addition, our products offer features designed to serve different market conditions. SCS targets clients with investable assets who want exposure to equity markets, but also want to guard against a market correction. Retirement Cornerstone targets clients who want growth potential and guaranteed income with increases in a rising interest rate environment. Investment Edge targets clients concerned about rising taxes.
Employer-Sponsored Products and Services. Pricing for our products is designedWe primarily operate in the tax-exempt 403(b)/457(b), corporate 401(k) and other markets. In the tax-exempt 403(b)/457(b) market, we primarily serve employees of public school systems. To a lesser extent, we also market to allow us to make an appropriate profit after paying benefits to customers,government entities that sponsor 457(b) plans. In the corporate 401(k) market, we target small and taking accountmedium-sized businesses with 401(k) plans that generally have under $20 million in assets. Our product offerings accommodate start up plans and plans with accumulated assets.
Life Insurance Products. We are focused on targeted segments of all the risks we assume. Product pricing is calculated through the use of estimateslife insurance market, particularly affluent and assumptions for mortality, morbidity, withdrawal rates and amounts, expenses, persistency, policyholder elections and investment returns,high net worth individuals, as well as certain macroeconomic factors. Assumptions used are determinedsmall and medium-sized businesses located in lightNew York. We focus on creating value for our customers through the differentiated features and benefits we offer on our products. We distribute these products through retail advisors and third-party firms who demonstrate the value of our underwriting standardslife insurance in helping clients to accumulate wealth and practices. Investment-oriented products are pricedprotect their assets.
Employee Benefit Products. Our employee benefit product suite is targeted to small and medium-sized businesses located in New York seeking simple, technology-driven employee benefits management. We built the employee benefits business from the ground up based on various factors, which may include investment return, expenses, persistencyfeedback from brokers and optionality.employers, ensuring the business’ relevance to the market we address. We are committed to continuously evolving our product suite and technology platform to meet market demand.
OurDISTRIBUTION
We primarily distribute our products through AXA Advisors and through third party distribution channels.
Affiliated Distribution.We offer our products on a retail basis through our affiliated retail sales force of financial professionals, AXA Advisors. These financial professionals have access to and offer a broad array of variable annuity, life insurance, employee benefits and investment products and services from affiliated and unaffiliated insurers and other financial service providers. AXA Advisors, through RBG, is the primary distribution channel for our employer-sponsored products and services. RBG has a group of more than 1,000 advisors that specialize in the 403(b) and 457(b) markets.
Third-Party Distribution. For our annuity products, we have shifted the focus of our third-party distribution significantly over the last decade, growing our distribution in the bank, broker-dealer and insurance partner channels and providing us access to more than 100,000 financial professionals. We also distribute life insurance products through third-party firms provides efficient access to independent producers on a largely variable cost basis. Brokerage general agencies, producer groups, banks, warehouses, independent broker-dealers and registered investment advisers are all important partners who distribute our products today. We distribute our employee benefitbenefits products through a growing network of third-party firms, including private exchanges, health plans and professional employer organizations.
COMPETITION
There is strong competition among insurers, banks, brokerage firms and other financial institutions and providers seeking clients for the types of products and services we provide. Competition is intense among a broad range of financial institutions and other financial service providers for retirement and other savings dollars.
The principal competitive factors affecting our business are highly regulatedour financial strength as evidenced, in part, by our financial and claims-paying ratings; access to capital; access to diversified sources of distribution; size and scale; product quality, range, features/functionality and price; our ability to bring customized products to the market quickly; technological capabilities; our
ability to explain complicated products and features to our distribution channels and customers; crediting rates on fixed products; visibility, recognition and understanding of our brand in the marketplace; reputation and quality of service; the tax-favored status certain of our products receive under the current federal and state laws and (with respect to variable insurance and annuity products, mutual funds and other investment products) investment options, flexibility and investment management performance.
We and our affiliated distributors must attract and retain productive sales representatives to sell our products. Strong competition continues among financial institutions for sales representatives with demonstrated ability. We and our affiliated distribution companies compete with other financial institutions for sales representatives primarily on the basis of financial position, product breadth and features, support services and compensation policies.
Legislative and other changes affecting the regulatory environment can affect our competitive position within the life insurance industry and within the broader financial services industry.
AXA EQUITABLE FMG
AXA Equitable FMG oversees our variable funds and supports our business. AXA Equitable FMG helps add value and marketing appeal to our products by bringing investment management expertise and specialized strategies to the underlying investment lineup of each product. In addition, by advising an attractive array of proprietary investment portfolios (each, a “Portfolio,” and together, the “Portfolios”), AXA Equitable FMG brings investment acumen, financial controls and economies of scale to the construction of high-quality, economical underlying investment options for our products. Finally, AXA Equitable FMG is able to negotiate favorable terms for investment services, operations, trading and administrative functions for the Portfolios.
AXA Equitable FMG provides investment management and administrative services to proprietary investment vehicles sponsored by the Company, including investment companies that are underlying investment options for our variable insurance and annuity products. AXA Equitable FMG is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”). AXA Equitable FMG serves as the investment adviser to three investment companies that are registered under the Investment Company Act of 1940, as amended—EQ Advisors Trust (“EQAT”), AXA Premier VIP Trust (“VIP Trust”) and 1290 Funds (each, a “Trust” and collectively, the “Trusts”)—and to two private investment trusts established in the Cayman Islands. Each of the investment companies and private investment trusts is a “series” type of trust with multiple Portfolios. AXA Equitable FMG provides discretionary investment management services to the Portfolios, including, among other things, (1) portfolio management services for the Portfolios; (2) selecting investment sub-advisers and (3) developing and executing asset allocation strategies for multi-advised Portfolios and Portfolios structured as funds-of-funds. AXA Equitable FMG also provides administrative services to the Portfolios. AXA Equitable FMG is further charged with ensuring that the other parts of the Company that interact with the Trusts, such as product management, the distribution system and the financial organization, have a specific point of contact.
AXA Equitable FMG has a variety of responsibilities for the general management and administration of its investment company clients. One of AXA Equitable FMG’s primary responsibilities is to provide clients with portfolio management and investment advisory evaluation services, principally by reviewing whether to appoint, dismiss or replace sub-advisers to each Portfolio, and thereafter monitoring and reviewing each sub-adviser’s performance through qualitative and quantitative analysis, as well as periodic in-person, telephonic and written consultations with the sub-advisers. Currently, AXA Equitable FMG has entered into sub-advisory agreements with more than 40 different sub-advisers, including AB and other AXA affiliates. Another primary responsibility of AXA Equitable FMG is to develop and monitor the investment program of each Portfolio, including Portfolio investment objectives, policies and asset allocations for the Portfolios, select investments for Portfolios (or portions thereof) for which it provides direct investment selection services, and ensure that investments and asset allocations are consistent with the guidelines that have been approved by clients. The administrative services that AXA Equitable FMG provides to the individual statePortfolios include, among others, coordination of each Portfolio’s audit, financial statements and tax returns; expense management and budgeting; legal administrative services and compliance monitoring; portfolio accounting services, including daily net asset value accounting; risk management; and oversight of proxy voting procedures and anti-money laundering program.
REGULATION
Insurance Regulation
We are licensed to transact insurance business, and are subject to extensive regulation and supervision by insurance regulators, where these products are sold. Annuity products generally include penalties for early withdrawals and policyholder benefit elections to tailor the formin all 50 states of the product’s benefitsUnited States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and nine of Canada’s thirteen provinces and territories. We are domiciled in New York and are primarily regulated by the New York State Department of Financial Services (the “NYDFS”). The extent of regulation by jurisdiction varies, but most jurisdictions have laws and regulations governing the financial aspects and business conduct of insurers. State laws in the U.S. grant insurance regulatory authorities broad administrative powers with respect to, among other things, licensing companies to transact business, sales practices, establishing statutory capital and reserve requirements and solvency standards, reinsurance and hedging, protecting privacy, regulating advertising, restricting the needspayment of dividends and other transactions between affiliates, permitted types and concentrations of investments and business conduct to be maintained by insurance companies as well as agent licensing, approval of policy forms and, for certain lines of insurance, approval or filing of rates. Insurance regulators have the discretionary authority to limit or prohibit new issuances of business to policyholders within their jurisdictions when, in their judgment, such regulators determine that the issuing company is not maintaining adequate statutory surplus or capital. Additionally, New York Insurance Law limits sales commissions and certain other marketing expenses that we may incur. For additional information on Insurance Supervision, see “Risk Factors.”
Supervisory agencies in each of the opting policyholder.jurisdictions in which we do business may conduct regular or targeted examinations of our operations and accounts, and make requests for particular information from us. Periodic financial examinations of the books, records, accounts and business practices of insurers domiciled in their states are generally conducted by such supervisory agencies every three to five years. From time to time, we reevaluateregulators raise issues during examinations or audits of us that could, if determined adversely, have a material adverse effect on us. In addition, the typeinterpretations of regulations by regulators may change and level of guaranteestatutes may be enacted with retroactive impact, particularly in areas such as accounting or statutory reserve requirements. In addition to oversight by state insurance regulators in recent years, the insurance industry has seen an increase in inquiries from state attorneys general and other features currently being offeredstate officials regarding compliance with certain state insurance, securities and other applicable laws. We have received and responded to such inquiries from time to time. For additional information on legal and regulatory risk, see “Risk Factors—Legal and Regulatory Risks.”
We are required to file detailed annual financial statements, prepared on a statutory accounting basis or in accordance with other accounting practices permitted by the applicable regulator, with supervisory agencies in each of the jurisdictions in which we do business. The NAIC has approved a series of uniform statutory accounting principles (“SAP”) that have been adopted, in some cases with minor modifications, by all state insurance regulators. As a basis of accounting, SAP was developed to monitor and regulate the solvency of insurance companies. In developing SAP, the insurance regulators were primarily concerned with assuring an insurer’s ability to pay all its current and future obligations to policyholders. As a result, statutory accounting focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the insurer’s domiciliary state. The values for assets, liabilities and equity reflected in financial statements prepared in accordance with U.S. GAAP are usually different from those reflected in financial statements prepared under SAP.
Holding Company and Shareholder Dividend Regulation
Most states, including New York, regulate transactions between an insurer and its affiliates under insurance holding company acts. The insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require that all transactions affecting insurers within a holding company system be fair and reasonable and, if material, typically require prior notice and approval or non-disapproval by the state’s insurance regulator.
The insurance holding company laws and regulations generally also require a controlled insurance company (insurers that are subsidiaries of insurance holding companies) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning its capital structure, ownership, financial condition, certain intercompany transactions and general business operations. States generally require the ultimate controlling person of a U.S. insurer to file an annual enterprise risk report with the lead state of the insurance holding company system identifying risks likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole.
State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, as well as on transactions between an insurer and its
affiliates. Under New York insurance law, a domestic stock life insurer may not, without prior approval of the NYDFS, pay a dividend to its stockholders exceeding an amount calculated under one of two standards. The first standard allows payment of an ordinary dividend out of the insurer’s earned surplus (as reported on the insurer’s most recent annual statement) up to a limit calculated pursuant to a statutory formula, provided that the NYDFS is given notice and opportunity to disapprove the dividend if certain qualitative tests are not met (the “Earned Surplus Standard”). The second standard allows payment of an ordinary dividend up to a limit calculated pursuant to a different statutory formula without regard to the insurer’s earned surplus (the “Alternative Standard”). Dividends exceeding these prescribed limits require the insurer to file a notice of its intent to declare the dividends with the NYDFS and prior approval or non-disapproval from the NYDFS.
State insurance holding company regulations also regulate changes in control. State laws generally provide that no person, corporation or other entity may acquire control of an insurance company, or a controlling interest in any parent company of an insurance company, without the prior approval of such insurance company’s domiciliary state insurance regulator. Generally, any person acquiring, directly or indirectly, 10% or more of the voting securities of an insurance company is presumed to have acquired “control” of the company. This statutory presumption may be rebutted by a showing that control does not exist in fact. State insurance regulators, however, may find that “control” exists in circumstances in which a person owns or controls less than 10% of voting securities.
The laws and regulations regarding acquisition of control transactions may discourage potential acquisition proposals and may delay or prevent a change of control involving us, including through unsolicited transactions that some of our shareholders might consider desirable.
NAIC
The mandate of the nature and/NAIC is to benefit state insurance regulatory authorities and consumers by promulgating model insurance laws and regulations for adoption by the states. The NAIC provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and Procedures Manual (the “Manual”). However, statutory accounting principles have been, or pricingmay be, modified by individual state laws, regulations and permitted practices. Changes to the Manual or modifications by the various state insurance departments may impact our statutory capital and surplus.
In September 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment Model Act (“ORSA”), which has been enacted by New York. ORSA requires that insurers maintain a risk management framework and conduct an internal risk and solvency assessment of such featuresthe insurer’s material risks in normal and stressed environments. The assessment is documented in a confidential annual summary report, a copy of which must be made available to regulators as required or upon request. We have been filing an ORSA summary report with the NYDFS since 2015.
In December 2012, the NAIC approved a new valuation manual containing a principles-based approach to life insurance company reserves. Principles-based reserving is designed to better address reserving for products, including the current generation of products for which the current formulaic basis for reserve determination does not work effectively. The principles-based reserving approach became effective for new sales.business on January 1, 2017 in the states where it has been adopted with a three-year phase-in period. The New York Legislature enacted legislation adopting principles-based reserving in June 2018 which was signed into law by the Governor in December 2018. Also, in December 2018, the NYDFS promulgated an emergency regulation to begin implementation of principle-based reserving, to become effective on January 1, 2020.
Captive Reinsurer Regulation
As described above, we use captive reinsurers as part of our capital management strategy. During the last few years, the NAIC and certain state regulators, including the NYDFS, have been scrutinizing insurance companies’ use of affiliated captive reinsurers or offshore entities.
In 2014, the NAIC considered a proposal to require states to apply NAIC accreditation standards, applicable to traditional insurers, to captive reinsurers. In 2015, the NAIC adopted such a proposal, in the form of a revised preamble to the NAIC accreditation standards (the “Standard”), with an effective date of January 1, 2016 for application of the Standard to captives that assume level premium term life insurance (“XXX”) business and universal life with secondary guarantees (“AXXX”) business. During 2014, the NAIC approved a new regulatory framework, the XXX/AXXX Reinsurance Framework, applicable to XXX/AXXX transactions. The framework requires more disclosure of an insurer’s use of captives in its statutory financial statements, and narrows the types of assets permitted to back statutory reserves that are required to support the insurer’s future obligations. The NAIC implemented the framework through an actuarial guideline (“AG 48”), which requires the actuary of the
We continually review our underwriting and pricing guidelines with a view to maintaining competitive offerings that are consistent with maintaining our financial strength and meeting profitability goals.12
InvestmentManagement
General
The Investment Management segmentceding insurer that opines on the insurer’s reserves to issue a qualified opinion if the framework is principally comprisednot followed. AG 48 applies prospectively, so that XXX/AXXX captives will not be subject to AG 48 if reinsured policies were issued prior to January 1, 2015 and ceded so that they were part of the investment management business of AB. Our consolidated economic interest in ABa reinsurance arrangement as of December 31, 2014, as is the case for the XXX business and AXXX business reinsured by our Arizona captive. Regulation of XXX/AXXX captives is deemed to satisfy the Standard if the applicable reinsurance transaction satisfies the XXX/AXXX Reinsurance Framework requirements adopted by the NAIC. The NAIC also adopted a revised Credit for Reinsurance Model Law in January 2016 was approximately 29.0%,and the Term and Universal Life Insurance Reserving Financing Model Regulation in December 2016 to replace AG 48. The model regulation will generally replace AG 48 in a state upon the state’s adoption of the model regulation. The NAIC left for future action the application of the Standard to captives that assume variable annuity business.
During 2015, the NAIC Financial Condition Committee (the “NAIC E Committee”) established the Variable Annuities Issues E Working Group (“VAIWG”) to oversee the NAIC’s efforts to study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions. In November 2015, upon the recommendation of the VAIWG, the NAIC E Committee adopted the Framework for Change which recommends charges for NAIC working groups to adjust the variable annuity statutory framework applicable to all insurers that have written or are writing variable annuity business. The Framework for Change contemplates a holistic set of reforms that would improve the current reserve and capital framework and address root cause issues that result in the use of captive arrangements but would not necessarily mandate recapture by insurers of VA cessions to captives. In November 2015, VAIWG engaged Oliver Wyman (“OW”) to conduct a quantitative impact study (the “QIS”) involving industry participants including the general partnership interestsCompany, of various reforms outlined in the Framework for Change. OW completed the QIS in July of 2016 and reported its initial findings to the VAIWG in late August 2016. The OW report proposed certain revisions to the current VA reserve and capital framework, which focused on (i) mitigating the asset-liability accounting mismatch between hedge instruments and statutory instruments and statutory liabilities, (ii) removing the non-economic volatility in statutory capital charges and the resulting solvency ratios and (iii) facilitating greater harmonization across insurers and products for greater compatibility, and recommended a second quantitative impact study to be conducted so that testing can inform the proper calibration for certain conceptual and/or preliminary parameters set out in the OW proposal. Following a fourth quarter 2016 public comment period and several meetings on the OW proposal, the VAIWG determined that a second quantitative impact study (the “QIS2”) involving industry participants, including us, will be conducted by OW. The QIS2 began in February 2017 and OW issued its recommendations in December 2017. In 2018, the VAIWG held indirectlymultiple public conference calls to discuss and refine the proposed recommendations. By the end of July 2018, both the VAIWG and the NAIC E Committee adopted the proposed recommendations with modifications reflecting input from all stakeholders. After adopting the Framework for Change, other NAIC working groups and task forces will consider specific revisions to the capital requirements for variable annuities to implement the recommendations in the framework. The changes to the variable annuity reserve and capital framework are expected to become effective January 1, 2020 with a suggested three-year phase-in period, but exact timing for implementation of changes remains subject to change.
We cannot predict what revisions, if any, will be made to the model laws and regulations relating to XXX/AXXX transactions, or to the Standard, if adopted for variable annuity captives, as states consider their adoption or undertake their implementation, or how the Framework for Change proposal may be implemented as a result of ongoing NAIC work. It is also unclear whether the Standard or other proposals will be adopted by AXA Equitablethe NAIC or how the NYDFS will implement the Framework for Change, or what additional actions and regulatory changes will result from the continued captives scrutiny and reform efforts by the NAIC and other regulatory bodies. Any regulatory action that limits our ability to achieve desired benefits from the use of or materially increases our cost of using captive reinsurance and applies retroactively, including, if the Standard is adopted as the parent companyproposed, without grandfathering provisions for existing captive variable annuity reinsurance entities, could have a material adverse effect on our financial condition or results of AllianceBernstein Corporation, the general partner (“AB General Partner”) of AB Holding and AB.operations. For additional information about AB,on our use of a captive reinsurance company, see “Risk Factors.”
Surplus and Capital; Risk Based Capital
Insurers are required to maintain their capital and surplus at or above minimum levels. Regulators have discretionary authority, in connection with the AB 10-K.continued licensing of insurance companies, to limit or prohibit an insurer’s sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders. We report our RBC based on a formula calculated by applying factors to various asset, premium and statutory reserve items, as well as taking into account the risk characteristics of the insurer. The major categories of risk involved are asset risk, insurance risk, interest rate risk, market risk and business risk. The formula is used as a regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose RBC ratio does not meet or exceed
Clients13
AB provides research, diversified investment management and related services globally to a broad range
certain RBC levels. As of December 31, 2016, 2015, and 2014, AB’s client assets under management (“AUM”) were approximately $480 billion, $467 billion and $474 billion, respectively, and its net revenues asthe date of each December 31, 2016, 2015 and 2014 were approximately $3.0 billion. AXA and its subsidiaries (including AXA Equitable), whose AUM consist primarilythe most recent annual statutory financial statements filed with insurance regulators, our RBC was in excess of fixed income investments, together constitute AB’s largest client. AB’s affiliates represented approximately 24%, 24% and 23% of its AUM as of December 31, 2016, 2015 and 2014, respectively, and AB earned approximately 5% of its net revenues from services it provided to its affiliates in each of those years.
Generally, AB is compensated for its investment services on the basis of investment advisory and services fees calculated as a percentage of AUM.
RBC levels. For additional information about AB,on RBC, see the AB 10-K, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - ResultsOperations—Liquidity and Capital Resources.”
Guaranty Associations and Similar Arrangements
Each of Continuing Operationsthe states in which we are admitted to transact business require life insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay certain contractual insurance benefits owed pursuant to insurance policies issued by Segment - Investment Management”impaired, insolvent or failed insurers. The laws are designed to protect policyholders from losses under insurance policies issued by insurance companies that become impaired or insolvent. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.
During each of the past five years, the assessments levied against us have not been material.
New York Insurance Regulation 210
State regulators are currently considering whether to apply regulatory standards to the determination and/or readjustment of non-guaranteed elements (“NGEs”) within life insurance policies and Noteannuity contracts that may be adjusted at the insurer’s discretion, such as the cost of insurance for universal life insurance policies and interest crediting rates for life insurance policies and annuity contracts. For example, in March 2018, Insurance Regulation 210 went into effect in New York. That regulation establishes standards for the determination and any readjustment of NGEs, including a prohibition on increasing profit margins on existing business or recouping past losses on such business, and requires advance notice of any adverse change in a NGE to both the NYDFS as well as to affected policyholders. We are continuing to assess the impact of Regulation 210 on our business. Beyond the New York regulation and a similar rule recently enacted in California that takes effect on July 1, 2019, the likelihood of Notesenactment of any such state-based regulation is uncertain at this time, but if implemented, these regulations could have adverse effects on our business and consolidated results of operations.
Broker-Dealer and Securities Regulation
We and certain policies and contracts offered by us are subject to Consolidatedregulation under the Federal securities laws administered by the U.S. Securities and Exchange Commission (the “SEC”), self-regulatory organizations and under certain state securities laws. These regulators may conduct examinations of our operations, and from time to time make requests for particular information from us.
Certain of our subsidiaries and affiliates, including AXA Advisors, AXA Distributors, AllianceBernstein Investments, Inc. and Sanford C. Bernstein & Co., LLC (“SCB LLC”), are registered as broker-dealers (collectively, the “Broker-Dealers”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Broker-Dealers are subject to extensive regulation by the SEC and are members of, and subject to regulation by, the Financial Statements.
Research
AB’s high-quality, in-depth research isIndustry Regulatory Authority, Inc. (“FINRA”), a self-regulatory organization subject to SEC oversight. The Broker-Dealers are subject to the foundationcapital requirements of its business. AB believesthe SEC and/or FINRA, which specify minimum levels of capital (“net capital”) that its global teamthe Broker-Dealers are required to maintain and also limit the amount of research professionals, whose disciplines include economic, fundamental equity, fixed incomeleverage that the Broker-Dealers are able to employ in their businesses. The SEC and quantitative research, gives it a competitive advantage in achieving investment success for its clients. ABFINRA also has experts focused on multi-asset strategies, wealth managementregulate the sales practices of the Broker-Dealers. In recent years, the SEC and FINRA have intensified their scrutiny of sales practices relating to variable annuities, variable life insurance and alternative investments.
Investment Services
AB’s broad range of investment services includes: (a) actively-managed equity strategies with global and regional portfolios across capitalization ranges and investment strategies, including value, growth, and core equities; (b) actively-managed traditional and unconstrained fixed income strategies, including taxable and tax-exempt strategies; (c) passive management, including index and enhanced index strategies; (d) alternative investments, including hedge funds, funds of funds and private equity (e.g., direct real estate investingamong other products. In addition, the Broker-Dealers are also subject to regulation by state securities administrators in those states in which they conduct business, who may also conduct examinations and direct lending);inquiries to the Broker-Dealers.
Certain of our Separate Accounts are registered as investment companies under the Investment Company Act. Separate Account interests under certain annuity contracts and (e) multi-asset solutionsinsurance policies issued by us are also registered under the Securities Act. EQAT, AXA Premier VIP Trust and services, including dynamic asset allocation, customized target-date funds and target-risk funds.
AB’s services span various investment disciplines, including market capitalization (e.g., large-, mid- and small-cap equities), term (e.g., long-, intermediate- and short-duration debt securities), and geographic location (e.g., U.S., international, global, emerging markets, regional and local), in major markets around the world.
Distribution Channels
Institutions. AB offers to its institutional clients, which include private and public pension plans, foundations and endowments, insurance companies, central banks and governments worldwide, and various of AB’s affiliates, separately-managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, hedge funds and other investment vehicles (“Institutional Services”).
AB manages the assets of its institutional clients pursuant to written investment management agreements or other arrangements, which generally1290 Funds are terminable at any time or upon relatively short notice by either party. In general, AB’s written investment management agreements may not be assigned without the client’s consent.
AXA and its subsidiaries (including AXA Equitable) together constitute AB’s largest institutional client. AXA’s AUM accounted for approximately 35%, 33% and 32% of AB’s institutional AUM as of December 31, 2016, 2015 and 2014, respectively, and approximately 28%, 26% and 22% of AB’s institutional revenues for 2016, 2015 and 2014, respectively. No single institutional client other than AXA and its subsidiaries accounted for more than approximately 1% of AB’s net revenues for the year ended December 31, 2016.
As of December 31, 2016, 2015 and 2014, Institutional Services represented approximately 50%, 51% and 50%, respectively, of AB’s AUM, and the fees AB earned for providing these services represented approximately 14% of AB’s net revenues for each of those years.
Retail. AB provides investment management and related services to a wide variety of individual retail investors, both in the U.S. and internationally, through retail mutual funds AB sponsors, mutual fund sub-advisory relationships, separately-managed account programs, and other investment vehicles (“Retail Products and Services”).
AB distributes its Retail Products and Services through financial intermediaries, including broker-dealers, insurance sales representatives, banks, registered investment advisers and financial planners. These products and services include open-end and closed-end funds that are either (i) registered as investment companies under the Investment Company Act (“U.S. Funds”), or (ii) notand shares offered by these investment companies are also registered under the Securities Act.
Certain subsidiaries and affiliates including AXA Equitable FMG and AXA Advisors are registered as investment advisers under the Investment Company ActAdvisers Act. The investment advisory activities of such registered investment advisers are subject to various federal and state laws and regulations and to the laws in those foreign countries in which they conduct business. These
laws and regulations generally not offeredgrant supervisory agencies broad administrative powers, including the power to United States persons (“Non-U.S. Funds”limit or restrict the carrying on of business for failure to comply with such laws and collectivelyregulations.
AXA Equitable FMG is registered with the U.S. Funds, “AB Funds”Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator with respect to certain portfolios and is also a member of the National Futures Association (“NFA”). TheyThe CFTC is a federal independent agency that is responsible for, among other things, the regulation of commodity interests and enforcement of the Commodity Exchange Act (“CEA”). The NFA is a self-regulatory organization to which the CFTC has delegated, among other things, the administration and enforcement of commodity regulatory registration requirements and the regulation of its members. As such, AXA Equitable FMG is subject to regulation by the NFA and CFTC and is subject to certain legal requirements and restrictions in the CEA and in the rules and regulations of the CFTC and the rules and by-laws of the NFA on behalf of itself and any commodity pools that it operates, including investor protection requirements and anti-fraud prohibitions, and is subject to periodic inspections and audits by the CFTC and NFA. AXA Equitable FMG is also include separately-managed account programs, which are sponsored by financial intermediariessubject to certain CFTC-mandated disclosure, reporting and generally charge an all-inclusive fee coveringrecord-keeping obligations.
Regulators, including the SEC, FINRA, the CFTC, NFA and state attorneys general, continue to focus attention on various practices in or affecting the investment management trade execution, asset allocation,and/or mutual fund industries, including portfolio management, valuation and custodialthe use of fund assets for distribution.
We and certain of our subsidiaries and affiliates have provided, and in certain cases continue to provide, information and documents to the SEC, FINRA, the CFTC, NFA, state attorneys general, the NYDFS and other state insurance regulators, and other regulators regarding our compliance with insurance, securities and other laws and regulations regarding the conduct of our business. For example, we have responded to inquiries from the SEC requesting information with regard to contract language and accompanying disclosure for certain variable annuity contracts. For additional information on regulatory matters, see Note 17 of the Notes to the Consolidated Financial Statements.
The SEC, FINRA, the CFTC and other governmental regulatory authorities may institute administrative services. or judicial proceedings that may result in censure, fines, the issuance of cease-and-desist orders, trading prohibitions, the suspension or expulsion of a broker-dealer or member, its officers, registered representatives or employees or other similar sanctions.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Currently, the U.S. federal government does not directly regulate the business of insurance. While the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) does not remove primary responsibility for the supervision and regulation of insurance from the states, Title V of the Dodd-Frank Act establishes the Federal Insurance Office (“FIO”) within the U.S. Treasury Department and reforms the regulation of the non-admitted property and casualty insurance market and the reinsurance market. The Dodd-Frank Act also established the Financial Stability Oversight Council (“FSOC”), which is authorized to subject non-bank financial companies, including insurers, to supervision by the Federal Reserve and enhanced prudential standards if the FSOC determines that a non-bank financial institution could pose a threat to U.S. financial stability.
The FIO has authority that extends to all lines of insurance except health insurance, crop insurance and (unless included with life or annuity components) long-term care insurance. Under the Dodd-Frank Act, the FIO is charged with monitoring all aspects of the insurance industry (including identifying gaps in regulation that could contribute to a systemic crisis), recommending to the FSOC the designation of any insurer and its affiliates (potentially including AXA and its affiliates) as a non-bank financial company subject to oversight by the Board of Governors of the Federal Reserve System (including the administration of stress testing on capital), assisting the Treasury Secretary in negotiating “covered agreements” with non-U.S. governments or regulatory authorities, and, with respect to state insurance laws and regulation, determining whether state insurance measures are pre-empted by such covered agreements.
In addition, AB provides distribution, shareholder servicing, transfer agency servicesthe FIO is empowered to request and administrative services for its Retail Productscollect data (including financial data) on and Services.from the insurance industry and insurers (including reinsurers) and their affiliates. In such capacity, the FIO may require an insurer or an affiliate of an insurer to submit such data or information as the FIO may reasonably require. In addition, the FIO’s approval will be required to subject a financial company whose largest U.S. subsidiary is an insurer to the special orderly liquidation process outside the federal bankruptcy code, administered by the Federal Deposit Insurance Corporation (the “FDIC”) pursuant to the Dodd-Frank Act. U.S. insurance subsidiaries of any such financial company, however, would be subject to rehabilitation and liquidation proceedings under state insurance law. The Dodd-Frank Act also reforms the regulation of the non-admitted property/casualty insurance market (commonly referred to as excess and surplus lines) and the reinsurance markets, including prohibiting the
ability of non-domiciliary state insurance regulators to deny credit for reinsurance when recognized by the ceding insurer’s domiciliary state regulator.
Other aspects of our operations could also be affected by the Dodd-Frank Act. These include:
Heightened Standards and Safeguards
The FSOC may recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices we and other insurers or other financial services companies engage in if the FSOC determines that those activities or practices could create or increase the risk that significant liquidity, credit or other problems spread among financial companies. We cannot predict whether any such recommendations will be made or their effect on our business, consolidated results of operations or financial condition.
Over-The-Counter Derivatives Regulation
The Dodd-Frank Act includes a framework of regulation of the over-the-counter (“OTC”) derivatives markets. Regulations approved to date require clearing of previously uncleared transactions and will require clearing of additional OTC transactions in the future. In addition, regulations approved pursuant to the Dodd-Frank Act impose margin requirements on OTC transactions not required to be cleared. As a result of these regulations, our costs of risk mitigation have and may continue to increase under the Dodd-Frank Act. For example, margin requirements, including the requirement to pledge initial margin for OTC cleared transactions entered into after June 10, 2013 and for OTC uncleared transactions entered into after the phase-in period, which would be applicable to us in 2020, have increased. In addition, restrictions on securities that will qualify as eligible collateral, will require increased holdings of cash and highly liquid securities with lower yields causing a reduction in income. Centralized clearing of certain OTC derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivatives transactions. We use derivatives to mitigate a wide range of risks in connection with our business, including the impact of increased benefit exposures from certain variable annuity products that offer GMxB features. We have always been subject to the risk that our hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might result from the enactment and implementation of the Dodd-Frank Act.
Broker-Dealer Regulation
The Dodd-Frank Act provides that the SEC may promulgate rules to provide that the standard of conduct for all broker-dealers, when providing personalized investment advice about securities to retail customers (and any other customers as the SEC may by rule provide) will be the same as the standard of conduct applicable to an investment adviser under the Investment Advisers Act. On April 18, 2018, the SEC released a set of proposed rules that would, among other things, enhance the existing standard of conduct for broker-dealers to require them to act in the best interest of their clients; clarify the nature of the fiduciary obligations owed by registered investment advisers to their clients; impose new disclosure requirements aimed at ensuring investors understand the nature of their relationship with their investment professionals; and restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor.” Public comments were due by August 7, 2018. Although the full impact of the proposed rules can only be measured when the implementing regulations are adopted, the intent of this provision is to authorize the SEC to impose on broker-dealers fiduciary duties to their customers, similar to what applies to investment advisers under existing law. We are currently assessing these proposed rules to determine the impact they may have on our business. In addition, FINRA is also currently focusing on how broker-dealers identify and manage conflicts of interest.
Although many of the regulations implementing portions of the Dodd-Frank Act have been promulgated, we are still unable to predict how this legislation may be interpreted and enforced or the full extent to which implementing regulations and policies may affect us. Also, the Trump administration and Congress have indicated that the Dodd-Frank Act will be under further scrutiny and some of the provisions of the Dodd-Frank Act may be revised, repealed or amended. For example, President Trump has issued an executive order that calls for a comprehensive review of the Dodd-Frank Act and requires the Secretary of the Treasury to consult with the heads of the member agencies of FSOC to identify any laws, regulations or requirements that inhibit federal regulation of the financial system in a manner consistent with the core principles identified in the executive order. In addition, on June 8, 2017, the U.S. House of Representatives passed the Financial CHOICE Act of 2017, which proposes to amend or repeal various sections of the Dodd-Frank Act. There is considerable uncertainty with respect to the impact the Trump administration and Congress may have, if any, on the Dodd-Frank Act and any changes likely will take
time to unfold. We cannot predict the ultimate content, timing or effect of any reform legislation or the impact of potential legislation on us.
ERISA Considerations
We provide certain products and services to employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) and certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”). As such, our activities are subject to the restrictions imposed by ERISA and the Code, including the requirement that fiduciaries must perform their duties solely in the interests of plan participants and beneficiaries, and fiduciaries may not cause or permit a covered plan to engage in certain prohibited transactions with persons (parties-in-interest) who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Code are subject to enforcement by the U.S. FundsDepartment of Labor (the “DOL”), the Internal Revenue Service (the “IRS”) and the Pension Benefit Guaranty Corporation.
In April 2016, the DOL issued a rule (the “DOL Rule”) which significantly expanded the range of activities considered to be fiduciary investment advice under ERISA when our advisors and our employees provide investment-related information and support to retirement plan sponsors, participants and IRA holders. In the wake of the March 2018 federal appeals court decision to vacate the DOL Rule, the SEC and NAIC as well as state regulators are reflectedcurrently considering whether to apply an impartial conduct standard similar to the DOL Rule to recommendations made in connection with certain annuities and, in one case, to life insurance policies. For example, the NAIC is actively working on a proposal to raise the advice standard for annuity sales and in July 2018, the NYDFS issued a final version of Regulation 187 that adopts a “best interest” standard for recommendations regarding the sale of life insurance and annuity products in New York. Regulation 187 takes effect on August 1, 2019 with respect to annuity sales and February 1, 2020 for life insurance sales and is applicable to sales of life insurance and annuity products in New York. We are currently assessing Regulation 187 to determine the impact it may have on our business. In November 2018, the three primary agent groups in New York launched a legal challenge against the NYDFS over the adoption of Regulation 187. It is not possible to predict whether this challenge will be successful. Beyond the New York regulation, the likelihood of enactment of any such federal or state-based regulation is uncertain at this time, but if implemented, these regulations could have adverse effects on our business and consolidated results of operations.
International Regulation
Regulators and lawmakers in non-U.S. jurisdictions are engaged in addressing the causes of the financial crisis and means of avoiding such crises in the applicable investment management agreement, which generally must be approved annuallyfuture. On July 18, 2013, the International Association of Insurance Supervisors (“IAIS”) published an initial assessment methodology for designating global systemically important insurers (“GSIIs”), as part of the global initiative launched by the boards of directors or trustees of those funds, including by a majorityG20 with the assistance of the independent directorsFinancial Stability Board (the “FSB”) to identify those insurers whose distress or trustees. Increasesdisorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity.
On July 18, 2013, the FSB published its initial list of nine GSIIs, which included AXA. The GSII list was originally intended to be updated annually following consultation with the IAIS and respective national supervisory authorities. AXA remained on the list as updated in these fees mustNovember 2014, 2015 and 2016. However, the FSB announced in November 2017 that it, in consultation with the IAIS and national authorities, has decided not to publish a new list of GSIIs for 2017. On November 14, 2018, the FSB announced that, in light of IAIS progress in developing a proposed holistic framework for the assessment and mitigation of potential systemic risk in the insurance sector, the FSB has decided not to engage in an identification of G-SIIs in 2018. In its public consultation on the holistic framework, issued on November 14, 2018, the IAIS recommended that the implementation of its proposed holistic framework should obviate the need for the FSB’s annual G-SII identification process. The FSB subsequently stated that it will assess the IAIS’s recommendation to suspend G-SII identification from 2020, once the holistic framework is finalized in November 2019, and, in November 2022, based on the initial implementation of the holistic framework, review the need to either discontinue or reestablish an annual identification of G-SIIs.
The policy measures for GSIIs, published by the IAIS in July 2013, include (i) the introduction of new capital requirements; a “basic” capital requirement (“BCR”) applicable to all GSII activities which is intended to serve as a basis for an additional level of capital, called “Higher Loss Absorbency” (“HLA”) required from GSIIs in relation to their systemic activities, (ii) greater regulatory oversight over holding companies, (iii) various measures to promote the structural and financial “self-sufficiency” of group companies and reduce group interdependencies including restrictions on intra-group financing and other arrangements, and (iv) in general, a greater level of regulatory scrutiny for GSIIs (including a requirement to establish a Systemic Risk Management Plan (“SRMP”), a Liquidity Risk Management Plan (“LRMP”) and a Recovery and Resolution Plan (“RRP”) which have entailed significant new processes, reporting and compliance burdens and costs for AXA. The
contemplated policy measures include the constitution of a Crisis Management Group by the group-wide supervisor, the preparation of the above-mentioned documents (SRMP, LRMP and RRP) and the development and implementation of the BCR in 2014, while other measures are to be approvedphased in more gradually, such as the HLA (the first version of which was endorsed by fund shareholders; decreases needthe FSB in October 2015 but which is expected to be revised before its implementation in at least 2019).
On June 16, 2016, the IAIS published an updated assessment methodology, applicable to the 2016 designation process, which is yet to be endorsed by the FSB. To support some adjustments proposed by the revised assessment methodology, the IAIS also published a paper on June 16, 2016, describing the “Systemic Features Framework” that the IAIS intends to employ in assessing whether certain contractual features and other factors are likely to expose an insurer to a greater degree of systemic risk, focusing specifically on two sets of risks: macroeconomic exposure and substantial liquidity risk. Also, the IAIS stated that the 2016 assessment methodology, along with the Systemic Features Framework, will lead to a change in HLA design and calibration. In addition, the IAIS is in the process of developing an activities-based approach to systemic risk in the insurance sector and published a consultation paper on this approach in December 2017. The development of this activities-based approach may have significant implications for the identification of GSIIs and the policy measures to which they are expected to be subject.
As part of its efforts to create a common framework for the supervision of internationally active insurance groups (“IAIGs”), the IAIS has also been developing a comprehensive, group-wide international insurance capital standard (the “ICS”) to be applied to both GSIIs and IAIGs, although it is not expected to be finalized until 2019 at the earliest, and is not expected to be fully implemented, if at all, until at least five years thereafter. AXA currently meets the parameters set forth to define an IAIG. Although the BCR and HLA are more developed than the ICS at present, the IAIS has stated that it intends to revisit both standards following development and refinement of the ICS, and that the BCR will eventually be replaced by the ICS. The NAIC plans to develop an “aggregation method” for group capital. Although the aggregation method will not be including any decreasespart of ICS, the IAIS aims to make a determination whether the aggregated approach provides substantially the same outcome as the ICS, in which case it could be incorporated into the ICS as an outcome-equivalent approach.
Although the standards issued by the FSB and/or the IAIS are not binding on the United States or other jurisdictions around the world unless and until the appropriate local governmental bodies or regulators adopt appropriate laws and regulations, these measures could have far reaching regulatory and competitive implications for AXA in the event they are implemented by a fund’s directorsits group supervisors, which in turn, to the extent we are deemed to be controlled by or trustees.an affiliate of AXA at the time the measures are implemented, or we independently meet the criteria for being an IAIG and the measures are adopted by U.S. group supervisors, could materially affect our competitive position, consolidated results of operations, financial condition, liquidity and how we operate our business.
Federal Tax Legislation, Regulation, and Administration
Although we cannot predict what legislative, regulatory, or administrative changes may or may not occur with respect to the federal tax law, we nevertheless endeavor to consider the possible ramifications of such changes on the profitability of our business and the attractiveness of our products to consumers. In general, each investment management agreement withthis regard, we analyze multiple streams of information, including those described below.
Enacted Legislation
At present, the U.S. Funds providesfederal tax laws generally permit certain holders of life insurance and annuity products to defer taxation on the build-up of value within such products (commonly referred to as “inside build-up”) until payments are made to the policyholders or other beneficiaries. From time to time, Congress considers legislation that could enhance or reduce (or eliminate) the benefit of tax deferral on some life insurance and annuity products. As an example, the American Taxpayer’s Relief Act increased individual tax rates for termination by either partyat any time upon 60 days’ notice.higher-income taxpayers. Higher tax rates increase the benefits of tax deferral on inside build-up and, correspondingly, tend to enhance the attractiveness of life insurance and annuity products to consumers that are subject to those higher tax rates. The Tax Reform Act reduced individual tax rates, which could reduce demand for our products. The modification or elimination of this tax-favored status could also reduce demand for our products. In addition, if the treatment of earnings accrued inside an annuity contract was changed prospectively, and the tax-favored status of existing contracts was grandfathered, holders of existing contracts would be less likely to surrender or rollover their contracts. These changes could reduce our earnings and negatively impact our business.
Fees paid by Non-U.S. Funds are reflected in investment management agreements that continue until they are terminated. Increases in these fees generally must be approved by the relevant regulatory authority, depending on the domicile and structure18
The mutual funds AB sub-advises for AXATax Reform Act
The Tax Reform Act overhauled the U.S. Internal Revenue Code and its subsidiaries (including AXA Equitable) together constitute AB’s largest client. They accounted for approximately 21%, 22%changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies. While the Tax Reform Act had a net positive economic impact on us, it contained measures which could have adverse or uncertain impacts on some aspects of our business, results of operations or financial condition. We continue to monitor regulations and 21% of AB’s retail AUM as of December 31, 2016, 2015, and 2014, respectively, and approximately 4%, 4% and 3% of AB’s retail net revenues as of 2016, 2015 and 2014, respectively.
Certain subsidiaries of AXA, including AXA Advisors, a subsidiary of AXA Financial, were responsible for approximately 2%, 4% and 3% of total sales of shares of open-end AB Funds in 2016, 2015 and 2014, respectively. HSBC was responsible for approximately 12% of AB’s open-end AB Fund sales in 2016. UBS AG was responsible for approximately 8% and 11% of AB’s open-end AB Fund sales in 2015 and 2014, respectively. Neither AB’s affiliates, HSBC or UBS AG are under any obligation to sell a specific amount of AB Fund shares and each also sells shares of mutual funds that it sponsors and that are sponsored by unaffiliated organizations.No other entity accounted for 10% or more of AB’s open-end AB Fund sales.
Most open-end U.S. Funds have adopted a plan under Rule 12b-1interpretations of the Investment CompanyTax Reform Act that allows the fund to pay, outcould impact our business, results of assets of the fund, distributionoperations and service fees for the distribution and sale of its shares. The open-end U.S. Funds have entered into such agreements with AB, and AB has entered into selling and distribution agreements pursuant to which it pays sales commissions to the financial intermediaries that distribute AB’s open-end U.S. Funds. These agreements are terminable by either party upon notice (generally 30 days) and do not obligate the financial intermediary to sell any specific amount of fund shares.
As of December 31, 2016, retail U.S. Fund AUM were approximately $41 billion, or 26% of retail AUM, as compared to $45 billion, or 29%, as of December 31, 2015, and $49 billion, or 30%, as of December 31, 2014. Non-U.S. Fund AUM, as of December 31, 2016, totaled $59 billion, or 37% of retail AUM, as compared to $52 billion, or 33%, as of December 31, 2015, and $57 billion, or 36%, as of December 31, 2014.
AB’s Retail Services represented approximately 33%, 33% and 34% of AB’s AUM as of December 31, 2016, 2015 and 2014, respectively, and the fees AB earned from providing these services represented approximately 42%, 45% and 46% of AB’s net revenues for the years ended December 31, 2016, 2015 and 2014, respectively.
Private Wealth Management. AB offers to its private clients, which include high-net-worth individuals and families, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities, separately-managed accounts, hedge funds, mutual funds and other investment vehicles (“Private Wealth Services”).
AB manages these accounts pursuant to written investment advisory agreements, which generally are terminable at any time or upon relatively short notice by any party and may not be assigned without the client’s consent.
AB’s Private Wealth Services represented approximately 17%, 16% and 16% of AB’s AUM as of December 31, 2016, 2015 and 2014, and the fees AB earned from providing these services represented approximately 23%, 23% and 22% of AB’s net revenues for 2016, 2015 and 2014, respectively.
Bernstein Research Services. AB offers high-quality fundamental research, quantitative services and brokerage-related services in equities and listed options to institutional investors, such as pension fund, hedge fund and mutual fund managers, and other institutional investors (“Bernstein Research Services”). AB serves its clients, which are based in the United States and in other major markets around the world, through AB’s trading professionals, who are primarily based in New York, London and Hong Kong, and AB’s sell-side analysts, who provide fundamental company and industry research along with quantitative research into securities valuation and factors affecting stock price movements.
AB earns revenues for providing investment research to, and executing brokerage transactions for, institutional clients. These clients compensate AB principally by directing AB to execute brokerage transactions on their behalf, for which AB earns commissions. These services accounted for approximately 16% of AB’s net revenues as of each December 31, 2016, 2015 and 2014.
Custody
AB’s U.S.- based broker-dealer subsidiary acts as custodian for the majority of AB’s Private Wealth Management AUM and some of its Institutions AUM. Other custodial arrangements are maintained by client-designated banks, trust companies, brokerage firms or custodians.
For additional information about AB’s investment advisory fees, including performance-based fees, see the AB 10-K, the AB Risk Factors in Exhibit 13.1 hereto, andcondition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - ResultsOperations—Macroeconomic and Industry Trends—Impact of Continuing Operationsthe Tax Reform Act.”
Future Changes in U.S. Tax Laws
We anticipate that, following the Tax Reform Act, we will continue deriving tax benefits from certain items, including but not limited to the dividend received deduction (“DRD”), tax credits, insurance reserve deductions and interest expense deductions. However, there is a risk that interpretations of the Tax Reform Act, regulations promulgated thereunder, or future changes to federal, state or other tax laws could reduce or eliminate the tax benefits from these or other items and result in our incurring materially higher taxes.
Regulatory and Other Administrative Guidance from the Treasury Department and the IRS
Regulatory and other administrative guidance from the Treasury Department and the IRS also could impact the amount of federal tax that we pay. For example, the adoption of “principles based” approaches for calculating statutory reserves may lead the Treasury Department and the IRS to issue guidance that changes the way that deductible insurance reserves are determined, potentially reducing future tax deductions for us.
Privacy and Security of Customer Information and Cybersecurity Regulation
We are subject to federal and state laws and regulations that require financial institutions to protect the security and confidentiality of customer information, and to notify customers about their policies and practices relating to their collection and disclosure of customer information and their practices relating to protecting the security and confidentiality of that information. We have adopted a privacy policy outlining procedures and practices to be followed by Segment - Investment Management.”members of Holdings and its subsidiaries relating to the collection, disclosure and protection of customer information. As required by law, a copy of the privacy policy is mailed to customers on an annual basis. Federal and state laws generally require that we provide notice to affected individuals, law enforcement, regulators and/or potentially others if there is a situation in which customer information is intentionally or accidentally disclosed to and/or acquired by unauthorized third parties. Federal regulations require financial institutions to implement programs to detect, prevent, and mitigate identity theft. Federal and state laws and regulations regulate the ability of financial institutions to make telemarketing calls and to send unsolicited e-mail or fax messages to both consumers and customers, and also regulate the permissible uses of certain categories of customer information. Violation of these laws and regulations may result in significant fines and remediation costs. It may be expected that legislation considered by either the U.S. Congress and/or state legislatures could create additional and/or more detailed obligations relating to the use and protection of customer information.
On February 16, 2017, the NYDFS announced the adoption of a new cybersecurity regulation for financial services institutions, including banking and insurance entities, under its jurisdiction. The new regulation became effective on March 1, 2017 and is being implemented in stages that commenced on August 28, 2017 and will be fully implemented by March 1, 2019. This new regulation requires these entities to, among other things, establish and maintain a cybersecurity policy designed to protect consumers’ private data. We have adopted a cybersecurity policy outlining our policies and procedures for the protection of our information systems and information stored on those systems that comports with the regulation. In addition to New York’s cybersecurity regulation, the NAIC adopted the Insurance Data Security Model Law in October 2017. Under the model law, companies that are compliant with the NYDFS cybersecurity regulation are deemed also to be in compliance with the model law. The purpose of the model law is to establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. Certain states have adopted the model law, and we expect that additional states will also adopt the model law, although it cannot be predicted whether or not, or in what form or when, they will do so.
Environmental Considerations
Federal, state and local environmental laws and regulations apply to our ownership and operation of real property. Inherent in owning and operating real property are the risk of environmental liabilities and the costs of any required clean-up. Under the
laws of certain states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of clean-up, which could adversely affect our mortgage lending business. In some states, this lien may have priority over the lien of an existing mortgage against such property. In addition, in some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, we may be liable, in certain circumstances, as an “owner” or “operator,” for costs of cleaning-up releases or threatened releases of hazardous substances at a property mortgaged to us. We also risk environmental liability when we foreclose on a property mortgaged to us. However, federal legislation provides for a safe harbor from CERCLA liability for secured lenders, provided that certain requirements are met. Application of various other federal and state environmental laws could also result in the imposition of liability on us for costs associated with environmental hazards.
We routinely conduct environmental assessments prior to making a mortgage loan or taking title to real estate, whether through acquisition for investment or through foreclosure on real estate collateralizing mortgages. We cannot provide assurance that unexpected environmental liabilities will not arise. However, based on information currently available to us, we believe that any costs associated with compliance with environmental laws and regulations or any clean-up of properties would not have a material adverse effect on our consolidated results of operations.
Intellectual Property
We rely on a combination of copyright, trademark, patent and trade secret laws to establish and protect our intellectual property rights. Holdings has entered into a licensing arrangement (the “Trademark License Agreement”) with AXA concerning the use by Holdings of the “AXA” name. We also have an extensive portfolio of trademarks and service marks that we consider important in the marketing of our products and services. We regard our intellectual property as valuable assets and protect them against infringement.
Iran Threat Reduction and Syria Human Rights Act
Holdings, AXA Equitable and their global subsidiaries had no transactions or activities requiring disclosure under the Iran Threat Reduction and Syria Human Rights Act (“Iran Act”), nor were they involved in the AXA Group matters described immediately below.
The non-U.S. based subsidiaries of AXA operate in compliance with applicable laws and regulations of the various jurisdictions in which they operate, including applicable international (United Nations and European Union) laws and regulations. While AXA Group companies based and operating outside the United States generally are not subject to U.S. law, as an international group, AXA has in place policies and standards (including the AXA Group International Sanctions Policy) that apply to all AXA Group companies worldwide and often impose requirements that go well beyond local law.
AXA has informed us that AXA Konzern AG, an AXA insurance subsidiary organized under the laws of Germany, provides car, accident and health insurance to diplomats based at the Iranian Embassy in Berlin, Germany. The total annual premium of these policies is approximately $139,700 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $24,272.
AXA also has informed us that AXA Belgium, an AXA insurance subsidiary organized under the laws of Belgium, has two policies providing for car insurance for Global Trading NV, which was designated on May 17, 2018 under (E.O.) 13224, and subsequently changed its name to Energy Engineers & Construction on August 20, 2018. The total annual premium of these policies is approximately $6,559 before tax and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $983.
In addition, AXA has informed us that AXA Insurance Ireland, an AXA insurance subsidiary, provides statutorily required car insurance under four separate policies to the Iranian Embassy in Dublin, Ireland. AXA has informed us that compliance with the Declined Cases Agreement of the Irish Government prohibits the cancellation of these policies unless another insurer is willing to assume the coverage. The total annual premium for these policies is approximately $7,115 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $853.
Also, AXA has informed us that AXA Sigorta, a subsidiary of AXA organized under the laws of the Republic of Turkey, provides car insurance coverage for vehicle pools of the Iranian General Consulate and the Iranian Embassy in Istanbul, Turkey. Motor liability insurance coverage is compulsory in Turkey and cannot be canceled unilaterally. The total annual premium in
respect of these policies is approximately $3,150 and the annual net profit, which is difficult to calculate with precision, is estimated to be $473.
Additionally, AXA has informed us that AXA Winterthur, an AXA insurance subsidiary organized under the laws of Switzerland, provides Naftiran Intertrade, a wholly-owned subsidiary of the Iranian state-owned National Iranian Oil Company, with life, disability and accident coverage for its employees. In addition, AXA Winterthur also provides car and property insurance coverage for the Iranian Embassy in Bern. The provision of these forms of coverage is mandatory in Switzerland. The total annual premium of these policies is approximately $396,597 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $59,489.
Also, AXA has informed us that AXA Egypt, an AXA insurance subsidiary organized under the laws of Egypt, provides the Iranian state-owned Iran Development Bank, two life insurance contracts, covering individuals who have loans with the bank. The total annual premium of these policies is approximately $19,839 and annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $2,000.
Furthermore, AXA has informed us that AXA XL, which AXA acquired during the third quarter of 2018, through various non-U.S. subsidiaries, provides insurance to marine policyholders located outside of the U.S. or reinsurance coverage to non-U.S. insurers of marine risks as well as mutual associations of ship owners that provide their members with protection and liability coverage. The provision of these coverages may involve entities or activities related to Iran, including transporting crude oil, petrochemicals and refined petroleum products. AXA XL’s non-U.S. subsidiaries insure or reinsure multiple voyages and fleets containing multiple ships, so they are unable to attribute gross revenues and net profits from such marine policies to activities with Iran. As the activities of these insureds and re-insureds are permitted under applicable laws and regulations, AXA XL intends for its non-U.S. subsidiaries to continue providing such coverage to its insureds and re-insureds to the extent permitted by applicable law.
Lastly, a non-U.S. subsidiary of AXA XL provided accident & health insurance coverage to the diplomatic personnel of the Embassy of Iran in Brussels, Belgium during the third quarter of 2018. AXA XL’s non-U.S. subsidiary received aggregate payments for this insurance from inception through December 31, 2018 of approximately $73,451. Benefits of approximately $2,994 were paid to beneficiaries during 2018. These activities are permitted pursuant to applicable law. The policy has been canceled and is no longer in force.
The aggregate annual premium for the above-referenced insurance policies is approximately $646,411, representing approximately 0.0006% of AXA’s 2018 consolidated revenues, which exceed $100 billion. The related net profit, which is difficult to calculate with precision, is estimated to be $88,070, representing approximately 0.001% of AXA’s 2018 aggregate net profit.
EMPLOYEESERISA Considerations
As of December 31, 2016, the Company had approximately 7,442 full time employees. Of these, approximately 4,004 were employed full-time by AXA Equitable and approximately 3,438 were employed full-time by AB.
COMPETITION
Insurance. There is strong competition among insurers, banks, brokerage firms and other financial institutions and providers seeking clients for the types ofWe provide certain products and services we provide. Competition is intense amongto employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) and certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”). As such, our activities are subject to the restrictions imposed by ERISA and the Code, including the requirement that fiduciaries must perform their duties solely in the interests of plan participants and beneficiaries, and fiduciaries may not cause or permit a broadcovered plan to engage in certain prohibited transactions with persons (parties-in-interest) who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Code are subject to enforcement by the U.S. Department of Labor (the “DOL”), the Internal Revenue Service (the “IRS”) and the Pension Benefit Guaranty Corporation.
In April 2016, the DOL issued a rule (the “DOL Rule”) which significantly expanded the range of financial institutionsactivities considered to be fiduciary investment advice under ERISA when our advisors and other financial service providers forour employees provide investment-related information and support to retirement plan sponsors, participants and other savings dollars. For additional information regarding competition, see “Risk Factors.”
The principal competitive factors affecting our businessIRA holders. In the wake of the March 2018 federal appeals court decision to vacate the DOL Rule, the SEC and NAIC as well as state regulators are our financial strength as evidenced, in part, by our financial and claims-paying ratings; accesscurrently considering whether to capital; access to diversified sources of distribution; size and scale; product quality, range, features/functionality and price; our ability to bring customized productsapply an impartial conduct standard similar to the market quickly; technological capabilities; our abilityDOL Rule to explain complicated productsrecommendations made in connection with certain annuities and, featuresin one case, to our distribution channelslife insurance policies. For example, the NAIC is actively working on a proposal to raise the advice standard for annuity sales and customers; crediting rates on fixed products; visibility, recognition and understandingin July 2018, the NYDFS issued a final version of our brand inRegulation 187 that adopts a “best interest” standard for recommendations regarding the marketplace; reputation and qualitysale of service; the tax-favored status certain of our products receive under the current federal and state laws and (with respect to variablelife insurance and annuity products mutual fundsin New York. Regulation 187 takes effect on August 1, 2019 with respect to annuity sales and February 1, 2020 for life insurance sales and is applicable to sales of life insurance and annuity products in New York. We are currently assessing Regulation 187 to determine the impact it may have on our business. In November 2018, the three primary agent groups in New York launched a legal challenge against the NYDFS over the adoption of Regulation 187. It is not possible to predict whether this challenge will be successful. Beyond the New York regulation, the likelihood of enactment of any such federal or state-based regulation is uncertain at this time, but if implemented, these regulations could have adverse effects on our business and consolidated results of operations.
International Regulation
Regulators and lawmakers in non-U.S. jurisdictions are engaged in addressing the causes of the financial crisis and means of avoiding such crises in the future. On July 18, 2013, the International Association of Insurance Supervisors (“IAIS”) published an initial assessment methodology for designating global systemically important insurers (“GSIIs”), as part of the global initiative launched by the G20 with the assistance of the Financial Stability Board (the “FSB”) to identify those insurers whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity.
On July 18, 2013, the FSB published its initial list of nine GSIIs, which included AXA. The GSII list was originally intended to be updated annually following consultation with the IAIS and respective national supervisory authorities. AXA remained on the list as updated in November 2014, 2015 and 2016. However, the FSB announced in November 2017 that it, in consultation with the IAIS and national authorities, has decided not to publish a new list of GSIIs for 2017. On November 14, 2018, the FSB announced that, in light of IAIS progress in developing a proposed holistic framework for the assessment and mitigation of potential systemic risk in the insurance sector, the FSB has decided not to engage in an identification of G-SIIs in 2018. In its public consultation on the holistic framework, issued on November 14, 2018, the IAIS recommended that the implementation of its proposed holistic framework should obviate the need for the FSB’s annual G-SII identification process. The FSB subsequently stated that it will assess the IAIS’s recommendation to suspend G-SII identification from 2020, once the holistic framework is finalized in November 2019, and, in November 2022, based on the initial implementation of the holistic framework, review the need to either discontinue or reestablish an annual identification of G-SIIs.
The policy measures for GSIIs, published by the IAIS in July 2013, include (i) the introduction of new capital requirements; a “basic” capital requirement (“BCR”) applicable to all GSII activities which is intended to serve as a basis for an additional level of capital, called “Higher Loss Absorbency” (“HLA”) required from GSIIs in relation to their systemic activities, (ii) greater regulatory oversight over holding companies, (iii) various measures to promote the structural and financial “self-sufficiency” of group companies and reduce group interdependencies including restrictions on intra-group financing and other investment products) investment options, flexibilityarrangements, and investment management performance.(iv) in general, a greater level of regulatory scrutiny for GSIIs (including a requirement to establish a Systemic Risk Management Plan (“SRMP”), a Liquidity Risk Management Plan (“LRMP”) and a Recovery and Resolution Plan (“RRP”) which have entailed significant new processes, reporting and compliance burdens and costs for AXA. The
contemplated policy measures include the constitution of a Crisis Management Group by the group-wide supervisor, the preparation of the above-mentioned documents (SRMP, LRMP and our affiliated distributors must attractRRP) and retain productive sales representativesthe development and implementation of the BCR in 2014, while other measures are to sell our products. Strong competition continues among financial institutionsbe phased in more gradually, such as the HLA (the first version of which was endorsed by the FSB in October 2015 but which is expected to be revised before its implementation in at least 2019).
On June 16, 2016, the IAIS published an updated assessment methodology, applicable to the 2016 designation process, which is yet to be endorsed by the FSB. To support some adjustments proposed by the revised assessment methodology, the IAIS also published a paper on June 16, 2016, describing the “Systemic Features Framework” that the IAIS intends to employ in assessing whether certain contractual features and other factors are likely to expose an insurer to a greater degree of systemic risk, focusing specifically on two sets of risks: macroeconomic exposure and substantial liquidity risk. Also, the IAIS stated that the 2016 assessment methodology, along with the Systemic Features Framework, will lead to a change in HLA design and calibration. In addition, the IAIS is in the process of developing an activities-based approach to systemic risk in the insurance sector and published a consultation paper on this approach in December 2017. The development of this activities-based approach may have significant implications for sales representatives with demonstrated ability. Wethe identification of GSIIs and our affiliated distribution companies compete with other financial institutionsthe policy measures to which they are expected to be subject.
As part of its efforts to create a common framework for sales representatives primarilythe supervision of internationally active insurance groups (“IAIGs”), the IAIS has also been developing a comprehensive, group-wide international insurance capital standard (the “ICS”) to be applied to both GSIIs and IAIGs, although it is not expected to be finalized until 2019 at the earliest, and is not expected to be fully implemented, if at all, until at least five years thereafter. AXA currently meets the parameters set forth to define an IAIG. Although the BCR and HLA are more developed than the ICS at present, the IAIS has stated that it intends to revisit both standards following development and refinement of the ICS, and that the BCR will eventually be replaced by the ICS. The NAIC plans to develop an “aggregation method” for group capital. Although the aggregation method will not be part of ICS, the IAIS aims to make a determination whether the aggregated approach provides substantially the same outcome as the ICS, in which case it could be incorporated into the ICS as an outcome-equivalent approach.
Although the standards issued by the FSB and/or the IAIS are not binding on the basisUnited States or other jurisdictions around the world unless and until the appropriate local governmental bodies or regulators adopt appropriate laws and regulations, these measures could have far reaching regulatory and competitive implications for AXA in the event they are implemented by its group supervisors, which in turn, to the extent we are deemed to be controlled by or an affiliate of financial position, product breadthAXA at the time the measures are implemented, or we independently meet the criteria for being an IAIG and features, support services and compensation policies. For additional information, see “Risk Factors.”
Legislative and other changes affecting the regulatory environment canmeasures are adopted by U.S. group supervisors, could materially affect our competitive position, within the life insurance industryconsolidated results of operations, financial condition, liquidity and within the broader financial services industry. For additional information, see “Business - Regulation”how we operate our business.
Federal Tax Legislation, Regulation, and “Risk Factors.”Administration
Investment Management. AB competes in all aspects of its business with numerous investment management firms, mutual fund sponsors, brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions that often provide investment products that have similar features and objectives as those AB offers. AB’s competitors offer a wide range of financial services to the same customers that AB seeks to serve. Some of AB’s competitors are larger, have a broader range of product choices and investment capabilities, conduct business in more markets, and have substantially greater resources than AB. These factorsAlthough we cannot predict what legislative, regulatory, or administrative changes may place AB at a competitive disadvantage, and AB can give no assurance that its strategies and efforts to maintain and enhance its current client relationships, and create new ones, will be successful.
In addition, AXA and certain of its subsidiaries (including AXA Financial and AXA Equitable) provide financial services, some of which compete with those offered by AB. AB’s partnership agreement specifically allows AXA and its subsidiaries (other than the AB General Partner) to compete with AB and to pursue opportunities thator may be available to AB. AXA, AXA Financial, AXA Equitable and certain of their respective subsidiaries have substantially greater resources than AB does and are not obligated to provide resources to AB.
To grow its business, AB believes it must be able to compete effectively for AUM. Key competitive factors include (i) AB’s investment performance for clients; (ii) AB’s commitment to place the interests of its clients first; (iii) the quality of AB’s research; (iv) AB’s ability to attract, motivate and retain highly skilled, and often highly specialized, personnel; (v) the array of investment products AB offers; (vi) the fees AB charges; (vii) Morningstar/Lipper rankings for the AB Funds; (viii) AB’s ability to sell its
actively-managed investment services despite the fact that many investors favor passive services; (ix) AB’s operational effectiveness; (x) AB’s ability to further develop and market its brand; and (xi) AB’s global presence.
REGULATION
Insurance Regulation
We are licensed to transact insurance business, and are subject to extensive regulation and supervision by insurance regulators, in all 50 states of the United States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and nine of Canada’s twelve provinces and territories. We are domiciled in New York and are primarily regulated by the New York State Department of Financial Services (the “NYDFS”). The extent of regulation by jurisdiction varies, but most jurisdictions have laws and regulations governing the financial aspects and business conduct of insurers. State laws in the U.S. grant insurance regulatory authorities broad administrative powersoccur with respect to among other things, sales practices, establishing statutory capital and reserve requirements and solvency standards, reinsurance and hedging, protecting privacy, regulating advertising, restricting the paymentfederal tax law, we nevertheless endeavor to consider the possible ramifications of dividends and other transactions between affiliates, permitted types and concentrations of investments and business conduct to be maintained by insurance companies as well as agent licensing, approval of policy forms and, for certain lines of insurance, approval or filing of rates. Insurance regulators havesuch changes on the discretionary authority to limit or prohibit new issuances of business to policyholders within their jurisdictions when, in their judgment, such regulators determine that the issuing company is not maintaining adequate statutory surplus or capital. Additionally, New York Insurance Law limits sales commissions and certain other marketing expenses that we may incur. For additional information on Insurance Supervision, see “Risk Factors.”
We are required to file detailed annual financial statements, prepared on a statutory accounting basis, with supervisory agencies in each of the jurisdictions in which we do business. Such agencies may conduct regular or targeted examinationsprofitability of our operationsbusiness and accounts,the attractiveness of our products to consumers. In this regard, we analyze multiple streams of information, including those described below.
Enacted Legislation
At present, the federal tax laws generally permit certain holders of life insurance and make requests for particular information from us.annuity products to defer taxation on the build-up of value within such products (commonly referred to as “inside build-up”) until payments are made to the policyholders or other beneficiaries. From time to time, regulators raise issues during examinations or audits of usCongress considers legislation that could if determined adversely, have a material adverse effectenhance or reduce (or eliminate) the benefit of tax deferral on us.some life insurance and annuity products. As an example, the American Taxpayer’s Relief Act increased individual tax rates for higher-income taxpayers. Higher tax rates increase the benefits of tax deferral on inside build-up and, correspondingly, tend to enhance the attractiveness of life insurance and annuity products to consumers that are subject to those higher tax rates. The Tax Reform Act reduced individual tax rates, which could reduce demand for our products. The modification or elimination of this tax-favored status could also reduce demand for our products. In addition, if the treatment of earnings accrued inside an annuity contract was changed prospectively, and the tax-favored status of existing contracts was grandfathered, holders of existing contracts would be less likely to surrender or rollover their contracts. These changes could reduce our earnings and negatively impact our business.
The Tax Reform Act
The Tax Reform Act overhauled the U.S. Internal Revenue Code and changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies. While the Tax Reform Act had a net positive economic impact on us, it contained measures which could have adverse or uncertain impacts on some aspects of our business, results of operations or financial condition. We continue to monitor regulations and interpretations of regulations by regulators may changethe Tax Reform Act that could impact our business, results of operations and statutes may be enacted with retroactive impact, particularly in areas such as accounting or statutory reserve requirements. In addition to oversight by state insurance regulators in recent years, the insurance industry has seen an increase in inquiries from state attorneys general and other state officials regarding compliance with certain state insurance, securities and other applicable laws. We have received and responded to such inquiries from time to time. For additional information on Legal and Regulatory Risk, see “Risk Factors.”
Holding Company and Shareholder Dividend Regulation. Most states, including New York, regulate transactions between an insurer and its affiliates under insurance holding company acts. The insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require a controlled insurance company (insurers that are subsidiaries of insurance holding companies) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning its capital structure, ownership, financial condition, certain intercompany transactions and general business operations.
State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, as well as on transactions between an insurer and its affiliates. The New York insurance laws were amended, effective for dividends paid in 2016 and thereafter, to permit payment of ordinary dividends without regulatory approval based on one of two standards. The first standard allows a domestic stock life insurer to pay an ordinary dividend out of earned surplus. The second standard allows an insurer to pay an ordinary dividend out of other than earned surplus if such insurer does not have sufficient positive earned surplus to pay an ordinary dividend. Dividends in excess of these limits are considered to be extraordinary transactions and require explicit approval from the NYDFS.
For additional information on shareholder dividends, seecondition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - LiquidityOperations—Macroeconomic and Capital Resources.”
NAIC. The mandateIndustry Trends—Impact of the National AssociationTax Reform Act.”
Future Changes in U.S. Tax Laws
We anticipate that, following the Tax Reform Act, we will continue deriving tax benefits from certain items, including but not limited to the dividend received deduction (“DRD”), tax credits, insurance reserve deductions and interest expense deductions. However, there is a risk that interpretations of Insurance Commissioners (the “NAIC”) isthe Tax Reform Act, regulations promulgated thereunder, or future changes to benefitfederal, state or other tax laws could reduce or eliminate the tax benefits from these or other items and result in our incurring materially higher taxes.
Regulatory and Other Administrative Guidance from the Treasury Department and the IRS
Regulatory and other administrative guidance from the Treasury Department and the IRS also could impact the amount of federal tax that we pay. For example, the adoption of “principles based” approaches for calculating statutory reserves may lead the Treasury Department and the IRS to issue guidance that changes the way that deductible insurance regulatory authoritiesreserves are determined, potentially reducing future tax deductions for us.
Privacy and consumers by promulgating model insuranceSecurity of Customer Information and Cybersecurity Regulation
We are subject to federal and state laws and regulations for adoption bythat require financial institutions to protect the states. The NAIC provides standardized insurance industry accountingsecurity and reporting guidance through its Accounting Practicesconfidentiality of customer information, and Procedures Manual (the “Manual”). However, statutory accounting principles continueto notify customers about their policies and practices relating to their collection and disclosure of customer information and their practices relating to protecting the security and confidentiality of that information. We have adopted a privacy policy outlining procedures and practices to be establishedfollowed by individualmembers of Holdings and its subsidiaries relating to the collection, disclosure and protection of customer information. As required by law, a copy of the privacy policy is mailed to customers on an annual basis. Federal and state laws generally require that we provide notice to affected individuals, law enforcement, regulators and/or potentially others if there is a situation in which customer information is intentionally or accidentally disclosed to and/or acquired by unauthorized third parties. Federal regulations require financial institutions to implement programs to detect, prevent, and permitted practices. Changesmitigate identity theft. Federal and state laws and regulations regulate the ability of financial institutions to make telemarketing calls and to send unsolicited e-mail or fax messages to both consumers and customers, and also regulate the permissible uses of certain categories of customer information. Violation of these laws and regulations may result in significant fines and remediation costs. It may be expected that legislation considered by either the U.S. Congress and/or state legislatures could create additional and/or more detailed obligations relating to the Manual or modificationsuse and protection of customer information.
On February 16, 2017, the NYDFS announced the adoption of a new cybersecurity regulation for financial services institutions, including banking and insurance entities, under its jurisdiction. The new regulation became effective on March 1, 2017 and is being implemented in stages that commenced on August 28, 2017 and will be fully implemented by March 1, 2019. This new regulation requires these entities to, among other things, establish and maintain a cybersecurity policy designed to protect consumers’ private data. We have adopted a cybersecurity policy outlining our policies and procedures for the various state insurance departments may impact the statutory capital and surplusprotection of our U.S. insurance companies.
information systems and information stored on those systems that comports with the regulation. In September 2012,addition to New York’s cybersecurity regulation, the NAIC adopted the Risk Management and Own Risk and Solvency AssessmentInsurance Data Security Model Act (“ORSA”), which has been enacted by New York. ORSA requiresLaw in October 2017. Under the model law, companies that insurers maintain a risk management framework and conduct an internal risk and solvency assessment of the insurer’s material risks in normal and stressed environments. The assessment is documented
in a confidential annual summary report, a copy of which must be made available to regulators as required or upon request. We have been filing an ORSA summary reportare compliant with the NYDFS since 2015.cybersecurity regulation are deemed also to be in compliance with the model law. The purpose of the model law is to establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. Certain states have adopted the model law, and we expect that additional states will also adopt the model law, although it cannot be predicted whether or not, or in what form or when, they will do so.
Environmental Considerations
Federal, state and local environmental laws and regulations apply to our ownership and operation of real property. Inherent in owning and operating real property are the risk of environmental liabilities and the costs of any required clean-up. Under the
laws of certain states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of clean-up, which could adversely affect our mortgage lending business. In December 2012,some states, this lien may have priority over the NAIC approvedlien of an existing mortgage against such property. In addition, in some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, we may be liable, in certain circumstances, as an “owner” or “operator,” for costs of cleaning-up releases or threatened releases of hazardous substances at a new valuation manual containingproperty mortgaged to us. We also risk environmental liability when we foreclose on a principles-based approachproperty mortgaged to life insurance company reserves. Principles-based reserving is designed to better address reservingus. However, federal legislation provides for products, including the current generationa safe harbor from CERCLA liability for secured lenders, provided that certain requirements are met. Application of products for which the current formulaic basis for reserve determination does not work effectively. The principles-based reserving approach became effective for new business on January 1, 2017various other federal and state environmental laws could also result in the states where itimposition of liability on us for costs associated with environmental hazards.
We routinely conduct environmental assessments prior to making a mortgage loan or taking title to real estate, whether through acquisition for investment or through foreclosure on real estate collateralizing mortgages. We cannot provide assurance that unexpected environmental liabilities will not arise. However, based on information currently available to us, we believe that any costs associated with compliance with environmental laws and regulations or any clean-up of properties would not have a material adverse effect on our consolidated results of operations.
Intellectual Property
We rely on a combination of copyright, trademark, patent and trade secret laws to establish and protect our intellectual property rights. Holdings has been adoptedentered into a licensing arrangement (the “Trademark License Agreement”) with a three-year phase-in period. AXA concerning the use by Holdings of the “AXA” name. We also have an extensive portfolio of trademarks and service marks that we consider important in the marketing of our products and services. We regard our intellectual property as valuable assets and protect them against infringement.
Iran Threat Reduction and Syria Human Rights Act
Holdings, AXA Equitable and their global subsidiaries had no transactions or activities requiring disclosure under the Iran Threat Reduction and Syria Human Rights Act (“Iran Act”), nor were they involved in the AXA Group matters described immediately below.
The NYDFS has publicly stated its intention to implementnon-U.S. based subsidiaries of AXA operate in compliance with applicable laws and regulations of the principles-based reserving approach beginningvarious jurisdictions in January 2018,which they operate, including applicable international (United Nations and European Union) laws and regulations. While AXA Group companies based and operating outside the United States generally are not subject to a workingU.S. law, as an international group, ofAXA has in place policies and standards (including the NYDFS establishing the necessary reserves safeguards.
Captive Reinsurer Regulation. As described above, we utilize a captive reinsurer as part of our capital management strategy. During the last few years, the NAIC and certain state regulators, including the NYDFS, have been scrutinizing insurance companies’ use of affiliated captive reinsurers or off-shore entities.
In December 2014, the NAIC adopted a new actuarial guideline, known as “AG 48”AXA Group International Sanctions Policy) that governs the reinsurance of term and universal life insurance business to captives by prescribing requirements for the types of assets that may be held by captives to support the reserves. The requirements in AG 48 became effective on January 1, 2015, and apply in respect of term and universal life insurance policies written from and after January 1, 2015, or written prior to January 1, 2015, but not included in a captive reinsurer financing arrangement as of December 31, 2014.
In March 2015, the NAIC established the Variable Annuities Issues (E) Working Group to oversee the NAIC’s efforts to study and address regulatory issues resulting in variable annuity captive transactions. In September 2015, a third-party consultant engaged by the NAIC provided the NAIC with a preliminary report covering several sets of recommendations regarding Actuarial Guideline 43 and C3 Phase II requirements. These recommendations generally focused on (i) mitigating the asset-liability mismatch between hedge instruments and statutory liabilities, (ii) removing the non-economic volatility in statutory capital charges and solvency ratios and (iii) facilitating greater harmonization across insurers and products for greater comparability. A variable annuity reserve and capital framework proposal was presented at the August 2016 NAIC meeting, and there was a 90-day comment period on the proposal. This proposal included the initial recommendations from 2015, but also some new aspects. These recommendations, if adopted, would apply to all existing businessAXA Group companies worldwide and could significantly changeoften impose requirements that go well beyond local law.
AXA has informed us that AXA Konzern AG, an AXA insurance subsidiary organized under the sensitivitylaws of reserveGermany, provides car, accident and capital requirementshealth insurance to capital markets including interest ratediplomats based at the Iranian Embassy in Berlin, Germany. The total annual premium of these policies is approximately $139,700 and equity marketsthe annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $24,272.
AXA also has informed us that AXA Belgium, an AXA insurance subsidiary organized under the laws of Belgium, has two policies providing for car insurance for Global Trading NV, which was designated on May 17, 2018 under (E.O.) 13224, and create prescribed assumptions for policyholder behavior. Whilesubsequently changed its name to Energy Engineers & Construction on August 20, 2018. The total annual premium of these policies is approximately $6,559 before tax and the exact nature and scopeannual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $983.
In addition, AXA has informed us that AXA Insurance Ireland, an AXA insurance subsidiary, provides statutorily required car insurance under four separate policies to the Iranian Embassy in Dublin, Ireland. AXA has informed us that compliance with the Declined Cases Agreement of the final frameworkIrish Government prohibits the cancellation of these policies unless another insurer is not predictable at this time, somewilling to assume the coverage. The total annual premium for these policies is approximately $7,115 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $853.
Also, AXA has informed us that AXA Sigorta, a subsidiary of AXA organized under the laws of the recommendations being discussedRepublic of Turkey, provides car insurance coverage for vehicle pools of the Iranian General Consulate and the Iranian Embassy in the current proposal would adversely impact the capital management benefits we receive under our reinsurance arrangement with AXA Arizona.Istanbul, Turkey. Motor liability insurance coverage is compulsory in Turkey and cannot be canceled unilaterally. The total annual premium in
We cannot predict what, if any, changes may result20
respect of these policies is approximately $3,150 and the annual net profit, which is difficult to calculate with precision, is estimated to be $473.
Additionally, AXA has informed us that AXA Winterthur, an AXA insurance subsidiary organized under the laws of Switzerland, provides Naftiran Intertrade, a wholly-owned subsidiary of the Iranian state-owned National Iranian Oil Company, with life, disability and accident coverage for its employees. In addition, AXA Winterthur also provides car and property insurance coverage for the Iranian Embassy in Bern. The provision of these forms of coverage is mandatory in Switzerland. The total annual premium of these policies is approximately $396,597 and the annual net profit arising from these reviews, further regulation and/policies, which is difficult to calculate with precision, is estimated to be $59,489.
Also, AXA has informed us that AXA Egypt, an AXA insurance subsidiary organized under the laws of Egypt, provides the Iranian state-owned Iran Development Bank, two life insurance contracts, covering individuals who have loans with the bank. The total annual premium of these policies is approximately $19,839 and annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $2,000.
Furthermore, AXA has informed us that AXA XL, which AXA acquired during the third quarter of 2018, through various non-U.S. subsidiaries, provides insurance to marine policyholders located outside of the U.S. or pending lawsuits regarding the usereinsurance coverage to non-U.S. insurers of captive reinsurers. If the NYDFSmarine risks as well as mutual associations of ship owners that provide their members with protection and liability coverage. The provision of these coverages may involve entities or other state insurance regulators wereactivities related to restrict the use of such captive reinsurersIran, including transporting crude oil, petrochemicals and refined petroleum products. AXA XL’s non-U.S. subsidiaries insure or if we otherwisereinsure multiple voyages and fleets containing multiple ships, so they are unable to attribute gross revenues and net profits from such marine policies to activities with Iran. As the activities of these insureds and re-insureds are permitted under applicable laws and regulations, AXA XL intends for its non-U.S. subsidiaries to continue providing such coverage to use our captive reinsurer,its insureds and re-insureds to the capital management benefits we receive under this reinsurance arrangement could be adversely affected. This could cause usextent permitted by applicable law.
Lastly, a non-U.S. subsidiary of AXA XL provided accident & health insurance coverage to recapture the business reinsured to AXA Arizona and adjust the design of our risk mitigation and hedging programs. For additional information on our use of a captive reinsurance company, see “Business - Reinsurance and Hedging”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Surplus and Capital; Risk Based Capital (“RBC”). Insurers are required to maintain their capital and surplus at or above minimum levels. Regulators have discretionary authority, in connection with the licensing of insurance companies, to limit or prohibit an insurer’s sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders. We report our RBC based on a formula calculated by applying factors to various asset, premium and statutory reserve items, as well as taking into account the risk characteristicsdiplomatic personnel of the insurer. The major categoriesEmbassy of risk involvedIran in Brussels, Belgium during the third quarter of 2018. AXA XL’s non-U.S. subsidiary received aggregate payments for this insurance from inception through December 31, 2018 of approximately $73,451. Benefits of approximately $2,994 were paid to beneficiaries during 2018. These activities are asset risk, insurance risk, interest rate risk, market risk and business risk. The formula is used as a regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose RBC ratio does not meet or exceed certain RBC levels. As of the date of the most recent annual statutory financial statements filed with insurance regulators, our RBC was in excess of each of those RBC levels. For additional information on RBC, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
Guaranty Associations and Similar Arrangements.Each of the states in which we are admitted to transact business require life insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay certain contractual insurance benefits owedpermitted pursuant to applicable law. The policy has been canceled and is no longer in force.
The aggregate annual premium for the above-referenced insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, upis approximately $646,411, representing approximately 0.0006% of AXA’s 2018 consolidated revenues, which exceed $100 billion. The related net profit, which is difficult to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the
premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurercalculate with precision, is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.
During each of the past five years, the assessments levied against us have not been material.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Currently, the U.S. federal government does not directly regulate the business of insurance. While the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) does not remove primary responsibility for the supervision and regulation of insurance from the states, Title V of the Dodd-Frank Act establishes the Federal Insurance Office (the “FIO”) within the U.S. Treasury Department and reforms the regulation of the non-admitted property and casualty insurance market and the reinsurance market. The FIO has authority that extends to all lines of insurance except health insurance, crop insurance and (unless included with life or annuity components) long-term care insurance. Under the Dodd-Frank Act, the FIO is charged with monitoring all aspects of the insurance industry (including identifying gaps in regulation that could contribute to a systemic crisis), recommending to the Financial Stability Oversight Council (“FSOC”) the designation of any insurer and its affiliates (potentially including AXA and its affiliates) as a non-bank financial company subject to oversight by the Board of Governors of the Federal Reserve System (including the administration of stress testing on capital), assisting the Treasury Secretary in negotiating “covered agreements” with non-U.S. governments or regulatory authorities, and, with respect to state insurance laws and regulation, determining whether such state insurance measures are pre-empted by such covered agreements. In addition, the FIO is empowered to request and collect data (including financial data) on and from the insurance industry and insurers (including reinsurers) and their affiliates. In such capacity, the FIO may require an insurer or an affiliate of an insurer to submit such data or information as the FIO may reasonably require. In addition, the FIO’s approval will be required to subject an insurer or a company whose largest U.S. subsidiary is an insurer to the special orderly liquidation process outside the federal bankruptcy code, administered by the Federal Deposit Insurance Corporation pursuant to the Dodd-Frank Act. The Dodd-Frank Act also reforms the regulation of the non-admitted property/casualty insurance market (commonly referred to as excess and surplus lines) and the reinsurance markets, including the ability of non-domiciliary state insurance regulators to deny credit for reinsurance when recognized by the ceding insurer’s domiciliary state regulator.
Other aspects of our operations could also be affected by the Dodd-Frank Act. These include:
Heightened Standards and Safeguards. The FSOC may recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices we and other insurers or other financial services companies engage in if the FSOC determines that those activities or practices could create or increase the risk that significant liquidity, credit or other problems spread among financial companies. We cannot predict whether any such recommendations will be made or their effect on our business, consolidated results of operations or financial condition.
Over-The-Counter Derivatives Regulation. The Dodd-Frank Act includes a framework of regulation of the over-the-counter (“OTC”) derivatives markets. Regulations approved to date require clearing of previously uncleared transactions and will require clearing of additional OTC transactions in the future. In addition, recently approved regulations impose margin requirements on OTC transactions not requiredestimated to be cleared. As a result$88,070, representing approximately 0.001% of these regulations, our costs of risk mitigation have and may continue to increase under the Dodd-Frank Act. For example, margin requirements, including the requirement to pledge initial margin for OTC cleared transactions entered into after June 10, 2013 and for OTC uncleared transactions entered into after the phase-in period, which would be applicable to us in 2019, have increased. In addition, restrictions on securities that will qualify as eligible collateral, will require increased holdings of cash and highly liquid securities with lower yields causing a reduction in income. Centralized clearing of certain OTC derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivative transactions. We use derivatives to mitigate a wide range of risks in connection with our business, including the impact of increased benefit exposures from certain of variable annuity products that offer enhanced guarantee features. We have always been subject to the risk that our hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might result from the enactment and implementation of the Dodd-Frank Act.AXA’s 2018 aggregate net profit.
Broker-Dealer Regulation.The Dodd-Frank Act provides that the SEC may promulgate rules to provide that the standard of conduct for all broker-dealers, when providing personalized investment advice about securities to retail customers (and any other customers as the SEC may by rule provide) will be the same as the standard of conduct applicable to an investment adviser under the Investment Advisers Act of 1940. Although the full impact of such a provision can only be measured when the implementing regulations are adopted, the intent of this provision is to authorize the SEC to impose on broker-dealers fiduciary duties to their customers, as applies to investment advisers under existing law. At the same time that the SEC is considering rulemaking as
directed by the Dodd-Frank Act, the Financial Industry Regulatory Authority, Inc. (“FINRA”) is also focusing on how broker-dealers identify and manage conflicts of interest.
Although many of the regulations implementing portions of the Dodd-Frank Act have been promulgated, we are still unable to predict how this legislation may be interpreted and enforced or the full extent to which implementing regulations and policies may affect us. Also, the Trump administration and Congressional majority have indicated that the Dodd-Frank Act will be under further scrutiny and some of the provisions of the Dodd-Frank Act may be revised, repealed or amended. There is considerable uncertainty with respect to the impact the Trump administration and Congressional majority may have, if any, and any changes likely will take time to unfold. We cannot predict the ultimate content, timing or effect of any reform legislation or the impact of potential legislation on us.
ERISA Considerations
Broker-Dealer and Securities Regulation
We provideand certain productspolicies and servicescontracts offered by us are subject to employee benefit plans thatregulation under the Federal securities laws administered by the U.S. Securities and Exchange Commission (the “SEC”), self-regulatory organizations and under certain state securities laws. These regulators may conduct examinations of our operations, and from time to time make requests for particular information from us.
Certain of our subsidiaries and affiliates, including AXA Advisors, AXA Distributors, AllianceBernstein Investments, Inc. and Sanford C. Bernstein & Co., LLC (“SCB LLC”), are registered as broker-dealers (collectively, the “Broker-Dealers”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Broker-Dealers are subject to extensive regulation by the SEC and are members of, and subject to regulation by, the Financial Industry Regulatory Authority, Inc. (“FINRA”), a self-regulatory organization subject to SEC oversight. The Broker-Dealers are subject to the Employment Retirement Income Security Act (“ERISA”) and certain provisionscapital requirements of the Internal Revenue Code. AsSEC and/or FINRA, which specify minimum levels of capital (“net capital”) that the Broker-Dealers are required to maintain and also limit the amount of leverage that the Broker-Dealers are able to employ in their businesses. The SEC and FINRA also regulate the sales practices of the Broker-Dealers. In recent years, the SEC and FINRA have intensified their scrutiny of sales practices relating to variable annuities, variable life insurance and alternative investments, among other products. In addition, the Broker-Dealers are also subject to regulation by state securities administrators in those states in which they conduct business, who may also conduct examinations and direct inquiries to the Broker-Dealers.
Certain of our Separate Accounts are registered as investment companies under the Investment Company Act. Separate Account interests under certain annuity contracts and insurance policies issued by us are also registered under the Securities Act. EQAT, AXA Premier VIP Trust and 1290 Funds are registered as investment companies under the Investment Company Act and shares offered by these investment companies are also registered under the Securities Act.
Certain subsidiaries and affiliates including AXA Equitable FMG and AXA Advisors are registered as investment advisers under the Investment Advisers Act. The investment advisory activities of such our activitiesregistered investment advisers are subject to various federal and state laws and regulations and to the restrictions imposed by ERISAlaws in those foreign countries in which they conduct business. These
laws and the Internal Revenue Code,regulations generally grant supervisory agencies broad administrative powers, including the requirement that fiduciaries must perform their duties solely inpower to limit or restrict the interestscarrying on of plan participantsbusiness for failure to comply with such laws and beneficiaries, and fiduciaries may not cause or permitregulations.
AXA Equitable FMG is registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a covered plan to engage in certain prohibited transactions with persons (parties-in-interest) who have certain relationshipscommodity pool operator with respect to such plans.certain portfolios and is also a member of the National Futures Association (“NFA”). The applicable provisionsCFTC is a federal independent agency that is responsible for, among other things, the regulation of ERISAcommodity interests and enforcement of the Commodity Exchange Act (“CEA”). The NFA is a self-regulatory organization to which the CFTC has delegated, among other things, the administration and enforcement of commodity regulatory registration requirements and the Internal Revenue Code areregulation of its members. As such, AXA Equitable FMG is subject to enforcementregulation by the U.S. DepartmentNFA and CFTC and is subject to certain legal requirements and restrictions in the CEA and in the rules and regulations of Labor (the “DOL”), the Internal Revenue Service (“IRS”)CFTC and the Pension Benefit Guaranty Corporation.rules and by-laws of the NFA on behalf of itself and any commodity pools that it operates, including investor protection requirements and anti-fraud prohibitions, and is subject to periodic inspections and audits by the CFTC and NFA. AXA Equitable FMG is also subject to certain CFTC-mandated disclosure, reporting and record-keeping obligations.
Regulators, including the SEC, FINRA, the CFTC, NFA and state attorneys general, continue to focus attention on various practices in or affecting the investment management and/or mutual fund industries, including portfolio management, valuation and the use of fund assets for distribution.
We and certain of our subsidiaries and affiliates have provided, and in certain cases continue to provide, information and documents to the SEC, FINRA, the CFTC, NFA, state attorneys general, the NYDFS and other state insurance regulators, and other regulators regarding our compliance with insurance, securities and other laws and regulations regarding the conduct of our business. For example, we have responded to inquiries from the SEC requesting information with regard to contract language and accompanying disclosure for certain variable annuity contracts. For additional information on regulatory matters, see Note 17 of the Notes to the Consolidated Financial Statements.
The SEC, FINRA, the CFTC and other governmental regulatory authorities may institute administrative or judicial proceedings that may result in censure, fines, the issuance of cease-and-desist orders, trading prohibitions, the suspension or expulsion of a broker-dealer or member, its officers, registered representatives or employees or other similar sanctions.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Currently, the U.S. federal government does not directly regulate the business of insurance. While the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) does not remove primary responsibility for the supervision and regulation of insurance from the states, Title V of the Dodd-Frank Act establishes the Federal Insurance Office (“FIO”) within the U.S. Treasury Department and reforms the regulation of the non-admitted property and casualty insurance market and the reinsurance market. The Dodd-Frank Act also established the Financial Stability Oversight Council (“FSOC”), which is authorized to subject non-bank financial companies, including insurers, to supervision by the Federal Reserve and enhanced prudential standards if the FSOC determines that a non-bank financial institution could pose a threat to U.S. financial stability.
The FIO has authority that extends to all lines of insurance except health insurance, crop insurance and (unless included with life or annuity components) long-term care insurance. Under the Dodd-Frank Act, the FIO is charged with monitoring all aspects of the insurance industry (including identifying gaps in regulation that could contribute to a systemic crisis), recommending to the FSOC the designation of any insurer and its affiliates (potentially including AXA and its affiliates) as a non-bank financial company subject to oversight by the Board of Governors of the Federal Reserve System (including the administration of stress testing on capital), assisting the Treasury Secretary in negotiating “covered agreements” with non-U.S. governments or regulatory authorities, and, with respect to state insurance laws and regulation, determining whether state insurance measures are pre-empted by such covered agreements.
In addition, the FIO is empowered to request and collect data (including financial data) on and from the insurance industry and insurers (including reinsurers) and their affiliates. In such capacity, the FIO may require an insurer or an affiliate of an insurer to submit such data or information as the FIO may reasonably require. In addition, the FIO’s approval will be required to subject a financial company whose largest U.S. subsidiary is an insurer to the special orderly liquidation process outside the federal bankruptcy code, administered by the Federal Deposit Insurance Corporation (the “FDIC”) pursuant to the Dodd-Frank Act. U.S. insurance subsidiaries of any such financial company, however, would be subject to rehabilitation and liquidation proceedings under state insurance law. The Dodd-Frank Act also reforms the regulation of the non-admitted property/casualty insurance market (commonly referred to as excess and surplus lines) and the reinsurance markets, including prohibiting the
The DOL issued a final rule (the “Rule”) on April 6, 2016 that significantly expands15
ability of non-domiciliary state insurance regulators to deny credit for reinsurance when recognized by the range of activities that would be considered to be fiduciary investment advice under ERISA when our affiliated advisors and our employees provide investment-related information and support to retirement plan sponsors, participants, and Individual Retirement Account (“IRA”) holders. Implementation of the Rule is currently scheduled to be phased in starting on April 10, 2017, although certainceding insurer’s domiciliary state regulator.
Other aspects of it covering existing business would notour operations could also be implemented until January 1, 2018. In February 2017, however,affected by the DOL was directed by executive orderDodd-Frank Act. These include:
Heightened Standards and memorandum (the “President’s OrderSafeguards
The FSOC may recommend that state insurance regulators or other regulators apply new or heightened standards and Memorandum”) to review the Rule and determine whether the Rule should be rescindedsafeguards for activities or revised, in light of the new administration’s policies and orientations. On March 2, 2017, the DOL submitted a proposal to delay for sixty days the applicability date of the Rule and invited comments on both the proposed extension and the examination described in the President’s Order and Memorandum. Comments on the proposed extension are due by March 17, 2017, and on the President’s Order and Memorandum by April 17, 2017. While the outcome of the foregoing cannot be anticipated at this time, it is likely to result in implementation of the Rule being delayed. Although implementation of the Rule remains uncertain, and is currently subject to judicial challenge, management continues to evaluate its potential impact on our business. If the Rule is implemented as planned, it is likely to result in adverse changes to the level and type of services we provide, as well as the nature and amount of compensation and fees thatpractices we and our affiliated advisors and firms receive for investment-relatedother insurers or other financial services to retirement plans and IRAs, which may have acompanies engage in if the FSOC determines that those activities or practices could create or increase the risk that significant adverseliquidity, credit or other problems spread among financial companies. We cannot predict whether any such recommendations will be made or their effect on our business, and consolidated results of operations or financial condition.
InternationalOver-The-Counter Derivatives Regulation
Regulators and lawmakers in non-U.S. jurisdictions are engaged in addressing the causesThe Dodd-Frank Act includes a framework of regulation of the financial crisisover-the-counter (“OTC”) derivatives markets. Regulations approved to date require clearing of previously uncleared transactions and meanswill require clearing of avoiding such crisesadditional OTC transactions in the future. On July 18,In addition, regulations approved pursuant to the Dodd-Frank Act impose margin requirements on OTC transactions not required to be cleared. As a result of these regulations, our costs of risk mitigation have and may continue to increase under the Dodd-Frank Act. For example, margin requirements, including the requirement to pledge initial margin for OTC cleared transactions entered into after June 10, 2013 and for OTC uncleared transactions entered into after the International Associationphase-in period, which would be applicable to us in 2020, have increased. In addition, restrictions on securities that will qualify as eligible collateral, will require increased holdings of Insurance Supervisors (“IAIS”) published an initial assessment methodology for designating global systemically important insurers (“GSIIs”), as partcash and highly liquid securities with lower yields causing a reduction in income. Centralized clearing of certain OTC derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivatives transactions. We use derivatives to mitigate a wide range of risks in connection with our business, including the impact of increased benefit exposures from certain variable annuity products that offer GMxB features. We have always been subject to the risk that our hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses beyond the scope of the global initiative launchedrisk management techniques employed. Any such losses could be increased by the G20 with the assistancehigher costs of the Financial Stability Board (the “FSB”) to identify those insurers whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity On the same date, the FSB published its initial list of nine GSIIs, which included the AXA Group. The GSII list is updated annually following consultation with the IAIS and respective national supervisory authorities. The AXA Group remained on the list as updated in November 2014, 2015 and 2016.
On July 18, 2013, the FSB published its initial list of nine GSIIs, which included the AXA Group. The GSII list is updated annually following consultation with the IAIS and respective national supervisory authorities. The AXA Group remained on the list as updated in November 2014, 2015 and 2016. The policy measures for GSIIs, published by the IAIS in July 2013, include (1) the introduction of new capital requirements; a “basic” capital requirement (“BCR”) applicable to all GSII activities which serves as a basis for an additional level of capital, called “Higher Loss Absorbency” (“HLA”) required from GSIIs in relation to their systemic activities, (2) greater regulatory oversight over holding companies, (3) various measures to promote the structural and financial “self-sufficiency” of group companies and reduce group interdependencies including restrictions on intra-group financing and other arrangements, and (4) in general, a greater level of regulatory scrutiny for GSIIswriting derivatives (including a requirement to establish a Systemic Risk Management Plan (“SRMP”), a Liquidity Risk Management Plan (“LRMP”) and a Recovery and Resolution Plan
(“RRP”)) which have entailed significant new processes, reporting and compliance burdens and costs. The contemplated policy measures include the constitution of a Crisis Management Group (“CMG”) by the group-wide supervisor, the preparation of the above-mentioned documents (SRMP, LRMP and RRP)customized derivatives) and the developmentreduced availability of customized derivatives that might result from the enactment and implementation of the BCR in 2014, whileDodd-Frank Act.
Broker-Dealer Regulation
The Dodd-Frank Act provides that the SEC may promulgate rules to provide that the standard of conduct for all broker-dealers, when providing personalized investment advice about securities to retail customers (and any other measures are to be phased in more gradually, suchcustomers as the HLA (the first versionSEC may by rule provide) will be the same as the standard of conduct applicable to an investment adviser under the Investment Advisers Act. On April 18, 2018, the SEC released a set of proposed rules that would, among other things, enhance the existing standard of conduct for broker-dealers to require them to act in the best interest of their clients; clarify the nature of the fiduciary obligations owed by registered investment advisers to their clients; impose new disclosure requirements aimed at ensuring investors understand the nature of their relationship with their investment professionals; and restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor.” Public comments were due by August 7, 2018. Although the full impact of the proposed rules can only be measured when the implementing regulations are adopted, the intent of this provision is to authorize the SEC to impose on broker-dealers fiduciary duties to their customers, similar to what applies to investment advisers under existing law. We are currently assessing these proposed rules to determine the impact they may have on our business. In addition, FINRA is also currently focusing on how broker-dealers identify and manage conflicts of interest.
Although many of the regulations implementing portions of the Dodd-Frank Act have been promulgated, we are still unable to predict how this legislation may be interpreted and enforced or the full extent to which was endorsed byimplementing regulations and policies may affect us. Also, the FSB in October 2015 but which is expected toTrump administration and Congress have indicated that the Dodd-Frank Act will be under further scrutiny and some of the provisions of the Dodd-Frank Act may be revised, before its implementationrepealed or amended. For example, President Trump has issued an executive order that calls for a comprehensive review of the Dodd-Frank Act and requires the Secretary of the Treasury to consult with the heads of the member agencies of FSOC to identify any laws, regulations or requirements that inhibit federal regulation of the financial system in 2019).
On June 16, 2016,a manner consistent with the IAIS published an updated assessment methodology, applicable tocore principles identified in the 2016 designation process, which is yet to be endorsed by the FSB. To support some adjustments proposed by the revised assessment methodology, the IAIS also published a paperexecutive order. In addition, on June 16, 2016, describing8, 2017, the “Systemic Features Framework” thatU.S. House of Representatives passed the IAIS intendsFinancial CHOICE Act of 2017, which proposes to employ in assessing whether certain contractual features and other factors are likely to expose an insurer to a greater degree of systemic risk, focusing specifically on two sets of risks: macroeconomic exposure and substantial liquidity risk. Also, the IAIS stated that the 2016 assessment methodology, along with the Systemic Features Framework, will lead to a change in HLA design and calibration.
As part of its efforts to create a common framework for the supervision of internationally active insurance groups (“IAIGs”), the IAIS has also been developing a comprehensive, group-wide international insurance capital standard (the “ICS”) to be applied to both GSIIs and IAIGs, although it is not expected to be finalized until at least 2019. Although the BCR and HLA are more developed than the ICS at present, the IAIS has stated that it intends to revisit both standards following development and refinementamend or repeal various sections of the ICS, and that the BCR will eventually be replaced by the ICS.
These measures could have far reaching regulatory and competitive implications for the AXA Group, which in turn could materially affect our competitive position, consolidated results of operations, financial condition, liquidity and how we operate our business. For additional information, see “Risk Factors.”
In addition, many of AB’s subsidiaries are subject to the oversight of regulatory authorities in jurisdictions outside of the United States in which they operate, including the European Securities and Markets Authority, the Financial Conduct Authority in the U.K., the CSSF in Luxembourg, the Financial Services Agency in Japan, the Securities & Futures Commission in Hong Kong, the Monetary Authority of Singapore, the Financial Services Commission in South Korea and the Financial Supervisory Commission in Taiwan. While these regulatory requirements often may be comparable to the requirements of the SEC and other U.S. regulators, they are sometimes more restrictive and may cause AB to incur substantial expenditures of time and money related to AB’s compliance efforts.
Federal Tax Legislation, Regulation, and Administration
Although we cannot predict what legislative, regulatory, or administrative changes may or may not occurDodd-Frank Act. There is considerable uncertainty with respect to the federal tax law, we nevertheless endeavor to consider the possible ramifications of such changes on the profitability of our business and the attractiveness of our products to consumers. In this regard, we analyze multiple streams of information, including those described below.
Enacted Legislation. At present, the federal tax laws generally permit certain holders of life insurance and annuity products to defer taxation on the build-up of value within such products (commonly referred to as “inside build-up”) until payments are made to the policyholders or other beneficiaries. From time to time, Congress considers legislation that could enhance or reduce (or eliminate) the benefit of tax deferral on some life insurance and annuity products. As an example, the American Taxpayer’s Relief Act increased individual tax rates for higher-income taxpayers. Higher tax rates increase the benefits of tax deferral on inside build-up and, correspondingly, tend to enhance the attractiveness of life insurance and annuity products to consumers that are subject to those higher tax rates.
Tax Reform Initiatives. Tax reform initiatives have been underway in Congress over the last several years. During that discourse, wholesale changes to long-standing provisions governing the taxation of insurance companies have been considered, including proposals that would modify (i) the calculation of the dividends-received deduction (“DRD”) with respect to life insurance company separate accounts in a way that largely would eliminate the benefit that life insurance companies receive, (ii) the calculation of insurance reserves in a manner that would decrease the federal tax deduction available to life insurance companies for such reserves, and (iii) the rules concerning the capitalization of certain policy acquisition expenses in a way that would increase the amount of policy acquisition expense that an insurance company would be required to capitalize and amortize for federal tax purposes. Recent proposals would limit the ability of companies, potentially including life insurance companies, to claim deductions for interest expenses in excess of annual interest income and would potentially impose a border adjustment on imported services, potentially including reinsurance purchased from non-US companies that could increase our costs of doing business. In addition, the tax reform plan released by President Trump during the presidential campaign would limit the tax deferral on inside build-up for high-income consumers. The likelihood of enactment of these (or of any other) proposals, whether as part of a comprehensive tax
reform package or as discrete legislative changes, is uncertain at this time due to the current political and economic environment as well as the ambiguity that comes with any tax reform initiative.
Presidential Budget Proposals. The President submits a budget proposal to Congress on an annual basis. To varying degrees, these budget proposals typically include federal tax and related proposals that, if enacted into law, could affect our profitability and the attractiveness of our products to consumers. For example, budget proposals from the Obama Administration included proposals that sought to modify the calculation of the DRD with respect to life insurance company separate accounts and impose a “financial fee” on certain firms in the financial sector, including insurance companies. If enacted into law, these proposals could have an adverse effect on our profitability. Budget proposals from the Obama Administration also proposed changes to the federal tax laws that could affect purchasers of products offered and sold through our various business lines, including proposals that would (i) expand the pro‑rata interest expense disallowance for COLI policies, (ii) increase the top capital gains rate, and (iii) restore and permanently extend the estate, gift, and generation-skipping transfer tax exemptions and tax rates as they applied in prior years. Some of these proposals, should they become law, could have the potential to improve the attractiveness of our products to consumers and enhance our sales, while other proposals could have the opposite effect. It remains to be seen to what extent any of these budget proposals will be included in tax reform initiatives or Trump administration budget proposals. To date, indications fromimpact the Trump administration and Congress may have, suggested that it plans to comprehensively modifyif any, on the Dodd-Frank Act and simplify the tax code, including the imposition of significantly lower tax rates.any changes likely will take
Regulatory and Other Administrative Guidance from the Treasury Department and the Internal Revenue Service. Regulatory and other administrative guidance from the Treasury Department and the Internal Revenue Service also could impact the amount of federal tax that we pay. For example, the adoption of “principles based” approaches for calculating statutory reserves may lead the Treasury Department and the Internal Revenue Service to issue guidance that changes the way that deductible insurance reserves are determined, potentially reducing future tax deductions for us.16
time to unfold. We cannot predict the ultimate content, timing or effect of any reform legislation or the impact of potential legislation on us.
Broker-Dealer and Securities Regulation
We and certain policies and contracts offered by us are subject to regulation under the Federal securities laws administered by the SEC,U.S. Securities and Exchange Commission (the “SEC”), self-regulatory organizations and under certain state securities laws. These regulators may conduct examinations of our operations, and from time to time make requests for particular information from us.
Certain of our subsidiaries and affiliates, of AXA Equitable including AXA Advisors, AXA Distributors, AllianceBernstein Investments, Inc., and Sanford C. Bernstein & Co., LLC (“SCB LLC”), are registered as broker-dealers (collectively, the “Broker-Dealers”) under the Securities Exchange Act.Act of 1934, as amended (the “Exchange Act”). The Broker-Dealers are subject to extensive regulation by the SEC and are members of, and subject to regulation by, FINRA,the Financial Industry Regulatory Authority, Inc. (“FINRA”), a self-regulatory organization subject to SEC oversight. The Broker-Dealers are subject to the capital requirements of the SEC and/or FINRA, which specify minimum levels of capital (“net capital”) that the Broker-Dealers are required to maintain and also limit the amount of leverage that the Broker-Dealers are able to employ in their businesses. The SEC and FINRA also regulate the sales practices of the Broker-Dealers. In recent years, the SEC and FINRA have intensified their scrutiny of sales practices relating to variable annuities, variable life insurance and alternative investments, among other products. In addition, the Broker-Dealers are also subject to regulation by state securities administrators in those states in which they conduct business, who may also conduct examinations and direct inquiries to the Broker-Dealers.
The SEC, FINRA and other governmental regulatory authorities, including state securities administrators, may institute administrative or judicial proceedings that may result in censure, fines, the issuance of cease-and-desist orders, the suspension or expulsion of a broker-dealer or member, its officers, registered representatives or employees or other similar sanctions.
Certain of our Separate Accounts are registered as investment companies under the Investment Company Act of 1940, as amended (the “Investment Company Act”).Act. Separate Account interests under certain annuity contracts and insurance policies issued by us are also registered under the Securities Act of 1933, as amended (the “Securities Act”).Act. EQAT, andAXA Premier VIP Trust and 1290 Funds are registered as investment companies under the Investment Company Act and shares offered by these investment companies are also registered under the Securities Act. Many of the investment companies managed by AB, including a variety of mutual funds and other pooled investment vehicles, are registered with the SEC under the Investment Company Act, and, if appropriate, shares of these entities are registered under the Securities Act.
Certain subsidiaries and affiliates of AXA Equitable including AXA Equitable FMG and AXA Advisors and AB and certain of its subsidiaries and affiliates are registered as investment advisorsadvisers under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”).Act. The investment advisory activities of such registered investment advisorsadvisers are subject to various Federalfederal and state laws and regulations and to the laws in those foreign countries in which they conduct business. These
laws and regulations generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. In case of such an event, the possible sanctions that may be
imposed include the suspension of individual employees or investment adviser representatives, limitations on engaging in business for specific periods, revocation of registration of the firm as an investment advisor or of the registration of its investment advisor representatives, censures and fines.
AXA Equitable FMG is registered with the CFTCU.S. Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator with respect to certain portfolios and is also a member of the National Futures Association (“NFA”). AB and certain of its subsidiaries are also separately registered with the CFTC as commodity pool operators and commodity trading advisers; SCB LLC is also registered with the CFTC as a commodities introducing broker. The CFTC is a federal independent agency that is responsible for, among other things, the regulation of commodity interests and enforcement of the Commodity Exchange Act (“CEA”). The NFA is a self-regulatory organization to which the CFTC has delegated, among other things, the administration and enforcement of commodity regulatory registration requirements and the regulation of its members. As such, AXA Equitable FMG is subject to regulation by the NFA and CFTC and is subject to certain legal requirements and restrictions in the CEA and in the rules and regulations of the CFTC and the rules and by-laws of the NFA on behalf of itself and any commodity pools that it operates, including investor protection requirements and antifraudanti-fraud prohibitions, and is subject to periodic inspections and audits by the CFTC and NFA. AXA Equitable FMG is also subject to certain CFTC-mandated disclosure, reporting and recordkeepingrecord-keeping obligations. Violations of the rules of the CFTC or NFA could result in remedial actions including censures, fines, registration restrictions, trading prohibitions, limitations on engaging in business for specific periods or the revocations of CFTC registration or NFA membership.
Regulators, including the SEC, FINRA, the CFTC, NFA and state attorneys general, continue to focus attention on various practices in or affecting the investment management and/or mutual fund industries, including portfolio management, valuation and the use of fund assets for distribution.
We and certain of our subsidiaries and affiliates have provided, and in certain cases continue to provide, information and documents to the SEC, FINRA, the CFTC, NFA, state attorneys general, the NYDFS and other state insurance regulators, and other regulators regarding our compliance with insurance, securities and other laws and regulations regarding the conduct of our businesses.business. For example, we are respondinghave responded to inquiries from the SEC requesting information with regard to contract language and accompanying disclosure for certain variable annuity contracts. For additional information on regulatory matters, see Note 17 of the Notes to the Consolidated Financial Statements.
The SEC, FINRA, the CFTC and other governmental regulatory authorities may institute administrative or judicial proceedings that may result in censure, fines, the issuance of cease-and-desist orders, trading prohibitions, the suspension or expulsion of a broker-dealer or member, its officers, registered representatives or employees or other similar sanctions.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Currently, the U.S. federal government does not directly regulate the business of insurance. While the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) does not remove primary responsibility for the supervision and regulation of insurance from the states, Title V of the Dodd-Frank Act establishes the Federal Insurance Office (“FIO”) within the U.S. Treasury Department and reforms the regulation of the non-admitted property and casualty insurance market and the reinsurance market. The Dodd-Frank Act also established the Financial Stability Oversight Council (“FSOC”), which is authorized to subject non-bank financial companies, including insurers, to supervision by the Federal Reserve and enhanced prudential standards if the FSOC determines that a non-bank financial institution could pose a threat to U.S. financial stability.
The FIO has authority that extends to all lines of insurance except health insurance, crop insurance and (unless included with life or annuity components) long-term care insurance. Under the Dodd-Frank Act, the FIO is charged with monitoring all aspects of the insurance industry (including identifying gaps in regulation that could contribute to a systemic crisis), recommending to the FSOC the designation of any insurer and its affiliates (potentially including AXA and its affiliates) as a non-bank financial company subject to oversight by the Board of Governors of the Federal Reserve System (including the administration of stress testing on capital), assisting the Treasury Secretary in negotiating “covered agreements” with non-U.S. governments or regulatory authorities, and, with respect to state insurance laws and regulation, determining whether state insurance measures are pre-empted by such covered agreements.
In addition, the FIO is empowered to request and collect data (including financial data) on and from the insurance industry and insurers (including reinsurers) and their affiliates. In such capacity, the FIO may require an insurer or an affiliate of an insurer to submit such data or information as the FIO may reasonably require. In addition, the FIO’s approval will be required to subject a financial company whose largest U.S. subsidiary is an insurer to the special orderly liquidation process outside the federal bankruptcy code, administered by the Federal Deposit Insurance Corporation (the “FDIC”) pursuant to the Dodd-Frank Act. U.S. insurance subsidiaries of any such financial company, however, would be subject to rehabilitation and liquidation proceedings under state insurance law. The Dodd-Frank Act also reforms the regulation of the non-admitted property/casualty insurance market (commonly referred to as excess and surplus lines) and the reinsurance markets, including prohibiting the
ability of non-domiciliary state insurance regulators to deny credit for reinsurance when recognized by the ceding insurer’s domiciliary state regulator.
Other aspects of our operations could also be affected by the Dodd-Frank Act. These include:
Heightened Standards and Safeguards
The FSOC may recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices we and other insurers or other financial services companies engage in if the FSOC determines that those activities or practices could create or increase the risk that significant liquidity, credit or other problems spread among financial companies. We cannot predict whether any such recommendations will be made or their effect on our business, consolidated results of operations or financial condition.
Over-The-Counter Derivatives Regulation
The Dodd-Frank Act includes a framework of regulation of the over-the-counter (“OTC”) derivatives markets. Regulations approved to date require clearing of previously uncleared transactions and will require clearing of additional OTC transactions in the future. In addition, regulations approved pursuant to the Dodd-Frank Act impose margin requirements on OTC transactions not required to be cleared. As a result of these regulations, our costs of risk mitigation have and may continue to increase under the Dodd-Frank Act. For example, margin requirements, including the requirement to pledge initial margin for OTC cleared transactions entered into after June 10, 2013 and for OTC uncleared transactions entered into after the phase-in period, which would be applicable to us in 2020, have increased. In addition, restrictions on securities that will qualify as eligible collateral, will require increased holdings of cash and highly liquid securities with lower yields causing a reduction in income. Centralized clearing of certain OTC derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivatives transactions. We use derivatives to mitigate a wide range of risks in connection with our business, including the impact of increased benefit exposures from certain variable annuity products that offer GMxB features. We have always been subject to the risk that our hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might result from the enactment and implementation of the Dodd-Frank Act.
Broker-Dealer Regulation
The Dodd-Frank Act provides that the SEC may promulgate rules to provide that the standard of conduct for all broker-dealers, when providing personalized investment advice about securities to retail customers (and any other customers as the SEC may by rule provide) will be the same as the standard of conduct applicable to an investment adviser under the Investment Advisers Act. On April 18, 2018, the SEC released a set of proposed rules that would, among other things, enhance the existing standard of conduct for broker-dealers to require them to act in the best interest of their clients; clarify the nature of the fiduciary obligations owed by registered investment advisers to their clients; impose new disclosure requirements aimed at ensuring investors understand the nature of their relationship with their investment professionals; and restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor.” Public comments were due by August 7, 2018. Although the full impact of the proposed rules can only be measured when the implementing regulations are adopted, the intent of this provision is to authorize the SEC to impose on broker-dealers fiduciary duties to their customers, similar to what applies to investment advisers under existing law. We are currently assessing these proposed rules to determine the impact they may have on our business. In addition, FINRA is also currently focusing on how broker-dealers identify and manage conflicts of interest.
Although many of the regulations implementing portions of the Dodd-Frank Act have been promulgated, we are still unable to predict how this legislation may be interpreted and enforced or the full extent to which implementing regulations and policies may affect us. Also, the Trump administration and Congress have indicated that the Dodd-Frank Act will be under further scrutiny and some of the provisions of the Dodd-Frank Act may be revised, repealed or amended. For example, President Trump has issued an executive order that calls for a comprehensive review of the Dodd-Frank Act and requires the Secretary of the Treasury to consult with the heads of the member agencies of FSOC to identify any laws, regulations or requirements that inhibit federal regulation of the financial system in a manner consistent with the core principles identified in the executive order. In addition, on June 8, 2017, the U.S. House of Representatives passed the Financial CHOICE Act of 2017, which proposes to amend or repeal various sections of the Dodd-Frank Act. There is considerable uncertainty with respect to the impact the Trump administration and Congress may have, if any, on the Dodd-Frank Act and any changes likely will take
time to unfold. We cannot predict the ultimate content, timing or effect of any reform legislation or the impact of potential legislation on us.
ERISA Considerations
We provide certain products and services to employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) and certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”). As such, our activities are subject to the restrictions imposed by ERISA and the Code, including the requirement that fiduciaries must perform their duties solely in the interests of plan participants and beneficiaries, and fiduciaries may not cause or permit a covered plan to engage in certain prohibited transactions with persons (parties-in-interest) who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Code are subject to enforcement by the U.S. Department of Labor (the “DOL”), the Internal Revenue Service (the “IRS”) and the Pension Benefit Guaranty Corporation.
In April 2016, the DOL issued a rule (the “DOL Rule”) which significantly expanded the range of activities considered to be fiduciary investment advice under ERISA when our advisors and our employees provide investment-related information and support to retirement plan sponsors, participants and IRA holders. In the wake of the March 2018 federal appeals court decision to vacate the DOL Rule, the SEC and NAIC as well as state regulators are currently considering whether to apply an impartial conduct standard similar to the DOL Rule to recommendations made in connection with certain annuities and, in one case, to life insurance policies. For example, the NAIC is actively working on a proposal to raise the advice standard for annuity sales and in July 2018, the NYDFS issued a final version of Regulation 187 that adopts a “best interest” standard for recommendations regarding the sale of life insurance and annuity products in New York. Regulation 187 takes effect on August 1, 2019 with respect to annuity sales and February 1, 2020 for life insurance sales and is applicable to sales of life insurance and annuity products in New York. We are currently assessing Regulation 187 to determine the impact it may have on our business. In November 2018, the three primary agent groups in New York launched a legal challenge against the NYDFS over the adoption of Regulation 187. It is not possible to predict whether this challenge will be successful. Beyond the New York regulation, the likelihood of enactment of any such federal or state-based regulation is uncertain at this time, but if implemented, these regulations could have adverse effects on our business and consolidated results of operations.
International Regulation
Regulators and lawmakers in non-U.S. jurisdictions are engaged in addressing the causes of the financial crisis and means of avoiding such crises in the future. On July 18, 2013, the International Association of Insurance Supervisors (“IAIS”) published an initial assessment methodology for designating global systemically important insurers (“GSIIs”), as part of the global initiative launched by the G20 with the assistance of the Financial Stability Board (the “FSB”) to identify those insurers whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity.
On July 18, 2013, the FSB published its initial list of nine GSIIs, which included AXA. The GSII list was originally intended to be updated annually following consultation with the IAIS and respective national supervisory authorities. AXA remained on the list as updated in November 2014, 2015 and 2016. However, the FSB announced in November 2017 that it, in consultation with the IAIS and national authorities, has decided not to publish a new list of GSIIs for 2017. On November 14, 2018, the FSB announced that, in light of IAIS progress in developing a proposed holistic framework for the assessment and mitigation of potential systemic risk in the insurance sector, the FSB has decided not to engage in an identification of G-SIIs in 2018. In its public consultation on the holistic framework, issued on November 14, 2018, the IAIS recommended that the implementation of its proposed holistic framework should obviate the need for the FSB’s annual G-SII identification process. The FSB subsequently stated that it will assess the IAIS’s recommendation to suspend G-SII identification from 2020, once the holistic framework is finalized in November 2019, and, in November 2022, based on the initial implementation of the holistic framework, review the need to either discontinue or reestablish an annual identification of G-SIIs.
The policy measures for GSIIs, published by the IAIS in July 2013, include (i) the introduction of new capital requirements; a “basic” capital requirement (“BCR”) applicable to all GSII activities which is intended to serve as a basis for an additional level of capital, called “Higher Loss Absorbency” (“HLA”) required from GSIIs in relation to their systemic activities, (ii) greater regulatory oversight over holding companies, (iii) various measures to promote the structural and financial “self-sufficiency” of group companies and reduce group interdependencies including restrictions on intra-group financing and other arrangements, and (iv) in general, a greater level of regulatory scrutiny for GSIIs (including a requirement to establish a Systemic Risk Management Plan (“SRMP”), a Liquidity Risk Management Plan (“LRMP”) and a Recovery and Resolution Plan (“RRP”) which have entailed significant new processes, reporting and compliance burdens and costs for AXA. The
contemplated policy measures include the constitution of a Crisis Management Group by the group-wide supervisor, the preparation of the above-mentioned documents (SRMP, LRMP and RRP) and the development and implementation of the BCR in 2014, while other measures are to be phased in more gradually, such as the HLA (the first version of which was endorsed by the FSB in October 2015 but which is expected to be revised before its implementation in at least 2019).
On June 16, 2016, the IAIS published an updated assessment methodology, applicable to the 2016 designation process, which is yet to be endorsed by the FSB. To support some adjustments proposed by the revised assessment methodology, the IAIS also published a paper on June 16, 2016, describing the “Systemic Features Framework” that the IAIS intends to employ in assessing whether certain contractual features and other factors are likely to expose an insurer to a greater degree of systemic risk, focusing specifically on two sets of risks: macroeconomic exposure and substantial liquidity risk. Also, the IAIS stated that the 2016 assessment methodology, along with the Systemic Features Framework, will lead to a change in HLA design and calibration. In addition, the IAIS is in the process of developing an activities-based approach to systemic risk in the insurance sector and published a consultation paper on this approach in December 2017. The development of this activities-based approach may have significant implications for the identification of GSIIs and the policy measures to which they are expected to be subject.
As part of its efforts to create a common framework for the supervision of internationally active insurance groups (“IAIGs”), the IAIS has also been developing a comprehensive, group-wide international insurance capital standard (the “ICS”) to be applied to both GSIIs and IAIGs, although it is not expected to be finalized until 2019 at the earliest, and is not expected to be fully implemented, if at all, until at least five years thereafter. AXA currently meets the parameters set forth to define an IAIG. Although the BCR and HLA are more developed than the ICS at present, the IAIS has stated that it intends to revisit both standards following development and refinement of the ICS, and that the BCR will eventually be replaced by the ICS. The NAIC plans to develop an “aggregation method” for group capital. Although the aggregation method will not be part of ICS, the IAIS aims to make a determination whether the aggregated approach provides substantially the same outcome as the ICS, in which case it could be incorporated into the ICS as an outcome-equivalent approach.
Although the standards issued by the FSB and/or the IAIS are not binding on the United States or other jurisdictions around the world unless and until the appropriate local governmental bodies or regulators adopt appropriate laws and regulations, these measures could have far reaching regulatory and competitive implications for AXA in the event they are implemented by its group supervisors, which in turn, to the extent we are deemed to be controlled by or an affiliate of AXA at the time the measures are implemented, or we independently meet the criteria for being an IAIG and the measures are adopted by U.S. group supervisors, could materially affect our competitive position, consolidated results of operations, financial condition, liquidity and how we operate our business.
Federal Tax Legislation, Regulation, and Administration
Although we cannot predict what legislative, regulatory, or administrative changes may or may not occur with respect to the federal tax law, we nevertheless endeavor to consider the possible ramifications of such changes on the profitability of our business and the attractiveness of our products to consumers. In this regard, we analyze multiple streams of information, including those described below.
Enacted Legislation
At present, the federal tax laws generally permit certain holders of life insurance and annuity products to defer taxation on the build-up of value within such products (commonly referred to as “inside build-up”) until payments are made to the policyholders or other beneficiaries. From time to time, Congress considers legislation that could enhance or reduce (or eliminate) the benefit of tax deferral on some life insurance and annuity products. As an example, the American Taxpayer’s Relief Act increased individual tax rates for higher-income taxpayers. Higher tax rates increase the benefits of tax deferral on inside build-up and, correspondingly, tend to enhance the attractiveness of life insurance and annuity products to consumers that are subject to those higher tax rates. The Tax Reform Act reduced individual tax rates, which could reduce demand for our products. The modification or elimination of this tax-favored status could also reduce demand for our products. In addition, if the treatment of earnings accrued inside an annuity contract was changed prospectively, and the tax-favored status of existing contracts was grandfathered, holders of existing contracts would be less likely to surrender or rollover their contracts. These changes could reduce our earnings and negatively impact our business.
The Tax Reform Act
The Tax Reform Act overhauled the U.S. Internal Revenue Code and changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies. While the Tax Reform Act had a net positive economic impact on us, it contained measures which could have adverse or uncertain impacts on some aspects of our business, results of operations or financial condition. We continue to monitor regulations and interpretations of the Tax Reform Act that could impact our business, results of operations and financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Macroeconomic and Industry Trends—Impact of the Tax Reform Act.”
Future Changes in U.S. Tax Laws
We anticipate that, following the Tax Reform Act, we will continue deriving tax benefits from certain items, including but not limited to the dividend received deduction (“DRD”), tax credits, insurance reserve deductions and interest expense deductions. However, there is a risk that interpretations of the Tax Reform Act, regulations promulgated thereunder, or future regulatory investigationschanges to federal, state or other tax laws could potentiallyreduce or eliminate the tax benefits from these or other items and result in fines,our incurring materially higher taxes.
Regulatory and Other Administrative Guidance from the Treasury Department and the IRS
Regulatory and other sanctions and/or other costs.
administrative guidance from the Treasury Department and the IRS also could impact the amount of federal tax that we pay. For example, the adoption of “principles based” approaches for calculating statutory reserves may lead the Treasury Department and the IRS to issue guidance that changes the way that deductible insurance reserves are determined, potentially reducing future tax deductions for us.
Privacy and Security of Customer Information
and Cybersecurity Regulation
We are subject to federal and state laws and regulations whichthat require financial institutions to protect the security and confidentiality of customer information, and to notify customers about their policies and practices relating to their collection and disclosure of customer information and their practices relating to protecting the security and confidentiality of that information. We have adopted a privacy policy outlining procedures and practices to be followed by members of the AXA Financial GroupHoldings and its subsidiaries relating to the collection, disclosure and protection of customer information. As required by law, a copy of the privacy policy is mailed to customers on an annual basis. Federal and state laws generally require that we provide notice to affected individuals, law enforcement, regulators and/or potentially others if there is a situation in which customer information is intentionally or accidentally disclosed to and/or acquired by unauthorized third parties. Federal regulations require financial institutions to implement programs to detect, prevent, and mitigate identity theft. Federal and state laws and regulations regulate the ability of financial institutions to make telemarketing calls and to send unsolicited e-mail or fax messages to both consumers and customers, and also regulate the permissible uses of certain categories of customer information. Violation of these laws and regulations may result in significant fines and remediation costs. It may be expected that legislation considered by either the U.S. Congress and/or state legislatures could create additional and/or more detailed obligations relating to the use and protection of customer information.
On February 16, 2017, the NYDFS announced the adoption of a new cybersecurity regulation for financial services institutions, including banking and insurance entities, under its jurisdiction. The new regulation became effective on March 1, 2017 and is being implemented in stages that commenced on August 28, 2017 and will be fully implemented by March 1, 2019. This new regulation requires these entities to, among other things, establish and maintain a cybersecurity policy designed to protect consumers’ private data. We have adopted a cybersecurity policy outlining our policies and procedures for the protection of our information systems and information stored on those systems that comports with the regulation. In addition to New York’s cybersecurity regulation, the NAIC adopted the Insurance Data Security Model Law in October 2017. Under the model law, companies that are compliant with the NYDFS cybersecurity regulation are deemed also to be in compliance with the model law. The purpose of the model law is to establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. Certain states have adopted the model law, and we expect that additional states will also adopt the model law, although it cannot be predicted whether or not, or in what form or when, they will do so.
Environmental Considerations
Federal, state and local environmental laws and regulations apply to our ownership and operation of real property. Inherent in owning and operating real property are the risk of environmental liabilities and the costs of any required clean-up. Under the
laws of certain states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of clean-up, which could adversely affect our mortgage lending business. In some states, this lien may have priority over the lien of an existing mortgage against such property. In addition, in some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, we may be liable, in certain circumstances, as an “owner” or “operator,” for costs of cleaning-up releases or threatened releases of hazardous substances at a property mortgaged to us. We also risk environmental liability when we foreclose on a property mortgaged to us. However, Federalfederal legislation provides for a safe harbor from CERCLA liability for secured lenders, provided that certain requirements are met. Application of various other federal and state environmental laws could also result in the imposition of liability on us for costs associated with environmental hazards.
We routinely conduct environmental assessments prior to making a mortgage loan or taking title to real estate, whether through acquisition for investment or through foreclosure on real estate collateralizing mortgages. AlthoughWe cannot provide assurance that unexpected environmental liabilities can always arise, we seekwill not arise. However, based on information currently available to minimize this risk by undertaking these environmental assessments consistent with regulatory guidance and complying with our internal procedures. As a result,us, we believe that any costs associated with compliance with environmental laws and regulations or any clean-up of properties would not have a material adverse effect on our consolidated results of operations.
Intellectual Property
We rely on a combination of copyright, trademark, patent and trade secret laws to establish and protect our intellectual property rights. AXA FinancialHoldings has entered into a licensing arrangement (the “Trademark License Agreement”) with AXA concerning the use by AXA Financial GroupHoldings of the “AXA” name. Since 2014, AXA Financial Group companies have been using AXA as the single brand for AXA Financial’s advice, retirement and life insurance lines of business. As a result, we have simplified our brand in the U.S. marketplace to “AXA” from AXA Equitable. We also have an extensive portfolio of trademarks and service marks that we consider important in the marketing of our products and services. We regard our intellectual property as valuable assets and protect them against infringement.
AB has also registered a number of service marks with the U.S. Patent and Trademark Office and various foreign trademark offices, including the mark “AllianceBernstein.” The [A/B] logo and “Ahead of Tomorrow” are service marks of AB. In January 2015, AB established two new brand identities. Although the legal names of AB did not change, the corporate entity, and its Institutions and Retail businesses now are referred to as “AB”. Private Wealth Management and Bernstein Research Services now are referred to as “AB Bernstein”. Also, AB adopted the [A/B] logo and “Ahead of Tomorrow” service marks described above. AB has acquired all of the rights and title in, and to, the Bernstein service marks, including the mark “Bernstein” and the W.P. Stewart & Co., Ltd. services marks, including the logo “WPSTEWART”.
Iran Threat Reduction and Syria Human Rights Act
AXA Financial,Holdings, AXA Equitable and their global subsidiaries had no transactions or activities requiring disclosure under the Iran Threat Reduction and Syria Human Rights Act (“Iran Act”), nor were they involved in the AXA Group matters described immediately below.
The non-U.S. based subsidiaries of AXA operate in compliance with applicable laws and regulations of the various jurisdictions wherein which they operate, including applicable international (United Nations and European Union) laws and regulations. While AXA Group companies based and operating outside the United States generally are not subject to U.S. law, as an international group, AXA has in place policies and standards (including the AXA Group International Sanctions Policy) that apply to all AXA Group companies worldwide and often impose requirements that go well beyond local law. For additional information regarding AXA, see “Business - Parent Company.”
AXA has informed us that AXA Konzern AG, an AXA insurance subsidiary organized under the laws of Germany, provides car, accident and health insurance to diplomats based at the Iranian embassyEmbassy in Berlin, Germany. The total annual premium of these policies is approximately $13,000$139,700 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $1,950. These$24,272.
AXA also has informed us that AXA Belgium, an AXA insurance subsidiary organized under the laws of Belgium, has two policies were underwritten by a broker who specializes in providing for car insurance coverage for diplomats. ProvisionGlobal Trading NV, which was designated on May 17, 2018 under (E.O.) 13224, and subsequently changed its name to Energy Engineers & Construction on August 20, 2018. The total annual premium of motor vehicle insurancethese policies is mandatory in Germanyapproximately $6,559 before tax and cannotthe annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be cancelled until the policies expire.
$983.
In addition, AXA has informed us that AXA Insurance Ireland, an AXA insurance subsidiary, provides statutorily required car insurance under four separate policies to the Iranian embassyEmbassy in Dublin, Ireland. AXA has informed us that compliance with the Declined Cases Agreement of the Irish Government prohibits the cancellation of these policies unless another insurer is willing to assume the coverage. The total annual premium for these policies is approximately $6,094$7,115 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $914.
$853.
Also, AXA has informed us that AXA Sigorta, a subsidiary of AXA organized under the laws of the Republic of Turkey, provides car insurance coverage for vehicle pools of the Iranian General Consulate and the Iranian embassyEmbassy in Istanbul, Turkey. Motor liability insurance coverage is mandatorycompulsory in Turkey and cannot be cancelledcanceled unilaterally. The total annual premium in
respect of these policies is approximately $3,150 and the annual net profit, which is difficult to calculate with precision, is estimated to be $473.
Additionally, AXA has informed us that AXA Ukraine, an AXA insurance subsidiary, provides car insurance for the Attaché of the Embassy of Iran in Ukraine. Motor liability insurance coverage cannot be cancelled under Ukrainian law. The total annual premium in respect of this policy is approximately $1,000 and the annual net profit, which is difficult to calculate with precision, is estimated to be $150.
AXA also has informed us that AXA Ubezpieczenia, an AXA insurance subsidiary organized under the laws of Poland, provides car insurance to two diplomats based at the Iranian embassy in Warsaw, Poland. Provision of motor vehicle insurance is mandatory in Poland. The total annual premium of these policies is approximately $535 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $80.
In addition, AXA has informed us that AXA Winterthur, an AXA insurance subsidiary organized under the laws of Switzerland, provides Naftiran Intertrade, a wholly-owned subsidiary of the Iranian state-owned National Iranian Oil Company, with life, disability and accident coverage for its employees. In addition, AXA Winterthur also provides car and property insurance coverage for the Iranian Embassy in Bern. The provision of these forms of coverage is mandatory for employees in Switzerland. The total annual premium of these policies is approximately $373,668$396,597 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $56,000.$59,489.
Lastly,Also, AXA has informed us that AXA France,Egypt, an AXA insurance subsidiary has identified a propertyorganized under the laws of Egypt, provides the Iranian state-owned Iran Development Bank, two life insurance contract for Bank Sepah in Paris, France. This business commenced in July 2016 for acontracts, covering individuals who have loans with the bank. The total annual premium of these policies is approximately $1,400$19,839 and the annual net profit arising from this policy,these policies, which is difficult to calculate with precision, is estimated to be $210. This business was cancelled$2,000.
Furthermore, AXA has informed us that AXA XL, which AXA acquired during the third quarter of 2018, through various non-U.S. subsidiaries, provides insurance to marine policyholders located outside of the U.S. or reinsurance coverage to non-U.S. insurers of marine risks as well as mutual associations of ship owners that provide their members with protection and liability coverage. The provision of these coverages may involve entities or activities related to Iran, including transporting crude oil, petrochemicals and refined petroleum products. AXA XL’s non-U.S. subsidiaries insure or reinsure multiple voyages and fleets containing multiple ships, so they are unable to attribute gross revenues and net profits from such marine policies to activities with Iran. As the activities of these insureds and re-insureds are permitted under applicable laws and regulations, AXA XL intends for its non-U.S. subsidiaries to continue providing such coverage to its insureds and re-insureds to the extent permitted by applicable law.
Lastly, a non-U.S. subsidiary of AXA XL provided accident & health insurance coverage to the diplomatic personnel of the Embassy of Iran in September 2016.
Brussels, Belgium during the third quarter of 2018. AXA XL’s non-U.S. subsidiary received aggregate payments for this insurance from inception through December 31, 2018 of approximately $73,451. Benefits of approximately $2,994 were paid to beneficiaries during 2018. These activities are permitted pursuant to applicable law. The policy has been canceled and is no longer in force.
The aggregate annual premium for the above-referenced insurance policies is approximately $398,847,$646,411, representing approximately 0.0004%0.0006% of AXA’s 20162018 consolidated revenues, which are approximatelyexceed $100 billion. The related net profit, which is difficult to calculate with precision, is estimated to be $59,777,$88,070, representing approximately 0.0009%0.001% of AXA’s 20162018 aggregate net profit.
EMPLOYEES
As of December 31, 2018, the Company had approximately 4,200 full time employees.
PARENT COMPANY
AXA, our ultimate parent company, is the holding company for the AXA Group, a worldwide leader in financial protection. AXA operates primarily in Europe, North America, the Asia/Pacific regions and, to a lesser extent, in other regions including the Middle East, Africa and Latin America. AXA has five operating business segments: Life and Savings, Property and Casualty, International Insurance, Asset Management and Banking.
Voting Trust. In connection with AXA’s application to the Superintendent for approval of its acquisition of the capital stock of AXA Financial, AXA and certain trustees (the “Voting Trustees”) of the Voting Trust entered into a Voting Trust Agreement dated as of May 12, 1992 (as amended by the First Amendment, dated January 22, 1997, and as amended and restated by the Second Amended and Restated Voting Trust Agreement, dated April 29, 2011, the “Voting Trust Agreement”). Pursuant to the Voting Trust Agreement, AXA and its affiliates (“AXA Parties”) have deposited the shares of AXA Financial’s Common Stock held by them in the Voting Trust. The purpose of the Voting Trust is to ensure for insurance regulatory purposes that certain indirect minority shareholders of AXA will not be able to exercise control over AXA Financial or AXA Equitable.
AXA and any other holder of Voting Trust certificates are the beneficial owner of the shares deposited by it, except that the Voting Trustees are entitled to exercise all voting rights attached to the deposited shares so long as such shares remain subject to the Voting Trust. In voting the deposited shares, the Voting Trustees must act to protect the legitimate economic interests of AXA and any other holders of Voting Trust certificates (but with a view to ensuring that certain indirect minority shareholders of AXA do not exercise control over AXA Financial or AXA Equitable). All dividends and distributions (other than those that are paid in the form of shares required to be deposited in the Voting Trust) in respect of deposited shares are paid directly to the holders of Voting Trust certificates. If a holder of Voting Trust certificates sells or transfers deposited shares to a person who is not an AXA Party and is not (and does not, in connection with such sale or transfer, become) a holder of Voting Trust certificates, the shares sold or transferred will be released from the Voting Trust. The initial term of the Voting Trust ended in 2002and the term of the Voting Trust has been extended, with the prior approval of the NYDFS, until April 29, 2021. Future extensions of the term of the Voting Trust remain subject to the prior approval of the NYDFS.
Part I, Item 1A.
RISK FACTORS
In the course of conducting our business operations, we could be exposed to a variety of risks. This “Risk Factors” section provides a summary of someYou should consider and read carefully all of the significant risks and uncertainties described below, as well as other information set forth in this Annual Report on Form 10-K. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that have affectedwe currently believe to be immaterial could materially and couldadversely affect our business, consolidatedfinancial position, results of operations or financial condition. In this section, the terms “we,” “us”cash flows. This Annual Report on Form 10-K also contains forward-looking statements and “our” refer to AXA Equitable. As noted below, risk factors relating to AB’s business, reportedestimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the Investment Management segment, are specifically incorporated by reference herein.
forward-looking statements as a result of specific factors, including the risks and uncertainties described below.
Risks relatingRelating to conditionsOur Business
Risks Relating to Conditions in the capital marketsFinancial Markets and economyEconomy
Conditions in the global capital markets and the economy could materially and adversely affect our business, consolidated results of operations andor financial condition.
condition.
Our business, consolidated results of operations andor financial condition are materially affected by conditions in the global capital markets and the economy generally. While financial markets in the U.S. generally performed well in 2016, aA wide variety of factors continue to impact economic conditions and consumer confidence. These factors include, among others, concerns over the pace of economic growth in the U.S.,United States, equity market performance, continued low interest rates, uncertainty regarding the U.S. Federal Reserve’s plans to further raise short-term interest rates, the strength of the U.S. Dollar, thedollar, uncertainty created by what actions the Trump administration and Congress may pursue, global trade wars, global economic factors including quantitative easing or similar programs by major central banks or the European Central Bank,unwinding of quantitative easing or similar programs, the United Kingdom’s vote to exit (“Brexit”) from the European Union (the “EU”), and other geopolitical issues. Given our interest rate and equity market exposure certainin our investment and derivatives portfolios and many of our products, these factors could have ana material adverse effect on us. Our revenues may decline, our profit margins could erode and we could incur significant losses.
The value of our investments and derivatives portfolios may also be impacted by reductions in price transparency, changes in the assumptions or methodology we use to estimate fair value and changes in investor confidence or preferences, which could potentially result in higher realized or unrealized losses and have a material adverse effect on our business, results of operations or financial condition. Market volatility may also make it difficult to transact in or to value certain of our securities if trading becomes less frequent.
Factors such as consumer spending, business investment, government debt and spending, the volatility and strength of the equity markets, interest rates, deflation and inflation all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our annuity, insurance and/retirement, protection or investment products and our investment returns could be materially and adversely affected. The profitability of many of our retirement, protection and investment products depends in part on the value of the General Account and Separate Accounts supporting them, which may fluctuate substantially depending on any of the foregoing conditions. In addition, a change in market conditions could cause a change in consumer sentiment and adversely affect sales and could cause the actual persistency of these products to vary from their anticipated persistency (the probability that a product will remain in force from one period to the next) and adversely affect profitability. Changing economic conditions or adverse public perception of financial institutions can influence customer behavior, which can result in, among other things, an increase or decrease in the levels of claims, lapses, deposits, surrenders and withdrawals in certain products, any of our variable life and annuity contracts we face may bewhich could adversely impacted.affect profitability. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. AdverseIn addition, market conditions may affect the availability and cost of reinsurance protections and the availability and performance of hedging instruments in ways that could materially and adversely affect our profitability.
Accordingly, both market and economic factors may affect our business results by adversely affecting our business volumes, profitability, cash flow, capitalization and overall financial condition. Disruptions in one market or asset class can also spread to other markets or asset classes. Upheavals and stagnation in the financial markets could also materially affect our financial condition (including our liquidity and capital levels) as a result of the impact of such events on our assets and liabilities.
Equity market declines and volatility may materially and adversely affect our business, results of operations or financial condition.
Declines or volatility in the equity markets, such as that which we experienced during the fourth quarter of 2018, can negatively impact our investment returns as well as our business, results of operations or financial condition. For example, equity market declines or volatility could, among other things, decrease the AV of our annuity and variable life contracts which, in turn, would reduce the amount of revenue we derive from fees charged on those account and asset values. Our variable annuity business in particular is highly sensitive to equity markets, and a sustained weakness or stagnation in equity markets could decrease our revenues and earnings with respect to those products. At the same time, for variable annuity contracts that include GMxB features, equity market declines increase the amount of our potential obligations related to such GMxB features and could increase the cost of executing GMxB-related hedges beyond what was anticipated in the pricing of the products being hedged. This could result in an increase in claims and reserves related to those contracts, net of any reinsurance reimbursements or proceeds from our hedging programs. We may not be able to effectively mitigate, including through our hedging strategies, and we may sometimes choose based on economic considerations and other factors not to fully mitigate the equity market volatility of our portfolio. Equity market declines and volatility may also influence policyholder behavior, which may adversely impact the levels of surrenders, withdrawals and amounts of withdrawals of our annuity and variable life contracts or cause policyholders to reallocate a portion of their account balances to more conservative investment options (which may have lower fees), which could negatively impact our future profitability or increase our benefit obligations particularly if they were to remain in such options during an equity market increase. Market volatility can negatively impact the value of equity securities we hold for investment which could in turn reduce our statutory capital. In addition, equity market volatility could reduce demand for variable products relative to fixed products, lead to changes in estimates underlying our calculations of DAC that, in turn, could accelerate our DAC amortization and reduce our current earnings and result in changes to the economyfair value of our GMIB reinsurance contracts and GMxB liabilities, which could affectincrease the volatility of our earnings negativelyearnings. Lastly, periods of high market volatility or adverse conditions could decrease the availability or increase the cost of derivatives.
Interest rate fluctuations or prolonged periods of low interest rates may materially and could have a material adverse effect onadversely impact our business, consolidated results of operations andor financial condition. See “Business - Products”
We are affected by the monetary policies of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) and “Management’s Discussionthe Federal Reserve Bank of New York (collectively, with the Federal Reserve Board, the “Federal Reserve”) and Analysisother major central banks, including the unwinding of Financial Condition and Resultsquantitative easing programs, as such policies may adversely impact the level of Operations - Results of Continuing Operations by Segment.”
Interest rate fluctuations and/or prolonged periods of low or negative interest rates may negatively impactand, as discussed below, the income we earn on our business,consolidated resultsinvestments or the level of operations and financial condition.
product sales.
Some of our life insuranceretirement and annuitiesprotection products and certain of our investment products, and our investment returns, are sensitive to interest rate fluctuations, and changes in interest rates may adversely affect our investment returns and results of operations, including in the following respects:
changes in interest rates may reduce the spread on some of our products between the amounts that we are required to pay under the contracts and the rate of return we are able to earn on our general accountGeneral Account investments supporting the contracts. When interest rates decline, we have to reinvest the cash income from our investments in lower yielding instruments, potentially reducing net investment income. Since many of our policies and contracts have guaranteed minimum interest or crediting rates or limit the resetting of interest rates, the spreads could decrease and potentially become negative. When interest rates rise, we may not be able to quickly replace the assets in our general account as quicklyGeneral Account with the higher yielding assets needed to fund the higher crediting rates necessary to keep these products and contracts competitive, which may result in higher lapse rates;
when interest rates rise rapidly, policy loans and surrenders and withdrawals of annuity contracts and life insurance policies and annuity contracts may increase as policyholders seek to buy products with perceived higher returns, requiring us to sell investment assets potentially resulting in realized investment losses, or requiring us to accelerate the amortization of DAC;
DAC, which could reduce our net income;
a decline in interest rates accompanied by unexpected prepayments of certain investments may result in reduced investment income and a decline in our profitability. An increase in interest rates accompanied by unexpected extensions of certain lower yielding investments may result in a decline in our profitability;
changes in the relationship between long-term and short-term interest rates may adversely affect the profitability of some of our products;
changes in interest rates could result in changes to the fair value of our GMIB reinsurance contracts asset, which could increase the volatility of our earnings. Higher interest rates reduce the value of the GMIB reinsurance contract asset
which reduces our earnings, while lower interest rates increase the value of the GMIB reinsurance contract asset which increases our earnings;
changes in interest rates could result in changes to the fair value liability of our variable annuity GMxB business. Higher interest rates decrease the fair value liability of our GMxB variable annuity business, which increases our earnings; while lower interest rates increase the fair value liability of our GMxB variable annuity business, which decreases our earnings;
changes in interest rates may adversely impact our liquidity and increase our costs of financing;
financing and the cost of some of our hedges;
our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a weighted average duration that is approximately equal towithin an acceptable range of the duration of our estimated liability cash flow profile.profile given our risk appetite. However, our estimate of the liability cash flow profile may turn out to be inaccurate. In addition, there are practical and capital market limitations on our ability to accomplish this matching.objective. Due to these and other factors we may need to liquidate investments prior to maturity at a loss in order to satisfy liabilities or be forced to reinvest funds in a lower rate environment;
although we take measures, including hedging strategies utilizing derivative instruments, to manage the economic risks of investing in a changing interest rate environment, we may not be able to effectively mitigate, including through our hedging strategies, and we may sometimes choose based on economic considerations and other factors not to fully mitigate or to increase, the interest rate risk of our assets relative to our liabilities; and
for certain of our products, a delay between the time we make changes in interest rate and other assumptions used for product pricing and the time we are able to reflect these assumptions in products available for sale may negatively impact the long-term profitability of products sold during the intervening period.
Recent periods have been characterized by low interest rates.rates relative to historical levels. A prolonged period during which interest rates remain at levels lower than those anticipatedlow may result in greater costs associated with certain of our product features which guarantee death benefits or income streams for stated periods or for life;variable annuity products with GMxB features; higher costs for some derivative instruments used to hedge certain of our product risks; or shortfalls in investment income on assets supporting policy obligations as our portfolio earnings decline over time, each of which may require us to record charges to increase reserves. In addition, an extended period of declining interest rates or a prolonged period of low interest rates may also cause us to change our long-term view of the interest rates that we can earn on our investments. Such a change in our view would cause us to change the long-term interest rate that we assume in our calculation of insurance assets and liabilities under U.S. GAAP. Any future revision would result in increased reserves, accelerated amortization of DAC and other unfavorable consequences. In addition, certain statutory capital and reserve requirements are based on formulas or models that consider interest rates, and an extended period of low interest rates may increase the statutory capital we are required to hold and the amount of assets we must maintain to support statutory reserves. In addition to compressing spreads and reducing net investment income, such an environment may cause certain policies to remain in force for longer periods than we anticipated in our pricing, potentially resulting in greater claims costs than we expected and resulting in lower overall returns on business in force.
We manage interest rate risk as part of our asset and liability management strategies, which include (i) maintaining an investment portfolio with diversified maturities that has a weighted average duration that is within an acceptable range of the duration of our estimated liability cash flow profile given our risk appetite and (ii) our hedging programs. For certain of our liability portfolios, it is not possible to invest assets to the full liability duration, thereby creating some asset/liability mismatch. Where a liability cash flow may exceed the maturity of available assets, as is the case with certain retirement products, we may support such liabilities with equity investments, derivatives or interest rate mismatch strategies. We take measures to manage the economic risks of investing in a changing interest rate environment, but we may not be able to mitigate the interest rate risk of our fixed income investments relative to our interest sensitive liabilities. Widening credit spreads, if not offset by equal or greater declines in the risk-free interest rate, would also cause the total interest rate payable on newly issued securities to increase, and thus would have the same effect as an increase in underlying interest rates.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, our access to capital and our cost of capital.
The capital and credit markets may experience, and have experienced, varying degrees of volatility and disruption. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers. We need liquidity to pay our operating expenses (including potential hedging losses), interest expenses and any dividends. Without sufficient liquidity, we could be required to curtail our operations and our business would suffer.
While we expect that our future liquidity needs will be satisfied primarily through cash generated by our operations, borrowings from third parties and dividends and distributions from our subsidiaries, it is possible that the level of cash and securities we maintain when combined with expected cash inflows from investments and operations will not be adequate to meet our anticipated short-term and long-term benefit and expense payment obligations. If current resources are insufficient to satisfy our needs, we may access financing sources such as bank debt or the capital markets. The availability of additional financing would depend on a variety of factors, such as market declinesconditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, interest rates, credit spreads, our credit ratings and credit capacity, as well as the possibility that our customers or lenders could develop a negative perception of our long- or short-term financial prospects if we incur large investment losses or if the level of our business activity decreases due to a market downturn. Similarly, our access to funds may be rendered more costly or impaired if rating agencies downgrade our ratings or if regulatory authorities take certain actions against us. If we are unable to access capital markets to issue new debt or refinance existing debt as needed, or if we are unable to obtain such financing on acceptable terms, our business could be adversely impacted.
Volatility in the capital markets may also consume liquidity as we pay hedge losses and meet collateral requirements related to market movements. We maintain hedging programs to reduce our net economic exposure under long-term liabilities to risks such as interest rates and equity market levels. We expect these hedging programs to incur losses in certain market scenarios, creating a need to pay cash settlements or post collateral to counterparties. Although our liabilities will also be reduced in these scenarios, this reduction is not immediate, and so in the short-term hedging losses will reduce available liquidity. Liquidity may also be consumed by increased required contributions to captive reinsurance trusts. For more details, see “—Risks Relating to Our Business—Risks Relating to Our Reinsurance and Hedging Programs—Our reinsurance arrangements with affiliated captives may be adversely impacted by changes to policyholder behavior assumptions under the reinsured contracts, the performance of their hedging program, their liquidity needs, their overall financial results and changes in regulatory requirements regarding the use of captives.”
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital. Such market conditions may in the future limit our ability to raise additional capital to support business growth, or to counter-balance the consequences of losses or increased regulatory reserves and rating agency capital requirements. Our business, results of operations, financial condition, liquidity, statutory capital or rating agency capital position could be materially and adversely affected by disruptions in the financial markets.
Future changes in our credit ratings are possible, and any downgrade to our ratings is likely to increase our borrowing costs and limit our access to the capital markets and could be detrimental to our business relationships with distribution partners. If this occurs, we may be forced to incur unanticipated costs or revise our strategic plans, which could materially and adversely affect our business, results of operations or financial condition.
Risks Relating to Our Operations
During the course of preparing our U.S. GAAP financial statements, our management identified two material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses is not effective, we may not be able to report our financial condition or results of operations accurately or on a timely basis.
During the course of preparing our U.S. GAAP financial statements, our management identified two material weaknesses in the design and operation of our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.
Our management consequently concluded that we do not: (1) maintain effective controls to timely validate that actuarial models are properly configured to capture all relevant product features and to provide reasonable assurance that timely reviews of assumptions and data have occurred, and, as a result, errors were identified in future policyholders’ benefits and deferred policy acquisition costs balances; and (2) maintain sufficient experienced personnel to prepare the Company’s consolidated financial statements and to verify that consolidating and adjusting journal entries were completely and accurately recorded to the appropriate accounts and, as a result, errors were identified in the Company’s consolidated financial statements, including in the presentation and disclosure between sections of the statement of cash flows.
These material weaknesses resulted in misstatements in the Company’s previously issued annual and interim financial statements and resulted in the restatement of the annual financial statements for the year ended December 31, 2016, the revision
to each of the quarterly interim periods for 2017 and 2016, and the revision of the annual financial statements for the year ended December 31, 2015.
In addition, during the preparation of our quarterly report on Form 10-Q for the six months ended June 30, 2018, management identified a misclassification error between interest credited and net derivative gains/losses, which resulted in misstatements in the consolidated statements of income (loss) and statements of cash flows that were not considered material. Accordingly, we: (i) revised the annual financial statements for the year ended December 31, 2017; (ii) revised the annual financial statements for the year ended December 31, 2016; and (iii) revised the interim financial statements for the nine months ended September 30, 2017 and for the six months ended June 30, 2017.
Further, in connection with preparing our quarterly report on Form 10-Q for the nine months ended September 30, 2018, management identified errors primarily related to the calculation of policyholders’ benefit reserves for our life and annuity products and the calculation of net derivative gains (losses) and DAC amortization for certain variable and interest sensitive life products. Accordingly, we: (i) revised the interim financial statements for the nine months ended September 30, 2017 and the six months ended June 30, 2017 from the previously reported interim financial statements; (ii) revised the interim financial statements for the six months ended June 30, 2018 and the three months ended March 31, 2018 and 2017 from the previously reported interim financial statements; (iii) revised the annual financial statements for the years ended December 31, 2017 from the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018; (iv) and revised the annual financial statements for the year ended December 31, 2016 from the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018.
Lastly, in connection with preparing our annual report on Form 10-K for the year ended December 31, 2018, management identified certain cash flows that were incorrectly classified in the Company’s historical consolidated statements of cash flows. The impact of these misclassifications was not considered material. Accordingly, the Company revised the interim financial statements for the three, six, and nine months ended March 31, June 30 and September 30, 2018 and 2017 and the annual financial statements for the year ended December 31, 2017.
The changes necessary to correct the identified misstatements in our previously reported historical results have been appropriately reflected in our consolidated annual financial statements included elsewhere in this Annual Report on Form 10-K. Until remedied, these material weaknesses could result in a misstatement of our consolidated financial statements or disclosures that would result in a material misstatement to our annual or interim financial statements that would not be prevented or detected.
Since identifying the two material weaknesses, we have been, and are currently in the process of, remediating each material weakness. Although we plan to complete the remediation process as quickly as possible for each material weakness, we cannot at this time estimate when the remediation will be completed. For additional information, see “Controls and Procedures-Remediation Status of Material Weaknesses.”
If we fail to remediate effectively these material weaknesses or if we identify additional material weaknesses in our internal control over financial reporting, we may be unable to report our financial condition or financial results accurately or to report them within the timeframes required by the SEC. If this were the case, we could become subject to sanctions or investigations by the SEC or other regulatory authorities. Furthermore, failure to report our financial condition or financial results accurately or report them within the timeframes required by the SEC could cause us to curtail or cease sales of certain variable insurance products. In addition, if we are unable to determine that our internal control over financial reporting or our disclosure controls and procedures are effective, users of our financial statements may lose confidence in the accuracy and completeness of our financial reports, we may face reduced ability to obtain financing and restricted access to the capital markets, and we may be required to curtail or cease sales of our products. See “Controls and Procedures” in Part II, Item 9A.
Failure to protect the confidentiality of customer information or proprietary business information could adversely affect our reputation and have a material adverse effect on our business, results of operations or financial condition.
Our business and relationships with customers are dependent upon our ability to maintain the confidentiality of our customers’ proprietary business and confidential information (including customer transactional data and personal data about our employees, our customers and the employees and customers of our customers). Pursuant to federal laws, various federal regulatory and law enforcement agencies have established rules protecting the privacy and security of personal information. In addition, most states, including New York, have enacted laws, which vary significantly from jurisdiction to jurisdiction, to safeguard the privacy and security of personal information.
We and certain of our vendors retain confidential information in our information systems and in cloud-based systems (including customer transactional data and personal information about our customers, the employees and customers of our customers, and our own employees). We rely on commercial technologies and third parties to maintain the security of those systems. Anyone who is able to circumvent our security measures and penetrate our information systems, those of our vendors, or the cloud-based systems we use, could access, view, misappropriate, alter or delete any information in the systems, including personally identifiable customer information and proprietary business information. It is possible that an employee, contractor or representative could, intentionally or unintentionally, disclose or misappropriate personal information or other confidential information. Our employees, distribution partners and other vendors may use portable computers or mobile devices which may contain similar information to that in our information systems, and these devices have been and can be lost, stolen or damaged. In addition, an increasing number of states require that customers be notified if a security breach results in the inappropriate disclosure of personally identifiable customer information. Any compromise of the security of our information systems, or those of our vendors, or the cloud-based systems we use, through cyber-attacks or for any other reason that results in inappropriate disclosure of personally identifiable customer information could damage our reputation in the marketplace, deter people from purchasing our products, subject us to significant civil and criminal liability and require us to incur significant technical, legal and other expenses any of which could have a material adverse effect on our reputation, business, results of operations or financial condition.
For example, in November 2018, we were notified by one of our third-party vendors of an incident involving unauthorized access to confidential information of certain of our customers, as well as customer information of a number of other institutions. In accordance with applicable law and regulations, we have notified the appropriate regulators and our affected customers. We have also conducted a thorough investigation of this security breach and believe it has been resolved. However, we cannot provide assurances that all potential causes of the incident have been identified and remediated or that a similar incident will not occur again.
Our own operational failures or those of service providers on which we rely, including failures arising out of human error, could disrupt our business, damage our reputation and have a material adverse effect on our business, results of operations or financial condition.
Weaknesses or failures in our internal processes or systems could lead to disruption of our operations, liability to clients, exposure to disciplinary action or harm to our reputation. Our business is highly dependent on our ability to process, on a daily basis, large numbers of transactions, many of which are highly complex, across numerous and diverse markets. These transactions generally must comply with client investment guidelines, as well as stringent legal and regulatory standards.
Weaknesses or failures within a vendor’s internal processes or systems, or inadequate business continuity plans, can materially disrupt our business operations. In addition, vendors may lack the necessary infrastructure or resources to effectively safeguard our confidential data. If we are unable to effectively manage the risks associated with such third-party relationships, we may suffer fines, disciplinary action and reputational damage.
Our obligations to clients require us to exercise skill, care and prudence in performing our services. The large number of transactions we process makes it highly likely that errors will occasionally occur. If we make a mistake in performing our services that causes financial harm to a client, we have a duty to act promptly to put the client in the position the client would have been in had we not made the error. The occurrence of mistakes, particularly significant ones, can have a material adverse effect on our reputation, business, results of operations or financial condition.
Our information systems may fail or their security may be compromised, which could materially and adversely impact our business, results of operations or financial condition.
Our business is highly dependent upon the effective operation of our information systems. We also have arrangements in place with outside vendors and other service providers through which we share and receive information. We rely on these systems throughout our business for a variety of functions, including processing claims and applications, providing information to customers and third-party distribution firms, performing actuarial analyses and modeling, hedging, performing operational tasks (e.g., processing transactions and calculating net asset value) and maintaining financial records. Our information systems and those of our outside vendors and service providers may be vulnerable to physical or cyber-attacks, computer viruses or other computer related attacks, programming errors and similar disruptive problems. In some cases, such physical and electronic break-ins, cyber-attacks or other security breaches may not be immediately detected. In addition, we could experience a failure of one or these systems, our employees or agents could fail to monitor and implement enhancements or other modifications to a system in a timely and effective manner, or our employees or agents could fail to complete all
necessary data reconciliation or other conversion controls when implementing a new software system or implementing modifications to an existing system. The failure of these systems for any reason could cause significant interruptions to our operations, which could result in a material adverse effect on our business, results of operations or financial condition. In addition, a failure of these systems could lead to the possibility of litigation or regulatory investigations or actions, including regulatory actions by state and federal governmental authorities. While we take preventative measures to avoid cyber-attacks and other security breaches, we cannot guarantee that such measures will successfully prevent an attack or breach.
Many of the software applications that we use in our business are licensed from, and supported, upgraded and maintained by, vendors. A suspension or termination of certain of these licenses or the related support, upgrades and maintenance could cause temporary system delays or interruptions. Additionally, technology rapidly evolves and we cannot guarantee that our competitors may not implement more advanced technology platforms for their products and services, which may place us at a competitive disadvantage and materially and adversely affect our results of operations and business prospects.
Our service providers, including service providers to whom we outsource certain of our functions, are also subject to the risks outlined above, any one of which could result in our incurring substantial costs and other negative consequences, including a material adverse effect on our business, results of operations or financial condition.
On February 16, 2017, the NYDFS issued final Cybersecurity Requirements for Financial Services Companies that require banks, insurance companies and other financial services institutions regulated by the NYDFS, including us, to, among other things, establish and maintain a cybersecurity policy “designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.” The regulation went into effect on March 1, 2017 and has transition periods ranging from 180 days to two years. We have a cybersecurity policy in place outlining our policies and procedures for the protection of our information systems and information stored on those systems that comports with the regulation. In accordance with the regulation, our Chief Information Security Officer reports to the Board. In addition to New York’s cybersecurity regulation, the NAIC adopted the Insurance Data Security Model Law in October 2017. Under the model law, companies that are compliant with the NYDFS cybersecurity regulation are deemed also to be in compliance with the model law. The purpose of the model law is to establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. Certain states have adopted the model law, and we expect that additional states will begin adopting the model law, although it cannot be predicted whether or not, or in what form or when, they will do so. We are currently evaluating these regulations and their potential impact on our operations, and, with respect to the NYDFS regulations, have begun implementing compliance procedures for those portions of the regulation that are in effect. Depending on our assessment of these and other potential implementation requirements, we and other financial services companies may be required to incur significant expense in order to comply with these regulatory mandates.
Central banks in Europe and Japan have in recent years begun to pursue negative interest rate policies, and the Federal Open Market Committee has not ruled out the possibility that the Federal Reserve would adopt a negative interest rate policy for the United States, at some point in the future, if circumstances so warranted. Because negative interest rates are largely unprecedented, there is uncertainty as to whether the technology used by financial institutions, including us, could operate correctly in such a scenario. Should negative interest rates emerge, our hardware or software, or the hardware or software used by our contractual counterparties and financial services providers, may not function as expected or at all. In such a case, our business, results of operations or financial condition could be materially and adversely affected.
We face competition from other insurance companies, banks, asset managers and other financial institutions, which may adversely impact our market share and consolidated results of operations.
There is strong competition among insurers, banks, asset managers, brokerage firms and other financial institutions and financial services providers seeking clients for the types of products and services we provide. Competition is intense among a broad range of financial institutions and other financial service providers for retirement and other savings dollars. As a result, this competition makes it especially difficult to provide unique products because, once such products are made available to the public, they often are reproduced and offered by our competitors. As with any highly competitive market, competitive pricing structures are important. If competitors charge lower fees for similar products or strategies, we may decide to reduce the fees on our own products or strategies (either directly on a gross basis or on a net basis through fee waivers) in order to retain or attract customers. Such fee reductions, or other effects of competition, could have a material adverse effect on our business, results of operations or financial condition.
Competition may adversely impact our market share and profitability. Many of our competitors are large and well-established and some have greater market share or breadth of distribution, offer a broader range of products, services or features, assume a greater level of risk, have greater financial resources, have higher claims-paying or credit ratings, have better brand recognition or have more established relationships with clients than we do. We may also face competition from new market entrants or non-traditional or online competitors, which may have a material adverse effect on our business.
Our ability to compete is dependent on numerous factors including, among others, the successful implementation of our strategy; our financial strength as evidenced, in part, by our financial and claims-paying ratings; new regulations or different interpretations of existing regulations; our access to diversified sources of distribution; our size and scale; our product quality, range, features/functionality and price; our ability to bring customized products to the market quickly; our technological capabilities; our ability to explain complicated products and features to our distribution channels and customers; crediting rates on our fixed products; the visibility, recognition and understanding of our brands in the marketplace; our reputation and quality of service; the tax-favored status certain of our products receive under current federal and state laws; and, with respect to variable annuity and insurance products, mutual funds and other investment products, investment options, flexibility and investment management performance.
Many of our competitors also have been able to increase their distribution systems through mergers, acquisitions, partnerships or other contractual arrangements. Furthermore, larger competitors may have lower operating costs and have an ability to absorb greater risk, while maintaining financial strength ratings, allowing them to price products more competitively. These competitive pressures could result in increased pressure on the pricing of certain of our products and services, and could harm our ability to maintain or increase profitability. In addition, if our financial strength and credit ratings are lower than our competitors, we may experience increased surrenders or a significant decline in sales. The competitive landscape in which we operate may be further affected by government sponsored programs or regulatory changes in the United States and similar governmental actions outside of the United States. Competitors that receive governmental financing, guarantees or other assistance, or that are not subject to the same regulatory constraints, may have or obtain pricing or other competitive advantages. Due to the competitive nature of the financial services industry, there can be no assurance that we will continue to effectively compete within the industry or that competition will not materially and adversely impact our business, results of operations or financial condition.
We may also face competition from new entrants into our markets, many of whom are leveraging digital technology that may challenge the position of traditional financial service companies, including us, by providing new services or creating new distribution channels.
The inability of AXA Advisors and AXA Network to recruit, motivate and retain experienced and productive financial professionals and our inability to recruit, motivate and retain key employees may have a material adverse effect on our business, results of operations or financial condition.
Financial professionals associated with AXA Advisors and AXA Network and our key employees are key factors driving our sales. Intense competition exists among insurers and other financial services companies for financial professionals and key employees. Companies compete for financial professionals principally with respect to compensation policies, products and sales support. Competition is particularly intense in the hiring and retention of experienced financial professionals. Our ability to incentivize our employees and financial professionals may be adversely affected by tax reform. We cannot provide assurances that we, AXA Advisors or AXA Network will be successful in our respective efforts to recruit, motivate and retain key employees and top financial professionals, and the loss of such employees and professionals could have a material adverse effect on our business, results of operations or financial condition.
We also rely upon the knowledge and experience of employees involved in functions that require technical expertise in order to provide for sound operational controls for our overall enterprise, including the accurate and timely preparation of required regulatory filings and U.S. GAAP and statutory financial statements and operation of internal controls. A loss of such employees, including as a result of shifting our real estate footprint away from the New York metropolitan area, could adversely impact our ability to execute key operational functions and could adversely affect our operational controls, including internal control over financial reporting.
Misconduct by our employees or financial professionals associated with us could expose us to significant legal liability and reputational harm.
Past or future misconduct by our employees, financial professionals associated with us, agents, intermediaries, representatives of our broker-dealer subsidiaries or employees of our vendors could result in violations of law by us or our subsidiaries, regulatory sanctions or serious reputational or financial harm and the precautions we take to prevent and detect this activity may not be effective in all cases. We employ controls and procedures designed to monitor employees’ and financial professionals’ business decisions and to prevent us from taking excessive or inappropriate risks, including with respect to information security, but employees may take such risks regardless of such controls and procedures. Our compensation policies and practices are reviewed by us as part of our overall risk management program, but it is possible that such compensation policies and practices could inadvertently incentivize excessive or inappropriate risk taking. If our employees or financial professionals take excessive or inappropriate risks, those risks could harm our reputation, subject us to significant civil or criminal liability and require us to incur significant technical, legal and other expenses.
We may engage in strategic transactions that could pose risks and present financial, managerial and operational challenges.
We may, from time to time, consider potential strategic transactions, including acquisitions, dispositions, mergers, consolidations, joint ventures and similar transactions, some of which may be material. These transactions may not be effective and could result in decreased earnings and harm to our competitive position. In addition, these transactions, if undertaken, may involve a number of risks and present financial, managerial and operational challenges, including:
adverse effects on our earnings;
additional demand on our existing employees;
unanticipated difficulties integrating operating facilities technologies and new technologies;
higher than anticipated costs related to integration;
existence of unknown liabilities or contingencies that arise after closing; and
potential disputes with counterparties.
Acquisitions also pose the risk that any business we acquire may lose customers or employees or could underperform relative to expectations. Additionally, the loss of investment personnel poses the risk that we may lose the AUM we expected to manage, which could materially and adversely affect our business, results of operations or financial condition. Furthermore, strategic transactions may require us to increase our leverage or, if we issue shares to fund an acquisition, would dilute the holdings of the existing stockholders. Any of the above could cause us to fail to realize the benefits anticipated from any such transaction.
Our business could be materially and adversely affected by the occurrence of a catastrophe, including natural or man-made disasters.
Any catastrophic event, such as pandemic diseases, terrorist attacks, floods, severe storms or hurricanes or computer cyber-terrorism, could have a material and adverse effect on our business in several respects:
we could experience long-term interruptions in our service and the services provided by our significant vendors due to the effects of catastrophic events. Some of our operational systems are not fully redundant, and our disaster recovery and business continuity planning cannot account for all eventualities. Additionally, unanticipated problems with our disaster recovery systems could further impede our ability to conduct business, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data;
the occurrence of a pandemic disease could have a material adverse effect on our liquidity and the operating results of our insurance business due to increased mortality and, in certain cases, morbidity rates;
the occurrence of any pandemic disease, natural disaster, terrorist attack or any other catastrophic event that results in our workforce being unable to be physically located at one of our facilities could result in lengthy interruptions in our service;
a localized catastrophic event that affects the location of one or more of our corporate-owned or employer-sponsored life insurance customers could cause a significant loss due to the corresponding mortality claims; and
a terrorist attack in the United States could have long-term economic impacts that may have severe negative effects on our investment portfolio, including loss of AUM and losses due to significant volatility, and disrupt our business operations. Any continuous and heightened threat of terrorist attacks could also result in increased costs of reinsurance.
In the event of a disaster, such as a natural catastrophe, epidemic, industrial accident, blackout, computer virus, terrorist attack, cyber-attack or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial position, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. Our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our operations and the communities in which they are located. This may include a disruption involving electrical, communications, transportation or other services we may use or third parties with which we conduct business. If a disruption occurs in one location and our employees in that location are unable to occupy our offices or communicate with or travel to other locations, our ability to conduct business with and on behalf of our clients may suffer, and we may not be able to successfully implement contingency plans that depend on communication or travel. Furthermore, unauthorized access to our systems as a result of a security breach, the failure of our systems, or the loss of data could give rise to legal proceedings or regulatory penalties under laws protecting the privacy of personal information, disrupt operations and damage our reputation.
Our operations require experienced, professional staff. Loss of a substantial number of such persons or an inability to provide properly equipped places for them to work may, by disrupting our operations, adversely affect our business, results of operations or financial condition. In addition, our property and business interruption insurance may not be adequate to compensate us for all losses, failures or breaches that may occur.
We may not be able to protect our intellectual property and may be subject to infringement claims by a third party.
We rely on a combination of contractual rights, copyright, trademark and trade secret laws to establish and protect our intellectual property. Third parties may infringe or misappropriate our intellectual property. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business and our ability to compete. Third parties may have, or may eventually be issued, patents or other protections that could be infringed by our products, methods, processes or services or could limit our ability to offer certain product features. In recent years, there has been increasing intellectual property litigation in the financial services industry challenging, among other things, product designs and business processes. If we were found to have infringed or misappropriated a third-party patent or other intellectual property right, we could in some circumstances be enjoined from providing certain products or services to our customers or from using and benefiting from certain patents, copyrights, trademarks, trade secrets or licenses. Alternatively, we could be required to enter into costly licensing arrangements with third parties or implement a costly alternative. Any of these scenarios could harm our reputation and have a material adverse effect on our business, results of operations or financial condition.
The insurance that we maintain may not fully cover all potential exposures.
We maintain property, business interruption, cyber, casualty and other types of insurance, but such insurance may not cover all risks associated with the operation of our business. Our coverage is subject to exclusions and limitations, including higher self-insured retentions or deductibles and maximum limits and liabilities covered. In addition, from time to time, various types of insurance may not be available on commercially acceptable terms or, in some cases, at all. We are potentially at additional risk if one or more of our insurance carriers fail. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. In the future, we may not be able to obtain coverage at current levels, if at all, and our premiums may increase significantly on coverage that we maintain. We can make no assurance that a claim or claims will be covered by our insurance policies or, if covered, will not exceed the limits of available insurance coverage, or that our insurers will remain solvent and meet their obligations.
Changes in accounting standards could have a material adverse effect on our business, results of operations or financial condition.
Our consolidated financial statements are prepared in accordance with U.S. GAAP, the principles of which are revised from time to time. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board (“FASB”). In the future, new accounting
pronouncements, as well as new interpretations of existing accounting pronouncements, may have material adverse effects on our business, results of operations or financial condition.
FASB has issued several accounting standards updates which have resulted in significant changes in U.S. GAAP, including how we account for our insurance contracts and financial instruments and how our financial statements are presented. The changes to U.S. GAAP could affect the way we account for and report significant areas of our business, could impose special demands on us in the areas of governance, employee training, internal controls and disclosure and will likely affect how we manage our business. In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance(Topic 944), which applies to all insurance entities that issue long-duration contracts and revises elements of the measurement models for traditional nonparticipating long-duration and limited payment insurance liabilities and recognition and amortization model for DAC for most long-duration contracts. The new accounting standard also requires product features that have other-than-nominal credit risk, or market risk benefits (“MRBs”), to be measured at fair value. ASU 2018-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact that the adoption of this guidance will have on our consolidated financial statements.
In addition, AXA, prepares consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). From time to time, AXA may be required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the International Accounting Standards Board. In the future, new accounting pronouncements, as well as new interpretations of existing accounting pronouncements, may have material adverse effects on AXA’s business, results of operations or financial condition which could impact the way we conduct our business (including, for example, which products we offer), our competitive position, our hedging program and the way we manage capital.
Certain of our administrative operations and offices are located internationally, subjecting us to various international risks and increased compliance and regulatory risks and costs.
We have various offices in other countries and certain of our administrative operations are located in India. In the future, we may seek to expand operations in India or other countries. As a result of these operations, we may be exposed to economic, operating, regulatory and political risks in those countries, such as foreign investment restrictions, substantial fluctuations in economic growth, high levels of inflation, volatile currency exchange rates and instability, including civil unrest, terrorist acts or acts of war, which could have an adverse effect on our business, financial condition or results of operations. The political or regulatory climate in the United States could also change such that it would no longer be lawful or practical for us to use international operations in the manner in which they are currently conducted. If we had to curtail or cease operations in India and transfer some or all of these operations to another geographic area, we would incur significant transition costs as well as higher future overhead costs that could adversely affect us.
In many foreign countries, particularly in those with developing economies, it may be common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”) and similar anti-bribery laws. Any violations of the FCPA or other anti-bribery laws by us, our employees, subsidiaries or local agents, could have a material adverse effect on our business and reputation and result in substantial financial penalties or other sanctions.
Our investment advisory agreements with clients, and our selling and distribution agreements with various financial intermediaries, are subject to termination or non-renewal on short notice.
As part of our variable annuity products, AXA Equitable FMG enters into written investment management agreements (or other arrangements) with mutual funds. Generally, these investment management agreements are terminable without penalty at any time or upon relatively short notice by either party. For example, an investment management contract with an SEC-registered investment company (a “RIC”) may be terminated at any time, without payment of any penalty, by the RIC’s board of directors or by vote of a majority of the outstanding voting securities of the RIC on not more than 60 days’ notice. The investment management agreements pursuant to which AXA Equitable FMG manage RICs must be renewed and approved by the RIC’s boards of directors (including a majority of the independent directors) annually. A significant majority of the directors are independent. Consequently, there can be no assurance that the board of directors of each RIC will approve the investment management agreement each year or will not condition its approval on revised terms that may be adverse to us.
Also, as required by the Investment Company Act, each investment advisory agreement with a RIC automatically terminates upon its assignment, although new investment advisory agreements may be approved by the RIC’s board of directors or trustees and stockholders. An “assignment” includes a sale of a control block of the voting stock of the investment adviser or
its parent company. If future sales of Holdings’ common stock were deemed to be an actual or constructive assignment, these termination provisions could be triggered, which may adversely affect AXA Equitable FMG’s ability to realize the value of its investment advisory agreements.
The Investment Advisers Act may also require approval or consent of advisory contracts by clients in the event of an “assignment” of the contract (including a sale of a control block of the voting stock of the investment adviser or its parent company) or a change in control of the investment adviser. Were future sales of Holdings’ common stock or another transaction to result in an assignment or change in control, the inability to obtain consent or approval from clients or stockholders of RICs or other clients could result in a significant reduction in advisory fees.
Similarly, we enter into selling and distribution agreements with securities firms, brokers, banks and other financial intermediaries that are terminable by either party upon notice (generally 60 days) and do not obligate the financial intermediary to sell any specific amount of our products. These intermediaries generally offer their clients investment products that compete with our products.
We may fail to replicate or replace functions, systems and infrastructure provided by AXA or certain of its affiliates (including through shared service contracts) or lose benefits from AXA’s global contracts, and AXA and its affiliates may fail to perform the services provided for in a transitional services agreement with Holdings.
Historically, we have received services from AXA and have provided services to AXA, including information technology services, services that support financial transactions and budgeting, risk management and compliance services, human resources services, insurance, operations and other support services, primarily through shared services contracts with various third-party service providers. AXA and its affiliates continue to provide or procure certain services to us pursuant to a transitional services agreement with Holdings (the “Transitional Services Agreement”). Under the Transitional Services Agreement, AXA will continue to provide certain services, either directly or on a pass-through basis, and we will continue to provide AXA with certain services, either directly or on a pass-through basis. The Transitional Services Agreement will not continue indefinitely.
We are working to replicate or replace the services that we will continue to need in the operation of our business that are provided currently by AXA or its affiliates through shared service contracts they have with various third-party providers and that will continue to be provided under the Transitional Services Agreement for applicable transitional periods. We cannot assure you that we will be able to obtain the services at the same or better levels or at the same or lower costs directly from third-party providers. As a result, when AXA or its affiliates cease providing these services to us, either as a result of the termination of the Transitional Services Agreement or individual services thereunder or a failure by AXA or its affiliates to perform their respective obligations under the Transitional Services Agreement, our costs of procuring these services or comparable replacement services may increase, and the cessation of such services may result in service interruptions and divert management attention from other aspects of our operations.
There is a risk that an increase in the costs associated with replicating and replacing the services provided to us under the Transitional Services Agreement and the diversion of management’s attention to these matters could have a material adverse effect on our business, results of operations or financial condition. We may fail to replicate the services we currently receive from AXA on a timely basis or at all. Additionally, we may not be able to operate effectively if the quality of replacement services is inferior to the services we are currently receiving. Furthermore, once we are no longer an affiliate of AXA, we will no longer receive certain group discounts and reduced fees that we are eligible to receive as an affiliate of AXA. The loss of these discounts and reduced fees could increase our expenses and have a material adverse effect on our business, results of operations or financial condition.
Costs associated with any rebranding could be significant.
Prior to the Holdings IPO, as an indirect, wholly-owned subsidiary of AXA, we marketed our products and services using the “AXA” brand name and logo together with the “Equitable” brand. Following the settlement of AXA’s sell-down in March 2019, we expect to rebrand and cease use, pursuant to the Trademark License Agreement, of the “AXA” brand name and logo within 18 months, subject to such extensions as permitted under the Trademark License Agreement. We have benefited, and will continue to benefit for a limited time as set forth in the Trademark License Agreement, from trademarks licensed in connection with the AXA brand. We believe the association with AXA provides us with preferred status among our customers, vendors and other persons due to AXA’s globally recognized brand, reputation for high quality products and services and strong capital base and financial strength. Any rebranding we undertake could adversely affect our ability to attract and retain customers, which could result in reduced sales of our products. We cannot accurately predict the effect that any rebranding we
undertake will have on our business, customers or volatilityemployees. We expect to incur significant costs, including marketing expenses, in connection with any rebranding of our business. Any adverse effect on our ability to attract and retain customers and any costs could have a material adverse effect on our business, results of operations or financial condition.
Changes in the equitymethod for determining the London Inter-Bank Offered Rate (“LIBOR”) and the potential replacement of LIBOR may affect our cost of capital and net investment income.
As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association (BBA) member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR. As a consequence of such events, it is anticipated that LIBOR will be discontinued by the end of 2021 and an alternative rate will be used for derivatives contracts, debt investments, intercompany and third party loans and other types of commercial contracts. We anticipate a valuation risk around the potential discontinuation event. It is not possible to predict what rate or rates may become accepted alternatives to LIBOR or the effect of any such alternatives on the value of LIBOR-linked securities. Any changes to LIBOR or any alternative rate, or any further uncertainty in relation to the timing and manner of implementation of such changes, could have an adverse effect on the value of investments in our investment portfolio, derivatives we use for hedging, or other indebtedness, securities or commercial contracts.
Risks Relating to Credit, Counterparties and Investments
Our counterparties’ requirements to pledge collateral or make payments related to declines in estimated fair value of derivative contracts exposes us to counterparty credit risk and may adversely affect our liquidity.
We use derivatives and other instruments to help us mitigate various business risks. Our transactions with financial and other institutions generally specify the circumstances under which the parties are required to pledge collateral related to any decline in the market value of the derivatives contracts. If our counterparties fail or refuse to honor their obligations under these contracts, we could face significant losses to the extent collateral agreements do not fully offset our exposures and our hedges of the related risk will be ineffective. Such failure could have a material adverse effect on our business, results of operations or financial condition. Additionally, the implementation of the Dodd-Frank Act and other regulations may increase the need for liquidity and for the amount of collateral assets in excess of current levels.
We may be materially and adversely affected by changes in the actual or perceived soundness or condition of other financial institutions and market participants.
A default by any financial institution or by a sovereign could lead to additional defaults by other market participants. The failure of any financial institution could disrupt securities markets can negativelyor clearance and settlement systems and lead to a chain of defaults, because the commercial and financial soundness of many financial institutions may be closely related as a result of credit, trading, clearing or other relationships. Even the perceived lack of creditworthiness of a financial institution may lead to market-wide liquidity problems and losses or defaults by us or by other institutions. This risk is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which we interact on a daily basis. Systemic risk could have a material adverse effect on our ability to raise new funding and on our business, results of operations or financial condition. In addition, such a failure could impact future product sales as a potential result of reduced confidence in the financial services industry. Regulatory changes implemented to address systemic risk could also cause market participants to curtail their participation in certain market activities, which could decrease market liquidity and increase trading and other costs.
Losses due to defaults, errors or omissions by third parties and affiliates, including outsourcing relationships, could materially and adversely impact our business, results of operations or financial condition.
We depend on third parties and affiliates that owe us money, securities or other assets to pay or perform under their obligations. These parties include the issuers whose securities we hold in our investment returnsportfolios, borrowers under the mortgage loans we make, customers, trading counterparties, counterparties under swap and other derivatives contracts, reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries. Defaults by one or more of these parties on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other factors, or even rumors about potential defaults by one or more of these parties, could have a material adverse effect on our business, results of operations or financial condition.
We also depend on third parties and affiliates in other contexts, including as distribution partners. For example, in establishing the amount of the liabilities and reserves associated with the risks assumed in connection with reinsurance pools and arrangements, we rely on the accuracy and timely delivery of data and other information from ceding companies. In addition, as investment manager and administrator of several mutual funds, we rely on various affiliated and unaffiliated sub-advisers to provide day-to-day portfolio management services for each investment portfolio.
We rely on various counterparties and other vendors to augment our existing investment, operational, financial and technological capabilities, but the use of a vendor does not diminish our responsibility to ensure that client and regulatory obligations are met. Default rates, credit downgrades and disputes with counterparties as to the valuation of collateral increase significantly in times of market stress. Disruptions in the financial markets and other economic challenges may cause our counterparties and other vendors to experience significant cash flow problems or even render them insolvent, which may expose us to significant costs and impair our ability to conduct business.
Losses associated with defaults or other failures by these third parties and outsourcing partners upon whom we rely could materially adversely impact our business, results of operations or financial condition.
We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. The deterioration or perceived deterioration in the credit quality of third parties whose securities or obligations we hold could result in losses or adversely affect our ability to use those securities or obligations for liquidity purposes. While in many cases we are permitted to require additional collateral from counterparties that experience financial difficulty, disputes may arise as to the amount of collateral we are entitled to receive and the value of pledged assets. Our credit risk may also be exacerbated when the collateral we hold cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives exposure that is due to us, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those experienced during the financial crisis. The termination of contracts and the foreclosure on collateral may subject us to claims for the improper exercise of rights under the contracts. Bankruptcies, downgrades and disputes with counterparties as to the valuation of collateral tend to increase in times of market stress and illiquidity.
Gross unrealized losses on fixed maturity and equity securities may be realized or result in future impairments, resulting in a reduction in our net earnings.
Fixed maturity securities classified as available-for-sale are reported at fair value. Unrealized gains or losses on available-for-sale securities are recognized as a component of other comprehensive income (loss) and are, therefore, excluded from net earnings. The accumulated change in estimated fair value of these available-for-sale securities is recognized in net earnings when the gain or loss is realized upon the sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary and an impairment charge to earnings is taken. Realized losses or impairments may have a material adverse effect on our net earnings in a particular quarterly or annual period.
The occurrence of a major economic downturn, acts of corporate malfeasance, widening credit risk spreads, or other events that adversely affect the issuers or guarantors of securities we own or the underlying collateral of structured securities we own could cause the estimated fair value of our fixed maturity securities portfolio and corresponding earnings to decline and cause the default rate of the fixed maturity securities in our investment portfolio to increase. A ratings downgrade affecting issuers or guarantors of particular securities we hold, or similar trends that could worsen the credit quality of issuers, such as the corporate issuers of securities in our investment portfolio, could also have a similar effect. With economic uncertainty, credit quality of issuers or guarantors could be adversely affected. Similarly, a ratings downgrade affecting a security we hold could indicate the credit quality of that security has deteriorated and could increase the capital we must hold to support that security to maintain our RBC level. Levels of write-downs or impairments are impacted by intent to sell, or our assessment of the likelihood that we will be required to sell, fixed maturity securities, as well as our intent and ability to hold equity securities which have declined in value until recovery. Realized losses or impairments on these securities may have a material adverse effect on our business, results of operations, liquidity or financial condition in, or at the end of, any quarterly or annual period.
Some of our investments are relatively illiquid and profitability. For example, equitymay be difficult to sell, or to sell in significant amounts at acceptable prices, to generate cash to meet our needs.
We hold certain investments that may lack liquidity, such as privately placed fixed maturity securities, mortgage loans, commercial mortgage backed securities and alternative investments. In the past, even some of our very high-quality investments experienced reduced liquidity during periods of market declines and/volatility or volatility may, among other things:disruption. Although we seek to adjust our cash and short-term investment positions to minimize the likelihood that we would need to sell illiquid investments, if we were
required to liquidate these investments on short notice or were required to post or return collateral, we may have difficulty doing so and be forced to sell them for less than we otherwise would have been able to realize.
The reported values of our variable life and annuity contracts which, in turn, reducesrelatively illiquid types of investments do not necessarily reflect the amount of revenuecurrent market price for the asset. If we derive from fees charged on those account and asset values. At the same time, for annuity contracts that provide enhanced guarantee features, equity market declines and/or volatility increases the amountwere forced to sell certain of our potential obligations related to such enhanced guarantee features and may increase the cost of executing product guarantee related hedges beyond what was anticipatedassets in the pricing ofcurrent market, there can be no assurance that we would be able to sell them for the products being hedged. This could result in an increase in claimsprices at which we have recorded them and reserves relatedwe might be forced to those contracts, net of any reinsurance reimbursements or proceeds from our hedging programs;
influence policyholder behavior, which may adversely impact the levels of surrenders, withdrawals and amounts of withdrawals of our variable life and annuity contracts or cause policyholders to reallocate a portion of their account balances to more conservative investment options (which may havesell them at significantly lower fees),prices, which could negatively impacthave a material adverse effect on our future profitability and/business, results of operations, liquidity or increasefinancial condition.
Defaults on our benefit obligations particularly if they were to remainmortgage loans and volatility in such options during an equity market increase;
negatively impact the value of equity securities we hold for investment, including our investment in AB, thereby reducing our statutory capital;
reduce demand for variable products relative to fixed products;
lead to changes in estimates underlying our calculations of DAC that, in turn, could accelerate our DAC amortization and reduce our current earnings; and
result in changes to the fair value of our GMIB reinsurance contracts, which could increase the volatility of our earnings.
Market conditions and other factors couldperformance may adversely affect our goodwillprofitability.
A portion of our investment portfolio consists of mortgage loans on commercial and negatively impactagricultural real estate. Our exposure to this risk stems from various factors, including the supply and demand of leasable commercial space, creditworthiness of tenants and partners, capital markets volatility, interest rate fluctuations, agricultural prices and farm incomes, which have recently been declining. Although we manage credit risk and market valuation risk for our consolidatedcommercial and agricultural real estate assets through geographic, property type and product type diversification and asset allocation, general economic conditions in the commercial and agricultural real estate sectors will continue to influence the performance of these investments. These factors, which are beyond our control, could have a material adverse effect on our business, results of operations, andliquidity or financial condition.
Our mortgage loans face default risk and are principally collateralized by commercial and agricultural properties. We establish valuation allowances for estimated impairments, which are based on loan risk characteristics, historical default rates and loss severities, real estate market fundamentals, such as property prices and unemployment, and economic outlooks, as well as other relevant factors (for example, local economic conditions). In addition, substantially all of our commercial and agricultural mortgage loans held-for-investment have balloon payment maturities. An increase in the default rate of our mortgage loan investments or fluctuations in their performance could have a material adverse effect on our business, results of operations, liquidity or financial condition.
BusinessFurther, any geographic or property type concentration of our mortgage loans may have adverse effects on our investment portfolio and market conditionsconsequently on our business, results of operations, liquidity or financial condition. While we seek to mitigate this risk by having a broadly diversified portfolio, events or developments that have a negative effect on any particular geographic region or sector may impact the amount of goodwill relatedhave a greater adverse effect on our investment portfolio to the Investment Management segment we carry inextent that the portfolio is concentrated. Moreover, our consolidated balance sheet. Asability to sell assets relating to a group of related assets may be limited if other market participants are seeking to sell at the value of certain of our businesses is significantly impacted by such factors as the state of the financial markets and ongoing operating performance, significant deterioration or prolonged weakness in the financial markets or economy generally, or our failure to meet operating targets which in some respects are ambitious, could adversely impact goodwill impairment testing and also may require more frequent testing for impairment. Any impairment would reduce the recorded goodwill amount with a corresponding charge to earnings, which could be material. See “Management’s Discussion and Analysis of Financial Condition - Critical Accounting Estimates” and Note 4 of Notes to Consolidated Financial Statements.
same time.
Risks relatingRelating to our reinsuranceOur Reinsurance and hedging programs
Hedging Programs
Our reinsurance and hedging programs may be inadequate to protect us against the full extent of the exposure or losses we seek to mitigate.
Certain of our products contain enhanced guaranteeGMxB features and/or minimum crediting rates. Downturns in equity markets increased equity volatility, and/or reduced interest rates could result in an increase in the valuation of liabilities associated with such products, resulting in increases in reserves and reductions in net earnings.income. In the normal course of business, we seek to mitigate some of these risks to which our business is subject through our reinsurancehedging and hedgingreinsurance programs. However, these programs cannot eliminate all of the risks, and no assurance can be given as to the extent to which such programs will be completely effective in reducing such risks. For example, in the event that reinsurers, derivatives or other counterparties or central clearinghouses do not pay balances due or do not post the required amount of collateral as required under our agreements, we still remain liable for the guaranteed benefits.
ReinsuranceReinsurance.. We utilizeuse reinsurance to mitigate a portion of the risks that we face, principally in certain of our in-force annuity and life insurance and annuity products with regard to mortality, and in certain of our annuity products with regard to a portion of the enhanced guaranteeGMxB features. Under our reinsurance arrangements, other insurers assume a portion of the obligation to pay claims and related expenses to which we are subject. However, we remain liable as the direct insurer on all risks we reinsure and, therefore, are subject to the risk that our reinsurer is unable or unwilling to pay or reimburse claims at the time demand is made. Although we evaluate periodically the financial condition (including the applicable capital requirements) of our reinsurers, theThe inability or unwillingness of a reinsurer to meet its obligations to us, (oror the inability to collect under our reinsurance treaties for any other reason)reason, could have a material adverse impact on our consolidatedbusiness, results of operations andor financial condition. See “Business - Reinsurance and Hedging” and Notes 2, 8 and 9 of Notes to Consolidated Financial Statements.
We are continuing to utilizeuse reinsurance to mitigate a portion of our risk on certain new life insurance sales. Prolonged or severe adverse mortality or morbidity experience could result in increased reinsurance costs, and ultimately may reduce the
availability of reinsurance for future life insurance sales. If, for new sales, we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient, we would either have to be willing to accept an increase in our net exposures, revise our pricing to reflect higher reinsurance premiums or limit the amount of new business written on any individual life. If this were to occur, we may be exposed to reduced profitability and cash flow strain or we may not be able to price new business at competitive rates.
The premium rates and other fees that we charge are based, in part, on the assumption that reinsurance will be available at a certain cost. Some of our reinsurance contracts contain provisions that limit the reinsurer’s ability to increase rates on in-force business; however, some do not. If a reinsurer raises the rates that it charges on a block of in-force business, in some instances, we will not be able to pass the increased costs onto our customers and our profitability will be negatively impacted. Additionally, such a rate increase could result in our recapturing of the business, which may result in a need to maintain additional reserves, reduce reinsurance receivables and expose us to greater risks. While in recent years, we have faced a number of rate increase actions on in-force business, to date they have not had a material effect on our business, results of operations or financial condition. However, there can be no assurance that the outcome of future rate increase actions would have no material effect. In addition, market conditions beyond our control determine the availability and cost of reinsurance for new business. If reinsurers raise the rates that they charge on new business, we may be forced to raise our premiums, which could have a negative impact on our competitive position.
Hedging ProgramsPrograms.. We utilizeuse a hedging program to mitigate a portion of the unreinsured risks we face in, among other areas, the enhanced guaranteeGMxB features of our variable annuity products and minimum crediting rates on our lifevariable annuity and annuitylife products from unfavorable changes in benefit exposures due to movements in the capital markets. In certain cases, however, we may not be able to apply these techniques to effectively hedge these risks because the derivative market(s)derivatives markets in question may not be of sufficient size or liquidity or there could be an operational error in the application of our hedging strategy or for other reasons. The operation of our hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates and amounts of withdrawals, election rates, fund performance, equity market returns and volatility, interest ratesrate levels and correlation among various market movements. There can be no assurance that ultimate actual experience will not differ materially from our assumptions, particularly, (butbut not only)only, during periods of high market volatility, which could adversely impact
consolidated our business, results of operations andor financial condition. For example, in the past, due to, among other things, levels of volatility in the equity and interest rate markets above our assumptions as well as deviations between actual and assumed surrender and withdrawal rates, gains from our hedging programs did not fully offset the economic effect of the increase in the potential net benefits payable under the guaranteesGMxB features offered in certain of our products. If these circumstances were to reoccurre-occur in the future or if, for other reasons, results from our hedging programs in the future do not correlate with the economic effect of changes in benefit exposures to customers, we could experience economic losses which could have a material adverse impact on our consolidatedresults of operations and financial condition.
Our hedging programs do not directly hedge our statutory capital position. Additionally, we may choose to hedge these risks on a basis that does not correspond to their anticipated or actual impact upon ourbusiness, results of operations or financial positioncondition. Additionally, our strategies may result in under U.S. GAAP,or over-hedging our liability exposure, which may decreasecould result in an increase in our hedging losses and greater volatility in our earnings or increase the volatility of our results of operations or financial position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Results of Continuing Operations By Segment.”
See “Business - Reinsurance and Hedging” and Notes 2, 8 and 9 of Notes to Consolidated Financial Statements.
Our reinsurance arrangements with AXA Arizona may be adversely impacted by changes to policyholder behavior assumptions under the reinsured contracts, the performance of AXA Arizona’s hedge program, its liquidity needs, its overall financial results and changes in regulatory requirements regarding the use of captives.
We currently reinsure to AXA Arizona, an indirect, wholly-owned subsidiary of AXA Financial, a 100% quota share of all liabilities for variable annuities with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under universal life insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. The reinsurance arrangements with AXA Arizona provide important capital management benefits to AXA Equitable. Under applicable statutory accounting rules, we are entitled to a credit in our calculation of reserves for amounts reinsured to AXA Arizona to the extent AXA Arizona holds assets in an irrevocable trust and/or letters of credit. Under the reinsurance transactions, AXA Arizona is permitted to transfer assets from the trusts under certain circumstances. The level of assets required to be maintained in the trust fluctuates based on market and interest rate movements, mortality experience and policyholder behavior (i.e., the exercise or non-exercise of rights by policyholders under the contracts including, but not limited to, lapses and surrenders, withdrawal rates and amounts and contributions). Increasing reserve requirements may necessitate that additional assets be placed in trust and/or securing additional letters of credit, which could impact AXA Arizona’s liquidity.
In addition, like AXA Equitable, AXA Arizona employs a dynamic hedging strategy which utilizes derivative contracts as well as repurchase agreement transactions that are collectively managed to help reduce the economic impact of unfavorable changes to GMDB and GMIB reserves. The terms of these contracts in many cases require AXA Arizona to post collateral for the benefit of counterparties or cash settle hedges when there is a decline in the estimated fair value of specified instruments. This would occur, for example, as interest rates and/or equity markets rise and AXA Arizona may not be permitted to transfer assets from the trust under the terms of the reinsurance treaty.
While management believes that AXA Arizona has adequate liquidity and credit facilities to deal with a range of market scenarios and increasing reserve requirements, larger market movements, including but not limited to a significant increase in interest rates, could require AXA Arizona to post more collateral or cash settle more hedges than its own resources would permit. While AXA Arizona’s management intends to take all reasonable steps to maintain adequate sources of liquidity to meet AXA Arizona’s obligations, there can be no assurance that such sources will be available in all market scenarios. The potential inability of AXA Arizona to post such collateral or cash settle such hedges could cause AXA Arizona to reduce the size of its hedging programs, which could ultimately adversely impact AXA Arizona’s ability to perform under the reinsurance arrangements and our ability to receive full statutory reserve credit for the reinsurance arrangements.
Recently, the NAIC, certain state regulators, including the NYDFS, and others have been scrutinizing and further regulating insurance companies’ use of affiliated captive reinsurers or off-shore entities. For example, the NAIC’s Variable Annuities Issues (E) Working Group is developing a revised variable annuities framework that is expected to include a number of changes to the statutory requirements dealing with variable annuities. While the exact nature and scope of the final framework is not predictable at this time, some of the recommendations being discussed in the most recent proposal would adversely impact the capital management benefits we receive under our reinsurance arrangement with AXA Arizona and could cause us to recapture the business reinsured to AXA Arizona and adjust the design of our risk mitigation and hedging programs. In addition, a number of lawsuits have been filed against insurance companies, including AXA Equitable, over the use of captive reinsurers. For additional information, see “Business - Regulation - Insurance Regulation” and Note 17 of Notes to Consolidated Financial Statements. If
the NYDFS or other state insurance regulators were to restrict the use of such captive reinsurers or if we otherwise are unable to continue to use a captive reinsurer, the capital management benefits we receive under this reinsurance arrangement could be adversely affected which could adversely affect our competitive position, capital, liquidity and financial condition and results of operations.
The inability to secure additional required capital and/or liquidity in the circumstances described above could have a material adverse effect on our business, consolidated results of operations and/or financial condition.
See Management’s DiscussionFor further discussion, see below “—Risks Relating to Estimates, Assumptions and AnalysisValuations—Our risk management policies and procedures may not be adequate to identify, monitor and manage risks, which may leave us exposed to unidentified or unanticipated risks, which could negatively affect our business, results of Financial Condition and Results of Operations - Liquidity and Capital Resources and Note 11 of Notes to Consolidated Financial Statements.
operations or financial condition.”
Risks relatingRelating to the natureProducts We Offer, Our Structure and Product Distribution
GMxB features within certain of our business,products may decrease our earnings, decrease our capitalization, increase the volatility of our results, result in higher risk management costs and expose us to increased counterparty risk.
Certain of the variable annuity products we offer and certain in-force variable annuity products we offered historically, and certain variable annuity risks we assumed historically through reinsurance, include GMxB features. We also offer index-linked variable annuities with guarantees against a defined floor on losses. GMxB features are designed to offer protection to policyholders against changes in equity markets and interest rates. Any such periods of significant and sustained negative or low Separate Account returns, increased equity volatility or reduced interest rates will result in an increase in the valuation of our structureliabilities associated with those products. In addition, if the Separate Account assets consisting of fixed income securities, which support the guaranteed index-linked return feature, are insufficient to reflect a period of sustained growth in the equity-index on which the product is based, we may be required to support such Separate Accounts with assets from our General Account and product distributionincrease our liabilities. An increase in these liabilities would result in a decrease in our net income and depending
on the magnitude of any such increase, could materially and adversely affect our financial condition, including our capitalization, as well as the financial strength ratings which are necessary to support our product sales.
Additionally, we make assumptions regarding policyholder behavior at the time of pricing and in selecting and using the GMxB features inherent within our products (e.g., use of option to annuitize within a GMIB product). An increase in the valuation of the liability could result to the extent emerging and actual experience deviates from these policyholder option use assumptions. We review our actuarial assumptions at least annually, including those assumptions relating to policyholder behavior, and update assumptions when appropriate. If we update our assumptions based on our actuarial assumption review in future years, we could be required to increase the liabilities we record for future policy benefits and claims to a level that may materially and adversely affect our business, results of operations or financial condition which, in certain circumstances, could impair our solvency. In addition, we have in the past updated our assumptions on policyholder behavior, which has negatively impacted our net income, and there can be no assurance that similar updates will not be required in the future.
In addition, capital markets hedging instruments may not effectively offset the costs of GMxB features or may otherwise be insufficient in relation to our obligations. Furthermore, we are subject to the risk that changes in policyholder behavior or mortality, combined with adverse market events, could produce economic losses not addressed by the risk management techniques employed. These factors, individually or collectively, may have a material adverse effect on our business, results of operations, capitalization, financial condition or liquidity including our ability to pay dividends.
Our products contain numerous features and are subject to extensive regulation and failure to administer or meet any of the complex product requirements may reduce profitability.
adversely impact our business, results of operations or financial condition.
Our products are subject to a complex and extensive array of state and federal tax, securities, insurance and employee benefit plan laws and regulations, which are administered and enforced by a number of different governmental and self-regulatory authorities, including, among others, state insurance regulators, state securities administrators, state banking authorities, the SEC, FINRA, the DOL and the IRS. See “Business - Regulation.”
For example, U.S. federal income tax law imposes requirements relating to insuranceannuity and annuityinsurance product design, administration and investments that are conditions for beneficial tax treatment of such products under the Internal Revenue Code. Additionally, state and federal securities and insurance laws impose requirements relating to insuranceannuity and annuityinsurance product design, offering and distribution, and administration. Failure to administer product features in accordance with contract provisions or applicable law, or to meet any of these complex tax, securities or insurance requirements could subject us to administrative penalties imposed by a particular governmental or self-regulatory authority, unanticipated costs associated with remedying such failure or other claims, litigation, harm to our reputation or interruption of our operations. If this were to occur, it could adversely impact our profitability,business, results of operations andor financial condition.
We are required to file periodic and other reports within certain time periods imposed by U.S. federal securities laws, rules and regulations. Failure to file such reports within the designated time period failure to accurately report our financial condition or results of operations, or restatements of historical financial statements could require us to curtail or cease sales of certain of our variable annuity products and other variable insurance products or delay the launch of new products or new features, which could cause a significant disruption in our business. If our affiliated and third party distribution platforms are required to curtail or cease sales of our products, we may lose shelf space for our products indefinitely, even once we are able to resume sales. For example, we failed to timely file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 and required an extension of the due date under Rule 12b-25 for this Form 10-K. If we fail to file any future periodic or other report with the SEC on a timely basis, we would be required to cease sales of SEC-registered variable annuity products until such time that new registration statements could be filed with the SEC and declared effective. Any curtailment or cessation of sales of our variable insurance products could have a material adverse effect on our business, results of operations or financial condition.
Many of our products and services are complex and are frequently sold through intermediaries. In particular, we rely on intermediaries to describe and explain our products to potential customers. The intentional or unintentional misrepresentation of our products and services in advertising materials or other external communications, or inappropriate activities by our personnel or an intermediary, could adversely affect our reputation and business, as well as lead to potential regulatory actions or litigation.
The amount of statutory capital that we have and the amount of statutory capital we must hold to meet our statutory capital requirements and our financial strength and credit ratings can vary significantly from time to time.
Statutory accounting standards and capital and reserve requirements for AXA Equitable are prescribed by the applicable state insurance regulators and the NAIC. State insurance regulators have established regulations that govern reserving requirements and provide minimum capitalization requirements based on RBC ratios for life insurance companies. This RBC formula establishes capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities and group annuities that contain death benefits or certain living benefits.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors, including but not limited to the amount of statutory income or losses we generate (which itself is sensitive to equity market and credit market conditions), changes in interest rates, changes to existing RBC formulas, changes in reserves, the amount of additional capital we must hold to support business growth, changes in equity market levels and the value and credit rating of certain fixed-incomefixed income and equity securities in our investment portfolio, (including the value of AB units), changeswhich could in interest rates, as well as changes to existing RBC formulas.turn reduce our statutory capital. Additionally, state insurance regulators have significant leeway in how to interpret existing regulations, which could further impact the amount of statutory capital or reserves that we must maintain. We are primarily regulated by the NYDFS, which from time to time has taken more stringent positions than other state insurance regulators on matters affecting, among other things, statutory capital and/or reserves. In certain circumstances, particularly those involving significant market declines, the effect of these more stringent positions may be that our financial condition appears to be worse than competitors who are not subject to the same stringent standards, which could have a material adverse impact on our competitiveness,business, results of operations and/or financial condition. Moreover, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of capital we must hold in order to maintain ourtheir current ratings. To the extent that our statutory capital resources are deemed to be insufficient to maintain a particular rating by one or more rating agencies, our financial strength and credit ratings might be downgraded by one or more rating agencies. There can be no assurance that we will be able to maintain our current RBC ratio in the future or that our RBC ratio will not fall to a level that could have a material adverse effect on our business, and consolidatedresults of operations or financial condition.
Our failure to meet our RBC requirements or minimum capital and surplus requirements could subject us to further examination or corrective action imposed by insurance regulators, including limitations on our ability to write additional business, supervision by regulators, rehabilitation, or seizure or liquidation. Any corrective action imposed could have a material adverse effect on our business, results of operations or financial condition. A decline in our RBC ratio, whether or not it results in a failure to meet applicable RBC requirements could result in a loss of customers or new business, and could be a factor in causing ratings agencies to downgrade our financial strength ratings, each of which could have a material adverse effect on our business, results of operations or financial condition.
Changes in statutory reserve or other requirements and/or the impact of adverse market conditions could result in changes to our product offerings that could negativelymaterially and adversely impact our business.
business, results of operations or financial condition.
Changes in statutory reserve or other requirements, increased costs of hedging, other risk mitigation techniques and financing and other adverse market conditions could result in certain products becoming less profitable or unprofitable. These circumstances may cause us to modify and/or eliminate certain features of various products and/or cause the suspension or cessation of sales of certain products in the future. Any modifications to products that we may make could result in certain of our products being less attractive and/or competitive. This could adversely impact sales, which could negatively impact AXA Advisors’ ability to retain its sales personnel and our ability to maintain our distribution relationships. This, in turn, may negativelymaterially and adversely impact our business, and consolidated results of operations andor financial condition.
A downgrade in our financial strength and claims-paying ratings could adversely affect our business,and consolidated results of operations andor financial condition.
Claims-paying and financial strength ratings are important factors in establishing the competitive position of insurance companies. They indicate the rating agencies’ opinions regarding an insurance company’s ability to meet policyholder obligations and are important to maintaining public confidence in our products and our competitive position. A downgrade of our ratings or those of AXA and/or AXA FinancialHoldings could adversely affect our business, and results of operations or financial condition by, among other things, reducing new sales of our products, increasing surrenders and withdrawals from our existing contracts, possibly requiring us to reduce prices or take other actions for many of our products and services to remain competitive, or adversely
affecting our ability to obtain reinsurance or obtain reasonable pricing on reinsurance. A downgrade in our ratings may also adversely affect our cost of raising capital or limit our access to sources of capital. Upon announcement of AXA’s plan to pursue the Holdings IPO, Holdings’ and AXA Equitable’s ratings were downgraded by AM Best, S&P and Moody’s. We may face additional downgrades as a result of future sales of Holdings’ common stock by AXA.
As rating agencies continue to evaluate the financial services industry, it is possible that rating agencies will heighten the level of scrutiny that they apply to financial institutions, increase the frequency and scope of their credit reviews, request additional information from the companies that they rate and potentially adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels. It is possible that the outcome of any such review of us would have additional adverse ratings consequences, which could have a material adverse effect on our business, results of operations or financial condition. We may need to take actions in response to changing standards or capital requirements set by any of the rating agencies which could cause our business and operations to suffer. We cannot predict what additional actions rating agencies may take, or what actions we may take in response to the actions of rating agencies.
AXA FinancialHoldings could sell insurance, annuity and/or investment products through another one of its subsidiaries which would result in reduced sales of our products and total revenues.
We are a direct, wholly owned subsidiary of AXA Financial,Holdings, a diversified financial services organization offering a broad spectrum of financial advisory, insurance and investment management products and services. As part of AXA Financial’sHoldings’ ongoing efforts to efficiently manage capital amongst its subsidiaries, improve the quality of the product line-up of its insurance subsidiaries and enhance the overall profitability of AXA Financial Group, AXA Financialits group of companies, Holdings could sell insurance, annuity, investment and/or employee benefit products through another one of its subsidiaries. For example, most sales of indexed universal life insurance to policyholders located outside of New York and sales of employee benefit products to businesses located outside of New York are issued through MONY America, another life insurance subsidiary of AXA Financial,Holdings, instead of AXA Equitable. It is expected that AXA FinancialHoldings will continue to issue newly-developed life insurance products to policyholders located outside of New York through MONY America instead of AXA Equitable. This has impacted sales and may continue to reduce sales of our insurance products outside of New York, which will continue to reduce our total revenues. Since future decisions regarding product development and availability depend on factors and considerations not yet known, management is unable to predict the extent to which additional products will be offered through MONY America or another subsidiary instead of or in addition to AXA Equitable, or the impact to AXA Equitable.
Our consolidated results of operations and financial condition depend in significant part on the performance of AB’s business.
AB is one of our principal subsidiaries. Consequently, our results of operations and financial condition depend in significant part on the performance of AB’s business. For information regarding risk factors associated with AB and its business, see “Item 1A - Risk Factors” included in AB’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which item is incorporated into this section by reference to Exhibit 13.1 filed with this Report.
We face competition from other insurance companies, banks and other financial institutions, which may adversely impact our market share and profitability.
There is strong competition among insurers, banks, brokerage firms and other financial institutions and providers seeking clients for the types of products and services we provide. Competition is intense among a broad range of financial institutions and other financial service providers for retirement and other savings dollars. This competition makes it especially difficult to provide unique insurance products since, once such products are made available to the public, they often are reproduced and offered by our competitors. Also, this competition may adversely impact our market share and profitability.
Our ability to compete is dependent on numerous factors including, among others, the successful implementation of our strategy; our financial strength as evidenced, in part, by our financial and claims-paying ratings; new regulations and/or different interpretations of existing regulations; our access to diversified sources of distribution; our size and scale; our product quality, range, features/functionality and price; our ability to bring customized products to the market quickly; our technological capabilities; our ability to explain complicated products and features to our distribution channels and customers; crediting rates on our fixed
products; the visibility, recognition and understanding of our brands in the marketplace; our reputation and quality of service; the tax-favored status certain of our products receive under current federal and state laws; and (with respect to variable insurance and annuity products, mutual funds and other investment products) investment options, flexibility and investment management performance. See “Business - Competition.”
The ability of financial professionals associated with AXA Advisors and AXA Network to sell our competitors’ products could result in reduced sales of our products and revenues.
Most of the financial professionals associated with AXA Advisors and AXA Network canare permitted to sell products from competing unaffiliated insurance companies. If our competitors offer products that are more attractive than ours, or pay higher commission rates to the sales representatives than we do, these representatives may concentrate their efforts in selling our competitor’s products instead of ours. To the extent the financial professionals sell our competitors’ products rather than our products, we willmay experience reduced sales and revenues.
A loss of, or significant change in, key product distribution relationships could materially and adversely affect sales.
The inabilityWe distribute certain products under agreements with third-party distributors and other members of AXA Advisors and AXA Networkthe financial services industry that are not affiliated with us. We compete with other financial institutions to recruit, motivateattract and retain experienced and productive financial professionalscommercial relationships in each of these channels, and our inabilitysuccess in competing for sales through these distribution intermediaries depends upon factors such as the amount of sales commissions and fees we pay, the breadth of our product offerings, the strength of our brand, our perceived stability and financial strength ratings, and the marketing and services we provide to, recruit, motivate and retainthe strength of the relationships we maintain with, individual third-party distributors. An interruption or significant change in certain key employees mayrelationships could materially and adversely affect our business.ability to market our products and could have a material adverse effect on our business, results of operation or financial condition. Distributors may elect to alter, reduce or terminate their distribution relationships with us, including for such reasons as changes in our distribution strategy, adverse developments in our business, adverse rating agency actions or concerns about market-related risks. Alternatively, we may terminate one or more distribution agreements due to, for example, a loss of confidence in, or a change in control of, one of the third-party distributors, which could reduce sales.
Furthermore, an interruption in certain key relationships could materially and adversely affect our ability to market our products and could have a material adverse effect on our business, results of operations or financial condition. The future sale of
Financial professionals associated40
Holdings shares by AXA could prompt some third parties to re-price, modify or terminate their distribution or vendor relationships with AXA Advisorsus due to a perceived uncertainty related to such offering or our business. An interruption or significant change in certain key relationships could materially and AXA Networkadversely affect our ability to market our products and could have a material adverse effect on our business, results of operations or financial condition. Distributors may elect to suspend, alter, reduce or terminate their distribution relationships with us for various reasons, including uncertainty related to offerings of Holdings’ common stock, changes in our distribution strategy, adverse developments in our business, adverse rating agency actions or concerns about market-related risks.
We are also at risk that key employeesdistribution partners may merge or change their business models in ways that affect how our products are key factors driving our sales. Intense competition exists among insurerssold, either in response to changing business priorities or as a result of shifts in regulatory supervision or potential changes in state and federal laws and regulations regarding standards of conduct applicable to third-party distributors when providing investment advice to retail and other financial services companiescustomers.
Because our products are distributed through unaffiliated firms, we may not be able to monitor or control the manner of their distribution despite our training and compliance programs. If our products are distributed by such firms in an inappropriate manner, or to customers for financial professionalswhom they are unsuitable, we may suffer reputational and key employees. Companies compete for financial professionals principally with respectother harm to compensation policies, products and sales support. Competition is particularly intense in the hiring and retention of experienced financial professionals. Although we believe that we and AXA Advisors and AXA Network offer key employees and financial professionals a strong value proposition, we cannot provide assurances that we and/or AXA Advisors and AXA Network will be successful in our respective efforts to recruit, motivate and retain key employees and top financial professionals.
business.
Consolidation of third-party distributors of insurance products may adversely affect the insurance industry and the profitability of our business.
The insurance industry distributes many of its products through other financial institutions such as banks and broker-dealers. An increase in the consolidation activity of bank and other financial services companies may create firms with even stronger competitive positions, negatively impact the industry’s sales, increase competition for access to third-party distributors, result in greater distribution expenses and impair our ability to market insurance products to our current customer base or expand our customer base. We may also face competition from new market entrants or non-traditional or online competitors, which may have a material adverse effect on our business. Consolidation of third-party distributors and/or other industry changes may also increase the likelihood that third-party distributors will try to renegotiate the terms of any existing selling agreements to terms less favorable to us.
Risks Relating to Estimates, Assumptions and Valuations
Risks relatingOur risk management policies and procedures may not be adequate to estimates,identify, monitor and manage risks, which may leave us exposed to unidentified or unanticipated risks, which could negatively affect our business, results of operations or financial condition.
Our policies and procedures, including hedging programs, to identify, monitor and manage risks may not be adequate or fully effective. Many of our methods of managing risk and exposures are based upon our use of historical market behavior or statistics based on historical models. As a result, these methods will not predict future exposures, which could be significantly greater than the historical measures indicate, such as the risk of terrorism or pandemics causing a large number of deaths. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record and verify large numbers of transactions and events. These policies and procedures may not be fully effective.
We employ various strategies, including hedging and reinsurance, with the objective of mitigating risks inherent in our business and operations. These risks include current or future changes in the fair value of our assets and liabilities, current or future changes in cash flows, the effect of interest rates, equity markets and credit spread changes, the occurrence of credit defaults and changes in mortality and longevity. We seek to control these risks by, among other things, entering into reinsurance contracts and through our various hedging programs. Developing an effective strategy for dealing with these risks is complex, and no strategy can completely insulate us from such risks. Our hedging strategies also rely on assumptions and valuationsprojections regarding our assets, liabilities, general market factors and the creditworthiness of our counterparties that may prove to be incorrect or prove to be inadequate. Accordingly, our hedging activities may not have the desired beneficial impact on our business, results of operations or financial condition. As U.S. GAAP accounting differs from the methods used to determine regulatory reserves and rating agency capital requirements, our hedging program tends to create earnings volatility in our U.S. GAAP financial statements. Further, the nature, timing, design or execution of our hedging transactions could actually increase our risks and losses. Our hedging strategies and the derivatives that we use, or may use in the future, may not adequately mitigate or offset the hedged risk and our hedging transactions may result in losses.
Our reserves could be inadequate due to differences between our actual experience and management’s estimates and assumptions.
We establish and carry reserves to pay future policyholder benefits and claims. Our reserve requirements for our direct and reinsurance assumed business are calculated based on a number of estimates and assumptions, including estimates and assumptions related to future mortality, morbidity, longevity, interest rates, future equity performance, reinvestment rates, persistency, claims experience and policyholder elections (i.e., the exercise or non-exercise of rights by policyholders under the contracts). Examples of policyholder elections include, but are not limited to, lapses and surrenders, withdrawals and amounts of withdrawals, and contributions and the allocation thereof. The assumptions and estimates used in connection with the reserve estimation process are inherently uncertain and involve the exercise of significant judgment. We review the appropriateness of reserves and the underlying assumptions on a quarterly basis and make adjustments when appropriate.update assumptions during the third quarter of each year and, if necessary, update our assumptions as additional information becomes available. For example, in 2018 we updated certain assumptions, resulting in increases and decreases in the carrying values of these product liabilities and assets. We cannot, however, determine with precision the amounts that we will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level assumed prior to payment of benefits or claims. Our claim costs could increase significantly and our reserves could be inadequate if actual results differ significantly from our estimates and assumptions. If so, we will be required to increase reserves or reduce DAC, which could materially and adversely impact our earnings and/business, results of operations or capital. See “Management’s Discussionfinancial condition.
Future reserve increases in connection with experience updates could be material and Analysisadverse to our results of Financial Conditions and Results of Operations - Critical Accounting Estimates.”
operations or financial condition.
Our profitability may decline if mortality, rateslongevity or persistency ratesor other experience differ significantly from our pricing expectations.
expectations or reserve assumptions.
We set prices for many of our insuranceretirement and annuityprotection products based upon expected claims and payment patterns, using assumptions for mortality rates of our policyholders. In addition to the potential effect of natural or man-made disasters, significant changes in mortality, longevity and morbidity could emerge gradually over time due to changes in the natural environment, the health habits of the insured population, technologies and treatments for disease or disability, the economic environment or other factors. The long-term profitability of our retirement and protection products depends upon how our actual mortality rates, and to a lesser extent actual morbidity rates, compare to our pricing assumptions. In addition, prolonged or severe adverse mortality or morbidity experience could result in increased reinsurance costs, and ultimately, reinsurers might not offer coverage at all. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient, we would have to accept an increase in our net risk exposures, revise our pricing to reflect higher reinsurance premiums, or otherwise modify our product offering.
Pricing of our insuranceretirement and annuityprotection products is also based in part upon expected persistency of these products, which is the probability that a policy or contract will remain in force from one period to the next. Persistency within our annuitiesvariable annuity products may be significantly and adversely impacted by the value of guaranteed minimum benefitsGMxB features contained in many of our variable annuity products being higher than current account valuesAV in light of poor equity market performance or extended periods of low interest rates as well as other factors. Results may also vary based on differences between actual and expected premium deposits and withdrawals for these products. Persistency within our life insurance products may be significantly impacted by, among other things, conditions in the capital markets, the changing needs of our policyholders, the manner in which a product
is marketed or illustrated and competition, including the availability of new products. The developmentproducts and policyholder perception of a secondary market for life insurance, including life settlements or “viaticals” and investor owned life insurance, and to a lesser extent third party investor strategies in the annuities market, could adversely affect the profitability of existing business and our pricing assumptions for new business. us, which may be negatively impacted by adverse publicity.
Significant deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our products. For example, if policyholder elections differ from the assumptions we use in our pricing, our profitability may decline. Actual persistency that is lower than our persistency assumptions could have an adverse effect on profitability, especially in the early years of a policy, primarily because we would be required to accelerate the amortization of expenses we defer in connection with the acquisition of the policy. Actual persistency that is higher than our persistency assumptions could have an adverse effect on profitability in the later years of a block of business because the anticipated claims experience is higher in these later years. If actual persistency is significantly different from that assumed in our current reserving assumptions, our reserves for future policy benefits may prove to be inadequate. Although some of our variable annuity and life insurance products permit us to increase premiums or adjust other charges and credits during the life of the policy or contract, the adjustments permitted under the terms of the policies or contracts may not be sufficient to maintain profitability. Many of our variable annuity and life insurance products do not permit us to increase premiums or adjust other charges and credits or
limit those adjustments during the life of the policy or contract.
Our earnings Even if we are impactedpermitted under the contract to increase premiums or adjust other charges and credits, we may not be able to do so due to litigation, point of sale disclosures, regulatory reputation and market risk or due to actions by DAC estimates that are subject to change.
Our earningsour competitors. In addition, the development of a secondary market for any period depend in part on the amount of ourlife insurance, including life settlements or “viaticals” and investor owned life insurance, and to a lesser extent third-party investor strategies in the variable annuity product acquisition costs (including commissions, underwriting, agencymarket, could adversely affect the profitability of existing business and policy issue expenses) that canour pricing assumptions for new business.
We may be deferred and amortized rather than expensed immediately. They also depend in part onrequired to accelerate the pattern of DAC amortization and the recoverability of DAC, which could adversely affect our business, results of operations or financial condition.
DAC represents policy acquisition costs that have been capitalized. Capitalized costs associated with DAC are amortized in proportion to actual and estimated gross profits, gross premiums or gross revenues depending on the type of contract. On an ongoing basis, we test the DAC recorded on our balance sheets to determine if the amount is based on models involving numerousrecoverable under current assumptions. In addition, we regularly review the estimates and subjective judgments, including those regarding investment results including hedging costs,assumptions underlying DAC. The projection of estimated gross profits, gross premiums or gross revenues requires the use of certain assumptions, principally related to Separate Account performance, Separate Account fees,fund returns in excess of amounts credited to policyholders, policyholder behavior such as surrender, lapse and annuitization rates, interest margin, expense margin, mortality, future impairments and expense margins, expectedhedging costs. Estimating future gross profits, gross premiums or gross revenues is a complex process requiring considerable judgment and the forecasting of events well into the future. If these assumptions prove to be inaccurate, if an estimation technique used to estimate future gross profits, gross premiums or gross revenues is changed, or if significant or sustained equity market rates of return, lapse rates and anticipated surrender charges. These estimates and judgments aredeclines occur or persist, we could be required to be revised periodically and adjusted as appropriate. Revisions to our estimates mayaccelerate the amortization of DAC, which would result in a change in DAC amortization, whichcharge to earnings. Such adjustments could negatively impacthave a material adverse effect on our earnings.
business, results of operations or financial condition.
We use financial models that rely on a number of estimates, assumptions and projections that are inherently uncertain and which may contain errors.
We use models in our hedging programs and many other aspects of our operations, including but not limited to, product development and pricing, capital management, the estimation of actuarial reserves, the amortization of DAC, the fair value of the GMIB reinsurance contracts and the valuation of certain other assets and liabilities. These models rely on estimates, assumptions and projections that are inherently uncertain and involve the exercise of significant judgment. Due to the complexity of such models, it is possible that errors in the models could exist and our controls could fail to detect such errors. Failure to detect such errors could result in a negativematerially and adversely impact to our consolidatedbusiness, results of operations andor financial position.
condition.
The determination of the amount of allowances and impairments taken on our investments is subjective and could materially impact our consolidatedbusiness, results of operations andor financial condition.
The determination of the amount of allowances and impairments vary by investment type and is based upon our evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. There can be no assurance that management’s judgments, as reflected in our financial statements, will ultimately prove to be an accurate estimate of the actual and eventual diminution in realized value. Historical trends may not be indicative of future impairments or allowances. Furthermore, additional impairments may need to be taken or allowances provided for in the future.future that could have a material adverse effect on our business, results of operations or financial condition.
Credit, counterpartyWe define fair value generally as the price that would be received to sell an asset or paid to transfer a liability. When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable; these generally are the most liquid holdings and their valuation does not involve management judgment. When quoted prices in active markets are not available, we estimate fair value based on market standard valuation methodologies, including discounted cash flow methodologies, matrix pricing, or other similar techniques. For securities with reasonable price transparency, the significant inputs to these valuation methodologies either are observable in the market or can be derived principally from or corroborated by observable market data. When the volume or level of activity results in little or no price transparency, significant inputs no longer can be supported by reference to market observable data but instead must be based on management’s estimation and judgment. Valuations may result in estimated fair values which vary significantly from the amount at which the investments related risks
Our requirements to pledge collateral or make payments related to declinesmay ultimately be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our financial statements and the period-to-period changes in estimated fair value could vary significantly. Decreases in the estimated fair value of specifiedsecurities we hold may have a material adverse effect on our business, results of operations or financial condition.
Legal and Regulatory Risks
We may be materially and adversely impacted by U.S. federal and state legislative and regulatory action affecting financial institutions.
Regulatory changes, and other reforms globally, could lead to business disruptions, could adversely impact the value of assets maywe have invested on behalf of clients and policyholders and could make it more difficult for us to conduct certain business activities or distinguish ourselves from competitors. Any of these factors could materially and adversely affect our business, results of operations or financial condition.
Dodd-Frank Act—The Dodd-Frank Act established the FSOC, which has the authority to designate non-bank systemically important financial institutions (“SIFIs”), thereby subjecting them to enhanced prudential standards and supervision by the Federal Reserve Board, including enhanced risk-based capital requirements, leverage limits, liquidity requirements, single counterparty exposure limits, governance requirements for risk management, capital planning and expose usstress test requirements, special debt-to-equity limits for certain companies, early remediation procedures and recovery and resolution planning. If the FSOC were to counterparty credit risk.
Somedetermine that Holdings is a non-bank SIFI, we, as a subsidiary of our transactionsHoldings, would become subject to certain of these enhanced prudential standards. Other regulators, such as state insurance regulators, may also determine to adopt new or heightened regulatory safeguards as a result of actions taken by the Federal Reserve Board in connection with financial and other institutions specify the circumstances under which the parties are requiredits supervision of non-bank SIFIs. There can be no assurance that Holdings will not be designated as a non-bank SIFI, that such new or enhanced regulation will not apply to pledge collateral related to any declineHoldings in the market valuefuture, or, to the extent such regulation is adopted, that it would not have a material impact on our operations.
In addition, if Holdings were designated a SIFI, it could potentially be subject to capital charges or other restrictions with respect to activities it engages in that are limited by Section 619 of the specified assets. In addition, underDodd-Frank Act, commonly referred to as the terms“Volcker Rule,” which places limitations on the ability of somebanks and their affiliates to engage in proprietary trading and limits the sponsorship of, our transactions, weand investment in, covered funds by banking entities and their affiliates.
Title II of the Dodd-Frank Act provides that certain financial companies, including Holdings, may be requiredsubject to make paymentsa special resolution regime outside the federal bankruptcy code, which is administered by the Federal Deposit Insurance Corporation as receiver, and is applied to a covered financial company upon a determination that the company presents a risk to U.S. financial stability. U.S. insurance subsidiaries of any such covered financial company, however, would be subject to rehabilitation and liquidation proceedings under state insurance law. We cannot predict how rating agencies, or our counterparties relatedcreditors, will evaluate this potential or whether it will impact our financing or hedging costs.
The Dodd-Frank Act also established the FIO within the U.S. Department of the Treasury, which has the authority, on behalf of the United States, to any declineparticipate in the market valuenegotiation of “covered agreements” with foreign governments or regulators, as well as to collect information and monitor about the insurance industry. While not having a general supervisory or regulatory authority over the business of insurance, the director of the specified assets. TheFIO will perform various functions with respect to insurance, including serving as a non-voting member of the FSOC and making recommendations to the FSOC regarding insurers to be designated for more stringent regulation.
While the Trump administration has indicated its intent to modify various aspects of the Dodd-Frank Act, it is unclear whether or how such modifications will be implemented or the impact any such modifications would have on our business.
Title VII of the Dodd-Frank Act creates a new framework for regulation of the OTC derivatives markets. As a result of the adoption of final rules by federal banking regulators and the CFTC in 2015 establishing margin requirements for non-centrally cleared derivatives, the amount of collateral we may be required to pledge and the payments we may be required to make under these agreementsin support of such transactions may increase under certain circumstances and will increase as a result of the requirement to pledge initial margin on non-centrally cleared derivatives commencing in 2020. Notwithstanding the broad categories of non-cash collateral permitted under the rules, higher capital charges on non-cash collateral applicable to our bank counterparties may significantly increase pricing of derivatives and restrict or eliminate certain types of eligible collateral that we have available to pledge, which could significantly increase our hedging costs, adversely affect the liquidity and yield of our liquidity. See “Management’s Discussion and Analysisinvestments, affect the profitability of Financial Condition and Results of Operations - Liquidity and Capital Resources.”
Ifour products or their attractiveness to our customers, or cause us to alter our hedging strategy or change the counterparties to the derivative contracts and other instruments we use to hedge our business risks default or fail to perform, we may be exposed to risks we had sought to mitigate, which could materially adversely affect our financial condition and results of operations.
We use derivatives and other instruments to help us mitigate various business risks. We enter into a variety of contracts, including, among other things, exchange traded futures contracts, over the counter derivative contracts, as well as repurchase agreement transactions, with a number of counterparties. The vast majority of these contracts are subject to collateral agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Derivatives.” If our counterparties
fail or refuse to honor their obligations under these contracts, we could face significant losses to the extent collateral agreements do not fully offset our exposures. Such failure could have a material adverse effect on our consolidated financial condition and results of operations.
Losses due to defaults, errors or omissions by third parties and affiliates, including outsourcing relationships, could materially adversely impact our business and consolidated results of operations and financial condition.
We depend on third parties and affiliates that owe us money, securities or other assets to pay or perform under their obligations. These parties include the issuers whose securities we hold in our investment portfolios, borrowers under the mortgage loans we make, customers, trading counterparties, counterparties under swap and other derivative contracts, clearing agents, exchanges, clearing houses and other financial intermediaries. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other reasons.
We also depend on third parties and affiliates in other contexts. For example, in establishing the amountcomposition of the liabilities and reserves associated with the risks assumed in connection with reinsurance pools and arrangements, we rely on the accuracy and timely delivery of data and other information from ceding companies. In addition, as investment manager and administrator of several mutual funds, we rely on various affiliated and unaffiliated subadvisors to provide day-to-day portfolio management services for each investment portfolio.
We also rely on third parties and affiliates to whom we outsource certain technology platforms, information systems and administrative functions, including records retention. If we do not effectively implement and manage our outsourcing strategy, third party vendor providers do not perform as anticipated, such vendors’ internal controls fail or are inadequate, or we experience technological or other problems associated with outsourcing transitions, we may not realize anticipated productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and reputational damage.hedge.
Losses associated with defaults or other failures by these third parties and outsourcing partners upon whom we rely could materially adversely impact our business, and consolidated results of operations and financial condition.
Some of our investments are relatively illiquid and may be difficult to sell, or to sell in significant amounts at acceptable prices, to generate cash to meet our needs.
We hold certain investments that may lack liquidity, such as privately placed fixed maturity securities, mortgage loans, commercial mortgage backed securities, equity real estate and limited partnership interests. These asset classes represented approximately 30.8% of the carrying value of our total cash and invested assets as of December 31, 2016. Although we seek to adjust our cash and short-term investment positions to minimize the likelihood that we would need to sell illiquid investments, if we were required to liquidate these investments on short notice, we may have difficulty doing so and be forced to sell them for less than we otherwise would have been able to realize. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - General Accounts Investment Portfolio.”
Gross unrealized losses on fixed maturity and equity securities may be realized or result in future impairments, resulting in a reduction in our net earnings.
Fixed maturity and equity securities classified as available-for-sale are reported at fair value. Unrealized gains or losses on available-for-sale securities are recognized as a component of other comprehensive income (loss) and are, therefore, excluded from net earnings. Our gross unrealized losses on fixed maturity and equity securities at December 31, 2016 were approximately $859 million. The accumulated change in estimated fair value of these available-for-sale securities is recognized in net earnings when the gain or loss is realized upon the sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary and an impairment charge to earnings is taken. Realized losses or impairments may have a material adverse effect on our net earnings in a particular quarterly or annual period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - General Accounts Investment Portfolio.”
Legal and regulatory risks
We are heavily regulated, and changes in regulation may reduce our profitability and limit our growth.
Insurance Regulation: We are subject to a wide variety of insurance and other laws and regulations. State insurance laws regulate most aspects of our insurance business. We are domiciled in New York and are primarily regulated by the NYDFS and by the states in which we are licensed. See “Business - Regulation”.
Our products are highly regulated and approved by the individual state regulators where such products are sold. State insurance regulators and the NAIC regularly reexamine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, including potentially rescinding prior product approvals, are often made for the benefit of the consumer at the expense of the insurer and, thus, could have a material adverse effect on our financial condition and consolidated results of operations. See “Business - Regulation - Insurance Regulation” and “Business - Regulation - NAIC.”
U.S. Federal Regulation Affecting Insurance: Currently, the U.S. federal government does not directly regulate the business of insurance. While the Dodd-Frank Act does not remove primary responsibility for the supervision and regulation of insurance from the states, Title V of the Dodd-Frank Act establishes the FIO within the U.S. Treasury Department and reforms the regulation of the non-admitted property and casualty insurance market and the reinsurance market. Federal legislation and administrative policies can significantly and adversely affect insurance companies, including policies regarding financial services regulation, securities regulation, derivatives regulation, pension regulation, health care regulation, privacy, tort reform legislation and taxation. In addition, various forms of direct and indirect federal regulation of insurance have been proposed from time to time, including proposals for the establishment of an optional federal charter for insurance companies. Other aspects of our insurance operations could also be affected by the Dodd-Frank Act. For example, the Dodd-Frank Act includes a new framework of regulation of the OTC derivatives market. See “Business - Regulation - Dodd-Frank Wall Street Reform and Consumer Protection Act.”
Regulation of Broker-Dealers: Broker-Dealers—The Dodd-Frank Act provides that the SEC may promulgate rules to provide that the standard of conduct for all broker-dealers, when providing personalized investment advice about securities to retail customers (and
(and any other customers as the SEC may by rule provide), will be the same as the standard of conduct applicable to an investment adviser under the Investment Advisers Act of 1940. See “Business - Regulation - Regulation of Broker-Dealers.”
ERISA: The DOL issuedAct. For a final Rule on April 6, 2016 that significantly expands the range of activities that would be considered to be fiduciary investment advice under ERISA when our affiliated advisors and our employees provide investment-related information and support to retirement plan sponsors, participants, and IRA holders. Implementationdiscussion of the Rule is currently scheduled to be phased in starting on April 10, 2017, although certain aspectsSEC’s recent set of it covering existing business would not be implemented until January 1, 2018. In February 2017, however, the DOL was directed by the President’s Orderproposed rules, see “Business—Regulation—Broker-Dealer and Memorandum to review the Rule and determine whether the Rule should be rescinded or revised, in light of the new administration’s policies and orientations. On March 2, 2017, the DOL submitted a proposal to delay for sixty days the applicability date of the Rule and invited comments on both the proposed extension and the examination described in the President’s Order and Memorandum. Comments on the proposed extension are due by March 17, 2017, and on the President’s Order and Memorandum by April 17, 2017. While the outcome of the foregoing cannot be anticipated at this time, it is likely to result in implementation of the Rule being delayed. Although implementation of the Rule remains uncertain, and is currently subject to judicial challenge, management continues to evaluate its potential impact on our business. If the Rule is implemented as planned, it is likely to result in adverse changes to the level and type of services we provide, as well as the nature and amount of compensation and fees that we and our affiliated advisors and firms receive for investment-related services to retirement plans and IRAs, which may have a significant adverse effect on our business and consolidated results of operations. See “Business - Regulation - ERISA Considerations.”
International Regulation: In addition, regulators and lawmakers in non-U.S. jurisdictions are engaged in addressing the causes of the financial crisis and means of avoiding such crises in the future. For example, the FSB has identified nine G-SIIs, which include the AXA Group. While the precise implications of being designated a G-SII are still developing, it could have far reaching regulatory and competitive implications for the AXA Group and adversely impact AXA’s capital requirements, profitability, the fungibility of AXA’s capital and ability to provide capital/financial support for AXA Group companies, including potentially AXA Equitable, AXA’s ability to grow through future acquisitions, internal governance and could change the way AXA conducts its business and adversely impact AXA’s overall competitive position versus insurance groups that are not designated G-SIIs. The multiplicity of different regulatory regimes, capital standards and reporting requirements could increase AXA’s operational complexity and costs. All of these possibilities, if they occurred, could affect the way we conduct our business (including, for example, which products we offer) and manage capital, and may require us to satisfy increased capital requirements, all of which in turn could materially affect our competitive position, consolidated results of operations, financial condition and liquidity. See “Business - Regulation - InternationalSecurities Regulation—Broker-Dealer Regulation.”
General: The NYDFS is completing its periodic statutory examinations of the books, records and accounts of AXA Equitable for the years 2011 through 2015, but has not yet issued its final report. We have responded to various information requests made during this examination. —From time to time, regulators raise issues during examinations or audits of us and regulated subsidiaries that could, if determined adversely, have a material impact on us. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact, particularly in areas such as accounting or statutory reserve requirements. We are also subject to other regulations and may in the future become subject to additional regulations. See “Business
- Regulation.” Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on our business, results of operations or financial condition.
Our business is heavily regulated, and changes in regulation and in supervisory and enforcement policies may limit our growth and have a material adverse effect on our business, results of operations or financial condition.
We are subject to a wide variety of insurance and other laws and regulations. State insurance laws regulate most aspects of our business, and we are regulated by the NYDFS and the states in which we are licensed. We are domiciled in New York and are primarily regulated by the NYDFS. The primary purpose of state regulation is to protect policyholders, and not necessarily to protect creditors and investors.
State insurance guaranty associations have the right to assess insurance companies doing business in their state in order to help pay the obligations of insolvent insurance companies to policyholders and claimants. Because the amount and timing of an assessment is beyond our control, liabilities we have currently established for these potential assessments may not be adequate.
State insurance regulators, the NAIC and other regulatory bodies regularly reexamine existing laws and regulations applicable to insurance companies and their products. In the wake of the March 2018 federal appeals court decision to vacate the DOL Rule, the SEC and NAIC as well as state regulators are currently considering whether to apply an impartial conduct standard similar to the DOL Rule to recommendations made in connection with certain annuities and, in one case, to life insurance policies. For example, the NAIC is actively working on a proposal to raise the advice standard for annuity sales and in July 2018, the NYDFS issued a final version of Regulation 187 that adopts a “best interest” standard for recommendations regarding the sale of life insurance and annuity products in New York. Regulation 187 takes effect on August 1, 2019 with respect to annuity sales and February 1, 2020 for life insurance sales and is applicable to sales of life insurance and annuity products in New York. In November 2018, the three primary agent groups in New York launched a legal challenge against the NYDFS over the adoption of Regulation 187. It is not possible to predict whether this challenge will be successful. We are currently assessing Regulation 187 to determine the impact it may have on our business. Beyond the New York regulation, the likelihood of any such state-based regulation is uncertain at this time, but if implemented, these regulations could have adverse effects on our business and consolidated results of operations. Generally, changes in laws and regulations, or in interpretations thereof, including potentially rescinding prior product approvals, are often made for the benefit of the consumer at the expense of the insurer and could materially and adversely affect our business, results of operations andor financial condition.
We currently use captive reinsurance subsidiaries primarily to reinsure (i) term life insurance and universal life insurance with secondary guarantees, (ii) excess claims relating to variable annuities with GMIB riders which are subject to reinsurance treaties with unaffiliated third parties and (iii) to retrocede reinsurance of variable annuity guaranteed minimum benefits assumed from unaffiliated third parties. Uncertainties associated with continued use of captive reinsurance are primarily related to potential regulatory changes. See “—Risks Relating to Our Business—Risks Relating to Our Reinsurance and Hedging Programs.”
Insurance regulators have implemented, or begun to implement significant changes in the way in which insurers must determine statutory reserves and capital, particularly for products with contractual guarantees, such as variable annuities and universal life policies, and are considering further potentially significant changes in these requirements. The resultsNAIC’s principle-based reserves (“PBR”) approach for life insurance policies became effective on January 1, 2017, and has a three-year phase-in period. Additionally, the New York legislature enacted legislation adopting principles based reserving in June 2018, which was signed into law by the Governor in December 2018. Also, in December 2018, the NYDFS promulgated emergency regulation to begin implementation of principles based reserving, to become effective on January 1, 2020. We are currently assessing the 2016 United States Presidentialimpact of, and Congressional elections have created regulatory uncertaintyappropriate implementation plan for, the financial services industry.PBR approach for life policies. The timing and extent of further changes to statutory reserves and reporting requirements are uncertain.
During 2015, the NAIC E Committee established the VAIWG to oversee the NAIC’s efforts to study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions. In November 2015, upon the recommendation of the VAIWG, the NAIC E Committee adopted the Framework for Change which recommends charges for NAIC working groups to adjust the variable annuity statutory framework applicable to all insurers that have written or are writing variable annuity business and therefore has broader implications beyond captive reinsurance transactions. The Framework for Change contemplates a holistic set of reforms that would improve the current reserve and capital framework for insurers that write variable annuity business. In November 2015, VAIWG engaged Oliver Wyman (“OW”) to conduct a QIS involving industry participants, including the Company, of various reforms outlined in the Framework for Change. OW completed the QIS in July of 2016 U.S. Presidential election campaign and following his inauguration, President Trump has consistently arguedreported its initial findings to the VAIWG in late August. The OW report proposed certain revisions to the current variable annuity reserve and capital framework and recommended a second quantitative impact study be conducted so that testing can inform the U.S. is over-regulatedproper calibration for certain conceptual and/or preliminary parameters set out in the OW proposal. Following a fourth quarter 2016 public comment period and requestedseveral meetings on the OW proposal, the VAIWG determined that a reviewQIS2 involving industry participants including us, will be conducted by OW. The QIS2 was initiated in February 2017 and OW issued its recommendation in December 2017. In 2018, the VAIWG held multiple public conference calls to discuss and refine the proposed recommendations. By the end of July 2018, both the VAIWG and the NAIC E Committee adopted the proposed recommendations with modifications reflecting input from all stakeholders. After adopting the Framework for Change, other NAIC working groups and task forces will consider specific revisions to the capital requirements for variable annuities to implement the recommendations in the framework. The changes to the variable annuity reserve and capital framework are expected to become effective January 1, 2020 with a wide rangesuggested three-year phase-in period, but exact timing for implementation of government lawschanges remains subject to change.
We are currently assessing the impact on the Company of the implementation of the NAIC proposed changes to the reserve and regulations. Whilecapital framework requirements currently applicable to our variable annuity business and we cannot ascertain what actionspredict how the Trump administrationFramework for Change proposal may ultimately pursuebe implemented as a result of ongoing NAIC deliberations. Additionally, we cannot predict how the NYDFS will implement the final Framework for Change. As a result, the timing and what actions will haveextent of any necessary changes to reserves and capital requirements for our variable annuity business resulting from the supportwork of the U.S. Congress, someNAIC VAIWG are uncertain.
In addition, state regulators are currently considering whether to apply regulatory standards to the determination and/or readjustment of non-guaranteed elements (“NGEs”) within life insurance policies and annuity contracts that may be adjusted at the items being discussedinsurer’s discretion, such as the cost of insurance for universal life insurance policies and interest crediting rates for life insurance policies and annuity contracts. For example, in March 2018, Insurance Regulation 210 went into effect in New York. That regulation establishes standards for the determination and any readjustment of NGEs, including a prohibition on increasing profit margins on existing business or recouping past losses on such business, and requires advance notice of any adverse change in a NGE to both the NYDFS as well as to affected policyholders. We are continuing to assess the impact of Regulation 210 on our business. Beyond the New York regulation and a similar rule recently enacted in California that takes effect on July 1, 2019, the likelihood of enactment of any such state-based regulation is uncertain at this time, but if implemented, these regulations could negatively impacthave adverse effects on our business and consolidated results of operations and financial condition.operations.
ChangesFuture changes in U.S. tax laws and regulations or interpretations thereofof the Tax Reform Act could reduce our earnings and negatively impact our business.business, results of operations or financial condition, including by making our products less attractive to consumers.
On December 22, 2017, President Trump signed into law the Tax Reform Act, a broad overhaul of the U.S. Internal Revenue Code that changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies. While the Tax Reform Act had a net positive economic impact on us, it contained measures which could have adverse or uncertain impacts on some aspects of our business, results of operations or financial condition.
Currently, we derive federal and stateIn August 2018, the NAIC adopted changes to the RBC calculation, including the C-3 Phase II Total Asset Requirement for variable annuities, to reflect the 21% corporate income tax rate in RBC reported at year-end 2018, which resulted in a reduction to our Combined RBC Ratio. These revisions could also have a negative impact on the CTE calculations of our insurance company subsidiaries, which could cause us to revise our target RBC and CTE levels, as appropriate.
Future changes in U.S. tax laws could have a material adverse effect on our business, results of operations or financial condition. We anticipate that, following the Tax Reform Act, we will continue deriving tax benefits from certain items, including but not limited to the DRD, various tax credits, and insurance reserve deductions and interest expense deductions. ThereHowever, there is a risk that ininterpretations of the contextTax Reform Act, regulations promulgated thereunder, or future changes to federal, state or
other tax laws could reduce or overalleliminate the tax reform, federal and/or state tax legislation could modify or eliminatebenefits from these or other items from which we derive tax benefits. Such modifications or eliminations could reduceand result in our earnings by increasing our actual tax rate and adversely affect our financial condition, consolidated results of operations and liquidity. The modification or elimination of interest expense deductions could also impact our investments and investment strategies.incurring materially higher taxes.
Moreover, manyMany of the products that we sell benefit from one or more forms of tax-favored status under current federal and state income tax regimes. For example, life insurance and annuity contracts currently allow policyholders to defer the recognition of taxable income earned within the contract. The modificationWhile the Tax Reform Act does not change these rules, a future change in law that modifies or elimination ofeliminates this tax-favored status could reduce demand for our products. Also, if the treatment of earnings accrued inside an annuity contract was changed prospectively, and the tax-favored status of existing contracts was grandfathered, holders of existing contracts would be less likely to surrender or rollover their contracts. It is difficult to predict how this wouldEach of these changes could reduce our earnings and negatively impact our business.
Finally, a decrease in individual income tax rates could also affect the demand for our products. See “Business - Regulation - Federal Tax Legislation.”
Changes in accounting standards could have a material adverse effect on our consolidated results of operations and/or financial condition.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America that are revised from time to time. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board (“FASB”). In the future, new accounting pronouncements, as well as new interpretations of existing accounting pronouncements, may have material adverse effects on our consolidated results of operations and/or financial condition. See Note 2 of Notes to Consolidated Financial Statements.
In addition AXA, our ultimate parent company prepares consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). From time to time AXA may be required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the International Accounting Standards Board (“IASB”). In the future, new accounting pronouncements, as well as new interpretations of existing accounting pronouncements, may have material adverse effects on AXA’s consolidated results of operations and/or financial condition which could impact the way we conduct our business (including, for example, which products we offer), our competitive position and the way we manage capital.
Legal and regulatory actions could have a material adverse effect on our reputation, business, reputation,and consolidated results of operations andor financial condition.
A number of lawsuits, claims, assessments and regulatory inquiries have been filed or commenced against us and other life and health insurers and asset managers in the jurisdictions in which we do business. These actions and proceedings involve, among other things, insurers’ sales practices, alleged agent misconduct, alleged failure to properly supervise agents, contract administration, product design, features and accompanying disclosure, cost of insurance increases, the use of captive reinsurers, payment of death benefits and the reporting and escheatment of unclaimed property, alleged breach of fiduciary duties, discrimination, alleged mismanagement of client funds and other matters. In addition, a number of lawsuits, claims, assessments and regulatory inquiries have been filed or commenced against businesses in the jurisdictions in which we do business, including actions and proceedings related to alleged
discrimination, alleged breaches of fiduciary duties in connection with qualified pension plans and other general business-related matters. Some of these matters have resulted in the award of substantial fines and judgments, including material amounts of punitive damages, or in substantial settlements. In some states, juries have substantial discretion in awarding punitive damages.
FromWe face a significant risk of, and from time to time we are involved in, such actions and proceedings, and ourincluding class action lawsuits. Our consolidated results of operations andor financial position could be materially and adversely affected by defense and settlement costs and any unexpected material adverse outcomes in such matters, as well as in other material actions and proceedings pending against us. The frequency of large damage awards, including large punitive damage awards and regulatory fines that bear little or no relation to actual economic damages incurred, continues to create the potential for an unpredictable judgment in any given matter.
For instance, we are a defendant in a number of lawsuits related to cost of insurance increases, including class actions in federal and state court alleging breach of contract and other claims under UL policies. For information regarding these and others legal proceedings pending against us, see Note 17 of the Notes to the Consolidated Financial Statements.
In addition, investigations or examinations by Federalfederal and state regulators and other governmental and self-regulatory agencies including, among others, the SEC, FINRA, the CFTC, the National Futures Association (the “NFA”), state attorneys general, insurancethe NYDFS and securitiesother state insurance regulators, and FINRAother regulators could result in legal proceedings (including securities class actions and stockholder derivative litigation), adverse publicity, sanctions, fines and other costs. We have provided and, in certain cases, continue to provide information and documents to the SEC, FINRA, the CFTC, the NFA, state attorneys general, the NYDFS and other state insurance departmentsregulators, and other regulators on a wide range of issues. On March 30, 2018, we received a copy of an anonymous letter containing general allegations relating to the preparation of our financial statements. Our audit committee, with the assistance of independent outside counsel, has reviewed these matters and concluded that the allegations were not substantiated and accordingly did not present any issue material to our financial statements. At this time, management cannot predict what actions the SEC, FINRA, and/the CFTC, the NFA, state attorneys general, the NYDFS and other state insurance regulators, or other regulators may take or what the impact of such actions might be. See “Business - Regulation” and Note 17 of Notes to Consolidated Financial Statements.
Operational and other risks
Our computer systems may failA substantial legal liability or their security may be compromised, which could adversely impact our business and consolidated results of operations and financial condition.
Our business is highly dependent upon the effective operation of our computer systems. We also have arrangements in place with outside vendors and other third-party service providers through which we share and receive information. We rely on these systems throughout our business for a variety of functions, including processing claims and applications, providing information to customers and distributors, performing actuarial analyses and modelling, hedging and maintaining financial records. Despite the implementation of security and back-up measures, our computer systems and those of our outside vendors and third-party service providers may be vulnerable to physical or cyber-attacks, computer virusessignificant federal, state or other computer related attacks, programming errorsregulatory action against us, as well as regulatory inquiries or investigations, may divert management’s time and similar disruptive problems. The failure of these systems for any reasonattention, could cause significant interruptions tocreate adverse publicity and harm our operations, which couldreputation, result in a material adverse effect on our business, financial conditionfines or results of operations.
We retain confidential information in our computer systems, and we rely on commercial technologies to maintain the security of those systems. Anyone who is able to circumvent our security measures and penetrate our computer systems could access, view, misappropriate, alter or delete any information in the systems, including personally identifiable customer information and proprietary business information. Our employees, distribution partners and other vendors may use portable computers or mobile devices which may contain similar information to that in our computer systems, and these devices have been and can be lost, stolen or damaged. In addition, an increasing number of states require that customers be notified if a security breach results in the inappropriate disclosure of personally identifiable customer information. Any compromise of the security of our computer systems through cyber-attacks or for any other reason that results in inappropriate disclosure of personally identifiable customer information could damage our reputation in the marketplace, deter people from purchasing our products, subject us to significant civil and criminal liability and require us to incur significant technical, legal and other expenses.
Our business could be adversely affected by the occurrence of a catastrophe, including natural or man-made disasters.
Any catastrophic event, such as pandemic diseases, terrorist attacks, floods, severe storms or hurricanes or computer cyber-terrorism, could have an adverse effect on our business in several respects:
we could experience long-term interruptions in our service and the services provided by our significant vendors due to the effects of catastrophic events. Some of our operational systems are not fully redundant, and our disaster recovery and business continuity planning cannot account for all eventualities. Additionally, unanticipated problems with our disaster recovery systems could further impede our ability to conduct business, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data;
the occurrence of a pandemic disease could have a material adverse effect on our liquidity and the operating results of the Insurance Segment due to increased mortality and, in certain cases, morbidity rates;
the occurrence of any pandemic disease, natural disaster, terrorist attacks or any other catastrophic event that results in our workforce being unable to be physically located at one of our facilities couldpenalties, result in lengthy interruptions in our service;
a localized catastrophic event that affects the location of one or more of our COLI and/or employer sponsored life insurance customers could cause a significant loss due to the corresponding mortality claims;expense, including legal costs, and
another terrorist attack in the United States could have long-term economic impacts that may have severe negative effects on our investment portfolio and disrupt our business operations. Any continuous and heightened threat of terrorist attacks could also result in increased costs of reinsurance.
Our risk management policies and procedures may not be adequate to identify, monitor and manage risks, which may leave us exposed to unidentified or unanticipated risks, which could negatively affect our businesses or result in losses.
Our policies and procedures to identify, monitor and manage risks may not be adequate or fully effective. Many of our methods of managing risk and exposures are based upon our use of historical market behavior or statistics based on historical models. As a result, these methods may not predict future exposures, which could be significantly greater than the historical measures indicate, such as the risk of pandemics causing a large number of deaths or terrorism. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated.
We may not be able to protect our intellectual property and may be subject to infringement claims by a third party.
We rely on a combination of contractual rights, copyright, trademark, and trade secret laws to establish and protect our intellectual property. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business, and our ability to compete.
Third parties may have, or may eventually be issued, patents or other protections that could be infringed by our products, methods, processes or services or could limit our ability to offer certain product features. In recent years, there has been increasing intellectual property litigation in the financial services industry challenging, among other things, product designs and business processes. If a third party were to successfully assert an intellectual property infringement claim against us, or if we were otherwise precluded from offering certain features or designs, or utilizing certain processes, it could have a material adverse effect on our business, consolidated results of operations andor financial condition. See “Business - Intellectual Property.”
Part I, Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Part I, Item 22.
PROPERTIES
Insurance
AXA Equitable’s principal executive offices at 1290 Avenue of the Americas, New York, NYNew York are occupied pursuant to a lease that extends to 2023. At this location, AXA Equitable currently leases approximately 423,174 square feet of space, within which AXA Equitable currently occupies 135,065 square feet of space and has sub-let 288,109 square feet of space.
AXA Equitable also has the following significant office space leases: 316,332 square feet of space inleases in: Syracuse, NY, under a lease that expires in 2023; 244,957 square feet of space in Jersey City, NJ, under a lease that expires in 2023, within which AXA Equitable occupies 228,043 square feet of space and is seeking to sublet 16,914 square feet of space; 144,647 square feet of space in Charlotte, NC, under a lease that expires in 2028; and 100,993 square feet of space in Secaucus, NJ, under a lease that expires in 2018.2020.
Investment Management
AB’s principal executive offices at 1345 Avenue of the Americas, New York, NY are occupied pursuant to a lease expiring in 2024. At this location, AB currently leases 992,043 square feet of space, within which AB currently occupies approximately 600,060 square feet of space and has sub-let approximately 391,983 square feet of space. AB also leases space at two other locations in New York City; AB acquired these leases in connection with an acquisition.
In addition, AB leases approximately 263,083 square feet of space at One North Lexington, White Plains, NY under a lease expiring in 2021 with options to extend to 2031. At this location, AB currently occupies approximately 69,013 square feet of space and has sub-let (or is seeking to sub-let) approximately 194,070 square feet of space. AB also leases 92,067 square feet of space in San Antonio, TX under a lease expiring in 2019 with options to extend to 2029. At this location, AB currently occupies approximately 59,004 square feet of space and has sub-let approximately 33,063 square feet of space.
AB also leases additional property both domestically and abroad for its operations.
Part I, Item 3.
LEGAL PROCEEDINGS
The matters set forth inFor information regarding certain legal proceedings pending against us, see Note 17 of the Notes to the Consolidated Financial Statements for the year ended December 31, 2016 (Part II, Item 8Statements. See “Risk Factors—Legal and Regulatory Risks—Legal and regulatory actions could have a material adverse effect on our reputation, business, results of this report) are incorporated herein by reference.operations or financial condition.”
Part I, Item 4.
MINE SAFETY DISCLOSURES
Not Applicable.
Part II, Item 5
MARKET FOR REGISTRANT’SREGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
General
At December 31, 2016,2018, all of AXA Equitable’s common equity was owned by AXA Equitable Financial Services, LLC, a wholly-owned, direct subsidiary of AXA Financial, Inc., which is an indirect, wholly-owned subsidiary of AXA.LLC. Consequently, there is no established public market for AXA Equitable’s common equity.
Dividends
In 2016, 20152018, 2017 and 2014,2016, AXA Equitable paid $1.1 billion, $767 million$0 and $382 million,$1.1 billion, respectively, in shareholder dividends. For information on AXA Equitable’s present and future ability to pay dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” (Part II, Item 7 of this report) and Note 18 of the Notes to the Consolidated Financial Statements.
Part II, Item 6.
SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Company’s audited consolidated financial statements. The consolidated statementsOmitted pursuant to General Instruction I(2)(a) of earnings (loss) for the years ended December 31, 2016, 2015 and 2014, and the consolidated balance sheet data at December 31, 2016 and 2015 have been derived from the Company’s audited financial statements included elsewhere herein. The consolidated statements of earnings (loss) for the years ended December 31, 2013 and 2012, and the consolidated balance sheet data at December 31, 2014, 2013 and 2012 have been derived from the Company’s previously reported audited financial statements not included herein. This selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited financial statements and related notes included elsewhere herein.
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In Millions) |
| Statements of Earnings (Loss) Data: | | | | | | | | | |
| REVENUES | | | | | | | | | |
| Universal life and investment-type product policy fee income | $ | 3,423 |
| | $ | 3,208 |
| | $ | 3,115 |
| | $ | 3,164 |
| | $ | 2,940 |
|
| Premiums | 880 |
| | 854 |
| | 874 |
| | 878 |
| | 908 |
|
| Net investment income (loss): | | | | | | | | | |
| Investment income (loss) from derivative instruments | (462 | ) | | (81 | ) | | 1,605 |
| | (2,866 | ) | | (978 | ) |
| Other investment income | 2,318 |
| | 2,057 |
| | 2,210 |
| | 2,237 |
| | 2,316 |
|
| Total net investment income (loss) | 1,856 |
| | 1,976 |
| | 3,815 |
| | (629 | ) | | 1,338 |
|
| Investment gains (losses), net: | | | | | | | | | |
| Total other-than-temporary impairment losses | (65 | ) | | (41 | ) | | (72 | ) | | (81 | ) | | (96 | ) |
| Portion of loss recognized in other comprehensive income (loss) | — |
| | — |
| | — |
| | 15 |
| | 2 |
|
| Net impairment losses recognized | (65 | ) | | (41 | ) | | (72 | ) | | (66 | ) | | (94 | ) |
| Other investment gains (losses), net | 81 |
| | 21 |
| | 14 |
| | (33 | ) | | (3 | ) |
| Total investment gains (losses), net | 16 |
| | (20 | ) | | (58 | ) | | (99 | ) | | (97 | ) |
| Commissions, fees and other income | 3,791 |
| | 3,942 |
| | 3,930 |
| | 3,823 |
| | 3,574 |
|
| Increase (decrease) in fair value of the reinsurance contract asset | (261 | ) | | (141 | ) | | 3,964 |
| | (4,297 | ) | | 497 |
|
| Total revenues | $ | 9,705 |
| | $ | 9,819 |
| | $ | 15,640 |
| | $ | 2,840 |
| | $ | 9,160 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In Millions) |
| Statements of Earnings (Loss) Data continued: | | | | | | | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | |
| Policyholders’ benefits | $ | 2,893 |
| | $ | 2,799 |
| | $ | 3,708 |
| | $ | 1,691 |
| | $ | 2,989 |
|
| Interest credited to policyholders’ account balances | 1,555 |
| | 978 |
| | 1,186 |
| | 1,373 |
| | 1,166 |
|
| Compensation and benefits | 1,723 |
| | 1,783 |
| | 1,739 |
| | 1,743 |
| | 1,672 |
|
| Commissions | 1,095 |
| | 1,111 |
| | 1,147 |
| | 1,160 |
| | 1,248 |
|
| Distribution related payments | 372 |
| | 394 |
| | 413 |
| | 423 |
| | 367 |
|
| Amortization of deferred sales commissions | | | — |
| | | | | | |
| Interest expense | 16 |
| | 20 |
| | 53 |
| | 88 |
| | 108 |
|
| Amortization of deferred policy acquisition costs, net | 162 |
| | (331 | ) | | (413 | ) | | (75 | ) | | (142 | ) |
| Other operating costs and expenses | 1,458 |
| | 1,415 |
| | 1,692 |
| | 1,746 |
| | 1,694 |
|
| Total benefits and other deductions | 9,274 |
| | 8,169 |
| | 9,525 |
| | 8,149 |
| | 9,102 |
|
| Earnings (loss) from operations, before income taxes | 431 |
| | 1,650 |
| | 6,115 |
| | (5,309 | ) | | 58 |
|
| Income tax (expense) benefit | 113 |
| | (186 | ) | | (1,695 | ) | | 2,073 |
| | 158 |
|
| Net earnings (loss) | 544 |
| | 1,464 |
| | 4,420 |
| | (3,236 | ) | | 216 |
|
| Less: net (earnings) loss attributable to the noncontrolling interest | (469 | ) | | (403 | ) | | (387 | ) | | (337 | ) | | (121 | ) |
| Net Earnings (Loss) Attributable to AXA Equitable | $ | 75 |
| | $ | 1,061 |
| | $ | 4,033 |
| | $ | (3,573 | ) | | $ | 95 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In Millions) |
| Balance Sheet Data: | | | | | | | | | |
| Total investments | $ | 58,416 |
| | $ | 52,527 |
| | $ | 51,783 |
| | $ | 45,977 |
| | $ | 47,962 |
|
| Separate Accounts assets | 111,403 |
| | 107,497 |
| | 111,059 |
| | 108,857 |
| | 94,139 |
|
| Total Assets | 203,764 |
| | 194,626 |
| | 196,005 |
| | 183,401 |
| | 176,843 |
|
| Policyholders’ account balances | 38,782 |
| | 33,033 |
| | 31,848 |
| | 30,340 |
| | 28,263 |
|
| Future policy benefits and other policyholders’ liabilities | 25,358 |
| | 24,531 |
| | 23,484 |
| | 21,697 |
| | 22,687 |
|
| Short-term and long-term debt | 513 |
| | 584 |
| | 689 |
| | 468 |
| | 523 |
|
| Loans from affiliates | — |
| | — |
| |
|
| | 825 |
| | 1,325 |
|
| Separate Accounts liabilities | 111,403 |
| | 107,497 |
| | 111,059 |
| | 108,857 |
| | 94,139 |
|
| Total liabilities | 186,945 |
| | 177,018 |
| | 177,880 |
| | 169,960 |
| | 158,913 |
|
| Total AXA Equitable’s equity | 13,331 |
| | 14,509 |
| | 15,119 |
| | 10,538 |
| | 15,436 |
|
| Noncontrolling interest | 3,085 |
| | 3,086 |
| | 2,989 |
| | 2,903 |
| | 2,494 |
|
| Total equity | $ | 16,416 |
| | $ | 17,595 |
| | $ | 18,108 |
| | $ | 13,441 |
| | $ | 17,930 |
|
| | | | | | | | | | |
| | December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In Millions) |
| Assets Under Management : | $ | 582,709 |
| | $ | 566,858 |
| | $ | 572,672 |
| | $ | 548,594 |
| | $ | 519,491 |
|
Part II, Item 7.
MANAGEMENT’SMANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s narrative analysis of the results of operations is presented pursuant to General Instruction I(2)(a) of Form 10-K.
The following Management’s Discussiondiscussion and Analysisanalysis of Financial Conditionour financial condition and Resultsresults of Operations (“MD&A”) for the Companyoperations should be read in conjunction with “Forward-looking Statements,” “Risk Factors,” “Selected Financial Data” and the consolidated financial statements and related notes to consolidatedour annual financial statements included elsewhere herein. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors. Factors that could or do contribute to these differences include those factors discussed below and elsewhere in this Form 10-K.10-K, particularly under the captions “Risk Factors” and “Note Regarding Forward-Looking Statements and Information.”
BACKGROUNDExecutive Summary
Overview
Established in 1859, AXA Equitable is among the oldest and largest life insurance companies in the United States. AXA Equitable is partWe are one of a diversifiedAmerica’s leading financial services organization that offerscompanies, providing advice and solutions for helping Americans set and meet their retirement goals and protect and transfer their wealth across generations.
We benefit from our complementary mix of businesses. This business mix provides diversity in our earnings sources, which helps offset fluctuations in market conditions and variability in business results, while offering growth opportunities.
GMxB Unwind
On April 12, 2018, we completed an unwind of the reinsurance provided to us by AXA RE Arizona for certain variable annuities with GMxB features (the “GMxB Unwind”). Accordingly, all business previously reinsured to AXA RE Arizona, with the exception of the GMxB business, was novated to EQ AZ Life Re Company (“EQ AZ Life Re”), a broad spectrumnewly formed captive insurance company organized under the laws of insurance, financial advisory and investment management products and services. Together with its subsidiaries, including AB, AXA Equitable is a leading asset manager, with total assets under management of approximately $582.7 billion at December 31, 2016, ofArizona, which approximately $480.2 billion were managed by AB. AXA Equitable is an indirect wholly owned subsidiary of Holdings. As of December 31, 2018, our GMIB reinsurance contract asset with EQ AZ Life Re had carrying value of $259 million and is reported in GMIB reinsurance contract asset at fair value in the consolidated balance sheets. Following the novation of this business to EQ AZ Life Re, AXA RE Arizona was merged with and into AXA Equitable. Following AXA RE Arizona’s merger with and into AXA Equitable, the GMxB business is not subject to any new internal or third-party reinsurance arrangements, though in the future AXA Equitable may reinsure the GMxB Business with third parties. See “Products — Individual Variable Annuities — Risk Management — Reinsurance — Captive Reinsurance” and Note 12 of the Notes to the Consolidated Financial Statements for further details of the GMxB Unwind.
Transfer of AB Units
In the fourth quarter of 2018, we transferred our interest in AB (including units of the limited partnership interest in AllianceBernstein L.P., units representing assignments of beneficial ownership of limited partnership interests in AllianceBernstein Holding L.P. and shares of AllianceBernstein Corporation) to a wholly-owned subsidiary of AXAHoldings (the “AB Business Transfer”). As a result of this transaction, the previously consolidated results of AB have been reclassified to Discontinued operations in the consolidated financial statements. See Note 19 of the Notes to the Consolidated Financial Statements for further details of the transfer of the AB Units.
As a result of the AB Business Transfer, we now operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources.
Revenues
Our revenues come from three principal sources:
fee income and premiums from our traditional life insurance and annuity products; and
investment income from our General Account investment portfolio.
Our fee income varies directly in relation to the amount of the underlying account value or benefit base of our retirement and protection products are influenced by changes in economic conditions, primarily equity market returns, as well as net flows. Our premium income is itself an indirect, wholly-owned subsidiarydriven by the growth in new policies written and the persistency of AXA.our in-force policies, both of which are influenced by a combination of factors, including our efforts to attract and retain customers and market conditions that influence demand for our products. Our investment income is driven by the yield on our General Account investment portfolio and is impacted by the prevailing level of interest rates as we reinvest cash associated with maturing investments and net flows to the portfolio.
Benefits and Other Deductions
Our primary expenses are:
policyholders’ benefits and interest credited to policyholders’ account balances;
sales commissions and compensation paid to intermediaries and advisors that distribute our products and services; and
compensation and benefits provided to our employees and other operating expenses.
Policyholders’ benefits are driven primarily by mortality, customer withdrawals and benefits which change in response to changes in capital market conditions. In addition, some of our policyholders’ benefits are directly tied to the AV and benefit base of our variable annuity products. Interest credited to policyholders varies in relation to the amount of the underlying AV or benefit base. Sales commissions and compensation paid to intermediaries and advisors vary in relation to premium and fee income generated from these sources, whereas compensation and benefits to our employees are more constant and impacted by market wages, and decline with increases in efficiency. Our ability to manage these expenses across various economic cycles and products is critical to the profitability of our company.
Net Income Volatility
We have offered and continue to offer variable annuity products with variable annuity guaranteed benefits (“GMxB”) features. The future claims exposure on these features is sensitive to movements in the equity markets and interest rates. Accordingly, we have implemented hedging and reinsurance programs designed to mitigate the economic exposure to us from these features due to equity market and interest rate movements. Changes in the values of the derivatives associated with these programs due to equity market and interest rate movements are recognized in the periods in which they occur while corresponding changes in offsetting liabilities are recognized over time. This results in net income volatility as further described below. See “—Significant Factors Impacting Our Results—Impact of Hedging and GMIB Reinsurance on Results.”
In addition to our dynamic hedging strategy, we have recently implemented static hedge positions designed to mitigate the adverse impact of changing market conditions on our statutory capital. We believe this program will continue to preserve the economic value of our variable annuity contracts and better protect our target variable annuity asset level. However, these new static hedge positions increase the size of our derivative positions and may result in higher net income volatility on a period-over-period basis.
Significant Factors Impacting Our Results
The Company conductsfollowing significant factors have impacted, and may in the future impact, our financial condition, results of operations or cash flows.
Impact of Hedging and GMIB Reinsurance on Results
We have offered and continue to offer variable annuity products with GMxB features. The future claims exposure on these features is sensitive to movements in two business segments, the Insurance segmentequity markets and interest rates. Accordingly, we have implemented hedging and reinsurance programs designed to mitigate the economic exposure to us from these features due to equity market and interest rate movements. These programs include:
Variable annuity hedging programs. We use a dynamic hedging program (within this program, generally, we reevaluate our economic exposure at least daily and rebalance our hedge positions accordingly) to mitigate certain
risks associated with the GMxB features that are embedded in our liabilities for our variable annuity products. This program utilizes various derivative instruments that are managed in an effort to reduce the economic impact of unfavorable changes in GMxB features’ exposures attributable to movements in the equity markets and interest rates. Although this program is designed to provide a measure of economic protection against the impact of adverse market conditions, it does not qualify for hedge accounting treatment. Accordingly, changes in value of the derivatives will be recognized in the period in which they occur with offsetting changes in reserves partially recognized in the current period, resulting in net income volatility. In addition to our dynamic hedging program, in the fourth quarter of 2017 and the Investment Management segment.first quarter of 2018, we implemented a new hedging program using static hedge positions (derivative positions intended to be held to maturity with less frequent re-balancing) to protect our statutory capital against stress scenarios. The Insurance segment offersimplementation of this new program in addition to our dynamic hedge program is expected to increase the size of our derivative positions, resulting in an increase in net income volatility.
GMIB reinsurance contracts. Historically, GMIB reinsurance contracts were used to cede to affiliated and non-affiliated reinsurers a varietyportion of term,our exposure to variable annuity products that offer a GMIB feature. We account for the GMIB reinsurance contracts as derivatives and report them at fair value. Gross reserves for GMIB reserves are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts. Accordingly, our gross reserves will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts. Because changes in the fair value of the GMIB reinsurance contracts are recorded in the period in which they occur and a majority of the changes in gross reserves for GMIB are recognized over time, net income will be more volatile.
Effect of Assumption Updates on Operating Results
Most of the variable annuity products, variable universal life insurance and universal life insurance products variable annuity products, employee benefitwe offer maintain policyholder deposits that are reported as liabilities and classified within either Separate Account liabilities or policyholder account balances. Our products and investmentriders also impact liabilities for future policyholder benefits and unearned revenues and assets for DAC and deferred sales inducements (“DSI”). The valuation of these assets and liabilities (other than deposits) are based on differing accounting methods depending on the product, each of which requires numerous assumptions and considerable judgment. The accounting guidance applied in the valuation of these assets and liabilities includes, but is not limited to, the following: (i) traditional life insurance products including mutual funds, principallyfor which assumptions are locked in at inception; (ii) universal life insurance and variable life insurance secondary guarantees for which benefit liabilities are determined by estimating the expected value of death benefits payable when the account balance is projected to individuals, smallbe zero and medium-size businesses and professional and trade associations. The Investment Management segment is principally comprisedrecognizing those benefits ratably over the accumulation period based on total expected assessments; (iii) certain product guarantees for which benefit liabilities are accrued over the life of the investmentcontract in proportion to actual and future expected policy assessments; and (iv) certain product guarantees reported as embedded derivatives at fair value.
Our actuaries oversee the valuation of these product liabilities and assets and review underlying inputs and assumptions. We comprehensively review the actuarial assumptions underlying these valuations and update assumptions during the third quarter of each year. Assumptions are based on a combination of company experience, industry experience, management businessactions and expert judgment and reflect our best estimate as of AB. AB provides research, diversified investment managementthe date of each financial statement. Changes in assumptions can result in a significant change to the carrying value of product liabilities and assets and, consequently, the impact could be material to earnings in the period of the change. For further details of our accounting policies and related services globallyjudgments pertaining to assumption updates, see Note 2 of the Notes to the Consolidated Financial Statements and “—Summary of Critical Accounting Estimates—Liability for Future Policy Benefits.”
Assumption Updates and Model Changes
In 2018, we began conducting our annual review of our assumptions and models during the third quarter, consistent with industry practice.
Our annual review encompasses assumptions underlying the valuation of unearned revenue liabilities, embedded derivatives for our insurance business, liabilities for future policyholder benefits, DAC and DSI assets. As a broad rangeresult of clients through three buy-side distribution channels: Institutions, Retailthis review, some assumptions were updated, resulting in increases and Private Wealth Management,decreases in the carrying values of these product liabilities and its sell-side business, Bernstein Research Services.assets.
The table below presents the impact of our actuarial assumption updates during 2018 and 2017 to our Income (loss) from continuing operations, before income taxes and Net income (loss):
|
| | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Impact of assumption updates on Net income (loss): | | | |
| Variable annuity product features related assumption updates | $ | (331 | ) | | $ | 1,324 |
|
| All other assumption updates | 103 |
| | 342 |
|
Impact of assumption updates on Income (loss) from continuing operations, before income tax
| (228 | ) | | 1,666 |
|
Income tax (expense) benefit on assumption updates
| 41 |
| | (583 | ) |
Net income (loss) impact of assumption updates
| $ | (187 | ) | | $ | 1,083 |
|
2018 Assumption Updates
The impact of assumption updates in 2018 on Income (loss) from continuing operations, before income taxes was a decrease of $228 million and a decrease to Net income (loss) of $187 million. This segment also includes institutional Separate Accounts principally manageda $331 million unfavorable impact on the reserves for our Variable annuity product features as a result of unfavorable updates to policyholder behavior, primarily due to annuitization assumptions, partially offset by AB that provide various investment optionsfavorable updates to economic assumptions.
The assumption changes during 2018 consisted of a decrease in Policy charges and fee income of $12 million, a decrease in Policyholders’ benefits of $684 million, an increase in Net derivative losses of $1,065 million, and a decrease in the Amortization of DAC of $165 million.
2017 Assumption Updates
The impact of the assumption updates in 2017 on Income (loss) from continuing operations, before income taxes was an increase of $1,666 million and an increase to Net income (loss) of approximately $1,083 million. This includes a $1,324 million favorable impact on the reserves for large group pension clients, primarily defined benefitour Variable annuity product features as a result of favorable updates to policyholder behavior assumptions.
The assumption changes during 2017 consisted of a decrease in Policy charges and contribution plans, through pooled or single group accounts.fee income of $88 million, a decrease in Policyholders’ benefits of $23 million, an increase in Amortization of DAC of $247 million, and a decrease in Net derivative losses by $1,978 million.
EXECUTIVE OVERVIEWMacroeconomic and Industry Trends
Our business and consolidated results of operations are significantly affected by economic conditions and consumer confidence, conditions in the global capital markets and the interest rate environment.
Financial and Economic Environment
A wide variety of factors continue to impact global financial and economic conditions. These factors include, among others, concerns over economic growth in the United States, continued low interest rates, falling unemployment rates, the U.S. Federal Reserve’s potential plans to further raise short-term interest rates, fluctuations in the strength of the U.S. dollar, the uncertainty created by what actions the current administration may pursue, concerns over global trade wars, changes in tax policy, global economic factors including programs by the European Central Bank and the United Kingdom’s vote to exit from the European Union and other geopolitical issues. Additionally, many of the products and solutions we sell are tax-advantaged or tax-deferred. If U.S. tax laws were to change, such that our products and solutions are no longer tax-advantaged or tax-deferred, demand for our products could materially decrease. See “Risk Factors—Legal and Regulatory Risks—Future changes in the U.S. tax laws and regulations or interpretations of the Tax Reform Act could reduce our earnings and negatively impact our business, results of operations or financial condition, including by making our products less attractive to consumers.
Stressed conditions, volatility and disruptions in the capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors. An increase in market volatility could affect our business, including through effects on the yields we earn on invested assets, changes in required reserves and capital and fluctuations in the value of our Account Values.
Earnings (loss). The Company’s52
These effects could be exacerbated by uncertainty about future fiscal policy, changes in tax policy, the scope of potential deregulation and levels of global trade.
In the short- to medium-term, the potential for increased volatility, coupled with prevailing interest rates remaining below historical averages, could pressure sales and reduce demand for our products as consumers consider purchasing alternative products to meet their objectives. In addition, this environment could make it difficult to consistently develop products that are attractive to customers. Financial performance can be adversely affected by market volatility and equity market declines as fees driven by Account Values fluctuate, hedging costs increase and revenues decline due to reduced sales and increased outflows.
We monitor the behavior of our customers and other factors, including mortality rates, morbidity rates, annuitization rates and lapse and surrender rates, which change in response to changes in capital market conditions, to ensure that our products and solutions remain attractive and profitable. For additional information on our sensitivity to interest rates and capital market prices, See “Quantitative and Qualitative Disclosures About Market Risk.”
Interest Rate Environment
We believe the interest rate environment will continue to impact our business and financial performance in the future for several reasons, including the following:
Certain of our variable annuity and life insurance products pay guaranteed minimum interest crediting rates. We are required to pay these guaranteed minimum rates even if earnings on our investment portfolio decline, with the resulting investment margin compression negatively impacting earnings. In addition, we expect more policyholders to hold policies with comparatively high guaranteed rates longer (lower lapse rates) in a low interest rate environment. Conversely, a rise in average yield on our investment portfolio should positively impact earnings. Similarly, we expect policyholders would be less likely to hold policies with existing guaranteed rates (higher lapse rates) as interest rates rise.
A prolonged low interest rate environment also may subject us to increased hedging costs or an increase in the amount of statutory reserves that our insurance subsidiaries are required to hold for GMxB features, lowering their statutory surplus, which would adversely affect their ability to pay dividends to us. In addition, it may also increase the perceived value of GMxB features to our policyholders, which in turn may lead to a higher rate of annuitization and higher persistency of those products over time. Finally, low interest rates may continue to cause an acceleration of DAC amortization or reserve increase due to loss recognition for interest sensitive products.
Regulatory Developments
We are regulated primarily by the NYDFS, with some policies and products also subject to federal regulation. On an ongoing basis, regulators refine capital requirements and introduce new reserving standards. Regulations recently adopted or currently under review can potentially impact our statutory reserve and capital requirements.
National Association of Insurance Commissioners (“NAIC”). In 2015, the NAIC Financial Condition (E) Committee established a working group to study and address, as appropriate, regulatory issues resulting from variable annuity captive reinsurance transactions, including reforms that would improve the current statutory reserve and RBC framework for insurance companies that sell variable annuity products. In August 2018, the NAIC adopted the new framework developed and proposed by this working group, expected to take effect January 2020, and which has now been referred to various other NAIC committees to develop the expected full implementation details. Among other changes, the new framework includes new prescriptions for reflecting hedge effectiveness, investment returns, interest rates, mortality and policyholder behavior in calculating statutory reserves and RBC. Once effective, it could materially change the level of variable annuity reserves and RBC requirements as well as their sensitivity to capital markets including interest rate, equity markets, volatility and credit spreads. Overall, we believe the NAIC reform is moving variable annuity capital standards towards an economic framework and is consistent with how we manage our business.
Fiduciary Rules/ “Best Interest” Standards of Conduct. In the wake of the March 2018 federal appeals court decision to vacate the DOL Rule, the SEC and NAIC as well as state regulators are currently considering whether to apply an impartial conduct standard similar to the DOL Rule to recommendations made in connection with certain annuities and, in one case, to life insurance policies. For example, the NAIC is actively working on a proposal to raise the advice standard for annuity sales and in July 2018, the NYDFS issued a final version of Regulation 187 that adopts a “best interest” standard for recommendations regarding the sale of life insurance and annuity products in New York.
Regulation 187 takes effect on August 1, 2019 with respect to annuity sales and February 1, 2020 for life insurance sales and is applicable to sales of life insurance and annuity products in New York. In November 2018, the primary agent groups in New York launched a legal challenge against the NYDFS over the adoption of Regulation 187. It is not possible to predict whether this challenge will be successful. We are currently assessing Regulation 187 to determine the impact it may have on our business. Beyond the New York regulation, the likelihood of enactment of any such state-based regulation is uncertain at this time, but if implemented, these regulations could have adverse effects on our business and consolidated results of operations.
In April 2018, the SEC released a set of proposed rules that would, among other things, enhance the existing standard of conduct for broker-dealers to require them to act in the best interest of their clients; clarify the nature of the fiduciary obligations owed by registered investment advisers to their clients; impose new disclosure requirements aimed at ensuring investors understand the nature of their relationship with their investment professionals; and restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor”. Public comments were due by August 7, 2018. Although the full impact of the proposed rules can only be measured when the implementing regulations are adopted, the intent of this provision is to authorize the SEC to impose on broker-dealers’ fiduciary duties to their customers similar to those that apply to investment advisers under existing law. We are currently assessing these proposed rules to determine the impact they may have on our business.
Impact of the Tax Reform Act
On December 22, 2017, President Trump signed into law the Tax Reform Act, a broad overhaul of the U.S. Internal Revenue Code that changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies.
The Tax Reform Act reduced the federal corporate income tax rate to 21% and repealed the corporate Alternative Minimum Tax (“AMT”) while keeping existing AMT credits. It also contained measures affecting our insurance companies, including changes to the DRD, insurance reserves and tax DAC. As a result of the Tax Reform Act, our Net Income has improved.
In August 2018, the NAIC adopted changes to the RBC calculation, including the C-3 Phase II Total Asset Requirement for variable annuities, to reflect the 21% corporate income tax rate in RBC, which resulted in a reduction to our Combined RBC Ratio.
Overall, the Tax Reform Act had a net positive economic impact on us and we continue to monitor regulations related to this reform.
Consolidated Results of Operations
Our consolidated results of operations are significantly affected by conditions in the capital markets and the economy. While financial markets in the U.S. generally performed well in 2016, a wide variety of factors continue to impact economic conditions and consumer confidence.economy because we offer market sensitive products. These factors include, among others, concerns over the pace of economic growth in the U.S., continued low interest rates, the U.S. Federal Reserve’s plans to further raise short-term interest rates, the strength of the U.S. Dollar, the uncertainty created by what actions the Trump administration may pursue, global economic factors including quantitative easing or similar programs by the European Central Bank, the United Kingdom’s vote to exit from the European Union, and geopolitical issues. For additional information on how the Company’s business and consolidated results of operations are effected by conditions in the capital markets and the economy, see “Item 1A - Risk Factors - Risks relating to conditions in the capital markets and economy” included elsewhere herein.
The accounting of reserves for GMDB and GMIB features do not fully and immediately reflect the impact of equity and interest market fluctuations. If the reserves were calculated on a basis that would fully and immediately reflect the impact of equity and interest market fluctuations, earnings would be higher than the $75 million consolidated net earnings of the Company and $24 million consolidated net loss of the Insurance segment in 2016. These lower net earnings were largely due to the market driven investment losses from derivative instruments used to hedge the variable annuity products with GMDB, GMIB and GWBL features (collectively, the “VA Guarantee Features”) and decreases in the fair values of the GMIB reinsurance contract asset which were not fully offset by the market driven decrease in VA Guarantee Features reserves. For additional information, see “Accounting For VA Guarantee Features” below.
Sales. The Company offers a balanced and diversified product portfolio that takes into account the macroeconomic environment and customer preferences and drives profitable growth while appropriately managing risk. In 2016, life insurance and annuities first year premiums and deposits increased by $468 million from the comparable 2015 period. The increase in first year premiums and deposits during 2016 was driven by $488 million higher annuity sales partially offset by $20 million lower life insurance sales. For additional information on sales, see “Premiums and Deposits” below.
In-force management. The Company continues to proactively manage its in-force business. For example:
GMDB/GMIB Buyout Programs. Since 2012, the Company has initiated several programs to purchase from certain contractholders the GMDB and GMIB riders contained in their Accumulator® contracts. In March 2016, a program to give contractholders an option to elect a full buyout of their rider or a new partial (50%) buyout of their rider expired. The Company believes that the buyout programs are mutually beneficial to the Company and contractholders who no longer need or want all or part of the GMDB or GMIB rider. To reflect the actual payments and reinsurance credit received from the buyout program that expired in March 2016, the Company recognized a $4 million increase to Net earnings. For additional information, see “Accounting for VA Guarantee Features” below.
Cost of Insurance Rates (“COI”). In 2015 the Company announced it would raise COI rates for certain universal life (“UL”) policies issued between 2004 and 2007 which have both issue ages 70 and above and a current face value amount of $1 million and above, effective in 2016. The Company raised the COI rates for these policies as management expects future mortality and investment experience to be less favorable than what was anticipated when the original schedule of COI rates was established. This COI rate increase was larger than the increase that previously had been anticipated in management’s reserve assumptions. As a result management updated the assumption to reflect the actual COI rate increase, resulting in a $46 million increase to net earnings in 2015.
Legislative and Regulatory Developments and NYDFS statutory examination. The U.S. life insurance industry is primarily regulated at the state level, with some products and services also subject to federal regulation. From time to time, our regulators may refine capital requirements, introduce new reserving standards and propose other rulemaking and/or legislation that may significantly impact our business. Recent regulatory initiatives that may affect our business include the NAIC’s efforts to revise reserve and capital requirements for variable annuities, the DOL’s issuance of the final fiduciary rule, and New York’s intention to implement a modified version of principles-based reserving. In addition, the NYDFS is in the process of completing our periodic statutory examination for the years 2011 through 2015. As part of this examination, we have responded to various information requests including inquiries related to our statutory reserves methodology. While we cannot predict the final outcomes of these regulatory initiatives or of the statutory examination, it is possible that our business, capital requirements, consolidated results of operations and financial condition may be materially impacted. For additional information, see “Item 1 - Business - Regulation” and “Item 1A - Risk Factors” included elsewhere herein.
AB AUM. AB’s, total assets under management (“AUM”) as of December 31, 2016 were $480.2 billion, an increase of $12.8 billion, or 2.7%, compared to December 31, 2015. The increase was driven by market appreciation of $23.1 billion partially and $2.5 billion from an acquisition offset by net outflows of $9.8 billion (Institutional outflows of $5.4 billion, and Retail outflows of $4.8 billion offset by Private Wealth Management inflows of $400 million) and by a $3.0 billion reduction in AUM due to AB’s shift from providing asset management services to consulting services for a client.
ACCOUNTING FOR VA GUARANTEE FEATURES
The Company has offered and continues to offer certain variable annuity products with VA Guarantee Features. These products continue to account for over half of the Company’s Separate Accounts assets and have been a significant driver of its results.our results of operations. Because the future claims exposure on these products is sensitive to movements in the equity markets and interest rates, the Company haswe have in place various hedging and reinsurance programs that are designed to mitigate the economic risks of movements in the equity markets and interest rates. DueThe volatility in Net income attributable to AXA Equitable for the accounting treatment,periods presented below results from the mismatch between (i) the change in carrying value of the reserves for GMDB and certain GMIB features that do not fully and immediately reflect the impact of theseequity and interest market fluctuations and (ii) the change in fair value of products with the GMIB feature that has a no-lapse guarantee, and our hedging and reinsurance programs contributeprograms.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company revised the presentation of the capitalization of deferred policy acquisition costs (“DAC”) in the consolidated statements of income for all prior periods presented herein by netting the capitalized amounts within the applicable expense line items, such as Compensation and benefits, Commissions and distribution plan payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of deferred acquisition costs. There was no impact on Net income (loss) or Comprehensive income of this reclassification.
The reclassification adjustments for the years ended December 31, 2017 and 2016 are presented in the table below. Capitalization of DAC reclassified to earnings volatility. These programs generally include, among others,Compensation and benefits, Commissions and distribution plan payments, and Other operating costs and expenses reduced the following:amounts previously reported in those expense line items, while the capitalization of
Dynamic VA Hedging programs. DAC reclassified from the Amortization of deferred policy acquisition costs line item increases that expense line item.Hedging programs are used |
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (in millions) |
| Reductions to expense line items: | | | |
| Compensation and benefits | $ | 128 |
| | $ | 128 |
|
| Commissions and distribution plan payments | 443 |
| | 460 |
|
| Other operating costs and expenses | 7 |
| | 6 |
|
| Total reductions | $ | 578 |
| | $ | 594 |
|
| | | | |
| Increase to expense line item: | | | |
| Amortization of deferred policy acquisition costs | $ | 578 |
| | $ | 594 |
|
The following table summarizes our consolidated statements of income (loss) for the years ended December 31, 2018 and 2017:
Consolidated Statement of Income (Loss)
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in millions) |
| REVENUES | | | |
| Policy charges and fee income | $ | 3,523 |
| | $ | 3,294 |
|
| Premiums | 862 |
| | 904 |
|
| Net derivative gains (losses) | (1,010 | ) | | 894 |
|
| Net investment income (loss) | 2,478 |
| | 2,441 |
|
| Investment gains (losses), net: | | | |
| Total other-than-temporary impairment losses | (37 | ) | | (13 | ) |
| Other investment gains (losses), net | 41 |
| | (112 | ) |
| Total investment gains (losses), net | 4 |
| | (125 | ) |
| Investment management and service fees | 1,029 |
| | 1,007 |
|
| Other income | 65 |
| | 41 |
|
| Total revenues | 6,951 |
| | 8,456 |
|
| BENEFITS AND OTHER DEDUCTIONS | | | |
| Policyholders’ benefits | 3,005 |
| | 3,473 |
|
| Interest credited to policyholders’ account balances | 1,002 |
| | 921 |
|
| Compensation and benefits | 422 |
| | 327 |
|
| Commissions and distribution related payments | 620 |
| | 628 |
|
| Interest expense | 34 |
| | 23 |
|
| Amortization of deferred policy acquisition costs | 431 |
| | 900 |
|
| Other operating costs and expenses | 2,918 |
| | 635 |
|
| Total benefits and other deductions | 8,432 |
| | 6,907 |
|
| Income (loss) from continuing operations, before income taxes | (1,481 | ) | | 1,549 |
|
| Income tax (expense) benefit from continuing operations | 446 |
| | 1,210 |
|
| Net income (loss) from continuing operations | (1,035 | ) | | 2,759 |
|
| Net income (loss) from discontinued operations, net of taxes and noncontrolling interest | 114 |
| | 85 |
|
| Less: net (income) loss attributable to the noncontrolling interest | 3 |
| | (1 | ) |
| Net income (loss) attributable to AXA Equitable | $ | (918 | ) | | $ | 2,843 |
|
The following discussion compares the results for the year ended December 31, 2018 to mitigate certain risks associatedthe year ended December 31, 2017.
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
Net Income (Loss) Attributable to AXA Equitable
The $3,761 million decrease in net income attributable to AXA Equitable, to a loss of $918 million for the year ended 2018 from net income of $2,843 million for the year ended 2017, was primarily driven by the following notable items:
Other operating costs and expenses increased by $2,283 million mainly due to $1,882 million of amortization of the deferred cost of reinsurance asset in 2018 including the write-off of $1,840 million of this asset, and the settlement of outstanding payments of $248 million, both related to the GMxB Unwind.
Net derivative gains (losses) decreased by $1,904 million mainly due to the unfavorable impact of assumption updates in 2018 compared to the favorable impact of assumption updates in 2017.
Compensation and benefits increased by $95 million primarily due to the loss resulting from the annuity purchase transaction and partial settlement of the employee pension plan in 2018.
Interest credited to policyholders’ account balances increased by $81 million primarily driven by higher SCS AV due to new business growth.
Interest expense increased by $11 million due to higher repurchase agreement costs.
Income tax benefit decreased by $764 million primarily driven by a one-time tax benefit in 2017 related to the Tax Reform Act.
Partially offsetting this decrease were the following notable items:
Amortization of deferred policy acquisition costs decreased by $469 million mainly due to the favorable impact of assumption updates in 2018.
Policyholders’ benefits decreased by $468 million mainly due to the favorable impact of assumption updates in 2018 compared to the unfavorable impact of assumption updates in 2017, combined with the VA Guarantee Features. These programs utilize various derivative instruments that are managed in an effort to reduce the economicfavorable impact of unfavorable changes in VA Guarantee Features’ exposures attributable to movements in the equity markets andrising interest rates. Although these programs are designed to provide a measure of economic protection againstrates, partially offset by the impact adverseof equity market conditions may have with respectdeclines affecting our GMxB liabilities.
Policy charges, fee income and premiums increased by $187 million primarily due to VA Guarantee Features, they do not qualify for hedge accounting treatment, meaning that changeshigher cost of insurance charges.
Total investment gains (losses), net increased by $129 million primarily due to the sale of fixed maturities.
Investment management, service fees and other income increased by $46 million primarily due to higher equity markets.
Increase in Net investment income of $37 million primarily due to higher assets from the value of the derivatives will be recognized in the period in which they occur while offsetting changes in reserves will be recognized over time.GMxB Unwind and General Account optimization.
Contractual Obligations
The table below summarizes the future estimated cash payments related to certain contractual obligations as of December 31, 2018. The estimated payments reflected in this table are based on management’s estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the actual cash outflows in future periods will vary, possibly materially, from those reflected in the table. In addition, we do not believe that our cash flow requirements can be adequately assessed based solely upon an analysis of these obligations, as the table below does not contemplate all aspects of our cash inflows, such as the level of cash flow generated by certain of our investments, nor all aspects of our cash outflows.
|
| | | | | | | | | | | | | | | | | | | | |
| | Estimated Payments Due by Period |
| | Total | | 2019 | | 2020-2022 | | 2023-2024 | | 2025 and thereafter |
| | (in millions) |
| Contractual obligations: | | | | | | | | | |
Policyholders’ liabilities (1)
| $ | 100,158 |
| | $ | 1,745 |
| | $ | 5,025 |
| | $ | 6,722 |
| | $ | 86,666 |
|
| FHLBNY Funding Agreements | 3,990 |
| | 1,640 |
| | 1,094 |
| — |
| 475 |
| | 781 |
|
| Interest on FHLBNY Funding Agreements | 267 |
| | 65 |
| | 109 |
| — |
| 50 |
| | 43 |
|
| Operating leases | 419 |
| | 81 |
| | 143 |
| | 129 |
| | 66 |
|
| Loan from affiliates | 572 |
| | 572 |
| | — |
| | — |
| | — |
|
| Employee benefits | 3,941 |
| | 214 |
| | 431 |
| | 410 |
| | 2,886 |
|
| Total Contractual Obligations | $ | 109,347 |
| | $ | 4,317 |
| | $ | 6,802 |
| | $ | 7,786 |
| | $ | 90,442 |
|
_______________
| |
| (1) | Policyholders’ liabilities represent estimated cash flows out of the General Account related to the payment of death and disability claims, policy surrenders and withdrawals, annuity payments, minimum guarantees on Separate Account funded contracts, matured endowments, benefits under accident and health contracts, policyholder dividends and future renewal premium-based and fund-based commissions offset by contractual future premiums and deposits on in-force contracts. These estimated cash flows are based on mortality, morbidity and lapse assumptions comparable with the Company’s experience and assume market growth and interest crediting consistent with actuarial assumptions used in amortizing DAC. These amounts are undiscounted and, therefore, exceed the policyholders’ account balances and future policy benefits and other policyholder liabilities included in the consolidated balance sheet. They do not reflect projected recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows will differ from these estimates, see “—Summary of Critical Accounting Policies—Liability for Future Policy Benefits.” Separate Account liabilities have been excluded as they are legally insulated from General Account obligations and will be funded by cash flows from Separate Account assets. |
Unrecognized tax benefits of $273 million, were not included in the above table because it is not possible to make reasonably reliable estimates of the occurrence or timing of cash settlements with the respective taxing authorities.
Off-Balance Sheet Arrangements
At December 31, 2018, the Company was not a party to any off-balance sheet transactions other than those guarantees and commitments described in Notes 10 and 17 of the Notes to the Consolidated Financial Statements.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in our consolidated financial statements included elsewhere herein. For a discussion of our significant accounting policies, see Note 2 of the Notes to the Consolidated Financial Statements. The most critical estimates include those used in determining:
liabilities for future policy benefits;
accounting for reinsurance;
capitalization and amortization of DAC and policyholder bonus interest credits;
estimated fair values of investments in the absence of quoted market values and investment impairments;
estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation;
measurement of income taxes and the valuation of deferred tax assets; and
liabilities for litigation and regulatory matters.
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries while others are specific to our business and operations. Actual results could differ from these estimates.
Liability for Future Policy Benefits
We establish reserves for future policy benefits to, or on behalf of, policyholders in the same period in which the policy is issued or acquired, using methodologies prescribed by U.S. GAAP. The assumptions used in establishing reserves are generally based on our experience, industry experience or other factors, as applicable. At least annually we review our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior assumptions, and update assumptions when appropriate. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term.
The reserving methodologies used include the following:
Universal life (“UL”) and investment-type contract policyholder account balances are equal to the policy AV. The policy AV represent an accumulation of gross premium payments plus credited interest less expense and mortality charges and withdrawals.
Participating traditional life insurance future policy benefit liabilities are calculated using a net level premium method on the basis of actuarial assumptions equal to guaranteed mortality and dividend fund interest rates.
Non-participating traditional life insurance future policy benefit liabilities are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest.
For most long-duration contracts, we utilize best estimate assumptions as of the date the policy is issued or acquired with provisions for the risk of adverse deviation, as appropriate. After the liabilities are initially established, we perform premium deficiency tests using best estimate assumptions as of the testing date without provisions for adverse deviation. If the liabilities determined based on these best estimate assumptions are greater than the net reserves (i.e., U.S. GAAP reserves net of any DAC or DSI), the existing net reserves are adjusted by first reducing the DAC or DSI by the amount of the deficiency or to zerothrough a charge to current period earnings. If the deficiency is more than these asset balances for insurance contracts, we then increase the net reserves by the excess, again through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the premium deficiency test date are locked in and used in subsequent valuations and the net reserves continue to be subject to premium deficiency testing.
For certain reserves, such as those related to GMDB and GMIB features, we use current best estimate assumptions in establishing reserves. The reserves are subject to adjustments based on periodic reviews of assumptions and quarterly adjustments for experience, including market performance, and the reserves may be adjusted through a benefit or charge to current period earnings.
For certain GMxB features, the benefits are accounted for as embedded derivatives, with fair values calculated as the present value of expected future benefit payments to contractholders less the present value of assessed rider fees attributable to the embedded derivative feature. Under U.S. GAAP, the fair values of these benefit features are based on assumptions a market participant would use in valuing these embedded derivatives. Changes in the fair value of the embedded derivatives are recorded quarterly through a benefit or charge to current period earnings.
The assumptions used in establishing reserves are generally based on our experience, industry experience and/or other factors, as applicable. We typically update our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior assumptions, annually, unless a material change is observed in an interim period that we feel is indicative of a long-term trend. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term. In a sustained low interest rate environment, there is an increased likelihood that the reserves determined based on best estimate assumptions may be greater than the net liabilities.
See Note 8 of the Notes to the Consolidated Financial Statements for additional information on our accounting policy relating to GMxB features and liability for future policy benefits and Note 2 of the Notes to the Consolidated Financial Statements for future policyholder benefit liabilities.
Sensitivity of Future Rate of Return Assumptions on GMDB/GMIB Reserves
The Separate Account future rate of return assumptions that are used in establishing reserves for GMxB features are set using a long-term-view of expected average market returns by applying a reversion to the mean approach, consistent with that used for DAC amortization. For additional information regarding the future expected rate of return assumptions and the reversion to the mean approach, see, “—DAC and Policyholder Bonus Interest Credits”.
The GMDB/GMIB reserve balance before reinsurance ceded was $8.4 billion at December 31, 2018. The following table provides the sensitivity of the reserves GMxB features related to variable annuity contracts relative to the future rate of return assumptions by quantifying the adjustments to these reserves that would be required assuming both a 1% increase and decrease in the future rate of return. This sensitivity considers only the direct effect of changes in the future rate of return on operating results due to the change in the reserve balance before reinsurance ceded and not changes in any other assumptions such as persistency, mortality, or expenses included in the evaluation of the reserves, or any changes on DAC or other balances including hedging derivatives and the GMIB reinsurance contracts.asset.
GMDB/GMIB Reserves
Sensitivity - Rate of Return
December 31, 2018
|
| | | |
| | Increase/(Decrease) in GMDB/GMIB Reserves |
| | (in millions) |
| 1% decrease in future rate of return | $ | 1,259.3 |
|
| 1% increase in future rate of return | $ | (1,333.2 | ) |
Traditional Annuities
The reserves for future policy benefits for annuities include group pension and payout annuities, and, during the accumulation period, are equal to accumulated policyholders’ fund balances and, after annuitization, are equal to the present value of expected future payments based on assumptions as to mortality, retirement, maintenance expense, and interest rates. Interest rates used in establishing such liabilities range from 1.6% to 5.5% (weighted average of 4.8%). If reserves determined based on these assumptions are greater than the existing reserves, the existing reserves are adjusted to the greater amount.
Health
Individual health benefit liabilities for active lives are estimated using the net level premium method and assumptions as to future morbidity, withdrawals and interest. Benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
Reinsurance
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risk with respect to reinsurance receivables. We periodically review actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluate the financial strength of counterparties to our reinsurance agreements using criteria similar to those evaluated in our security impairment process. See “—Estimated Fair Value of Investments.” Additionally, for each of our reinsurance agreements, we determine whether the agreement provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We review all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If we determine that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit method of accounting.
For reinsurance contracts other than those covering GMIB exposure, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities. GMIB reinsurance contracts are used to cede to affiliated and non-affiliated reinsurers a portion of the exposure on variable annuity products that offer the GMIB feature. The GMIB reinsurance contracts are accounted for as derivatives and are reported at fair value. Gross reserves for GMIB, as noted above, on the other hand, are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts, and therefore, will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market and/or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance
contracts.
See Note 10 of the Notes to the Consolidated Financial Statements for additional information on our reinsurance agreements.
contracts. BecauseDAC and Policyholder Bonus Interest Credits
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to the successful acquisition or renewal of insurance contracts are deferred as DAC. In addition to commissions, certain direct-response advertising expenses and other direct costs, other deferrable costs include the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed. We utilize various techniques to estimate the portion of an employee’s time spent on qualifying acquisition activities that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include assumptions that are reviewed and updated on a periodic basis or more frequently to reflect significant changes in processes or distribution methods.
Amortization Methodologies
Participating Traditional Life Policies
For participating traditional life policies (substantially all of which are in the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield.
At December 31, 2018, the average investment yields assumed (excluding policy loans) were 4.7% grading to 4.3% in 2024. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the fair valuenet level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of the GMIB reinsurance contracts are recordedDAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in which they occur while offsetting changesconsolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
Non-participating Traditional Life Insurance Policies
DAC associated with non-participating traditional life policies are amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earnings (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy.
Universal Life and Investment-type Contracts
DAC associated with certain variable annuity products is amortized based on estimated assessments, with the remainder of variable annuity products, UL and investment-type products amortized over the expected total life of the contract group as a constant percentage of estimated gross reserves for GMIB will be recognized over time, earnings will tendprofits arising principally from investment results, Separate Account fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, updated at the end of each accounting period. When estimated gross profits are expected to be more volatile.
Changes in interest rates and equity markets have contributed to earnings volatility.negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The table below shows, for 2016, 2015 and 2014, the impacteffect on Earnings (Loss) from continuing operations before income taxes of the items discussed above (prior to the impact of Amortization of deferred acquisition costs):
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
Income (loss) on free-standing derivatives(1) | $ | (1,004 | ) | | $ | (245 | ) | | $ | 1,372 |
|
Increase (decrease) in the fair value of the GMIB reinsurance contracts asset(2) | (261 | ) | | (141 | ) | | 3,964 |
|
(Increase) decrease in GMDB, GMIB and GWBL and other features reserves, net of related GMDB reinsurance(3) | (362 | ) | | (367 | ) | | (1,590 | ) |
| Total | $ | (1,627 | ) | | $ | (753 | ) | | $ | 3,746 |
|
| |
(1) | Reported in Net investment income (loss) in the consolidated statements of earnings (loss). |
| |
(2) | Reported in Increase (decrease) in the fair value of reinsurance contracts asset in the consolidated statements of earnings (loss). |
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(3) | Reported in Policyholders’ benefits in the consolidated statements of earnings (loss). |
Reinsurance ceded - AXA Arizona. The Company currently reinsures to AXA Arizona a 100% quota share of all liabilities for GMDB/GMIB riders on the Accumulator® products sold on or after January 1, 2006 and in-force at September 30, 2008. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under universal life insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. For AXA Equitable, these reinsurance transactions currently provide statutory capital relief and mitigate the volatility of capital requirements.
The Company receives statutory reserve credits for reinsurance treaties with AXA Arizona to the extent AXA Arizona holds assets in an irrevocable trust ($9.4 billion at December 31, 2016) and/or letters of credit ($3.7 billion at December 31, 2016). AXA Arizona is required to hold a combination of assets in the trust and/or letters of credit so that the Company can take credit for the reinsurance. These letters of credit are guaranteed by AXA.
For further information regarding this transaction, see “Item 1A-Risk Factors” and Note 11 of Notes to Consolidated Financial Statements included elsewhere herein.
2016 Assumption Updates and Model Changes. In 2016, the Company made several assumption updates and model changes including the following (1) updated the premium funding assumption used in setting variable life policyholder benefit reserves; (2) made changes in the model used in calculating premium loads, which increased interest sensitive life policyholder benefit reserves; (3) updated its mortality assumption for certain VISL products as a result of favorable mortality experience for some of its older products and unfavorable mortality experience on some of its newer products and (4) updated the General Account spread and yield assumptions for certain VISL products to reflect lower expected investment yields.
The net impact of these model changes and assumption updates in 2016 decreased policyholders’ benefits by $77 million, increased the amortization of DAC of revisions to estimated
gross profits or assessments is reflected in net income (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
Quarterly adjustments to the DAC balance are made for current period experience and market performance related adjustments, and the impact of reviews of estimated total gross profits. The quarterly adjustments for current period experience reflect the impact of differences between actual and previously estimated expected gross profits for a given period. Total estimated gross profits include both actual experience and estimates of gross profits for future periods. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, cumulative adjustment to all previous periods’ costs is recognized.
During each accounting period, the DAC balances are evaluated and adjusted with a corresponding charge or credit to current period earnings for the effects of the Company’s actual gross profits and changes in the assumptions regarding estimated future gross profits. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
For the variable and UL policies a significant portion of the gross profits is derived from mortality margins and therefore, are significantly influenced by $276 million, increased Universalthe mortality assumptions used. Mortality assumptions represent our expected claims experience over the life of these policies and investment-typeare based on a long-term average of actual company experience. This assumption is updated periodically to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Loss Recognition Testing
After the initial establishment of reserves, loss recognition tests are performed using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy fee incomebenefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC is first written off, and thereafter a premium deficiency reserve is established by $25 million, decreased Earnings from continuing operations before income taxes by $174a charge to earnings.
In 2018 and 2017, we determined that we had a loss recognition in certain of our variable interest-sensitive life insurance products due to the release of life reserves and low interest rates. As of December 31, 2018 and 2017, we wrote off $162 million and decreased$656 million, respectively, of the DAC balance through accelerated amortization.
Additionally, in certain policyholder liability balances for a particular line of business may not be deficient in the aggregate to trigger loss recognition; however, the pattern of earnings may be such that profits are expected to be recognized in earlier years and then followed by losses in later years. This pattern of profits followed by losses is exhibited in our VISL business and is generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. We accrue for these Profits Followed by Losses (“PFBL”) using a dynamic approach that changes over time as the projection of future losses change.
In addition, we are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. This may result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on available-for-sale investment securities within the statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, which is based on changes in net unrealized investment (gains) losses, these adjustments may reverse from period to period. In 2017, due primarily to the release of life reserves, we recorded an unrealized loss in Other comprehensive income (loss). There was no impact to Net earnings by approximately $113 million.income (loss).
2015 Assumption Updates. In 2015, expectations61
Sensitivity of DAC to Changes in Future Mortality Assumptions
The following table demonstrates the fair valuesensitivity of the GMIB reinsurance contract asset. Also in 2015, expectations of GMIB election rates were lowered for certain ages based on emerging experience. This update decreasedDAC balance relative to future mortality assumptions by quantifying the expected future GMIB claim costadjustments that would be required, assuming an increase and the fair value of the GMIB reinsurance contract asset, while increasing the expected future GMDB claim cost. The impact of these assumption updates in 2015 was a net decrease in the fair valuefuture mortality rate by 1.0%. This information considers only the direct effect of changes in the mortality assumptions on the DAC balance and not changes in any other assumptions used in the measurement of the GMIB reinsurance contract assetDAC balance and does not assume changes in reserves.
DAC Sensitivity - Mortality
December 31, 2018
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| | Increase/(Decrease) in DAC |
| | (in millions) |
| Decrease in future mortality by 1% | $ | 20 |
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| Increase in future mortality by 1% | $ | (20 | ) |
Sensitivity of $746 million, a decreaseDAC to Changes in the GMDB/GMIB reservesFuture Rate of $637 million and a decreaseReturn Assumptions
A significant assumption in the amortization of DAC on variable annuity products and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future Separate Accounts performance. Management sets estimated future gross profit or assessment assumptions related to Separate Account performance using a long-term view of $17 million.expected average market returns by applying a Reversion to the Mean (“RTM”) approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
Additionally inIn applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. In second quarter 2015, based upon management’s currentthen-current expectations of interest rates and future fund growth, the Companywe updated itsour reversion to the mean (“RTM”) assumption used to calculate GMDB/GMIB and variable and interest sensitive life (“VISL”)
reserves and amortization of DAC from 9.0% to 7.0%. The impactaverage gross long-term return measurement start date was also updated to December 31, 2014. Management has set limitations as to maximum and minimum future rate of this assumption updatereturn assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At December 31, 2018, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuity products was 7.0% (4.7% net of product weighted average Separate Accounts fees), and 0.0% (2.3)% net of product weighted average Separate Account fees), respectively. The maximum duration over which these rate limitations may be applied is five years. This approach will continue to be applied in 2015 wasfuture periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than five years in order to reach the average gross long-term return estimate, the application of the five-year maximum duration limitation would result in an increaseacceleration of DAC amortization. Conversely, actual market returns resulting in GMIB/GMDB reservesassumed future market returns of $723 million,0.0% for more than five years would result in a required deceleration of DAC amortization. At December 31, 2018, current projections of future average gross market returns assume a 1.6% annualized return for the next two quarters, followed by 7.0% thereafter. Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
The following table provides an increase in VISL reservesexample of $29 millionthe sensitivity of the DAC balance of variable annuity products and variable and interest-sensitive life insurance relative to future return assumptions by quantifying the adjustments to the DAC balance that would be required assuming both an increase and decrease in amortizationthe future rate of return by 1.0%. This information considers only the effect of changes in the future Separate Accounts rate of return and not changes in any other assumptions used in the measurement of the DAC of $67 million.balance.
DAC Sensitivity - Rate of Return
December 31, 2018
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| | Increase/(Decrease) in DAC |
| | (in millions) |
| Decrease in future rate of return by 1% | $ | (97 | ) |
| Increase in future rate of return by 1% | $ | 121 |
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Estimated Fair Value of Investments
The assumption updates mentioned above resultedCompany’s investment portfolio principally consists of public and private fixed maturities, mortgage loans, equity securities and derivative financial instruments, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options used to manage various risks relating to its business operations.
Fair Value Measurements
Investments reported at fair value in the consolidated balance sheets of the Company include fixed maturity securities classified as available-for-sale, equity and trading securities and certain other invested assets, such as freestanding derivatives. In addition, reinsurance contracts covering GMIB exposure and the liabilities in the SCS variable annuity products, SIO in the EQUI-VEST variable annuity product series, MSO in the variable life insurance products, IUL insurance products and the GMAB, GIB, GMWB and GWBL feature in certain variable annuity products issued by the Company are considered embedded derivatives and reported at fair value.
When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable; these generally are the most liquid holdings and their valuation does not involve management judgment. When quoted prices in active markets are not available, we estimate fair value based on market standard valuation methodologies. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a net decreasediscounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment. For securities with reasonable price transparency, the significant inputs to these valuation methodologies either are observable in the market or can be derived principally from or corroborated by observable market data. When the volume or level of activity results in little or no price transparency, significant inputs no longer can be supported by reference to market observable data but instead must be based on management’s estimation and judgment. Substantially the same approach is used by us to measure the fair values of freestanding and embedded derivatives with exception for consideration of the effects of master netting agreements and collateral arrangements as well as incremental value or risk ascribed to changes in own or counterparty credit risk.
As required by the accounting guidance, we categorize our assets and liabilities measured at fair value into a three-level hierarchy, based on the priority of the inputs to the 2015 Earnings from continuing operations before income taxesrespective valuation technique, giving the highest priority to quoted prices in active markets for identical assets and Net earningsliabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). For additional information regarding the key estimates and assumptions surrounding the determinations of approximately $777 millionfair value measurements, see Note 7 of the Notes to the Consolidated Financial Statements.
Impairments and $505 million, respectively.Valuation Allowances
The assessment of whether OTTIs have occurred is performed quarterly by our Investments Under Surveillance (“IUS”) Committee, with the assistance of its investment advisors, on a security-by-security basis for each available-for-sale fixed maturity that has experienced a decline in fair value for purpose of evaluating the underlying reasons. The analysis begins with a review of gross unrealized losses by the following categories of securities: (i) all investment grade and below investment grade fixed maturities for which fair value has declined and remained below amortized cost by 20% or more and (ii) below-investment-grade fixed maturities for which fair value has declined and remained below amortized cost for a period greater than 12 months. Integral to the analysis is an assessment of various indicators of credit deterioration to determine whether the investment security is expected to recover, including, but not limited to, consideration of the duration and severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity, and continued viability of the
2014 Assumption Updates63
issuer and, Model Changes. for equity securities only, the intent and ability to hold the investment until recovery, resulting in identification of specific securities for which OTTI is recognized.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting OTTI is recognized in earnings and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage- and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and valuation allowances. Valuation allowances are based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or on its collateral value if the loan is collateral dependent. However, if foreclosure is or becomes probable, the collateral value measurement method is used.
For commercial and agricultural mortgage loans, an allowance for credit loss is typically recommended when management believes it is probable that principal and interest will not be collected according to the contractual terms. Factors that influence management’s judgment in determining allowance for credit losses include the following:
Loan-to-value ratio— Derived from current loan balance divided by the fair market value of the property. An allowance for credit loss is typically recommended when the loan-to-value ratio is in excess of 100%. In 2014, the Company updatedcase where the loan-to-value is in excess of 100%, the allowance for credit loss is derived by taking the difference between the fair market value (less cost of sale) and the current loan balance.
Debt service coverage ratio—Derived from actual operating earnings divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt.
Occupancy—Criteria vary by property type but low or below market occupancy is an indicator of sub-par property performance.
Lease expirations—The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor.
Maturity—Mortgage loans that are not fully amortizing and have upcoming maturities within the next 12 to 24 months are monitored in conjunction with the capital markets to determine the borrower’s ability to refinance the debt and/or pay off the balloon balance.
Borrower/tenant related issues—Financial concerns, potential bankruptcy, or words or actions that indicate imminent default or abandonment of property.
Payment status - current vs. delinquent—A history of delinquent payments may be a cause for concern.
Property condition—Significant deferred maintenance observed during the lenders annual site inspections.
Other—Any other factors such as current economic conditions may call into question the performance of the loan.
Mortgage loans also are individually evaluated quarterly by the IUS Committee for impairment on a loan-by-loan basis, including an assessment of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its mortality assumption usedmonthly monitoring of mortgages, a class of potential problem mortgages also is identified, consisting of mortgage loans not currently classified as problems but for which management has doubts as to valuethe ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future GMIB costsindustry conditions and developments with respect to the borrower or the individual mortgaged property.
For problem mortgage loans a valuation allowance is established to provide for contracts that receive GMIB benefitsthe risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for loans determined to be non-performing as a result of the contract value going to $0. The mortality for these policyholdersloan review process. A non-performing loan is expected to be the same as the mortality experienced by inforce policyholders who have not yet exercised their GMIB benefit. This mortality assumption is higher (shorter expected lifespan) than for policyholders who exercise their GMIB benefit. Also,in 2014, the Company updated its assumptions of future GMIB costsdefined as a resultloan for which it is probable that amounts due according to the contractual terms of lowerthe loan agreement will not be collected. The loan specific portion of the loss allowance is based on our
assessment as to ultimate collectability of loan principal and interest. Valuation allowances for a non-performing loan are recorded based on the present value of expected short-term lapsesfuture cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The valuation allowance for those policyholders who did not acceptmortgage loans can increase or decrease from period to period based on such factors.
Impaired mortgage loans without provision for losses are mortgage loans where the GMIB buyout offer that expiredfair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on mortgage loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on mortgage loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows. Changes in third quarter 2014. The impactsthe present value attributable to changes in the amount or timing of these assumption updatesexpected cash flows are reported as investment gains or losses.
Mortgage loans are placed on nonaccrual status once management believes the collection of accrued interest is doubtful. Once mortgage loans are classified as nonaccrual mortgage loans, interest income is recognized under the cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan on real estate has been restructured to where the collection of interest is considered likely.
See Notes 2 and 3 of the Notes to the Consolidated Financial Statements for additional information relating to our determination of the amount of allowances and impairments.
Derivatives
We use freestanding derivative instruments to hedge various capital market risks in 2014 resulted in a decreaseour products, including: (i) certain guarantees, some of which are reported as embedded derivatives; (ii) current or future changes in the fair value of our assets and liabilities; and (iii) current or future changes in cash flows. All derivatives, whether freestanding or embedded, are required to be carried on the GMIB reinsurance contract assetbalance sheet at fair value with changes reflected in either net income (loss) or in other comprehensive income, depending on the type of $91 millionhedge. Below is a summary of critical accounting estimates by type of derivative.
Freestanding Derivatives
The determination of the estimated fair value of freestanding derivatives, when quoted market values are not available, is based on market standard valuation methodologies and a decreaseinputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. See Note 7 of the Notes to the Consolidated Financial Statements for additional details on significant inputs into the OTC derivative pricing models and credit risk adjustment.
Embedded Derivatives
We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net derivative gains (losses). We also have assumed from an affiliate the risk associated with certain guaranteed minimum benefits, which are accounted for as embedded derivatives measured at estimated fair value. The estimated fair values of these embedded derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees attributable to the guarantee. The projections of future benefits and future fees require capital markets and actuarial assumptions, including expectations concerning policyholder behavior. A risk-neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates.
Market conditions, including, but not limited to, changes in interest rates, equity indices, market volatility and variations in actuarial assumptions, including policyholder behavior, mortality and risk margins related to non-capital market inputs, as well as changes in our nonperformance risk adjustment may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income. Changes to actuarial assumptions, principally related to contract holder behavior such as annuitization utilization and withdrawals associated with GMIB reservesriders, can result in a change of $42 million.expected future cash outflows of a guarantee between the accrual-based model for insurance liabilities and the fair-value based model for embedded derivatives. See Note 2 of the Notes to the Consolidated Financial Statements for additional information relating to the determination of the accounting model. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the
uncertainties in 2014,certain actuarial assumptions. The establishment of risk margins requires the Company madeuse of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees.
With respect to assumptions regarding policyholder behavior, we have recorded charges, and in some cases benefits, in prior years as a changeresult of the availability of sufficient and credible data at the conclusion of each review.
We ceded the risk associated with certain of the variable annuity products with GMxB features described in its model usedthe preceding paragraphs. The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by us with the exception of the input for nonperformance risk that reflects the credit of the reinsurer. However, because certain of the reinsured guarantees do not meet the definition of an embedded derivative and, thus are not accounted for at fair value, calculation ofsignificant fluctuations in net income may occur when the GMIB reinsurance contract asset and GWBL, GIB and guaranteed minimum accumulated benefit (“GMAB”) liabilities, utilizing scenarios that explicitly reflect risk free bond and equity components separately (previously aggregated and including counterparty risk premium embedded in swap rates) and stochastic interest rates for projecting and discounting cash flows (previously a single yield curve). The Company also changed its model used for the fair value calculation of the GMIB reinsurance contract asset to use Life-only annuity purchase rates for certain reinsurance contracts to be consistent with the treaty terms. The net impacts of these model changes in 2014 were a $655 million increase to the GMIB reinsurance contract asset and a $37 million increase in the GWBL, GIB and GMAB liability which are reported in the Company’s consolidated statements of Earnings (Loss) as Increase (decrease)change in the fair value of the reinsurance contract assetrecoverable is recorded in net income without a corresponding and Policyholders’ benefits, respectively.offsetting change in fair value of the directly written guaranteed liability.
Nonperformance Risk Adjustment
The assumption updates and model changes mentioned above resultedvaluation of our embedded derivatives includes an adjustment for the risk that we fail to satisfy our obligations, which we refer to as our nonperformance risk. The nonperformance risk adjustment, which is captured as a spread over the risk-free rate in determining the discount rate to discount the cash flows of the liability, is determined by taking into consideration publicly available information relating to spreads on corporate bonds in the secondary market comparable to AXA Equitable Life’s financial strength rating.
The table below illustrates the impact that a net increaserange of reasonably likely variances in credit spreads would have on our consolidated balance sheet, excluding the effect of income tax, related to the 2014 to Earnings from continuing operations before income taxes and Net earningsembedded derivative valuation on certain variable annuity products measured at estimated fair value. Even when credit spreads do not change, the impact of approximately $569 million and $369 million, respectively.
CRITICAL ACCOUNTING ESTIMATES
Applicationthe nonperformance risk adjustment on fair value will change when the cash flows within the fair value measurement change. The table only reflects the impact of Critical Accounting Estimates
The Company’s MD&A is based upon itschanges in credit spreads on our consolidated financial statements included elsewhere herein and not these other potential changes. In determining the ranges, we have considered current market conditions, as well as the market level of spreads that have been preparedcan reasonably be anticipated over the near term. The ranges do not reflect extreme market conditions such as those experienced during the 2008–2009 Financial Crisis as we do not consider those to be reasonably likely events in accordance with U.S. GAAP. The preparation of these financial statements requires the application of accounting policies that often involve a significant degree of judgment, requiring management to make estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities at the datenear future.
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| | Future policyholders’ benefits and other policyholders’ liabilities
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| | (in billions) |
| 100% increase in AXA Equitable Life’s credit spread | $ | 3.6 |
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| As reported | $ | 5.3 |
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| 50% decrease in AXA Equitable Life’s credit spread | $ | 6.4 |
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See Note 3 of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management, on an ongoing basis, reviews and evaluates the estimates and assumptions used in the preparation of the consolidated financial statements, including those relatedNotes to investments, recognition of insurance income and related expenses, DAC, future policy benefits, recognition of Investment Management revenues and related expenses and benefit plan costs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of such factors form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the consolidated results of operations and financial position as reported in the Consolidated Financial Statements could change significantly.for additional information on our derivatives and hedging programs.
Management believesLitigation Contingencies
We are a party to a number of legal actions and are involved in a number of regulatory investigations. Given the critical accounting policies relatinginherent unpredictability of these matters, it is difficult to estimate the impact on our financial position.
Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. On a quarterly and annual basis, we review relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in our consolidated financial statements included elsewhere herein. See Note 17 of the Notes to the following areas are most dependent on the applicationConsolidated Financial Statements for information regarding our assessment of estimates, assumptions and judgments:litigation contingencies.
Insurance Revenue Recognition
Insurance Reserves and Policyholder Benefits
DAC
Goodwill and Other Intangible Assets
Investment Management Revenue Recognition and Related Expenses
Pension Plans
Share-based Compensation Programs
Investments – Impairments, Valuation Allowances and Fair Value Measurements
Income Taxes
Insurance Revenue Recognition
Profits on non-participating traditional life policies and annuity contracts with life contingencies emerge from the matching of benefits and other expenses against the related premiums. Profits on participating traditional life, universal life and investment-type contracts emerge from the matching of benefits and other expenses against the related contract margins. This matching is accomplished by means of the provision for liabilities for future policy benefits and the deferral, and subsequent amortization, of policy acquisition costs. Trends in the general population and the Company’s own mortality, morbidity, persistency and claims experience have a direct impact on the benefits and expenses reported in any given period.
Insurance Reserves and Policyholder Benefits
Participating Traditional Life Insurance Policies
For participating traditional life policies substantially(substantially all of which are in the Closed Block, future policy benefit liabilities are calculated using a net level premium method accruedBlock), DAC is amortized over the expected total life of the contract group as a level proportionconstant percentage based on the present value of the premium paid by the policyholder. The net level premium method reflects actuarial assumptions equalestimated gross margin amounts expected to guaranteed mortality and dividend fund interest rates. The liability for annual dividends represents the accrual of the annual dividends earned. Terminal dividends are accrued in proportion to gross marginsbe realized over the life of the contract. Gainscontracts using the expected investment yield.
At December 31, 2018, the average investment yields assumed (excluding policy loans) were 4.7% grading to 4.3% in 2024. Estimated gross margins include anticipated premiums and lossesinvestment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization. If
Non-participating Traditional Life Insurance Policies
DAC associated with non-participating traditional life policies are amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earnings (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy.
Universal Life and Investment-type Contracts
DAC associated with certain variable annuity products is amortized based on estimated assessments, with the remainder of variable annuity products, UL and investment-type products amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Account fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated
gross profits or assessments is reflected in net income (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
Quarterly adjustments to the DAC balance are made for current period experience and market performance related adjustments, and the impact of reviews of estimated total gross profits. The quarterly adjustments for current period experience reflect the impact of differences between actual cumulative earningsand previously estimated expected gross profits for a given period. Total estimated gross profits include both actual experience and estimates of gross profits for future periods. To the extent each period’s actual experience differs from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earningsprevious estimate for that period, the policyholder dividend obligationassumed level of total gross profits may change. In these cases, cumulative adjustment to all previous periods’ costs is recognized.
During each accounting period, the DAC balances are evaluated and adjusted with a corresponding charge or credit to current period earnings for the effects of the Company’s actual gross profits and changes in the assumptions regarding estimated future gross profits. A decrease in expected gross profits or assessments would be reduced (but not below zero). Ifaccelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
For the variable and UL policies a significant portion of the gross profits is derived from mortality margins and therefore, are significantly influenced by the mortality assumptions used. Mortality assumptions represent our expected claims experience over the period thelife of these policies and contractsare based on a long-term average of actual company experience. This assumption is updated periodically to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Loss Recognition Testing
After the Closed Block remain in force, the actual cumulative earningsinitial establishment of reserves, loss recognition tests are performed using best estimate assumptions as of the Closed Block are less thantesting date without provisions for adverse deviation. When the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.
Non-participating Traditional Life Policies
Theliabilities for future policy benefit reserves for non-participating traditional life insurance policies relate primarily to non-participating term life products and are calculated using a net level premium method equal tobenefits plus the present value of expected future benefits plusgross premiums for the present value ofaggregate product group are insufficient to provide for expected future maintenance expenses less the present value of future net premiums. The expected futurepolicy benefits and expenses arefor that line of business (i.e., reserves net of any DAC asset), DAC is first written off, and thereafter a premium deficiency reserve is established by a charge to earnings.
In 2018 and 2017, we determined using actuarial assumptions asthat we had a loss recognition in certain of our variable interest-sensitive life insurance products due to mortality, persistencythe release of life reserves and low interest established at policy issue. Reserve assumptions established at policy issue reflect best estimate assumptions based onrates. As of December 31, 2018 and 2017, we wrote off $162 million and $656 million, respectively, of the Company’s experience that, together with interest and expense assumptions, includes a margin for adverse deviation. Mortality assumptions are reviewed annually and are generally based on the Company’s historical experience or standard industry tables, as applicable; expense assumptions are based on current levels of maintenance costs, adjusted for the effects of inflation; and interest rate assumptions are based on current and expected net investment returns.DAC balance through accelerated amortization.
Universal Life and Investment-type Contracts
Policyholders’ accountAdditionally, in certain policyholder liability balances for UL and investment-type contracts are equal to the policy account values. The policy account values represent an accumulationa particular line of gross premium payments plus credited interest, including interest linked to market indices for certain products, less expense and mortality charges and withdrawals.
The Company has issued and continues to offer certain variable annuity products with GMDB, GMIB and GIB features. The GMDB feature provides thatbusiness may not be deficient in the eventaggregate to trigger loss recognition; however, the pattern of an insured’s death,earnings may be such that profits are expected to be recognized in earlier years and then followed by losses in later years. This pattern of profits followed by losses is exhibited in our VISL business and is generated by the beneficiary will receive the highercost structure of the current contract account balanceproduct or another amount definedsecondary guarantees in the contract. The GMIB feature,secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if electedthere is insufficient policy value to cover the monthly deductions and charges. We accrue for these Profits Followed by Losses (“PFBL”) using a dynamic approach that changes over time as the policyholder afterprojection of future losses change.
In addition, we are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. This may result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a stipulated waiting period from contract issuance, guaranteesmanner consistent with the recognition of the unrealized gains and losses on available-for-sale investment securities within the statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of whatloss recognition event, when the contract account value can purchase at then-current annuity purchase rates. This minimum lifetime annuityDAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, which is based on predetermined annuity purchase rates appliedchanges in net unrealized investment (gains) losses, these adjustments may reverse from period to a GMIB base. The GIB feature provides a lifetime annuity based on predetermined annuity purchase rates if and whenperiod. In 2017, due primarily to the contract account value is depleted. This lifetime annuity is based on predetermined annuity purchase rates appliedrelease of life reserves, we recorded an unrealized loss in Other comprehensive income (loss). There was no impact to a GIB base.Net income (loss).
Sensitivity of DAC to Changes in Future Mortality Assumptions
The Company previously issued certain variable annuity products with GWBL, guaranteed minimum withdrawal benefit (“GMWB”) and GMAB features (collectively, “GWBL and other features”). The GWBL feature allowsfollowing table demonstrates the policyholder to withdraw, each year for the lifesensitivity of the contract, a specified annual percentageDAC balance relative to future mortality assumptions by quantifying the adjustments that would be required, assuming an increase and decrease in the future mortality rate by 1.0%. This information considers only the direct effect of an amount basedchanges in the mortality assumptions on the contract’s benefit base. The GMWB feature allowsDAC balance and not changes in any other assumptions used in the policyholder to withdraw at minimum, over the lifemeasurement of the contract, an amount based on the contract’s benefit base. The GMAB feature increases the contract account value at the end of a specified period to a GMAB base.DAC balance and does not assume changes in reserves.
Reserves for GMDB and GMIB obligations are calculated on the basis of actuarial assumptions related to projected benefits and related contract charges generally over the lives of the contracts. The determination of this estimated liability is based on models that involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, contract surrender and withdrawal rates and amounts of withdrawals, mortality experience, and, for contracts with the GMIB feature, GMIB election rates. Assumptions related to contractholder behavior and mortality are updated when a material change in behavior or mortality experience is observed in an interim period.DAC Sensitivity - Mortality
The Structured Capital StrategiesDecember 31, 2018® (��SCS”) variable annuity, Structured Investment Option in the EQUI-VEST® variable annuity series (“SIO”), Market Stabilizer Option® (“MSO”) in the variable life insurance products and Indexed Universal Life (“IUL”) insurance products, GIB and GWBL and other features are accounted for as embedded derivatives, with fair values calculated as the present value of future expected benefit payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature. The determination of the fair value for the GIB and GWBL and other features is based upon models involving numerous estimates and subjective judgments.
|
| | | |
| | Increase/(Decrease) in DAC |
| | (in millions) |
| Decrease in future mortality by 1% | $ | 20 |
|
| Increase in future mortality by 1% | $ | (20 | ) |
Sensitivity of DAC to Changes in Future Rate of Return Assumptions
A significant assumption in the amortization of DAC on GMDB/GMIB Reserves
Thevariable annuity products and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future rate of returnSeparate Accounts performance. Management sets estimated future gross profit or assessment assumptions used in establishing reserves for GMDB and GMIB features regardingrelated to Separate Account performance used for purposes of this calculation are set using a long-term view of expected average market returns by applying a Reversion to the Mean (“RTM”) approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. In second quarter 2015, based upon management’s then-current expectations of interest rates and future fund growth, we updated our reversion to the mean approach, consistent with that used for DAC amortization. For additional information regarding theassumption from 9.0% to 7.0%. The average gross long-term return measurement start date was also updated to December 31, 2014. Management has set limitations as to maximum and minimum future expected rate of return assumptions, andas well as a limitation on the reversion to the mean approach, see, “—DAC”.
The GMDB/GMIB reserve balance before reinsurance ceded was $7.2 billion atduration of use of these maximum or minimum rates of return. At December 31, 2016. 2018, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuity products was 7.0% (4.7% net of product weighted average Separate Accounts fees), and 0.0% (2.3)% net of product weighted average Separate Account fees), respectively. The maximum duration over which these rate limitations may be applied is five years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than five years in order to reach the average gross long-term return estimate, the application of the five-year maximum duration limitation would result in an acceleration of DAC amortization. Conversely, actual market returns resulting in assumed future market returns of 0.0% for more than five years would result in a required deceleration of DAC amortization. At December 31, 2018, current projections of future average gross market returns assume a 1.6% annualized return for the next two quarters, followed by 7.0% thereafter. Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
The following table provides an example of the sensitivity of the reserves for GMDB and GMIB features related toDAC balance of variable annuity policiesproducts and variable and interest-sensitive life insurance relative to the future rate of return assumptions by quantifying the adjustments to these reservesthe DAC balance that would be required assuming both a 100 basis point (“BP”)an increase and decrease in the future rate of return.return by 1.0%. This sensitivityinformation considers only the direct effect of changes in the future Separate Accounts rate of return on operating results due to the change in the reserve balance before reinsurance ceded and not changes in any other assumptions such as persistency, mortality, or expenses includedused in the evaluationmeasurement of the reserves, or any changes on DAC or other balances including hedging derivatives and the GMIB reinsurance asset.balance.
GMDB/GMIB Reserves
DAC Sensitivity - Rate of Return
December 31, 20162018
|
| | | |
| | Increase/(Reduction) in GMDB/GMIB Reserves |
| | (In Millions) |
| 100 BP decrease in future rate of return | $ | 1,113 |
|
| 100 BP increase in future rate of return | (706 | ) |
|
| | | |
| | Increase/(Decrease) in DAC |
| | (in millions) |
| Decrease in future rate of return by 1% | $ | (97 | ) |
| Increase in future rate of return by 1% | $ | 121 |
|
Traditional AnnuitiesEstimated Fair Value of Investments
The reservesCompany’s investment portfolio principally consists of public and private fixed maturities, mortgage loans, equity securities and derivative financial instruments, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options used to manage various risks relating to its business operations.
Fair Value Measurements
Investments reported at fair value in the consolidated balance sheets of the Company include fixed maturity securities classified as available-for-sale, equity and trading securities and certain other invested assets, such as freestanding derivatives. In addition, reinsurance contracts covering GMIB exposure and the liabilities in the SCS variable annuity products, SIO in the EQUI-VEST variable annuity product series, MSO in the variable life insurance products, IUL insurance products and the GMAB, GIB, GMWB and GWBL feature in certain variable annuity products issued by the Company are considered embedded derivatives and reported at fair value.
When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable; these generally are the most liquid holdings and their valuation does not involve management judgment. When quoted prices in active markets are not available, we estimate fair value based on market standard valuation methodologies. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment. For securities with reasonable price transparency, the significant inputs to these valuation methodologies either are observable in the market or can be derived principally from or corroborated by observable market data. When the volume or level of activity results in little or no price transparency, significant inputs no longer can be supported by reference to market observable data but instead must be based on management’s estimation and judgment. Substantially the same approach is used by us to measure the fair values of freestanding and embedded derivatives with exception for consideration of the effects of master netting agreements and collateral arrangements as well as incremental value or risk ascribed to changes in own or counterparty credit risk.
As required by the accounting guidance, we categorize our assets and liabilities measured at fair value into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique, giving the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). For additional information regarding the key estimates and assumptions surrounding the determinations of fair value measurements, see Note 7 of the Notes to the Consolidated Financial Statements.
Impairments and Valuation Allowances
The assessment of whether OTTIs have occurred is performed quarterly by our Investments Under Surveillance (“IUS”) Committee, with the assistance of its investment advisors, on a security-by-security basis for each available-for-sale fixed maturity that has experienced a decline in fair value for purpose of evaluating the underlying reasons. The analysis begins with a review of gross unrealized losses by the following categories of securities: (i) all investment grade and below investment grade fixed maturities for which fair value has declined and remained below amortized cost by 20% or more and (ii) below-investment-grade fixed maturities for which fair value has declined and remained below amortized cost for a period greater than 12 months. Integral to the analysis is an assessment of various indicators of credit deterioration to determine whether the investment security is expected to recover, including, but not limited to, consideration of the duration and severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity, and continued viability of the
issuer and, for equity securities only, the intent and ability to hold the investment until recovery, resulting in identification of specific securities for which OTTI is recognized.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting OTTI is recognized in earnings and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future policy benefits for annuitiescash flows at the effective interest rate implicit in the debt security at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage- and asset-backed securities, projected future cash flows also include group pensionassumptions regarding prepayments and payout annuities,underlying collateral value.
Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and during the accumulation period,valuation allowances. Valuation allowances are equal to accumulated contractholders’ fund balances and, after annuitization, are equal tobased on the present value of expected future cash flows discounted at the loan’s original effective interest rate or on its collateral value if the loan is collateral dependent. However, if foreclosure is or becomes probable, the collateral value measurement method is used.
For commercial and agricultural mortgage loans, an allowance for credit loss is typically recommended when management believes it is probable that principal and interest will not be collected according to the contractual terms. Factors that influence management’s judgment in determining allowance for credit losses include the following:
Loan-to-value ratio— Derived from current loan balance divided by the fair market value of the property. An allowance for credit loss is typically recommended when the loan-to-value ratio is in excess of 100%. In the case where the loan-to-value is in excess of 100%, the allowance for credit loss is derived by taking the difference between the fair market value (less cost of sale) and the current loan balance.
Debt service coverage ratio—Derived from actual operating earnings divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt.
Occupancy—Criteria vary by property type but low or below market occupancy is an indicator of sub-par property performance.
Lease expirations—The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor.
Maturity—Mortgage loans that are not fully amortizing and have upcoming maturities within the next 12 to 24 months are monitored in conjunction with the capital markets to determine the borrower’s ability to refinance the debt and/or pay off the balloon balance.
Borrower/tenant related issues—Financial concerns, potential bankruptcy, or words or actions that indicate imminent default or abandonment of property.
Payment status - current vs. delinquent—A history of delinquent payments may be a cause for concern.
Property condition—Significant deferred maintenance observed during the lenders annual site inspections.
Other—Any other factors such as current economic conditions may call into question the performance of the loan.
Mortgage loans also are individually evaluated quarterly by the IUS Committee for impairment on a loan-by-loan basis, including an assessment of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages also is identified, consisting of mortgage loans not currently classified as problems but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
For problem mortgage loans a valuation allowance is established to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for loans determined to be non-performing as a result of the loan review process. A non-performing loan is defined as a loan for which it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan specific portion of the loss allowance is based on assumptions as to mortality, retirement, maintenance expense, and interest rates. Interest rates used in establishing such liabilities range from 1.6% to 5.5% (weighted average of 4.3%). If reserves determined based on these assumptions are greater than the existing reserves, the existing reserves are adjusted to the greater amount.our
For reinsurance contracts other than those covering GMIB exposure, reinsurance recoverable balancesassessment as to ultimate collectability of loan principal and interest. Valuation allowances for a non-performing loan are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities. GMIB reinsurance contracts are used to cede affiliated and non-affiliated reinsurers a portion of the exposure on variable annuity products that offer the GMIB feature. The GMIB reinsurance contracts are accounted for as derivatives and are reported at fair value. Gross reserves for GMIB,recorded based on the other hand, are calculated onpresent value of expected future cash flows discounted at the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts, therefore, will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market and/orloan’s effective interest rate fluctuations that cause gains or lossesbased on the fair value of the GMIB reinsurance contracts.collateral if the loan is collateral dependent. The valuation allowance for mortgage loans can increase or decrease from period to period based on such factors.
Health
Individual health benefit liabilitiesImpaired mortgage loans without provision for active liveslosses are estimated usingmortgage loans where the fair value of the collateral or the net level premiumpresent value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on mortgage loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on mortgage loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows. Changes in the present value attributable to changes in the amount or timing of expected cash flows are reported as investment gains or losses.
Mortgage loans are placed on nonaccrual status once management believes the collection of accrued interest is doubtful. Once mortgage loans are classified as nonaccrual mortgage loans, interest income is recognized under the cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan on real estate has been restructured to where the collection of interest is considered likely.
See Notes 2 and 3 of the Notes to the Consolidated Financial Statements for additional information relating to our determination of the amount of allowances and impairments.
Derivatives
We use freestanding derivative instruments to hedge various capital market risks in our products, including: (i) certain guarantees, some of which are reported as embedded derivatives; (ii) current or future changes in the fair value of our assets and liabilities; and (iii) current or future changes in cash flows. All derivatives, whether freestanding or embedded, are required to be carried on the balance sheet at fair value with changes reflected in either net income (loss) or in other comprehensive income, depending on the type of hedge. Below is a summary of critical accounting estimates by type of derivative.
Freestanding Derivatives
The determination of the estimated fair value of freestanding derivatives, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. See Note 7 of the Notes to the Consolidated Financial Statements for additional details on significant inputs into the OTC derivative pricing models and credit risk adjustment.
Embedded Derivatives
We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net derivative gains (losses). We also have assumed from an affiliate the risk associated with certain guaranteed minimum benefits, which are accounted for as to future morbidity, withdrawals and interest. Benefit liabilities for disabled livesembedded derivatives measured at estimated fair value. The estimated fair values of these embedded derivatives are estimated usingdetermined based on the present value of projected future benefits methodminus the present value of projected future fees attributable to the guarantee. The projections of future benefits and experiencefuture fees require capital markets and actuarial assumptions, including expectations concerning policyholder behavior. A risk-neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates.
Market conditions, including, but not limited to, changes in interest rates, equity indices, market volatility and variations in actuarial assumptions, including policyholder behavior, mortality and risk margins related to non-capital market inputs, as well as changes in our nonperformance risk adjustment may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income. Changes to claim terminations, expensesactuarial assumptions, principally related to contract holder behavior such as annuitization utilization and interest.
DACwithdrawals associated with GMIB riders, can result in a change of expected future cash outflows of a guarantee between the accrual-based model for insurance liabilities and the fair-value based model for embedded derivatives. See Note 2 of the Notes to the Consolidated Financial Statements for additional information relating to the determination of the accounting model. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the
uncertainties in certain actuarial assumptions. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees.
With respect to assumptions regarding policyholder behavior, we have recorded charges, and in some cases benefits, in prior years as a result of the availability of sufficient and credible data at the conclusion of each review.
We ceded the risk associated with certain of the variable annuity products with GMxB features described in the preceding paragraphs. The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that varydescribed previously for the guarantees directly written by us with the exception of the input for nonperformance risk that reflects the credit of the reinsurer. However, because certain of the reinsured guarantees do not meet the definition of an embedded derivative and, thus are primarilynot accounted for at fair value, significant fluctuations in net income may occur when the change in the fair value of the reinsurance recoverable is recorded in net income without a corresponding and offsetting change in fair value of the directly written guaranteed liability.
Nonperformance Risk Adjustment
The valuation of our embedded derivatives includes an adjustment for the risk that we fail to satisfy our obligations, which we refer to as our nonperformance risk. The nonperformance risk adjustment, which is captured as a spread over the risk-free rate in determining the discount rate to discount the cash flows of the liability, is determined by taking into consideration publicly available information relating to spreads on corporate bonds in the secondary market comparable to AXA Equitable Life’s financial strength rating.
The table below illustrates the impact that a range of reasonably likely variances in credit spreads would have on our consolidated balance sheet, excluding the effect of income tax, related to the acquisitionembedded derivative valuation on certain variable annuity products measured at estimated fair value. Even when credit spreads do not change, the impact of newthe nonperformance risk adjustment on fair value will change when the cash flows within the fair value measurement change. The table only reflects the impact of changes in credit spreads on our consolidated financial statements included elsewhere herein and renewal insurance business, reflecting incremental direct costs of contract acquisition with independent third parties or employees that are essential tonot these other potential changes. In determining the contract transaction,ranges, we have considered current market conditions, as well as the portionmarket level of employee compensation, including payroll fringe benefits and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts including commissions, underwriting, agency and policy issue expenses, are deferred. Depending on the type of contract, DAC is amortizedspreads that can reasonably be anticipated over the expected total lifenear term. The ranges do not reflect extreme market conditions such as those experienced during the 2008–2009 Financial Crisis as we do not consider those to be reasonably likely events in the near future.
|
| | | |
| | Future policyholders’ benefits and other policyholders’ liabilities
|
| | (in billions) |
| 100% increase in AXA Equitable Life’s credit spread | $ | 3.6 |
|
| As reported | $ | 5.3 |
|
| 50% decrease in AXA Equitable Life’s credit spread | $ | 6.4 |
|
See Note 3 of the contract group, basedNotes to the Consolidated Financial Statements for additional information on our derivatives and hedging programs.
Litigation Contingencies
We are a party to a number of legal actions and are involved in a number of regulatory investigations. Given the Company’s estimatesinherent unpredictability of these matters, it is difficult to estimate the impact on our financial position.
Liabilities are established when it is probable that a loss has been incurred and the amount of the levelloss can be reasonably estimated. On a quarterly and timing of gross margins, gross profits or assessments, or anticipated premiums. In calculating DAC amortization, management is requiredannual basis, we review relevant information with respect to make assumptions about investment results including hedging costs, Separate Account performance, Separate Account fees, mortalityliabilities for litigation, regulatory investigations and expense margins, lapse rates and anticipated surrender charges that impact the estimateslitigation-related contingencies to be reflected in our consolidated financial statements included elsewhere herein. See Note 17 of the level and timingNotes to the Consolidated Financial Statements for information regarding our assessment of estimated gross profits or assessments, margins and anticipated future experience. DAC is subject to loss recognition testing at the end of each accounting period.litigation contingencies.
Participating Traditional Life Policies
For participating traditional life policies (substantially all of which are in the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield.
At December 31, 2016,2018, the average rate of assumed investment yields excludingassumed (excluding policy loans, wasloans) were 4.7% grading to 4.3% over 7 years.in 2024. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to accumulated other comprehensive income (loss) (“AOCI”)AOCI in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
Non-participating Traditional Life Insurance Policies
DAC associated with non-participating traditional life policies isare amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earnings (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy.
Universal Life and Investment-type Contracts
DAC associated with certain variable annuity products is amortized based on estimated assessments, with the remainder of variable annuities,annuity products, UL and investment-type products amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Account fees, mortality and expense margins and
surrender charges based on historical and anticipated future experience, updated at the end of each accounting period.Whenperiod. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated
gross profits or assessments is reflected in earningsnet income (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
Quarterly adjustments to the DAC balance are made for current period experience and market performance related adjustments, and the impact of reviews of estimated total gross profits. The quarterly adjustments for current period experience reflect the impact of differences between actual and previously estimated expected gross profits for a given period. Total estimated gross profits include both actual experience and estimates of gross profits for future periods. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, cumulative adjustment to all previous periods’ costs is recognized.
During each accounting period, the DAC balances are evaluated and adjusted with a corresponding charge or credit to current period earnings for the effects of the Company’s actual gross profits and changes in the assumptions regarding estimated future gross profits. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
For the variable and UL policies a significant portion of the gross profits is derived from mortality margins and therefore, are significantly influenced by the mortality assumptions used. Mortality assumptions represent the Company’sour expected claims experience over the life of these policies and are based on a long-term average of actual company experience. This assumption is updated quarterlyperiodically to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Premium Deficiency Reserves and Loss Recognition TestsTesting
After the initial establishment of reserves, premium deficiency and loss recognition tests are performed using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC wouldis first be written off, and thereafter if required, a premium deficiency reserve would beis established by a charge to earnings.
In 2018 and 2017, we determined that we had a loss recognition in certain of our variable interest-sensitive life insurance products due to the release of life reserves and low interest rates. As of December 31, 2018 and 2017, we wrote off $162 million and $656 million, respectively, of the DAC balance through accelerated amortization.
Additionally, in certain policyholder liability balances for a particular line of business may not be deficient in the aggregate to trigger loss recognition; however, the pattern of earnings may be such that profits are expected to be recognized in earlier years and then followed by losses in later years. This pattern of profits followed by losses is exhibited in our VISL business and is generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. We accrue for these Profits Followed by Losses (“PFBL”) using a dynamic approach that changes over time as the projection of future losses change.
In addition, we are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. This may result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on available-for-sale investment securities within the statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, which is based on changes in net unrealized investment (gains) losses, these adjustments may reverse from period to period. In 2017, due primarily to the release of life reserves, we recorded an unrealized loss in Other comprehensive income (loss). There was no impact to Net income (loss).
Sensitivity of DAC to Changes in Future Mortality Assumptions
The variable and UL policies DAC balance was $1.8 billion at December 31, 2016. The following table demonstrates the sensitivity of the DAC balance relative to future mortality assumptions by quantifying the adjustments that would be required, assuming an increase and decrease in the future mortality rate by 1.0%. This information considers only the direct effect of changes in the mortality assumptions on the DAC balance and not changes in any other assumptions used in the measurement of the DAC balance and does not assume changes in reserves.
DAC Sensitivity - Mortality
December 31, 20162018
| | | | Increase/(Reduction) in DAC | Increase/(Decrease) in DAC |
| | (In Millions) | (in millions) |
| Decrease in future mortality by 1% | $ | 41 |
| $ | 20 |
|
| Increase in future mortality by 1% | (35 | ) | $ | (20 | ) |
Sensitivity of DAC to Changes in Future Rate of Return Assumptions
A significant assumption in the amortization of DAC on variable annuitiesannuity products and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future Separate AccountAccounts performance. Management sets estimated future gross profit or assessment assumptions related to Separate Account performance using a long-term view of expected average market returns by
applying a reversionReversion to the meanMean (“RTM”) approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. In second quarter 2015, based upon management’s currentthen-current expectations of interest rates and future fund growth, we updated our reversion to the Company updated its RTMmean assumption from 9.0% to 7.0%. The average gross long-term return measurement start date was also updated to December 31, 2014. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At December 31, 2016,2018, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuitiesannuity products was 7.0% (4.67%(4.7% net of product weighted average Separate AccountAccounts fees), and the gross maximum and minimum short-term annual rate of return limitations were 15.0% (12.67% net of product weighted average Separate Account fees) and 0.0% (-2.33%(2.3)% net of product weighted average Separate Account fees), respectively. The maximum duration over which these rate limitations may be applied is 5five years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than 5five years in order to reach the average gross long-term return estimate, the application of the 5 yearfive-year maximum duration limitation would result in an acceleration of DAC amortization. Conversely, actual market returns resulting in assumed future market returns of 0.0% for more than 5five years would result in a required deceleration of DAC amortization. At December 31, 2016,2018, current projections of future average gross market returns assume a 15.0%1.6% annualized return for the next two quarters, grading to a reversion to the mean offollowed by 7.0% in five quarters.
thereafter. Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
The variable annuity contracts DAC balance was $2.0 billion at December 31, 2016. The following table provides an example of the sensitivity of the DAC balance of variable annuity products and variable and interest-sensitive life insurance relative to future return assumptions by quantifying the adjustments to the DAC balance that would be required assuming both an increase and decrease in the future rate of return by 1.0%. This information considers only the effect of changes in the future Separate AccountAccounts rate of return and not changes in any other assumptions used in the measurement of the DAC balance.
DAC Sensitivity - Rate of Return
|
| | | |
| | Increase/(Reduction) in DAC |
| | (In Millions) |
| Decrease in future rate of return by 1% | $ | (86 | ) |
| Increase in future rate of return by 1% | 100 |
|
Goodwill and Other Intangible Assets
Goodwill recognized in the Company’s consolidated balance sheet at December 31, 2016 was $3.7 billion, solely related to the Investment Management segment and arising primarily from AB’s acquisition of SCB Inc. (the "Bernstein Acquisition") and purchases of AB Units. The Company tests goodwill for recoverability on an annual basis as of December 31 each year and at interim periods if events occur or circumstances change that would indicate the potential for impairment. The test requires a comparison of the fair value of the Investment Management segment to its carrying amount, including goodwill. If this comparison results in a shortfall of fair value, the impairment loss would be calculated as the excess of recorded goodwill over its implied fair value, the latter measure requiring application of business combination purchase accounting guidance to determine the fair value of all individual assets and liabilities of the reporting unit. Any impairment loss would reduce the recorded amount of goodwill with a corresponding charge to earnings.
The remaining useful lives of intangible assets being amortized are evaluated each period to determine whether events and circumstances warrant their revision. All intangible assets are periodically reviewed for impairment if events or circumstances indicate that the carrying value may not be recoverable. If the carrying value exceeds fair value, additional impairment tests are
performed to measure the amount of the impairment loss, if any, to be charged to earnings with a corresponding reduction of the carrying value of the intangible asset.
Investment Management
The Company primarily uses a discounted cash flow valuation technique to measure the fair value of its Investment Management reporting unit for purpose of goodwill impairment testing. Market transactions and metrics, including the market capitalization of AB and implied pricing of comparable companies, are used to corroborate the resulting fair value measure. Cash flow projections used by the Company in the discounted cash flow valuation technique are based on AB’s current four-year business plan, which factors in current market conditions and all material events that have impacted, or that management believes at the time could potentially impact, future expected cash flows, and a declining annual growth rate thereafter. The resulting present value amount, net of noncontrolling interest, is tax-effected to reflect taxes incurred at the Company level.
Key assumptions and judgments applied by management in the context of the Company’s goodwill impairment testing are particularly sensitive to equity market levels, including AB’s assets under management, revenues and profitability. Other risks to which the business of AB is subject, including, but not limited to, retention of investment management contracts, selling and distribution agreements, and existing relationships with clients and various financial intermediaries, could negatively impact future cash flow projections used in the discounted cash flow technique. Significant or prolonged weakness in the financial markets and the economy generally would adversely impact the goodwill impairment testing for the Company’s Investment Management reporting unit. Similarly, significant or prolonged downward pressure on the market capitalization of AB relative to its carrying value likely would increase the frequency of goodwill impairment testing by AXA Equitable for its Investment Management reporting unit.
The Company annually tests goodwill for recoverability at December 31. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of its investment in AB, the reporting unit, to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered to be impaired and the second step of the impairment test is not performed. However, if the carrying value of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed by measuring the amount of impairment loss only if the result indicates a potential impairment. The second step compares the implied fair value of the reporting unit to the aggregated fair values of its individual assets and liabilities to determine the amount of impairment, if any. The Company also assesses this goodwill for recoverability at each interim reporting period in consideration of facts and circumstances that may indicate a shortfall of the fair value of its investment in AB as compared to its carrying value and thereby require re-performance of its annual impairment testing.
Intangible assets related to the Investment Management segment principally relate to the Bernstein Acquisition and purchases of AB Units and include values assigned to investment management contracts acquired based on their estimated fair values at the time of purchase, less accumulated amortization generally recognized on a straight-line basis over their estimated useful life of approximately 20 years. The gross carrying amount and accumulated amortization of these intangible assets were $625 million and $468 million, respectively, at December 31, 2016 and $610 million and $439 million, respectively, at December 31, 2015. Amortization expense related to these intangible assets totaled $29 million, $28 million and $27 million for the years ended December 31, 2016, 2015 and 2014, respectively, and estimated amortization expense for each of the next 5 years is expected to be approximately $29 million.
Investment Management Revenue Recognition and Related Expenses
The Investment Management segment’s revenues are largely dependent on the total value and composition of AUM. The most significant factors that could affect this segment’s results include, but are not limited to, the performance of the financial markets and the investment performance and composition of sponsored investment products and separately managed accounts.
Investment advisory and services fees, generally calculated as a percentage of AUM are recorded as the related services are performed. Certain investment advisory contracts, including those associated with hedge funds, provide for a performance-based fee, in addition to or in lieu of a base fee. Performance fees are calculated as either a percentage of absolute investment results or a percentage of investment results in excess of a stated benchmark over a specified period of time. Performance-based fees are recorded as revenue at the end of the specified period and will generally be higher in favorable markets and lower in unfavorable markets, which may increase the volatility of the segment’s revenues and earnings.
Commissions paid to financial intermediaries in connection with the sale of shares of open-end mutual funds sold without a front-end sales charge are capitalized as deferred sales commissions and are amortized over periods not exceeding five and one-half years, the periods of time during which the deferred sales commissions are generally recovered from distribution fees received from those funds and from contingent deferred sales commissions received from shareholders of those funds upon redemption of
their shares. The recoverability of these commissions is estimated based on management’s assessment of these future revenue flows.
Pension Plans
AXA Equitable sponsors the AXA Equitable 401(k) Plan, a qualified defined contribution plan for eligible employees and financial professionals. The plan provides for both a company contribution and a discretionary profit-sharing contribution.
AXA Equitable also sponsors the AXA Equitable Retirement Plan (the “AXA Equitable QP”), a frozen qualified defined benefit pension plan covering its eligible employees (including certain qualified part-time employees) and financial professionals. This pension plan is non-contributory and its benefits are generally based on a cash balance formula and/or, for certain participants, years of service and average earnings over a specified period in the plan.
Effective December 31, 2015, primary liability for the obligations of AXA Equitable under the AXA Equitable QP was transferred from AXA Equitable to AXA Financial under the terms of an Assumption Agreement (the “Assumption Transaction”). Immediately preceding the Assumption Transaction, the AXA Equitable QP had plan assets (held in a trust for the exclusive benefit of plan participants) with market value of approximately $2.2 billion and liabilities of approximately $2.4 billion. The assumption by AXA Financial and resulting extinguishment of AXA Equitable’s primary liability for its obligations under the AXA Equitable QP was recognized by AXA Equitable as a capital contribution in the amount of $211 million ($137 million, net of tax), reflecting the non-cash settlement of its net unfunded liability for the AXA Equitable QP at December 31, 2015. In addition, approximately $1.2 billion ($772 million, net of tax) unrecognized net actuarial losses related to the AXA Equitable QP and accumulated in AOCI were also transferred to AXA Financial due to the Assumption Transaction. AXA Equitable remains secondarily liable for its obligations under the AXA Equitable QP and would recognize such liability in the event AXA Financial does not perform under the terms of the Assumption Agreement.
AXA Financial has also legally assumed primary liability from AXA Equitable for all current and future liabilities of AXA Equitable under certain employee benefit plans that provide participants with medical, life insurance, and deferred compensation benefits; AXA Equitable remains secondarily liable. AXA Equitable reimburses AXA Financial, Inc. for costs associated with all of these plans, as described in Note 11 of Notes to the Consolidated Financial Statements, included herein.
AB maintains the Profit Sharing Plan for Employees of AB, a tax-qualified retirement plan for U.S. employees. Employer contributions under this plan are discretionary and generally are limited to the amount deductible for Federal income tax purposes.
AB also maintains a qualified, non-contributory, defined benefit retirement plan covering current and former employees who were employed by AB in the United States prior to October 2, 2000. AB’s benefits are based on years of credited service and average final base salary.
For 2016, 2015 and 2014, respectively, the Company recognized net periodic cost of $2 million, $53 million and $73 million related to its qualified pension plans. Net periodic pension benefits cost is based on the Company’s best estimate of long-term actuarial (including mortality) and investment return assumptions and consider, as appropriate, an assumed discount rate, an expected rate of return on plan assets, inflation costs, expected increases in compensation levels and trends in health care costs. Mortality experience had biggest impact over last couple of years. Actual experience different from that assumed generally is recognized prospectively over future periods; however, significant variances could result in immediate recognition of net periodic cost or benefit if they exceed certain prescribed thresholds or in conjunction with a reconsideration of the related assumptions.
The discount rate assumptions used by AXA Equitable to measure the benefits obligations and related net periodic cost of the AXA Equitable QP reflected the rates at which those benefits could be effectively settled. Projected nominal cash outflows to fund expected annual benefits payments under the AXA Equitable QP were discounted using a published high-quality bond yield curve for which AXA Equitable replaced its reference to the Citigroup-AA curve with the Citigroup Above-Median-AA curve beginning in 2014, thereby reducing the PBO of AXA Equitable’s qualified pension plan and the related charge to equity to adjust the funded status of the plan by $25 million in 2014. At December 31, 2015, AXA Equitable refined its calculation of the discount rate to use the discrete single equivalent discount rate for each plan as compared to its previous use of an aggregate, weighted average practical expedient. Use of the discrete approach at December 31, 2015 produced a discount rate for the AXA Equitable QP of 3.98% as compared to a 4.00% aggregate rate, thereby increasing the net unfunded PBO of the AXA Equitable QP immediately preceding the Assumption Transaction by approximately $4 million in 2015.
In fourth quarter 2015, the Society of Actuaries (SOA) released MP-2015, an update to the mortality projection scale for pension plans issued last year by the SOA, indicating that while mortality data continued to show longer lives, longevity was increasing at a slower rate and lagging behind that previously suggested. For the year ended December 31, 2015, valuations of its defined
benefits plans, AXA Equitable considered this new data as well as observations made from current practice regarding how best to estimate improved trends in life expectancies. As a result, AXA Equitable concluded to change the mortality projection scale used to measure and report its defined benefit obligations from 125% Scale AA to Scale BB, representing a reasonable “fit” to the results of the AXA Equitable QP mortality experience study and more aligned to current thinking in practice with respect to projections of mortality improvements. Adoption of that change increased the net unfunded PBO of the AXA Equitable QP immediately preceding the Assumption Transaction by approximately $83 million. At December 31, 2014, AXA Equitable modified its then-current use of Scale AA by adopting 125% Scale AA and introduced additional refinements to its projection of assumed mortality, including use of a full generational approach, thereby increasing the year-end 2014 valuation of the AXA Equitable QP PBO by approximately $54 million.
The following table discloses assumptions used to measure the Company’s pension benefit obligations and net periodic pension cost at and for the years ended December 31, 2016 and 2015. As described above, AXA Equitable refined its calculation of the discount rate for the year ended December 31, 2015 valuation of its defined benefits plans to use the discrete single equivalent discount rate for each plan as compared to its previous use of an aggregate, weighted average practical expedient.
|
| | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Discount rates: | | | |
| Benefit obligations: | | | |
| AXA Equitable QP, immediately preceding Transfer to AXA Financial | N/A |
| | 3.98 | % |
| Other AXA Equitable defined benefit plans | 3.48 | % | | 3.66 | % |
| AB Qualified Retirement Plan | 4.75 | % | | 4.3 | % |
| Periodic cost | 3.7 | % | | 3.6 | % |
| Rates of compensation increase: | | | |
| Benefit obligation | N/A |
| | 6.00 | % |
| Periodic cost | N/A |
| | 6.46 | % |
| Expected long-term rates of return on pension plan assets (periodic cost) | 6.5 | % | | 6.75 | % |
|
| | | |
| | Increase/(Decrease) in DAC |
| | (in millions) |
| Decrease in future rate of return by 1% | $ | (97 | ) |
| Increase in future rate of return by 1% | $ | 121 |
|
Note 12 of Notes to Consolidated Financial Statements, included elsewhere herein, describes the respective funding policies of AB to its qualified pension plans, AB currently estimates it will contribute $4 million to the AB retirement plan in 2017 . Contribution estimates, which are subject to change, are based on regulatory requirements, future market conditions, and assumptions used for actuarial computations of the plans’ obligations and assets.
Share-based Compensation Programs
As further described in Note 13 of Notes to Consolidated Financial Statements, included elsewhere herein, AXA and AXA Financial sponsor various share-based compensation plans for eligible employees and financial professionals of AXA Financial and its subsidiaries, including the Company. AB also sponsors its own unit option plans for certain of its employees. For 2016, 2015, and 2014, respectively, the Company recognized compensation costs of $187 million, $211 million and $192 million for share-based payment arrangements. Compensation expense related to these awards is measured based on the estimated fair value of the equity instruments issued or the liabilities incurred. The Company uses the Black-Scholes option valuation model to determine the grant-date fair values of equity share/unit option awards and similar instruments, requiring assumptions with respect to the expected term of the award, expected price volatility of the underlying share/unit, and expected dividends. These assumptions are significant factors in the resulting measure of fair value recognized over the vesting period and require use of management judgment as to likely future conditions, including employee exercise behavior, as well as consideration of historical and market observable data.
Investments – Impairments, Valuation Allowances andEstimated Fair Value Measurementsof Investments
The Company’s investment portfolio principally consists of public and private fixed maturities, mortgage loans, equity securities and derivative financial instruments, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options used to manage various risks relating to its business operations.
Fair Value Measurements
Investments reported at fair value in the consolidated balance sheets of the Company include fixed maturity securities classified as available-for-sale, equity and trading securities and certain other invested assets, such as freestanding derivatives. In applyingaddition, reinsurance contracts covering GMIB exposure and the Company’s accounting policiesliabilities in the SCS variable annuity products, SIO in the EQUI-VEST variable annuity product series, MSO in the variable life insurance products, IUL insurance products and the GMAB, GIB, GMWB and GWBL feature in certain variable annuity products issued by the Company are considered embedded derivatives and reported at fair value.
When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable; these generally are the most liquid holdings and their valuation does not involve management judgment. When quoted prices in active markets are not available, we estimate fair value based on market standard valuation methodologies. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with respectthe credit quality and duration of the investment. For securities with reasonable price transparency, the significant inputs to these investments, estimates, assumptions, and judgmentsvaluation methodologies either are required about matters that are inherently uncertain, particularlyobservable in the identificationmarket or can be derived principally from or corroborated by observable market data. When the volume or level of activity results in little or no price transparency, significant inputs no longer can be supported by reference to market observable data but instead must be based on management’s estimation and recognitionjudgment. Substantially the same approach is used by us to measure the fair values of OTTI, determinationfreestanding and embedded derivatives with exception for consideration of the effects of master netting agreements and collateral arrangements as well as incremental value or risk ascribed to changes in own or counterparty credit risk.
As required by the accounting guidance, we categorize our assets and liabilities measured at fair value into a three-level hierarchy, based on the priority of the inputs to the respective valuation allowancetechnique, giving the highest priority to quoted prices in active markets for losses on mortgage loans,identical assets and measurementsliabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). For additional information regarding the key estimates and assumptions surrounding the determinations of fair value.value measurements, see Note 7 of the Notes to the Consolidated Financial Statements.
ImpairmentsBenefits and Valuation AllowancesOther Deductions
Our primary expenses are:
policyholders’ benefits and interest credited to policyholders’ account balances;
sales commissions and compensation paid to intermediaries and advisors that distribute our products and services; and
compensation and benefits provided to our employees and other operating expenses.
Policyholders’ benefits are driven primarily by mortality, customer withdrawals and benefits which change in response to changes in capital market conditions. In addition, some of our policyholders’ benefits are directly tied to the AV and benefit base of our variable annuity products. Interest credited to policyholders varies in relation to the amount of the underlying AV or benefit base. Sales commissions and compensation paid to intermediaries and advisors vary in relation to premium and fee income generated from these sources, whereas compensation and benefits to our employees are more constant and impacted by market wages, and decline with increases in efficiency. Our ability to manage these expenses across various economic cycles and products is critical to the profitability of our company.
Net Income Volatility
We have offered and continue to offer variable annuity products with variable annuity guaranteed benefits (“GMxB”) features. The future claims exposure on these features is sensitive to movements in the equity markets and interest rates. Accordingly, we have implemented hedging and reinsurance programs designed to mitigate the economic exposure to us from these features due to equity market and interest rate movements. Changes in the values of the derivatives associated with these programs due to equity market and interest rate movements are recognized in the periods in which they occur while corresponding changes in offsetting liabilities are recognized over time. This results in net income volatility as further described below. See “—Significant Factors Impacting Our Results—Impact of Hedging and GMIB Reinsurance on Results.”
In addition to our dynamic hedging strategy, we have recently implemented static hedge positions designed to mitigate the adverse impact of changing market conditions on our statutory capital. We believe this program will continue to preserve the economic value of our variable annuity contracts and better protect our target variable annuity asset level. However, these new static hedge positions increase the size of our derivative positions and may result in higher net income volatility on a period-over-period basis.
Significant Factors Impacting Our Results
The assessmentfollowing significant factors have impacted, and may in the future impact, our financial condition, results of whether OTTIsoperations or cash flows.
Impact of Hedging and GMIB Reinsurance on Results
We have occurredoffered and continue to offer variable annuity products with GMxB features. The future claims exposure on these features is performed quarterlysensitive to movements in the equity markets and interest rates. Accordingly, we have implemented hedging and reinsurance programs designed to mitigate the economic exposure to us from these features due to equity market and interest rate movements. These programs include:
Variable annuity hedging programs. We use a dynamic hedging program (within this program, generally, we reevaluate our economic exposure at least daily and rebalance our hedge positions accordingly) to mitigate certain
risks associated with the GMxB features that are embedded in our liabilities for our variable annuity products. This program utilizes various derivative instruments that are managed in an effort to reduce the economic impact of unfavorable changes in GMxB features’ exposures attributable to movements in the equity markets and interest rates. Although this program is designed to provide a measure of economic protection against the impact of adverse market conditions, it does not qualify for hedge accounting treatment. Accordingly, changes in value of the derivatives will be recognized in the period in which they occur with offsetting changes in reserves partially recognized in the current period, resulting in net income volatility. In addition to our dynamic hedging program, in the fourth quarter of 2017 and the first quarter of 2018, we implemented a new hedging program using static hedge positions (derivative positions intended to be held to maturity with less frequent re-balancing) to protect our statutory capital against stress scenarios. The implementation of this new program in addition to our dynamic hedge program is expected to increase the size of our derivative positions, resulting in an increase in net income volatility.
GMIB reinsurance contracts. Historically, GMIB reinsurance contracts were used to cede to affiliated and non-affiliated reinsurers a portion of our exposure to variable annuity products that offer a GMIB feature. We account for the GMIB reinsurance contracts as derivatives and report them at fair value. Gross reserves for GMIB reserves are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts. Accordingly, our gross reserves will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts. Because changes in the fair value of the GMIB reinsurance contracts are recorded in the period in which they occur and a majority of the changes in gross reserves for GMIB are recognized over time, net income will be more volatile.
Effect of Assumption Updates on Operating Results
Most of the variable annuity products, variable universal life insurance and universal life insurance products we offer maintain policyholder deposits that are reported as liabilities and classified within either Separate Account liabilities or policyholder account balances. Our products and riders also impact liabilities for future policyholder benefits and unearned revenues and assets for DAC and deferred sales inducements (“DSI”). The valuation of these assets and liabilities (other than deposits) are based on differing accounting methods depending on the product, each of which requires numerous assumptions and considerable judgment. The accounting guidance applied in the valuation of these assets and liabilities includes, but is not limited to, the following: (i) traditional life insurance products for which assumptions are locked in at inception; (ii) universal life insurance and variable life insurance secondary guarantees for which benefit liabilities are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments; (iii) certain product guarantees for which benefit liabilities are accrued over the life of the contract in proportion to actual and future expected policy assessments; and (iv) certain product guarantees reported as embedded derivatives at fair value.
Our actuaries oversee the valuation of these product liabilities and assets and review underlying inputs and assumptions. We comprehensively review the actuarial assumptions underlying these valuations and update assumptions during the third quarter of each year. Assumptions are based on a combination of company experience, industry experience, management actions and expert judgment and reflect our best estimate as of the date of each financial statement. Changes in assumptions can result in a significant change to the carrying value of product liabilities and assets and, consequently, the impact could be material to earnings in the period of the change. For further details of our accounting policies and related judgments pertaining to assumption updates, see Note 2 of the Notes to the Consolidated Financial Statements and “—Summary of Critical Accounting Estimates—Liability for Future Policy Benefits.”
Assumption Updates and Model Changes
In 2018, we began conducting our annual review of our assumptions and models during the third quarter, consistent with industry practice.
Our annual review encompasses assumptions underlying the valuation of unearned revenue liabilities, embedded derivatives for our insurance business, liabilities for future policyholder benefits, DAC and DSI assets. As a result of this review, some assumptions were updated, resulting in increases and decreases in the carrying values of these product liabilities and assets.
The table below presents the impact of our actuarial assumption updates during 2018 and 2017 to our Income (loss) from continuing operations, before income taxes and Net income (loss):
|
| | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Impact of assumption updates on Net income (loss): | | | |
| Variable annuity product features related assumption updates | $ | (331 | ) | | $ | 1,324 |
|
| All other assumption updates | 103 |
| | 342 |
|
Impact of assumption updates on Income (loss) from continuing operations, before income tax
| (228 | ) | | 1,666 |
|
Income tax (expense) benefit on assumption updates
| 41 |
| | (583 | ) |
Net income (loss) impact of assumption updates
| $ | (187 | ) | | $ | 1,083 |
|
2018 Assumption Updates
The impact of assumption updates in 2018 on Income (loss) from continuing operations, before income taxes was a decrease of $228 million and a decrease to Net income (loss) of $187 million. This includes a $331 million unfavorable impact on the reserves for our Variable annuity product features as a result of unfavorable updates to policyholder behavior, primarily due to annuitization assumptions, partially offset by favorable updates to economic assumptions.
The assumption changes during 2018 consisted of a decrease in Policy charges and fee income of $12 million, a decrease in Policyholders’ benefits of $684 million, an increase in Net derivative losses of $1,065 million, and a decrease in the Amortization of DAC of $165 million.
2017 Assumption Updates
The impact of the assumption updates in 2017 on Income (loss) from continuing operations, before income taxes was an increase of $1,666 million and an increase to Net income (loss) of approximately $1,083 million. This includes a $1,324 million favorable impact on the reserves for our Variable annuity product features as a result of favorable updates to policyholder behavior assumptions.
The assumption changes during 2017 consisted of a decrease in Policy charges and fee income of $88 million, a decrease in Policyholders’ benefits of $23 million, an increase in Amortization of DAC of $247 million, and a decrease in Net derivative losses by $1,978 million.
Macroeconomic and Industry Trends
Our business and consolidated results of operations are significantly affected by economic conditions and consumer confidence, conditions in the global capital markets and the interest rate environment.
Financial and Economic Environment
A wide variety of factors continue to impact global financial and economic conditions. These factors include, among others, concerns over economic growth in the United States, continued low interest rates, falling unemployment rates, the U.S. Federal Reserve’s potential plans to further raise short-term interest rates, fluctuations in the strength of the U.S. dollar, the uncertainty created by what actions the current administration may pursue, concerns over global trade wars, changes in tax policy, global economic factors including programs by the Company’s Investment Under Surveillance ("IUS") Committee,European Central Bank and the United Kingdom’s vote to exit from the European Union and other geopolitical issues. Additionally, many of the products and solutions we sell are tax-advantaged or tax-deferred. If U.S. tax laws were to change, such that our products and solutions are no longer tax-advantaged or tax-deferred, demand for our products could materially decrease. See “Risk Factors—Legal and Regulatory Risks—Future changes in the U.S. tax laws and regulations or interpretations of the Tax Reform Act could reduce our earnings and negatively impact our business, results of operations or financial condition, including by making our products less attractive to consumers.
Stressed conditions, volatility and disruptions in the capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors. An increase in market volatility could affect our business, including through effects on the yields we earn on invested assets, changes in required reserves and capital and fluctuations in the value of our Account Values.
These effects could be exacerbated by uncertainty about future fiscal policy, changes in tax policy, the scope of potential deregulation and levels of global trade.
In the short- to medium-term, the potential for increased volatility, coupled with prevailing interest rates remaining below historical averages, could pressure sales and reduce demand for our products as consumers consider purchasing alternative products to meet their objectives. In addition, this environment could make it difficult to consistently develop products that are attractive to customers. Financial performance can be adversely affected by market volatility and equity market declines as fees driven by Account Values fluctuate, hedging costs increase and revenues decline due to reduced sales and increased outflows.
We monitor the behavior of our customers and other factors, including mortality rates, morbidity rates, annuitization rates and lapse and surrender rates, which change in response to changes in capital market conditions, to ensure that our products and solutions remain attractive and profitable. For additional information on our sensitivity to interest rates and capital market prices, See “Quantitative and Qualitative Disclosures About Market Risk.”
Interest Rate Environment
We believe the interest rate environment will continue to impact our business and financial performance in the future for several reasons, including the following:
Certain of our variable annuity and life insurance products pay guaranteed minimum interest crediting rates. We are required to pay these guaranteed minimum rates even if earnings on our investment portfolio decline, with the assistanceresulting investment margin compression negatively impacting earnings. In addition, we expect more policyholders to hold policies with comparatively high guaranteed rates longer (lower lapse rates) in a low interest rate environment. Conversely, a rise in average yield on our investment portfolio should positively impact earnings. Similarly, we expect policyholders would be less likely to hold policies with existing guaranteed rates (higher lapse rates) as interest rates rise.
A prolonged low interest rate environment also may subject us to increased hedging costs or an increase in the amount of itsstatutory reserves that our insurance subsidiaries are required to hold for GMxB features, lowering their statutory surplus, which would adversely affect their ability to pay dividends to us. In addition, it may also increase the perceived value of GMxB features to our policyholders, which in turn may lead to a higher rate of annuitization and higher persistency of those products over time. Finally, low interest rates may continue to cause an acceleration of DAC amortization or reserve increase due to loss recognition for interest sensitive products.
Regulatory Developments
We are regulated primarily by the NYDFS, with some policies and products also subject to federal regulation. On an ongoing basis, regulators refine capital requirements and introduce new reserving standards. Regulations recently adopted or currently under review can potentially impact our statutory reserve and capital requirements.
National Association of Insurance Commissioners (“NAIC”). In 2015, the NAIC Financial Condition (E) Committee established a working group to study and address, as appropriate, regulatory issues resulting from variable annuity captive reinsurance transactions, including reforms that would improve the current statutory reserve and RBC framework for insurance companies that sell variable annuity products. In August 2018, the NAIC adopted the new framework developed and proposed by this working group, expected to take effect January 2020, and which has now been referred to various other NAIC committees to develop the expected full implementation details. Among other changes, the new framework includes new prescriptions for reflecting hedge effectiveness, investment advisors,returns, interest rates, mortality and policyholder behavior in calculating statutory reserves and RBC. Once effective, it could materially change the level of variable annuity reserves and RBC requirements as well as their sensitivity to capital markets including interest rate, equity markets, volatility and credit spreads. Overall, we believe the NAIC reform is moving variable annuity capital standards towards an economic framework and is consistent with how we manage our business.
Fiduciary Rules/ “Best Interest” Standards of Conduct. In the wake of the March 2018 federal appeals court decision to vacate the DOL Rule, the SEC and NAIC as well as state regulators are currently considering whether to apply an impartial conduct standard similar to the DOL Rule to recommendations made in connection with certain annuities and, in one case, to life insurance policies. For example, the NAIC is actively working on a security-by-security basisproposal to raise the advice standard for each available-for-sale fixed maturityannuity sales and in July 2018, the NYDFS issued a final version of Regulation 187 that adopts a “best interest” standard for recommendations regarding the sale of life insurance and annuity products in New York.
Regulation 187 takes effect on August 1, 2019 with respect to annuity sales and February 1, 2020 for life insurance sales and is applicable to sales of life insurance and annuity products in New York. In November 2018, the primary agent groups in New York launched a legal challenge against the NYDFS over the adoption of Regulation 187. It is not possible to predict whether this challenge will be successful. We are currently assessing Regulation 187 to determine the impact it may have on our business. Beyond the New York regulation, the likelihood of enactment of any such state-based regulation is uncertain at this time, but if implemented, these regulations could have adverse effects on our business and consolidated results of operations.
In April 2018, the SEC released a set of proposed rules that would, among other things, enhance the existing standard of conduct for broker-dealers to require them to act in the best interest of their clients; clarify the nature of the fiduciary obligations owed by registered investment advisers to their clients; impose new disclosure requirements aimed at ensuring investors understand the nature of their relationship with their investment professionals; and restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor”. Public comments were due by August 7, 2018. Although the full impact of the proposed rules can only be measured when the implementing regulations are adopted, the intent of this provision is to authorize the SEC to impose on broker-dealers’ fiduciary duties to their customers similar to those that apply to investment advisers under existing law. We are currently assessing these proposed rules to determine the impact they may have on our business.
Impact of the Tax Reform Act
On December 22, 2017, President Trump signed into law the Tax Reform Act, a broad overhaul of the U.S. Internal Revenue Code that changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies.
The Tax Reform Act reduced the federal corporate income tax rate to 21% and repealed the corporate Alternative Minimum Tax (“AMT”) while keeping existing AMT credits. It also contained measures affecting our insurance companies, including changes to the DRD, insurance reserves and tax DAC. As a result of the Tax Reform Act, our Net Income has improved.
In August 2018, the NAIC adopted changes to the RBC calculation, including the C-3 Phase II Total Asset Requirement for variable annuities, to reflect the 21% corporate income tax rate in RBC, which resulted in a reduction to our Combined RBC Ratio.
Overall, the Tax Reform Act had a net positive economic impact on us and we continue to monitor regulations related to this reform.
Consolidated Results of Operations
Our consolidated results of operations are significantly affected by conditions in the capital markets and the economy because we offer market sensitive products. These products have been a significant driver of our results of operations. Because the future claims exposure on these products is sensitive to movements in the equity securitymarkets and interest rates, we have in place various hedging and reinsurance programs that has experienced a declineare designed to mitigate the economic risks of movements in the equity markets and interest rates. The volatility in Net income attributable to AXA Equitable for the periods presented below results from the mismatch between (i) the change in carrying value of the reserves for GMDB and certain GMIB features that do not fully and immediately reflect the impact of equity and interest market fluctuations and (ii) the change in fair value of products with the GMIB feature that has a no-lapse guarantee, and our hedging and reinsurance programs.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company revised the presentation of the capitalization of deferred policy acquisition costs (“DAC”) in the consolidated statements of income for purposeall prior periods presented herein by netting the capitalized amounts within the applicable expense line items, such as Compensation and benefits, Commissions and distribution plan payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of evaluatingdeferred acquisition costs. There was no impact on Net income (loss) or Comprehensive income of this reclassification.
The reclassification adjustments for the underlying reasons. years ended December 31, 2017 and 2016 are presented in the table below. Capitalization of DAC reclassified to Compensation and benefits, Commissions and distribution plan payments, and Other operating costs and expenses reduced the amounts previously reported in those expense line items, while the capitalization of
DAC reclassified from the Amortization of deferred policy acquisition costs line item increases that expense line item. |
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (in millions) |
| Reductions to expense line items: | | | |
| Compensation and benefits | $ | 128 |
| | $ | 128 |
|
| Commissions and distribution plan payments | 443 |
| | 460 |
|
| Other operating costs and expenses | 7 |
| | 6 |
|
| Total reductions | $ | 578 |
| | $ | 594 |
|
| | | | |
| Increase to expense line item: | | | |
| Amortization of deferred policy acquisition costs | $ | 578 |
| | $ | 594 |
|
The analysis begins withfollowing table summarizes our consolidated statements of income (loss) for the years ended December 31, 2018 and 2017:
Consolidated Statement of Income (Loss)
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in millions) |
| REVENUES | | | |
| Policy charges and fee income | $ | 3,523 |
| | $ | 3,294 |
|
| Premiums | 862 |
| | 904 |
|
| Net derivative gains (losses) | (1,010 | ) | | 894 |
|
| Net investment income (loss) | 2,478 |
| | 2,441 |
|
| Investment gains (losses), net: | | | |
| Total other-than-temporary impairment losses | (37 | ) | | (13 | ) |
| Other investment gains (losses), net | 41 |
| | (112 | ) |
| Total investment gains (losses), net | 4 |
| | (125 | ) |
| Investment management and service fees | 1,029 |
| | 1,007 |
|
| Other income | 65 |
| | 41 |
|
| Total revenues | 6,951 |
| | 8,456 |
|
| BENEFITS AND OTHER DEDUCTIONS | | | |
| Policyholders’ benefits | 3,005 |
| | 3,473 |
|
| Interest credited to policyholders’ account balances | 1,002 |
| | 921 |
|
| Compensation and benefits | 422 |
| | 327 |
|
| Commissions and distribution related payments | 620 |
| | 628 |
|
| Interest expense | 34 |
| | 23 |
|
| Amortization of deferred policy acquisition costs | 431 |
| | 900 |
|
| Other operating costs and expenses | 2,918 |
| | 635 |
|
| Total benefits and other deductions | 8,432 |
| | 6,907 |
|
| Income (loss) from continuing operations, before income taxes | (1,481 | ) | | 1,549 |
|
| Income tax (expense) benefit from continuing operations | 446 |
| | 1,210 |
|
| Net income (loss) from continuing operations | (1,035 | ) | | 2,759 |
|
| Net income (loss) from discontinued operations, net of taxes and noncontrolling interest | 114 |
| | 85 |
|
| Less: net (income) loss attributable to the noncontrolling interest | 3 |
| | (1 | ) |
| Net income (loss) attributable to AXA Equitable | $ | (918 | ) | | $ | 2,843 |
|
The following discussion compares the results for the year ended December 31, 2018 to the year ended December 31, 2017.
Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
Net Income (Loss) Attributable to AXA Equitable
The $3,761 million decrease in net income attributable to AXA Equitable, to a reviewloss of gross unrealized losses$918 million for the year ended 2018 from net income of $2,843 million for the year ended 2017, was primarily driven by the following categoriesnotable items:
Other operating costs and expenses increased by $2,283 million mainly due to $1,882 million of securities: (i) all investment grade and below investment grade fixed maturities for which fair value has declined and remained below amortized cost by 20% or more; (ii) below-investment-grade fixed maturities for which fair value has declined and remained below amortized cost for a period greater than 12 months; and (iii) equity securities for which fair value has declined and remained below cost by 20% or greater or remained below cost for a period of 6 months or greater. Integral to the analysis is an assessment of various indicators of credit deterioration to determine whether the investment security is expected to recover, including, but not limited to, considerationamortization of the durationdeferred cost of reinsurance asset in 2018 including the write-off of $1,840 million of this asset, and severitythe settlement of the unrealized loss, failure, if any,outstanding payments of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically$248 million, both related to the security or sector,GMxB Unwind.
Net derivative gains (losses) decreased by $1,904 million mainly due to the financial strength, liquidity,unfavorable impact of assumption updates in 2018 compared to the favorable impact of assumption updates in 2017.
Compensation and continued viabilitybenefits increased by $95 million primarily due to the loss resulting from the annuity purchase transaction and partial settlement of the issueremployee pension plan in 2018.
Interest credited to policyholders’ account balances increased by $81 million primarily driven by higher SCS AV due to new business growth.
Interest expense increased by $11 million due to higher repurchase agreement costs.
Income tax benefit decreased by $764 million primarily driven by a one-time tax benefit in 2017 related to the Tax Reform Act.
Partially offsetting this decrease were the following notable items:
Amortization of deferred policy acquisition costs decreased by $469 million mainly due to the favorable impact of assumption updates in 2018.
Policyholders’ benefits decreased by $468 million mainly due to the favorable impact of assumption updates in 2018 compared to the unfavorable impact of assumption updates in 2017, combined with the favorable impact of rising interest rates, partially offset by the impact of equity market declines affecting our GMxB liabilities.
Policy charges, fee income and forpremiums increased by $187 million primarily due to higher cost of insurance charges.
Total investment gains (losses), net increased by $129 million primarily due to the sale of fixed maturities.
Investment management, service fees and other income increased by $46 million primarily due to higher equity securities only,markets.
Increase in Net investment income of $37 million primarily due to higher assets from the intentGMxB Unwind and abilityGeneral Account optimization.
Contractual Obligations
The table below summarizes the future estimated cash payments related to holdcertain contractual obligations as of December 31, 2018. The estimated payments reflected in this table are based on management’s estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the investment until recovery, resultingactual cash outflows in identificationfuture periods will vary, possibly materially, from those reflected in the table. In addition, we do not believe that our cash flow requirements can be adequately assessed based solely upon an analysis of specific securities for which OTTIthese obligations, as the table below does not contemplate all aspects of our cash inflows, such as the level of cash flow generated by certain of our investments, nor all aspects of our cash outflows.
|
| | | | | | | | | | | | | | | | | | | | |
| | Estimated Payments Due by Period |
| | Total | | 2019 | | 2020-2022 | | 2023-2024 | | 2025 and thereafter |
| | (in millions) |
| Contractual obligations: | | | | | | | | | |
Policyholders’ liabilities (1)
| $ | 100,158 |
| | $ | 1,745 |
| | $ | 5,025 |
| | $ | 6,722 |
| | $ | 86,666 |
|
| FHLBNY Funding Agreements | 3,990 |
| | 1,640 |
| | 1,094 |
| — |
| 475 |
| | 781 |
|
| Interest on FHLBNY Funding Agreements | 267 |
| | 65 |
| | 109 |
| — |
| 50 |
| | 43 |
|
| Operating leases | 419 |
| | 81 |
| | 143 |
| | 129 |
| | 66 |
|
| Loan from affiliates | 572 |
| | 572 |
| | — |
| | — |
| | — |
|
| Employee benefits | 3,941 |
| | 214 |
| | 431 |
| | 410 |
| | 2,886 |
|
| Total Contractual Obligations | $ | 109,347 |
| | $ | 4,317 |
| | $ | 6,802 |
| | $ | 7,786 |
| | $ | 90,442 |
|
_______________
| |
| (1) | Policyholders’ liabilities represent estimated cash flows out of the General Account related to the payment of death and disability claims, policy surrenders and withdrawals, annuity payments, minimum guarantees on Separate Account funded contracts, matured endowments, benefits under accident and health contracts, policyholder dividends and future renewal premium-based and fund-based commissions offset by contractual future premiums and deposits on in-force contracts. These estimated cash flows are based on mortality, morbidity and lapse assumptions comparable with the Company’s experience and assume market growth and interest crediting consistent with actuarial assumptions used in amortizing DAC. These amounts are undiscounted and, therefore, exceed the policyholders’ account balances and future policy benefits and other policyholder liabilities included in the consolidated balance sheet. They do not reflect projected recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows will differ from these estimates, see “—Summary of Critical Accounting Policies—Liability for Future Policy Benefits.” Separate Account liabilities have been excluded as they are legally insulated from General Account obligations and will be funded by cash flows from Separate Account assets. |
Unrecognized tax benefits of $273 million, were not included in the above table because it is recognized.
If there is no intentnot possible to sell or likely requirement to disposemake reasonably reliable estimates of the fixed maturity security before its recovery, onlyoccurrence or timing of cash settlements with the credit loss componentrespective taxing authorities.
Off-Balance Sheet Arrangements
At December 31, 2018, the Company was not a party to any off-balance sheet transactions other than those guarantees and commitments described in Notes 10 and 17 of the Notes to the Consolidated Financial Statements.
Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in our consolidated financial statements included elsewhere herein. For a discussion of our significant accounting policies, see Note 2 of the Notes to the Consolidated Financial Statements. The most critical estimates include those used in determining:
liabilities for future policy benefits;
accounting for reinsurance;
capitalization and amortization of DAC and policyholder bonus interest credits;
estimated fair values of investments in the absence of quoted market values and investment impairments;
estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation;
measurement of income taxes and the valuation of deferred tax assets; and
liabilities for litigation and regulatory matters.
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries while others are specific to our business and operations. Actual results could differ from these estimates.
Liability for Future Policy Benefits
We establish reserves for future policy benefits to, or on behalf of, policyholders in the same period in which the policy is issued or acquired, using methodologies prescribed by U.S. GAAP. The assumptions used in establishing reserves are generally based on our experience, industry experience or other factors, as applicable. At least annually we review our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior assumptions, and update assumptions when appropriate. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term.
The reserving methodologies used include the following:
Universal life (“UL”) and investment-type contract policyholder account balances are equal to the policy AV. The policy AV represent an accumulation of gross premium payments plus credited interest less expense and mortality charges and withdrawals.
Participating traditional life insurance future policy benefit liabilities are calculated using a net level premium method on the basis of actuarial assumptions equal to guaranteed mortality and dividend fund interest rates.
Non-participating traditional life insurance future policy benefit liabilities are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest.
For most long-duration contracts, we utilize best estimate assumptions as of the date the policy is issued or acquired with provisions for the risk of adverse deviation, as appropriate. After the liabilities are initially established, we perform premium deficiency tests using best estimate assumptions as of the testing date without provisions for adverse deviation. If the liabilities determined based on these best estimate assumptions are greater than the net reserves (i.e., U.S. GAAP reserves net of any resulting OTTIDAC or DSI), the existing net reserves are adjusted by first reducing the DAC or DSI by the amount of the deficiency or to zerothrough a charge to current period earnings. If the deficiency is more than these asset balances for insurance contracts, we then increase the net reserves by the excess, again through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the premium deficiency test date are locked in earningsand used in subsequent valuations and the remaindernet reserves continue to be subject to premium deficiency testing.
For certain reserves, such as those related to GMDB and GMIB features, we use current best estimate assumptions in establishing reserves. The reserves are subject to adjustments based on periodic reviews of assumptions and quarterly adjustments for experience, including market performance, and the reserves may be adjusted through a benefit or charge to current period earnings.
For certain GMxB features, the benefits are accounted for as embedded derivatives, with fair value loss is recognized in OCI. The amount of credit loss is the shortfall ofvalues calculated as the present value of expected future benefit payments to contractholders less the cash flows expected to be collected as comparedpresent value of assessed rider fees attributable to the amortized cost basisembedded derivative feature. Under U.S. GAAP, the fair values of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. Projections of future cash flowsthese benefit features are based on assumptions regarding probabilitya market participant would use in valuing these embedded derivatives. Changes in the fair value of defaultthe embedded derivatives are recorded quarterly through a benefit or charge to current period earnings.
The assumptions used in establishing reserves are generally based on our experience, industry experience and/or other factors, as applicable. We typically update our actuarial assumptions, such as mortality, morbidity, retirement and estimatespolicyholder behavior assumptions, annually, unless a material change is observed in an interim period that we feel is indicative of a long-term trend. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term. In a sustained low interest rate environment, there is an increased likelihood that the reserves determined based on best estimate assumptions may be greater than the net liabilities.
See Note 8 of the Notes to the Consolidated Financial Statements for additional information on our accounting policy relating to GMxB features and liability for future policy benefits and Note 2 of the Notes to the Consolidated Financial Statements for future policyholder benefit liabilities.
Sensitivity of Future Rate of Return Assumptions on GMDB/GMIB Reserves
The Separate Account future rate of return assumptions that are used in establishing reserves for GMxB features are set using a long-term-view of expected average market returns by applying a reversion to the mean approach, consistent with that used for DAC amortization. For additional information regarding the amountfuture expected rate of return assumptions and timingthe reversion to the mean approach, see, “—DAC and Policyholder Bonus Interest Credits”.
The GMDB/GMIB reserve balance before reinsurance ceded was $8.4 billion at December 31, 2018. The following table provides the sensitivity of recoveries. Thesethe reserves GMxB features related to variable annuity contracts relative to the future rate of return assumptions by quantifying the adjustments to these reserves that would be required assuming both a 1% increase and decrease in the future rate of return. This sensitivity considers only the direct effect of changes in the future rate of return on operating results due to the change in the reserve balance before reinsurance ceded and not changes in any other assumptions such as persistency, mortality, or expenses included in the evaluation of the reserves, or any changes on DAC or other balances including hedging derivatives and the GMIB reinsurance asset.
GMDB/GMIB Reserves
Sensitivity - Rate of Return
December 31, 2018
|
| | | |
| | Increase/(Decrease) in GMDB/GMIB Reserves |
| | (in millions) |
| 1% decrease in future rate of return | $ | 1,259.3 |
|
| 1% increase in future rate of return | $ | (1,333.2 | ) |
Traditional Annuities
The reserves for future policy benefits for annuities include group pension and payout annuities, and, during the accumulation period, are equal to accumulated policyholders’ fund balances and, after annuitization, are equal to the present value of expected future payments based on assumptions as to mortality, retirement, maintenance expense, and interest rates. Interest rates used in establishing such liabilities range from 1.6% to 5.5% (weighted average of 4.8%). If reserves determined based on these assumptions are greater than the existing reserves, the existing reserves are adjusted to the greater amount.
Health
Individual health benefit liabilities for active lives are estimated using the net level premium method and assumptions as to future morbidity, withdrawals and interest. Benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
Reinsurance
Accounting for reinsurance requires extensive use of assumptions and estimates, require use of management judgment and consider internal credit analyses as well as market observable data relevantparticularly related to the collectabilityfuture performance of the security. For mortgage-underlying business and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Mortgage loans also are reviewed quarterly by the IUS Committee for impairment on a loan-by-loan basis, including an assessmentpotential impact of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages also is identified, consisting of mortgage loans not currently classified as problems but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future industry conditions and developmentscounterparty credit risk with respect to reinsurance receivables. We periodically review actual and anticipated experience compared to the borroweraforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluate the financial strength of counterparties to our reinsurance agreements using criteria similar to those evaluated in our security impairment process. See “—Estimated Fair Value of Investments.” Additionally, for each of our reinsurance agreements, we determine whether the agreement provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We review all contractual features, including those that may limit the individual mortgaged property.amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If we determine that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit method of accounting.
For problem mortgage loansreinsurance contracts other than those covering GMIB exposure, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities. GMIB reinsurance contracts are used to cede affiliated and non-affiliated reinsurers a valuation allowance is established to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for loans determined to be non-performing as a result of the loan review process. A non-performing loan is defined as a loan for which it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan specific portion of the loss allowance is basedexposure on variable annuity products that offer the GMIB feature. The GMIB reinsurance contracts are accounted for as derivatives and are reported at fair value. Gross reserves for GMIB, on the Company’s assessmentother hand, are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts, therefore, will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market and/or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts.
See Note 10 of the Notes to the Consolidated Financial Statements for additional information on our reinsurance agreements.
DAC and Policyholder Bonus Interest Credits
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to the successful acquisition or renewal of insurance contracts are deferred as DAC. In addition to ultimate collectabilitycommissions, certain direct-response advertising expenses and other direct costs, other deferrable costs include the portion of loan principalan employee’s total compensation and interest. Valuation allowances forbenefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed. We utilize various techniques to estimate the portion of an employee’s time spent on qualifying acquisition activities that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include assumptions that are reviewed and updated on a non-performing loanperiodic basis or more frequently to reflect significant changes in processes or distribution methods.
Amortization Methodologies
Participating Traditional Life Policies
For participating traditional life policies (substantially all of which are recordedin the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield.
At December 31, 2018, the average investment yields assumed (excluding policy loans) were 4.7% grading to 4.3% in 2024. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
Non-participating Traditional Life Insurance Policies
DAC associated with non-participating traditional life policies are amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earnings (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy.
Universal Life and Investment-type Contracts
DAC associated with certain variable annuity products is amortized based on estimated assessments, with the remainder of variable annuity products, UL and investment-type products amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Account fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated
gross profits or assessments is reflected in net income (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
Quarterly adjustments to the DAC balance are made for current period experience and market performance related adjustments, and the impact of reviews of estimated total gross profits. The quarterly adjustments for current period experience reflect the impact of differences between actual and previously estimated expected gross profits for a given period. Total estimated gross profits include both actual experience and estimates of gross profits for future periods. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, cumulative adjustment to all previous periods’ costs is recognized.
During each accounting period, the DAC balances are evaluated and adjusted with a corresponding charge or credit to current period earnings for the effects of the Company’s actual gross profits and changes in the assumptions regarding estimated future gross profits. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
For the variable and UL policies a significant portion of the gross profits is derived from mortality margins and therefore, are significantly influenced by the mortality assumptions used. Mortality assumptions represent our expected claims experience over the life of these policies and are based on a long-term average of actual company experience. This assumption is updated periodically to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Loss Recognition Testing
After the initial establishment of reserves, loss recognition tests are performed using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future cash flows discounted atgross premiums for the loan’s effectiveaggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC is first written off, and thereafter a premium deficiency reserve is established by a charge to earnings.
In 2018 and 2017, we determined that we had a loss recognition in certain of our variable interest-sensitive life insurance products due to the release of life reserves and low interest rate or based on the fair valuerates. As of December 31, 2018 and 2017, we wrote off $162 million and $656 million, respectively, of the collateralDAC balance through accelerated amortization.
Additionally, in certain policyholder liability balances for a particular line of business may not be deficient in the aggregate to trigger loss recognition; however, the pattern of earnings may be such that profits are expected to be recognized in earlier years and then followed by losses in later years. This pattern of profits followed by losses is exhibited in our VISL business and is generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the loan is collateral dependent. The valuation allowancemonthly deductions and charges. We accrue for mortgage loans canthese Profits Followed by Losses (“PFBL”) using a dynamic approach that changes over time as the projection of future losses change.
In addition, we are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. This may result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on available-for-sale investment securities within the statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, which is based on changes in net unrealized investment (gains) losses, these adjustments may reverse from period to period. In 2017, due primarily to the release of life reserves, we recorded an unrealized loss in Other comprehensive income (loss). There was no impact to Net income (loss).
Sensitivity of DAC to Changes in Future Mortality Assumptions
The following table demonstrates the sensitivity of the DAC balance relative to future mortality assumptions by quantifying the adjustments that would be required, assuming an increase and decrease in the future mortality rate by 1.0%. This information considers only the direct effect of changes in the mortality assumptions on the DAC balance and not changes in any other assumptions used in the measurement of the DAC balance and does not assume changes in reserves.
DAC Sensitivity - Mortality
December 31, 2018
|
| | | |
| | Increase/(Decrease) in DAC |
| | (in millions) |
| Decrease in future mortality by 1% | $ | 20 |
|
| Increase in future mortality by 1% | $ | (20 | ) |
Sensitivity of DAC to Changes in Future Rate of Return Assumptions
A significant assumption in the amortization of DAC on variable annuity products and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future Separate Accounts performance. Management sets estimated future gross profit or assessment assumptions related to Separate Account performance using a long-term view of expected average market returns by applying a Reversion to the Mean (“RTM”) approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. In second quarter 2015, based upon management’s then-current expectations of interest rates and future fund growth, we updated our reversion to the mean assumption from 9.0% to 7.0%. The average gross long-term return measurement start date was also updated to December 31, 2014. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on such factors.the duration of use of these maximum or minimum rates of return. At December 31, 2018, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuity products was 7.0% (4.7% net of product weighted average Separate Accounts fees), and 0.0% (2.3)% net of product weighted average Separate Account fees), respectively. The maximum duration over which these rate limitations may be applied is five years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than five years in order to reach the average gross long-term return estimate, the application of the five-year maximum duration limitation would result in an acceleration of DAC amortization. Conversely, actual market returns resulting in assumed future market returns of 0.0% for more than five years would result in a required deceleration of DAC amortization. At December 31, 2018, current projections of future average gross market returns assume a 1.6% annualized return for the next two quarters, followed by 7.0% thereafter. Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
The following table provides an example of the sensitivity of the DAC balance of variable annuity products and variable and interest-sensitive life insurance relative to future return assumptions by quantifying the adjustments to the DAC balance that would be required assuming both an increase and decrease in the future rate of return by 1.0%. This information considers only the effect of changes in the future Separate Accounts rate of return and not changes in any other assumptions used in the measurement of the DAC balance.
DAC Sensitivity - Rate of Return
December 31, 2018
|
| | | |
| | Increase/(Decrease) in DAC |
| | (in millions) |
| Decrease in future rate of return by 1% | $ | (97 | ) |
| Increase in future rate of return by 1% | $ | 121 |
|
Estimated Fair Value of Investments
The Company’s investment portfolio principally consists of public and private fixed maturities, mortgage loans, equity securities and derivative financial instruments, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options used to manage various risks relating to its business operations.
Fair Value Measurements
Investments reported at fair value in the consolidated balance sheets of the Company include fixed maturity and equity securities classified as available-for-sale, equity and trading securities and certain other invested assets, such as freestanding derivatives. In addition, reinsurance contracts covering GMIB exposure and the liabilities in the SCS variable annuity products, SIO in the EQUI-VEST® variable annuity product series, MSO in the variable life insurance products, IUL insurance products and the GMAB, GIB, GMWB and GWBL feature in certain variable annuity products issued by the Company are considered embedded derivatives and reported at fair value.
When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable; these generally are the most liquid holdings and their valuation does not involve management judgment. When quoted prices in active markets are not available, the Company estimateswe estimate fair value based on market standard valuation methodologies, includingmethodologies. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodologies, matrix pricing, or other similar techniques.methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment. For securities with reasonable price transparency, the significant inputs to these valuation methodologies either are observable in the market or can be derived principally from or corroborated by observable market data. When the volume or level of activity results in little or no price transparency, significant inputs no longer can be supported by reference to market observable data but instead must be based on management’s
estimation and judgment. Substantially the same approach is used by the Companyus to measure the fair values of freestanding and embedded derivatives with exception for consideration of the effects of master netting agreements and collateral arrangements as well as incremental value or risk ascribed to changes in own or counterparty credit risk.
As required by the accounting guidance, the Company categorizes itswe categorize our assets and liabilities measured at fair value into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique, giving the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). For additional information regarding the key estimates and assumptions surrounding the determinations of fair value measurements, see Note 7 of the Notes to the Consolidated Financial Statements – Fair Value Disclosures.Statements.
Income Taxes
Income taxes represent the net amount of income taxes that the Company expects to pay to or receive from various taxing jurisdictions in connection with its operations. The Company provides for Federal and state income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryforward periods under the tax law in the applicable jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred tax assets will not be realized. Management considers all available evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. The Company’s accounting for income taxes represents management’s best estimate of the tax consequences of various events and transactions.
Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities, and in evaluating the Company’s tax positions including evaluating uncertainties under the guidance for Accounting for Uncertainty in Income taxes. Under the guidance, the Company determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. Tax positions are then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.
The Company’s tax positions are reviewed quarterly and the balances are adjusted as new information becomes available.
CONSOLIDATED RESULTS OF OPERATIONS
AXA Equitable
Consolidated Results of Operations
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| REVENUES | | | | | |
| Universal life and investment-type product policy fee income | $ | 3,423 |
| | $ | 3,208 |
| | $ | 3,115 |
|
| Premiums | 880 |
| | 854 |
| | 874 |
|
| Net investment income (loss): | | | | | |
| Investment income (loss) from derivative instruments | (462 | ) | | (81 | ) | | 1,605 |
|
| Other investment income (loss) | 2,318 |
| | 2,057 |
| | 2,210 |
|
| Total net investment income (loss) | 1,856 |
| | 1,976 |
| | 3,815 |
|
| Investment gains (losses), net: | | | | | |
| Total other-than-temporary impairment losses | (65 | ) | | (41 | ) | | (72 | ) |
| Portion of loss recognized in other comprehensive income | — |
| | — |
| | — |
|
| Net impairment losses recognized | (65 | ) | | (41 | ) | | (72 | ) |
| Other investment gains (losses), net | 81 |
| | 21 |
| | 14 |
|
| Total investment gains (losses), net | 16 |
| | (20 | ) | | (58 | ) |
| Commissions, fees and other income | 3,791 |
| | 3,942 |
| | 3,930 |
|
| Increase (decrease) in the fair value of the reinsurance contract asset | (261 | ) | | (141 | ) | | 3,964 |
|
| Total revenues | 9,705 |
| | 9,819 |
| | 15,640 |
|
| BENEFITS AND OTHER DEDUCTIONS | | | | | |
| Policyholders’ benefits | 2,893 |
| | 2,799 |
| | 3,708 |
|
| Interest credited to policyholders’ account balances | 1,555 |
| | 978 |
| | 1,186 |
|
| Compensation and benefits | 1,723 |
| | 1,783 |
| | 1,739 |
|
| Commissions | 1,095 |
| | 1,111 |
| | 1,147 |
|
| Distribution related payments | 372 |
| | 394 |
| | 413 |
|
| Interest expense | 16 |
| | 20 |
| | 53 |
|
| Amortization of deferred policy acquisition costs, net | 162 |
| | (331 | ) | | (413 | ) |
| Other operating costs and expenses | 1,458 |
| | 1,415 |
| | 1,692 |
|
| Total benefits and other deductions | 9,274 |
| | 8,169 |
| | 9,525 |
|
| Earnings (loss) from operations, before income taxes | 431 |
| | 1,650 |
| | 6,115 |
|
| Income tax (expense) benefit | 113 |
| | (186 | ) | | (1,695 | ) |
| Net earnings (loss) | 544 |
| | 1,464 |
| | 4,420 |
|
| Less: net (earnings) loss attributable to the noncontrolling interest | (469 | ) | | (403 | ) | | (387 | ) |
| Net Earnings (Loss) Attributable to AXA Equitable | $ | 75 |
| | $ | 1,061 |
| | $ | 4,033 |
|
The consolidated earnings narratives that follow discuss the results for 2016 compared to 2015’s results, followed by the results for 2015 compared to 2014’s results. For additional information, see “Accounting for VA Guarantee Features”, above.
Year ended December 31, 2016 Compared to the Year Ended December 31, 2015
Net earnings attributable to the Company in 2016 were $75 million, a decrease of $986 million from the $1.1 billion of net earnings attributable to the Company in 2015. The decrease is primarily attributable to a $462 million investment loss from derivative instruments, a $261 million decrease in the fair value of the GMIB reinsurance contract asset and by the $362 million increase in GMDB/GMIB/GWBL/GMAB reserves in 2016 compared to a $81 million investment loss from derivative instruments, a $141 million decrease in the fair value of the GMIB reinsurance contract asset and by the $367 million increase in GMDB/GMIB/GWBL/GMAB reserves in 2015. The 2016 lower Net earnings also included $577 million higher interest credited to policyholders’ account balances, a $151 million decrease in commissions, fees and other income and $493 million higher amortization of DAC, net partially offset by $263 million higher other investment income and $215 million higher Universal life and investment-type
product policy fee income when compared to 2015. The Company recorded an income tax benefit of $113 million in 2016 compared to an income tax expense of $186 million in 2015.
Net earnings attributable to the noncontrolling interest were $469 million in 2016 as compared to $403 million in 2015 primarily reflecting earnings from AB in both periods.
Net earnings inclusive of earnings (losses) attributable to noncontrolling interest were $544 million in 2016, a decrease of $920 million from net earnings of $1.5 billion reported in 2015.
Income tax benefit in 2016 was $113 million, primarily due to the $274 million pre-tax loss in the Insurance segment, compared to income tax expense of $186 million in 2015, primarily due to the $1.0 billion pre-tax earnings in the Insurance segment. Income tax expense in 2015 was decreased by a $77 million benefit related to a settlement with the IRS on the appeal of proposed adjustments to the Company’s 2004 and 2005 Federal corporate income tax returns. Income taxes for 2016 and 2015 were computed using an estimated annual effective tax rate. In 2016 and 2015, Federal income taxes attributable to consolidated operations were different from the amounts determined by multiplying the earnings before income taxes and noncontrolling interest by the expected Federal income tax rate of 35%. The primary differences were dividend received deductions, nontaxable investment income and noncontrolling interest permanent differences. Additionally, the Company does not provide Federal and state income taxes on the undistributed earnings of non-U.S. corporate subsidiaries except to the extent that such earnings are permanently invested outside the United States.
Earnings from operations before income taxes were $431 million in 2016, a decrease of $1.2 billion from the $1.7 billion in pre-tax earnings reported in 2015. The Insurance segment’s pre-tax loss from operations totaled $274 million in 2016, $1.3 billion lower than the pre-tax earnings of $1.0 billion in 2015. The Investment Management segment’s pre-tax earnings from operations were $706 million in 2016 as compared to $618 million for 2015. The Insurance segment’s pre-tax loss in 2016 as compared to pre-tax earnings in 2015 was primarily due to a $447 million investment loss from derivative instruments, a $261 million decrease in the fair value of the GMIB reinsurance contract asset and by the $362 million increase in GMDB/GMIB/GWBL/GMAB reserves in 2016 compared to a $96 million investment loss from derivative instruments, a $141 million decrease in the fair value of the GMIB reinsurance contract asset and by the $367 million increase in GMDB/GMIB/GWBL/GMAB reserves in 2015. The 2016 Insurance segment Loss from continuing operations before income taxes also included $577 million higher interest credited to policyholders’ account balances and $493 million higher amortization of DAC, net partially offset by $215 million higher Universal life and investment-type product policy fee income and $124 million higher other investment income when compared to 2015. The Investment Management segment’s higher pre-tax earnings in 2016 as compared to 2015 was primarily due to $102 million higher net investment income, $37 million lower compensation and benefit expenses and $22 million lower distribution related payments partially offset by $100 million lower commission fees and other income.
Total revenues were $9.7 billion in 2016, a decrease of $114 million from revenues from $9.8 billion reported in 2015. The Insurance segment reported total revenues of $6.7 billion in 2016, a $119 million decrease from the $6.8 billion reported in 2015. The Investment Management segment reported total revenues of $3.0 billion, a $4 million decrease from the $3.0 billion of revenues reported in 2015. The decrease in Insurance segment revenues was primarily due to a $447 million investment loss from derivative instruments and a $261 million decrease in the fair value of the GMIB reinsurance contract asset in 2016 compared to a $96 million investment loss from derivative instruments and a $141 million decrease in the fair value of the GMIB reinsurance contract asset in 2015. These decreases were partially offset by $215 million higher Universal life and investment-type product policy fee income and $134 million higher other investment income when compared to 2015. The $4 million increase in the Investment Management segment’s revenues in 2016 was primarily due to $102 million higher net investment income and $2 million higher investment gains partially offset by $100 million lower other commission fees and other income.
Total benefits and expenses were $9.3 billion in 2016, an increase of $1.1 billion from the $8.2 billion reported in 2015. The Insurance segment’s total benefits and expenses were $7.0 billion, an increase of $1.2 billion from 2015 total of $5.8 billion. The Investment Management segment’s total expenses for 2016 were $2.3 billion, $84 million lower than the $2.4 billion in expenses in 2015. The Insurance segment’s increase was principally due to $577 million higher interest credited to policyholders’ account balances, $493 million higher amortization of DAC, net and $94 million higher policyholders’ benefits. The decrease in expenses for the Investment Management segment was principally due to $37 million lower compensation and benefits expenses, a $27 million decrease in other operating expenses and $22 million lower distribution related payments.
Year ended December 31, 2015 Compared to the Year Ended December 31, 2014
Net earnings attributable to the Company in 2015 were $1.1 billion, a decrease of $3.0 billion from the $4.0 billion of net earnings attributable to the Company in 2014. The decrease is primarily attributable to a $141 million decrease in the fair value of the GMIB reinsurance contract asset, $81 million of investment losses from derivative instruments and a $367 million increase in GMDB/
GMIB/GWBL reserves in 2015 compared to a $4.0 billion increase in the fair value of the GMIB reinsurance contract asset, $1.6 billion of investment income from derivative instruments and a $1.6 billion increase in GMDB/GMIB/GWBL reserves in 2014. The decrease was partially offset by lower interest credited to policyholder’s account balances and higher Universal life and investment-type product policy fee income in 2015 as compared to the comparable 2014 period. The Company recorded an income tax expense of $186 million and $1.7 billion in 2015 and 2014, respectively.
Net earnings attributable to the noncontrolling interest were $403 million in 2015 as compared to $387 million in 2014. The increase was principally due to higher earnings from AB in 2015 as compared to 2014.
Net earnings inclusive of earnings (losses) attributable to noncontrolling interest were $1.5 billion in 2015, a decrease of $2.9 billion from net earnings of $4.4 billion reported in 2014.
Income tax expense in 2015 was $186 million, primarily due to the $1.0 billion pre-tax earnings in the Insurance segment, compared to income tax expense of $1.7 billion in 2014, primarily due to the $5.5 billion pre-tax earnings in the Insurance segment. Income tax expense in 2015 decreased by a $77 million benefit related to a settlement with the IRS on the appeal of proposed adjustments to the Company’s 2004 and 2005 Federal corporate income tax returns. Income tax expense in 2014 was decreased by a $212 million benefit related to the completion of the 2006 and 2007 IRS audit. In 2015 and 2014, Federal income taxes attributable to consolidated operations were different from the amounts determined by multiplying the earnings before income taxes and noncontrolling interest by the expected Federal income tax rate of 35%. The primary differences were dividend received deductions, nontaxable investment income and noncontrolling interest permanent differences. The Company does not provide Federal and state income taxes on the undistributed earnings of non-U.S. corporate subsidiaries as such earnings are permanently invested outside of the United States.
Earnings from operations before income taxes were $1.7 billion in 2015, a decrease of $4.5 billion from the $6.1 billion in pre-tax earnings reported in 2014. The Insurance segment’s pre-tax earnings from operations totaled $1.0 billion in 2015; $4.5 billion lower than the $5.5 billion pre-tax earnings in 2014. The Investment Management segment’s pre-tax earnings were $618 million in 2015, $15 million higher than the $603 million pre-tax earnings reported in 2014. The Insurance segment’s lower pre-tax earnings in 2015 as compared to 2014 were primarily due to a $141 million decrease in the fair value of the GMIB reinsurance contract asset, $96 million of investment losses from derivative instruments and a $367 million increase in GMDB/GMIB/GWBL reserves in 2015 compared to a $4.0 billion increase in the fair value of the GMIB reinsurance contract asset, $1.6 billion of investment income from derivative instruments and a $1.6 billion increase in GMDB/GMIB/GWBL reserves in 2014. The $15 million higher pre-tax earnings from operations in the investment management segment in 2015 were primarily due to $15 million of investment income from derivative instruments in 2015 compared to $19 million of investments losses from derivative instruments in 2014 and $19 million lower distribution related payments partially offset by $16 million lower other investment income, $7 million higher amortization of deferred sales commission, $6 million higher compensation and benefits and $6 million higher other operating expenses in 2015 as compared to 2014.
Total revenues were $9.8 billion in 2015, a decrease of $5.8 billion from revenues of $15.6 billion reported in 2014. The Insurance segment reported total revenues of $6.8 billion in 2015, a $5.8 billion decrease from the $12.6 billion reported in 2014. The Investment Management segment reported total revenues of $3.0 billion, a $14 million increase from the $3.0 billion of revenues reported in 2014. The decrease in Insurance segment revenues was principally due to a $141 million decrease in the fair value of the GMIB reinsurance contract asset and $1.7 billion lower investment income from derivative instruments ($96 million investment losses in 2015 compared to $1.6 billion investment income in 2014) partially offset by $93 million higher Universal life and investment-type product policy fee income and $43 million lower investment losses. The increase in the Investment Management segment’s revenues in 2015 was primarily due to an increase in income from derivative instruments ($15 million of income in 2015 compared to a $19 million loss in 2014) partially offset by $16 million lower other investment income.
Total benefits and expenses were $8.2 billion in 2015, a decrease of $1.3 billion from the $9.5 billion reported in 2014. The Insurance segment’s total benefits and expenses were $5.8 billion, a decrease of $1.3 billion from 2014 total of $7.1 billion. The Investment Management segment’s total expenses for 2015 were $2.4 billion, $1 million lower than the $2.4 billion in expenses in 2014. The Insurance segment’s decrease was principally due to $909 million lower policyholders’ benefits, $208 million lower interest credited to policyholder’s account balances and $293 million lower other operating costs and expenses partially offset by $82 million higher amortization of DAC, net. The decrease in expenses for the Investment Management segment was principally due to $19 million lower distribution related payments offset by $7 million higher amortization of deferred sales commissions, $6 million higher other operating expenses and $6 million higher compensation and benefits expenses.
RESULTS OF OPERATIONS BY SEGMENT
Insurance.
Insurance - Results of Operations
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| REVENUES | | | | | |
| Universal life and investment-type product policy fee income | $ | 3,423 |
| | $ | 3,208 |
| | $ | 3,115 |
|
| Premiums | 880 |
| | 854 |
| | 874 |
|
| Net investment income (loss): | | | | | |
| Investment income (loss) from derivative instruments | (447 | ) | | (96 | ) | | 1,624 |
|
| Other investment income | 2,118 |
| | 1,994 |
| | 2,136 |
|
| Total net investment income (loss) | 1,671 |
| | 1,898 |
| | 3,760 |
|
| Investment gains (losses), net: | | | | | |
| Total other-than-temporary impairment losses | (65 | ) | | (41 | ) | | (72 | ) |
| Portion of loss recognized in other comprehensive income | — |
| | — |
| | - |
|
| Net impairment losses recognized | (65 | ) | | (41 | ) | | (72 | ) |
| Other investment gains (losses), net | 83 |
| | 25 |
| | 13 |
|
| Total investment gains (losses), net | 18 |
| | (16 | ) | | (59 | ) |
| Commissions, fees and other income | 972 |
| | 1,019 |
| | 1,002 |
|
| Increase (decrease) in the fair value of the reinsurance contract asset | (261 | ) | | (141 | ) | | 3,964 |
|
| Total revenues | 6,703 |
| | 6,822 |
| | 12,656 |
|
| BENEFITS AND OTHER DEDUCTIONS | | | | | |
| Policyholders’ benefits | 2,893 |
| | 2,799 |
| | 3,708 |
|
| Interest credited to policyholders’ account balances | 1,555 |
| | 978 |
| | 1,186 |
|
| Compensation and benefits | 470 |
| | 493 |
| | 455 |
|
| Commissions | 1,095 |
| | 1,111 |
| | 1,147 |
|
| Amortization of deferred policy acquisition costs, net | 162 |
| | (331 | ) | | (413 | ) |
| Interest expense | 13 |
| | 19 |
| | 52 |
|
| All other operating costs and expenses | 789 |
| | 720 |
| | 1,009 |
|
| Total benefits and other deductions | 6,977 |
| | 5,789 |
| | 7,144 |
|
| Earnings (Loss) from Operations, Before Income Taxes | $ | (274 | ) | | $ | 1,033 |
| | $ | 5,512 |
|
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015 – Insurance
Revenues
In 2016, the Insurance segment’s revenues decreased $119 million to $6.7 billion from $6.8 billion in 2015. The decrease was primarily due to a $447 million investment loss from derivative instruments and a $261 million decrease in the fair value of the GMIB reinsurance contract asset in 2016 compared to a $96 million investment loss from derivative instruments and a $141 million decrease in the fair value of the GMIB reinsurance contract asset in 2015. These decreases were partially offset by $215 million higher Universal life and investment-type product policy fee income and $134 million higher other investment income when compared to 2015.
Universal life and investment-type product policy fee income increased $215 million to $3.4 billion in 2016 from $3.2 billion in 2015 principally due a $20 million decrease in the initial fee liability in 2016 compared to an increase of $145 million in the initial fee liability in 2015. The 2016 decrease in the initial fee liability includes the impact from assumption updates and model changes for certain VISL products, which decreased the initial fee liability by $8 million. The 2015 increase in the initial fee liability includes a $112 million out of period adjustment related to the amortization of initial fee liability for certain VISL products and $29 million from favorable changes in expected future margins on certain VISL products. Additionally,in 2016 higher policy fee income earned on annuity and VISL products increased Universal life and investment-type product policy fee income by $50 million.
Premiums totaled $880 million in 2016, $26 million higher than the $854 million in 2015. This increase primarily resulted from lower reinsurance premiums ceded and higher renewal sales of traditional products.
Net investment income decreased $227 million to $1.7 billion in 2016 from $1.9 billion in 2015. The decrease resulted from a decrease of $351 million in investment income from derivative instruments and $124 million higher other investment income. The Insurance segment reported $447 million of investment losses from derivative instruments including those related to hedging programs implemented to mitigate certain risks associated with the GMDB/GMIB/GWBL features of certain variable annuity contracts and those used to hedge risks associated with interest margins on interest sensitive life and annuity contracts as compared to $96 million of investment losses from derivative instruments during 2015. The 2016 investment loss from derivative instruments was primarily driven by improvements in equity markets. The 2015 investment loss from derivatives instruments was primarily driven by an increase in interest rates and equity market volatility during 2015. The increase in other investment income is primarily attributable to a $65 million prepayment penalty charged to an affiliate for early prepayment of a loan, $57 million higher investment income from mortgage loans on real estate and $157 million higher realized and unrealized investment gains from trading account securities partially offset by $14 million lower income from equity in limited partnerships and $10 million higher investment expenses.
Investment gains (losses), net was a gain of $18 million in 2016, as compared to a loss of $16 million in 2015. The Insurance segment’s 2016 higher net gains were primarily due to $40 million higher gains on sales of fixed maturities and a $21 million realized gain on sale of artwork in 2016 which were partially offset by $24 million higher writedowns of fixed maturities.
Commissions, fees and other income decreased $47 million to $1.0 billion in 2016 as compared to $1.0 billion in 2015. The decrease was primarily due to $42 million lower gross investment management and distribution fees. Included in commission fees and other income were fees earned by AXA Equitable FMG of $674 million and $707 million in 2016 and 2015 respectively.
In 2016, there was a $261 million decrease in the fair value of the GMIB reinsurance contract asset as compared to the $141 million decrease in its fair value in 2015; both periods’ changes reflected existing capital market conditions. Included in 2016 were the impacts of improvements in equity markets in 2016 and the December 2015 buyback program which was completed in March 2016 and decreased the fair value of the GMIB reinsurance contract asset by $839 million and $53 million, respectively. Partially offsetting the decrease was the impact from lower swap rates for the longer maturities at year-end 2016, compared to the year-end 2015, which increased the fair value of the reinsurance contract asset by $262 million. Other changes in the fair value of the GMIB reinsurance contract asset resulting from capital market volatility, credit spreads, and other items increased the fair value of the GMIB reinsurance contract asset by $369 million. Included in 2015 were the impacts from increasing interest rates and decreasing equity markets which increased the fair value of the reinsurance contract asset by $490 million and $33 million, respectively. These increases were more than offset by the impacts of updated assumptions resulting from managements’ expectation of future pro-rata withdrawals, election rates and lapse rates which collectively decreased the fair value of the GMIB reinsurance contract asset by $746 million. In addition, management updated its assumptions reflecting inforce management actions from the Company’s lump sum option and the 2015 GMIB buyback offer to certain policyholder’s GMIB contracts which decreased the fair value of the reinsurance contract asset by $306 million. Other changes in the fair value of the GMIB reinsurance contract asset including volatility and inforce spreads increased the fair value of the GMIB reinsurance contract asset by $448 million.
Benefits and Other Deductions
In 2016, total benefits and other deductions increased $1.2 billion to $7.0 billion from $5.8 billion in 2015. The Insurance segment’s increase was principally due to $577 million higher interest credited to policyholders’ account balances, $493 million higher DAC amortization and $94 million higher policyholders’ benefits partially offset by a $23 million decrease in compensation and benefits expense and a $16 million decrease in commission expense
Policyholders’ benefits increased $94 million to $2.9 billion in 2016 from $2.8 billion in 2015. The increase was primarily due to the $58 million higher increase in reserves and $53 million higher benefits paid partially offset by $17 million lower policyholders’ dividend expense. The 2016 higher increase in reserves includes a $145 million increase in payout annuity reserves , $36 million additional loss recognition in Non-par Wind-up annuity reserves and $19 million higher increase in GMDB/GMIB reserves (an increase of $372 million in 2016 as compared to an increase of $353 million in 2015). Partially offsetting the increase in reserves was a $23 million net decrease in GWBL and GMAB reserves (a decrease of $9 million in 2016 as compared to an increase of $14 million in 2015), a $102 million lower increase in the no lapse guarantee reserve and an $87 million decrease in VISL policyholders’ reserves resulting from mortality assumption updates and changes in the premium funding reserve model. In 2015, reserves for VISL products were decreased by $71 million to reflect an assumption update for the actual COI rate increase.
The 2016 increase in GMDB/GMIB reserves includes a $56 million decrease in GMDB/GMIB reserves as a result of the December 2015 buyback that completed in March 2016. The 2015 increase in the GMDB/GMIB reserves reflects the impacts of changes
in capital markets which increased the GMDB/GMIB reserves by $249 million. The 2015 GMDB/GMIB reserve balance also includes a $723 million increase in reserves resulting from the Company’s update to the RTM assumption and a $129 million increase in reserves to reflect updated assumptions of future GMIB costs as a result of lower expected short-term lapses for those policyholders who do not accept the GMIB buyout offer program initiated in fourth quarter 2015. Partially offsetting these increases was a $637 million decrease in reserves resulting from the Company’s updated expectations of election, partial withdrawal and long-term lapse rates. Also decreasing the GMIB and GWBL reserves in 2015 were the impacts of updated assumptions resulting from the Company’s lump sum option added to certain policyholder’s GMIB and GWBL contracts in 2015 which decreased the GMIB and GWBL reserve by $55 million.
In 2016, interest credited to policyholders’ account balances totaled $1.6 billion, an increase of $577 million from the $1.0 billion reported in 2015 primarily due to higher interest credited on certain variable annuity contracts which is based upon performance of market indices subject to guarantees.
Total compensation and benefits totaled $470 million in 2016, a $23 million decrease from $493 million in 2015. The decrease is primarily a result of a $46 million decrease in employee benefit costs and stock plan expenses partially offset by $23 million higher employee salaries.
In 2016, commission expense totaled $1.1 billion, a decrease of $16 million compared to 2015, principally due to a decrease in indexed universal life product sales.
In 2016, interest expense totaled $13 million; a decrease of $6 million from $19 million in 2015. The decrease is due to the repayment at maturity of a $200 million callable 7.7% surplus note during fourth quarter 2015, partially offset by $8 million higher interest expense on repurchase agreement transactions.
Amortization of DAC, net was $162 million in 2016, an increase of $493 million from $(331) million of amortization of DAC, net in 2015. DAC amortization in 2016 included $218 million of unfavorable changes in expected future margins primarily on VISL products (partially offset in the initial fee liability) resulting from updates to the General Account spread assumption to reflect lower expected investment yields and the impact of reflecting the updated benefit reserve projection in the DAC calculation which increased the amortization of DAC by $105 million. In addition, in 2016 the Company recorded $116 million of accelerated DAC amortization after performing the loss recognition testing of the VISL line of business. Partially offsetting the increase in amortization were updates to the mortality assumption and updates to the persistency assumption on certain VISL products which decreased the amortization of DAC by $46 million. Other one-time updates including balance true ups which decreased the amortization of DAC by $43 million. DAC amortization in 2015 included $191 million of favorable changes in expected future margins on VISL products (partially offset in the initial fee liability) primarily a result of updates to the RTM, mortality, lapse and pro-rata withdrawal assumptions. Other drivers offsetting the increase in DAC amortization primarily resulted from baseline amortization and DAC reactivity to realized capital gains (losses). The increase in Amortization of DAC also included a $17 million and $4 million decrease in capitalization of first year commissions and deferrable operating expenses, respectively.
Other operating costs and expenses totaled $789 million in 2016, an increase of $69 million from the $720 million reported in 2015. The increase is primarily related to $120 million higher amortization of reinsurance costs related to the deferred asset recorded from the Company’s reinsurance transaction with AXA Arizona and unaffiliated reinsurers and a $21 million donation to the AXA Foundation from the proceeds received from the sale of artwork in 2016. Partially offsetting the increase in other operating expenses were $27 million lower legal expenses, $17 million lower consulting expenses and $20 million lower other general and administrative expenses.
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014 – Insurance
Revenues
In 2015, the Insurance segment reported total revenues of $6.8 billion, a $5.9 billion decrease from the $12.7 billion reported in 2014. The decrease in Insurance segment revenues was principally due to a $141 million decrease in the fair value of the GMIB reinsurance contract asset compared to a $4.0 billion increase in the fair value of the GMIB reinsurance contract asset in 2015, $1.7 billion lower investment income from derivative instruments ($96 million investment losses in 2015 compared to $1.6 billion investment income in 2014) and $142 million lower other investment income partially offset by $93 million higher Universal life and investment-type product policy fee income and $43 million lower investment losses.
Universal life and investment-type product policy fee income increased $93 million to $3.2 billion in 2015 from $3.1 billion in 2014. The increase was principally due to $205 million higher policy fee income earned on variable annuity and variable and interest sensitive life products partially offset by a $112 million higher increase in the initial fee liability in 2015 as compared
to 2014. During 2015, management made an out of period adjustment in the amortization of initial fee liability for certain VISL products resulting in a $112 million increase in the initial fee liability and favorable changes in expected future margins on VISL products increased the initial fee liability by $29 million and $20 million in 2015 and 2014, respectively.
Premiums totaled $854 million in 2015, $20 million lower than the $874 million in 2014. This decrease primarily resulted from lower traditional life insurance sales.
Net investment income (loss) decreased $1.9 billion to $1.9 billion in 2015 from $3.8 billion in 2014. The decrease resulted from a $1.7 billion decrease in investment income from derivative instruments ($96 million investment losses in 2015 compared to $1.6 billion investment income in 2014), a $123 million decrease in equity income in limited partnerships, a $15 million decrease in interest income on loans to an affiliate and $27 million and $11 million lower investment income from trading account securities and fixed maturities, respectively, partially offset by $32 million higher income from mortgage loans on real estate. The Insurance segment reported a $245 million loss from derivative instruments related to hedging programs implemented to mitigate certain risks associated with the GMDB/GMIB/GWBL features of certain variable annuity contracts and $149 million of income from derivatives used to hedge risks associated with interest margins on interest sensitive life and other annuity contracts in 2015 as compared to $1.4 billion of income from derivative instruments related to hedging programs implemented to mitigate certain risks associated with the GMDB/GMIB/GWBL features of certain variable annuity contracts and $252 million of income from derivatives used to hedge risks associated with interest margins on interest sensitive life and other annuity contracts in 2014. The 2015 investment loss from derivatives instruments was primarily driven by an increase in interest rates and equity market volatility during 2015. The 2014 investment income from derivative instruments was primarily driven by a decrease in interest rates and relatively flat equity markets.
Investment gains (losses), net was a loss of $16 million in 2015, as compared to a loss of $59 million in 2014. The Insurance segment’s investment loss, net in 2015 was primarily due to $31 million lower write-downs of fixed maturities ($41 million in 2015 and $72 million in 2014) and $6 million higher realized gains from fixed maturities.
Commissions, fees and other income increased $17 million to $1.0 billion in 2015 as compared to $1.0 billion in 2014. This increase was primarily due to $17 million higher fee income for AXA Distributors, including $10 million higher service fee income from MONY Life Insurance Company of America ("MONY America") as a result of AXA Financial’s strategy to sell life insurance product outside of New York through MONY America. Included in commission fees and other income were fees earned by AXA Equitable FMG of $707 million and $711 million in 2015 and 2014, respectively.
In 2015, there was a $141 million decrease in the fair value of the GMIB reinsurance contract asset as compared to the $4.0 billion increase in its fair value in 2014; both periods’ changes reflected existing capital market conditions. Included in 2015 were the impacts from increasing interest rates and decreasing equity markets which increased the fair value of the reinsurance contract asset by $490 million and $33 million, respectively. These increases were more than offset by the impacts of updated assumptions resulting from managements’ expectation of future pro-rata withdrawals, election rates and lapse rates which collectively decreased the fair value of the GMIB reinsurance contract asset by $746 million. In addition, management updated its assumptions reflecting inforce management actions from the Company’s lump sum option and the 2015 GMIB buyback offer to certain policyholder’s GMIB contracts which decreased the fair value of the reinsurance contract asset by $306 million. Other changes in the fair value of the GMIB reinsurance contract asset including volatility and inforce spreads increased the fair value of the GMIB reinsurance contract asset by $448 million.
Included in 2014 was the impact from decreasing interest rates which increased the fair value of the GMIB reinsurance contract asset by $3.7 billion. In addition in 2014, refinements to the fair value calculation of the GMIB reinsurance contract asset and updated assumptions of future GMIB costs as a result of lower expected short-term lapses for those policyholders who did not accept the GMIB buyout offer that expired in third quarter 2014 increased the fair value of the GMIB reinsurance contract asset by $655 million and $62 million, respectively. Partially offsetting these increases was the impact from improvements in equity markets which decreased the fair value of the GMIB reinsurance contract asset by $609 million. In addition, in 2014, the Company updated its mortality assumption used to value future GMIB costs for contracts that receive GMIB benefits as a result of the contract value going to $0, which decreased the fair value of the GMIB reinsurance contract asset by $153 million.
Benefits and Other Deductions
Our primary expenses are:
In 2015 totalpolicyholders’ benefits and other deductions were $5.8 billion, a decrease of $1.3 billion from the 2014 total of $7.1 billion. The decrease was principally due to $909 million lower policyholders’ benefits, $208 million lower interest credited to policyholder’s account balances and $289 million lower other operating costs and expenses partially offset by $82 million higher amortization of DAC.
Policyholders’ benefits decreased $909 million to $2.8 billion in 2015 from $3.7 billion in 2014. The decrease was primarily due to a $1.2 billion lower increase in GMDB/GMIB reserves (increase of $353 million and $1.5 billion in 2015 and 2014, respectively) and a $31 million lower increase in GWBL and GMAB reserves (increases of $14 million and $45 million in 2015 and 2014 respectively). In addition, in 2015 reserves for variable and interest-sensitive life products were decreased by $71 million to reflect an assumption update for the actual COI rate increase. These decreases were partially offset by a $173 million increase in benefits paid and $116 million higher net increase in the no lapse guarantee reserve (reflecting a $55 million decrease in ceded reserves as a result of model refinements in the calculation of affiliated ceded reserves).
The $353 million increase in the GMDB/GMIB reserves in 2015 reflects the impacts of changes in capital markets which increased the GMDB/GMIB reserves by $249 million. The 2015 GMDB/GMIB reserve balance also includes a $723 million increase in reserves resulting from the Company’s update to the RTM assumption and a $129 million increase in reserves to reflect updated assumptions of future GMIB costs as a result of lower expected short-term lapses for those policyholders who do not accept the GMIB buyout offer program initiated in fourth quarter 2015. Partially offsetting these increases was a $637 million decrease in reserves resulting from the Company’s updated expectations of election, partial withdrawal and long-term lapse rates. Also decreasing the GMIB and GWBL reserves in 2015 were the impacts of updated assumptions resulting from the Company’s lump sum option added to certain policyholder’s GMIB and GWBL contracts in 2015 which decreased the GMIB and GWBL reserve by $55 million.
The $1.5 billion increase in the GMDB/GMIB reserves in 2014 reflects the impacts of changes in capital markets which increased the GMDB/GMIB reserves by $1.8 billion. The increase in the GMDB/GMIB reserves also includes updated assumptions of future GMIB costs as a result of lower expected short-term lapses for those policyholders who did not accept the GMIB buyout offer that expired in third quarter 2014, model refinements and updated assumptions of future GMIB costs for contracts that receive GMIB benefits as a result of the contract value going to $0, which decreased the GMIB/DB reserves by $152 million. The 2014 increase in GWBL and GMAB reserves reflects refinements in the fair value calculation of these reserves which increased the reserve by $37 million.
In 2015, interest credited to policyholders’ account balances totaled $978 million, a decrease of $208 million from the $1.2 billion reported in 2014 primarily duebalances;
sales commissions and compensation paid to lower interest credited on certain variable annuity contracts which is based upon performance of market indices subject to guaranteesintermediaries and lower amortization of sales inducements.advisors that distribute our products and services; and
Total compensation and benefits totaled $493 millionprovided to our employees and other operating expenses.
Policyholders’ benefits are driven primarily by mortality, customer withdrawals and benefits which change in 2015, a $38 million increase from $455 millionresponse to changes in 2014, primarily due to higher salary costs, employeecapital market conditions. In addition, some of our policyholders’ benefits and share based compensation.
In 2015, commission expense totaled $1.1 billion, a decrease of $36 million compared to 2014, principally due to a decrease in indexed universal life product sales.
In 2015, interest expense totaled $19 million; a decrease of $33 million from $52 million in 2014. The decrease is dueare directly tied to the repaymentAV and benefit base of a $500 million callable 7.1% surplus note during the second quarter of 2014 and repayment of a $325 million surplus note with an interest rate of 6.0%our variable annuity products. Interest credited to policyholders varies in fourth quarter 2014 to AXA Financial.
Amortization of DAC, net was $(331) million in 2015, an increase of $82 million from $(413) million of amortization of DAC, net in 2014. The increase in DAC amortization is primarily due to higher baseline amortization partially offset by $103 million favorable changes in expected future margins on variable and interest-sensitive life products (partially offset in the initial fee liability) and updatesrelation to the RTM and lapse assumptions in 2015 compared to $56 million favorable changes in expected future margins on variable and interest-sensitive life products (partially offset inamount of the initial fee liability) in 2014. Also increasing the amortization of DAC were the impacts of a $12 million and a $1 million decrease in capitalization of first yearunderlying AV or benefit base. Sales commissions and deferrable operatingcompensation paid to intermediaries and advisors vary in relation to premium and fee income generated from these sources, whereas compensation and benefits to our employees are more constant and impacted by market wages, and decline with increases in efficiency. Our ability to manage these expenses respectively.
Other operating costsacross various economic cycles and expenses totaled $720 million in 2015, a decrease of $289 million from the $1.0 billion reported in 2014. The decreaseproducts is primarily related to a $195 million lower amortization of reinsurance costs relatedcritical to the deferred asset recorded from the Company’s reinsurance transaction with AXA Arizona, a decreaseprofitability of $68 million in amortization of deferred cost of reinsurance with third partiesour company.
Net Income Volatility
We have offered and $39 million lower restructuring costs partially offset by an increase of $30 million in consulting fees and $26 million higher legal expenses.
Premiums and Deposits
The Company offers a balanced and diversified product portfolio that takes into account the macroeconomic environment and customer preferences and drives profitable growth while appropriately managing risk. Variable annuity products continue to account for the majority of the Company’s sales.
The following table lists sales for major insurance product lines for 2016, 2015 and 2014. Premiums and deposits are presented gross of internal conversions and are presented gross of reinsurance ceded:
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Retail: | | | | | |
| Annuities | | | | | |
| First year | $ | 3,669 |
| | $ | 3,702 |
| | $ | 3,775 |
|
| Renewal | 2,244 |
| | 2,195 |
| | 2,146 |
|
| | 5,913 |
| | 5,897 |
| | 5,921 |
|
Life(1) | | | | | |
| First year | 144 |
| | 156 |
| | 174 |
|
| Renewal | 1,649 |
| | 1,682 |
| | 1,712 |
|
| | 1,793 |
| | 1,838 |
| | 1,886 |
|
Other(2) | | | | | |
| First year | — |
| | — |
| | — |
|
| Renewal | 233 |
| | 229 |
| | 240 |
|
| | 233 |
| | 229 |
| | 240 |
|
| Total retail | 7,939 |
| | 7,964 |
| | 8,047 |
|
| Wholesale: | | | | | |
| Annuities | | | | | |
| First year | 4,658 |
| | 4,137 |
| | 4,228 |
|
| Renewal | 297 |
| | 247 |
| | 187 |
|
| | 4,955 |
| | 4,384 |
| | 4,415 |
|
Life(1) | | | | | |
| First year | 25 |
| | 33 |
| | 32 |
|
| Renewal | 701 |
| | 630 |
| | 627 |
|
| | 726 |
| | 663 |
| | 659 |
|
| Total wholesale | 5,681 |
| | 5,047 |
| | 5,074 |
|
Total Premiums and Deposits(3) | $ | 13,620 |
| | $ | 13,011 |
| | $ | 13,121 |
|
| |
(1) | Includes variable, interest-sensitive and traditional life products. |
| |
(2) | Includes reinsurance assumed and health insurance. |
| |
(3) | Excludes funding agreement deposits |
2016 Compared to 2015.
Total premiums and deposits for insurance and annuity products for 2016 were $13.6 billion, a $609 million increase from $13.0 billion in 2015 while total first year premiums and deposits increased $468 million to $8.5 billion in 2016 from $8.0 billion in the 2015. The annuity line’s first year premiums and deposits increased $488 million to $8.3 billion principally due to the $521 million increase in sales in the wholesale channel. The increase in first year annuity sales in the wholesale channel is primarily due to higher sales of the Company’s SCS and other variable annuity products that do not offer enhanced guaranteed living benefits partially offset by lower sales of Retirement Cornerstone® and Accumulator® products. First year premiums and deposits for the life insurance products decreased $20 million, primarily due to a decrease in sales of Indexed universal life insurance products in both the retail and wholesale channels.
2015 Compared to 2014.
Total premiums and deposits for insurance and annuity products for 2015 were $13.0 billion, a $110 million decrease from $13.1 billion in 2014 while total first year premiums and deposits decreased $181 million to $8.0 billion in 2015 from $8.2 billion in 2014. The annuity line’s first year premiums and deposits decreased $164 million to $7.8 billion principally due to a $91 million and $73 million decrease in sales in the wholesale and retail channels, respectively. First year premiums and deposits for the life insurance products decreased $17 million, primarily due to lower sales of UL and term life products in the retail channel.
The decrease in variable annuity sales for 2015 was primarily due to lower sales of certain variable annuity products with enhanced guaranteevariable annuity guaranteed benefits generally consistent with industry wide decreases of annuity sales. (“GMxB”) features. The decreasefuture claims exposure on these features is sensitive to movements in first year annuity sales were partially offset by higher sales of certain variable annuities that do not include enhanced guarantee benefits.
Surrenders and Withdrawals.
The following table presents surrender and withdrawal amounts and rates for major insurance product lines. Annuity surrenders and withdrawals are presented net of internal replacements.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Rates(1) |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| | (Dollars in Millions) | | | | | | |
| Annuities | $ | 8,051 |
| | $ | 7,493 |
| | $ | 9,202 |
| | 6.6 | % | | 6.3 | % | | 7.8 | % |
| Variable and interest-sensitive life | 696 |
| | 737 |
| | 747 |
| | 3.4 | % | | 3.6 | % | | 3.6 | % |
| Traditional life | 190 |
| | 189 |
| | 192 |
| | 2.6 | % | | 2.6 | % | | 2.5 | % |
Total (2) | $ | 8,937 |
| | $ | 8,419 |
| | $ | 10,141 |
|
|
| | | | |
| |
(1) | Surrender rates are based on the average surrenderable future policy benefits and/or policyholders’ account balances for the related policies and contracts in force during each year. |
| |
(2) | Excludes funding agreements withdrawals |
2016 Compared to 2015.
Surrenders and withdrawals increased $518 million, from $8.4 billion in 2015 to $8.9 billion in 2016. There was an increase of $558 million and $1 million in annuities and traditional life, respectively, and a decrease of $41 million in VISL products surrenders and withdrawals. The increase in annuities surrenders for 2016 is due to the impact of $558 million of surrenders related to the Company’s 2015 buyback program to purchase from certain policyholders the GMDB and GMIB riders contained in their Accumulator® contracts. The buyback program expired in March 2016.
2015 Compared to 2014.
Surrenders and withdrawals decreased $1.7 billion, from $10.1 billion in 2014 to $8.4 billion in 2015. There was a decrease of $1.7 billion in individual annuities surrenders and withdrawals with decreases of $10 million and $3 million, respectively, in variableequity markets and interest sensitiverates. Accordingly, we have implemented hedging and traditional life products. The annuities surrender rate decreasedreinsurance programs designed to 6.3% in 2015 from 7.8% in 2014. Annuity surrenders in 2015 and 2014 include $201 million and $1.8 billion of surrenders related tomitigate the Company’s buyback programs to purchase from certain policyholders the GMDB and GMIB riders contained in their Accumulator® contracts. As a result of these programs, the Company expects a change in the short-term behavior of policyholders, as those who do not accept the offer are assumed to be less likely to lapse their contract over the short term.
Investment Management.
The table that follows presents the operating results of the Investment Management segment, consisting principally of AB’s operations, for 2016, 2015 and 2014.
Investment Management - Results of Operations |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Revenues: | | | | | |
| Investment advisory and service fees | $ | 1,933 |
| | $ | 1,974 |
| | $ | 1,958 |
|
| Distribution revenues | 384 |
| | 427 |
| | 445 |
|
| Bernstein research services | 480 |
| | 493 |
| | 483 |
|
| Other revenues | 99 |
| | 102 |
| | 109 |
|
| Commissions, fees and other income | 2,896 |
| | 2,996 |
| | 2,995 |
|
| Net investment income (losses) | 135 |
| | 33 |
| | 15 |
|
| Investment gains (losses), net | (2 | ) | | (4 | ) | | 1 |
|
| Total revenues | 3,029 |
| | 3,025 |
| | 3,011 |
|
| Expenses: | | | | | |
| Compensation and benefits | 1,254 |
| | 1,291 |
| | 1,285 |
|
| Distribution related payments | 372 |
| | 394 |
| | 413 |
|
| Interest expense | 3 |
| | 1 |
| | 1 |
|
| Other operating costs and expenses | 694 |
| | 721 |
| | 709 |
|
| Total expenses | 2,323 |
| | 2,407 |
| | 2,408 |
|
| Earnings (losses) from Operations before Income Taxes | $ | 706 |
| | $ | 618 |
| | $ | 603 |
|
Year Ended December 31, 2016 Compared to the Year Ended December 31, 2015 – Investment Management
Revenues
Revenues totaled $3.0 billion in 2016, an increase of $4 million from $3.0 billion in 2015. The increase is primarily due to $102 million higher Net investment income and $2 million lower net investment losses partially offset by a $41 million decrease in Investment advisory and services fees, $43 million lower Distribution revenues, a $13 million decrease in Bernstein research revenues and a $3 million decrease in other revenues.
Investment advisory and services fees include base fees and performance-based fees. The increase or decrease in base fees is primarily attributable to an increase or decrease in average AUM. In 2016, investment advisory and services fees totaled $1.9 billion, a decrease of $41 million from the $2.0 billion in 2015. The decrease includes a decrease in base fees of $49 million partially offset by an increase of $9 million in performance-based fees. Retail investment advisory and services fees and Institutional investment advisory and services base and performance fees decreased $47 million and $14 million respectively, primarily due to a decrease in average AUM in 2016, as compared to 2015, partially offset by an increase in Private Wealth Management base and performance fees of $20 million.
Bernstein research revenues decreased $13 million in 2016 as compared to 2015. The decrease was the result of declines in client revenues across the U.S., Europe and Asia.
Distribution revenues were $384 million in 2016 as a decrease of $43 million as compared to the $427 million in 2015, while the corresponding average AUM of these mutual funds decreased.
Net investment income (loss) consisted principally of realized and unrealized gains (losses) on trading investments, income (losses) from derivative instruments and dividend and interest income, offset by interest expense related to interest accrued on cash balances in customers’ brokerage accounts. The $102 million increase in net investment income to $135 million in 2016 as compared to $33 million in 2015 was principally due to a $75 million investment gain from the sale of an investment holding $27 million higher income from seed capital investments, $15 million higher income from AB private equity investment fund and other consolidated VIE investments partially offset by $31 million lower investment income from derivative instruments ($16 million of investment losses from derivative instruments in 2016 as compared to $15 million of investment income from derivative instruments in 2015).
Expenses
The Investment Management segment’s total expenses were $2.3 billion in 2016, a decrease of $84 million from the $2.4 billion in 2015 attributed to lower compensation and benefits of $37 million, lower distribution related expenses of $22 million, and lower Other operating charges of $27 million.
For 2016, employee compensation and benefits expenses for the Investment Management segment were $1.3 billion a decrease of $37 million as compared to $1.3 billion in 2015. The decrease was primarily attributable to lower incentive compensation of $34 million, lower commissions of $6 million, and lower fringes and other costs of $8 million partially offset by an increase in base compensation of $10 million, reflecting higher severance costs.
The distribution related payments decreased $22 million to $372 million in 2016 from $394 million in 2015 primarily as a result of lower distribution revenues.
The $27 million decrease in other operating costs and expenses to $694 million for 2016 as compared to $721 million in 2015 was primarily due to $17 million lower general and administrative expenses and an $8 million decrease in amortization of deferred sales commissions partially offset by an $18 million real estate charge recorded in 2016.
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014 – Investment Management
Revenues
Revenues totaled $3.0 billion in 2015, an increase of $14 million from $3.0 billion in 2014. The increase is primarily due to higher net investment income, Investment advisory services fees and Bernstein research services of $18 million, $16 million and $10 million, respectively, partially offset by decreases in distribution revenues and investment gains of $18 million and $5 million, respectively.
Investment advisory and services fees include base fees and performance-based fees. The increase or decrease in base fees is primarily attributable to an increase or decrease in average AUM. In 2015, investment advisory and services fees totaled $2.0 billion, an increase of $16 million from the $2.0 billion in 2014. The increase includes an increase of $45 million in base fees offset by decrease of $29 million in performance-based fees. The decrease in performance-based fees primarily resulted from major equity market declines during the year. Institutional investment advisory and services fees increased $1 million primarily due to a $12 million increase in base fees offset by decrease in performance based fees of $11 million. Retail investment advisory and services fees decreased $11 million, primarily due to a $12 million decrease in performance base fees. Private Wealth Management base and performance fees increased $25 million, primarily as a result of a $32 million increase in base fees, which primarily resulted from an increase in average billable AUM, partially offset by decrease of $7 million in performance based fees.
Bernstein research revenues increased $10 million in 2015 as compared to 2014. The increase was the result of growth in the U.S. and Asia, partially offset by a combination of pricing pressure in Europe and weakness in European currencies compared to the U.S. dollar.
Distribution revenues decreased $18 million in 2015 as compared to 2014, while the corresponding average AUM of these mutual funds decreased.
Net investment income (loss) consisted principally of realized and unrealized gains (losses) on trading investments, income (losses) from derivative instruments and dividend and interest income, offset by interest expense related to interest accrued on cash balances in customers’ brokerage accounts. The $18 million increase in net investment income (loss) to $33 million in 2015 as compared to $15 million of income in 2014 was principally due to $34 million higher investment income from derivative instruments ($15 million of income in 2015 as compared to a loss of $19 million in 2014) and $17 million higher investment income from mark-to-market income on investments held by AB’s consolidated private equity fund ($11 million of investment income in 2015 as compared to $6 million of investment loss in 2014). These increases were offset by a $35 million decrease in unrealized losses from equity trading securities ($15 million unrealized losses in 2015 as compared to $20 million of unrealized gains in 2014).
Investment gains (losses), net were losses of $4 million in 2015 as compared to gains of $1 million in 2014 principally from realized and unrealized gains (losses) on deferred compensation related investments.
Expenses
The Investment Management segment’s total expenses were $2.4 billion in 2015, a decrease of $1 million from the $2.4 billion in 2014 primarily due to $19 million lower distribution related payments offset by a $12 million higher other operating expenses and $6 million higher compensation and benefit expenses.
For 2015, employee compensation and benefits expenses for the Investment Management segment were $1.3 billion as compared to $1.3 billion in 2014. The $6 million increase was primarily attributable to higher base compensation of $16 million and higher fringes/other of $6 million partially offset by lower commissions of $14 million and incentive compensation of $6 million.
The distribution related payments decreased $19 million to $394 million in 2015 from $413 million in 2014 primarily as a result of lower distribution revenues.
The $12 million increase in other operating costs and expenses to $516 million for 2015 as compared to $510 million in 2014 was primarily due to higher portfolio services expenses of $8 million, $7 million higher amortization of deferred sales commissions, $4 million higher technology expenses and $4 million higher execution and clearing costs. The increases were partially offset by an $8 million decrease in marketing costs, office related and travel and entertainment expenses.
FEES AND ASSETS UNDER MANAGEMENT
A breakdown of fees and AUM follows:
Fees and Assets Under Management |
| | | | | | | | | | | |
| | At or For the Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| FEES | | | | | |
| Third party | $ | 1,858 |
| | $ | 1,900 |
| | $ | 1,894 |
|
| General Account and other | 49 |
| | 46 |
| | 36 |
|
| AXA Financial Insurance Segment Separate Accounts | 26 |
| | 28 |
| | 27 |
|
| Total Fees | $ | 1,933 |
| | $ | 1,974 |
| | $ | 1,957 |
|
| ASSETS UNDER MANAGEMENT | | | | | |
| Assets by Manager | | | | | |
| AB | | | | | |
Third party(1) | $ | 396,828 |
| | $ | 387,872 |
| | 391,946 |
|
General Account and other(2) | 51,545 |
| | 48,405 |
| | 48,802 |
|
AXA Financial Insurance Segment Separate Accounts(3) | 31,827 |
| | 31,163 |
| | 33,252 |
|
| Total AB | 480,200 |
| | 467,440 |
| | 474,000 |
|
| Insurance Segment | | | | | |
General Account and other(4) | 21,171 |
| | 21,367 |
| | 19,039 |
|
| AXA Financial Insurance Segment Separate Accounts | 81,338 |
| | 78,051 |
| | 79,633 |
|
| Total Insurance Segment | 102,509 |
| | 99,418 |
| | 98,672 |
|
| Total by Account: | | | | | |
| Third party | 396,828 |
| | 387,872 |
| | 391,946 |
|
| General Account and other | 72,716 |
| | 69,788 |
| | 67,841 |
|
| AXA Financial Insurance Segment Separate Accounts | 113,165 |
| | 109,198 |
| | 112,885 |
|
| Total Assets Under Management | $ | 582,709 |
| | $ | 566,858 |
| | $ | 572,672 |
|
| |
(1) | Includes $43.1 billion and $41.4 billion of assets managed on behalf of AXA affiliates at December 31, 2016 and 2015, respectively. Third party AUM includes 100% of the estimated fair value of real estate owned by joint ventures in which third party clients own an interest.
|
| |
(2) | Includes all General Account and other invested assets of the Company managed by AB as well as General Account investments of other members of the AXA Financial Insurance Segment.
|
| |
(3) | Includes $1.8 billion and $1.7 billion of MONY America Separate Accounts’ assets and $31.8 billion and $31.2 billion of AXA Equitable Separate Accounts’ assets managed by AB at December 31, 2016 and 2015, respectively.
|
| |
(4) | Includes invested assets of the Company not managed by AB, principally cash and short-term investments and policy loans, totaling approximately $11.4 billion and $13.7 billion at December 31, 2016 and 2015, respectively, as well as mortgages and equity real estate totaling $9.8 billion and $7.7 billion at December 31, 2016 and 2015, respectively.
|
Fees for assets under management decreased 2.1% from 2015 to 2016 and increased 0.9% from 2014 to 2015, in line with the change in average assets under management for the General Account and third parties.
Total assets under management at December 31, 2016 increased $15.9 billion to $582.7 billion. The $15.9 billion increase at December 31, 2016 as compared to December 31, 2015 primarily resulted from market appreciation and an acquisition of $2.5 billion of AUM by AB partially offset by net outflows and a $3.0 billion AUM adjustment due to AB’s shift from providing asset management services to consulting services for a client.
Changes in assets under management at AB for 2016 and 2015 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Investment Service |
| | Equity Actively Managed | | Equity Passively Managed(1) | | Fixed Income Actively Managed- Taxable | | Fixed Income Actively Managed -Tax- Exempt | | Fixed Income Passively Managed(1) | | Other(2) | | Total |
| | (In billions) |
| Balance as of December 31, 2015 | $ | 110.6 |
| | $ | 46.4 |
| | $ | 207.4 |
| | $ | 33.5 |
| | $ | 10.0 |
| | $ | 59.5 |
| | $ | 467.4 |
|
| Long-term flows: | | | | | | | | | | | | | |
| Sales/new accounts | 14.4 |
| | 0.5 |
| | 45.8 |
| | 8.5 |
| | 0.2 |
| | 3.6 |
| | 73.0 |
|
| Redemptions/terminations | (19.3 | ) | | (1.0 | ) | | (31.0 | ) | | (5.0 | ) | | (0.6 | ) | | (8.9 | ) | | (65.8 | ) |
| Cash flow/unreinvested dividends | (2.7 | ) | | (2.0 | ) | | (9.1 | ) | | (0.2 | ) | | 1.1 |
| | (4.1 | ) | | (17.0 | ) |
| Net long-term (outflows) inflows | (7.6 | ) | | (2.5 | ) | | 5.7 |
| | 3.3 |
| | 0.7 |
| | (9.4 | ) | | (9.8 | ) |
| Acquisitions | — |
| | — |
| | — |
| | — |
| | — |
| | 2.5 |
| | 2.5 |
|
AUM adjustment(3) | — |
| | — |
| | — |
| | — |
| | — |
| | (3.0 | ) | | (3.0 | ) |
Market appreciation (depreciation) | 8.9 |
| | 4.2 |
| | 7.8 |
| | 0.1 |
| | 0.4 |
| | 1.7 |
| | 23.1 |
|
| Net change | 1.3 |
| | 1.7 |
| | 13.5 |
| | 3.4 |
| | 1.1 |
| | (8.2 | ) | | 12.8 |
|
| Balance as of December 31, 2016 | $ | 111.9 |
| | $ | 48.1 |
| | $ | 220.9 |
| | $ | 36.9 |
| | $ | 11.1 |
| | $ | 51.3 |
| | $ | 480.2 |
|
| Balance as of December 31, 2014 | $ | 112.5 |
| | $ | 50.4 |
| | $ | 219.4 |
| | $ | 31.6 |
| | $ | 10.1 |
| | $ | 50.0 |
| | $ | 474.0 |
|
| Long-term flows: | | | | | | | | | | | | | |
| Sales/new accounts | 18.6 |
| | 0.9 |
| | 36.2 |
| | 5.6 |
| | 0.6 |
| | 13.5 |
| | 75.4 |
|
| Redemptions/terminations | (17.2 | ) | | (1.5 | ) | | (34.6 | ) | | (4.4 | ) | | (0.5 | ) | | (3.2 | ) | | (61.4 | ) |
| Cash flow/unreinvested dividends | (3.7 | ) | | (2.5 | ) | | (4.6 | ) | | (0.1 | ) | | (0.1 | ) | | 0.2 |
| | (10.8 | ) |
| Net long-term (outflows) inflows | (2.3 | ) | | (3.1 | ) | | (3.0 | ) | | 1.1 |
| | — |
| | 10.5 |
| | 3.2 |
|
| Acquisitions | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
AUM adjustment(3) | 0.1 |
| | — |
| | — |
| | (0.1 | ) | | — |
| | — |
| | — |
|
| Market appreciation (depreciation) | 0.3 |
| | (0.9 | ) | | (9.0 | ) | | 0.9 |
| | (0.1 | ) | | (1.0 | ) | | (9.8 | ) |
| Net change | (1.9 | ) | | (4.0 | ) | | (12.0 | ) | | 1.9 |
| | (0.1 | ) | | 9.5 |
| | (6.6 | ) |
| Balance as of December 31, 2015 | $ | 110.6 |
| | $ | 46.4 |
| | $ | 207.4 |
| | $ | 33.5 |
| | $ | 10.0 |
| | $ | 59.5 |
| | $ | 467.4 |
|
| |
(1) | Includes index and enhanced index services. |
| |
(2) | Includes multi-asset solutions and services and certain alternative investments. |
| |
(3) | Excludes Institutional assets for which we provide administrative services but not investment management services and Retail funds seed capital for which we do not charge an investment management fee from AUM. |
Average assets under management at AB by distribution channel and investment services were as follows:
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change |
| | 2016 | | 2015 | | 2014 | | 2016-15 | | 2015-14 |
| | (In Billions) |
| Distribution Channel: | | | | | | | | | |
| Institutions | $ | 243.4 |
| | $ | 242.9 |
| | $ | 234.3 |
| | 0.2 | % | | 3.6 | % |
| Retail | 157.7 |
| | 160.6 |
| | 159.6 |
| | (1.8 | ) | | 0.6 |
|
| Private Wealth Management | 78.9 |
| | 77.2 |
| | 73.6 |
| | 2.2 |
| | 4.9 |
|
| Total | $ | 480.0 |
| | $ | 480.7 |
| | $ | 467.5 |
| | (0.1 | )% | | 2.8 | % |
| Investment Service: | | | | | | | | | |
| Equity Actively Managed | $ | 109.4 |
| | $ | 113.2 |
| | $ | 111.2 |
| | (3.4 | )% | | 1.8 | % |
Equity Passively Managed(1) | 46.5 |
| | 49.3 |
| | 49.6 |
| | (5.7 | ) | | (0.6 | ) |
| Fixed Income Actively | | | | | | | | | |
| Managed – Taxable | 221.5 |
| | 217.7 |
| | 219.5 |
| | 1.7 |
| | (0.8 | ) |
| Fixed Income Actively | | | | | | | | | |
| Managed – Tax-exempt | 36.3 |
| | 32.6 |
| | 30.4 |
| | 11.3 |
| | 7.2 |
|
| Fixed Income Passively | | | | | | | | | |
Managed(1) | 11.0 |
| | 10.1 |
| | 9.7 |
| | 8.9 |
| | 4.1 |
|
Other(2) | 55.3 |
| | 57.8 |
| | 47.1 |
| | (4.3 | ) | | 22.7 |
|
| Total | $ | 480.0 |
| | $ | 480.7 |
| | $ | 467.5 |
| | (0.1 | )% | | 2.8 | % |
| |
(1) | Includes index and enhanced index services. |
| |
(2) | Includes multi-asset solutions and services, and certain alternative investments. |
GENERAL ACCOUNT INVESTMENT PORTFOLIO
The General Account investment assets (“GAIA”) portfolio consists of a well-diversified portfolio of public and private fixed maturities, commercial and agricultural mortgages and other loans, equity securities and other invested assets.
The Company has asset/liability management (“ALM”) with separate investment objectives for specific classes of product liabilities. The Company establishes investment strategies to manage each product class’ investment return, duration and liquidity requirements, consistent with management’s overall investment objectives for the GAIA portfolio.
The GAIA portfolio and investment results support the insurance and annuity liabilities of the Insurance segment’s business operations. The following table reconciles the consolidated balance sheet asset and liability amounts to GAIA.
Net General Account Investment Assets
December 31, 2016
|
| | | | | | | | | | | |
| Balance Sheet Captions: | Balance Sheet Total | | Other(1) | | GAIA |
| | (In Millions) |
Fixed maturities, available for sale, at fair value(2) | $ | 32,570 |
| | $ | 1,493 |
| | $ | 31,077 |
|
| Mortgage loans on real estate | 9,757 |
| | 45 |
| | 9,712 |
|
| Policy Loans | 3,361 |
| | (104 | ) | | 3,465 |
|
| Other equity investments | 1,408 |
| | 82 |
| | 1,326 |
|
| Trading securities | 9,134 |
| | 505 |
| | 8,629 |
|
| Other invested assets | 2,186 |
| | 2,186 |
| | — |
|
| Total investments | 58,416 |
| | 4,207 |
| | 54,209 |
|
| Cash and cash equivalents | 2,950 |
| | 862 |
| | 2,088 |
|
| Short-term and long-term debt | (513 | ) | | (513 | ) | | — |
|
| Total | $ | 60,853 |
| | $ | 4,556 |
| | $ | 56,297 |
|
| |
(1) | Assets listed in the “Other” category principally consist of the Company’s loans to affiliates and other miscellaneous assets or liabilities related to GAIA that are reclassified from various balance sheet lines held in portfolios other than the General Account which are not managed as part of GAIA, including related accrued income or expense, certain reclassifications and intercompany adjustments, other invested assets related to Derivatives and Alliance investments and, for fixed maturities, the reversal of net unrealized gains (losses). The “Other” category is deducted in arriving at GAIA. |
| |
(2) | The liability for repurchase agreements is included with Fixed Maturities at December 31, 2016, 2015 and 2014. |
Investment Results of General Account Investment Assets
The following table summarizes investment results by asset category for the periods indicated. |
| | | | | | | | | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | Yield | | Amount | | Yield | | Amount | | Yield | | Amount |
| | (Dollars in Millions) |
| Fixed Maturities: | | | | | | | | | | | |
| Investment grade | | | | | | | | | | | |
| Income (loss) | 4.53 | % | | $ | 1,367 |
| | 4.44 | % | | $ | 1,297 |
| | 4.62 | % | | $ | 1,329 |
|
| Ending assets | | | 29,487 |
| | | | 28,998 |
| | | | 28,958 |
|
| Below investment grade | | | | | | | | | | | |
| Income | 7.02 | % | | 109 |
| | 6.98 | % | | 109 |
| | 6.57 | % | | 121 |
|
| Ending assets | | | 1,590 |
| | | | 1,321 |
| | | | 1,847 |
|
| Mortgages: | | | | | | | | | | | |
| Income (loss) | 5.54 | % | | 462 |
| | 5.07 | % | | 354 |
| | 5.27 | % | | 336 |
|
| Ending assets | | | 9,712 |
| | | | 7,480 |
| | | | 6,794 |
|
| Other Equity Investments: | | | | | | | | | | | |
| Income (loss) | 4.70 | % | | 62 |
| | 4.5 | % | | 66 |
| | 12.14 | % | | 204 |
|
| Ending assets | | | 1,326 |
| | | | 1,339 |
| | | | 1,632 |
|
| Policy Loans: | | | | | | | | | | | |
| Income | 6.03 | % | | 210 |
| | 6.09 | % | | 213 |
| | 6.13 | % | | 216 |
|
| Ending assets | | | 3,465 |
| | | | 3,499 |
| | | | 3,515 |
|
| Cash and Short-term Investments: | | | | | | | | | | | |
| Income | — | % | | 11 |
| | — | % | | 1 |
| | — | % | | 1 |
|
| Ending assets | | | 2,088 |
| | | | 2,530 |
| | | | 2,845 |
|
| Trading Securities: | | | | | | | | | | | |
| Income | 0.67 | % | | 49 |
| | 0.80 | % | | 44 |
| | 0.91 | % | | 38 |
|
| Ending assets | | | 8,629 |
| | | | 6,303 |
| | | | 4,513 |
|
| Total Invested Assets: | | | | | | | | | | | |
| Income | 4.19 | % | | 2,270 |
| | 4.1 | % | | 2,084 |
| | 4.53 | % | | 2,245 |
|
| Ending Assets | | | 56,297 |
| | | | 51,470 |
| | | | 50,104 |
|
| Debt and Other: | | | | | | | | | | | |
| Interest expense and other | | | — |
| | | | (9 | ) | | | | (15 | ) |
| Ending assets (liabilities) | | | — |
| | | | — |
| | | | (201 | ) |
| Total: | | | | | | | | | | | |
| Investment income | 4.19 | % | | 2,270 |
| | 4.10 | % | | 2,075 |
| | 4.63 | % | | 2,230 |
|
| Less: investment fees | (0.11 | )% | | (60 | ) | | (0.11 | )% | | (55 | ) | | (0.11 | )% | | (52 | ) |
| Investment Income, Net | 4.08 | % | | $ | 2,210 |
| | 3.99 | % | | $ | 2,020 |
| | 4.52 | % | | $ | 2,178 |
|
| Ending Net Assets | | | $ | 56,297 |
| | | | $ | 51,470 |
| | | | $ | 49,903 |
|
The increase in the book yield in 2016 when compared to 2015 was primarily due to prepayment of fixed maturities and mortgage loans.
Fixed Maturities
The fixed maturity portfolio consists largely of investment grade corporate debt securities and includes significant amounts of U.S. government and agency obligations. At December 31, 2016, 75.0% of the fixed maturity portfolio was publicly traded. At December 31, 2016, GAIA held commercial mortgage backed securities (“CMBS”) with an amortized cost of $415 million. The General Account had a $0.3 millioneconomic exposure to the sovereign debt of Italy and no exposure to the sovereign debt of Greece, Portugal, Spain and the Republic of Ireland. The General Account had $2.1 billion or 6.4% of exposure to the oil and gas industry ($1.4 billion in the Energy sector, $630 million in the Utility sector and $88 million in other sectors) at December 31, 2016. Of the total oil and gas industry related securities the General Account held at December 31, 2016 an amortized cost of $1.9 billion or 92.0% was above investment grade. Given recent market conditions the Company expects some ofus from these securities to fall below investment grade in the future. See “Fixed Maturities by Industry” below.
Fixed Maturities by Industry
The General Account’s fixed maturities portfolios include publicly-traded and privately-placed corporate debt securities across an array of industry categories.
The following table sets forth these fixed maturities by industry category as of the dates indicated along with their associated gross unrealized gains and losses.
Fixed Maturities by Industry(1)
|
| | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | (In Millions) |
| At December 31, 2016 | | | | | | | |
| Corporate Securities: | | | | | | | |
| Finance | $ | 4,764 |
| | $ | 150 |
| | $ | 20 |
| | $ | 4,894 |
|
| Manufacturing | 5,525 |
| | 249 |
| | 40 |
| | 5,734 |
|
| Utilities | 3,395 |
| | 201 |
| | 24 |
| | 3,572 |
|
| Services | 3,095 |
| | 133 |
| | 22 |
| | 3,206 |
|
| Energy | 1,383 |
| | 70 |
| | 15 |
| | 1,438 |
|
| Retail and wholesale | 1,017 |
| | 34 |
| | 9 |
| | 1,042 |
|
| Transportation | 748 |
| | 50 |
| | 6 |
| | 792 |
|
| Other | 74 |
| | 3 |
| | — |
| | 77 |
|
| Total corporate securities | 20,001 |
| | 890 |
| | 136 |
| | 20,755 |
|
| U.S. government | 10,724 |
| | 221 |
| | 624 |
| | 10,321 |
|
| Commercial mortgage-backed | 415 |
| | 28 |
| | 72 |
| | 371 |
|
Residential mortgage-backed(2) | 294 |
| | 20 |
| | — |
| | 314 |
|
| Preferred stock | 519 |
| | 45 |
| | 10 |
| | 554 |
|
| State & municipal | 432 |
| | 63 |
| | 2 |
| | 493 |
|
| Foreign governments | 375 |
| | 29 |
| | 14 |
| | 390 |
|
| Asset-backed securities | 51 |
| | 10 |
| | 1 |
| | 60 |
|
| Total | $ | 32,811 |
| | $ | 1,306 |
| | $ | 859 |
| | $ | 33,258 |
|
| At December 31, 2015 | | | | | | | |
| Corporate Securities: | | | | | | | |
| Finance | $ | 4,680 |
| | $ | 188 |
| | $ | 18 |
| | $ | 4,850 |
|
| Manufacturing | 5,837 |
| | 270 |
| | 110 |
| | 5,997 |
|
| Utilities | 3,235 |
| | 200 |
| | 44 |
| | 3,391 |
|
| Services | 2,942 |
| | 126 |
| | 35 |
| | 3,033 |
|
| Energy | 1,728 |
| | 46 |
| | 96 |
| | 1,678 |
|
| Retail and wholesale | 1,069 |
| | 38 |
| | 10 |
| | 1,097 |
|
| Transportation | 819 |
| | 49 |
| | 12 |
| | 856 |
|
| Other | 74 |
| | 2 |
| | 1 |
| | 75 |
|
| Total corporate securities | 20,384 |
| | 919 |
| | 326 |
| | 20,977 |
|
| U.S. government | 8,783 |
| | 279 |
| | 305 |
| | 8,757 |
|
| Commercial mortgage-backed | 591 |
| | 29 |
| | 87 |
| | 533 |
|
Residential mortgage-backed(2) | 607 |
| | 32 |
| | — |
| | 639 |
|
| Preferred stock | 592 |
| | 57 |
| | 2 |
| | 647 |
|
| State & municipal | 437 |
| | 68 |
| | 1 |
| | 504 |
|
| Foreign governments | 397 |
| | 36 |
| | 17 |
| | 416 |
|
| Asset-backed securities | 68 |
| | 10 |
| | 1 |
| | 77 |
|
| Total | $ | 31,859 |
| | $ | 1,430 |
| | $ | 739 |
| | $ | 32,550 |
|
| |
(1) | Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings. |
| |
(2) | Includes publicly traded agency pass-through securities and collateralized mortgage obligations. |
Fixed Maturities Credit Quality
The Securities Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“NAIC”), evaluates the investments of insurers for regulatory reporting purposes and assigns fixed maturity securities to one of six categories (“NAIC Designations”). NAIC designations of “1” or “2” include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s or BBB- or higher by Standard & Poor’s. NAIC Designations of “3” through “6” are referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by Standard & Poor’s. As a result of time lags between the funding of investments and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date. Pending receipt of SVO ratings, the categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis.
The amortized cost of the General Account’s public and private below investment grade fixed maturities totaled $1.2 billion, or 3.5%, of the total fixed maturities at December 31, 2016 and $895 million, or 2.8%, of the total fixed maturities at December 31, 2015. Gross unrealized losses on public and private fixed maturities increased from $739 million in 2015 to $859 million in 2016. Below investment grade fixed maturities represented 5.2% and 12.4% of the gross unrealized losses at December 31, 2016 and 2015, respectively. For public, private and corporate fixed maturity categories, gross unrealized gains were lower and gross unrealized losses were higher in 2016 than in the prior year.
Public Fixed Maturities Credit Quality. The following table sets forth the General Account’s public fixed maturities portfolios by NAIC rating at the dates indicated.
Public Fixed Maturities
|
| | | | | | | | | | | | | | | | | |
NAIC Designation(1) | Rating Agency Equivalent | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | (In Millions) |
| At December 31, 2016 | | | | | | | | | |
| 1 | Aaa, Aa, A | | $ | 17,819 |
| | $ | 653 |
| | $ | 696 |
| | $ | 17,776 |
|
| 2 | Baa | | 6,303 |
| | 367 |
| | 41 |
| | 6,629 |
|
| | Investment grade | | 24,122 |
| | 1,020 |
| | 737 |
| | 24,405 |
|
| 3 | Ba | | 345 |
| | 6 |
| | — |
| | 351 |
|
| 4 | B | | 132 |
| | 1 |
| | 1 |
| | 132 |
|
| 5 | C and lower | | — |
| | — |
| | — |
| | — |
|
| 6 | In or near default | | 15 |
| | 1 |
| | 1 |
| | 15 |
|
| | Below investment grade | | 492 |
| | 8 |
| | 2 |
| | 498 |
|
| Total Public Fixed Maturities | | $ | 24,614 |
| | $ | 1,028 |
| | $ | 739 |
| | $ | 24,903 |
|
| At December 31, 2015 | | | | | | | | | |
| 1 | Aaa, Aa, A | | $ | 16,263 |
| | $ | 789 |
| | $ | 360 |
| | $ | 16,692 |
|
| 2 | Baa | | 6,831 |
| | 332 |
| | 137 |
| | 7,026 |
|
| | Investment grade | | 23,094 |
| | 1,121 |
| | 497 |
| | 23,718 |
|
| 3 | Ba | | 354 |
| | 4 |
| | 29 |
| | 329 |
|
| 4 | B | | 101 |
| | — |
| | 7 |
| | 94 |
|
| 5 | C and lower | | 28 |
| | — |
| | 2 |
| | 26 |
|
| 6 | In or near default | | 3 |
| | — |
| | — |
| | 3 |
|
| | Below investment grade | | 486 |
| | 4 |
| | 38 |
| | 452 |
|
| Total Public Fixed Maturities | | $ | 23,580 |
| | $ | 1,125 |
| | $ | 535 |
| | $ | 24,170 |
|
| |
(1) | At December 31, 2016 and 2015, no securities had been categorized based on expected NAIC designation pending receipt of SVO ratings. |
Private Fixed Maturities Credit Quality. The following table sets forth the General Account’s private fixed maturities portfolios by NAIC rating at the dates indicated.
|
| | | | | | | | | | | | | | | | | |
NAIC Designation(1) | Rating Agency Equivalent | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | (In Millions) |
| At December 31, 2016 | | | | | | | | | |
| 1 | Aaa, Aa, A | | $ | 3,913 |
| | $ | 149 |
| | $ | 54 |
| | $ | 4,008 |
|
| 2 | Baa | | 3,623 |
| | 123 |
| | 23 |
| | 3,723 |
|
| | Investment grade | | 7,536 |
| | 272 |
| | 77 |
| | 7,731 |
|
| 3 | Ba | | 491 |
| | 3 |
| | 14 |
| | 480 |
|
| 4 | B | | 128 |
| | 1 |
| | 9 |
| | 120 |
|
| 5 | C and lower | | 28 |
| | 1 |
| | 12 |
| | 17 |
|
| 6 | In or near default | | 14 |
| | 1 |
| | 8 |
| | 7 |
|
| | Below investment grade | | 661 |
| | 6 |
| | 43 |
| | 624 |
|
| Total Private Fixed Maturities | | $ | 8,197 |
| | $ | 278 |
| | $ | 120 |
| | $ | 8,355 |
|
| At December 31, 2015 | | | | | | | | | |
| 1 | Aaa, Aa, A | | $ | 4,167 |
| | $ | 180 |
| | $ | 47 |
| | $ | 4,300 |
|
| 2 | Baa | | 3,703 |
| | 120 |
| | 103 |
| | 3,720 |
|
| | Investment grade | | 7,870 |
| | 300 |
| | 150 |
| | 8,020 |
|
| 3 | Ba | | 243 |
| | 1 |
| | 7 |
| | 237 |
|
| 4 | B | | 46 |
| | — |
| | 7 |
| | 39 |
|
| 5 | C and lower | | 76 |
| | — |
| | 17 |
| | 59 |
|
| 6 | In or near default | | 44 |
| | 4 |
| | 23 |
| | 25 |
|
| | Below investment grade | | 409 |
| | 5 |
| | 54 |
| | 360 |
|
| Total Private Fixed Maturities | | $ | 8,279 |
| | $ | 305 |
| | $ | 204 |
| | $ | 8,380 |
|
| |
(1) | Includes, as of December 31, 2016 and 2015, respectively, 12 securities with amortized cost of $190 million (fair value, $180 million) and 19 securities with amortized cost of $313 million (fair value, $307 million) that were categorized based on expected NAIC designation pending receipt of SVO ratings. |
Corporate Fixed Maturities Credit Quality. The following table sets forth the General Account’s holdings of public and private corporate fixed maturities by NAIC rating at the dates indicated.
Corporate Fixed Maturities |
| | | | | | | | | | | | | | | | | |
NAIC Designation | Rating Agency Equivalent | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | | (In Millions) |
| At December 31, 2016 | | | | | | | | | |
| 1 | Aaa, Aa, A | | $ | 9,593 |
| | $ | 432 |
| | $ | 70 |
| | $ | 9,955 |
|
| 2 | Baa | | 9,353 |
| | 444 |
| | 50 |
| | 9,747 |
|
| | Investment grade | | 18,946 |
| | 876 |
| | 120 |
| | 19,702 |
|
| 3 | Ba | | 828 |
| | 9 |
| | 14 |
| | 823 |
|
| 4 | B | | 214 |
| | 2 |
| | 1 |
| | 215 |
|
| 5 | C and lower | | 13 |
| | 1 |
| | 1 |
| | 13 |
|
| 6 | In or near default | | — |
| | 2 |
| | — |
| | 2 |
|
| | Below investment grade | | 1,055 |
| | 14 |
| | 16 |
| | 1,053 |
|
| Total Corporate Fixed Maturities | | $ | 20,001 |
| | $ | 890 |
| | $ | 136 |
| | $ | 20,755 |
|
| At December 31, 2015 | | | | | | | | | |
| 1 | Aaa, Aa, A | | $ | 9,800 |
| | $ | 514 |
| | $ | 54 |
| | $ | 10,260 |
|
| 2 | Baa | | 9,911 |
| | 396 |
| | 232 |
| | 10,075 |
|
| | Investment grade | | 19,711 |
| | 910 |
| | 286 |
| | 20,335 |
|
| 3 | Ba | | 568 |
| | 6 |
| | 36 |
| | 538 |
|
| 4 | B | | 75 |
| | — |
| | 3 |
| | 72 |
|
| 5 | C and lower | | 29 |
| | — |
| | 1 |
| | 28 |
|
| 6 | In or near default | | 1 |
| | 3 |
| | — |
| | 4 |
|
| | Below investment grade | | 673 |
| | 9 |
| | 40 |
| | 642 |
|
| Total Corporate Fixed Maturities | | $ | 20,384 |
| | $ | 919 |
| | $ | 326 |
| | $ | 20,977 |
|
| |
(1) | Includes, as of December 31, 2016 and 2015, respectively, 12 securities with amortized cost of $190 million (fair value, $180 million) and 18 securities with amortized cost of $312 million (fair value, $306 million) that were categorized based on expected NAIC designation pending receipt of SVO ratings. |
Asset-backed Securities
At December 31, 2016, the amortized cost and fair value of asset-backed securities held were $51 million and $60 million, respectively; at December 31, 2015, those amounts were $68 million and $77 million, respectively.
Commercial Mortgage-backed Securities
The following table sets forth the amortized cost and fair value of the General Account’s commercial mortgage-backed securities at the dates indicated by credit quality and by year of issuance (vintage).
Commercial Mortgage-Backed Securities
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vintage | Moody’s Agency Rating | | Total December 31, 2016 | | Total December 31, 2015 |
| Aaa | | Aa | | A | | Baa | | Ba and Below |
| | (In Millions) |
| At amortized cost: | | | | | | | | | | | | | |
| 2004 and Prior Years | $ | 14 |
| | $ | 2 |
| | $ | 3 |
| | $ | 7 |
| | $ | 23 |
| | $ | 49 |
| | $ | 103 |
|
| 2005 | 3 |
| | — |
| | 1 |
| | 20 |
| | 112 |
| | 136 |
| | 217 |
|
| 2006 | — |
| | — |
| | — |
| | 15 |
| | 143 |
| | 158 |
| | 196 |
|
| 2007 | — |
| | — |
| | — |
| | — |
| | 72 |
| | 72 |
| | 75 |
|
| Total CMBS | $ | 17 |
| | $ | 2 |
| | $ | 4 |
| | $ | 42 |
| | $ | 350 |
| | $ | 415 |
| | $ | 591 |
|
| At fair value: | | | | | | | | | | | | | |
| 2004 and Prior Years | $ | 14 |
| | $ | 2 |
| | $ | 3 |
| | $ | 7 |
| | $ | 22 |
| | $ | 48 |
| | $ | 96 |
|
| 2005 | 3 |
| | — |
| | 1 |
| | 20 |
| | 111 |
| | 135 |
| | 212 |
|
| 2006 | — |
| | — |
| | — |
| | 15 |
| | 107 |
| | 122 |
| | 157 |
|
| 2007 | — |
| | — |
| | — |
| | — |
| | 65 |
| | 65 |
| | 68 |
|
| Total CMBS | $ | 17 |
| | $ | 2 |
| | $ | 4 |
| | $ | 42 |
| | $ | 305 |
| | $ | 370 |
| | $ | 533 |
|
Mortgages
Investment Mix
At December 31, 2016 and 2015, respectively, approximately 16.8% and 14.7%, respectively, of GAIA were in commercial and agricultural mortgage loans. The table below shows the composition of the commercial and agricultural mortgage loan portfolio, before the loss allowance, as of the dates indicated. A portion of the funds used to originate new mortgage loans in 2016 were received from the issuance of approximately $1.7 billion of long term funding agreements to the FHLBNY.
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | (In Millions) |
| Commercial mortgage loans | $ | 7,264 |
| | $ | 5,230 |
|
| Agricultural mortgage loans | $ | 2,501 |
| | $ | 2,330 |
|
| Total Mortgage Loans | $ | 9,765 |
| | $ | 7,560 |
|
The investment strategy for the mortgage loan portfolio emphasizes diversification by property type and geographic location with a primary focus on asset quality. The tables below show the breakdown of the amortized cost of the General Account’s investments in mortgage loans by geographic region and property type as of the dates indicated.
Mortgage Loans by Region and Property Type |
| | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Amortized Cost | | % of Total | | Amortized Cost | | % of Total |
| | (Dollars in Millions) |
| By Region: | | | | | | | |
| U.S. Regions: | | | | | | | |
| Pacific | $ | 2,760 |
| | 28.3 | % | | $ | 2,014 |
| | 26.6 | % |
| Middle Atlantic | 2,671 |
| | 27.4 |
| | 2,101 |
| | 27.8 |
|
| South Atlantic | 1,069 |
| | 10.9 |
| | 879 |
| | 11.6 |
|
| East North Central | 818 |
| | 8.4 |
| | 535 |
| | 7.1 |
|
| Mountain | 725 |
| | 7.4 |
| | 567 |
| | 7.5 |
|
| West North Central | 713 |
| | 7.3 |
| | 603 |
| | 8.0 |
|
| West South Central | 448 |
| | 4.6 |
| | 413 |
| | 5.5 |
|
| New England | 371 |
| | 3.8 |
| | 272 |
| | 3.6 |
|
| East South Central | 190 |
| | 1.9 |
| | 176 |
| | 2.3 |
|
| Total Mortgage Loans | $ | 9,765 |
| | 100 | % | | $ | 7,560 |
| | 100 | % |
| By Property Type: | | | | | | | |
| Office Buildings | $ | 3,249 |
| | 33.3 | % | | $ | 2,251 |
| | 29.8 | % |
| Agricultural properties | 2,501 |
| | 25.6 |
| | 2,330 |
| | 30.8 |
|
| Apartment complexes | 2,439 |
| | 25.0 |
| | 1,622 |
| | 21.5 |
|
| Retail Stores | 585 |
| | 6.0 |
| | 471 |
| | 6.2 |
|
| Industrial Buildings | 453 |
| | 4.6 |
| | 377 |
| | 5.0 |
|
| Hospitality | 416 |
| | 4.3 |
| | 400 |
| | 5.3 |
|
| Other | 122 |
| | 1.2 |
| | 109 |
| | 1.4 |
|
| Total Mortgage Loans | $ | 9,765 |
| | 100 | % | | $ | 7,560 |
| | 100 | % |
At December 31, 2016, the General Account investments in commercial mortgage loans had a weighted average loan-to-value ratio of 60% while the agricultural mortgage loans weighted average loan-to-value ratio was 46%.
The following table provides information relating to the Loan-to-value and debt service coverage ratios for commercial and agricultural mortgage loans as of December 31, 2016. The values used in these ratio calculations were developed as part of the periodic review of the commercial and agricultural mortgage loan portfolio, which includes an evaluation of the underlying collateral value.
Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Debt Service Coverage Ratio(1) | | |
| Loan-to-Value Ratio | Greater than 2.0x | | 1.8x to 2.0x | | 1.5x to 1.8x | | 1.2x to 1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total Mortgage Loans |
| | (In Millions) |
| 0% - 50% | $ | 992 |
| | $ | 233 |
| | $ | 355 |
| | $ | 524 |
| | $ | 286 |
| | $ | 49 |
| | $ | 2,439 |
|
| 50% - 70% | 3,358 |
| | 487 |
| | 882 |
| | 1,433 |
| | 295 |
| | 45 |
| | 6,500 |
|
| 70% - 90% | 282 |
| | 65 |
| | 231 |
| | 131 |
| | 28 |
| | 46 |
| | 783 |
|
| 90% plus | — |
| | — |
| | 28 |
| | 15 |
| | — |
| | — |
| | 43 |
|
| Total Commercial and Agricultural Mortgage Loans | $ | 4,632 |
| | $ | 785 |
| | $ | 1,496 |
| | $ | 2,103 |
| | $ | 609 |
| | $ | 140 |
| | $ | 9,765 |
|
| |
(1) | The debt service coverage ratio is calculated using actual results from property operations. |
The tables below show the breakdown of the commercial and agricultural mortgage loans by year of origination at December 31, 2016.
Mortgage Loans by Year of Origination |
| | | | | | |
| | December 31, 2016 |
| Year of Origination | Amortized Cost | | % of Total |
| | (Dollars In Millions) |
| 2016 | $ | 3,308 |
| | 33.9 | % |
| 2015 | 1,437 |
| | 14.7 |
|
| 2014 | 1,331 |
| | 13.6 |
|
| 2013 | 1,642 |
| | 16.8 |
|
| 2012 | 945 |
| | 9.7 |
|
| 2011 and prior | 1,102 |
| | 11.3 |
|
| Total Mortgage Loans | $ | 9,765 |
| | 100 | % |
At December 31, 2016 and 2015, respectively, $6 million and $32 million of mortgage loans were classified as problem loans while $60 million and $63 million were classified as potential problem loans and $15 million and $16 million were classified as restructured loans.
The TDR mortgage loan shown in the table below has been modified five times since 2011. The modifications extended the maturity from its original maturity of November 5, 2014 to March 5, 2017 and extended interest only payments through maturity. In November 2015, the recorded investment was reduced by $45 million in conjunction with the sale of the majority of the underlying collateral and $32 million from a charge-off. The remaining $15 million mortgage loan balance reflects the value of the remaining underlying collateral and cash held in escrow supporting the mortgage loan. Since the fair market value of the underlying real estate and cash held in escrow collateral is the primary factor in determining the allowance for credit losses, modifications of loan terms typically have no direct impact on the allowance for credit losses, and therefore, no impact on the financial statements.
Troubled Debt Restructuring - Modifications
|
| | | | | | | | | | |
| | Number of Loans | | Outstanding Recorded Investment |
| | Pre-Modification | | Post-Modification |
| | | | (Dollars In Millions) |
| Commercial mortgage loans | 1 |
| | $ | 15 |
| | $ | 15 |
|
There were no default payments on the above loan during 2016.
Valuation allowances for the commercial mortgage loan portfolio were related to loan specific reserves. The following table sets forth the change in valuation allowances for the commercial mortgage loan portfolio as of the dates indicated. There were no valuation allowances for agricultural mortgages at December 31, 2016 and 2015.
|
| | | | | | | | | | | |
| | Commercial Mortgage Loans |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Allowance for credit losses: | | | | | |
| Beginning Balance, January 1, | $ | 6 |
| | $ | 37 |
| | $ | 42 |
|
| Charge-offs | — |
| | (32 | ) | | (14 | ) |
| Recoveries | (2 | ) | | (1 | ) | | — |
|
| Provision | 4 |
| | 2 |
| | 9 |
|
| Ending Balance, December 31, | $ | 8 |
| | $ | 6 |
| | $ | 37 |
|
| Ending Balance, December 31, | | | | | |
| Individually Evaluated for Impairment | $ | 8 |
| | $ | 6 |
| | $ | 37 |
|
Other Equity Investments
At December 31, 2016, private equity partnerships, hedge funds and real-estate related partnerships were 87.5% of total other equity investments. These interests, which represent 2.1% of GAIA, consist of a diversified portfolio of LBO mezzanine, venture capital and other alternative limited partnerships, diversified by sponsor, fund and vintage year. The portfolio is actively managed to control risk and generate investment returns over the long term. Portfolio returns are sensitive to overall market developments. The General Account had $0.1 million of exposure (less than 0.1% of other equity investments) to private equity partnerships denominated in British currency at December 31, 2016.
Other Equity Investments - Classifications
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | (In Millions) |
| Common stock | $ | 171 |
| | $ | 105 |
|
| Joint ventures and limited partnerships: | | | |
| Private equity | 823 |
| | 884 |
|
| Hedge funds | 221 |
| | 254 |
|
| Real estate related | 158 |
| | 106 |
|
| Total Other Equity Investments | $ | 1,373 |
| | $ | 1,349 |
|
Derivatives
The Company uses derivatives as part of its overall asset/liability risk management primarily to reduce exposuresfeatures due to equity market and interest rate risks. Derivativemovements. Changes in the values of the derivatives associated with these programs due to equity market and interest rate movements are recognized in the periods in which they occur while corresponding changes in offsetting liabilities are recognized over time. This results in net income volatility as further described below. See “—Significant Factors Impacting Our Results—Impact of Hedging and GMIB Reinsurance on Results.”
In addition to our dynamic hedging strategies arestrategy, we have recently implemented static hedge positions designed to reducemitigate the adverse impact of changing market conditions on our statutory capital. We believe this program will continue to preserve the economic value of our variable annuity contracts and better protect our target variable annuity asset level. However, these risks from an economic perspectivenew static hedge positions increase the size of our derivative positions and are all executed withinmay result in higher net income volatility on a period-over-period basis.
Significant Factors Impacting Our Results
The following significant factors have impacted, and may in the frameworkfuture impact, our financial condition, results of a “Derivative Use Plan” approved byoperations or cash flows.
Impact of Hedging and GMIB Reinsurance on Results
We have offered and continue to offer variable annuity products with GMxB features. The future claims exposure on these features is sensitive to movements in the NYDFS. Operation of these hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates, election rates, fund performance, market volatilityequity markets and interest rates. A wide range of derivative contracts are used inAccordingly, we have implemented hedging and reinsurance programs designed to mitigate the economic exposure to us from these hedging programs, including exchange tradedfeatures due to equity currencymarket and interest rate futures contracts, total return and/or other equitymovements. These programs include:
Variable annuity hedging programs. We use a dynamic hedging program (within this program, generally, we reevaluate our economic exposure at least daily and rebalance our hedge positions accordingly) to mitigate certain
swaps, interest rate swap and floor contracts, bond and bond-index total return swaps, swaptions, variance swaps, equity options as well as bond and repo transactions to support50
risks associated with the hedging. TheGMxB features that are embedded in our liabilities for our variable annuity products. This program utilizes various derivative contractsinstruments that are collectively managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’GMxB features’ exposures attributable to movements in the equity markets and interest rates. Although this program is designed to provide a measure of economic protection against the impact of adverse market conditions, it does not qualify for hedge accounting treatment. Accordingly, changes in value of the derivatives will be recognized in the period in which they occur with offsetting changes in reserves partially recognized in the current period, resulting in net income volatility. In addition to our dynamic hedging program, in the fourth quarter of 2017 and the first quarter of 2018, we implemented a new hedging program using static hedge positions (derivative positions intended to be held to maturity with less frequent re-balancing) to protect our statutory capital markets.against stress scenarios. The implementation of this new program in addition to our dynamic hedge program is expected to increase the size of our derivative positions, resulting in an increase in net income volatility.
Derivatives utilizedGMIB reinsurance contracts. Historically, GMIB reinsurance contracts were used to hedgecede to affiliated and non-affiliated reinsurers a portion of our exposure to Variable Annuities with Guarantee Features
The Company has issued and continues to offer certain variable annuity products with GMDB,that offer a GMIB feature. We account for the GMIB reinsurance contracts as derivatives and GIB features. The Company had previously issued certainreport them at fair value. Gross reserves for GMIB reserves are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts. Accordingly, our gross reserves will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts. Because changes in the fair value of the GMIB reinsurance contracts are recorded in the period in which they occur and a majority of the changes in gross reserves for GMIB are recognized over time, net income will be more volatile.
Effect of Assumption Updates on Operating Results
Most of the variable annuity products, with GWBLvariable universal life insurance and other features. universal life insurance products we offer maintain policyholder deposits that are reported as liabilities and classified within either Separate Account liabilities or policyholder account balances. Our products and riders also impact liabilities for future policyholder benefits and unearned revenues and assets for DAC and deferred sales inducements (“DSI”). The risk associated withvaluation of these assets and liabilities (other than deposits) are based on differing accounting methods depending on the GMDB feature is that under-performanceproduct, each of the financial markets could result in GMDB benefits,which requires numerous assumptions and considerable judgment. The accounting guidance applied in the eventvaluation of death, being higher than what accumulated policyholders’ account balances would support. The risk associated withthese assets and liabilities includes, but is not limited to, the GMIB feature is that under-performance of the financial markets could result in the present value of GMIB benefits, in the event of annuitization, being higher than what accumulated policyholders’ account balances would support, taking into account the relationship between current annuity purchase rates and the GMIB guaranteed annuity purchase rates. The risk associated with the GIB and GWBL and other features is that under-performance of the financial markets could result in the GIB and GWBL and other features’ benefits being higher than what accumulated policyholders’ account balances would support.
For GMDB, GMIB, GIB and GWBL and other features, the Company retains certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected assumptions for mortality, lapse and surrender, withdrawal and contractholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMDB, GMIB, GIB and GWBL and other features that result from financial markets movements. A portion of exposure to realized equity volatility is hedged using equity options and variance swaps and a portion of exposure to credit risk is hedged using total return swaps on fixed income indices. Additionally, the Company is party to total return swapsfollowing: (i) traditional life insurance products for which the reference U.S. Treasury securitiesassumptions are contemporaneously purchased from the marketlocked in at inception; (ii) universal life insurance and sold to the swap counterparty. As these transactions result in a transfer of control of the U.S. Treasury securities to the swap counterparty, the Company derecognizes these securities with consequent gain or loss from the sale. The Company has also purchased reinsurance contracts to mitigate the risks associated with GMDB features and the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts issued by the Company.
The Company has in place a hedge program utilizing interest rate swaps to partially protect the overall profitability of future variable annuity sales against declining interest rates.
Derivatives utilized to hedge crediting rate exposure on SCS, SIO, MSO and IUL products/investment options
The Company hedges crediting rates in the SCS variable annuity, SIO in the EQUI-VEST® variable annuity series, MSO in the variable life insurance productssecondary guarantees for which benefit liabilities are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and IUL insurance products. These products permitrecognizing those benefits ratably over the contract owner to participate in the performance of an index, ETF or commodity price movement up to a capaccumulation period based on total expected assessments; (iii) certain product guarantees for a set period of time. They also contain a protection feature, in which the Company will absorb, up to a certain percentage, the loss of value in an index, ETF or commodity price, which varies by product segment.
In order to support the returns associated with these features, the Company enters into derivative contracts whose payouts, in combination with fixed income investments, emulate those of the index, ETF or commodity price, subject to caps and buffers.
Derivatives utilized to hedge risks associated with interest-rate risk arising from issuance of funding agreements
The Company issues fixed and floating rate funding agreements, to fund originated non-recourse commercial real estate mortgage loans, the terms of which may result in short term economic interest rate risk between mortgage loan commitment and mortgage loan funding. The Company uses forward interest-rate swaps to protect against interest rate fluctuations during this period. Realized gains and losses from the forward interest rate swapsbenefit liabilities are amortizedaccrued over the life of the loancontract in interest creditedproportion to policyholder’s account balances.actual and future expected policy assessments; and (iv) certain product guarantees reported as embedded derivatives at fair value.
Derivatives utilizedOur actuaries oversee the valuation of these product liabilities and assets and review underlying inputs and assumptions. We comprehensively review the actuarial assumptions underlying these valuations and update assumptions during the third quarter of each year. Assumptions are based on a combination of company experience, industry experience, management actions and expert judgment and reflect our best estimate as of the date of each financial statement. Changes in assumptions can result in a significant change to hedge equity market risks associatedthe carrying value of product liabilities and assets and, consequently, the impact could be material to earnings in the period of the change. For further details of our accounting policies and related judgments pertaining to assumption updates, see Note 2 of the Notes to the Consolidated Financial Statements and “—Summary of Critical Accounting Estimates—Liability for Future Policy Benefits.”
Assumption Updates and Model Changes
In 2018, we began conducting our annual review of our assumptions and models during the third quarter, consistent with industry practice.
Our annual review encompasses assumptions underlying the General Account’s seed money investmentsvaluation of unearned revenue liabilities, embedded derivatives for our insurance business, liabilities for future policyholder benefits, DAC and DSI assets. As a result of this review, some assumptions were updated, resulting in Separate Accounts, retail mutual fundsincreases and Separate Account fee revenue fluctuationsdecreases in the carrying values of these product liabilities and assets.
The table below presents the impact of our actuarial assumption updates during 2018 and 2017 to our Income (loss) from continuing operations, before income taxes and Net income (loss):
The Company’s General Account seed money investments in Separate Account equity funds and retail mutual funds exposes the Company to market risk, including equity market risk which is partially hedged through equity-index futures contracts to minimize such risk.51
|
| | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Impact of assumption updates on Net income (loss): | | | |
| Variable annuity product features related assumption updates | $ | (331 | ) | | $ | 1,324 |
|
| All other assumption updates | 103 |
| | 342 |
|
Impact of assumption updates on Income (loss) from continuing operations, before income tax
| (228 | ) | | 1,666 |
|
Income tax (expense) benefit on assumption updates
| 41 |
| | (583 | ) |
Net income (loss) impact of assumption updates
| $ | (187 | ) | | $ | 1,083 |
|
2018 Assumption Updates
The impact of assumption updates in 2018 on Income (loss) from continuing operations, before income taxes was a decrease of $228 million and a decrease to Net income (loss) of $187 million. This includes a $331 million unfavorable impact on the Company enters into futuresreserves for our Variable annuity product features as a result of unfavorable updates to policyholder behavior, primarily due to annuitization assumptions, partially offset by favorable updates to economic assumptions.
The assumption changes during 2018 consisted of a decrease in Policy charges and fee income of $12 million, a decrease in Policyholders’ benefits of $684 million, an increase in Net derivative losses of $1,065 million, and a decrease in the Amortization of DAC of $165 million.
2017 Assumption Updates
The impact of the assumption updates in 2017 on Income (loss) from continuing operations, before income taxes was an increase of $1,666 million and an increase to Net income (loss) of approximately $1,083 million. This includes a $1,324 million favorable impact on the reserves for our Variable annuity product features as a result of favorable updates to policyholder behavior assumptions.
The assumption changes during 2017 consisted of a decrease in Policy charges and fee income of $88 million, a decrease in Policyholders’ benefits of $23 million, an increase in Amortization of DAC of $247 million, and a decrease in Net derivative losses by $1,978 million.
Macroeconomic and Industry Trends
Our business and consolidated results of operations are significantly affected by economic conditions and consumer confidence, conditions in the global capital markets and the interest rate environment.
Financial and Economic Environment
A wide variety of factors continue to impact global financial and economic conditions. These factors include, among others, concerns over economic growth in the United States, continued low interest rates, falling unemployment rates, the U.S. Federal Reserve’s potential plans to further raise short-term interest rates, fluctuations in the strength of the U.S. dollar, the uncertainty created by what actions the current administration may pursue, concerns over global trade wars, changes in tax policy, global economic factors including programs by the European Central Bank and the United Kingdom’s vote to exit from the European Union and other geopolitical issues. Additionally, many of the products and solutions we sell are tax-advantaged or tax-deferred. If U.S. tax laws were to change, such that our products and solutions are no longer tax-advantaged or tax-deferred, demand for our products could materially decrease. See “Risk Factors—Legal and Regulatory Risks—Future changes in the U.S. tax laws and regulations or interpretations of the Tax Reform Act could reduce our earnings and negatively impact our business, results of operations or financial condition, including by making our products less attractive to consumers.
Stressed conditions, volatility and disruptions in the capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors. An increase in market volatility could affect our business, including through effects on the yields we earn on invested assets, changes in required reserves and capital and fluctuations in the value of our Account Values.
These effects could be exacerbated by uncertainty about future fiscal policy, changes in tax policy, the scope of potential deregulation and levels of global trade.
In the short- to medium-term, the potential for increased volatility, coupled with prevailing interest rates remaining below historical averages, could pressure sales and reduce demand for our products as consumers consider purchasing alternative products to meet their objectives. In addition, this environment could make it difficult to consistently develop products that are attractive to customers. Financial performance can be adversely affected by market volatility and equity indicesmarket declines as fees driven by Account Values fluctuate, hedging costs increase and revenues decline due to mitigatereduced sales and increased outflows.
We monitor the behavior of our customers and other factors, including mortality rates, morbidity rates, annuitization rates and lapse and surrender rates, which change in response to changes in capital market conditions, to ensure that our products and solutions remain attractive and profitable. For additional information on our sensitivity to interest rates and capital market prices, See “Quantitative and Qualitative Disclosures About Market Risk.”
Interest Rate Environment
We believe the interest rate environment will continue to impact our business and financial performance in the future for several reasons, including the following:
Certain of our variable annuity and life insurance products pay guaranteed minimum interest crediting rates. We are required to pay these guaranteed minimum rates even if earnings on our investment portfolio decline, with the resulting investment margin compression negatively impacting earnings. In addition, we expect more policyholders to hold policies with comparatively high guaranteed rates longer (lower lapse rates) in a low interest rate environment. Conversely, a rise in average yield on our investment portfolio should positively impact earnings. Similarly, we expect policyholders would be less likely to hold policies with existing guaranteed rates (higher lapse rates) as interest rates rise.
A prolonged low interest rate environment also may subject us to increased hedging costs or an increase in the amount of statutory reserves that our insurance subsidiaries are required to hold for GMxB features, lowering their statutory surplus, which would adversely affect their ability to pay dividends to us. In addition, it may also increase the perceived value of GMxB features to our policyholders, which in turn may lead to a higher rate of annuitization and higher persistency of those products over time. Finally, low interest rates may continue to cause an acceleration of DAC amortization or reserve increase due to loss recognition for interest sensitive products.
Regulatory Developments
We are regulated primarily by the NYDFS, with some policies and products also subject to federal regulation. On an ongoing basis, regulators refine capital requirements and introduce new reserving standards. Regulations recently adopted or currently under review can potentially impact our statutory reserve and capital requirements.
National Association of Insurance Commissioners (“NAIC”). In 2015, the NAIC Financial Condition (E) Committee established a working group to study and address, as appropriate, regulatory issues resulting from variable annuity captive reinsurance transactions, including reforms that would improve the current statutory reserve and RBC framework for insurance companies that sell variable annuity products. In August 2018, the NAIC adopted the new framework developed and proposed by this working group, expected to take effect January 2020, and which has now been referred to various other NAIC committees to develop the expected full implementation details. Among other changes, the new framework includes new prescriptions for reflecting hedge effectiveness, investment returns, interest rates, mortality and policyholder behavior in calculating statutory reserves and RBC. Once effective, it could materially change the level of variable annuity reserves and RBC requirements as well as their sensitivity to capital markets including interest rate, equity markets, volatility and credit spreads. Overall, we believe the NAIC reform is moving variable annuity capital standards towards an economic framework and is consistent with how we manage our business.
Fiduciary Rules/ “Best Interest” Standards of Conduct. In the wake of the March 2018 federal appeals court decision to vacate the DOL Rule, the SEC and NAIC as well as state regulators are currently considering whether to apply an impartial conduct standard similar to the DOL Rule to recommendations made in connection with certain annuities and, in one case, to life insurance policies. For example, the NAIC is actively working on a proposal to raise the advice standard for annuity sales and in July 2018, the NYDFS issued a final version of Regulation 187 that adopts a “best interest” standard for recommendations regarding the sale of life insurance and annuity products in New York.
Regulation 187 takes effect on August 1, 2019 with respect to annuity sales and February 1, 2020 for life insurance sales and is applicable to sales of life insurance and annuity products in New York. In November 2018, the primary agent groups in New York launched a legal challenge against the NYDFS over the adoption of Regulation 187. It is not possible to predict whether this challenge will be successful. We are currently assessing Regulation 187 to determine the impact it may have on our business. Beyond the New York regulation, the likelihood of enactment of any such state-based regulation is uncertain at this time, but if implemented, these regulations could have adverse effects on our business and consolidated results of operations.
In April 2018, the SEC released a set of proposed rules that would, among other things, enhance the existing standard of conduct for broker-dealers to require them to act in the best interest of their clients; clarify the nature of the fiduciary obligations owed by registered investment advisers to their clients; impose new disclosure requirements aimed at ensuring investors understand the nature of their relationship with their investment professionals; and restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor”. Public comments were due by August 7, 2018. Although the full impact of the proposed rules can only be measured when the implementing regulations are adopted, the intent of this provision is to authorize the SEC to impose on broker-dealers’ fiduciary duties to their customers similar to those that apply to investment advisers under existing law. We are currently assessing these proposed rules to determine the impact they may have on our business.
Impact of the Tax Reform Act
On December 22, 2017, President Trump signed into law the Tax Reform Act, a broad overhaul of the U.S. Internal Revenue Code that changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies.
The Tax Reform Act reduced the federal corporate income tax rate to 21% and repealed the corporate Alternative Minimum Tax (“AMT”) while keeping existing AMT credits. It also contained measures affecting our insurance companies, including changes to the DRD, insurance reserves and tax DAC. As a result of the Tax Reform Act, our Net Income has improved.
In August 2018, the NAIC adopted changes to the RBC calculation, including the C-3 Phase II Total Asset Requirement for variable annuities, to reflect the 21% corporate income tax rate in RBC, which resulted in a reduction to our Combined RBC Ratio.
Overall, the Tax Reform Act had a net earnings from Separate Account fee revenue fluctuations duepositive economic impact on us and we continue to monitor regulations related to this reform.
Consolidated Results of Operations
Our consolidated results of operations are significantly affected by conditions in the capital markets and the economy because we offer market sensitive products. These products have been a significant driver of our results of operations. Because the future claims exposure on these products is sensitive to movements in the equity markets. These positions partially cover fees expectedmarkets and interest rates, we have in place various hedging and reinsurance programs that are designed to be earnedmitigate the economic risks of movements in the equity markets and interest rates. The volatility in Net income attributable to AXA Equitable for the periods presented below results from the Company’s Separate Account products.
Derivatives utilizedmismatch between (i) the change in carrying value of the reserves for General Account Investment Portfolio
Beginning inGMDB and certain GMIB features that do not fully and immediately reflect the second quarterimpact of 2013,equity and interest market fluctuations and (ii) the Company implemented a strategy in its General Account investment portfolio to replicate the credit exposure of fixed maturity securities otherwise permissible under its investment guidelines through the sale of credit default swaps CDSs. Under the terms of these swaps, the Company receives quarterly fixed premiums that, together with any initial amount paid or received at trade inception, replicate the credit spread otherwise currently obtainable by purchasing the referenced entity’s bonds of similar maturity. These credit derivatives have remaining terms of five years or less and are recorded at fair value with changeschange in fair value includingof products with the yield componentGMIB feature that emerges from initialhas a no-lapse guarantee, and our hedging and reinsurance programs.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company revised the presentation of the capitalization of deferred policy acquisition costs (“DAC”) in the consolidated statements of income for all prior periods presented herein by netting the capitalized amounts paidwithin the applicable expense line items, such as Compensation and benefits, Commissions and distribution plan payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of deferred acquisition costs. There was no impact on Net income (loss) or received,Comprehensive income of this reclassification.
The reclassification adjustments for the years ended December 31, 2017 and 2016 are presented in the table below. Capitalization of DAC reclassified to Compensation and benefits, Commissions and distribution plan payments, and Other operating costs and expenses reduced the amounts previously reported in Net investment income (loss). The Company manages its credit exposure taking into consideration both cash and derivatives based positions and selectsthose expense line items, while the reference entities in its replicated credit exposures in a manner consistent with its selectioncapitalization of fixed maturities. In addition, the Company has transacted the sale of CDSs exclusively in single name reference entities of investment grade credit quality and with counterparties subject to collateral posting requirements. If there is an event of default by the reference entity or other such credit event as defined under the terms of the swap contract, the Company is obligated to perform under the credit derivative and, at the counterparty’s option, either pay the referenced amount of the contract less an auction-determined recovery amount or pay the referenced amount of the contract and receive in return the defaulted or similar security of the reference entity for recovery by sale at the contract settlement auction. To date, there have been no events of default or circumstances indicative of a deterioration in the credit quality of the named referenced entities to require or suggest that the Company will have to perform under these CDSs. The maximum potential amount of future payments the Company could be required to make under these credit derivatives is limited to the par value of the referenced securities which is the dollar-equivalent of the derivative notional amount. The SNAC under which the Company executes these CDS sales transactions does not contain recourse provisions for recovery of amounts paid under the credit derivative.
DAC reclassified from the Company purchases TIPSAmortization of deferred policy acquisition costs line item increases that expense line item. |
| | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 |
| | (in millions) |
| Reductions to expense line items: | | | |
| Compensation and benefits | $ | 128 |
| | $ | 128 |
|
| Commissions and distribution plan payments | 443 |
| | 460 |
|
| Other operating costs and expenses | 7 |
| | 6 |
|
| Total reductions | $ | 578 |
| | $ | 594 |
|
| | | | |
| Increase to expense line item: | | | |
| Amortization of deferred policy acquisition costs | $ | 578 |
| | $ | 594 |
|
The following table summarizes our consolidated statements of income (loss) for the years ended December 31, 2018 and other sovereign bonds, both inflation linked and non-inflation linked, as General Account investments and enters into asset or cross-currency basis swaps, to result in payment2017:
Consolidated Statement of the given bond’s coupons and principal at maturity in the bond’s specified currency to the swap counterparty, in return for fixed dollar amounts. These swaps, when considered in combination with the bonds, together result in a net position that is intended to replicate a dollar-denominated fixed-coupon cash bond with a yield higher than a term-equivalent U.S. Treasury bond.Income (Loss)
|
| | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 |
| | (in millions) |
| REVENUES | | | |
| Policy charges and fee income | $ | 3,523 |
| | $ | 3,294 |
|
| Premiums | 862 |
| | 904 |
|
| Net derivative gains (losses) | (1,010 | ) | | 894 |
|
| Net investment income (loss) | 2,478 |
| | 2,441 |
|
| Investment gains (losses), net: | | | |
| Total other-than-temporary impairment losses | (37 | ) | | (13 | ) |
| Other investment gains (losses), net | 41 |
| | (112 | ) |
| Total investment gains (losses), net | 4 |
| | (125 | ) |
| Investment management and service fees | 1,029 |
| | 1,007 |
|
| Other income | 65 |
| | 41 |
|
| Total revenues | 6,951 |
| | 8,456 |
|
| BENEFITS AND OTHER DEDUCTIONS | | | |
| Policyholders’ benefits | 3,005 |
| | 3,473 |
|
| Interest credited to policyholders’ account balances | 1,002 |
| | 921 |
|
| Compensation and benefits | 422 |
| | 327 |
|
| Commissions and distribution related payments | 620 |
| | 628 |
|
| Interest expense | 34 |
| | 23 |
|
| Amortization of deferred policy acquisition costs | 431 |
| | 900 |
|
| Other operating costs and expenses | 2,918 |
| | 635 |
|
| Total benefits and other deductions | 8,432 |
| | 6,907 |
|
| Income (loss) from continuing operations, before income taxes | (1,481 | ) | | 1,549 |
|
| Income tax (expense) benefit from continuing operations | 446 |
| | 1,210 |
|
| Net income (loss) from continuing operations | (1,035 | ) | | 2,759 |
|
| Net income (loss) from discontinued operations, net of taxes and noncontrolling interest | 114 |
| | 85 |
|
| Less: net (income) loss attributable to the noncontrolling interest | 3 |
| | (1 | ) |
| Net income (loss) attributable to AXA Equitable | $ | (918 | ) | | $ | 2,843 |
|
The Company implemented a strategyfollowing discussion compares the results for the year ended December 31, 2018 to hedge a portion of the credit exposure in its General Account investment portfolio by buying protection through a swap. These are swaps on the “super senior tranche” of the investment grade CDX index. Under the terms of these swaps, the Company pays quarterly fixed premiums that, together with any initial amount paid or received at trade inception, serve as premiums paid to hedge the risk arising from multiple defaults of bonds referenced in the CDX index. These credit derivatives have terms of five years or less and are recorded at fair value with changes in fair value, including the yield component that emerges from initial amounts paid or received, reported in Net investment income (loss) from derivative instruments.year ended December 31, 2017.
The tables below present quantitative disclosures about the Company’s derivative instruments, including those embedded in other contracts required to be accounted for as derivative instruments.
At or For
Year Ended December 31, 2018 Compared to the Year Ended December 31, 20162017
Net Income (Loss) Attributable to AXA Equitable
The $3,761 million decrease in net income attributable to AXA Equitable, to a loss of $918 million for the year ended 2018 from net income of $2,843 million for the year ended 2017, was primarily driven by the following notable items:
Other operating costs and expenses increased by $2,283 million mainly due to $1,882 million of amortization of the deferred cost of reinsurance asset in 2018 including the write-off of $1,840 million of this asset, and the settlement of outstanding payments of $248 million, both related to the GMxB Unwind.
Net derivative gains (losses) decreased by $1,904 million mainly due to the unfavorable impact of assumption updates in 2018 compared to the favorable impact of assumption updates in 2017.
Compensation and benefits increased by $95 million primarily due to the loss resulting from the annuity purchase transaction and partial settlement of the employee pension plan in 2018.
Interest credited to policyholders’ account balances increased by $81 million primarily driven by higher SCS AV due to new business growth.
Interest expense increased by $11 million due to higher repurchase agreement costs.
Income tax benefit decreased by $764 million primarily driven by a one-time tax benefit in 2017 related to the Tax Reform Act.
Partially offsetting this decrease were the following notable items:
Amortization of deferred policy acquisition costs decreased by $469 million mainly due to the favorable impact of assumption updates in 2018.
Policyholders’ benefits decreased by $468 million mainly due to the favorable impact of assumption updates in 2018 compared to the unfavorable impact of assumption updates in 2017, combined with the favorable impact of rising interest rates, partially offset by the impact of equity market declines affecting our GMxB liabilities.
Policy charges, fee income and premiums increased by $187 million primarily due to higher cost of insurance charges.
Total investment gains (losses), net increased by $129 million primarily due to the sale of fixed maturities.
Investment management, service fees and other income increased by $46 million primarily due to higher equity markets.
Increase in Net investment income of $37 million primarily due to higher assets from the GMxB Unwind and General Account optimization.
Contractual Obligations
The table below summarizes the future estimated cash payments related to certain contractual obligations as of December 31, 2018. The estimated payments reflected in this table are based on management’s estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the actual cash outflows in future periods will vary, possibly materially, from those reflected in the table. In addition, we do not believe that our cash flow requirements can be adequately assessed based solely upon an analysis of these obligations, as the table below does not contemplate all aspects of our cash inflows, such as the level of cash flow generated by certain of our investments, nor all aspects of our cash outflows.
|
| | | | | | | | | | | | | | | |
| | | | | | | | Gains (Losses) Reported in Net Earnings (Loss) |
| | | Fair Value | |
Notional Amount | | Asset Derivatives | | Liability Derivatives | |
| | (In Millions) |
| Freestanding derivatives | | | | | | | |
Equity contracts:(1) | | | | | | | |
| Futures | $ | 4,983 |
| | $ | — |
| | $ | — |
| | $ | (823 | ) |
| Swaps | 3,439 |
| | 13 |
| | 66 |
| | (281 | ) |
| Options | 11,465 |
| | 2,114 |
| | 1,154 |
| | 727 |
|
Interest rate contracts:(1) | | | | | | | |
| Floors | 1,500 |
| | 11 |
| | — |
| | 4 |
|
| Swaps | 18,892 |
| | 245 |
| | 1,162 |
| | (224 | ) |
| Futures | 6,926 |
| | — |
| | | | 87 |
|
| Swaptions | — |
| | — |
| | | | — |
|
Credit contracts:(1) | | | | | | | |
| Credit default swaps | 2,712 |
| | 19 |
| | 14 |
| | 16 |
|
Other freestanding contracts:(1) | | | | | | | |
| Foreign currency Contracts | 549 |
| | 48 |
| | 1 |
| | 47 |
|
| Margin | — |
| | 101 |
| | — |
| | — |
|
| Collateral | — |
| | 712 |
| | 748 |
| | — |
|
| Net investment income | | | | | | | (447 | ) |
| Embedded derivatives: | | | | | | | |
| GMIB reinsurance contracts | — |
| | 10,309 |
| | — |
| | (261 | ) |
GWBL and other features(2) | — |
| | — |
| | 164 |
| | (20 | ) |
SCS, SIO, MSO and IUL indexed features(3) | — |
| | — |
| | 887 |
| | (754 | ) |
| Balance, December 31, 2016 | $ | 50,466 |
| | $ | 13,572 |
| | $ | 4,196 |
| | $ | (1,482 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | Estimated Payments Due by Period |
| | Total | | 2019 | | 2020-2022 | | 2023-2024 | | 2025 and thereafter |
| | (in millions) |
| Contractual obligations: | | | | | | | | | |
Policyholders’ liabilities (1)
| $ | 100,158 |
| | $ | 1,745 |
| | $ | 5,025 |
| | $ | 6,722 |
| | $ | 86,666 |
|
| FHLBNY Funding Agreements | 3,990 |
| | 1,640 |
| | 1,094 |
| — |
| 475 |
| | 781 |
|
| Interest on FHLBNY Funding Agreements | 267 |
| | 65 |
| | 109 |
| — |
| 50 |
| | 43 |
|
| Operating leases | 419 |
| | 81 |
| | 143 |
| | 129 |
| | 66 |
|
| Loan from affiliates | 572 |
| | 572 |
| | — |
| | — |
| | — |
|
| Employee benefits | 3,941 |
| | 214 |
| | 431 |
| | 410 |
| | 2,886 |
|
| Total Contractual Obligations | $ | 109,347 |
| | $ | 4,317 |
| | $ | 6,802 |
| | $ | 7,786 |
| | $ | 90,442 |
|
_______________
| |
| (1) | ReportedPolicyholders’ liabilities represent estimated cash flows out of the General Account related to the payment of death and disability claims, policy surrenders and withdrawals, annuity payments, minimum guarantees on Separate Account funded contracts, matured endowments, benefits under accident and health contracts, policyholder dividends and future renewal premium-based and fund-based commissions offset by contractual future premiums and deposits on in-force contracts. These estimated cash flows are based on mortality, morbidity and lapse assumptions comparable with the Company’s experience and assume market growth and interest crediting consistent with actuarial assumptions used in Other invested assetsamortizing DAC. These amounts are undiscounted and, therefore, exceed the policyholders’ account balances and future policy benefits and other policyholder liabilities included in the consolidated balance sheets. |
| |
(2) | Reported insheet. They do not reflect projected recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows will differ from these estimates, see “—Summary of Critical Accounting Policies—Liability for Future policy benefitsPolicy Benefits.” Separate Account liabilities have been excluded as they are legally insulated from General Account obligations and other policyholders’ liabilities in the consolidated balance sheets. |
| |
(3) | SCS and SIO indexed features are reported in Policyholders’ account balances; MSO and IUL indexed features are reported in Future policyholders’ benefits and other policyholders’ liabilities in the consolidated balance sheets.will be funded by cash flows from Separate Account assets. |
Derivative Instruments by Category
At or ForUnrecognized tax benefits of $273 million, were not included in the Year Ended December 31, 2015 |
| | | | | | | | | | | | | | | |
| | | | | | | | Gains (Losses) Reported in Net Earnings (Loss) |
| | | | Fair Value | |
| | Notional Amount | | Asset Derivatives | | Liability Derivatives | |
| (In Millions) |
| Freestanding derivatives | | | | | | | |
Equity contracts:(1) | | | | | | | |
| Futures | $ | 6,929 |
| | $ | — |
| | $ | — |
| | $ | (92 | ) |
| Swaps | 1,213 |
| | 7 |
| | 20 |
| | (45 | ) |
| Options | 7,358 |
| | 1,042 |
| | 653 |
| | 13 |
|
Interest rate contracts:(1) | | | | | | | |
| Floors | 1,800 |
| | 61 |
| | — |
| | 12 |
|
| Swaps | 13,653 |
| | 348 |
| | 104 |
| | (7 | ) |
| Futures | 8,685 |
| | — |
| | | | (81 | ) |
| Swaptions | — |
| | — |
| | | | 118 |
|
Credit contracts:(1) | | | | | | | |
| Credit default swaps | 2,412 |
| | 14 |
| | 37 |
| | (14 | ) |
| Net investment income | | | | | | | (96 | ) |
| Embedded derivatives: | | | | | | | |
| GMIB reinsurance contracts | — |
| | 10,570 |
| | — |
| | (141 | ) |
GWBL and other features(2) | — |
| | — |
| | 184 |
| | (56 | ) |
SCS, SIO, MSO and IUL indexed features(3) | — |
| | — |
| | 310 |
| | (38 | ) |
| Balance, December 31, 2015 | $ | 42,050 |
| | $ | 12,042 |
| | $ | 1,308 |
| | $ | (331 | ) |
| |
(1) | Reported in Other invested assets in the consolidated balance sheets. |
| |
(2) | Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets. |
| |
(3) | SCS and SIO indexed features are reported in Policyholders’ account balances; MSO and IUL indexed features are reported in Future policyholders’ benefits and other policyholders’ liabilities in the consolidated balance sheets. |
Dodd-Frank Wall Street Reform and Consumer Protection Act
Since June 2013, various new derivative regulations under Title VIIabove table because it is not possible to make reasonably reliable estimates of the Dodd-Frank Wall Street Reform and Consumer Protection Act have become effective, requiring financial entities, including U.S. life insurers, to clear certain typesoccurrence or timing of newly executed OTC derivativescash settlements with central clearing houses, and to post larger sums of higher quality collateral, among other provisions. Counterparties subject to these regulations are required to post initial margin to the clearing house as well as variation margin to cover any daily negative mark-to-market movements in the value of OTC derivatives covered by these regulations. Centrally cleared OTC derivatives, protected by initial margin requirements and higher quality collateral are expected to reduce the risk of loss in the event of counterparty default. The Company has counterparty exposure to the clearing house and its clearing broker for futures and cleared OTC derivative contracts. Further regulations will increase the amount and quality of collateral required to be posted for non-cleared OTC derivatives by requiring initial margin for uncleared swaps, as well as mandate thresholds, transfer timing, and haircuts for variation margin. Additional regulations are expected to reduce various risks, including the risk of a “run on the bank” scenario in the event of the insolvency of a dealer.
Realized Investment Gains (Losses)
Realized investment gains (losses) are generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for OTTI. Realized investment gains (losses) are also generated from prepayment premiums received on private fixed maturity securities, recoveries of principal on previously impaired securities, provisions for losses on commercial mortgage and other loans,
fair value changes on commercial mortgage loans carried at fair value, and fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment.
The following table sets forth “Realized investment gains (losses), net,” for the periods indicated:
Realized Investment Gains (Losses) |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Fixed maturities | $ | (2 | ) | | $ | (18 | ) | | $ | (54 | ) |
| Other equity investments | (9 | ) | | 3 |
| | (3 | ) |
| Other | (2 | ) | | (1 | ) | | (3 | ) |
| Total | $ | (13 | ) | | $ | (16 | ) | | $ | (60 | ) |
The following table further describes realized gains (losses), net for Fixed maturities:
Fixed Maturities
Realized Investment Gains (Losses), Net |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Gross realized investment gains: | | | | | |
| Gross gains on sales and maturities | $ | 141 |
| | $ | 43 |
| | $ | 47 |
|
| Total gross realized investment gains | 141 |
| | 43 |
| | 47 |
|
| Gross realized investment losses: | | | | | |
| Other-than-temporary impairments recognized in earnings (loss) | (65 | ) | | (41 | ) | | (72 | ) |
| Gross losses on sales and maturities | (78 | ) | | (20 | ) | | (29 | ) |
| Total gross realized investment losses | (143 | ) | | (61 | ) | | (101 | ) |
| Total | $ | (2 | ) | | $ | (18 | ) | | $ | (54 | ) |
The following table sets forth, for the periods indicated, the composition of other-than-temporary impairments recorded in Earnings (loss) by asset type.
Other-Than-Temporary Impairments Recorded in Earnings (Loss) |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Fixed Maturities: | | | | | |
| Public fixed maturities | $ | (22 | ) | | $ | (22 | ) | | $ | (33 | ) |
| Private fixed maturities | (43 | ) | | (19 | ) | | (39 | ) |
| Total fixed maturities securities | (65 | ) | | (41 | ) | | (72 | ) |
| Equity securities | — |
| | — |
| | (3 | ) |
| Total | $ | (65 | ) | | $ | (41 | ) | | $ | (75 | ) |
OTTI on fixed maturities recorded in net earnings (loss) in 2016, 2015 and 2014 were due to credit events or adverse conditions of the respective issuer. In these situations, management believes such circumstances have caused, or will lead to, a deficiency in the contractual cash flows related to the investment. The amount of the impairment recorded in earnings (loss) is the difference between the amortized cost of the debt security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment.taxing authorities.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company conducts operations in two business segments: the Insurance and Investment Management segments. The liquidity and capital resource needs of each of these segments are managed independently.
Analysis of Consolidated Statement of Cash Flows
Years Ended December 31, 2016 and 2015
Cash and cash equivalents of $3.0 billion at December 31, 2016 decreased $78 million from $3.0 billion at December 31, 2015.
Net cash used in operating activities was $461 million in 2016 as compared to net cash used in operating activities of $244 million in 2015. Cash flows from operating activities include such sources as premiums, investment management and advisory fees and investment income offset by such uses as life insurance benefit payments, policyholder dividends, compensation payments, other cash expenditures and tax payments.
Net cash used in investing activities was $5.4 billion, $2.9 billion higher than the $2.5 billion net cash used by investing activities in 2015. The increase was principally due to $3.0 billion higher net purchase of investments and $427 million lower cash inflows from cash settlement related to derivatives which was partially offset by $384 million decrease of loans to affiliates and $158 million lower purchase of short-term investments.
Cash flows provided by financing activities were $5.8 billion in 2016; $2.7 billion higher than the $3.0 billion net cash provided by financing activities in 2015. The impact of the net deposits to policyholders’ account balances was $8.1 billion (including $1.7 billion from the issuance of funding agreements to the FHLBNY) and $3.9 billion in 2016 and 2015, respectively. Net cash inflows related to repurchase and reverse repurchase agreements were $183 million and $860 million in 2016 and 2015 respectively. Partially offsetting these cash inflows were the impacts of $1.1 billion shareholder cash dividends, $552 million cash outflows from changes in collateralized pledged assets and liabilities, $522 million of cash outflows from cash distributions to noncontrolling interest of the Company and non-controlling interest of consolidated VIE's in 2016 compared to $767 million shareholder cash dividends, $272 million cash outflows from changes in collateralized pledged assets and liabilities and $414 million of cash outflows from cash distributions to noncontrolling interest of the Company in 2015.
Years Ended December 31, 2015 and 2014
Cash and cash equivalents of $3.0 billion at December 31, 2015 increased $302 million from $2.7 billion at December 31, 2014.
Net cash used in operating activities was $286 million in 2015 as compared to net cash used in operating activities of $617 million in 2014. Cash flows from operating activities include such sources as premiums, investment management and advisory fees and investment income offset by such uses as life insurance benefit payments, policyholder dividends, compensation payments, other cash expenditures and tax payments.
Net cash used in investing activities was $2.5 billion, $283 million lower than the $2.8 billion net cash used by investing activities in 2014. The decrease was principally due to $1.8 billion lower net purchase of investments which was partially offset by $818 million higher net purchases of trading account securities, $470 million lower cash inflows from cash settlement related to derivatives and $368 million higher purchase of short-term investments.
Cash flows provided by financing activities decreased $809 million from $3.8 billion in 2014 to $3.0 billion in 2015. The impact of the net deposits to policyholders’ account balances was $3.9 billion and $4.0 billion in 2015 and 2014, respectively. During 2015, the Company entered into $860 million of net repurchase and reverse repurchase agreements. Change in short-term borrowings decreased $95 million in 2015 compared to a decrease of $221 million in 2014, which primarily reflect AB’s commercial paper program activity. Change in collateralized pledged assets and liabilities decreased $272 million in 2015, $690 million less than the $418 million increase in 2014. In 2015, AXA Equitable paid $767 million of shareholder cash dividends to AXA Financial and repaid a $200 million surplus note to a third party at maturity. In 2014, AXA Equitable paid $382 million of shareholder cash dividends and repaid $825 million of surplus notes to AXA Financial.
Insurance Segment
The Insurance segment’s liquidity management uses a centralized funds management process. This centralized process includes the monitoring and control of cash flow associated with policyholder receipts and disbursements and General Account portfolio principal, interest and investment activity including derivative transactions. Funds are managed through a banking system designed to reduce float and maximize funds availability. Information regarding liquidity needs and availability is used to produce forecasts of available funds and cash flow. Significant market volatility can affect daily cash requirements due to the settlement and collateral calls of derivative transactions.
In addition to gathering and analyzing information on funding needs, the Insurance segment has a centralized process for both investing short-term cash and borrowing funds to meet cash needs. In general, the short-term investment positions have a maturity profile of 1-7 days with considerable flexibility as to availability.
In managing the liquidity of the Insurance segment’s business, management also considers the risk of policyholder and contractholder withdrawals of funds earlier than assumed when selecting assets to support these contractual obligations. Surrender charges and other contract provisions are used to mitigate the extent, timing and profitability impact of withdrawals of funds by customers from annuity contracts and deposit liabilities. The following table sets forth withdrawal characteristics of the Insurance segment’s General Account annuity reserves and deposit liabilities (based on statutory liability values) as of the dates indicated.
General Accounts Annuity Reserves and Deposit Liabilities |
| | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Amount | | % of Total | | Amount | | % of Total |
| | (Dollars in Millions) |
| Not subject to discretionary withdrawal provisions | $ | 2,773 |
| | 12.4 | % | | $ | 2,819 |
| | 14.1 | % |
| Subject to discretionary withdrawal, with adjustment: | | | | | | | |
| With market value adjustment | 29 |
| | 0.1 |
| | 31 |
| | 0.2 |
|
| At contract value, less surrender charge of 5% or more | 1,174 |
| | 5.2 |
| | 1,399 |
| | 7.0 |
|
| Subtotal | 1,203 |
| | 5.3 |
| | 1,430 |
| | 7.2 |
|
| Subject to discretionary withdrawal at contract value with no surrender charge or surrender charge of less than 5% | 18,427 |
| | 82.3 |
| | 15,793 |
| | 78.7 |
|
| Total Annuity Reserves And Deposit Liabilities | $ | 22,403 |
| | 100 | % | | $ | 20,042 |
| | 100 | % |
Liquidity Requirements. The Insurance segment’s liquidity requirements principally relate to the liabilities associated with its various life insurance, annuity and funding agreements; the active management of various economic hedging programs; shareholder dividends; and operating expenses, including debt service. The Insurance segment’s liabilities include, among other things, the payment of benefits under life insurance, annuity and funding agreements as well as cash payments in connection with policy surrenders, withdrawals and loans.
The Insurance segment’s liquidity needs are affected by: fluctuations in mortality; other benefit payments; policyholder directed transfers from General Account to Separate Account investment options; and the level of surrenders and withdrawals previously discussed in “Results of Continuing Operations by Segment—Insurance,” as well as by cash settlements of its derivative hedging programs, debt service requirements and dividends to its shareholder.
Sources of Liquidity. The principal sources of the Insurance segment’s cash flows are premiums, deposits (including the issuance of funding agreements) and charges on policies and contracts, investment income, investment advisory fees, repayments of principal and sales proceeds from its fixed maturity portfolios, sales of other General Account Investment Assets, borrowings from third parties and affiliates, repurchase agreements and dividends and distributions from subsidiaries.
The Insurance segment’s primary source of short-term liquidity to support its insurance operations is a pool of liquid, high quality short-term instruments structured to provide liquidity in excess of the expected cash requirements. At December 31, 2016, this asset pool included an aggregate of $2.2 billion in highly liquid short-term investments, as compared to $2.5 billion at December 31, 2015. In addition, a substantial portfolio of public bonds including U.S. Treasury and agency securities and other investment grade fixed maturities is available to meet AXA Equitable’s liquidity needs.
Funding and repurchase agreements. As a member of the FHLBNY, AXA Equitable has access to collateralized borrowings. AXA Equitable may also issue funding agreements to the FHLBNY. Both the collateralized borrowings and funding agreements would
require AXA Equitable to pledge qualified mortgage-backed assets and/or government securities as collateral. At December 31, 2016 and 2015 AXA Equitable had $2.2 billion and $500 million respectively, of outstanding funding agreements with the FHLBNY. During 2016, AXA Equitable issued an additional $1.7 billion of funding agreements to the FHLBNY in order to increase investment in commercial mortgage loans. At December 31, 2016 and 2015, the total outstanding balance of repurchase agreements was $2.0 billion and $1.9 billion, respectively. The Company utilized these funding and repurchase agreements for cash management, asset liability management and spread lending purposes.
Third-party borrowings. In December 1995, AXA Equitable issued a $200 million callable 7.7% surplus note in exchange for cash to third parties. The note paid interest semi-annually and matured on December 1, 2015. The Company repaid the note at maturity.
Affiliated loans. In third quarter 2013, AXA Equitable purchased, at fair value, AXA Arizona’s $50 million note receivable from AXA for $56 million. This note pays interest semi-annually at an interest rate of 5.4% and matures on December 15, 2020.
In June 2009, AXA Equitable sold real estate property valued at $1.1 billion to a non-insurance subsidiary of AXA Financial in exchange for $700 million in cash and $400 million in 8.0% ten year term mortgage notes on the property reported in Loans to affiliates in the consolidated balance sheets. In November 2014, this loan was refinanced and a new $382 million, seven year term loan with an interest rate of 4.0% was issued. In January 2016, the property was sold and a portion of the proceeds was used to repay the $382 million term loan outstanding and a $65 million prepayment penalty.
In September 2007, AXA Equitable purchased a $650 million 5.4% Senior Unsecured Note from AXA. The note pays interest semi-annually and was scheduled to mature on September 30, 2012. In March 2011, the maturity date of the note was extended to December 30, 2020 and the interest rate was increased to 5.7%.
Off Balance Sheet Transactions. At December 31, 2016 and 2015, AXA Equitable was not a party to any off balance sheet transactions other than those guarantees and commitments described in Notes 10 and 16 of Notes to Consolidated Financial Statements.
Guarantees and Other Commitments. AXA Equitable had approximately $18 million of undrawn letters of credit issued in favor of third party beneficiaries primarily related to reinsurance as well as $697 million and $883 million of commitments under equity financing arrangements to certain limited partnership and existing mortgage loan agreements, respectively, at December 31, 2016.
Statutory Regulation, Capital and Dividends. AXA Equitable is subject to the regulatory capital requirements of New York law, which are designed to monitor capital adequacy. The level of an insurer’s required capital is impacted by many factors including, but not limited to, business mix, product design, sales volume, invested assets, liabilities, reserves and movements in the capital markets, including interest rates and equity markets. At December 31, 2016, the total adjusted capital was in excess of its regulatory capital requirements and management believes that AXA Equitable has (or has the ability to meet) the necessary capital resources to support its business.
AXA Equitable currently reinsures to AXA Arizona a 100% quota share of all liabilities for GMDB/GMIB riders on the Accumulator® products issued on or after January 1, 2006 and in-force on September 30, 2008. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under UL insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. The reinsurance arrangements with AXA Arizona provide important capital management benefits to AXA Equitable. AXA Equitable receives statutory reserve credits for reinsurance treaties with AXA Arizona to the extent AXA Arizona holds assets in an irrevocable trust ($9.4 billion at December 31, 2016) and/or letters of credit ($3.7 billion at December 31, 2016). These letters of credit are guaranteed by AXA. Under the reinsurance contracts, AXA Arizona is required to transfer assets into and is permitted to transfer assets from the Trust under certain circumstances. The level of statutory reserves held by AXA Arizona fluctuate based on market movements, mortality experience and policyholder behavior. Increasing reserve requirements may necessitate that additional assets be placed in trust and/or securing additional letters of credit, which could adversely impact AXA Arizona’s liquidity. For additional information, see “Item 1A - Risk Factors”.
AXA Equitable monitors its regulatory capital requirements on an ongoing basis taking into account the prevailing conditions in the capital markets. Interest rates and/or equity market performance impact the reserve requirements and capital needed to support the variable annuity guarantee business. While management believes that AXA Equitable currently has the necessary capital to support its business, future capital requirements will depend on future market conditions and regulations and there can be no assurance that sufficient additional required capital could be secured. For additional information, see “Item 1A – Risk Factors”.
Several states, including New York, regulate transactions between an insurer and its affiliates under insurance holding company acts. These acts contain certain reporting requirements and restrictions on provision of services and on transactions, such as intercompany service agreements, asset transfers, reinsurance, loans and shareholder dividend payments by insurers. Depending on their size, such transactions and payments may be subject to prior notice to, or approval by, the insurance department of the applicable state.
AXA Equitable is restricted as to the amounts it may pay as dividends to AXA Financial. Under New York Insurance law, a domestic life insurer may not, without prior approval of the NYDFS, pay a dividend to its shareholders exceeding an amount calculated based on a statutory formula. This formula would permit AXA Equitable to pay shareholder dividends not greater than approximately $1.2 billion during 2017. Payment of dividends exceeding this amount requires the insurer to file a notice of its intent to declare such dividends with the NYDFS, which then has 30 days to disapprove the distribution. In 2016, AXA Equitable paid $1,050 million in shareholder dividends. In 2015, AXA Equitable paid $767 million in shareholder dividends and transferred approximately 10.0 million in Units of AB (fair value of $245 million) in the form of a dividend to AEFS. In 2014, AXA Equitable paid $382 million in shareholder dividends.
For 2016, 2015 and 2014, respectively, AXA Equitable’s statutory net income (loss) totaled $679 million, $2.0 billion and $1.7 billion. Statutory surplus, capital stock and Asset Valuation Reserve (“AVR”) totaled $5.3 billion and $5.9 billion at December 31, 2016 and 2015, respectively.
For additional information, see “Item 1 – Business – Regulation” and “Item 1A – Risk Factors”.
Investment Management Segment
The Investment Management segment’s primary sources of liquidity have been cash flows from AB’s operations, the issuance of commercial paper and proceeds from sales of investments. AB requires financial resources to fund distributions to its General Partner and Unitholders, capital expenditures, repayments of commercial paper and purchases of Holding Units to fund deferred compensation plans.
Debt and Credit Facilities
At December 31, 2016 and 2015, AB had $513 million and $584 million, respectively, in commercial paper outstanding with weighted average interest rates of approximately 0.9% and 0.5% respectively. The commercial paper is short term in nature, and as such, recorded value is estimated to approximate fair value. Average daily borrowings of commercial paper during 2016 and 2015 were $423 million and $338 million, respectively, with weighted average interest rates of approximately 0.6% and 0.3%, respectively.
AB has a $1.0 billion committed, unsecured senior revolving credit facility (the “AB Credit Facility”) with a group of commercial banks and other lenders, which matures on January 17, 2017. The AB Credit Facility provides for possible increases in the principal amount by up to an aggregate incremental amount of $250 million, any such increase being subject to the consent of the affected lenders. The AB Credit Facility is available for AB’s and SCB LLC’s business purposes, including the support of AB’s $1.0 billion commercial paper program. Both AB and SCB LLC can draw directly under the AB Credit Facility and AB management expects to draw on the AB Credit Facility from time to time. AB has agreed to guarantee the obligations of SCB LLC under the AB Credit Facility.
The AB Credit Facility contains affirmative, negative and financial covenants, which are customary for facilities of this type, including, among other things, restrictions on dispositions of assets, restrictions on liens, a minimum interest coverage ratio and a maximum leverage ratio. As of December 31, 2016, AB was in compliance with these covenants. The AB Credit Facility also includes customary events of default (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or lender’s commitments may be terminated. Also, under such provisions, upon the occurrence of certain insolvency- or bankruptcy-related events of default, all amounts payable under the AB Credit Facility would automatically become immediately due and payable, and the lender’s commitments would automatically terminate.
As of December 31, 2016 and 2015, AB and SCB LLC had no amounts outstanding under the AB Credit Facility. During 2016 and 2015, AB and SCB LLC did not draw upon the Credit Facility.
On December 1, 2016, AB entered into a $200 million, unsecured 364-day senior revolving credit facility (the “ AB Revolver”) with a leading international bank and the other lending institutions that may be party thereto. The AB Revolver is available for
AB's and SCB LLC's business purposes, including the provision of additional liquidity to meet funding requirements primarily related to SCB LLC's operations. Both AB and SCB LLC can draw directly under the AB Revolver and management expects to draw on the AB Revolver from time to time. AB has agreed to guarantee the obligations of SCB LLC under the AB Revolver. The AB Revolver contains affirmative, negative and financial covenants which are identical to those of the Credit Facility. As of December 31, 2016, we had no amounts outstanding under the AB Revolver and the average daily borrowings for 2016 were $7.3 million, with a weighted average interest rate of 1.6%.
In addition, SCB LLC has three uncommitted lines of credit with four financial institutions. Two of these lines of credit permit us to borrow up to an aggregate of approximately $200 million, with AB named as an additional borrower, while one has no stated limit.
As of December 31, 2016 and 2015, we had no uncommitted bank loans outstanding. Average daily borrowings of uncommitted bank loans during 2016 and 2015 were $4 million and $4 million, respectively, with weighted average interest rates of approximately 1.1% and 1.2% for 2016 and 2015, respectively.
AB’s financial condition and access to public and private debt markets should provide adequate liquidity for AB’s general business needs. AB’s Management believes that cash flow from operations and the issuance of debt and AB Units or Holding Units will provide AB with the resources necessary to meet its financial obligations. For further information, see AB’s Annual Report on Form 10-K for the year ended December 31, 2016.
Other AB Transactions
AB engages in open-market purchases of AB Holding Units (“Holding units”) to help fund anticipated obligations under its incentive compensation award program, for purchases of Holding units from employees and other corporate purposes. During 2016 and 2015, AB purchased 10.5 million and 8.5 million Holding units for $237 million and $218 million respectively. These amounts reflect open-market purchases of 7.9 million and 5.8 million Holding units for $176 million and $151 million, respectively, with the remainder relating to purchases of Holding Units from employees to allow them to fulfill statutory tax requirements at the time of distribution of long-term incentive compensation awards, offset by Holding units purchased by employees as part of a distribution reinvestment election.
During 2016, AB granted to employees and eligible directors 7.0 million restricted AB Holding unit awards (including 6.1 million granted in December for 2016 year-end awards). During 2015, AB granted to employees and eligible directors 7.4 million restricted AB Holding awards (including 7.0 million granted in December 2015 for year-end awards). Prior to third quarter 2014, AB funded these awards by allocating previously repurchased Holding units that had been held in its consolidated rabbi trust. In 2015, AB Holding used Holding units repurchased during the fourth quarter of 2015 and newly-issued Holding units to fund restricted Holding awards.
Effective July 1, 2013, management of AB and AB Holding retired all unallocated Holding units in AB’s consolidated rabbi trust. To retire such units, AB delivered the unallocated Holding units held in its consolidated rabbi trust to AB Holding in exchange for the same amount of AB units. Each entity then retired its respective units. As a result, on July 1, 2013, each of AB’s and AB Holding’s units outstanding decreased by approximately 13.1 million units. AB and AB Holding intend to retire additional units as AB purchases Holding units on the open market or from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards, if such units are not required to fund new employee awards in the near future. If a sufficient number of Holding units is not available in the rabbi trust to fund new awards, AB Holding will issue new Holding units in exchange for newly-issued AB units, as was done in December 2015.
Off-Balance Sheet Arrangements
AB had noAt December 31, 2018, the Company was not a party to any off-balance sheet arrangementstransactions other than thethose guarantees that are discussed below.
Guarantees
Under various circumstances, AB guarantees the obligations of its consolidated subsidiaries.
AB maintains a guaranteeand commitments described in connection with the $1.0 billion AB Credit Facility. If SCB LLC is unable to meet its obligations, AB will pay the obligations when due or on demand. In addition, AB maintains guarantees totaling $425 million for four of SCB LLC’s uncommitted lines of credit.
AB maintains a guarantee with a commercial bank, under which it guarantees the obligations in the ordinary course of business of SCB LLC, its U.K.-based broker-dealerNotes 10 and its Cayman subsidiary. AB also maintains three additional guarantees with other commercial banks, under which it guarantees approximately $366 million of obligations for AB’s U.K.-based broker-dealer. In the event any of these entities is unable to meet its obligations, AB will pay the obligations when due or on demand.
AB also has two smaller guarantees with a commercial bank totaling approximately $2 million, under which it guarantees certain obligations in the ordinary course of business of two foreign subsidiaries.
AB has not been required to perform under any17 of the above agreements and currently has no liability in connection with these agreements.
Notes to the Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONSSummary of Critical Accounting Estimates
The Companypreparation of financial statements in conformity with U.S. GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in our consolidated financial statements included elsewhere herein. For a discussion of our significant accounting policies, see Note 2 of the Notes to the Consolidated Financial Statements. The most critical estimates include those used in determining:
liabilities for future policy benefits;
accounting for reinsurance;
capitalization and amortization of DAC and policyholder bonus interest credits;
estimated fair values of investments in the absence of quoted market values and investment impairments;
estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation;
measurement of income taxes and the valuation of deferred tax assets; and
liabilities for litigation and regulatory matters.
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries while others are specific to our business and operations. Actual results could differ from these estimates.
Liability for Future Policy Benefits
We establish reserves for future policy benefits to, or on behalf of, policyholders in the same period in which the policy is involvedissued or acquired, using methodologies prescribed by U.S. GAAP. The assumptions used in establishing reserves are generally based on our experience, industry experience or other factors, as applicable. At least annually we review our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior assumptions, and update assumptions when appropriate. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term.
The reserving methodologies used include the following:
Universal life (“UL”) and investment-type contract policyholder account balances are equal to the policy AV. The policy AV represent an accumulation of gross premium payments plus credited interest less expense and mortality charges and withdrawals.
Participating traditional life insurance future policy benefit liabilities are calculated using a numbernet level premium method on the basis of venturesactuarial assumptions equal to guaranteed mortality and transactionsdividend fund interest rates.
Non-participating traditional life insurance future policy benefit liabilities are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest.
For most long-duration contracts, we utilize best estimate assumptions as of the date the policy is issued or acquired with AXAprovisions for the risk of adverse deviation, as appropriate. After the liabilities are initially established, we perform premium deficiency tests using best estimate assumptions as of the testing date without provisions for adverse deviation. If the liabilities determined based on these best estimate assumptions are greater than the net reserves (i.e., U.S. GAAP reserves net of any DAC or DSI), the existing net reserves are adjusted by first reducing the DAC or DSI by the amount of the deficiency or to zerothrough a charge to current period earnings. If the deficiency is more than these asset balances for insurance contracts, we then increase the net reserves by the excess, again through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the premium deficiency test date are locked in and used in subsequent valuations and the net reserves continue to be subject to premium deficiency testing.
For certain reserves, such as those related to GMDB and GMIB features, we use current best estimate assumptions in establishing reserves. The reserves are subject to adjustments based on periodic reviews of its affiliates: assumptions and quarterly adjustments for experience, including market performance, and the reserves may be adjusted through a benefit or charge to current period earnings.
For certain GMxB features, the benefits are accounted for as embedded derivatives, with fair values calculated as the present value of expected future benefit payments to contractholders less the present value of assessed rider fees attributable to the embedded derivative feature. Under U.S. GAAP, the fair values of these benefit features are based on assumptions a market participant would use in valuing these embedded derivatives. Changes in the fair value of the embedded derivatives are recorded quarterly through a benefit or charge to current period earnings.
The assumptions used in establishing reserves are generally based on our experience, industry experience and/or other factors, as applicable. We typically update our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior assumptions, annually, unless a material change is observed in an interim period that we feel is indicative of a long-term trend. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term. In a sustained low interest rate environment, there is an increased likelihood that the reserves determined based on best estimate assumptions may be greater than the net liabilities.
See Notes 10, 11, 12 and 16Note 8 of the Notes to the Consolidated Financial Statements for additional information on our accounting policy relating to GMxB features and “Certain Relationshipsliability for future policy benefits and Related Party Transactions” contained elsewhere hereinNote 2 of the Notes to the Consolidated Financial Statements for future policyholder benefit liabilities.
Sensitivity of Future Rate of Return Assumptions on GMDB/GMIB Reserves
The Separate Account future rate of return assumptions that are used in establishing reserves for GMxB features are set using a long-term-view of expected average market returns by applying a reversion to the mean approach, consistent with that used for DAC amortization. For additional information regarding the future expected rate of return assumptions and AB’s Report on Form 10-K for the year endedreversion to the mean approach, see, “—DAC and Policyholder Bonus Interest Credits”.
The GMDB/GMIB reserve balance before reinsurance ceded was $8.4 billion at December 31, 20162018. The following table provides the sensitivity of the reserves GMxB features related to variable annuity contracts relative to the future rate of return assumptions by quantifying the adjustments to these reserves that would be required assuming both a 1% increase and decrease in the future rate of return. This sensitivity considers only the direct effect of changes in the future rate of return on operating results due to the change in the reserve balance before reinsurance ceded and not changes in any other assumptions such as persistency, mortality, or expenses included in the evaluation of the reserves, or any changes on DAC or other balances including hedging derivatives and the GMIB reinsurance asset.
GMDB/GMIB Reserves
Sensitivity - Rate of Return
December 31, 2018
|
| | | |
| | Increase/(Decrease) in GMDB/GMIB Reserves |
| | (in millions) |
| 1% decrease in future rate of return | $ | 1,259.3 |
|
| 1% increase in future rate of return | $ | (1,333.2 | ) |
Traditional Annuities
The reserves for future policy benefits for annuities include group pension and payout annuities, and, during the accumulation period, are equal to accumulated policyholders’ fund balances and, after annuitization, are equal to the present value of expected future payments based on assumptions as to mortality, retirement, maintenance expense, and interest rates. Interest rates used in establishing such liabilities range from 1.6% to 5.5% (weighted average of 4.8%). If reserves determined based on these assumptions are greater than the existing reserves, the existing reserves are adjusted to the greater amount.
Health
Individual health benefit liabilities for active lives are estimated using the net level premium method and assumptions as to future morbidity, withdrawals and interest. Benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
Reinsurance
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risk with respect to reinsurance receivables. We periodically review actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluate the financial strength of counterparties to our reinsurance agreements using criteria similar to those evaluated in our security impairment process. See “—Estimated Fair Value of Investments.” Additionally, for each of our reinsurance agreements, we determine whether the agreement provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We review all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If we determine that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit method of accounting.
For reinsurance contracts other than those covering GMIB exposure, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities. GMIB reinsurance contracts are used to cede affiliated and non-affiliated reinsurers a portion of the exposure on variable annuity products that offer the GMIB feature. The GMIB reinsurance contracts are accounted for as derivatives and are reported at fair value. Gross reserves for GMIB, on the other hand, are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts, therefore, will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market and/or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts.
See Note 10 of the Notes to the Consolidated Financial Statements for additional information on our reinsurance agreements.
DAC and Policyholder Bonus Interest Credits
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to the successful acquisition or renewal of insurance contracts are deferred as DAC. In addition to commissions, certain direct-response advertising expenses and other direct costs, other deferrable costs include the portion of an employee’s total compensation and benefits related party transactions.to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed. We utilize various techniques to estimate the portion of an employee’s time spent on qualifying acquisition activities that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include assumptions that are reviewed and updated on a periodic basis or more frequently to reflect significant changes in processes or distribution methods.
A scheduleAmortization Methodologies
Participating Traditional Life Policies
For participating traditional life policies (substantially all of future payments under certainwhich are in the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield.
At December 31, 2018, the average investment yields assumed (excluding policy loans) were 4.7% grading to 4.3% in 2024. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s consolidated contractual obligations follows:
Contractual Obligations - December 31, 2016 |
| | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
| | Total | | Less than 1 year | | 1 - 3 years | | 4 -5 years | | Over 5 years |
| | (In Millions) |
| Contractual obligations: | | | | | | | | | |
Policyholders liabilities - policyholders’ account balances, future policy benefits and other policyholders liabilities(1) | $ | 91,177 |
| | $ | 1,990 |
| | $ | 4,599 |
| | $ | 5,575 |
| | $ | 79,013 |
|
| FHLBNY Funding Agreements | 2,238 |
| | 500 |
| | — |
| | 58 |
| | 1,680 |
|
| AB commercial paper | 513 |
| | 513 |
| | — |
| | — |
| | — |
|
| Operating leases | 1,392 |
| | 218 |
| | 401 |
| | 327 |
| | 446 |
|
| AB Funding commitments | 32 |
| | 11 |
| | 14 |
| | 3 |
| | 4 |
|
| Employee benefits | 65 |
| | 4 |
| | 12 |
| | 11 |
| | 38 |
|
| Total Contractual Obligations | $ | 95,417 |
| | $ | 3,236 |
| | $ | 5,026 |
| | $ | 5,974 |
| | $ | 81,181 |
|
| |
(1) | Policyholders liabilities represent estimated cash flows out of the General Account related to the payment of death and disability claims, policy surrenders and withdrawals, annuity payments, minimum guarantees on Separate Account funded contracts, matured endowments, benefits under accident and health contracts, policyholder dividends and future renewal premium-based and fund-based commissions offset by contractual future premiums and deposits on in-force contracts. These estimated cash flows are based on mortality, morbidity and lapse assumptions comparable with the Company’s experience and assume market growth and interest crediting consistent with assumptions used in amortizing DAC. These amounts are undiscounted and, therefore, exceed the Policyholders’ account balances and Future policy benefits and other policyholder liabilities included in the consolidated balance sheet included elsewhere herein. They do not reflect projected recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows will differ from these estimates (see “Critical Accounting Estimates – Future Policy Benefits”). Separate Accounts liabilities have been excluded as they are legally insulated from General Account obligations and will be funded by cash flows from Separate Accounts assets. |
Unrecognized tax benefits of $394 million, including $13 milliondividends to these policyholders. DAC adjustments related to AB wereparticipating traditional life policies do not includedcreate significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
Non-participating Traditional Life Insurance Policies
DAC associated with non-participating traditional life policies are amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earnings (loss) in the above table because it is not possible to make reasonably reliable estimatesperiod such deviations occur. For these contracts, the amortization periods generally are for the total life of the occurrence or timing of cash settlementspolicy.
Universal Life and Investment-type Contracts
DAC associated with certain variable annuity products is amortized based on estimated assessments, with the respective taxing authorities.remainder of variable annuity products, UL and investment-type products amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Account fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated
gross profits or assessments is reflected in net income (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
Quarterly adjustments to the DAC balance are made for current period experience and market performance related adjustments, and the impact of reviews of estimated total gross profits. The quarterly adjustments for current period experience reflect the impact of differences between actual and previously estimated expected gross profits for a given period. Total estimated gross profits include both actual experience and estimates of gross profits for future periods. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, cumulative adjustment to all previous periods’ costs is recognized.
During 2009, AB entered intoeach accounting period, the DAC balances are evaluated and adjusted with a subscription agreement under whichcorresponding charge or credit to current period earnings for the effects of the Company’s actual gross profits and changes in the assumptions regarding estimated future gross profits. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
For the variable and UL policies a significant portion of the gross profits is derived from mortality margins and therefore, are significantly influenced by the mortality assumptions used. Mortality assumptions represent our expected claims experience over the life of these policies and are based on a long-term average of actual company experience. This assumption is updated periodically to reflect recent experience as it committedemerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Loss Recognition Testing
After the initial establishment of reserves, loss recognition tests are performed using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to invest upprovide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC is first written off, and thereafter a premium deficiency reserve is established by a charge to $35 million, as amendedearnings.
In 2018 and 2017, we determined that we had a loss recognition in 2011, in a venture capital fund over a six-year period.certain of our variable interest-sensitive life insurance products due to the release of life reserves and low interest rates. As of December 31, 2016, AB had funded $342018 and 2017, we wrote off $162 million and $656 million, respectively, of this commitment.the DAC balance through accelerated amortization.
Additionally, in certain policyholder liability balances for a particular line of business may not be deficient in the aggregate to trigger loss recognition; however, the pattern of earnings may be such that profits are expected to be recognized in earlier years and then followed by losses in later years. This pattern of profits followed by losses is exhibited in our VISL business and is generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. We accrue for these Profits Followed by Losses (“PFBL”) using a dynamic approach that changes over time as the projection of future losses change.
In addition, we are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. This may result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on available-for-sale investment securities within the statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, which is based on changes in net unrealized investment (gains) losses, these adjustments may reverse from period to period. In 2017, due primarily to the release of life reserves, we recorded an unrealized loss in Other comprehensive income (loss). There was no impact to Net income (loss).
During 2010, as general partner61
Sensitivity of DAC to Changes in Future Mortality Assumptions
The following table demonstrates the sensitivity of the AllianceBernstein U.S. Real Estate L.P. Fund, AB committedDAC balance relative to invest $25 millionfuture mortality assumptions by quantifying the adjustments that would be required, assuming an increase and decrease in the Real Estate Fund. Asfuture mortality rate by 1.0%. This information considers only the direct effect of changes in the mortality assumptions on the DAC balance and not changes in any other assumptions used in the measurement of the DAC balance and does not assume changes in reserves.
DAC Sensitivity - Mortality
December 31, 2016, AB had funded $21 million2018
|
| | | |
| | Increase/(Decrease) in DAC |
| | (in millions) |
| Decrease in future mortality by 1% | $ | 20 |
|
| Increase in future mortality by 1% | $ | (20 | ) |
Sensitivity of DAC to Changes in Future Rate of Return Assumptions
A significant assumption in the amortization of DAC on variable annuity products and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future Separate Accounts performance. Management sets estimated future gross profit or assessment assumptions related to Separate Account performance using a long-term view of expected average market returns by applying a Reversion to the Mean (“RTM”) approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
In applying this commitment.approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. In second quarter 2015, based upon management’s then-current expectations of interest rates and future fund growth, we updated our reversion to the mean assumption from 9.0% to 7.0%. The average gross long-term return measurement start date was also updated to December 31, 2014. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At December 31, 2018, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuity products was 7.0% (4.7% net of product weighted average Separate Accounts fees), and 0.0% (2.3)% net of product weighted average Separate Account fees), respectively. The maximum duration over which these rate limitations may be applied is five years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than five years in order to reach the average gross long-term return estimate, the application of the five-year maximum duration limitation would result in an acceleration of DAC amortization. Conversely, actual market returns resulting in assumed future market returns of 0.0% for more than five years would result in a required deceleration of DAC amortization. At December 31, 2018, current projections of future average gross market returns assume a 1.6% annualized return for the next two quarters, followed by 7.0% thereafter. Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
The following table provides an example of the sensitivity of the DAC balance of variable annuity products and variable and interest-sensitive life insurance relative to future return assumptions by quantifying the adjustments to the DAC balance that would be required assuming both an increase and decrease in the future rate of return by 1.0%. This information considers only the effect of changes in the future Separate Accounts rate of return and not changes in any other assumptions used in the measurement of the DAC balance.
During 2012, AB entered into an investment agreement under which it committed to invest up to $8 million in an oil and gas fund over a three-year period. As of December 31, 2016, AB had funded $6 million of this commitment.62
At year-end 2016, AB had
DAC Sensitivity - Rate of Return
December 31, 2018
|
| | | |
| | Increase/(Decrease) in DAC |
| | (in millions) |
| Decrease in future rate of return by 1% | $ | (97 | ) |
| Increase in future rate of return by 1% | $ | 121 |
|
Estimated Fair Value of Investments
The Company’s investment portfolio principally consists of public and private fixed maturities, mortgage loans, equity securities and derivative financial instruments, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options used to manage various risks relating to its business operations.
Fair Value Measurements
Investments reported at fair value in the consolidated balance sheets of the Company include fixed maturity securities classified as available-for-sale, equity and trading securities and certain other invested assets, such as freestanding derivatives. In addition, reinsurance contracts covering GMIB exposure and the liabilities in the SCS variable annuity products, SIO in the EQUI-VEST variable annuity product series, MSO in the variable life insurance products, IUL insurance products and the GMAB, GIB, GMWB and GWBL feature in certain variable annuity products issued by the Company are considered embedded derivatives and reported at fair value.
When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable; these generally are the most liquid holdings and their valuation does not involve management judgment. When quoted prices in active markets are not available, we estimate fair value based on market standard valuation methodologies. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a $226 million accrualdiscounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment. For securities with reasonable price transparency, the significant inputs to these valuation methodologies either are observable in the market or can be derived principally from or corroborated by observable market data. When the volume or level of activity results in little or no price transparency, significant inputs no longer can be supported by reference to market observable data but instead must be based on management’s estimation and judgment. Substantially the same approach is used by us to measure the fair values of freestanding and embedded derivatives with exception for compensationconsideration of the effects of master netting agreements and benefits,collateral arrangements as well as incremental value or risk ascribed to changes in own or counterparty credit risk.
As required by the accounting guidance, we categorize our assets and liabilities measured at fair value into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique, giving the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). For additional information regarding the key estimates and assumptions surrounding the determinations of fair value measurements, see Note 7 of the Notes to the Consolidated Financial Statements.
Impairments and Valuation Allowances
The assessment of whether OTTIs have occurred is performed quarterly by our Investments Under Surveillance (“IUS”) Committee, with the assistance of its investment advisors, on a security-by-security basis for each available-for-sale fixed maturity that has experienced a decline in fair value for purpose of evaluating the underlying reasons. The analysis begins with a review of gross unrealized losses by the following categories of securities: (i) all investment grade and below investment grade fixed maturities for which $137 millionfair value has declined and remained below amortized cost by 20% or more and (ii) below-investment-grade fixed maturities for which fair value has declined and remained below amortized cost for a period greater than 12 months. Integral to the analysis is an assessment of various indicators of credit deterioration to determine whether the investment security is expected to be paidrecover, including, but not limited to, consideration of the duration and severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity, and continued viability of the
issuer and, for equity securities only, the intent and ability to hold the investment until recovery, resulting in 2017, $49 millionidentification of specific securities for which OTTI is recognized.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting OTTI is recognized in 2018 and 2019, $13 million in 2020-2021earnings and the rest thereafter. Further, AB expects to make contributions to its qualified profit sharing plan of approximately $14 million in eachremainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage- and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and valuation allowances. Valuation allowances are based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or on its collateral value if the loan is collateral dependent. However, if foreclosure is or becomes probable, the collateral value measurement method is used.
For commercial and agricultural mortgage loans, an allowance for credit loss is typically recommended when management believes it is probable that principal and interest will not be collected according to the contractual terms. Factors that influence management’s judgment in determining allowance for credit losses include the following:
Loan-to-value ratio— Derived from current loan balance divided by the fair market value of the property. An allowance for credit loss is typically recommended when the loan-to-value ratio is in excess of 100%. In the case where the loan-to-value is in excess of 100%, the allowance for credit loss is derived by taking the difference between the fair market value (less cost of sale) and the current loan balance.
Debt service coverage ratio—Derived from actual operating earnings divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt.
Occupancy—Criteria vary by property type but low or below market occupancy is an indicator of sub-par property performance.
Lease expirations—The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor.
Maturity—Mortgage loans that are not fully amortizing and have upcoming maturities within the next four years.12 to 24 months are monitored in conjunction with the capital markets to determine the borrower’s ability to refinance the debt and/or pay off the balloon balance.
Borrower/tenant related issues—Financial concerns, potential bankruptcy, or words or actions that indicate imminent default or abandonment of property.
Payment status - current vs. delinquent—A history of delinquent payments may be a cause for concern.
Property condition—Significant deferred maintenance observed during the lenders annual site inspections.
Other—Any other factors such as current economic conditions may call into question the performance of the loan.
Mortgage loans also are individually evaluated quarterly by the IUS Committee for impairment on a loan-by-loan basis, including an assessment of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages also is identified, consisting of mortgage loans not currently classified as problems but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
For problem mortgage loans a valuation allowance is established to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for loans determined to be non-performing as a result of the loan review process. A non-performing loan is defined as a loan for which it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan specific portion of the loss allowance is based on our
assessment as to ultimate collectability of loan principal and interest. Valuation allowances for a non-performing loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The valuation allowance for mortgage loans can increase or decrease from period to period based on such factors.
Impaired mortgage loans without provision for losses are mortgage loans where the fair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on mortgage loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on mortgage loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows. Changes in the present value attributable to changes in the amount or timing of expected cash flows are reported as investment gains or losses.
Mortgage loans are placed on nonaccrual status once management believes the collection of accrued interest is doubtful. Once mortgage loans are classified as nonaccrual mortgage loans, interest income is recognized under the cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan on real estate has been restructured to where the collection of interest is considered likely.
See Notes 2 and 3 of the Notes to the Consolidated Financial Statements for additional information relating to our determination of the amount of allowances and impairments.
Derivatives
We use freestanding derivative instruments to hedge various capital market risks in our products, including: (i) certain guarantees, some of which are reported as embedded derivatives; (ii) current or future changes in the fair value of our assets and liabilities; and (iii) current or future changes in cash flows. All derivatives, whether freestanding or embedded, are required to be carried on the balance sheet at fair value with changes reflected in either net income (loss) or in other comprehensive income, depending on the type of hedge. Below is a summary of critical accounting estimates by type of derivative.
Freestanding Derivatives
The determination of the estimated fair value of freestanding derivatives, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. See Note 7 of the Notes to the Consolidated Financial Statements for additional details on significant inputs into the OTC derivative pricing models and credit risk adjustment.
Embedded Derivatives
We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net derivative gains (losses). We also have assumed from an affiliate the risk associated with certain guaranteed minimum benefits, which are accounted for as embedded derivatives measured at estimated fair value. The estimated fair values of these embedded derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees attributable to the guarantee. The projections of future benefits and future fees require capital markets and actuarial assumptions, including expectations concerning policyholder behavior. A risk-neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates.
Market conditions, including, but not limited to, changes in interest rates, equity indices, market volatility and variations in actuarial assumptions, including policyholder behavior, mortality and risk margins related to non-capital market inputs, as well as changes in our nonperformance risk adjustment may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income. Changes to actuarial assumptions, principally related to contract holder behavior such as annuitization utilization and withdrawals associated with GMIB riders, can result in a change of expected future cash outflows of a guarantee between the accrual-based model for insurance liabilities and the fair-value based model for embedded derivatives. See Note 2 of the Notes to the Consolidated Financial Statements for additional information relating to the determination of the accounting model. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the
uncertainties in certain actuarial assumptions. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees.
With respect to assumptions regarding policyholder behavior, we have recorded charges, and in some cases benefits, in prior years as a result of the availability of sufficient and credible data at the conclusion of each review.
We ceded the risk associated with certain of the variable annuity products with GMxB features described in the preceding paragraphs. The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by us with the exception of the input for nonperformance risk that reflects the credit of the reinsurer. However, because certain of the reinsured guarantees do not meet the definition of an embedded derivative and, thus are not accounted for at fair value, significant fluctuations in net income may occur when the change in the fair value of the reinsurance recoverable is recorded in net income without a corresponding and offsetting change in fair value of the directly written guaranteed liability.
Nonperformance Risk Adjustment
The valuation of our embedded derivatives includes an adjustment for the risk that we fail to satisfy our obligations, which we refer to as our nonperformance risk. The nonperformance risk adjustment, which is captured as a spread over the risk-free rate in determining the discount rate to discount the cash flows of the liability, is determined by taking into consideration publicly available information relating to spreads on corporate bonds in the secondary market comparable to AXA Equitable Life’s financial strength rating.
The table below illustrates the impact that a range of reasonably likely variances in credit spreads would have on our consolidated balance sheet, excluding the effect of income tax, related to the embedded derivative valuation on certain variable annuity products measured at estimated fair value. Even when credit spreads do not change, the impact of the nonperformance risk adjustment on fair value will change when the cash flows within the fair value measurement change. The table only reflects the impact of changes in credit spreads on our consolidated financial statements included elsewhere herein and not these other potential changes. In addition,determining the Company has obligations under contingent commitments at December 31, 2016, including: AB’s Credit Facility and commercial paper program; AXA Equitable’s $18 million undrawn letters of credit;ranges, we have considered current market conditions, as well as the Company’s $697 millionmarket level of spreads that can reasonably be anticipated over the near term. The ranges do not reflect extreme market conditions such as those experienced during the 2008–2009 Financial Crisis as we do not consider those to be reasonably likely events in the near future.
|
| | | |
| | Future policyholders’ benefits and other policyholders’ liabilities
|
| | (in billions) |
| 100% increase in AXA Equitable Life’s credit spread | $ | 3.6 |
|
| As reported | $ | 5.3 |
|
| 50% decrease in AXA Equitable Life’s credit spread | $ | 6.4 |
|
See Note 3 of the Notes to the Consolidated Financial Statements for additional information on our derivatives and $883 million commitments under equity financing arrangementshedging programs.
Litigation Contingencies
We are a party to certain limited partnershipa number of legal actions and existing mortgage loan agreements, respectively. Informationare involved in a number of regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on these contingent commitmentsour financial position.
Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be foundreasonably estimated. On a quarterly and annual basis, we review relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in Notes 10, 16 andour consolidated financial statements included elsewhere herein. See Note 17 of the Notes to the Consolidated Financial Statements.Statements for information regarding our assessment of litigation contingencies.
Income Taxes
Income taxes represent the net amount of income taxes that we expect to pay to or receive from various taxing jurisdictions in connection with its operations. We provide for Federal and state income taxes currently payable, as well as those deferred
due to temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryforward periods under the tax law in the applicable jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred tax assets will not be realized. Management considers all available evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. Our accounting for income taxes represents management’s best estimate of the tax consequences of various events and transactions.
Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities, and in evaluating our tax positions including evaluating uncertainties under the guidance for Accounting for Uncertainty in Income taxes. Under the guidance, we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. Tax positions are then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.
Our tax positions are reviewed quarterly and the balances are adjusted as new information becomes available.
Adoption of New Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements for a complete discussion of newly issued accounting pronouncements.
Part II, Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company’s businesses are subject to financial, market, political and economic risks, as well as to risks inherent in its business operations. The discussion that follows provides additional information on market risks arising from its insurance asset/liability management and asset management activities. Such risks are evaluated and managed by each business on a decentralized basis. Primary market risk exposure results from interest rate fluctuations, equity price movements and changes in credit quality.
Insurance Segment
Insurance Segment results significantly depend on profit margins or “spreads” between investment results from assets held in the GAIA and interest credited on individual insurance and annuity products. Management believes its fixed rate liabilities should be supported by a portfolio principally composed of fixed rate investments that generate predictable, steady rates of return. Although these assets are purchased for long-term investment, the portfolio management strategy considers them available for sale in response to changes in market interest rates, changes in prepayment risk, changes in relative values of asset sectors and individual securities and loans, changes in credit quality outlook and other relevant factors. See the “Investments” section of Note 2 of Notes to Consolidated Financial Statements for the accounting policies for the investment portfolios. The objective of portfolio management is to maximize returns, taking into account interest rate and credit risks. Insurance asset/liability management includes strategies to minimize exposure to loss as interest rates and economic and market conditions change. As a result, the fixed maturity portfolio has modest exposure to call and prepayment risk and the vast majority of mortgage holdings are fixed rate mortgages that carry yield maintenance and prepayment provisions.8.
Investments with Interest Rate Risk - Fair Value. Insurance Segment assets with interest rate risk include available-for-sale and trading fixed maturities and mortgage loans that make up 87.2% of the carrying value of General Account Investment Assets at December 31, 2016. As part of its asset/liability management, quantitative analyses are used to model the impact various changes in interest rates have on assets with interest rate risk. The table that follows shows the impact an immediate 100 BP increase in interest rates at December 31, 2016 and 2015 would have on the fair value of fixed maturities and mortgage loans:
Interest Rate Risk Exposure |
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Fair Value | | Balance After +100 BP Change | | Fair Value | | Balance After +100 BP Change |
| | (In Millions) |
| Fixed Income Investments: | | | | | | | |
| Available-for-sale: | | | | | | | |
| Fixed rate | $ | 31,978 |
| | $ | 28,944 |
| | $ | 30,677 |
| | $ | 28,656 |
|
| Floating rate | 591 |
| | 590 |
| | 523 |
| | 522 |
|
| Trading securities: | | | | | | | |
| Fixed rate | 8,127 |
| | 7,947 |
| | 5,690 |
| | 5,587 |
|
| Floating rate | 546 |
| | 542 |
| | 466 |
| | 463 |
|
| Mortgage loans | $ | 9,608 |
| | $ | 9,062 |
| | $ | 7,171 |
| | $ | 6,875 |
|
A 100 BP increase in interest rates is a hypothetical rate scenario used to demonstrate potential risk; it does not represent management’s view of future market changes. While these fair value measurements provide a representation of interest rate sensitivity of fixed maturities and mortgage loans, they are based on various portfolio exposures at a particular point in time and may not be representative of future market results. These exposures will change as a result of ongoing portfolio activities in response to management’s assessment of changing market conditions and available investment opportunities.
Investments with Equity Price Risk – Fair Value. The investment portfolios also have direct holdings of public and private equity securities. The following table shows the potential exposure from those equity security investments, measured in terms of fair value, to an immediate 10% drop in equity prices from those prevailing at December 31, 2016 and 2015:
Equity Price Risk Exposure |
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Fair Value | | Balance After -10% Equity Price Change | | Fair Value | | Balance After -10% Equity Price Change |
| | (In Millions) |
| Equity Investments | | | | | | | |
| Available-For-Sale | $ | 110 |
| | $ | 99 |
| | $ | 32 |
| | $ | 29 |
|
| Trading | $ | 265 |
| | $ | 238 |
| | $ | 108 |
| | $ | 98 |
|
A 10% decrease in equity prices is a hypothetical scenario used to calibrate potential risk and does not represent management’s view of future market changes. The fair value measurements shown are based on the equity securities portfolio exposures at a particular point in time and these exposures will change as a result of ongoing portfolio activities in response to management’s assessment of changing market conditions and available investment opportunities.
Liabilities with Interest Rate Risk - Fair Value. At December 31, 2016 and 2015, the aggregate carrying values of insurance contracts with interest rate risk were $4.5 billion and $2.7 billion, respectively. The aggregate fair value of such liabilities at December 31, 2016 and 2015 were $4.5 billion and $2.8 billion, respectively. The impact of a relative 1% decrease in interest rates would be an increase in the fair value of those liabilities of $236 million and $109 million, respectively. While these fair value measurements provide a representation of the interest rate sensitivity of insurance liabilities, they are based on the composition of such liabilities at a particular point in time and may not be representative of future results.
Asset/liability management is integrated into many aspects of the Insurance Segment’s operations, including investment decisions, product development and determination of crediting rates. As part of its risk management process, numerous economic scenarios are modeled, including cash flow testing required for insurance regulatory purposes, to determine if existing assets would be sufficient to meet projected liability cash flows. Key variables include policyholder behavior, such as persistency, under differing crediting rate strategies.
Derivatives and Interest Rate and Equity Risks – Fair Value. The Company primarily uses derivative contracts for asset/liability risk management, to mitigate the Company’s exposure to equity market decline and interest rate risks and for hedging individual securities. In addition, the Company periodically enters into forward, exchange-traded futures and interest rate swap, swaptions, floor contracts and credit default swaps to reduce the economic impact of movements in the equity and fixed income markets, including the program to hedge certain risks associated with the GMDB and GMIB features of the Accumulator® series of annuity products. As more fully described in Notes 2 and 3 of Notes to Consolidated Financial Statements, various traditional derivative financial instruments are used to achieve these objectives, including interest rate floors to hedge crediting rates on interest-sensitive individual annuity contracts, interest rate futures to protect against declines in interest rates between receipt of funds and purchase of appropriate assets, interest rate swaps to modify the duration and cash flows of fixed maturity investments and long-term debt and open exchange-traded options to mitigate the adverse effects of equity market declines on the Company’s statutory reserves. To minimize credit risk exposure associated with its derivative transactions, each counterparty’s credit is appraised and approved and risk control limits and monitoring procedures are applied. Credit limits are established and monitored on the basis of potential exposures that take into consideration current market values and estimates of potential future movements in market values given potential fluctuations in market interest rates. To reduce credit exposures in over-the-counter (“OTC”) derivative transactions the Company generally enters into master agreements that provide for a netting of financial exposures with the counterparty and allow for collateral arrangements. The Company further controls and minimizes its counterparty exposure through a credit appraisal and approval process. Under the ISDA Master Agreement, the Company generally has executed a Credit Support Annex (“CSA”) with each of its OTC derivative counterparties that require both posting and accepting collateral either in the form of cash or high-quality securities, such as U.S. Treasury securities or those issued by government agencies.
Mark to market exposure is a point-in-time measure of the value of a derivative contract in the open market. A positive value indicates existence of credit risk for the Company because the counterparty would owe money to the Company if the contract were closed. Alternatively, a negative value indicates the Company would owe money to the counterparty if the contract were closed. If there is more than one derivative transaction outstanding with a counterparty, a master netting arrangement exists with the counterparty. In that case, the market risk represents the net of the positive and negative exposures with the single counterparty. In management’s view, the net potential exposure is the better measure of credit risk.
At December 31, 2016 and 2015, the net fair values of the Company’s derivatives were $54 million and $658 million, respectively. The table that follows shows the interest rate or equity sensitivities of those derivatives, measured in terms of fair value. These exposures will change as a result of ongoing portfolio and risk management activities.
Insurance Segment - Derivative Financial Instruments
|
| | | | | | | | | | | | | | | | | |
| | | | | | Interest Rate Sensitivity |
| | Notional Amount | | Weighted Average Term (Years) | | Balance After -100 BP Change | | Fair Value | | Balance After +100 BP Change |
| | (In Millions, Except for Weighted Average Term) |
| December 31, 2016 | | | | | | | | | |
| Floors | $ | 1,500 |
| | 0 | | $ | 11 |
| | $ | 11 |
| | $ | 11 |
|
| Swaps | 19,441 |
| | 5 | | 960 |
| | (870 | ) | | (2,396 | ) |
| Futures | 6,926 |
| | | | (159 | ) | | — |
| | 168 |
|
| Credit Default Swaps | 2,712 |
| | 4 | | 5 |
| | 5 |
| | 5 |
|
| Total | $ | 30,579 |
| | | | $ | 817 |
| | $ | (854 | ) | | $ | (2,212 | ) |
| December 31, 2015 | | | | | | | | | |
| Floors | $ | 1,800 |
| | 2 | | $ | 75 |
| | $ | 61 |
| | $ | 42 |
|
| Swaps | 13,653 |
| | 5 | | 2,096 |
| | 244 |
| | (1,294 | ) |
| Futures | 8,685 |
| | | | (75 | ) | | — |
| | 100 |
|
| Credit Default Swaps | 2,412 |
| | 4 | | (23 | ) | | (23 | ) | | (23 | ) |
| Total | $ | 26,550 |
| | | | $ | 2,073 |
| | $ | 282 |
| | $ | (1,175 | ) |
|
| | | | | | | | | | | | | |
| | | | | | Equity Sensitivity |
| | Notional
Amount | | Weighted
Average
Term
(Years) | | Fair Value | | Balance after -10% Equity Price Shift |
| December 31, 2016 | | | | | | | |
| Futures | $ | 4,983 |
| | 0 | | $ | — |
| | $ | 479 |
|
| Swaps | 3,439 |
| | 1 | | (53 | ) | | 277 |
|
| Options | 11,465 |
| | 2 | | 961 |
| | 494 |
|
| Total | $ | 19,887 |
| | | | $ | 908 |
| | $ | 1,250 |
|
| December 31, 2015 | | | | | | | |
| Futures | $ | 6,929 |
| | 0 | | $ | — |
| | $ | 621 |
|
| Swaps | 1,213 |
| | 1 | | (13 | ) | | 127 |
|
| Options | 7,358 |
| | 2 | | 389 |
| | 68 |
|
| Total | $ | 15,500 |
| | | | $ | 376 |
| | $ | 816 |
|
In addition to the freestanding derivatives discussed above, the Company has entered into reinsurance contracts to mitigate the risk associated with the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts. These reinsurance contracts are considered derivatives under the guidance on derivatives and hedging and were reported at their fair values of $10.3 billion and $10.6 billion at December 31, 2016 and 2015, respectively. The potential fair value exposure to an immediate 10% drop in equity prices from those prevailing at December 31, 2016 and 2015, respectively, would increase the balances of the reinsurance contract asset to $11.0 billion and $11.5 billion. Also, the SCS, SIO, MSO, IUL, GIB, GWBL and other feature’s liability associated with certain annuity contracts is similarly considered to be a derivative for accounting purposes and was reported at its fair value. The liability for SCS, SIO, MSO, IUL, GIB and GWBL and other features was $1.1 billion and $494 million at December 31, 2016 and 2015, respectively. The potential fair value exposure to an immediate 10% drop in equity prices from those prevailing at December 31, 2016 and 2015, respectively, would be to decrease the liability balance to $662 million and $258 million.
Investment Management
AB’s investments consist of trading and available-for-sale investments and other investments. AB’s trading and available-for-sale investments include U.S. Treasury bills and equity and fixed income mutual funds investments. Trading investments are purchased for short-term investment, principally to fund liabilities related to deferred compensation plans and to seed new investment services. Although available-for-sale investments are purchased for long-term investment, the portfolio strategy considers them available-for-sale from time to time due to changes in market interest rates, equity prices and other relevant factors. Other investments include investments in hedge funds sponsored by AB and other private investment vehicles.
Investments with Interest Rate Risk – Fair Value. The table below provides AB’s potential exposure with respect to its fixed income investments, measured in terms of fair value, to an immediate 100 BP increase in interest rates at all maturities from the levels prevailing at December 31, 2016 and 2015:
Interest Rate Risk Exposure |
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Fair Value | | Balance After +100 BP Point | | Fair Value | | Balance After +100 BP Change |
| | (In Millions) |
| Fixed Income Investments: | | | | | | | |
| Trading | $ | 121 |
| | $ | 113 |
| | $ | 208 |
| | $ | 196 |
|
Such a fluctuation in interest rates is a hypothetical rate scenario used to calibrate potential risk and does not represent AB management’s view of future market changes. While these fair value measurements provide a representation of interest rate sensitivity of its investments in fixed income mutual funds and fixed income hedge funds, they are based on AB’s exposures at a particular point in time and may not be representative of future market results. These exposures will change as a result of ongoing changes in investments in response to AB management’s assessment of changing market conditions and available investment opportunities.
Investments with Equity Price Risk – Fair Value. AB’s investments include investments in equity mutual funds and equity hedge funds. The following table presents AB’s potential exposure from its equity investments, measured in terms of fair value, to an immediate 10% drop in equity prices from those prevailing at December 31, 2016 and 2015:
Equity Price Risk Exposure |
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Fair Value | | Balance After -10% Equity Price Change | | Fair Value | | Balance After -10% Equity Price Change |
| | (In Millions) |
| Equity Investments: | | | | | | | |
| Trading | $ | 180 |
| | $ | 162 |
| | $ | 332 |
| | $ | 299 |
|
| Available-for-sale and other investments | 163 |
| | 147 |
| | 130 |
| | 117 |
|
A 10% decrease in equity prices is a hypothetical scenario used to calibrate potential risk and does not represent AB management’s view of future market changes. While these fair value measurements provide a representation of equity price sensitivity of AB’s investments in equity mutual funds and equity hedge funds, they are based on AB’s exposure at a particular point in time and may not be representative of future market results. These exposures will change as a result of ongoing portfolio activities in response to AB management’s assessment of changing market conditions and available investment opportunities.
For further information on AB’s market risk, see AB L.P. and AB Holding’s Annual Reports on Form 10-K for the year ended December 31, 2016.
Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULESAdoption of New Accounting Pronouncements
AXA EQUITABLE LIFE INSURANCE COMPANY |
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Consolidated Financial Statements: | |
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See Note 2 of the Notes to the Consolidated Financial Statements for a complete discussion of newly issued accounting pronouncements.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
AXA Equitable Life Insurance Company:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings (loss), comprehensive income (loss), equity and cash flows present fairly, in all material respects, the financial position of AXA Equitable Life Insurance Company and its subsidiaries (the “Company”) as of December 31, 2016 and December 31, 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 24, 201767
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2016 AND 2015 |
| | | | | | | |
| | 2016 | | 2015 |
| ASSETS | (In Millions) |
| Investments: | | | |
| Fixed maturities available for sale, at fair value (amortized cost of $32,123 and $31,201) | $ | 32,570 |
| | $ | 31,893 |
|
| Mortgage loans on real estate (net of valuation allowances of $8 and $6) | 9,757 |
| | 7,171 |
|
| Policy loans | 3,361 |
| | 3,393 |
|
| Other equity investments | 1,408 |
| | 1,477 |
|
| Trading securities, at fair value | 9,134 |
| | 6,805 |
|
| Other invested assets | 2,186 |
| | 1,788 |
|
| Total investments | 58,416 |
| | 52,527 |
|
| Cash and cash equivalents | 2,950 |
| | 3,028 |
|
| Cash and securities segregated, at fair value | 946 |
| | 565 |
|
| Broker-dealer related receivables | 2,100 |
| | 1,971 |
|
| Securities purchased under agreements to resell | — |
| | 79 |
|
| Deferred policy acquisition costs | 4,301 |
| | 4,469 |
|
| Goodwill and other intangible assets, net | 3,741 |
| | 3,733 |
|
| Amounts due from reinsurers | 4,635 |
| | 4,466 |
|
| Loans to affiliates | 703 |
| | 1,087 |
|
| Guaranteed minimum income benefit reinsurance asset, at fair value | 10,309 |
| | 10,570 |
|
| Other assets | 4,260 |
| | 4,634 |
|
| Separate Accounts’ assets | 111,403 |
| | 107,497 |
|
| Total Assets | $ | 203,764 |
| | $ | 194,626 |
|
| LIABILITIES | | | |
| Policyholders’ account balances | $ | 38,782 |
| | $ | 33,033 |
|
| Future policy benefits and other policyholders liabilities | 25,358 |
| | 24,531 |
|
| Broker-dealer related payables | 484 |
| | 404 |
|
| Securities sold under agreements to repurchase | 1,996 |
| | 1,890 |
|
| Customers related payables | 2,360 |
| | 1,715 |
|
| Amounts due to reinsurers | 125 |
| | 131 |
|
| Short-term debt | 513 |
| | 584 |
|
| Current and deferred income taxes | 3,816 |
| | 4,647 |
|
| Other liabilities | 2,108 |
| | 2,586 |
|
| Separate Accounts’ liabilities | 111,403 |
| | 107,497 |
|
| Total liabilities | 186,945 |
| | 177,018 |
|
| Redeemable Noncontrolling Interest | $ | 403 |
| | $ | 13 |
|
| | | | |
| Commitments and contingent liabilities (Notes 2, 7, 10, 11, 12, 13, 16 and 17) | | | |
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETSPart II, Item 8.
DECEMBER 31, 2016FINANCIAL STATEMENTS AND 2015SUPPLEMENTARY DATA
(CONTINUED)
|
| | | | | | | |
| | 2016 | | 2015 |
| EQUITY | (In Millions) |
| AXA Equitable’s equity: | | | |
| Common stock, $1.25 par value, 2 million shares authorized, issued and outstanding | $ | 2 |
| | $ | 2 |
|
| Capital in excess of par value | 5,339 |
| | 5,321 |
|
| Retained earnings | 7,983 |
| | 8,958 |
|
| Accumulated other comprehensive income (loss) | 7 |
| | 228 |
|
| Total AXA Equitable’s equity | 13,331 |
| | 14,509 |
|
| Noncontrolling interest | 3,085 |
| | 3,086 |
|
| Total equity | 16,416 |
| | 17,595 |
|
| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 203,764 |
| | $ | 194,626 |
|
See Notes to Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| REVENUES | | | | | |
| Universal life and investment-type product policy fee income | $ | 3,423 |
| | $ | 3,208 |
| | $ | 3,115 |
|
| Premiums | 880 |
| | 854 |
| | 874 |
|
| Net investment income (loss): | | | | | |
| Investment income (loss) from derivative instruments | (462 | ) | | (81 | ) | | 1,605 |
|
| Other investment income (loss) | 2,318 |
| | 2,057 |
| | 2,210 |
|
| Total net investment income (loss) | 1,856 |
| | 1,976 |
| | 3,815 |
|
| Investment gains (losses), net: | | | | | |
| Total other-than-temporary impairment losses | (65 | ) | | (41 | ) | | (72 | ) |
| Portion of loss recognized in other comprehensive income (loss) | — |
| | — |
| | — |
|
| Net impairment losses recognized | (65 | ) | | (41 | ) | | (72 | ) |
| Other investment gains (losses), net | 81 |
| | 21 |
| | 14 |
|
| Total investment gains (losses), net | 16 |
| | (20 | ) | | (58 | ) |
| Commissions, fees and other income | 3,791 |
| | 3,942 |
| | 3,930 |
|
| Increase (decrease) in the fair value of the reinsurance contract asset | (261 | ) | | (141 | ) | | 3,964 |
|
| Total revenues | 9,705 |
| | 9,819 |
| | 15,640 |
|
| BENEFITS AND OTHER DEDUCTIONS | | | | | |
| Policyholders’ benefits | 2,893 |
| | 2,799 |
| | 3,708 |
|
| Interest credited to policyholders’ account balances | 1,555 |
| | 978 |
| | 1,186 |
|
| Compensation and benefits | 1,723 |
| | 1,783 |
| | 1,739 |
|
| Commissions | 1,095 |
| | 1,111 |
| | 1,147 |
|
| Distribution related payments | 372 |
| | 394 |
| | 413 |
|
| Interest expense | 16 |
| | 20 |
| | 53 |
|
| Amortization of deferred policy acquisition costs, net | 162 |
| | (331 | ) | | (413 | ) |
| Other operating costs and expenses | 1,458 |
| | 1,415 |
| | 1,692 |
|
| Total benefits and other deductions | 9,274 |
| | 8,169 |
| | 9,525 |
|
| Earnings (loss) from operations, before income taxes | 431 |
| | 1,650 |
| | $ | 6,115 |
|
| Income tax (expense) benefit | 113 |
| | (186 | ) | | (1,695 | ) |
| Net earnings (loss) | 544 |
| | 1,464 |
| | 4,420 |
|
| Less: net (earnings) loss attributable to the noncontrolling interest | (469 | ) | | (403 | ) | | (387 | ) |
| Net Earnings (Loss) Attributable to AXA Equitable | $ | 75 |
| | $ | 1,061 |
| | $ | 4,033 |
|
See Notes to Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| COMPREHENSIVE INCOME (LOSS) | | | | | |
| Net earnings (loss) | $ | 544 |
| | $ | 1,464 |
| | $ | 4,420 |
|
| Other comprehensive income (loss) net of income taxes: | | | | | |
| Foreign currency translation adjustment | (18 | ) | | (25 | ) | | (21 | ) |
| Change in unrealized gains (losses), net of reclassification adjustment | (217 | ) | | (881 | ) | | 969 |
|
| Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment | (3 | ) | | (4 | ) | | (23 | ) |
| Total other comprehensive income (loss), net of income taxes | (238 | ) | | (910 | ) | | 925 |
|
| Comprehensive income (loss) | 306 |
| | 554 |
| | 5,345 |
|
| Less: Comprehensive (income) loss attributable to noncontrolling interest | (452 | ) | | (388 | ) | | (358 | ) |
| Comprehensive Income (Loss) Attributable to AXA Equitable | $ | (146 | ) | | $ | 166 |
| | $ | 4,987 |
|
See Notes to Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014 |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| EQUITY | | | | |
| AXA Equitable’s Equity: | | | | | |
| Common stock, at par value, beginning and end of year | $ | 2 |
| | $ | 2 |
| | $ | 2 |
|
| | | | | | |
| Capital in excess of par value, beginning of year | 5,321 |
| | 5,957 |
| | 5,934 |
|
| Deferred tax on dividend of AB Units | — |
| | (35 | ) | | (26 | ) |
| Non cash capital contribution from AXA Financial (See Note 12) | — |
| | 137 |
| | — |
|
| Transfer of unrecognized net actuarial loss of the AXA Equitable Qualified Pension Plan to AXA Financial (see Note 15) | — |
| | (772 | ) | | — |
|
| Changes in capital in excess of par value | 18 |
| | 34 |
| | 49 |
|
| Capital in excess of par value, end of year | 5,339 |
| | 5,321 |
| | 5,957 |
|
| | | | | | |
| Retained earnings, beginning of year | 8,958 |
| | 8,809 |
| | 5,205 |
|
| Net earnings (loss) | 75 |
| | 1,061 |
| | 4,033 |
|
| Shareholder dividends | (1,050 | ) | | (912 | ) | | (429 | ) |
| Retained earnings, end of year | 7,983 |
| | 8,958 |
| | 8,809 |
|
| | | | | | |
| Accumulated other comprehensive income (loss), beginning of year | 228 |
| | 351 |
| | (603 | ) |
| Transfer of unrecognized net actuarial loss of the AXA Equitable Qualified Pension Plan to AXA Financial (see Note 15) | — |
| | 772 |
| | — |
|
| Other comprehensive income (loss) | (221 | ) | | (895 | ) | | 954 |
|
| Accumulated other comprehensive income (loss), end of year | 7 |
| | 228 |
| | 351 |
|
| Total AXA Equitable’s equity, end of year | 13,331 |
| | 14,509 |
| | 15,119 |
|
| | | | | | |
| Noncontrolling interest, beginning of year | 3,086 |
| | 2,989 |
| | 2,903 |
|
| Repurchase of AB Holding units | (168 | ) | | (154 | ) | | (62 | ) |
| Net earnings (loss) attributable to noncontrolling interest | 464 |
| | 403 |
| | 387 |
|
| Dividends paid to noncontrolling interest | (384 | ) | | (414 | ) | | (401 | ) |
| Dividend of AB Units by AXA Equitable to AXA Financial | — |
| | 145 |
| | 48 |
|
| Other comprehensive income (loss) attributable to noncontrolling interest | (17 | ) | | (15 | ) | | (29 | ) |
| Other changes in noncontrolling interest | 104 |
| | 132 |
| | 143 |
|
| Noncontrolling interest, end of year | 3,085 |
| | 3,086 |
| | 2,989 |
|
| Total Equity, End of Year | $ | 16,416 |
| | $ | 17,595 |
| | $ | 18,108 |
|
See Notes to Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Net earnings (loss) | $ | 544 |
| | $ | 1,464 |
| | $ | 4,420 |
|
| Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | |
| Interest credited to policyholders’ account balances | 1,555 |
| | 978 |
| | 1,186 |
|
| Universal life and investment-type product policy fee income | (3,423 | ) | | (3,208 | ) | | (3,115 | ) |
| (Increase) decrease in the fair value of the reinsurance contract asset | 261 |
| | 141 |
| | (3,964 | ) |
| (Income) loss related to derivative instruments | 462 |
| | 81 |
| | (1,605 | ) |
| Investment (gains) losses, net | (16 | ) | | 20 |
| | 58 |
|
| Realized and unrealized (gains) losses on trading securities | 41 |
| | 43 |
| | (22 | ) |
| Non-cash long term incentive compensation expense | 152 |
| | 172 |
| | 171 |
|
| Amortization of deferred sales commission | 41 |
| | 49 |
| | 42 |
|
| Other depreciation and amortization | (98 | ) | | (18 | ) | | 44 |
|
| Amortization of deferred cost of reinsurance asset | 159 |
| | 39 |
| | 302 |
|
| Amortization of other intangibles | 29 |
| | 28 |
| | 27 |
|
| Changes in: | | | | | |
| Net broker-dealer and customer related receivables/payables | 608 |
| | (38 | ) | | (525 | ) |
| Reinsurance recoverable | (534 | ) | | (916 | ) | | (488 | ) |
| Segregated cash and securities, net | (381 | ) | | (89 | ) | | 505 |
|
| Deferred policy acquisition costs | 162 |
| | (331 | ) | | (413 | ) |
| Future policy benefits | 783 |
| | 934 |
| | 1,647 |
|
| Current and deferred income taxes | (771 | ) | | 258 |
| | 1,448 |
|
| Accounts payable and accrued expenses | (66 | ) | | 38 |
| | (259 | ) |
| Other, net | 31 |
| | 111 |
| | (98 | ) |
| Net cash provided by (used in) operating activities | $ | (461 | ) | | $ | (244 | ) | | $ | (639 | ) |
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(CONTINUED)
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Cash flows from investing activities: | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | |
| Fixed maturities, available for sale | $ | 7,154 |
| | $ | 4,368 |
| | $ | 3,157 |
|
| Mortgage loans on real estate | 676 |
| | 609 |
| | 652 |
|
| Trading account securities | 6,271 |
| | 10,768 |
| | 6,099 |
|
| Other | 32 |
| | 134 |
| | 99 |
|
| Payment for the purchase/origination of: | | | | | |
| Fixed maturities, available for sale | (7,873 | ) | | (4,701 | ) | | (5,184 | ) |
| Mortgage loans on real estate | (3,261 | ) | | (1,311 | ) | | (1,432 | ) |
| Trading account securities | (8,691 | ) | | (12,501 | ) | | (7,014 | ) |
| Other | (250 | ) | | (132 | ) | | (135 | ) |
| Cash settlements related to derivative instruments | 102 |
| | 529 |
| | 999 |
|
| Decrease in loans to affiliates | 384 |
| | — |
| | — |
|
| Change in short-term investments | (205 | ) | | (363 | ) | | (5 | ) |
| Investment in capitalized software, leasehold improvements and EDP equipment | (85 | ) | | (71 | ) | | (83 | ) |
| Purchase of business, net of cash acquired | (21 | ) | | — |
| | (61 | ) |
| Other, net | 409 |
| | 203 |
| | 157 |
|
| Net cash provided by (used in) investing activities | $ | (5,358 | ) | | $ | (2,468 | ) | | $ | (2,751 | ) |
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2016, 2015 AND 2014
(CONTINUED)
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Cash flows from financing activities: | | | | | |
| Policyholders’ account balances: | | | | | |
| Deposits | $ | 9,342 |
| | $ | 5,757 |
| | $ | 6,011 |
|
| Withdrawals | (2,874 | ) | | (2,861 | ) | | (2,867 | ) |
| Transfer (to) from Separate Accounts | 1,606 |
| | 1,045 |
| | 815 |
|
| Change in short-term financings | (69 | ) | | 95 |
| | 221 |
|
| Change in collateralized pledged assets | (677 | ) | | (2 | ) | | (12 | ) |
| Change in collateralized pledged liabilities | 125 |
| | (270 | ) | | 430 |
|
| (Decrease) increase in overdrafts payable | (85 | ) | | — |
| | — |
|
| Repayment of Loans from Affiliates | — |
| | — |
| | (825 | ) |
| Repayment of long term debt | — |
| | (200 | ) | | — |
|
| Shareholder dividends paid | (1,050 | ) | | (767 | ) | | (382 | ) |
| Repurchase of AB Holding units | (236 | ) | | (214 | ) | | (90 | ) |
| Redemptions of non-controlling interests of consolidated VIEs, net | (137 | ) | | — |
| | — |
|
| Distribution to noncontrolling interest in consolidated subsidiaries | (385 | ) | | (414 | ) | | (401 | ) |
| Increase (decrease) in Securities sold under agreement to repurchase | 104 |
| | 939 |
| | 950 |
|
| (Increase) decrease in securities purchased under agreement to resell | 79 |
| | (79 | ) | | — |
|
| Other, net | 8 |
| | 5 |
| | (7 | ) |
| Net cash provided by (used in) financing activities | 5,751 |
| | 3,034 |
| | 3,843 |
|
| Effect of exchange rate changes on cash and cash equivalents | (10 | ) | | (10 | ) | | (20 | ) |
| Change in cash and cash equivalents | (78 | ) | | 312 |
| | 433 |
|
| Cash and cash equivalents, beginning of year | 3,028 |
| | 2,716 |
| | 2,283 |
|
| Cash and Cash Equivalents, End of Year | $ | 2,950 |
| | $ | 3,028 |
| | $ | 2,716 |
|
| Supplemental cash flow information: | | | | | |
| Interest Paid | $ | 11 |
| | $ | 19 |
| | $ | 72 |
|
| Income Taxes (Refunded) Paid | $ | 613 |
| | $ | (80 | ) | | $ | 272 |
|
See Notes to Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AXA Equitable Life Insurance Company (“AXA Equitable,” and collectively with its consolidated subsidiaries the “Company”) is a direct, wholly-owned subsidiary of AXA Equitable Financial Services, LLC (“AEFS”). AEFS is a direct, wholly-owned subsidiary of AXA Financial, Inc. (“AXA Financial,” and collectively with its consolidated subsidiaries, “AXA Financial Group”). AXA Financial is an indirect wholly-owned subsidiary of AXA S.A. (“AXA”), a French holding company for the AXA Group, a worldwide leader in financial protection.
The Company conducts operations in two business segments: the Insurance and Investment Management segments. The Company’s management evaluates the performance of each of these segments independently.
Insurance
The Insurance segment offers a variety of term, variable and universal life insurance products, variable annuity products, employee benefit products and investment products including mutual funds principally to individuals and small and medium size businesses and professional and trade associations. This segment also includes Separate Accounts for individual insurance and annuity products.
The Company’s insurance business is conducted principally by AXA Equitable and its indirect, wholly-owned insurance subsidiaries and AXA Equitable Funds Management Group (“AXA Equitable FMG”).
Investment Management
The Investment Management segment is principally comprised of the investment management business of AllianceBernstein L.P., a Delaware limited partnership (together with its consolidated subsidiaries “AB”). AB provides research, diversified investment management and related services globally to a broad range of clients. This segment also includes institutional Separate Accounts principally managed by AB that provide various investment options for large group pension clients, primarily defined benefit and contribution plans, through pooled or single group accounts.
At December 31, 2016 and 2015, the Company’s economic interest in AB was 29.0% and 28.6%, respectively. At December 31, 2016 and 2015, respectively, AXA and its subsidiaries’ economic interest in AB (including AXA Financial Group) was approximately 63.7% and 62.8%. AXA Equitable is the parent of AllianceBernstein Corporation, the general partner (“General Partner”) of the limited partnership, as a result it consolidates AB in the Company’s consolidated financial statements.
| |
2) | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. The accompanying consolidated financial statements reflect all adjustments necessary in the opinion of management for a fair presentation of the consolidated financial position of the Company and its consolidated results of operations and cash flows for the periods presented.
The accompanying consolidated financial statements include the accounts of AXA Equitable and its subsidiaries engaged in insurance related businesses (collectively, the “Insurance Group”); other subsidiaries, principally AB; and those investment companies, partnerships and joint ventures in which AXA Equitable or its subsidiaries has control and a majority economic interest as well as those variable interest entities (“VIEs”) that meet the requirements for consolidation.
All significant intercompany transactions and balances have been eliminated in consolidation. The years “2016”, “2015” and “2014” refer to the years ended December 31, 2016, 2015 and 2014, respectively. Certain reclassifications have been made in the amounts presented for prior periods to conform those periods to the current presentation.
Adoption of New Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements for a complete discussion of newly issued accounting pronouncements.
Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
AXA EQUITABLE LIFE INSURANCE COMPANY |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of AXA Equitable Life Insurance Company:
Opinion on the Financial Accounting Standards Board (“FASB”) issued new guidance that amendsStatements
We have audited the definitionaccompanying consolidated balance sheets of a business to provide a more robust frameworkAXA Equitable Life Insurance Company and its subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of income (loss), comprehensive income (loss), equity and cash flows for determining when a seteach of assets and activities is a business. The definition primarily adds clarity for evaluating whether certain transactions should be accounted for as acquisitions/dispositions of assets or businesses, the latter subject to guidance on business combinations, but also may interact with other areas of accounting where the defined term is used, such asthree years in the application of guidance on consolidation and goodwill impairment. The new guidance is effective for fiscal years endingperiod ended December 31, 2018. The2018, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company elected to early adopt the new guidance for the year endingas of December 31, 20162018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with no significant impactaccounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the Company’s consolidated financial statements.statements, the Company changed in 2018 the manner in which it accounts for certain income tax effects originally recognized in accumulated other comprehensive income.
Basis for Opinion
In February 2015,These consolidated financial statements are the FASB issued a new consolidation standard that makes targeted amendments to the VIE assessment, including guidance specific to the analysis of fee arrangements and related party relationships, modifies the guidance for the evaluation of limited partnerships and similar entities for consolidation to eliminate the presumption of general partner control, and ends the deferral that had been granted to certain investment companies for applying previous VIE guidance. The Company adopted this new standard beginning January 1, 2016, having elected not to early-adopt in previous interim periods, and applied the guidance using a modified retrospective approach, thereby not requiring the restatement of prior year periods. The Company’s reevaluation of all legal entities under the new standard resulted in identification of additional VIEs and consolidation of certain investment productsresponsibility of the Investment Management segment that were not consolidated in accordance with previous guidance. See Consolidation of VIEs below.
In May 2015, the FASB issued new guidance relatedCompany’s management. Our responsibility is to disclosures for investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). Under the new guidance, investments measured at NAV, as a practical expedient for fair value, are excluded from the fair value hierarchy. Removing investments measured using the practical expedient from the fair value hierarchy was intended to eliminate the diversity in practice with respect to the categorization of these investments. The only criterion for categorizing investments in the fair value hierarchy is now the observability of the inputs. The amendment was effective retrospectively for interim and annual periods beginning after December 15, 2015. Implementation of this guidance did not have a material impactexpress an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
New York, NY
March 28, 2019
We have served as the Company’s auditor since 1993.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 AND 2017
|
| | | | | | | |
| | 2018 | | 2017 |
| | (in millions, except share amounts) |
| ASSETS | |
| Investments: | | | |
| Fixed maturities available for sale, at fair value (amortized cost of $42,492 and $34,831) | $ | 41,915 |
| | $ | 36,358 |
|
| Mortgage loans on real estate (net of valuation allowance of $7 and $8) | 11,818 |
| | 10,935 |
|
| Real estate held for production of income | 52 |
| | 390 |
|
| Policy loans | 3,267 |
| | 3,315 |
|
| Other equity investments | 1,144 |
| | 1,264 |
|
| Trading securities, at fair value | 15,166 |
| | 12,277 |
|
| Other invested assets | 1,554 |
| | 1,830 |
|
| Total investments | 74,916 |
| | 66,369 |
|
| Cash and cash equivalents | 2,622 |
| | 2,400 |
|
| Cash and securities segregated, at fair value | — |
| | 9 |
|
| Deferred policy acquisition costs | 5,011 |
| | 4,492 |
|
| Amounts due from reinsurers | 3,124 |
| | 5,079 |
|
| Loans to affiliates | 600 |
| | 703 |
|
| GMIB reinsurance contract asset, at fair value | 1,991 |
| | 10,488 |
|
| Current and deferred income taxes | 438 |
| | — |
|
| Other assets | 2,763 |
| | 4,018 |
|
| Assets of disposed subsidiary | — |
| | 9,835 |
|
| Separate Accounts assets | 108,487 |
| | 122,537 |
|
| Total Assets | $ | 199,952 |
| | $ | 225,930 |
|
| LIABILITIES | | | |
| Policyholders' account balances | $ | 46,403 |
| | $ | 43,805 |
|
| Future policy benefits and other policyholders' liabilities | 29,808 |
| | 29,070 |
|
| Broker-dealer related payables | 69 |
| | 430 |
|
| Securities sold under agreements to repurchase | 573 |
| | 1,887 |
|
| Amounts due to reinsurers | 113 |
| | 134 |
|
| Long-term debt | — |
| | 203 |
|
| Loans from affiliates | 572 |
| | — |
|
| Current and deferred income taxes | — |
| | 1,550 |
|
| Other liabilities | 1,460 |
| | 1,242 |
|
| Liabilities of disposed subsidiary | — |
| | 4,954 |
|
| Separate Accounts liabilities | 108,487 |
| | 122,537 |
|
| Total Liabilities | $ | 187,485 |
| | $ | 205,812 |
|
| Redeemable noncontrolling interest: | | | |
| Continuing operations | $ | 39 |
| | $ | 24 |
|
| Disposed subsidiary | — |
| | 602 |
|
| Redeemable noncontrolling interest | $ | 39 |
| | $ | 626 |
|
| Commitments and contingent liabilities (Note 17) |
| |
|
| EQUITY | | | |
| Equity attributable to AXA Equitable: | | |
|
|
| Common stock, $1.25 par value; 2,000,000 shares authorized, issued and outstanding | $ | 2 |
| | $ | 2 |
|
| Capital in excess of par value | 7,807 |
| | 6,859 |
|
| Retained earnings | 5,098 |
| | 8,938 |
|
| Accumulated other comprehensive income (loss) | (491 | ) | | 598 |
|
| Total equity attributable to AXA Equitable | 12,416 |
| | 16,397 |
|
| Noncontrolling interest | 12 |
| | 3,095 |
|
| Total Equity | 12,428 |
| | 19,492 |
|
| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 199,952 |
| | $ | 225,930 |
|
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| REVENUES | | | | | |
| Policy charges and fee income | $ | 3,523 |
| | $ | 3,294 |
| | $ | 3,311 |
|
| Premiums | 862 |
| | 904 |
| | 880 |
|
| Net derivative gains (losses) | (1,010 | ) | | 894 |
| | (1,321 | ) |
| Net investment income (loss) | 2,478 |
| | 2,441 |
| | 2,168 |
|
| Investment gains (losses), net: | | | | | |
| Total other-than-temporary impairment losses | (37 | ) | | (13 | ) | | (65 | ) |
| Other investment gains (losses), net | 41 |
| | (112 | ) | | 83 |
|
| Total investment gains (losses), net | 4 |
| | (125 | ) | | 18 |
|
| Investment management and service fees | 1,029 |
| | 1,007 |
| | 951 |
|
| Other income | 65 |
| | 41 |
| | 36 |
|
| Total revenues | 6,951 |
| | $ | 8,456 |
| | $ | 6,043 |
|
| | | | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | | |
| Policyholders’ benefits | 3,005 |
| | 3,473 |
| | 2,771 |
|
| Interest credited to policyholders’ account balances | 1,002 |
| | 921 |
| | 905 |
|
| Compensation and benefits | 422 |
| | 327 |
| | 364 |
|
| Commissions and distribution related payments | 620 |
| | 628 |
| | 635 |
|
| Interest expense | 34 |
| | 23 |
| | 13 |
|
| Amortization of deferred policy acquisition costs | 431 |
| | 900 |
| | 642 |
|
| Other operating costs and expenses | 2,918 |
| | 635 |
| | 753 |
|
| Total benefits and other deductions | 8,432 |
| | 6,907 |
| | 6,083 |
|
| Income (loss) from continuing operations, before income taxes | (1,481 | ) | | 1,549 |
| | (40 | ) |
| Income tax (expense) benefit from continuing operations | 446 |
| | 1,210 |
| | 164 |
|
| Net income (loss) from continuing operations | (1,035 | ) | | 2,759 |
| | 124 |
|
| Net income (loss) from discontinued operations, net of taxes and noncontrolling interest | 114 |
| | 85 |
| | 66 |
|
| Net income (loss) | (921 | ) | | 2,844 |
| | 190 |
|
| Less: net (income) loss attributable to the noncontrolling interest | 3 |
| | (1 | ) | | — |
|
| Net income (loss) attributable to AXA Equitable | $ | (918 | ) | | $ | 2,843 |
| | $ | 190 |
|
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| COMPREHENSIVE INCOME (LOSS) | | | | | |
| Net income (loss) | $ | (921 | ) | | $ | 2,844 |
| | $ | 190 |
|
| Other Comprehensive income (loss) net of income taxes: | | | | | |
| Change in unrealized gains (losses), net of reclassification adjustment | (1,230 | ) | | 625 |
| | (233 | ) |
| Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment | (4 | ) | | (5 | ) | | (3 | ) |
| Other comprehensive income (loss) from discontinued operations | — |
| | (18 | ) | | 17 |
|
| Total other comprehensive income (loss), net of income taxes | (1,234 | ) | | 602 |
| | (219 | ) |
| Comprehensive income (loss) attributable to AXA Equitable | $ | (2,155 | ) | | $ | 3,446 |
| | $ | (29 | ) |
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Equity attributable to AXA Equitable: | | | | | |
| Common stock, at par value, beginning and end of year | $ | 2 |
| | $ | 2 |
| | $ | 2 |
|
| | | | | | |
| Capital in excess of par value, beginning of year | $ | 6,859 |
| | $ | 5,339 |
| | $ | 5,321 |
|
| Capital contribution from parent company | — |
| | 1,500 |
| | — |
|
| Transfer of deferred tax asset in GMxB Unwind | 1,209 |
| | — |
| | — |
|
| Settlement of intercompany payables in GMxB Unwind | (297 | ) | | — |
| | — |
|
| Other | 36 |
| | 20 |
| | 18 |
|
| Capital in excess of par value, end of year | $ | 7,807 |
| | $ | 6,859 |
| | $ | 5,339 |
|
| | | | | | |
| Retained earnings, beginning of year | $ | 8,938 |
| | $ | 6,095 |
| | $ | 6,955 |
|
| Cumulative effect of adoption of revenue recognition standard ASC 606 | 8 |
| | — |
| | — |
|
Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects Attribute to Disposed Subsidiary | (83 | ) | | — |
| | — |
|
| Net income (loss) attributable to AXA Equitable | (918 | ) | | 2,843 |
| | 190 |
|
| Dividend to parent company | (1,672 | ) | | — |
| | (1,050 | ) |
| Distribution of disposed subsidiary | (1,175 | ) | | — |
| | — |
|
| Retained earnings, end of year | $ | 5,098 |
| | $ | 8,938 |
| | $ | 6,095 |
|
| | | | | | |
| Accumulated other comprehensive income (loss), beginning of year | $ | 598 |
| | $ | (4 | ) | | $ | 215 |
|
Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects | 83 |
| | — |
| | — |
|
| Other comprehensive income (loss) | (1,234 | ) | | 602 |
| | (219 | ) |
| Transfer of accumulated other comprehensive income to discontinued operations | 62 |
| | — |
| | — |
|
| Accumulated other comprehensive income (loss), end of year | (491 | ) | | 598 |
| | (4 | ) |
| Total AXA Equitable's equity, end of year | $ | 12,416 |
| | $ | 16,397 |
| | $ | 11,432 |
|
| | | | | | |
| Equity attributable to the Noncontrolling Interest | | | | | |
| Noncontrolling interest, continuing operations, beginning of year | $ | 19 |
| | $ | — |
| | $ | — |
|
| Net earnings (loss) attributable to noncontrolling interest | 1 |
| | — |
| | — |
|
| Net earnings (loss) attributable to redeemable noncontrolling interests | 2 |
| | (1 | ) | | — |
|
| Consolidation of real estate joint ventures | — |
| | 19 |
| | — |
|
| Deconsolidation of real estate joint ventures | (8 | ) | | — |
| | — |
|
| Reclassification of net earnings (loss) attributable to redeemable noncontrolling interests | (2 | ) | | 1 |
| | — |
|
| Noncontrolling interest, continuing operations, end of year | $ | 12 |
| | $ | 19 |
| | $ | — |
|
| | | |
|
| | |
| Noncontrolling interest, discontinued operations, beginning of year | $ | 3,076 |
| | $ | 3,096 |
| | $ | 3,059 |
|
| Repurchase of AB Holding Units | — |
| | (158 | ) | | (168 | ) |
| Net earnings (loss) attributable to noncontrolling interest | — |
| | 485 |
| | 491 |
|
| Dividends paid to noncontrolling interest | — |
| | (457 | ) | | (384 | ) |
| Transfer of AB Holding Units | (3,076 | ) | | — |
| | — |
|
| Other changes in noncontrolling interest | — |
| | 110 |
| | 98 |
|
| Noncontrolling interest, discontinued operations, end of year | $ | — |
| | $ | 3,076 |
| | $ | 3,096 |
|
| Equity attributable to the Noncontrolling Interest | $ | 12 |
| | $ | 3,095 |
| | $ | 3,096 |
|
| Total equity, end of Year | $ | 12,428 |
| | $ | 19,492 |
| | $ | 14,528 |
|
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Net income (loss) (1) | $ | (358 | ) | | $ | 3,377 |
| | $ | 686 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
| Interest credited to policyholders’ account balances | 1,002 |
| | 921 |
| | 905 |
|
| Policy charges and fee income | (3,523 | ) | | (3,294 | ) | | (3,311 | ) |
| Net derivative (gains) losses | 1,010 |
| | (870 | ) | | 1,337 |
|
| Investment (gains) losses, net | (3 | ) | | 125 |
| | (16 | ) |
| Realized and unrealized (gains) losses on trading securities | 221 |
| | (166 | ) | | 41 |
|
| Non-cash long-term incentive compensation expense (2) | 218 |
| | 185 |
| | 152 |
|
| Amortization of deferred cost of reinsurance asset | 1,882 |
| | (84 | ) | | 159 |
|
| Amortization and depreciation (2) | 340 |
| | 825 |
| | 614 |
|
| Cash received on the recapture of captive reinsurance | 1,273 |
| | — |
| | — |
|
| Equity (income) loss from limited partnerships | (120 | ) | | (157 | ) | | (91 | ) |
| Changes in: | | | | | |
| Net broker-dealer and customer related receivables/payables | 838 |
| | (278 | ) | | 608 |
|
| Reinsurance recoverable (2) | (390 | ) | | (1,018 | ) | | (304 | ) |
| Segregated cash and securities, net | (345 | ) | | 130 |
| | (381 | ) |
| Capitalization of deferred policy acquisition costs (2) | (597 | ) | | (578 | ) | | (594 | ) |
| Future policy benefits | (284 | ) | | 1,189 |
| | 431 |
|
| Current and deferred income taxes | (556 | ) | | (1,174 | ) | | (753 | ) |
| Other, net (2) | 810 |
| | 486 |
| | 56 |
|
| Net cash provided by (used in) operating activities | $ | 1,418 |
| | $ | (381 | ) | | $ | (461 | ) |
| | | | | | |
| Cash flows from investing activities: | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | |
| Fixed maturities, available-for-sale | $ | 8,935 |
| | $ | 9,738 |
| | $ | 7,154 |
|
| Mortgage loans on real estate | 768 |
| | 934 |
| | 676 |
|
| Trading account securities | 9,298 |
| | 9,125 |
| | 6,271 |
|
| Real estate joint ventures | 139 |
| | — |
| | — |
|
| Short-term investments (2) | 2,315 |
| | 2,204 |
| | 2,984 |
|
| Other | 190 |
| | 228 |
| | 32 |
|
| Payment for the purchase/origination of: | | | | | |
| Fixed maturities, available-for-sale | (11,110 | ) | | (12,465 | ) | | (7,873 | ) |
| Mortgage loans on real estate | (1,642 | ) | | (2,108 | ) | | (3,261 | ) |
| Trading account securities | (11,404 | ) | | (12,667 | ) | | (8,691 | ) |
| Short-term investments (2) | (1,852 | ) | | (2,456 | ) | | (3,187 | ) |
| Other | (170 | ) | | (280 | ) | | (250 | ) |
| Cash settlements related to derivative instruments | 805 |
| | (1,259 | ) | | 102 |
|
| Repayments of loans to affiliates | 900 |
| | — |
| | 384 |
|
| Investment in capitalized software, leasehold improvements and EDP equipment | (115 | ) | | (100 | ) | | (85 | ) |
| Purchase of business, net of cash acquired | — |
| | (130 | ) | | (21 | ) |
| Issuance of loans to affiliates | (1,100 | ) | | — |
| | — |
|
| Cash disposed due to distribution of disposed subsidiary | (672 | ) | | — |
| | — |
|
| Other, net (2) | (91 | ) | | 322 |
| | 407 |
|
| Net cash provided by (used in) investing activities | $ | (4,806 | ) | | $ | (8,914 | ) | | $ | (5,358 | ) |
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Policyholders’ account balances: | | | | | |
| Deposits | $ | 9,365 |
| | $ | 9,334 |
| | $ | 9,746 |
|
| Withdrawals | (4,496 | ) | | (3,926 | ) | | (2,874 | ) |
| Transfer (to) from Separate Accounts | 1,809 |
| | 1,566 |
| | 1,202 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(CONTINUED)
|
| | | | | | | | | | | |
| | 2018 | �� | 2017 | | 2016 |
| | (in millions) |
| Change in short-term financings | (26 | ) | | 53 |
| | (69 | ) |
| Change in collateralized pledged assets | 1 |
| | 710 |
| | (677 | ) |
| Change in collateralized pledged liabilities | (291 | ) | | 1,108 |
| | 125 |
|
| (Decrease) increase in overdrafts payable | 3 |
| | 63 |
| | (85 | ) |
| Additional loans from affiliates | 572 |
| | — |
| | — |
|
| Shareholder dividends paid | (1,672 | ) | | — |
| | (1,050 | ) |
| Repurchase of AB Holding Units | (267 | ) | | (220 | ) | | (236 | ) |
| Purchases (redemptions) of noncontrolling interests of consolidated company-sponsored investment funds | (472 | ) | | 120 |
| | (137 | ) |
| Distribution to noncontrolling interest of consolidated subsidiaries | (610 | ) | | (457 | ) | | (385 | ) |
| Increase (decrease) in securities sold under agreement to repurchase | (1,314 | ) | | (109 | ) | | 104 |
|
| (Increase) decrease in securities purchased under agreement to resell | — |
| | — |
| | 79 |
|
| Capital contribution from parent company | — |
| | 1,500 |
| | — |
|
| Other, net | 11 |
| | (10 | ) | | 8 |
|
| Net cash provided by (used in) financing activities | $ | 2,613 |
| | $ | 9,732 |
| | $ | 5,751 |
|
| | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | (12 | ) | | 22 |
| | (10 | ) |
| | | | | | |
| Change in cash and cash equivalents | (787 | ) | | 459 |
| | (78 | ) |
| Cash and cash equivalents, beginning of year | 3,409 |
| | 2,950 |
| | 3,028 |
|
| Cash and cash equivalents, end of year | $ | 2,622 |
| | $ | 3,409 |
| | $ | 2,950 |
|
| | | | | | |
| Cash and cash equivalents of disposed subsidiary: | | | | | |
| Beginning of year | $ | 1,009 |
| | $ | 1,006 |
| | $ | 561 |
|
| End of year | $ | — |
| | $ | 1,009 |
| | $ | 1,006 |
|
| | | | | | |
| Cash and cash equivalents of continuing operations | | | | | |
| Beginning of year | $ | 2,400 |
| | $ | 1,944 |
| | $ | 2,467 |
|
| End of year | $ | 2,622 |
| | $ | 2,400 |
| | $ | 1,944 |
|
| | | | | | |
| Supplemental cash flow information: | | | | | |
| Interest paid | $ | — |
| | $ | (8 | ) | | $ | (11 | ) |
| Income taxes (refunded) paid | $ | (8 | ) | | $ | (33 | ) | | $ | 613 |
|
| | | | | | |
| Cash flows of disposed subsidiary: | | | | | |
| Net cash provided by (used in) operating activities | $ | 1,137 |
| | $ | 715 |
| | $ | 1,041 |
|
| Net cash provided by (used in) investing activities | (102 | ) | | (297 | ) | | 323 |
|
| Net cash provided by (used in) financing activities | (1,360 | ) | | (437 | ) | | (909 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (12 | ) | | 22 |
| | (10 | ) |
| |
|
| |
|
| |
|
|
| Non-cash transactions: | | | | | |
| Continuing operations | | | | | |
| (Settlement) issuance of long-term debt | $ | (202 | ) | | $ | 202 |
| | $ | — |
|
| Transfer of assets to reinsurer | $ | (604 | ) | | $ | — |
| | $ | — |
|
| Repayments of loans from affiliates | $ | 300 |
| | $ | — |
| | $ | — |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(CONTINUED)
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Discontinued operations | | | | | |
| Fair value of assets acquired | $ | — |
| | $ | — |
| | $ | 34 |
|
| Fair value of liabilities assumed | $ | — |
| | $ | — |
| | $ | 1 |
|
| Payables recorded under contingent payment arrangements | $ | — |
| | $ | — |
| | $ | 12 |
|
| | | | | | |
| Disposal of subsidiary | | | | | |
| Assets disposed | $ | 9,156 |
| | $ | — |
| | $ | — |
|
| Liabilities disposed | 4,914 |
| | — |
| | — |
|
| Net assets disposed | 4,242 |
| | — |
| | — |
|
| Cash disposed | 672 |
| | — |
| | — |
|
| Net non-cash disposed | $ | 3,570 |
| | $ | — |
| | $ | — |
|
| |
| (1) | Net income (loss) includes $564 million, $533 million and $496 million in 2018, 2017 and 2016, respectively, of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss). |
| |
| (2) | Prior period amounts have been reclassified to conform to current period presentation. See Note 20 for further information. |
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
Consolidation
AXA Equitable Life Insurance Company’s (“AXA Equitable” and, collectively with its consolidated subsidiaries, the “Company”) primary business is providing life insurance and employee benefit products to both individuals and businesses. The Company is an indirect, wholly-owned subsidiary of AXA Equitable Holdings, Inc. (“Holdings”). Prior to the closing of the initial public offering of shares of Holdings’ common stock on May 14, 2018 (the “IPO”), Holdings was a wholly-owned subsidiary of AXA S.A. (“AXA”), a French holding company for the AXA Group, a worldwide leader in life, property and casualty, and health insurance and asset management. As of December 31, 2018, AXA owns approximately 59% of the outstanding common stock of Holdings.
In April 2015,March 2018, AXA contributed its 0.5% minority interest in AXA Financial, Inc. (“AXA Financial”) to Holdings, increasing Holdings’ ownership of AXA Financial to 100%. On October 1, 2018, AXA Financial merged with and into its direct parent, Holdings, with Holdings continuing as the FASB issued new guidance, simplifyingsurviving entity (the “AXA Financial Merger”). As a result of the presentationAXA Financial Merger, Holdings assumed all of debt issuance costs,AXA Financial’s liabilities, including two assumption agreements under which requires debt issuance costs to be presentedit legally assumed primary liability for certain employee benefit plans of AXA Equitable Life and various guarantees for its subsidiaries.
The accompanying consolidated financial statements represent the consolidated results and financial position of AXA Equitable and not the consolidated results and financial position of Holdings.
Discontinued Operations
In the fourth quarter of 2018, the Company transferred its economic interest in the balance sheet asbusiness of AllianceBernstein Holding L.P. (“AB Holding”), AllianceBernstein L.P. (“ABLP”) and their subsidiaries (collectively, “AB”) to a direct deduction from the carrying valuenewly created wholly-owned subsidiary of the associated debt liability, consistent with the presentationHoldings (the “AB Business Transfer”). The results of a debt discount. The new guidance was effective retrospectively for interim and annual periods beginning after December 15, 2015. Implementation of this guidance did not have a material impact onAB are reflected in the Company’s consolidated financial statements.statements as a discontinued operation and, therefore, are presented as Assets of disposed subsidiary, Liabilities of disposed subsidiary on the consolidated balance sheets and Net income (loss) from discontinued operations, net of taxes, on the consolidated statements of income (loss). Intercompany transactions between the Company and AB prior to the AB Business Transfer have been eliminated. Ongoing service transactions will be reported as related party transactions going forward. See Note 19 for information on discontinued operations and transactions with AB.
As a result of the AB Business Transfer, we have reassessed the Company's segment structure and concluded that the Company operates as a single reportable segment as information on a more segmented basis is not evaluated by the Chief Operating Decision Maker and as such there is only a single reporting segment.
| |
| 2) | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation
The preparation of the FASB issued new guidance for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The new guidance was effective for interim
and annual periods beginning after December 15, 2015. Implementation of this guidance did not have a material impact on the Company’saccompanying consolidated financial statements.
In August 2014,statements in conformity with accounting principles generally accepted in the FASB issued new guidance whichUnited States of America (“U.S. GAAP”) requires management to evaluate whether there is “substantial doubt” aboutmake estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting entity’s ability to continue as a going concern and provide related footnote disclosures about those uncertainties, if they exist. periods. Actual results could differ from these estimates.
The new guidance was effective for annual periods, ending after December 15, 2016 and interim periods thereafter. Implementation of this guidance did not have a material impact on the Company’saccompanying consolidated financial statements.statements present the consolidated results of operations, financial condition and cash flows of the Company and its subsidiaries and those investment companies, partnerships and joint ventures in which the Company has control and a majority economic interest as well as those variable interest entities (“VIEs”) that meet the requirements for consolidation.
Financial results in the historical consolidated financial statements may not be indicative of the results of operations, comprehensive income (loss), financial position, equity or cash flows that would have been achieved had we operated
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as a separate, standalone entity during the FASB issued new guidancereporting periods presented. We believe that allows investors to elect to use the proportional amortization method to accountconsolidated financial statements include all adjustments necessary for investmentsa fair presentation of the results of operations of the Company.
All significant intercompany transactions and balances have been eliminated in qualified affordable housing projects if certain conditions are met. Under this method, which replaces the effective yield method, an investor amortizes the cost of its investment, in proportionconsolidation. The years “2018”, “2017” and “2016” refer to the tax creditsyears ended December 31, 2018, 2017 and other tax benefits it receives, to income tax expense. The guidance also introduces disclosure requirements for all investments in qualified affordable housing projects, regardless2016, respectively.
Adoption of the accounting method used for those investments. The guidance was effective for annual periods beginning after December 15, 2014. ImplementationNew Accounting Pronouncements
|
| |
| Description | Effect on the Financial Statement or Other Significant Matters |
ASU 2014-09: Revenue from Contracts with Customers (Topic 606) |
| This ASU contains new guidance that clarifies the principles for recognizing revenue arising from contracts with customers and develops a common revenue standard for U.S. GAAP. | On January 1, 2018, the Company adopted the new revenue recognition guidance on a modified retrospective basis. The impact of the adoption of the new revenue recognition guidance related to the disposed subsidiary resulted in an opening retained earnings adjustment to the Company of $8 million. Adoption did not change the amounts or timing of the Company’s revenue recognition for investment management and advisory fees related to continuing operations. |
ASU 2016-01: Financial Instruments - Overall (Subtopic 825-10) |
| This ASU provides new guidance related to the recognition and measurement of financial assets and financial liabilities. The new guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. The FASB also clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on AFS debt securities. The new guidance requires equity investments in unconsolidated entities, except those accounted for under the equity method, to be measured at fair value through earnings, thereby eliminating the AFS classification for equity securities with readily determinable fair values for which changes in fair value currently were reported in AOCI. | On January 1, 2018, the Company adopted the new recognition requirements on a modified retrospective basis for changes in the fair value of AFS equity securities, resulting in no material reclassification adjustment from AOCI to opening retained earnings for the net unrealized gains, net of tax, related to approximately $13 million of common stock securities and eliminated their designation as AFS equity securities. The Company does not currently report any of its financial liabilities under the fair value option. |
ASU 2016-15: Statement of Cash Flows (Topic 230) |
| This ASU provides new guidance to simplify elements of cash flow classification. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance requires application of a retrospective transition method. | Adoption of this guidance on January 1, 2018, did not have a material impact on the Company’s consolidated financial statements. |
ASU 2017-07: Compensation - Retirement Benefits (Topic 715) |
| This ASU provides new guidance on the presentation of net periodic pension and post-retirement benefit costs that requires retrospective disaggregation of the service cost component from the other components of net benefit costs on the income statement. | On January 1, 2018, the Company adopted the change in the income statement presentation utilizing the practical expedient for determining the historical components of net benefit costs, resulting in no material impact to the consolidated financial statements. In addition, no changes to the Company’s capitalization policies with respect to benefit costs resulted from the adoption of the new guidance. |
ASU 2017-09: Compensation - Stock Compensation (Topic 718) |
| This ASU provides clarity and reduces both 1) diversity in practice and 2) cost and complexity when applying guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. | Adoption of this amendment on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements. |
ASU 2018-02: Income Statement - Reporting Comprehensive Income
|
| This ASU contains new guidance that permits entities to reclassify to retained earnings tax effects “stranded” in AOCI resulting from the change in federal tax rate enacted by the Tax Cuts and Jobs Act (the “Tax Reform Act”) on December 22, 2017. If elected, the stranded tax effects for all items must be reclassified in AOCI, including, but not limited to, AFS securities and employee benefits. | The company early adopted the ASU effective October 1, 2018 and recognized the impact in the period of adoption. As a result, the company reclassified stranded effects resulting from the Tax Act of 2017 by decreasing AOCI and increasing retained earnings by $83 million. |
ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| |
| Description | Effect on the Financial Statement or Other Significant Matters |
| This ASU improves the effectiveness of disclosures related to defined benefit plans in the notes to the financial statements. The amendments in this ASU remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add new, relevant disclosure requirements. | Effective for the year ended December 31, 2018 the Company early adopted new guidance that amends the disclosure guidance for employee benefit plans, applied on a retrospective basis to all periods presented. See Note 13 for additional information regarding the Company’s employee benefit plans.
|
Future Adoption of New Accounting Pronouncements
In January 2017, the FASB issued updated guidance to simplify the accounting for goodwill impairment. The revised guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The revised guidance will be applied prospectively, |
| | |
| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-17: Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities |
This ASU provides guidance requiring that indirect interests held through related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests.
| Effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. All entities are required to apply the amendments in this update retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.
| Management currently is effective for fiscal year ending December 31, 2020. Early adoption is permitted for fiscal periods beginning after January 1, 2017. Management is currently evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements and related disclosures. |
ASU 2018-13: Fair Value Measurement (Topic 820) |
| This ASU improves the effectiveness of fair value disclosures in the notes to financial statements. Amendments in this ASU impact the disclosure requirements in Topic 820, including the removal, modification and addition to existing disclosure requirements. | Effective for fiscal years beginning after December 15, 2019. Early adoption is permitted, with the option to early adopt amendments to remove or modify disclosures, with full adoption of additional disclosure requirements delayed until the stated effective date. Amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. | Management currently is evaluating the impact of the guidance on the Company’s financial statement disclosures but has concluded that this guidance will not impact the Company’s consolidated financial position or results of operations. |
In October 2016, the FASB issued updated guidance on consolidation of interests held through related parties that are under common control, which alters how a decision maker needs to consider indirect interests in a VIE held through an entity under common control. The new guidance amends the recently adopted consolidation guidance analysis. Under the new guidance, if a decision maker is required to evaluate whether it is the primary beneficiary of a VIE, it will need to consider only its proportionate indirect interest in the VIE held through a common control party. The revised guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. Adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.
In August 2016, the FASB issued new guidance to simplify elements of cash flow classification. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance is effective for interim and annual periods beginning after December 15, 2017 and should be applied using a retrospective transition method. Management is currently evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements.
In June 2016, the FASB issued new guidance related to the accounting for credit losses on financial instruments. The new guidance introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The new guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted for annual periods beginning after December 15, 2018. Management is currently evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements.
In March 2016, the FASB issued new guidance simplifying the transition to the equity method of accounting. The amendment eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investments had been held. The amendment is effective for interim and annual periods beginning after December 15, 2016 and should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. The amendment is not expected to have a material impact on the Company’s consolidated financial statements.80
In March 2016, the FASB issued new guidance on improvements to employee share-based payment accounting. The amendment includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements including: income tax effects of share-based payments, minimum statutory tax withholding requirements and forfeitures. The amendment is effective for interim and annual periods beginning after December 15, 2016. The provisions will be applied using various transition approaches (prospective, retrospective and modified retrospective). Management is currently evaluating the impact that the adoption of this standard will have on the Company’s consolidated financial statements.AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In February 2016, the FASB issued revised guidance to lease accounting. The revised guidance will require lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases. Lessor accounting will continue to be similar to the current model, but updated to align with certain changes to the lessee model. Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts. The revised guidance is effective for interim and annual periods, beginning after December 15, 2018, with early adoption permitted. Management is currently evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements.In May 2014, the FASB issued new revenue recognition guidance that is intended to improve and converge the financial reporting requirements for revenue from contracts with customers with International Financial Reporting Standards (“IFRS”). The new guidance applies to contracts that deliver goods or services to a customer, except when those contracts are for: insurance, leases, rights and obligations that are in the scope of certain financial instruments (i.e., derivative contracts) and guarantees other than product or service warranties. The new guidance is effective for interim and annual periods, beginning after December 15, 2017, with early adoption permitted for interim and annual periods beginning after December 15, 2016. Management is currently evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements.
Closed Block
As a result of demutualization, the Closed Block was established in 1992 for the benefit of certain individual participating policies that were in force on that date. Assets, liabilities and earnings of the Closed Block are specifically identified to support its participating policyholders.
Assets allocated to the Closed Block inure solely to the benefit of the Closed Block policyholders and will not revert to the benefit of AXA Equitable. No reallocation, transfer, borrowing or lending of assets can be made between the Closed Block and other portions of AXA Equitable’s General Account, any of its Separate Accounts or any affiliate of AXA Equitable without the approval of the New York State Department of Financial Services, (the “NYDFS”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the General Account.
The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in AOCI) represents the expected maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. As of January 1, 2001, the Company has developed an actuarial calculation of the expected timing of the Closed Block’s earnings.
If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.
Many expenses related to Closed Block operations, including amortization of deferred policy acquisition costs (“DAC”), are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block. |
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| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-12: Financial Services - Insurance (Topic 944) |
This ASU provides targeted improvements to existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The ASU primarily impacts four key areas, including:
Measurement of the liability for future policy benefits for traditional and limited payment contracts. The ASU requires companies to review, and if necessary update, cash flow assumptions at least annually for non-participating traditional and limited-payment insurance contracts. Interest rates used to discount the liability will need to be updated quarterly using an upper medium grade (low credit risk) fixed-income instrument yield.
Measurement of market risk benefits (“MRBs”). MRBs, as defined under the ASU, will encompass certain GMxB features associated with variable annuity products and other general account annuities with other than nominal market risk. The ASU requires MRBs to be measured at fair value with changes in value attributable to changes in instrument-specific credit risk recognized in OCI.
Amortization of deferred acquisition costs. The ASU simplifies the amortization of deferred acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins, requiring such balances to be amortized on a constant level basis over the expected term of the contracts. Deferred costs will be required to be written off for unexpected contract terminations but will not be subject to impairment testing.
Expanded footnote disclosures. The ASU requires additional disclosures including disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, MRBs, separate account liabilities and deferred acquisition costs. Companies will also be required to disclose information about significant inputs, judgements, assumptions and methods used in measurement. | Effective date for public business entities for fiscal years and interim periods with those fiscal years, beginning after December 31, 2020. Early adoption is permitted.
For the liability for future policyholder benefits for traditional and limited payment contracts, companies can elect one of two adoption methods. Companies can either elect a modified retrospective transition method applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or a full retrospective transition method using actual historical experience information as of contract inception. The same adoption method must be used for deferred acquisition costs.
For MRBs, the ASU should be applied retrospectively as of the earliest period presented by a retrospective application to all prior periods.
For deferred acquisition costs, companies can elect one of two adoption methods. Companies can either elect a modified retrospective transition method applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or a full retrospective transition method using actual historical experience information as of contract inception. The same adoption method must be used for the liability for future policyholder benefits for traditional and limited payment contracts.
| Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements and related disclosures. The Company has formed a project implementation team to work on compiling all significant information needed to assess the impact of the new guidance, including changes to system requirements and internal controls. The Company expects adoption of the ASU will have a significant impact on its consolidated financial condition, results of operations, cash flows and required disclosures, as well as processes and controls.
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| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-07: Compensation - Stock Compensation (Topic 718) |
| This ASU contains new guidance that largely aligns the accounting for share-based payment awards issued to employees and non-employees. | Effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods, with early adoption permitted. | The Company has granted share-based payment awards only to employees as defined by accounting guidance and does not expect this guidance will have a material impact on its consolidated financial statements.
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ASU 2017-12: Derivatives and Hedging (Topic 815) |
| The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. | Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. | Management does not expect this guidance will have a material impact on the Company’s consolidated financial statements. |
ASU 2017-08: Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) |
| This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date and is intended to better align interest income recognition with the manner in which market participants price these instruments. | Effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted and is to be applied on a modified retrospective basis. | Management does not expect this guidance will have a material impact on the Company’s consolidated financial statements. |
ASU 2016-13: Financial Instruments - Credit Losses (Topic 326) |
| This ASU contains new guidance which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. | Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. These amendments should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. | Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements. Although early adoption is permitted, the Company expects to adopt ASU 2016-13 when it becomes effective for the Company on January 1, 2020.
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ASU 2016-02: Leases (Topic 842) |
| This ASU contains revised guidance to lease accounting that will require lessees to recognize on the balance sheet a “right-of-use” asset and a lease liability for virtually all lease arrangements, including those embedded in other contracts. Lessor accounting will remain substantially unchanged from the current model but has been updated to align with certain changes made to the lessee model. | Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for public business entities. Early application is permitted. Lessees and lessors are required to apply a modified retrospective transition approach, which includes optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU 2018-11 which allows for an additional transition method. The Company will adopt the standard utilizing the additional transition method, which allows entities to initially apply the new leases standard at the adoption date.
| The Company adopted ASU 2016-02, as well as other related clarifications and interpretive guidance issued by the FASB effective January 1, 2019. The Company has identified its significant existing leases, which primarily include real estate leases for office space, that will be impacted by the new guidance. The Company’s adoption of this guidance is expected to result in a material impact on the consolidated balance sheets, however it will not have a material impact on the Consolidated Statement of Income (Loss). The Company’s adoption of this guidance will result in the recognition, as of January 1, 2019, of additional right of use (RoU) operating lease assets ranging from $300 million to $400 million and operating lease liabilities ranging from $400 million to $500 million, respectively. The adoption of this standard will not have a significant impact on opening retained earnings.
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Investments
The carrying values of fixed maturities classified as available-for-sale (“AFS”) are reported at fair value. Changes in fair value are reported in OCI.other comprehensive income (“OCI”), net of policy related amounts and deferred income
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
taxes. The amortized cost of fixed maturities is adjusted for impairments in value deemed to be other than temporary which are recognized in Investment gains (losses), net. The redeemable preferred stock investments that are reported in fixed maturities include real estate investment trusts (“REIT”), perpetual preferred stock and redeemable preferred stock. These securities may not have a stated maturity, may not be cumulative and do not provide for mandatory redemption by the issuer.
The Company determines the fair values of fixed maturities and equity securities based upon quoted prices in active markets, when available, or through the use of alternative approaches when market quotes are not readily accessible or available. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment.
The Company’s management, with the assistance of its investment advisors, monitors the investment performance of its portfolio and reviews AFS securities with unrealized losses for other-than-temporary impairments (“OTTI”). Integral to this review is an assessment made each quarter, on a security-by-security basis, by the Company’s Investments Under Surveillance (“IUS”) Committee, of various indicators of credit deterioration to determine whether the investment security is expected to recover. This assessment includes, but is not limited to, consideration of the duration and severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity and continued viability of the issuer and, for equity securities only, the intent and ability to hold the investment until recovery, and results in identification of specific securities for which OTTI is recognized.issuer.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting OTTI is recognized in earningsincome (loss) and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment.at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage-mortgage and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Real estate held for the production of income is stated at depreciated cost less valuation allowances.
Depreciation of real estate held for production of income is computed using the straight-line method over the estimated useful lives of the properties, which generally range from 40 to 50 years.
Policy loans represent funds loaned to policyholders up to the cash surrender value of the associated insurance policies and are carried at the unpaid principal balances due to the Company from the policyholders. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. Policy loans are stated at unpaid principal balances.fully collateralized by the cash surrender value of the associated insurance policies.
Partnerships, investment companies and joint venture interests that the Company has control of and has an economic interest in or those that meet the requirements for consolidation under accounting guidance for consolidation of VIEs are consolidated. Those that the Company does not have control of and does not have a majority economic interest in and those that do not meet the VIE requirements for consolidation are reported on the equity method of accounting and are reported in other equity investments. The Company records its interests in certain of these partnerships on a month or one quarter lag.
Equity securities, which include common stock, and non-redeemable preferred stock classified as AFS securities, are carried at fair value and are included in other equity investments with changes in fair value reported in OCI.
Trading securities, which include equity securities and fixed maturities, are carried at fair value based on quoted market prices, with realized and unrealized gains (losses) reported in othernet investment income (loss) in the statements of Net earningsincome (loss).
Corporate owned life insurance (“COLI”) has been purchased by AXA Equitablethe Company and certain subsidiaries on the lives of certain key employees (including former employees) and AXA Equitablethe Company and these subsidiaries are named as beneficiaries under these policies. COLI is carried at the cash surrender value of the policies. At December 31, 20162018, 2017 and 2015,2016 the carrying value of COLI was $892$873 million, $911 million and $864$892 million, respectively, and is reported in Other invested assets in the consolidated balance sheets.
Short-term investments are reported at amortized cost that approximates fair value and are included in Other invested assets.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Cash and cash equivalents includes cash on hand, demand deposits, money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less. Due to the short-term nature of these investments, the recorded value is deemed to approximate fair value.
All securities owned, including United StatesU.S. government and agency securities, mortgage-backed securities, futures and forwards transactions, are reported in the consolidated financial statements on a trade date basis.
Derivatives
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior and non-performance risk used in valuation models. Derivative financial instruments generally used by the Company include exchange traded equity, currency, and interest rate futures, contracts, total return and/or other equity swaps, interest rate swapswaps and floor contracts,floors, swaptions, variance swaps as well asand equity options, andall of which may be exchange-traded or contracted in the over-the-counter market. All derivative positions are carried in the consolidated balance sheets at fair value, generally by obtaining quoted market prices or through the use of valuation models.
Freestanding derivative contracts are reported in the consolidated balance sheets either as assets within “Other invested assets” or as liabilities within “Other liabilities.”liabilities”. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related Credit Support Annex ("CSA"(“CSA”) have been executed. The Company uses derivatives to manage asset/liability risk and has designated some of those economic relationships under the criteria to qualify for hedge accounting treatment. All changes in the fair value of the Company’s freestanding derivative positions not designated to hedge accounting relationships, including net receipts and payments, are included in “Investment income (loss) from“Net derivative instruments”gains (losses)” without considering changes in the fair value of the economically associated assets or liabilities.
The Company is a party to financial instruments and other contracts that contain “embedded” derivative instruments. At inception, the Company assesses whether the economic characteristics of the embedded instrument are “clearly and closely related” to the economic characteristics of the remaining component of the “host contract” and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When those criteria are satisfied, the resulting embedded derivative is bifurcated from the host contract, carried in the consolidated balance sheets at fair value, and changes in its fair value are recognized immediately and captioned in the consolidated statements of earningsincome (loss) according to the nature of the related host contract. For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company instead may elect to carry the entire instrument at fair value.
Securities Repurchase and Reverse Repurchase Agreements
Securities repurchase and reverse repurchase transactions involve the temporary exchange of securities for cash or other collateral of equivalent value, with agreement to redeliver a like quantity of the same or similar securities at a future date prior to maturity at a fixed and determinable price. Transfers of securities under these agreements to repurchase or resell are evaluated by the Company to determine whether they satisfy the criteria for accounting treatment as secured borrowing or lending arrangements. Agreements not meeting the criteria would require recognition of the transferred securities as sales or purchases with related forward repurchase or resale commitments. All of the Company’s securities repurchase transactions are accounted for as collateralized borrowings with the related obligations distinctly captioned in the consolidated balance sheets. Earnings from investing activities related to the cash received under the Company’s securities repurchase arrangements are reported in the consolidated statements of income (loss) as “Net investment income” and the associated borrowing cost is reported as “Interest expense.” The Company has not actively engaged in securities reverse repurchase transactions.
Commercial and Agricultural Mortgage Loans on Real Estate (“mortgage loans”):
Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and valuation allowances. Valuation allowances are based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or on its collateral value if the loan is collateral dependent. However, if foreclosure is or becomes probable, the collateral value measurement method is used.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For commercial and agricultural mortgage loans, an allowance for credit loss is typically recommended when management believes it is probable that principal and interest will not be collected according to the contractual terms. Factors that influence management’s judgment in determining allowance for credit losses include the following:
Loan-to-value ratio – Derived from current loan balance divided by the fair market value of the property. An allowance for credit loss is typically recommended when the loan-to-value ratio is in excess of 100%. In the case where the loan-to-value is in excess of 100%, the allowance for credit loss is derived by taking the difference between the fair market value (less cost of sale) and the current loan balance.
Debt service coverage ratio – Derived from actual net operating incomeearnings divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt.
Occupancy – Criteria varies by property type but low or below market occupancy is an indicator of sub-par property performance.
Lease expirations – The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor.
Maturity – Mortgage loans that are not fully amortizing and have upcoming maturities within the next 12 to 24 months are monitored in conjunction with the capital markets to determine the borrower’s ability to refinance the debt and/or pay off the balloon balance.
Borrower/tenant related issues – Financial concerns, potential bankruptcy or words or actions that indicate imminent default or abandonment of property.
Payment status – current(current vs. delinquentdelinquent) – A history of delinquent payments may be a cause for concern.
Property condition – Significant deferred maintenance observed during the lenders annual site inspections.
Other – Any other factors such as current economic conditions may call into question the performance of the loan.
Mortgage loans also are individually evaluated quarterly by the Company’s Investments Under Surveillance ("IUS")IUS Committee for impairment, including an assessment of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages are also identified, consisting of mortgage loans not currently classified as problemsproblem mortgages but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
For problem mortgage loans, a valuation allowance is established to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for mortgage loans determined to be non-performing as a result of the loan review process. A non-performing loan is defined as a loan for which it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan specificloan-specific portion of the loss allowance is based on the Company’s assessment as to ultimate collectability of loan principal and interest. Valuation allowances for a non-performing loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The valuation allowance for mortgage loans can increase or decrease from period to period based on such factors.
Impaired mortgage loans without provision for losses are mortgage loans where the fair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on mortgage loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on mortgage loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows. Changes in the present value attributable to changes in the amount or timing of expected cash flows are reported as investment gains or losses.
Mortgage loans are placed on nonaccrual status once management believes the collection of accrued interest is doubtful. Once mortgage loans are classified as nonaccrual mortgage loans, interest income is recognized under the
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan on real estate has been restructured to where the collection of interest is considered likely. At December 31, 2016 and 2015, the carrying values of commercial mortgage loans that had been classified as nonaccrual mortgage loans were $34 million and $72 million, respectively.
Troubled Debt Restructuring
When a loan modification is determined to be a troubled debt restructuring (“TDR”), the impairment of the loan is re-measured by discounting the expected cash flows to be received based on the modified terms using the loan’s original effective yield, and the allowance for loss is adjusted accordingly. Subsequent to the modification, income is recognized prospectively based on the modified terms of the mortgage loans. Additionally, the loan continues to be subject to the credit review process noted above.
Net Investment Income (Loss), Investment Gains (Losses), Net and Unrealized Investment Gains (Losses)
Realized investment gains (losses) are determined by identification with the specific asset and are presented as a component of revenue. Changes in the valuation allowances are included in Investment gains (losses), net.
Realized and unrealized holding gains (losses) on trading and equity securities are reflected in Net investment income (loss).
Unrealized investment gains (losses) on fixed maturities and equity securities designated as AFS held by the Company are accounted for as a separate component of Accumulated Other Comprehensive Income ("AOCI"),AOCI, net of related deferred income taxes, as are amounts attributable to certain pension operations, Closed Blocks’ policyholdersBlock’s policyholders’ dividend obligation, insurance liability loss recognition, and DAC related to universal life (“UL”)UL policies, investment-type products and participating traditional life policies.
Changes in unrealized gains (losses) reflect changes in fair value of only those fixed maturities and equity securities classified as AFS and do not reflect any change in fair value of policyholders’ account balances and future policy benefits.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance established a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, and identifies three levels of inputs that may be used to measure fair value:
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Level 1 | Unadjusted quoted prices for identical instruments in active markets. Level 1 fair values generally are supported by market transactions that occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
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Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, and inputs to model-derived valuations that are directly observable or can be corroborated by observable market data. |
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Level 3 | Unobservable inputs supported by little or no market activity and often requiring significant management judgment or estimation, such as an entity’s own assumptions about the cash flows or other significant components of value that market participants would use in pricing the asset or liability. |
The Company uses unadjusted quoted market prices to measure fair valueSee Note 7 for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are measured using present value or other valuation techniques. The fair value determinations are made at a specific point in time, based on available marketadditional information and judgments about the financial instrument, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such adjustments do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases,regarding determining the fair value cannot be substantiated by direct comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument.
Management is responsible for the determination of the value of investments carried at fair value and the supporting methodologies and assumptions. Under the terms of various service agreements, the Company often utilizes independent valuation service providers to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual securities. These independent valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. As further described below with respect to specific asset classes, these inputs include, but are not limited to, market prices for recent trades and transactions in comparable securities, benchmark yields, interest rate yield curves, credit spreads, quoted prices for similar securities, and other market-observable information, as applicable. Specific attributes of the security being valued also are considered, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security- or issuer-specific information. When insufficient market observable information is available upon which to measure fair value, the Company either will request brokers knowledgeable about these securities to provide a non-binding quote or will employ internal valuation models. Fair values
received from independent valuation service providers and brokers and those internally modeled or otherwise estimated are assessed for reasonableness. To validate reasonableness, prices also are internally reviewed by those with relevant expertise through comparison with directly observed recent market trades.financial instruments.
Recognition of Insurance Income and Related Expenses
Deposits related to ULuniversal life (“UL”) and investment-type contracts are reported as deposits to policyholders’ account balances. Revenues from these contracts consist of fees assessed during the period against policyholders’ account balances for mortality charges, policy administration charges and surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policyholders’ account balances.
Premiums from participating and non-participating traditional life and annuity policies with life contingencies generally are recognized in income when due. Benefits and expenses are matched with such income so as to result in the recognition of profits over the life of the contracts. This match is accomplished by means of the provision for liabilities for future policy benefits and the deferral and subsequent amortization of DAC.
For contracts with a single premium or a limited number of premium payments due over a significantly shorter period than the total period over which benefits are provided, premiums are recorded as revenue when due with any excess profit deferred and recognized in income in a constant relationship to insurance in-force or, for annuities, the amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over the period to which the premiums relate in proportion to the amount of insurance protection provided.
DAC
Acquisition costs that vary with and are primarily related to the acquisition of new and renewal insurance business, reflecting incremental direct costs of contract acquisition with independent third parties or employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts including commissions, underwriting, agency and policy issue expenses, are deferred.In each reporting period, DAC is amortized to Amortization of deferred policy acquisition costs of the accrual of imputed interest on DAC balances. DAC is subject to recoverability testing at the time of policy issue and loss recognition testing at the end of each accounting period.
After the initial establishment of reserves, premium deficiency and loss recognition tests are performed each period end using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities
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for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of anyDAC asset), DAC would first be written off and thereafter, if required, a premium deficiency reserve would be established by a charge to earnings.
Amortization Policy
In accordance with the guidance for the accounting and reporting by insurance enterprises for certain long-duration contracts and participating contracts and for realized gains and losses from the sale of investments, current and expected future profit margins for products covered by this guidance are examined regularly in determining the amortization of DAC.
DAC associated with certain variable annuity products is amortized based on estimated assessments, with DAC on the remainder of variable annuities, UL and investment-type products amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate AccountAccounts fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, embedded derivatives and changes in the reserve of products that have indexed features such as SCS IUL and MSO, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated gross profits or assessments is reflected in earnings (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
A significant assumption in the amortization of DAC on variable annuities and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future Separate Accountseparate account performance. Management sets estimated future gross profit or assessment assumptions related to Separate Accountseparate account performance using a long-term view of expected average
market returns by applying a reversionReversion to the meanMean (“RTM”) approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. In second quarter 2015, based upon management’s current expectations of interest rates and future fund growth, the Company updated its Reversion to the Mean (“RTM”) assumption from 9.0% to 7.0%. The average gross long-term return measurement start date was also updated to December 31, 2014. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At December 31, 2016,2018, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuities was 7.0% (4.67%(4.7% net of product weighted average Separate AccountAccounts fees), and the gross maximum and minimum short-term annual rate of return limitations were 15.0% (12.67%(12.7% net of product weighted average Separate AccountAccounts fees) and 0.0% (-2.33%((2.3)% net of product weighted average Separate AccountAccounts fees), respectively. The maximum duration over which these rate limitations may be applied is 5five years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than 5 years in order to reach the average gross long-term return estimate, the application of the 5 year maximum duration limitation would result in an acceleration of DAC amortization. Conversely, actual market returns resulting in assumed future market returns of 0.0% for more than 5 years would result in a required deceleration of DAC amortization.
In addition, projections of future mortality assumptions related to variable and interest-sensitive life products are based on a long-term average of actual experience. This assumption is updated quarterlyperiodically to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
For participating traditional life policies (substantially all of which are in the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield. At December 31, 2016,2018, the average rate of assumed investment yields, excluding policy loans, for the Company was 5.1%
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4.7% grading to 4.5%4.3% over 10six years. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
DAC associated with non-participating traditional life policies isare amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earningsincome (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy. DAC related to these policies isare subject to recoverability testing as part of the Company’s premium deficiency testing. If a premium deficiency exists, DAC isare reduced by the amount of the deficiency or to zero through a charge to current period earnings (loss). If the deficiency exceeds the DAC balance, the reserve for future policy benefits is increased by the excess, reflected in earnings (loss) in the period such deficiency occurs.
For some products, policyholders can elect to modify product benefits, features, rights or coverages that occur by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. These transactions are known as internal replacements. If such modification substantially changes the contract, the associated DAC is written off immediately through income and any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC amortization on the original contract will continue and any acquisition costs associated with the related modification are expensed.
Reinsurance
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Cessions under reinsurance agreements do not discharge the Company’s obligations as the primary insurer. The Company reviews all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception of the reinsurance agreement. The net cost of reinsurance is recorded as an adjustment to DAC and recognized as a component of other expenses on a basis consistent with the way the acquisition costs on the underlying reinsured contracts would be recognized. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as Premiums ceded (assumed); andAmounts due from reinsurers (Amounts due to reinsurers)are established.
Amounts currently recoverable under reinsurance agreements are included in Amounts due from reinsurers and amounts currently payable are included in Amounts due to reinsurers. Assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance.
Premiums, Policy charges and fee income and Policyholders’ benefits include amounts assumed under reinsurance agreements and are net of reinsurance ceded. Amounts received from reinsurers for policy administration are reported in other revenues. With respect to GMIBs, a portion of the directly written GMIBs are accounted for as insurance liabilities, but the associated reinsurance agreements contain embedded derivatives. These embedded derivatives are included in GMIB reinsurance contract asset, at fair value with changes in estimated fair value reported in Net derivative gains (losses).
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits received are included in Other liabilities and deposits made are included within premiums, reinsurance and other receivables. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenues or other expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other expenses, as appropriate.
For reinsurance contracts other than those accounted for as derivatives, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities.
Policyholder Bonus Interest Credits
ContractholderPolicyholder bonus interest credits are offered on certain deferred annuity products in the form of either immediate bonus interest credited or enhanced interest crediting rates for a period of time. The interest crediting expense associated with these contractholderpolicyholder bonus interest credits is deferred and amortized over the lives of the underlying contracts in a manner consistent with the amortization of DAC. Unamortized balances are included in Other assets.assets in the consolidated balance sheets and amortization is included in Interest credited to policyholders’ account balances in the consolidated statements of income (loss).
Policyholders’ Account Balances and Future Policy Benefits
Policyholders’ account balances for UL and investment-typerelate to contracts are equalor contract features where the Company has no significant insurance risk. This liability represents the contract value that has accrued to the policy account values. The policy account values represent an accumulationbenefit of gross premium payments plus credited interest less expense and mortality charges and withdrawals.
The Company has issued and continues to offer certain variable annuity products with guaranteed minimum death benefits (“GMDB”) and Guaranteed income benefit (“GIB”) features. The Company previously issued certain variable annuity products with guaranteed withdrawal benefit for life (“GWBL”), guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) features (collectively, “GWBL and other features”). The Company also issues certain variable annuity products that contain a guaranteed minimum income benefit (“GMIB”) feature which, if elected by the policyholder after a stipulated waiting period from contract issuance, guarantees a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of what the contract account value can purchase at then-current annuity purchase rates. This minimum lifetime annuity is based on predetermined annuity purchase rates applied to a GMIB base. Reserves for GMDB and GMIB obligations are calculated on the basis of actuarial assumptions related to projected benefits and related contract charges generally over the livesas of the contracts. The determination of this estimated liability is based on models that involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, contract surrender and withdrawal rates, mortality experience, and, for contracts with the GMIB feature, GMIB election rates. Assumptions regarding Separate Account performance used for purposes of this calculation are set using a long-term view of expected average market returns by applying a reversion to the mean approach, consistent with that used for DAC amortization. There can be no assurance that actual experience will be consistent with management’s estimates.
For reinsurance contracts other than those covering GMIB exposure, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities.balance sheet date.
For participating traditional life insurance policies, future policy benefit liabilities are calculated using a net level premium method on the basis of actuarial insurance assumptions equal to guaranteed mortality and dividend fund interest rates. The liability for annual dividends represents the accrual of annual dividends earned. Terminal dividends are accrued in proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy benefit liabilities are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on the Company’s experience that, together with interest and expense assumptions, includes a margin for adverse deviation. Benefit liabilities for traditional annuities during the accumulation period are equal to accumulated contractholders’policyholders’ fund balances and, after annuitization, are equal to the present value of expected future payments. Interest rates used in establishing such liabilities range from 5.0% 4.5%to6.3% (weighted average of 5.1%5.0%) for approximately 99.0%99.2% of life insurance liabilities and from 1.6% to 5.5% (weighted average of 4.3%4.8%) for annuity liabilities.
Individual health benefit liabilities for active lives are estimated using the net level premium method and assumptions as to future morbidity, withdrawals and interest. Benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest. While management believes its disability income (“DI”) reserves have been calculated on a reasonable basis and are adequate, there can be no assurance reserves will be sufficient to provide for future liabilities.
When the liabilities for future policy benefits plus the present value of expected future gross premiums for a product are insufficient to provide for expected future policy benefits and expenses for that product, DAC is written off and thereafter, if required, a premium deficiency reserve is established by a charge to earnings.
Funding agreements are also reported in Policyholders’ account balances in the consolidated balance sheets. As a member of the Federal Home Loan Bank of New York (“FHLBNY”), AXA Equitablethe Company has access to collateralized borrowings. AXA
EquitableThe Company may also issue funding agreements to the FHLBNY. Both the collateralized borrowings and funding agreements would require AXA Equitablethe Company to pledge qualified mortgage-backed assets and/or government securities as collateral.
Accounting for Variable AnnuitiesThe Company has issued and continues to offer certain variable annuity products with guaranteed minimum death benefits (“GMDB”) and/or contain a guaranteed minimum living benefit (“GMLB,” and together with GMDB, the “GMxB features”) which, if elected by the policyholder after a stipulated waiting period from contract issuance,
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
guarantees a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of what the contract account value can purchase at then-current annuity purchase rates. This minimum lifetime annuity is based on predetermined annuity purchase rates applied to a guaranteed minimum income benefit (“GMIB”) base. The Company previously issued certain variable annuity products with and guaranteed income benefit (“GIB”) features, guaranteed withdrawal benefit for life (“GWBL”), guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) features. The Company has also assumed reinsurance for products with GMxB features.
Reserves for products that have GMIB Features
Future claims exposure onfeatures, but do not have no-lapse guarantee features, and products with GMDB features are determined by estimating the expected value of death or income benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated life based on expected assessments (i.e., benefit ratio). The determination of this estimated liability is based on models that involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, contract surrender and withdrawal rates, mortality experience, and, for contracts with the GMIB feature, GMIB election rates. Assumptions regarding separate account performance used for purposes of this calculation are set using a long-term view of expected average market returns by applying a RTM approach, consistent with that used for DAC amortization. There can be no assurance that actual experience will be consistent with management’s estimates.
Products that have a GMIB feature with a no-lapse guarantee rider (“GMIBNLG”), GIB, GWBL, GMWB and GMAB features and the assumed products with GMIB features (collectively “GMxB derivative features”) are sensitiveconsidered either freestanding or embedded derivatives and discussed below under (“Embedded and Freestanding Insurance Derivatives”).
After the initial establishment of reserves, premium deficiency and loss recognition tests are performed each period end using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to movementsprovide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC would first be written off and thereafter, if required, a premium deficiency reserve would be established by a charge to earnings. Premium deficiency reserves have been recorded for the group single premium annuity business, certain interest-sensitive life contracts, structured settlements, individual disability income and major medical. Additionally, in certain instances the policyholder liability for a particular line of business may not be deficient in the equity markets and interest rates. The Company has in place various hedging programs utilizing derivativesaggregate to trigger loss recognition, but the pattern of earnings may be such that profits are designedexpected to mitigate the impact of movements in equity markets and interest rates. These various hedging programs do not qualify for hedge accounting treatment. As a result, changes in the value of the derivatives will be recognized in earlier years followed by losses in later years.This pattern of profits followed by losses is exhibited in our VISL business and is generated by the periodcost structure of the product or secondary guarantees in which they occur while offsettingthe contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. We accrue for these Profits Followed by Losses (“PFBL”) using a dynamic approach that changes over time as the projection of future losses change.
Embedded and Freestanding Insurance Derivatives
Reserves for products considered either embedded or freestanding derivatives are measured at estimated fair value separately from the host variable annuity product, with changes in reservesestimated fair value reported in Net derivative gains (losses). The estimated fair values of these derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees attributable to the guarantee. The projections of future benefits and deferred policy acquisition costs DAC will be recognized over time in accordancefuture fees require capital markets and actuarial assumptions, including expectations concerning policyholder behavior. A risk-neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates.
Additionally, the Company cedes and assumes reinsurance of products with policies described below under “Policyholders’ Account BalancesGMxB features, which are considered either an embedded or freestanding derivative and Future Policy Benefits” and “DAC”. These differences in recognition contribute to earnings volatility.
GMIB reinsurance contracts are used to cede to affiliated and non-affiliated reinsurers a portion of the exposure on variable annuity products that offer the GMIB feature. The GMIB reinsurance contracts are accounted for as derivatives and are reportedmeasured at fair value. Gross reserves for GMIB are calculated on the basis of assumptions related to projected benefitsThe GMxB reinsurance contract asset and related contract charges over the lives of the contracts and therefore will not immediatelyliabilities’ fair values reflect the offsetting impact on future claims exposure resulting from the same capital market and/or interest rate fluctuations that cause gains or losses on the fairpresent value of the GMIB reinsurance contracts. The changespremiums and recoveries and risk margins over a range of market-consistent economic scenarios.
Changes in the fair value of embedded and freestanding derivatives are reported in Net derivative gains (losses). Embedded derivatives in direct and assumed reinsurance contracts are reported in Future policyholders’ benefits and other policyholders’ liabilities and embedded derivatives in ceded reinsurance contracts are reported in the GMIB reinsurance contracts are recordedcontract asset, at fair value in the period in which they occur while offsetting changes in gross reserves and DAC for GMIB are recognized over time in accordance with policies described below under “Policyholders’ Account Balances and Future Policy Benefits” and “DAC”. These differences in recognition contribute to earnings volatility.consolidated balance sheets.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Embedded and freestanding insurance derivatives fair values are determined based on the present value of projected future benefits minus the present value of projected future fees. At policy inception, a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits is attributed to the embedded derivative. The percentage of fees included in the fair value measurement is locked-in at inception. Fees above those amounts represent “excess” fees and are reported in Policy charges and fee income.
Policyholders’ Dividends
The amount of policyholders’ dividends to be paid (including dividends on policies included in the Closed Block) is determined annually by AXA Equitable’sthe board of directors.directors of the issuing insurance company. The aggregate amount of policyholders’ dividends is related to actual interest, mortality, morbidity and expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by AXA Equitable.
At December 31, 2016, participating policies, including those in the Closed Block, represent approximately 5.0% ($17,491 million) of directly written life insurance in-force, net of amounts ceded.Company.
Separate AccountsIncome Taxes
Generally, Separate Accounts established under New York State Insurance Law are not chargeable with liabilities that arise from any other business of AXA Equitable. Separate Accounts assets are subject to General Account claims only to the extent Separate Accounts assets exceed Separate Accounts liabilities. Assets and liabilities of the Separate AccountsIncome taxes represent the net depositsamount of income taxes that we expect to pay to or receive from various taxing jurisdictions in connection with its operations. We provide for Federal and state income taxes currently payable, as well as those deferred
due to temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryforward periods under the tax law in the applicable jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred tax assets will not be realized. Management considers all available evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. Our accounting for income taxes represents management’s best estimate of the tax consequences of various events and transactions.
Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities, and in evaluating our tax positions including evaluating uncertainties under the guidance for Accounting for Uncertainty in Income taxes. Under the guidance, we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. Tax positions are then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.
Our tax positions are reviewed quarterly and the balances are adjusted as new information becomes available.
Adoption of New Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements for a complete discussion of newly issued accounting pronouncements.
Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
AXA EQUITABLE LIFE INSURANCE COMPANY |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of AXA Equitable Life Insurance Company:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AXA Equitable Life Insurance Company and its subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of income (loss), comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed in 2018 the manner in which it accounts for certain income tax effects originally recognized in accumulated other comprehensive income.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
New York, NY
March 28, 2019
We have served as the Company’s auditor since 1993.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 AND 2017
|
| | | | | | | |
| | 2018 | | 2017 |
| | (in millions, except share amounts) |
| ASSETS | |
| Investments: | | | |
| Fixed maturities available for sale, at fair value (amortized cost of $42,492 and $34,831) | $ | 41,915 |
| | $ | 36,358 |
|
| Mortgage loans on real estate (net of valuation allowance of $7 and $8) | 11,818 |
| | 10,935 |
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| Real estate held for production of income | 52 |
| | 390 |
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| Policy loans | 3,267 |
| | 3,315 |
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| Other equity investments | 1,144 |
| | 1,264 |
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| Trading securities, at fair value | 15,166 |
| | 12,277 |
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| Other invested assets | 1,554 |
| | 1,830 |
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| Total investments | 74,916 |
| | 66,369 |
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| Cash and cash equivalents | 2,622 |
| | 2,400 |
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| Cash and securities segregated, at fair value | — |
| | 9 |
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| Deferred policy acquisition costs | 5,011 |
| | 4,492 |
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| Amounts due from reinsurers | 3,124 |
| | 5,079 |
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| Loans to affiliates | 600 |
| | 703 |
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| GMIB reinsurance contract asset, at fair value | 1,991 |
| | 10,488 |
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| Current and deferred income taxes | 438 |
| | — |
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| Other assets | 2,763 |
| | 4,018 |
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| Assets of disposed subsidiary | — |
| | 9,835 |
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| Separate Accounts assets | 108,487 |
| | 122,537 |
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| Total Assets | $ | 199,952 |
| | $ | 225,930 |
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| LIABILITIES | | | |
| Policyholders' account balances | $ | 46,403 |
| | $ | 43,805 |
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| Future policy benefits and other policyholders' liabilities | 29,808 |
| | 29,070 |
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| Broker-dealer related payables | 69 |
| | 430 |
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| Securities sold under agreements to repurchase | 573 |
| | 1,887 |
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| Amounts due to reinsurers | 113 |
| | 134 |
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| Long-term debt | — |
| | 203 |
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| Loans from affiliates | 572 |
| | — |
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| Current and deferred income taxes | — |
| | 1,550 |
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| Other liabilities | 1,460 |
| | 1,242 |
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| Liabilities of disposed subsidiary | — |
| | 4,954 |
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| Separate Accounts liabilities | 108,487 |
| | 122,537 |
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| Total Liabilities | $ | 187,485 |
| | $ | 205,812 |
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| Redeemable noncontrolling interest: | | | |
| Continuing operations | $ | 39 |
| | $ | 24 |
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| Disposed subsidiary | — |
| | 602 |
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| Redeemable noncontrolling interest | $ | 39 |
| | $ | 626 |
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| Commitments and contingent liabilities (Note 17) |
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| EQUITY | | | |
| Equity attributable to AXA Equitable: | | |
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| Common stock, $1.25 par value; 2,000,000 shares authorized, issued and outstanding | $ | 2 |
| | $ | 2 |
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| Capital in excess of par value | 7,807 |
| | 6,859 |
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| Retained earnings | 5,098 |
| | 8,938 |
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| Accumulated other comprehensive income (loss) | (491 | ) | | 598 |
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| Total equity attributable to AXA Equitable | 12,416 |
| | 16,397 |
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| Noncontrolling interest | 12 |
| | 3,095 |
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| Total Equity | 12,428 |
| | 19,492 |
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| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 199,952 |
| | $ | 225,930 |
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See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
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| | 2018 | | 2017 | | 2016 |
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| REVENUES | | | | | |
| Policy charges and fee income | $ | 3,523 |
| | $ | 3,294 |
| | $ | 3,311 |
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| Premiums | 862 |
| | 904 |
| | 880 |
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| Net derivative gains (losses) | (1,010 | ) | | 894 |
| | (1,321 | ) |
| Net investment income (loss) | 2,478 |
| | 2,441 |
| | 2,168 |
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| Investment gains (losses), net: | | | | | |
| Total other-than-temporary impairment losses | (37 | ) | | (13 | ) | | (65 | ) |
| Other investment gains (losses), net | 41 |
| | (112 | ) | | 83 |
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| Total investment gains (losses), net | 4 |
| | (125 | ) | | 18 |
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| Investment management and service fees | 1,029 |
| | 1,007 |
| | 951 |
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| Other income | 65 |
| | 41 |
| | 36 |
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| Total revenues | 6,951 |
| | $ | 8,456 |
| | $ | 6,043 |
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| BENEFITS AND OTHER DEDUCTIONS | | | | | |
| Policyholders’ benefits | 3,005 |
| | 3,473 |
| | 2,771 |
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| Interest credited to policyholders’ account balances | 1,002 |
| | 921 |
| | 905 |
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| Compensation and benefits | 422 |
| | 327 |
| | 364 |
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| Commissions and distribution related payments | 620 |
| | 628 |
| | 635 |
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| Interest expense | 34 |
| | 23 |
| | 13 |
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| Amortization of deferred policy acquisition costs | 431 |
| | 900 |
| | 642 |
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| Other operating costs and expenses | 2,918 |
| | 635 |
| | 753 |
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| Total benefits and other deductions | 8,432 |
| | 6,907 |
| | 6,083 |
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| Income (loss) from continuing operations, before income taxes | (1,481 | ) | | 1,549 |
| | (40 | ) |
| Income tax (expense) benefit from continuing operations | 446 |
| | 1,210 |
| | 164 |
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| Net income (loss) from continuing operations | (1,035 | ) | | 2,759 |
| | 124 |
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| Net income (loss) from discontinued operations, net of taxes and noncontrolling interest | 114 |
| | 85 |
| | 66 |
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| Net income (loss) | (921 | ) | | 2,844 |
| | 190 |
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| Less: net (income) loss attributable to the noncontrolling interest | 3 |
| | (1 | ) | | — |
|
| Net income (loss) attributable to AXA Equitable | $ | (918 | ) | | $ | 2,843 |
| | $ | 190 |
|
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| COMPREHENSIVE INCOME (LOSS) | | | | | |
| Net income (loss) | $ | (921 | ) | | $ | 2,844 |
| | $ | 190 |
|
| Other Comprehensive income (loss) net of income taxes: | | | | | |
| Change in unrealized gains (losses), net of reclassification adjustment | (1,230 | ) | | 625 |
| | (233 | ) |
| Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment | (4 | ) | | (5 | ) | | (3 | ) |
| Other comprehensive income (loss) from discontinued operations | — |
| | (18 | ) | | 17 |
|
| Total other comprehensive income (loss), net of income taxes | (1,234 | ) | | 602 |
| | (219 | ) |
| Comprehensive income (loss) attributable to AXA Equitable | $ | (2,155 | ) | | $ | 3,446 |
| | $ | (29 | ) |
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Equity attributable to AXA Equitable: | | | | | |
| Common stock, at par value, beginning and end of year | $ | 2 |
| | $ | 2 |
| | $ | 2 |
|
| | | | | | |
| Capital in excess of par value, beginning of year | $ | 6,859 |
| | $ | 5,339 |
| | $ | 5,321 |
|
| Capital contribution from parent company | — |
| | 1,500 |
| | — |
|
| Transfer of deferred tax asset in GMxB Unwind | 1,209 |
| | — |
| | — |
|
| Settlement of intercompany payables in GMxB Unwind | (297 | ) | | — |
| | — |
|
| Other | 36 |
| | 20 |
| | 18 |
|
| Capital in excess of par value, end of year | $ | 7,807 |
| | $ | 6,859 |
| | $ | 5,339 |
|
| | | | | | |
| Retained earnings, beginning of year | $ | 8,938 |
| | $ | 6,095 |
| | $ | 6,955 |
|
| Cumulative effect of adoption of revenue recognition standard ASC 606 | 8 |
| | — |
| | — |
|
Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects Attribute to Disposed Subsidiary | (83 | ) | | — |
| | — |
|
| Net income (loss) attributable to AXA Equitable | (918 | ) | | 2,843 |
| | 190 |
|
| Dividend to parent company | (1,672 | ) | | — |
| | (1,050 | ) |
| Distribution of disposed subsidiary | (1,175 | ) | | — |
| | — |
|
| Retained earnings, end of year | $ | 5,098 |
| | $ | 8,938 |
| | $ | 6,095 |
|
| | | | | | |
| Accumulated other comprehensive income (loss), beginning of year | $ | 598 |
| | $ | (4 | ) | | $ | 215 |
|
Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects | 83 |
| | — |
| | — |
|
| Other comprehensive income (loss) | (1,234 | ) | | 602 |
| | (219 | ) |
| Transfer of accumulated other comprehensive income to discontinued operations | 62 |
| | — |
| | — |
|
| Accumulated other comprehensive income (loss), end of year | (491 | ) | | 598 |
| | (4 | ) |
| Total AXA Equitable's equity, end of year | $ | 12,416 |
| | $ | 16,397 |
| | $ | 11,432 |
|
| | | | | | |
| Equity attributable to the Noncontrolling Interest | | | | | |
| Noncontrolling interest, continuing operations, beginning of year | $ | 19 |
| | $ | — |
| | $ | — |
|
| Net earnings (loss) attributable to noncontrolling interest | 1 |
| | — |
| | — |
|
| Net earnings (loss) attributable to redeemable noncontrolling interests | 2 |
| | (1 | ) | | — |
|
| Consolidation of real estate joint ventures | — |
| | 19 |
| | — |
|
| Deconsolidation of real estate joint ventures | (8 | ) | | — |
| | — |
|
| Reclassification of net earnings (loss) attributable to redeemable noncontrolling interests | (2 | ) | | 1 |
| | — |
|
| Noncontrolling interest, continuing operations, end of year | $ | 12 |
| | $ | 19 |
| | $ | — |
|
| | | |
|
| | |
| Noncontrolling interest, discontinued operations, beginning of year | $ | 3,076 |
| | $ | 3,096 |
| | $ | 3,059 |
|
| Repurchase of AB Holding Units | — |
| | (158 | ) | | (168 | ) |
| Net earnings (loss) attributable to noncontrolling interest | — |
| | 485 |
| | 491 |
|
| Dividends paid to noncontrolling interest | — |
| | (457 | ) | | (384 | ) |
| Transfer of AB Holding Units | (3,076 | ) | | — |
| | — |
|
| Other changes in noncontrolling interest | — |
| | 110 |
| | 98 |
|
| Noncontrolling interest, discontinued operations, end of year | $ | — |
| | $ | 3,076 |
| | $ | 3,096 |
|
| Equity attributable to the Noncontrolling Interest | $ | 12 |
| | $ | 3,095 |
| | $ | 3,096 |
|
| Total equity, end of Year | $ | 12,428 |
| | $ | 19,492 |
| | $ | 14,528 |
|
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Net income (loss) (1) | $ | (358 | ) | | $ | 3,377 |
| | $ | 686 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
| Interest credited to policyholders’ account balances | 1,002 |
| | 921 |
| | 905 |
|
| Policy charges and fee income | (3,523 | ) | | (3,294 | ) | | (3,311 | ) |
| Net derivative (gains) losses | 1,010 |
| | (870 | ) | | 1,337 |
|
| Investment (gains) losses, net | (3 | ) | | 125 |
| | (16 | ) |
| Realized and unrealized (gains) losses on trading securities | 221 |
| | (166 | ) | | 41 |
|
| Non-cash long-term incentive compensation expense (2) | 218 |
| | 185 |
| | 152 |
|
| Amortization of deferred cost of reinsurance asset | 1,882 |
| | (84 | ) | | 159 |
|
| Amortization and depreciation (2) | 340 |
| | 825 |
| | 614 |
|
| Cash received on the recapture of captive reinsurance | 1,273 |
| | — |
| | — |
|
| Equity (income) loss from limited partnerships | (120 | ) | | (157 | ) | | (91 | ) |
| Changes in: | | | | | |
| Net broker-dealer and customer related receivables/payables | 838 |
| | (278 | ) | | 608 |
|
| Reinsurance recoverable (2) | (390 | ) | | (1,018 | ) | | (304 | ) |
| Segregated cash and securities, net | (345 | ) | | 130 |
| | (381 | ) |
| Capitalization of deferred policy acquisition costs (2) | (597 | ) | | (578 | ) | | (594 | ) |
| Future policy benefits | (284 | ) | | 1,189 |
| | 431 |
|
| Current and deferred income taxes | (556 | ) | | (1,174 | ) | | (753 | ) |
| Other, net (2) | 810 |
| | 486 |
| | 56 |
|
| Net cash provided by (used in) operating activities | $ | 1,418 |
| | $ | (381 | ) | | $ | (461 | ) |
| | | | | | |
| Cash flows from investing activities: | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | |
| Fixed maturities, available-for-sale | $ | 8,935 |
| | $ | 9,738 |
| | $ | 7,154 |
|
| Mortgage loans on real estate | 768 |
| | 934 |
| | 676 |
|
| Trading account securities | 9,298 |
| | 9,125 |
| | 6,271 |
|
| Real estate joint ventures | 139 |
| | — |
| | — |
|
| Short-term investments (2) | 2,315 |
| | 2,204 |
| | 2,984 |
|
| Other | 190 |
| | 228 |
| | 32 |
|
| Payment for the purchase/origination of: | | | | | |
| Fixed maturities, available-for-sale | (11,110 | ) | | (12,465 | ) | | (7,873 | ) |
| Mortgage loans on real estate | (1,642 | ) | | (2,108 | ) | | (3,261 | ) |
| Trading account securities | (11,404 | ) | | (12,667 | ) | | (8,691 | ) |
| Short-term investments (2) | (1,852 | ) | | (2,456 | ) | | (3,187 | ) |
| Other | (170 | ) | | (280 | ) | | (250 | ) |
| Cash settlements related to derivative instruments | 805 |
| | (1,259 | ) | | 102 |
|
| Repayments of loans to affiliates | 900 |
| | — |
| | 384 |
|
| Investment in capitalized software, leasehold improvements and EDP equipment | (115 | ) | | (100 | ) | | (85 | ) |
| Purchase of business, net of cash acquired | — |
| | (130 | ) | | (21 | ) |
| Issuance of loans to affiliates | (1,100 | ) | | — |
| | — |
|
| Cash disposed due to distribution of disposed subsidiary | (672 | ) | | — |
| | — |
|
| Other, net (2) | (91 | ) | | 322 |
| | 407 |
|
| Net cash provided by (used in) investing activities | $ | (4,806 | ) | | $ | (8,914 | ) | | $ | (5,358 | ) |
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Policyholders’ account balances: | | | | | |
| Deposits | $ | 9,365 |
| | $ | 9,334 |
| | $ | 9,746 |
|
| Withdrawals | (4,496 | ) | | (3,926 | ) | | (2,874 | ) |
| Transfer (to) from Separate Accounts | 1,809 |
| | 1,566 |
| | 1,202 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(CONTINUED)
|
| | | | | | | | | | | |
| | 2018 | �� | 2017 | | 2016 |
| | (in millions) |
| Change in short-term financings | (26 | ) | | 53 |
| | (69 | ) |
| Change in collateralized pledged assets | 1 |
| | 710 |
| | (677 | ) |
| Change in collateralized pledged liabilities | (291 | ) | | 1,108 |
| | 125 |
|
| (Decrease) increase in overdrafts payable | 3 |
| | 63 |
| | (85 | ) |
| Additional loans from affiliates | 572 |
| | — |
| | — |
|
| Shareholder dividends paid | (1,672 | ) | | — |
| | (1,050 | ) |
| Repurchase of AB Holding Units | (267 | ) | | (220 | ) | | (236 | ) |
| Purchases (redemptions) of noncontrolling interests of consolidated company-sponsored investment funds | (472 | ) | | 120 |
| | (137 | ) |
| Distribution to noncontrolling interest of consolidated subsidiaries | (610 | ) | | (457 | ) | | (385 | ) |
| Increase (decrease) in securities sold under agreement to repurchase | (1,314 | ) | | (109 | ) | | 104 |
|
| (Increase) decrease in securities purchased under agreement to resell | — |
| | — |
| | 79 |
|
| Capital contribution from parent company | — |
| | 1,500 |
| | — |
|
| Other, net | 11 |
| | (10 | ) | | 8 |
|
| Net cash provided by (used in) financing activities | $ | 2,613 |
| | $ | 9,732 |
| | $ | 5,751 |
|
| | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | (12 | ) | | 22 |
| | (10 | ) |
| | | | | | |
| Change in cash and cash equivalents | (787 | ) | | 459 |
| | (78 | ) |
| Cash and cash equivalents, beginning of year | 3,409 |
| | 2,950 |
| | 3,028 |
|
| Cash and cash equivalents, end of year | $ | 2,622 |
| | $ | 3,409 |
| | $ | 2,950 |
|
| | | | | | |
| Cash and cash equivalents of disposed subsidiary: | | | | | |
| Beginning of year | $ | 1,009 |
| | $ | 1,006 |
| | $ | 561 |
|
| End of year | $ | — |
| | $ | 1,009 |
| | $ | 1,006 |
|
| | | | | | |
| Cash and cash equivalents of continuing operations | | | | | |
| Beginning of year | $ | 2,400 |
| | $ | 1,944 |
| | $ | 2,467 |
|
| End of year | $ | 2,622 |
| | $ | 2,400 |
| | $ | 1,944 |
|
| | | | | | |
| Supplemental cash flow information: | | | | | |
| Interest paid | $ | — |
| | $ | (8 | ) | | $ | (11 | ) |
| Income taxes (refunded) paid | $ | (8 | ) | | $ | (33 | ) | | $ | 613 |
|
| | | | | | |
| Cash flows of disposed subsidiary: | | | | | |
| Net cash provided by (used in) operating activities | $ | 1,137 |
| | $ | 715 |
| | $ | 1,041 |
|
| Net cash provided by (used in) investing activities | (102 | ) | | (297 | ) | | 323 |
|
| Net cash provided by (used in) financing activities | (1,360 | ) | | (437 | ) | | (909 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (12 | ) | | 22 |
| | (10 | ) |
| |
|
| |
|
| |
|
|
| Non-cash transactions: | | | | | |
| Continuing operations | | | | | |
| (Settlement) issuance of long-term debt | $ | (202 | ) | | $ | 202 |
| | $ | — |
|
| Transfer of assets to reinsurer | $ | (604 | ) | | $ | — |
| | $ | — |
|
| Repayments of loans from affiliates | $ | 300 |
| | $ | — |
| | $ | — |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(CONTINUED)
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Discontinued operations | | | | | |
| Fair value of assets acquired | $ | — |
| | $ | — |
| | $ | 34 |
|
| Fair value of liabilities assumed | $ | — |
| | $ | — |
| | $ | 1 |
|
| Payables recorded under contingent payment arrangements | $ | — |
| | $ | — |
| | $ | 12 |
|
| | | | | | |
| Disposal of subsidiary | | | | | |
| Assets disposed | $ | 9,156 |
| | $ | — |
| | $ | — |
|
| Liabilities disposed | 4,914 |
| | — |
| | — |
|
| Net assets disposed | 4,242 |
| | — |
| | — |
|
| Cash disposed | 672 |
| | — |
| | — |
|
| Net non-cash disposed | $ | 3,570 |
| | $ | — |
| | $ | — |
|
| |
| (1) | Net income (loss) includes $564 million, $533 million and $496 million in 2018, 2017 and 2016, respectively, of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss). |
| |
| (2) | Prior period amounts have been reclassified to conform to current period presentation. See Note 20 for further information. |
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
Consolidation
AXA Equitable Life Insurance Company’s (“AXA Equitable” and, collectively with its consolidated subsidiaries, the “Company”) primary business is providing life insurance and employee benefit products to both individuals and businesses. The Company is an indirect, wholly-owned subsidiary of AXA Equitable Holdings, Inc. (“Holdings”). Prior to the closing of the initial public offering of shares of Holdings’ common stock on May 14, 2018 (the “IPO”), Holdings was a wholly-owned subsidiary of AXA S.A. (“AXA”), a French holding company for the AXA Group, a worldwide leader in life, property and casualty, and health insurance and asset management. As of December 31, 2018, AXA owns approximately 59% of the outstanding common stock of Holdings.
In March 2018, AXA contributed its 0.5% minority interest in AXA Financial, Inc. (“AXA Financial”) to Holdings, increasing Holdings’ ownership of AXA Financial to 100%. On October 1, 2018, AXA Financial merged with and into its direct parent, Holdings, with Holdings continuing as the surviving entity (the “AXA Financial Merger”). As a result of the AXA Financial Merger, Holdings assumed all of AXA Financial’s liabilities, including two assumption agreements under which it legally assumed primary liability for certain employee benefit plans of AXA Equitable Life and various guarantees for its subsidiaries.
The accompanying consolidated financial statements represent the consolidated results and financial position of AXA Equitable and not the consolidated results and financial position of Holdings.
Discontinued Operations
In the fourth quarter of 2018, the Company transferred its economic interest in the business of AllianceBernstein Holding L.P. (“AB Holding”), AllianceBernstein L.P. (“ABLP”) and their subsidiaries (collectively, “AB”) to a newly created wholly-owned subsidiary of Holdings (the “AB Business Transfer”). The results of AB are reflected in the Company’s consolidated financial statements as a discontinued operation and, therefore, are presented as Assets of disposed subsidiary, Liabilities of disposed subsidiary on the consolidated balance sheets and Net income (loss) from discontinued operations, net of taxes, on the consolidated statements of income (loss). Intercompany transactions between the Company and AB prior to the AB Business Transfer have been eliminated. Ongoing service transactions will be reported as related party transactions going forward. See Note 19 for information on discontinued operations and transactions with AB.
As a result of the AB Business Transfer, we have reassessed the Company's segment structure and concluded that the Company operates as a single reportable segment as information on a more segmented basis is not evaluated by the Chief Operating Decision Maker and as such there is only a single reporting segment.
| |
| 2) | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
The accompanying consolidated financial statements present the consolidated results of operations, financial condition and cash flows of the Company and its subsidiaries and those investment companies, partnerships and joint ventures in which the Company has control and a majority economic interest as well as those variable interest entities (“VIEs”) that meet the requirements for consolidation.
Financial results in the historical consolidated financial statements may not be indicative of the results of operations, comprehensive income (loss), financial position, equity or cash flows that would have been achieved had we operated
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as a separate, standalone entity during the reporting periods presented. We believe that the consolidated financial statements include all adjustments necessary for a fair presentation of the results of operations of the Company.
All significant intercompany transactions and balances have been eliminated in consolidation. The years “2018”, “2017” and “2016” refer to the years ended December 31, 2018, 2017 and 2016, respectively.
Adoption of New Accounting Pronouncements
|
| |
| Description | Effect on the Financial Statement or Other Significant Matters |
ASU 2014-09: Revenue from Contracts with Customers (Topic 606) |
| This ASU contains new guidance that clarifies the principles for recognizing revenue arising from contracts with customers and develops a common revenue standard for U.S. GAAP. | On January 1, 2018, the Company adopted the new revenue recognition guidance on a modified retrospective basis. The impact of the adoption of the new revenue recognition guidance related to the disposed subsidiary resulted in an opening retained earnings adjustment to the Company of $8 million. Adoption did not change the amounts or timing of the Company’s revenue recognition for investment management and advisory fees related to continuing operations. |
ASU 2016-01: Financial Instruments - Overall (Subtopic 825-10) |
| This ASU provides new guidance related to the recognition and measurement of financial assets and financial liabilities. The new guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. The FASB also clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on AFS debt securities. The new guidance requires equity investments in unconsolidated entities, except those accounted for under the equity method, to be measured at fair value through earnings, thereby eliminating the AFS classification for equity securities with readily determinable fair values for which changes in fair value currently were reported in AOCI. | On January 1, 2018, the Company adopted the new recognition requirements on a modified retrospective basis for changes in the fair value of AFS equity securities, resulting in no material reclassification adjustment from AOCI to opening retained earnings for the net unrealized gains, net of tax, related to approximately $13 million of common stock securities and eliminated their designation as AFS equity securities. The Company does not currently report any of its financial liabilities under the fair value option. |
ASU 2016-15: Statement of Cash Flows (Topic 230) |
| This ASU provides new guidance to simplify elements of cash flow classification. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance requires application of a retrospective transition method. | Adoption of this guidance on January 1, 2018, did not have a material impact on the Company’s consolidated financial statements. |
ASU 2017-07: Compensation - Retirement Benefits (Topic 715) |
| This ASU provides new guidance on the presentation of net periodic pension and post-retirement benefit costs that requires retrospective disaggregation of the service cost component from the other components of net benefit costs on the income statement. | On January 1, 2018, the Company adopted the change in the income statement presentation utilizing the practical expedient for determining the historical components of net benefit costs, resulting in no material impact to the consolidated financial statements. In addition, no changes to the Company’s capitalization policies with respect to benefit costs resulted from the adoption of the new guidance. |
ASU 2017-09: Compensation - Stock Compensation (Topic 718) |
| This ASU provides clarity and reduces both 1) diversity in practice and 2) cost and complexity when applying guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. | Adoption of this amendment on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements. |
ASU 2018-02: Income Statement - Reporting Comprehensive Income
|
| This ASU contains new guidance that permits entities to reclassify to retained earnings tax effects “stranded” in AOCI resulting from the change in federal tax rate enacted by the Tax Cuts and Jobs Act (the “Tax Reform Act”) on December 22, 2017. If elected, the stranded tax effects for all items must be reclassified in AOCI, including, but not limited to, AFS securities and employee benefits. | The company early adopted the ASU effective October 1, 2018 and recognized the impact in the period of adoption. As a result, the company reclassified stranded effects resulting from the Tax Act of 2017 by decreasing AOCI and increasing retained earnings by $83 million. |
ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| |
| Description | Effect on the Financial Statement or Other Significant Matters |
| This ASU improves the effectiveness of disclosures related to defined benefit plans in the notes to the financial statements. The amendments in this ASU remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add new, relevant disclosure requirements. | Effective for the year ended December 31, 2018 the Company early adopted new guidance that amends the disclosure guidance for employee benefit plans, applied on a retrospective basis to all periods presented. See Note 13 for additional information regarding the Company’s employee benefit plans.
|
Future Adoption of New Accounting Pronouncements
|
| | |
| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-17: Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities |
This ASU provides guidance requiring that indirect interests held through related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests.
| Effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. All entities are required to apply the amendments in this update retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.
| Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements and related disclosures. |
ASU 2018-13: Fair Value Measurement (Topic 820) |
| This ASU improves the effectiveness of fair value disclosures in the notes to financial statements. Amendments in this ASU impact the disclosure requirements in Topic 820, including the removal, modification and addition to existing disclosure requirements. | Effective for fiscal years beginning after December 15, 2019. Early adoption is permitted, with the option to early adopt amendments to remove or modify disclosures, with full adoption of additional disclosure requirements delayed until the stated effective date. Amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. | Management currently is evaluating the impact of the guidance on the Company’s financial statement disclosures but has concluded that this guidance will not impact the Company’s consolidated financial position or results of operations. |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | |
| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-12: Financial Services - Insurance (Topic 944) |
This ASU provides targeted improvements to existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The ASU primarily impacts four key areas, including:
Measurement of the liability for future policy benefits for traditional and limited payment contracts. The ASU requires companies to review, and if necessary update, cash flow assumptions at least annually for non-participating traditional and limited-payment insurance contracts. Interest rates used to discount the liability will need to be updated quarterly using an upper medium grade (low credit risk) fixed-income instrument yield.
Measurement of market risk benefits (“MRBs”). MRBs, as defined under the ASU, will encompass certain GMxB features associated with variable annuity products and other general account annuities with other than nominal market risk. The ASU requires MRBs to be measured at fair value with changes in value attributable to changes in instrument-specific credit risk recognized in OCI.
Amortization of deferred acquisition costs. The ASU simplifies the amortization of deferred acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins, requiring such balances to be amortized on a constant level basis over the expected term of the contracts. Deferred costs will be required to be written off for unexpected contract terminations but will not be subject to impairment testing.
Expanded footnote disclosures. The ASU requires additional disclosures including disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, MRBs, separate account liabilities and deferred acquisition costs. Companies will also be required to disclose information about significant inputs, judgements, assumptions and methods used in measurement. | Effective date for public business entities for fiscal years and interim periods with those fiscal years, beginning after December 31, 2020. Early adoption is permitted.
For the liability for future policyholder benefits for traditional and limited payment contracts, companies can elect one of two adoption methods. Companies can either elect a modified retrospective transition method applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or a full retrospective transition method using actual historical experience information as of contract inception. The same adoption method must be used for deferred acquisition costs.
For MRBs, the ASU should be applied retrospectively as of the earliest period presented by a retrospective application to all prior periods.
For deferred acquisition costs, companies can elect one of two adoption methods. Companies can either elect a modified retrospective transition method applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or a full retrospective transition method using actual historical experience information as of contract inception. The same adoption method must be used for the liability for future policyholder benefits for traditional and limited payment contracts.
| Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements and related disclosures. The Company has formed a project implementation team to work on compiling all significant information needed to assess the impact of the new guidance, including changes to system requirements and internal controls. The Company expects adoption of the ASU will have a significant impact on its consolidated financial condition, results of operations, cash flows and required disclosures, as well as processes and controls.
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| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-07: Compensation - Stock Compensation (Topic 718) |
| This ASU contains new guidance that largely aligns the accounting for share-based payment awards issued to employees and non-employees. | Effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods, with early adoption permitted. | The Company has granted share-based payment awards only to employees as defined by accounting guidance and does not expect this guidance will have a material impact on its consolidated financial statements.
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ASU 2017-12: Derivatives and Hedging (Topic 815) |
| The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. | Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. | Management does not expect this guidance will have a material impact on the Company’s consolidated financial statements. |
ASU 2017-08: Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) |
| This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date and is intended to better align interest income recognition with the manner in which market participants price these instruments. | Effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted and is to be applied on a modified retrospective basis. | Management does not expect this guidance will have a material impact on the Company’s consolidated financial statements. |
ASU 2016-13: Financial Instruments - Credit Losses (Topic 326) |
| This ASU contains new guidance which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. | Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. These amendments should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. | Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements. Although early adoption is permitted, the Company expects to adopt ASU 2016-13 when it becomes effective for the Company on January 1, 2020.
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ASU 2016-02: Leases (Topic 842) |
| This ASU contains revised guidance to lease accounting that will require lessees to recognize on the balance sheet a “right-of-use” asset and a lease liability for virtually all lease arrangements, including those embedded in other contracts. Lessor accounting will remain substantially unchanged from the current model but has been updated to align with certain changes made to the lessee model. | Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for public business entities. Early application is permitted. Lessees and lessors are required to apply a modified retrospective transition approach, which includes optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU 2018-11 which allows for an additional transition method. The Company will adopt the standard utilizing the additional transition method, which allows entities to initially apply the new leases standard at the adoption date.
| The Company adopted ASU 2016-02, as well as other related clarifications and interpretive guidance issued by the FASB effective January 1, 2019. The Company has identified its significant existing leases, which primarily include real estate leases for office space, that will be impacted by the new guidance. The Company’s adoption of this guidance is expected to result in a material impact on the consolidated balance sheets, however it will not have a material impact on the Consolidated Statement of Income (Loss). The Company’s adoption of this guidance will result in the recognition, as of January 1, 2019, of additional right of use (RoU) operating lease assets ranging from $300 million to $400 million and operating lease liabilities ranging from $400 million to $500 million, respectively. The adoption of this standard will not have a significant impact on opening retained earnings.
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Investments
The carrying values of fixed maturities classified as available-for-sale (“AFS”) are reported at fair value. Changes in fair value are reported in other comprehensive income (“OCI”), net of policy related amounts and deferred income
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taxes. The amortized cost of fixed maturities is adjusted for impairments in value deemed to be other than temporary which are recognized in Investment gains (losses), net. The redeemable preferred stock investments that are reported in fixed maturities include real estate investment trusts (“REIT”), perpetual preferred stock and redeemable preferred stock. These securities may not have a stated maturity, may not be cumulative and do not provide for mandatory redemption by the issuer.
The Company determines the fair values of fixed maturities and equity securities based upon quoted prices in active markets, when available, or through the use of alternative approaches when market quotes are not readily accessible or available. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment.
The Company’s management, with the assistance of its investment advisors, monitors the investment performance of its portfolio and reviews AFS securities with unrealized losses for other-than-temporary impairments (“OTTI”). Integral to this review is an assessment made each quarter, on a security-by-security basis, by the Company’s Investments Under Surveillance (“IUS”) Committee, of various indicators of credit deterioration to determine whether the investment security is expected to recover. This assessment includes, but is not limited to, consideration of the duration and severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity and continued viability of the issuer.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting OTTI is recognized in income (loss) and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Real estate held for the production of income is stated at depreciated cost less valuation allowances.
Depreciation of real estate held for production of income is computed using the straight-line method over the estimated useful lives of the properties, which generally range from 40 to 50 years.
Policy loans represent funds loaned to policyholders up to the cash surrender value of the associated insurance policies and are carried at the unpaid principal balances due to the Company from the policyholders. Interest income on policy loans is recognized in net investment earnings (loss) less fees, held primarilyincome at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.
Partnerships, investment companies and joint venture interests that the Company has control of and has an economic interest in or those that meet the requirements for the benefitconsolidation under accounting guidance for consolidation of contractholders, and for whichVIEs are consolidated. Those that the Company does not bearhave control of and does not have a majority economic interest in and those that do not meet the VIE requirements for consolidation are reported on the equity method of accounting and are reported in other equity investments. The Company records its interests in certain of these partnerships on a month or one quarter lag.
Trading securities, which include equity securities and fixed maturities, are carried at fair value based on quoted market prices, with realized and unrealized gains (losses) reported in net investment risk. Separate Accounts’ assets and liabilities are shown on separate linesincome (loss) in the consolidated balance sheets. Assets held in Separate Accounts are reported at quoted market values or, where quoted values are not readily available or accessible for these securities, their fair value measures most often are determined throughstatements of Net income (loss).
Corporate owned life insurance (“COLI”) has been purchased by the useCompany and certain subsidiaries on the lives of model pricing that effectively discounts prospective cash flows to present value using appropriate sector-adjusted credit spreads commensurate with the security’s duration, also taking into consideration issuer-specific credit quality and liquidity. Investment performance (including investment income, net investment gains (losses) and changes in unrealized gains (losses))certain key employees and the corresponding amounts credited to contractholdersCompany and these subsidiaries are named as beneficiaries under these policies. COLI is carried at the cash surrender value of such Separate Accounts are offset within the same line inpolicies. At December 31, 2018, 2017 and 2016 the consolidated statementscarrying value of earnings (loss). For 2016, 2015 and 2014, investment results of such Separate Accounts were gains (losses) of $8,222COLI was $873 million, $1,148$911 million and $5,959$892 million, respectively.
Deposits to Separate Accounts are reported as increases in Separate Accounts assetsrespectively, and liabilities and are notis reported in revenues. Mortality, policy administration and surrender charges on all policies including those funded by Separate Accounts are included in revenues.
The Company reports the General Account’s interests in Separate Accounts as Other equity investmentsinvested assets in the consolidated balance sheets.
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Cash and cash equivalents includes cash on hand, demand deposits, money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less. Due to the short-term nature of these investments, the recorded value is deemed to approximate fair value.
All securities owned, including U.S. government and agency securities, mortgage-backed securities, futures and forwards transactions, are reported in the consolidated financial statements on a trade date basis.
Derivatives
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior and non-performance risk used in valuation models. Derivative financial instruments generally used by the Company include equity, currency, and interest rate futures, total return and/or other equity swaps, interest rate swaps and floors, swaptions, variance swaps and equity options, all of which may be exchange-traded or contracted in the over-the-counter market. All derivative positions are carried in the consolidated balance sheets at fair value, generally by obtaining quoted market prices or through the use of valuation models.
Freestanding derivative contracts are reported in the consolidated balance sheets either as assets within “Other invested assets” or as liabilities within “Other liabilities”. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related Credit Support Annex (“CSA”) have been executed. The Company uses derivatives to manage asset/liability risk and has designated some of those economic relationships under the criteria to qualify for hedge accounting treatment. All changes in the fair value of the Company’s freestanding derivative positions not designated to hedge accounting relationships, including net receipts and payments, are included in “Net derivative gains (losses)” without considering changes in the fair value of the economically associated assets or liabilities.
The Company is a party to financial instruments and other contracts that contain “embedded” derivative instruments. At inception, the Company assesses whether the economic characteristics of the embedded instrument are “clearly and closely related” to the economic characteristics of the remaining component of the “host contract” and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When those criteria are satisfied, the resulting embedded derivative is bifurcated from the host contract, carried in the consolidated balance sheets at fair value, and changes in its fair value are recognized immediately and captioned in the consolidated statements of income (loss) according to the nature of the related host contract. For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company instead may elect to carry the entire instrument at fair value.
Securities Repurchase and Reverse Repurchase Agreements
Securities repurchase and reverse repurchase transactions involve the temporary exchange of securities for cash or other collateral of equivalent value, with agreement to redeliver a like quantity of the same or similar securities at a future date prior to maturity at a fixed and determinable price. Transfers of securities under these agreements to repurchase or resell are evaluated by the Company to determine whether they satisfy the criteria for accounting treatment as secured borrowing or lending arrangements. Agreements not meeting the criteria would require recognition of the transferred securities as sales or purchases with related forward repurchase or resale commitments. All of the Company’s securities repurchase transactions are accounted for as collateralized borrowings with the related obligations distinctly captioned in the consolidated balance sheets. Earnings from investing activities related to the cash received under the Company’s securities repurchase arrangements are reported in the consolidated statements of income (loss) as “Net investment income” and the associated borrowing cost is reported as “Interest expense.” The Company has not actively engaged in securities reverse repurchase transactions.
Commercial and Agricultural Mortgage Loans on Real Estate
Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and valuation allowances. Valuation allowances are based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or on its collateral value if the loan is collateral dependent. However, if foreclosure is or becomes probable, the collateral value measurement method is used.
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For commercial and agricultural mortgage loans, an allowance for credit loss is typically recommended when management believes it is probable that principal and interest will not be collected according to the contractual terms. Factors that influence management’s judgment in determining allowance for credit losses include the following:
Loan-to-value ratio – Derived from current loan balance divided by the fair market value of the property. An allowance for credit loss is typically recommended when the loan-to-value ratio is in excess of 100%. In the case where the loan-to-value is in excess of 100%, the allowance for credit loss is derived by taking the difference between the fair market value (less cost of sale) and the current loan balance.
Debt service coverage ratio – Derived from actual operating earnings divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt.
Occupancy – Criteria varies by property type but low or below market occupancy is an indicator of sub-par property performance.
Lease expirations – The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor.
Maturity – Mortgage loans that are not fully amortizing and have upcoming maturities within the next 12 to 24 months are monitored in conjunction with the capital markets to determine the borrower’s ability to refinance the debt and/or pay off the balloon balance.
Borrower/tenant related issues – Financial concerns, potential bankruptcy or words or actions that indicate imminent default or abandonment of property.
Payment status (current vs. delinquent) – A history of delinquent payments may be a cause for concern.
Property condition – Significant deferred maintenance observed during the lenders annual site inspections.
Other – Any other factors such as current economic conditions may call into question the performance of the loan.
Mortgage loans also are individually evaluated quarterly by the Company’s IUS Committee for impairment, including an assessment of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages are also identified, consisting of mortgage loans not currently classified as problem mortgages but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
For problem mortgage loans, a valuation allowance is established to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for mortgage loans determined to be non-performing as a result of the loan review process. A non-performing loan is defined as a loan for which it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan-specific portion of the loss allowance is based on the Company’s assessment as to ultimate collectability of loan principal and interest. Valuation allowances for a non-performing loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The valuation allowance for mortgage loans can increase or decrease from period to period based on such factors.
Impaired mortgage loans without provision for losses are mortgage loans where the fair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on mortgage loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on mortgage loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows. Changes in the present value attributable to changes in the amount or timing of expected cash flows are reported as investment gains or losses.
Mortgage loans are placed on nonaccrual status once management believes the collection of accrued interest is doubtful. Once mortgage loans are classified as nonaccrual mortgage loans, interest income is recognized under the
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured to where the collection of interest is considered likely.
Net Investment Income (Loss), Investment Gains (Losses), Net and Unrealized Investment Gains (Losses)
Realized investment gains (losses) are determined by identification with the specific asset and are presented as a component of revenue. Changes in the valuation allowances are included in Investment gains (losses), net.
Realized and unrealized holding gains (losses) on trading and equity securities are reflected in Net investment income (loss).
Unrealized investment gains (losses) on fixed maturities designated as AFS held by the Company are accounted for as a separate component of AOCI, net of related deferred income taxes, as are amounts attributable to certain pension operations, Closed Block’s policyholders’ dividend obligation, insurance liability loss recognition, DAC related to UL policies, investment-type products and participating traditional life policies.
Changes in unrealized gains (losses) reflect changes in fair value of only those fixed maturities classified as AFS and do not reflect any change in fair value of policyholders’ account balances and future policy benefits.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. See Note 7 for additional information regarding determining the fair value of financial instruments.
Recognition of Investment Advisory and Administrative Services RevenuesInsurance Income and Related Expenses
AXA Equitable FMG performs investment advisoryDeposits related to universal life (“UL”) and administrative servicesinvestment-type contracts are reported as deposits to investment companies, currently AXA Premier VIP Trust (“VIP Trust”), EQ Advisors Trust (“EQAT”), 1290 Funds, AXA Allocation Funds Trustspolicyholders’ account balances. Revenues from these contracts consist of fees assessed during the period against policyholders’ account balances for mortality charges, policy administration charges and AXA Offshore Multimanager Funds Trust (“Other AXA Trusts”). AXA Equitable FMG has entered into sub-advisory agreementssurrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policyholders’ account balances.
Premiums from participating and non-participating traditional life and annuity policies with affiliatedlife contingencies generally are recognized in income when due. Benefits and unaffiliated registered investment advisersexpenses are matched with such income so as to provide sub-advisory services to AXA Equitable FMG with respect to certain portfoliosresult in the recognition of EQATprofits over the life of the contracts. This match is accomplished by means of the provision for liabilities for future policy benefits and the Other AXA Trusts. AXA Equitable FMG’s administrative services include, among others, fund accountingdeferral and compliance services. AXA Equitable FMG has entered intosubsequent amortization of DAC.
For contracts with a sub-administration agreement with JPMorgan Chase Bank, N.A. to provide certain sub-administration services to AXA Equitable FMG as instructed by AXA Equitable FMG. AXA Equitable FMG earns fees related to these services;single premium or a limited number of premium payments due over a significantly shorter period than the feestotal period over which benefits are calculated as a percentage of assets under management and are recorded in Commissions, fees and other income in the Consolidated statements of earnings (loss) as the related services are performed. Sub-advisory and sub-administrative expenses associated with the services are calculated and recorded as the related services are performed in Other operating costs and expenses in the Consolidated statements of earnings (loss).
Recognition of Investment Management Revenues and Related Expenses
Commissions, fees and other income principally include the Investment Management segment’s investment advisory and service fees, distribution revenues and institutional research services revenue. Investment advisory and service base fees, generally calculated as a percentage, referred to as basis points (“BPs”), of assets under management,provided, premiums are recorded as revenue when due with any excess profit deferred and recognized in income in a constant relationship to insurance in-force or, for annuities, the amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over the period to which the premiums relate in proportion to the amount of insurance protection provided.
DAC
Acquisition costs that vary with and are primarily related to the acquisition of new and renewal insurance business, reflecting incremental direct costs of contract acquisition with independent third parties or employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits and other costs directly related services are performed; they include brokerage transactions charges received by Sanford C. Bernstein & Co. LLC (“SCB LLC”)to underwriting, policy issuance and processing, medical inspection, and contract selling for certain retail, private client and institutional investment client transactions. Certain investment advisorysuccessfully negotiated contracts including those associated with hedge funds, provide for a performance-based fee, in additioncommissions, underwriting, agency and policy issue expenses, are deferred.In each reporting period, DAC is amortized to or in lieuAmortization of a base fee which is calculated as either a percentage of absolute investment results or a percentagedeferred policy acquisition costs of the investment results in excessaccrual of a stated benchmark over a specified periodimputed interest on DAC balances. DAC is subject to recoverability testing at the time of time. Performance-based fees are recorded as a component of revenuepolicy issue and loss recognition testing at the end of each contract’s measurementaccounting period. Institutional research services revenue consists
After the initial establishment of brokerage transaction charges receivedreserves, premium deficiency and loss recognition tests are performed each period end using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of anyDAC asset), DAC would first be written off and thereafter, if required, a premium deficiency reserve would be established by SCB LLCa charge to earnings.
Amortization Policy
In accordance with the guidance for the accounting and Sanford C. Bernstein Limited (“SCBL”)reporting by insurance enterprises for independent researchcertain long-duration contracts and brokerage-related services provided to institutional investors. Brokerage transaction charges earnedparticipating contracts and related expenses are recorded on a trade date basis. Distribution revenuesfor realized gains and shareholder servicing fees are accrued as earned.
Commissions paid to financial intermediaries in connection withlosses from the sale of sharesinvestments, current and expected future profit margins for products covered by this guidance are examined regularly in determining the amortization of open-end AB sponsored mutual funds sold without a front-end sales charge (“back-end load shares”) are capitalized as deferred sales commissionsDAC.
DAC associated with certain variable annuity products is amortized based on estimated assessments, with DAC on the remainder of variable annuities, UL and investment-type products amortized over periods not exceeding five and one-half years for U.S. fund shares and four years for non-U.S. fund shares, the periods of time during which the deferred sales commissions are generally recovered. These commissions are recovered from distribution services fees received from those funds and from contingent deferred sales commissions (“CDSC”) received from shareholders of those funds upon the redemption of their shares. CDSC cash recoveries are recorded as reductions of unamortized deferred sales commissions when received. Effective January 31, 2009, back-end load shares are no longer offered to new investors by AB’s U.S. funds. Management tests the deferred sales commission asset for recoverability quarterly and determined that the balance as of December 31, 2016 was not impaired.
AB’s management determines recoverability by estimating undiscounted future cash flows to be realized from this asset, as compared to its recorded amount, as well as the estimated remainingexpected total life of the deferred sales commission asset over which undiscountedcontract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Accounts fees, mortality and expense margins and surrender charges based on historical and anticipated future cash flowsexperience, embedded derivatives and changes in the reserve of products that have indexed features such as SCS IUL and MSO, updated at the end of each accounting period. When estimated gross profits are expected to be received. Undiscountednegative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated gross profits or assessments is reflected in earnings (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
A significant assumption in the amortization of DAC on variable annuities and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future cash flows consist of ongoing distribution services fees and CDSC. Distribution services fees are calculated as a percentage of average assets under managementseparate account performance. Management sets estimated future gross profit or assessment assumptions related to back-end load shares. CDSC are based on the lower of cost or current value, at the time of redemption, of back-end load shares redeemed and the point at which redeemed during the applicable minimum holding period under the mutual fund distribution system.
Significant assumptions utilized to estimate future average assets under management and undiscounted future cash flows from back-end load shares include expected future market levels and redemption rates. Market assumptions are selectedseparate account performance using a long-term view of expected average market returns by applying a Reversion to the Mean (“RTM”) approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At December 31, 2018, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuities was 7.0% (4.7% net of product weighted average Separate Accounts fees), and the gross maximum and minimum short-term annual rate of return limitations were 15.0% (12.7% net of product weighted average Separate Accounts fees) and 0.0% ((2.3)% net of product weighted average Separate Accounts fees), respectively. The maximum duration over which these rate limitations may be applied is five years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
In addition, projections of future mortality assumptions related to variable and interest-sensitive life products are based on historical returnsa long-term average of broad market indices. Future redemption rateactual experience. This assumption is updated periodically to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
For participating traditional life policies (substantially all of which are determined by reference to actual redemption experiencein the Closed Block), DAC is amortized over the five-year, three-year and one-year periods and current quarterly periods ended December 31, 2016. These assumptions are updated periodically. Estimates of undiscounted future cash flows and the remainingexpected total life of the deferred sales commission asset are made from these assumptions andcontract group as a constant percentage based on the aggregate undiscounted cash flows are compared to the recordedpresent value of the deferred sales commission asset. If AB’s management determinesestimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield. At December 31, 2018, the average rate of assumed investment yields, excluding policy loans, for the Company was
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4.7% grading to 4.3% over six years. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the futurenet level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the deferred sales commission asset isbalance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not recoverable, an impairment condition would exist and a loss would be measuredcreate significant volatility in results of operations as the amount by which the recorded amount of the
asset exceeds its estimated fair value. Estimated fair value is determined using AB’s management’s best estimate of future cash flows discounted toClosed Block recognizes a present value amount.
Goodwill and Other Intangible Assets
Goodwill representscumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of the purchase priceactual cumulative earnings over the fair value of identifiable net assets of acquired companies, and relates principally to the acquisition of SCB Inc., an investment research and management company formerly knownexpected cumulative earnings as Sanford C. Bernstein Inc. (“Bernstein Acquisition”) and the purchase of units of the limited partnership interest in AB (“AB Units”). In accordance with the guidance for Goodwill and Other Intangible Assets, goodwill is tested annually for impairment and at interim periods if events or circumstances indicate an impairment could have occurred.
Intangible assets related to the Bernstein Acquisition and purchases of AB Units include values assigned to contracts of businesses acquired based on their estimated fair valuedetermined at the time of acquisition, less accumulated amortization. These intangible assetsdemutualization.
DAC associated with non-participating traditional life policies are generally amortized on a straight-line basis over theirin proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated usefulat the date of policy issue and are consistently applied during the life of approximately 20 years. All intangible assetsthe contracts. Deviations from estimated experience are periodically reviewedreflected in income (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for impairmentthe total life of the policy. DAC related to these policies are subject to recoverability testing as events or changes in circumstances indicate thatpart of the carrying value may not be recoverable.Company’s premium deficiency testing. If the carrying value exceeds fair value, additional impairment testsa premium deficiency exists, DAC are performed to measurereduced by the amount of the impairmentdeficiency or to zero through a charge to current period earnings (loss). If the deficiency exceeds the DAC balance, the reserve for future policy benefits is increased by the excess, reflected in earnings (loss) in the period such deficiency occurs.
For some products, policyholders can elect to modify product benefits, features, rights or coverages that occur by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. These transactions are known as internal replacements. If such modification substantially changes the contract, the associated DAC is written off immediately through income and any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC amortization on the original contract will continue and any acquisition costs associated with the related modification are expensed.
Reinsurance
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Cessions under reinsurance agreements do not discharge the Company’s obligations as the primary insurer. The Company reviews all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any.any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception of the reinsurance agreement. The net cost of reinsurance is recorded as an adjustment to DAC and recognized as a component of other expenses on a basis consistent with the way the acquisition costs on the underlying reinsured contracts would be recognized. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as Premiums ceded (assumed); andAmounts due from reinsurers (Amounts due to reinsurers)are established.
Amounts currently recoverable under reinsurance agreements are included in Amounts due from reinsurers and amounts currently payable are included in Amounts due to reinsurers. Assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance.
Premiums, Policy charges and fee income and Policyholders’ benefits include amounts assumed under reinsurance agreements and are net of reinsurance ceded. Amounts received from reinsurers for policy administration are reported in other revenues. With respect to GMIBs, a portion of the directly written GMIBs are accounted for as insurance liabilities, but the associated reinsurance agreements contain embedded derivatives. These embedded derivatives are included in GMIB reinsurance contract asset, at fair value with changes in estimated fair value reported in Net derivative gains (losses).
Internal-use Software88
Capitalized internal-use software,
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits received are included in Other liabilities and deposits made are included within premiums, reinsurance and other receivables. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenues or other expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other expenses, as appropriate.
For reinsurance contracts other than those accounted for as derivatives, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities.
Policyholder Bonus Interest Credits
Policyholder bonus interest credits are offered on certain deferred annuity products in the form of either immediate bonus interest credited or enhanced interest crediting rates for a period of time. The interest crediting expense associated with these policyholder bonus interest credits is deferred and amortized over the lives of the underlying contracts in a manner consistent with the amortization of DAC. Unamortized balances are included in Other assets in the consolidated balance sheets and amortization is amortizedincluded in Interest credited to policyholders’ account balances in the consolidated statements of income (loss).
Policyholders’ Account Balances and Future Policy Benefits
Policyholders’ account balances relate to contracts or contract features where the Company has no significant insurance risk. This liability represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date.
For participating traditional life insurance policies, future policy benefit liabilities are calculated using a net level premium method on the basis of actuarial insurance assumptions equal to guaranteed mortality and dividend fund interest rates. The liability for annual dividends represents the accrual of annual dividends earned. Terminal dividends are accrued in proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy benefit liabilities are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on the Company’s experience that, together with interest and expense assumptions, includes a margin for adverse deviation. Benefit liabilities for traditional annuities during the accumulation period are equal to accumulated policyholders’ fund balances and, after annuitization, are equal to the present value of expected future payments. Interest rates used in establishing such liabilities range from 4.5%to6.3% (weighted average of 5.0%) for approximately 99.2% of life insurance liabilities and from 1.6% to 5.5% (weighted average of 4.8%) for annuity liabilities.
Individual health benefit liabilities for active lives are estimated using the net level premium method and assumptions as to future morbidity, withdrawals and interest. Benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest. While management believes its disability income (“DI”) reserves have been calculated on a straight-linereasonable basis and are adequate, there can be no assurance reserves will be sufficient to provide for future liabilities.
When the liabilities for future policy benefits plus the present value of expected future gross premiums for a product are insufficient to provide for expected future policy benefits and expenses for that product, DAC is written off and thereafter, if required, a premium deficiency reserve is established by a charge to earnings.
Funding agreements are also reported in Policyholders’ account balances in the consolidated balance sheets. As a member of the Federal Home Loan Bank of New York (“FHLBNY”), the Company has access to collateralized borrowings. The Company may also issue funding agreements to the FHLBNY. Both the collateralized borrowings and funding agreements would require the Company to pledge qualified mortgage-backed assets and/or government securities as collateral.
The Company has issued and continues to offer certain variable annuity products with guaranteed minimum death benefits (“GMDB”) and/or contain a guaranteed minimum living benefit (“GMLB,” and together with GMDB, the “GMxB features”) which, if elected by the policyholder after a stipulated waiting period from contract issuance,
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
guarantees a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of what the contract account value can purchase at then-current annuity purchase rates. This minimum lifetime annuity is based on predetermined annuity purchase rates applied to a guaranteed minimum income benefit (“GMIB”) base. The Company previously issued certain variable annuity products with and guaranteed income benefit (“GIB”) features, guaranteed withdrawal benefit for life (“GWBL”), guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) features. The Company has also assumed reinsurance for products with GMxB features.
Reserves for products that have GMIB features, but do not have no-lapse guarantee features, and products with GMDB features are determined by estimating the expected value of death or income benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated useful life based on expected assessments (i.e., benefit ratio). The determination of this estimated liability is based on models that involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, contract surrender and withdrawal rates, mortality experience, and, for contracts with the GMIB feature, GMIB election rates. Assumptions regarding separate account performance used for purposes of this calculation are set using a long-term view of expected average market returns by applying a RTM approach, consistent with that used for DAC amortization. There can be no assurance that actual experience will be consistent with management’s estimates.
Products that have a GMIB feature with a no-lapse guarantee rider (“GMIBNLG”), GIB, GWBL, GMWB and GMAB features and the assumed products with GMIB features (collectively “GMxB derivative features”) are considered either freestanding or embedded derivatives and discussed below under (“Embedded and Freestanding Insurance Derivatives”).
After the initial establishment of reserves, premium deficiency and loss recognition tests are performed each period end using best estimate assumptions as of the softwaretesting date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that ranges between threeline of business (i.e., reserves net of any DAC asset), DAC would first be written off and fivethereafter, if required, a premium deficiency reserve would be established by a charge to earnings. Premium deficiency reserves have been recorded for the group single premium annuity business, certain interest-sensitive life contracts, structured settlements, individual disability income and major medical. Additionally, in certain instances the policyholder liability for a particular line of business may not be deficient in the aggregate to trigger loss recognition, but the pattern of earnings may be such that profits are expected to be recognized in earlier years followed by losses in later years. IfThis pattern of profits followed by losses is exhibited in our VISL business and is generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. We accrue for these Profits Followed by Losses (“PFBL”) using a dynamic approach that changes over time as the projection of future losses change.
Embedded and Freestanding Insurance Derivatives
Reserves for products considered either embedded or freestanding derivatives are measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in Net derivative gains (losses). The estimated fair values of these derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees attributable to the guarantee. The projections of future benefits and future fees require capital markets and actuarial assumptions, including expectations concerning policyholder behavior. A risk-neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates.
Additionally, the Company cedes and assumes reinsurance of products with GMxB features, which are considered either an impairmentembedded or freestanding derivative and measured at fair value. The GMxB reinsurance contract asset and liabilities’ fair values reflect the present value of reinsurance premiums and recoveries and risk margins over a range of market-consistent economic scenarios.
Changes in the fair value of embedded and freestanding derivatives are reported in Net derivative gains (losses). Embedded derivatives in direct and assumed reinsurance contracts are reported in Future policyholders’ benefits and other policyholders’ liabilities and embedded derivatives in ceded reinsurance contracts are reported in the GMIB reinsurance contract asset, at fair value in the consolidated balance sheets.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Embedded and freestanding insurance derivatives fair values are determined based on the present value of projected future benefits minus the present value of projected future fees. At policy inception, a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits is attributed to the embedded derivative. The percentage of fees included in the fair value measurement is locked-in at inception. Fees above those amounts represent “excess” fees and are reported in Policy charges and fee income.
Policyholders’ Dividends
The amount of policyholders’ dividends to be paid (including dividends on policies included in the Closed Block) is determined annually by the board of directors of the issuing insurance company. The aggregate amount of policyholders’ dividends is related to have occurred, software capitalization is acceleratedactual interest, mortality, morbidity and expense experience for the remaining balance deemedyear and judgment as to the appropriate level of statutory surplus to be impaired.retained by the Company.
Income Taxes
Income taxes represent the net amount of income taxes that we expect to pay to or receive from various taxing jurisdictions in connection with its operations. We provide for Federal and state income taxes currently payable, as well as those deferred
due to temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryforward periods under the tax law in the applicable jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred tax assets will not be realized. Management considers all available evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. Our accounting for income taxes represents management’s best estimate of the tax consequences of various events and transactions.
Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities, and in evaluating our tax positions including evaluating uncertainties under the guidance for Accounting for Uncertainty in Income taxes. Under the guidance, we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. Tax positions are then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.
Our tax positions are reviewed quarterly and the balances are adjusted as new information becomes available.
Adoption of New Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements for a complete discussion of newly issued accounting pronouncements.
Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
AXA EQUITABLE LIFE INSURANCE COMPANY |
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of AXA Equitable Life Insurance Company:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AXA Equitable Life Insurance Company and its subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of income (loss), comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed in 2018 the manner in which it accounts for certain income tax effects originally recognized in accumulated other comprehensive income.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
New York, NY
March 28, 2019
We have served as the Company’s auditor since 1993.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 AND 2017
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| | | | | | | |
| | 2018 | | 2017 |
| | (in millions, except share amounts) |
| ASSETS | |
| Investments: | | | |
| Fixed maturities available for sale, at fair value (amortized cost of $42,492 and $34,831) | $ | 41,915 |
| | $ | 36,358 |
|
| Mortgage loans on real estate (net of valuation allowance of $7 and $8) | 11,818 |
| | 10,935 |
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| Real estate held for production of income | 52 |
| | 390 |
|
| Policy loans | 3,267 |
| | 3,315 |
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| Other equity investments | 1,144 |
| | 1,264 |
|
| Trading securities, at fair value | 15,166 |
| | 12,277 |
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| Other invested assets | 1,554 |
| | 1,830 |
|
| Total investments | 74,916 |
| | 66,369 |
|
| Cash and cash equivalents | 2,622 |
| | 2,400 |
|
| Cash and securities segregated, at fair value | — |
| | 9 |
|
| Deferred policy acquisition costs | 5,011 |
| | 4,492 |
|
| Amounts due from reinsurers | 3,124 |
| | 5,079 |
|
| Loans to affiliates | 600 |
| | 703 |
|
| GMIB reinsurance contract asset, at fair value | 1,991 |
| | 10,488 |
|
| Current and deferred income taxes | 438 |
| | — |
|
| Other assets | 2,763 |
| | 4,018 |
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| Assets of disposed subsidiary | — |
| | 9,835 |
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| Separate Accounts assets | 108,487 |
| | 122,537 |
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| Total Assets | $ | 199,952 |
| | $ | 225,930 |
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| LIABILITIES | | | |
| Policyholders' account balances | $ | 46,403 |
| | $ | 43,805 |
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| Future policy benefits and other policyholders' liabilities | 29,808 |
| | 29,070 |
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| Broker-dealer related payables | 69 |
| | 430 |
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| Securities sold under agreements to repurchase | 573 |
| | 1,887 |
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| Amounts due to reinsurers | 113 |
| | 134 |
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| Long-term debt | — |
| | 203 |
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| Loans from affiliates | 572 |
| | — |
|
| Current and deferred income taxes | — |
| | 1,550 |
|
| Other liabilities | 1,460 |
| | 1,242 |
|
| Liabilities of disposed subsidiary | — |
| | 4,954 |
|
| Separate Accounts liabilities | 108,487 |
| | 122,537 |
|
| Total Liabilities | $ | 187,485 |
| | $ | 205,812 |
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| Redeemable noncontrolling interest: | | | |
| Continuing operations | $ | 39 |
| | $ | 24 |
|
| Disposed subsidiary | — |
| | 602 |
|
| Redeemable noncontrolling interest | $ | 39 |
| | $ | 626 |
|
| Commitments and contingent liabilities (Note 17) |
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| EQUITY | | | |
| Equity attributable to AXA Equitable: | | |
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| Common stock, $1.25 par value; 2,000,000 shares authorized, issued and outstanding | $ | 2 |
| | $ | 2 |
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| Capital in excess of par value | 7,807 |
| | 6,859 |
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| Retained earnings | 5,098 |
| | 8,938 |
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| Accumulated other comprehensive income (loss) | (491 | ) | | 598 |
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| Total equity attributable to AXA Equitable | 12,416 |
| | 16,397 |
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| Noncontrolling interest | 12 |
| | 3,095 |
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| Total Equity | 12,428 |
| | 19,492 |
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| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 199,952 |
| | $ | 225,930 |
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See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
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| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| REVENUES | | | | | |
| Policy charges and fee income | $ | 3,523 |
| | $ | 3,294 |
| | $ | 3,311 |
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| Premiums | 862 |
| | 904 |
| | 880 |
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| Net derivative gains (losses) | (1,010 | ) | | 894 |
| | (1,321 | ) |
| Net investment income (loss) | 2,478 |
| | 2,441 |
| | 2,168 |
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| Investment gains (losses), net: | | | | | |
| Total other-than-temporary impairment losses | (37 | ) | | (13 | ) | | (65 | ) |
| Other investment gains (losses), net | 41 |
| | (112 | ) | | 83 |
|
| Total investment gains (losses), net | 4 |
| | (125 | ) | | 18 |
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| Investment management and service fees | 1,029 |
| | 1,007 |
| | 951 |
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| Other income | 65 |
| | 41 |
| | 36 |
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| Total revenues | 6,951 |
| | $ | 8,456 |
| | $ | 6,043 |
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| BENEFITS AND OTHER DEDUCTIONS | | | | | |
| Policyholders’ benefits | 3,005 |
| | 3,473 |
| | 2,771 |
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| Interest credited to policyholders’ account balances | 1,002 |
| | 921 |
| | 905 |
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| Compensation and benefits | 422 |
| | 327 |
| | 364 |
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| Commissions and distribution related payments | 620 |
| | 628 |
| | 635 |
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| Interest expense | 34 |
| | 23 |
| | 13 |
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| Amortization of deferred policy acquisition costs | 431 |
| | 900 |
| | 642 |
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| Other operating costs and expenses | 2,918 |
| | 635 |
| | 753 |
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| Total benefits and other deductions | 8,432 |
| | 6,907 |
| | 6,083 |
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| Income (loss) from continuing operations, before income taxes | (1,481 | ) | | 1,549 |
| | (40 | ) |
| Income tax (expense) benefit from continuing operations | 446 |
| | 1,210 |
| | 164 |
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| Net income (loss) from continuing operations | (1,035 | ) | | 2,759 |
| | 124 |
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| Net income (loss) from discontinued operations, net of taxes and noncontrolling interest | 114 |
| | 85 |
| | 66 |
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| Net income (loss) | (921 | ) | | 2,844 |
| | 190 |
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| Less: net (income) loss attributable to the noncontrolling interest | 3 |
| | (1 | ) | | — |
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| Net income (loss) attributable to AXA Equitable | $ | (918 | ) | | $ | 2,843 |
| | $ | 190 |
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See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
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| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| COMPREHENSIVE INCOME (LOSS) | | | | | |
| Net income (loss) | $ | (921 | ) | | $ | 2,844 |
| | $ | 190 |
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| Other Comprehensive income (loss) net of income taxes: | | | | | |
| Change in unrealized gains (losses), net of reclassification adjustment | (1,230 | ) | | 625 |
| | (233 | ) |
| Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment | (4 | ) | | (5 | ) | | (3 | ) |
| Other comprehensive income (loss) from discontinued operations | — |
| | (18 | ) | | 17 |
|
| Total other comprehensive income (loss), net of income taxes | (1,234 | ) | | 602 |
| | (219 | ) |
| Comprehensive income (loss) attributable to AXA Equitable | $ | (2,155 | ) | | $ | 3,446 |
| | $ | (29 | ) |
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
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| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Equity attributable to AXA Equitable: | | | | | |
| Common stock, at par value, beginning and end of year | $ | 2 |
| | $ | 2 |
| | $ | 2 |
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| | | | | | |
| Capital in excess of par value, beginning of year | $ | 6,859 |
| | $ | 5,339 |
| | $ | 5,321 |
|
| Capital contribution from parent company | — |
| | 1,500 |
| | — |
|
| Transfer of deferred tax asset in GMxB Unwind | 1,209 |
| | — |
| | — |
|
| Settlement of intercompany payables in GMxB Unwind | (297 | ) | | — |
| | — |
|
| Other | 36 |
| | 20 |
| | 18 |
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| Capital in excess of par value, end of year | $ | 7,807 |
| | $ | 6,859 |
| | $ | 5,339 |
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| Retained earnings, beginning of year | $ | 8,938 |
| | $ | 6,095 |
| | $ | 6,955 |
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| Cumulative effect of adoption of revenue recognition standard ASC 606 | 8 |
| | — |
| | — |
|
Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects Attribute to Disposed Subsidiary | (83 | ) | | — |
| | — |
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| Net income (loss) attributable to AXA Equitable | (918 | ) | | 2,843 |
| | 190 |
|
| Dividend to parent company | (1,672 | ) | | — |
| | (1,050 | ) |
| Distribution of disposed subsidiary | (1,175 | ) | | — |
| | — |
|
| Retained earnings, end of year | $ | 5,098 |
| | $ | 8,938 |
| | $ | 6,095 |
|
| | | | | | |
| Accumulated other comprehensive income (loss), beginning of year | $ | 598 |
| | $ | (4 | ) | | $ | 215 |
|
Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects | 83 |
| | — |
| | — |
|
| Other comprehensive income (loss) | (1,234 | ) | | 602 |
| | (219 | ) |
| Transfer of accumulated other comprehensive income to discontinued operations | 62 |
| | — |
| | — |
|
| Accumulated other comprehensive income (loss), end of year | (491 | ) | | 598 |
| | (4 | ) |
| Total AXA Equitable's equity, end of year | $ | 12,416 |
| | $ | 16,397 |
| | $ | 11,432 |
|
| | | | | | |
| Equity attributable to the Noncontrolling Interest | | | | | |
| Noncontrolling interest, continuing operations, beginning of year | $ | 19 |
| | $ | — |
| | $ | — |
|
| Net earnings (loss) attributable to noncontrolling interest | 1 |
| | — |
| | — |
|
| Net earnings (loss) attributable to redeemable noncontrolling interests | 2 |
| | (1 | ) | | — |
|
| Consolidation of real estate joint ventures | — |
| | 19 |
| | — |
|
| Deconsolidation of real estate joint ventures | (8 | ) | | — |
| | — |
|
| Reclassification of net earnings (loss) attributable to redeemable noncontrolling interests | (2 | ) | | 1 |
| | — |
|
| Noncontrolling interest, continuing operations, end of year | $ | 12 |
| | $ | 19 |
| | $ | — |
|
| | | |
|
| | |
| Noncontrolling interest, discontinued operations, beginning of year | $ | 3,076 |
| | $ | 3,096 |
| | $ | 3,059 |
|
| Repurchase of AB Holding Units | — |
| | (158 | ) | | (168 | ) |
| Net earnings (loss) attributable to noncontrolling interest | — |
| | 485 |
| | 491 |
|
| Dividends paid to noncontrolling interest | — |
| | (457 | ) | | (384 | ) |
| Transfer of AB Holding Units | (3,076 | ) | | — |
| | — |
|
| Other changes in noncontrolling interest | — |
| | 110 |
| | 98 |
|
| Noncontrolling interest, discontinued operations, end of year | $ | — |
| | $ | 3,076 |
| | $ | 3,096 |
|
| Equity attributable to the Noncontrolling Interest | $ | 12 |
| | $ | 3,095 |
| | $ | 3,096 |
|
| Total equity, end of Year | $ | 12,428 |
| | $ | 19,492 |
| | $ | 14,528 |
|
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Net income (loss) (1) | $ | (358 | ) | | $ | 3,377 |
| | $ | 686 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | |
| Interest credited to policyholders’ account balances | 1,002 |
| | 921 |
| | 905 |
|
| Policy charges and fee income | (3,523 | ) | | (3,294 | ) | | (3,311 | ) |
| Net derivative (gains) losses | 1,010 |
| | (870 | ) | | 1,337 |
|
| Investment (gains) losses, net | (3 | ) | | 125 |
| | (16 | ) |
| Realized and unrealized (gains) losses on trading securities | 221 |
| | (166 | ) | | 41 |
|
| Non-cash long-term incentive compensation expense (2) | 218 |
| | 185 |
| | 152 |
|
| Amortization of deferred cost of reinsurance asset | 1,882 |
| | (84 | ) | | 159 |
|
| Amortization and depreciation (2) | 340 |
| | 825 |
| | 614 |
|
| Cash received on the recapture of captive reinsurance | 1,273 |
| | — |
| | — |
|
| Equity (income) loss from limited partnerships | (120 | ) | | (157 | ) | | (91 | ) |
| Changes in: | | | | | |
| Net broker-dealer and customer related receivables/payables | 838 |
| | (278 | ) | | 608 |
|
| Reinsurance recoverable (2) | (390 | ) | | (1,018 | ) | | (304 | ) |
| Segregated cash and securities, net | (345 | ) | | 130 |
| | (381 | ) |
| Capitalization of deferred policy acquisition costs (2) | (597 | ) | | (578 | ) | | (594 | ) |
| Future policy benefits | (284 | ) | | 1,189 |
| | 431 |
|
| Current and deferred income taxes | (556 | ) | | (1,174 | ) | | (753 | ) |
| Other, net (2) | 810 |
| | 486 |
| | 56 |
|
| Net cash provided by (used in) operating activities | $ | 1,418 |
| | $ | (381 | ) | | $ | (461 | ) |
| | | | | | |
| Cash flows from investing activities: | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | |
| Fixed maturities, available-for-sale | $ | 8,935 |
| | $ | 9,738 |
| | $ | 7,154 |
|
| Mortgage loans on real estate | 768 |
| | 934 |
| | 676 |
|
| Trading account securities | 9,298 |
| | 9,125 |
| | 6,271 |
|
| Real estate joint ventures | 139 |
| | — |
| | — |
|
| Short-term investments (2) | 2,315 |
| | 2,204 |
| | 2,984 |
|
| Other | 190 |
| | 228 |
| | 32 |
|
| Payment for the purchase/origination of: | | | | | |
| Fixed maturities, available-for-sale | (11,110 | ) | | (12,465 | ) | | (7,873 | ) |
| Mortgage loans on real estate | (1,642 | ) | | (2,108 | ) | | (3,261 | ) |
| Trading account securities | (11,404 | ) | | (12,667 | ) | | (8,691 | ) |
| Short-term investments (2) | (1,852 | ) | | (2,456 | ) | | (3,187 | ) |
| Other | (170 | ) | | (280 | ) | | (250 | ) |
| Cash settlements related to derivative instruments | 805 |
| | (1,259 | ) | | 102 |
|
| Repayments of loans to affiliates | 900 |
| | — |
| | 384 |
|
| Investment in capitalized software, leasehold improvements and EDP equipment | (115 | ) | | (100 | ) | | (85 | ) |
| Purchase of business, net of cash acquired | — |
| | (130 | ) | | (21 | ) |
| Issuance of loans to affiliates | (1,100 | ) | | — |
| | — |
|
| Cash disposed due to distribution of disposed subsidiary | (672 | ) | | — |
| | — |
|
| Other, net (2) | (91 | ) | | 322 |
| | 407 |
|
| Net cash provided by (used in) investing activities | $ | (4,806 | ) | | $ | (8,914 | ) | | $ | (5,358 | ) |
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Policyholders’ account balances: | | | | | |
| Deposits | $ | 9,365 |
| | $ | 9,334 |
| | $ | 9,746 |
|
| Withdrawals | (4,496 | ) | | (3,926 | ) | | (2,874 | ) |
| Transfer (to) from Separate Accounts | 1,809 |
| | 1,566 |
| | 1,202 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(CONTINUED)
|
| | | | | | | | | | | |
| | 2018 | �� | 2017 | | 2016 |
| | (in millions) |
| Change in short-term financings | (26 | ) | | 53 |
| | (69 | ) |
| Change in collateralized pledged assets | 1 |
| | 710 |
| | (677 | ) |
| Change in collateralized pledged liabilities | (291 | ) | | 1,108 |
| | 125 |
|
| (Decrease) increase in overdrafts payable | 3 |
| | 63 |
| | (85 | ) |
| Additional loans from affiliates | 572 |
| | — |
| | — |
|
| Shareholder dividends paid | (1,672 | ) | | — |
| | (1,050 | ) |
| Repurchase of AB Holding Units | (267 | ) | | (220 | ) | | (236 | ) |
| Purchases (redemptions) of noncontrolling interests of consolidated company-sponsored investment funds | (472 | ) | | 120 |
| | (137 | ) |
| Distribution to noncontrolling interest of consolidated subsidiaries | (610 | ) | | (457 | ) | | (385 | ) |
| Increase (decrease) in securities sold under agreement to repurchase | (1,314 | ) | | (109 | ) | | 104 |
|
| (Increase) decrease in securities purchased under agreement to resell | — |
| | — |
| | 79 |
|
| Capital contribution from parent company | — |
| | 1,500 |
| | — |
|
| Other, net | 11 |
| | (10 | ) | | 8 |
|
| Net cash provided by (used in) financing activities | $ | 2,613 |
| | $ | 9,732 |
| | $ | 5,751 |
|
| | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | (12 | ) | | 22 |
| | (10 | ) |
| | | | | | |
| Change in cash and cash equivalents | (787 | ) | | 459 |
| | (78 | ) |
| Cash and cash equivalents, beginning of year | 3,409 |
| | 2,950 |
| | 3,028 |
|
| Cash and cash equivalents, end of year | $ | 2,622 |
| | $ | 3,409 |
| | $ | 2,950 |
|
| | | | | | |
| Cash and cash equivalents of disposed subsidiary: | | | | | |
| Beginning of year | $ | 1,009 |
| | $ | 1,006 |
| | $ | 561 |
|
| End of year | $ | — |
| | $ | 1,009 |
| | $ | 1,006 |
|
| | | | | | |
| Cash and cash equivalents of continuing operations | | | | | |
| Beginning of year | $ | 2,400 |
| | $ | 1,944 |
| | $ | 2,467 |
|
| End of year | $ | 2,622 |
| | $ | 2,400 |
| | $ | 1,944 |
|
| | | | | | |
| Supplemental cash flow information: | | | | | |
| Interest paid | $ | — |
| | $ | (8 | ) | | $ | (11 | ) |
| Income taxes (refunded) paid | $ | (8 | ) | | $ | (33 | ) | | $ | 613 |
|
| | | | | | |
| Cash flows of disposed subsidiary: | | | | | |
| Net cash provided by (used in) operating activities | $ | 1,137 |
| | $ | 715 |
| | $ | 1,041 |
|
| Net cash provided by (used in) investing activities | (102 | ) | | (297 | ) | | 323 |
|
| Net cash provided by (used in) financing activities | (1,360 | ) | | (437 | ) | | (909 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (12 | ) | | 22 |
| | (10 | ) |
| |
|
| |
|
| |
|
|
| Non-cash transactions: | | | | | |
| Continuing operations | | | | | |
| (Settlement) issuance of long-term debt | $ | (202 | ) | | $ | 202 |
| | $ | — |
|
| Transfer of assets to reinsurer | $ | (604 | ) | | $ | — |
| | $ | — |
|
| Repayments of loans from affiliates | $ | 300 |
| | $ | — |
| | $ | — |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(CONTINUED)
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Discontinued operations | | | | | |
| Fair value of assets acquired | $ | — |
| | $ | — |
| | $ | 34 |
|
| Fair value of liabilities assumed | $ | — |
| | $ | — |
| | $ | 1 |
|
| Payables recorded under contingent payment arrangements | $ | — |
| | $ | — |
| | $ | 12 |
|
| | | | | | |
| Disposal of subsidiary | | | | | |
| Assets disposed | $ | 9,156 |
| | $ | — |
| | $ | — |
|
| Liabilities disposed | 4,914 |
| | — |
| | — |
|
| Net assets disposed | 4,242 |
| | — |
| | — |
|
| Cash disposed | 672 |
| | — |
| | — |
|
| Net non-cash disposed | $ | 3,570 |
| | $ | — |
| | $ | — |
|
| |
| (1) | Net income (loss) includes $564 million, $533 million and $496 million in 2018, 2017 and 2016, respectively, of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss). |
| |
| (2) | Prior period amounts have been reclassified to conform to current period presentation. See Note 20 for further information. |
See Notes to the Consolidated Financial Statements.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
Consolidation
AXA Equitable Life Insurance Company’s (“AXA Equitable” and, collectively with its consolidated subsidiaries, the “Company”) primary business is providing life insurance and employee benefit products to both individuals and businesses. The Company is an indirect, wholly-owned subsidiary of AXA Equitable Holdings, Inc. (“Holdings”). Prior to the closing of the initial public offering of shares of Holdings’ common stock on May 14, 2018 (the “IPO”), Holdings was a wholly-owned subsidiary of AXA S.A. (“AXA”), a French holding company for the AXA Group, a worldwide leader in life, property and casualty, and health insurance and asset management. As of December 31, 2018, AXA owns approximately 59% of the outstanding common stock of Holdings.
In March 2018, AXA contributed its 0.5% minority interest in AXA Financial, Inc. (“AXA Financial”) to Holdings, increasing Holdings’ ownership of AXA Financial to 100%. On October 1, 2018, AXA Financial merged with and into its direct parent, Holdings, with Holdings continuing as the surviving entity (the “AXA Financial Merger”). As a result of the AXA Financial Merger, Holdings assumed all of AXA Financial’s liabilities, including two assumption agreements under which it legally assumed primary liability for certain employee benefit plans of AXA Equitable Life and various guarantees for its subsidiaries.
The accompanying consolidated financial statements represent the consolidated results and financial position of AXA Equitable and not the consolidated results and financial position of Holdings.
Discontinued Operations
In the fourth quarter of 2018, the Company transferred its economic interest in the business of AllianceBernstein Holding L.P. (“AB Holding”), AllianceBernstein L.P. (“ABLP”) and their subsidiaries (collectively, “AB”) to a newly created wholly-owned subsidiary of Holdings (the “AB Business Transfer”). The results of AB are reflected in the Company’s consolidated financial statements as a discontinued operation and, therefore, are presented as Assets of disposed subsidiary, Liabilities of disposed subsidiary on the consolidated balance sheets and Net income (loss) from discontinued operations, net of taxes, on the consolidated statements of income (loss). Intercompany transactions between the Company and AB prior to the AB Business Transfer have been eliminated. Ongoing service transactions will be reported as related party transactions going forward. See Note 19 for information on discontinued operations and transactions with AB.
As a result of the AB Business Transfer, we have reassessed the Company's segment structure and concluded that the Company operates as a single reportable segment as information on a more segmented basis is not evaluated by the Chief Operating Decision Maker and as such there is only a single reporting segment.
| |
| 2) | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
The accompanying consolidated financial statements present the consolidated results of operations, financial condition and cash flows of the Company and its subsidiaries and those investment companies, partnerships and joint ventures in which the Company has control and a majority economic interest as well as those variable interest entities (“VIEs”) that meet the requirements for consolidation.
Financial results in the historical consolidated financial statements may not be indicative of the results of operations, comprehensive income (loss), financial position, equity or cash flows that would have been achieved had we operated
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
as a separate, standalone entity during the reporting periods presented. We believe that the consolidated financial statements include all adjustments necessary for a fair presentation of the results of operations of the Company.
All significant intercompany transactions and balances have been eliminated in consolidation. The years “2018”, “2017” and “2016” refer to the years ended December 31, 2018, 2017 and 2016, respectively.
Adoption of New Accounting Pronouncements
|
| |
| Description | Effect on the Financial Statement or Other Significant Matters |
ASU 2014-09: Revenue from Contracts with Customers (Topic 606) |
| This ASU contains new guidance that clarifies the principles for recognizing revenue arising from contracts with customers and develops a common revenue standard for U.S. GAAP. | On January 1, 2018, the Company adopted the new revenue recognition guidance on a modified retrospective basis. The impact of the adoption of the new revenue recognition guidance related to the disposed subsidiary resulted in an opening retained earnings adjustment to the Company of $8 million. Adoption did not change the amounts or timing of the Company’s revenue recognition for investment management and advisory fees related to continuing operations. |
ASU 2016-01: Financial Instruments - Overall (Subtopic 825-10) |
| This ASU provides new guidance related to the recognition and measurement of financial assets and financial liabilities. The new guidance primarily affects the accounting for equity investments, financial liabilities under the fair value option, and presentation and disclosure requirements for financial instruments. The FASB also clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on AFS debt securities. The new guidance requires equity investments in unconsolidated entities, except those accounted for under the equity method, to be measured at fair value through earnings, thereby eliminating the AFS classification for equity securities with readily determinable fair values for which changes in fair value currently were reported in AOCI. | On January 1, 2018, the Company adopted the new recognition requirements on a modified retrospective basis for changes in the fair value of AFS equity securities, resulting in no material reclassification adjustment from AOCI to opening retained earnings for the net unrealized gains, net of tax, related to approximately $13 million of common stock securities and eliminated their designation as AFS equity securities. The Company does not currently report any of its financial liabilities under the fair value option. |
ASU 2016-15: Statement of Cash Flows (Topic 230) |
| This ASU provides new guidance to simplify elements of cash flow classification. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The new guidance requires application of a retrospective transition method. | Adoption of this guidance on January 1, 2018, did not have a material impact on the Company’s consolidated financial statements. |
ASU 2017-07: Compensation - Retirement Benefits (Topic 715) |
| This ASU provides new guidance on the presentation of net periodic pension and post-retirement benefit costs that requires retrospective disaggregation of the service cost component from the other components of net benefit costs on the income statement. | On January 1, 2018, the Company adopted the change in the income statement presentation utilizing the practical expedient for determining the historical components of net benefit costs, resulting in no material impact to the consolidated financial statements. In addition, no changes to the Company’s capitalization policies with respect to benefit costs resulted from the adoption of the new guidance. |
ASU 2017-09: Compensation - Stock Compensation (Topic 718) |
| This ASU provides clarity and reduces both 1) diversity in practice and 2) cost and complexity when applying guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award. | Adoption of this amendment on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements. |
ASU 2018-02: Income Statement - Reporting Comprehensive Income
|
| This ASU contains new guidance that permits entities to reclassify to retained earnings tax effects “stranded” in AOCI resulting from the change in federal tax rate enacted by the Tax Cuts and Jobs Act (the “Tax Reform Act”) on December 22, 2017. If elected, the stranded tax effects for all items must be reclassified in AOCI, including, but not limited to, AFS securities and employee benefits. | The company early adopted the ASU effective October 1, 2018 and recognized the impact in the period of adoption. As a result, the company reclassified stranded effects resulting from the Tax Act of 2017 by decreasing AOCI and increasing retained earnings by $83 million. |
ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20) |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| |
| Description | Effect on the Financial Statement or Other Significant Matters |
| This ASU improves the effectiveness of disclosures related to defined benefit plans in the notes to the financial statements. The amendments in this ASU remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add new, relevant disclosure requirements. | Effective for the year ended December 31, 2018 the Company early adopted new guidance that amends the disclosure guidance for employee benefit plans, applied on a retrospective basis to all periods presented. See Note 13 for additional information regarding the Company’s employee benefit plans.
|
Future Adoption of New Accounting Pronouncements
|
| | |
| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-17: Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities |
This ASU provides guidance requiring that indirect interests held through related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests.
| Effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. All entities are required to apply the amendments in this update retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.
| Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements and related disclosures. |
ASU 2018-13: Fair Value Measurement (Topic 820) |
| This ASU improves the effectiveness of fair value disclosures in the notes to financial statements. Amendments in this ASU impact the disclosure requirements in Topic 820, including the removal, modification and addition to existing disclosure requirements. | Effective for fiscal years beginning after December 15, 2019. Early adoption is permitted, with the option to early adopt amendments to remove or modify disclosures, with full adoption of additional disclosure requirements delayed until the stated effective date. Amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively. | Management currently is evaluating the impact of the guidance on the Company’s financial statement disclosures but has concluded that this guidance will not impact the Company’s consolidated financial position or results of operations. |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | |
| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-12: Financial Services - Insurance (Topic 944) |
This ASU provides targeted improvements to existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The ASU primarily impacts four key areas, including:
Measurement of the liability for future policy benefits for traditional and limited payment contracts. The ASU requires companies to review, and if necessary update, cash flow assumptions at least annually for non-participating traditional and limited-payment insurance contracts. Interest rates used to discount the liability will need to be updated quarterly using an upper medium grade (low credit risk) fixed-income instrument yield.
Measurement of market risk benefits (“MRBs”). MRBs, as defined under the ASU, will encompass certain GMxB features associated with variable annuity products and other general account annuities with other than nominal market risk. The ASU requires MRBs to be measured at fair value with changes in value attributable to changes in instrument-specific credit risk recognized in OCI.
Amortization of deferred acquisition costs. The ASU simplifies the amortization of deferred acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins, requiring such balances to be amortized on a constant level basis over the expected term of the contracts. Deferred costs will be required to be written off for unexpected contract terminations but will not be subject to impairment testing.
Expanded footnote disclosures. The ASU requires additional disclosures including disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, MRBs, separate account liabilities and deferred acquisition costs. Companies will also be required to disclose information about significant inputs, judgements, assumptions and methods used in measurement. | Effective date for public business entities for fiscal years and interim periods with those fiscal years, beginning after December 31, 2020. Early adoption is permitted.
For the liability for future policyholder benefits for traditional and limited payment contracts, companies can elect one of two adoption methods. Companies can either elect a modified retrospective transition method applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or a full retrospective transition method using actual historical experience information as of contract inception. The same adoption method must be used for deferred acquisition costs.
For MRBs, the ASU should be applied retrospectively as of the earliest period presented by a retrospective application to all prior periods.
For deferred acquisition costs, companies can elect one of two adoption methods. Companies can either elect a modified retrospective transition method applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or a full retrospective transition method using actual historical experience information as of contract inception. The same adoption method must be used for the liability for future policyholder benefits for traditional and limited payment contracts.
| Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements and related disclosures. The Company has formed a project implementation team to work on compiling all significant information needed to assess the impact of the new guidance, including changes to system requirements and internal controls. The Company expects adoption of the ASU will have a significant impact on its consolidated financial condition, results of operations, cash flows and required disclosures, as well as processes and controls.
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | |
| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-07: Compensation - Stock Compensation (Topic 718) |
| This ASU contains new guidance that largely aligns the accounting for share-based payment awards issued to employees and non-employees. | Effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods, with early adoption permitted. | The Company has granted share-based payment awards only to employees as defined by accounting guidance and does not expect this guidance will have a material impact on its consolidated financial statements.
|
ASU 2017-12: Derivatives and Hedging (Topic 815) |
| The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. | Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption. | Management does not expect this guidance will have a material impact on the Company’s consolidated financial statements. |
ASU 2017-08: Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) |
| This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date and is intended to better align interest income recognition with the manner in which market participants price these instruments. | Effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted and is to be applied on a modified retrospective basis. | Management does not expect this guidance will have a material impact on the Company’s consolidated financial statements. |
ASU 2016-13: Financial Instruments - Credit Losses (Topic 326) |
| This ASU contains new guidance which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. | Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. These amendments should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. | Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements. Although early adoption is permitted, the Company expects to adopt ASU 2016-13 when it becomes effective for the Company on January 1, 2020.
|
ASU 2016-02: Leases (Topic 842) |
| This ASU contains revised guidance to lease accounting that will require lessees to recognize on the balance sheet a “right-of-use” asset and a lease liability for virtually all lease arrangements, including those embedded in other contracts. Lessor accounting will remain substantially unchanged from the current model but has been updated to align with certain changes made to the lessee model. | Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for public business entities. Early application is permitted. Lessees and lessors are required to apply a modified retrospective transition approach, which includes optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU 2018-11 which allows for an additional transition method. The Company will adopt the standard utilizing the additional transition method, which allows entities to initially apply the new leases standard at the adoption date.
| The Company adopted ASU 2016-02, as well as other related clarifications and interpretive guidance issued by the FASB effective January 1, 2019. The Company has identified its significant existing leases, which primarily include real estate leases for office space, that will be impacted by the new guidance. The Company’s adoption of this guidance is expected to result in a material impact on the consolidated balance sheets, however it will not have a material impact on the Consolidated Statement of Income (Loss). The Company’s adoption of this guidance will result in the recognition, as of January 1, 2019, of additional right of use (RoU) operating lease assets ranging from $300 million to $400 million and operating lease liabilities ranging from $400 million to $500 million, respectively. The adoption of this standard will not have a significant impact on opening retained earnings.
|
Investments
The carrying values of fixed maturities classified as available-for-sale (“AFS”) are reported at fair value. Changes in fair value are reported in other comprehensive income (“OCI”), net of policy related amounts and deferred income
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
taxes. The amortized cost of fixed maturities is adjusted for impairments in value deemed to be other than temporary which are recognized in Investment gains (losses), net. The redeemable preferred stock investments that are reported in fixed maturities include real estate investment trusts (“REIT”), perpetual preferred stock and redeemable preferred stock. These securities may not have a stated maturity, may not be cumulative and do not provide for mandatory redemption by the issuer.
The Company determines the fair values of fixed maturities and equity securities based upon quoted prices in active markets, when available, or through the use of alternative approaches when market quotes are not readily accessible or available. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment.
The Company’s management, with the assistance of its investment advisors, monitors the investment performance of its portfolio and reviews AFS securities with unrealized losses for other-than-temporary impairments (“OTTI”). Integral to this review is an assessment made each quarter, on a security-by-security basis, by the Company’s Investments Under Surveillance (“IUS”) Committee, of various indicators of credit deterioration to determine whether the investment security is expected to recover. This assessment includes, but is not limited to, consideration of the duration and severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity and continued viability of the issuer.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting OTTI is recognized in income (loss) and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Real estate held for the production of income is stated at depreciated cost less valuation allowances.
Depreciation of real estate held for production of income is computed using the straight-line method over the estimated useful lives of the properties, which generally range from 40 to 50 years.
Policy loans represent funds loaned to policyholders up to the cash surrender value of the associated insurance policies and are carried at the unpaid principal balances due to the Company from the policyholders. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.
Partnerships, investment companies and joint venture interests that the Company has control of and has an economic interest in or those that meet the requirements for consolidation under accounting guidance for consolidation of VIEs are consolidated. Those that the Company does not have control of and does not have a majority economic interest in and those that do not meet the VIE requirements for consolidation are reported on the equity method of accounting and are reported in other equity investments. The Company records its interests in certain of these partnerships on a month or one quarter lag.
Trading securities, which include equity securities and fixed maturities, are carried at fair value based on quoted market prices, with realized and unrealized gains (losses) reported in net investment income (loss) in the statements of Net income (loss).
Corporate owned life insurance (“COLI”) has been purchased by the Company and certain subsidiaries on the lives of certain key employees and the Company and these subsidiaries are named as beneficiaries under these policies. COLI is carried at the cash surrender value of the policies. At December 31, 2018, 2017 and 2016 the carrying value of COLI was $873 million, $911 million and $892 million, respectively, and is reported in Other invested assets in the consolidated balance sheets.
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Cash and cash equivalents includes cash on hand, demand deposits, money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less. Due to the short-term nature of these investments, the recorded value is deemed to approximate fair value.
All securities owned, including U.S. government and agency securities, mortgage-backed securities, futures and forwards transactions, are reported in the consolidated financial statements on a trade date basis.
Derivatives
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior and non-performance risk used in valuation models. Derivative financial instruments generally used by the Company include equity, currency, and interest rate futures, total return and/or other equity swaps, interest rate swaps and floors, swaptions, variance swaps and equity options, all of which may be exchange-traded or contracted in the over-the-counter market. All derivative positions are carried in the consolidated balance sheets at fair value, generally by obtaining quoted market prices or through the use of valuation models.
Freestanding derivative contracts are reported in the consolidated balance sheets either as assets within “Other invested assets” or as liabilities within “Other liabilities”. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related Credit Support Annex (“CSA”) have been executed. The Company uses derivatives to manage asset/liability risk and has designated some of those economic relationships under the criteria to qualify for hedge accounting treatment. All changes in the fair value of the Company’s freestanding derivative positions not designated to hedge accounting relationships, including net receipts and payments, are included in “Net derivative gains (losses)” without considering changes in the fair value of the economically associated assets or liabilities.
The Company is a party to financial instruments and other contracts that contain “embedded” derivative instruments. At inception, the Company assesses whether the economic characteristics of the embedded instrument are “clearly and closely related” to the economic characteristics of the remaining component of the “host contract” and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When those criteria are satisfied, the resulting embedded derivative is bifurcated from the host contract, carried in the consolidated balance sheets at fair value, and changes in its fair value are recognized immediately and captioned in the consolidated statements of income (loss) according to the nature of the related host contract. For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company instead may elect to carry the entire instrument at fair value.
Securities Repurchase and Reverse Repurchase Agreements
Securities repurchase and reverse repurchase transactions involve the temporary exchange of securities for cash or other collateral of equivalent value, with agreement to redeliver a like quantity of the same or similar securities at a future date prior to maturity at a fixed and determinable price. Transfers of securities under these agreements to repurchase or resell are evaluated by the Company to determine whether they satisfy the criteria for accounting treatment as secured borrowing or lending arrangements. Agreements not meeting the criteria would require recognition of the transferred securities as sales or purchases with related forward repurchase or resale commitments. All of the Company’s securities repurchase transactions are accounted for as collateralized borrowings with the related obligations distinctly captioned in the consolidated balance sheets. Earnings from investing activities related to the cash received under the Company’s securities repurchase arrangements are reported in the consolidated statements of income (loss) as “Net investment income” and the associated borrowing cost is reported as “Interest expense.” The Company has not actively engaged in securities reverse repurchase transactions.
Commercial and Agricultural Mortgage Loans on Real Estate
Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and valuation allowances. Valuation allowances are based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or on its collateral value if the loan is collateral dependent. However, if foreclosure is or becomes probable, the collateral value measurement method is used.
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For commercial and agricultural mortgage loans, an allowance for credit loss is typically recommended when management believes it is probable that principal and interest will not be collected according to the contractual terms. Factors that influence management’s judgment in determining allowance for credit losses include the following:
Loan-to-value ratio – Derived from current loan balance divided by the fair market value of the property. An allowance for credit loss is typically recommended when the loan-to-value ratio is in excess of 100%. In the case where the loan-to-value is in excess of 100%, the allowance for credit loss is derived by taking the difference between the fair market value (less cost of sale) and the current loan balance.
Debt service coverage ratio – Derived from actual operating earnings divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt.
Occupancy – Criteria varies by property type but low or below market occupancy is an indicator of sub-par property performance.
Lease expirations – The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor.
Maturity – Mortgage loans that are not fully amortizing and have upcoming maturities within the next 12 to 24 months are monitored in conjunction with the capital markets to determine the borrower’s ability to refinance the debt and/or pay off the balloon balance.
Borrower/tenant related issues – Financial concerns, potential bankruptcy or words or actions that indicate imminent default or abandonment of property.
Payment status (current vs. delinquent) – A history of delinquent payments may be a cause for concern.
Property condition – Significant deferred maintenance observed during the lenders annual site inspections.
Other – Any other factors such as current economic conditions may call into question the performance of the loan.
Mortgage loans also are individually evaluated quarterly by the Company’s IUS Committee for impairment, including an assessment of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages are also identified, consisting of mortgage loans not currently classified as problem mortgages but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
For problem mortgage loans, a valuation allowance is established to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for mortgage loans determined to be non-performing as a result of the loan review process. A non-performing loan is defined as a loan for which it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan-specific portion of the loss allowance is based on the Company’s assessment as to ultimate collectability of loan principal and interest. Valuation allowances for a non-performing loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The valuation allowance for mortgage loans can increase or decrease from period to period based on such factors.
Impaired mortgage loans without provision for losses are mortgage loans where the fair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on mortgage loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on mortgage loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows. Changes in the present value attributable to changes in the amount or timing of expected cash flows are reported as investment gains or losses.
Mortgage loans are placed on nonaccrual status once management believes the collection of accrued interest is doubtful. Once mortgage loans are classified as nonaccrual mortgage loans, interest income is recognized under the
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cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured to where the collection of interest is considered likely.
Net Investment Income (Loss), Investment Gains (Losses), Net and Unrealized Investment Gains (Losses)
Realized investment gains (losses) are determined by identification with the specific asset and are presented as a component of revenue. Changes in the valuation allowances are included in Investment gains (losses), net.
Realized and unrealized holding gains (losses) on trading and equity securities are reflected in Net investment income (loss).
Unrealized investment gains (losses) on fixed maturities designated as AFS held by the Company are accounted for as a separate component of AOCI, net of related deferred income taxes, as are amounts attributable to certain pension operations, Closed Block’s policyholders’ dividend obligation, insurance liability loss recognition, DAC related to UL policies, investment-type products and participating traditional life policies.
Changes in unrealized gains (losses) reflect changes in fair value of only those fixed maturities classified as AFS and do not reflect any change in fair value of policyholders’ account balances and future policy benefits.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. See Note 7 for additional information regarding determining the fair value of financial instruments.
Recognition of Insurance Income and Related Expenses
Deposits related to universal life (“UL”) and investment-type contracts are reported as deposits to policyholders’ account balances. Revenues from these contracts consist of fees assessed during the period against policyholders’ account balances for mortality charges, policy administration charges and surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policyholders’ account balances.
Premiums from participating and non-participating traditional life and annuity policies with life contingencies generally are recognized in income when due. Benefits and expenses are matched with such income so as to result in the recognition of profits over the life of the contracts. This match is accomplished by means of the provision for liabilities for future policy benefits and the deferral and subsequent amortization of DAC.
For contracts with a single premium or a limited number of premium payments due over a significantly shorter period than the total period over which benefits are provided, premiums are recorded as revenue when due with any excess profit deferred and recognized in income in a constant relationship to insurance in-force or, for annuities, the amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over the period to which the premiums relate in proportion to the amount of insurance protection provided.
DAC
Acquisition costs that vary with and are primarily related to the acquisition of new and renewal insurance business, reflecting incremental direct costs of contract acquisition with independent third parties or employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts including commissions, underwriting, agency and policy issue expenses, are deferred.In each reporting period, DAC is amortized to Amortization of deferred policy acquisition costs of the accrual of imputed interest on DAC balances. DAC is subject to recoverability testing at the time of policy issue and loss recognition testing at the end of each accounting period.
After the initial establishment of reserves, premium deficiency and loss recognition tests are performed each period end using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of anyDAC asset), DAC would first be written off and thereafter, if required, a premium deficiency reserve would be established by a charge to earnings.
Amortization Policy
In accordance with the guidance for the accounting and reporting by insurance enterprises for certain long-duration contracts and participating contracts and for realized gains and losses from the sale of investments, current and expected future profit margins for products covered by this guidance are examined regularly in determining the amortization of DAC.
DAC associated with certain variable annuity products is amortized based on estimated assessments, with DAC on the remainder of variable annuities, UL and investment-type products amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Accounts fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, embedded derivatives and changes in the reserve of products that have indexed features such as SCS IUL and MSO, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated gross profits or assessments is reflected in earnings (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
A significant assumption in the amortization of DAC on variable annuities and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future separate account performance. Management sets estimated future gross profit or assessment assumptions related to separate account performance using a long-term view of expected average market returns by applying a Reversion to the Mean (“RTM”) approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At December 31, 2018, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuities was 7.0% (4.7% net of product weighted average Separate Accounts fees), and the gross maximum and minimum short-term annual rate of return limitations were 15.0% (12.7% net of product weighted average Separate Accounts fees) and 0.0% ((2.3)% net of product weighted average Separate Accounts fees), respectively. The maximum duration over which these rate limitations may be applied is five years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
In addition, projections of future mortality assumptions related to variable and interest-sensitive life products are based on a long-term average of actual experience. This assumption is updated periodically to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
For participating traditional life policies (substantially all of which are in the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield. At December 31, 2018, the average rate of assumed investment yields, excluding policy loans, for the Company was
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4.7% grading to 4.3% over six years. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
DAC associated with non-participating traditional life policies are amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in income (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy. DAC related to these policies are subject to recoverability testing as part of the Company’s premium deficiency testing. If a premium deficiency exists, DAC are reduced by the amount of the deficiency or to zero through a charge to current period earnings (loss). If the deficiency exceeds the DAC balance, the reserve for future policy benefits is increased by the excess, reflected in earnings (loss) in the period such deficiency occurs.
For some products, policyholders can elect to modify product benefits, features, rights or coverages that occur by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. These transactions are known as internal replacements. If such modification substantially changes the contract, the associated DAC is written off immediately through income and any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC amortization on the original contract will continue and any acquisition costs associated with the related modification are expensed.
Reinsurance
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Cessions under reinsurance agreements do not discharge the Company’s obligations as the primary insurer. The Company reviews all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception of the reinsurance agreement. The net cost of reinsurance is recorded as an adjustment to DAC and recognized as a component of other expenses on a basis consistent with the way the acquisition costs on the underlying reinsured contracts would be recognized. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as Premiums ceded (assumed); andAmounts due from reinsurers (Amounts due to reinsurers)are established.
Amounts currently recoverable under reinsurance agreements are included in Amounts due from reinsurers and amounts currently payable are included in Amounts due to reinsurers. Assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance.
Premiums, Policy charges and fee income and Policyholders’ benefits include amounts assumed under reinsurance agreements and are net of reinsurance ceded. Amounts received from reinsurers for policy administration are reported in other revenues. With respect to GMIBs, a portion of the directly written GMIBs are accounted for as insurance liabilities, but the associated reinsurance agreements contain embedded derivatives. These embedded derivatives are included in GMIB reinsurance contract asset, at fair value with changes in estimated fair value reported in Net derivative gains (losses).
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits received are included in Other liabilities and deposits made are included within premiums, reinsurance and other receivables. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenues or other expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other expenses, as appropriate.
For reinsurance contracts other than those accounted for as derivatives, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities.
Policyholder Bonus Interest Credits
Policyholder bonus interest credits are offered on certain deferred annuity products in the form of either immediate bonus interest credited or enhanced interest crediting rates for a period of time. The interest crediting expense associated with these policyholder bonus interest credits is deferred and amortized over the lives of the underlying contracts in a manner consistent with the amortization of DAC. Unamortized balances are included in Other assets in the consolidated balance sheets and amortization is included in Interest credited to policyholders’ account balances in the consolidated statements of income (loss).
Policyholders’ Account Balances and Future Policy Benefits
Policyholders’ account balances relate to contracts or contract features where the Company has no significant insurance risk. This liability represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date.
For participating traditional life insurance policies, future policy benefit liabilities are calculated using a net level premium method on the basis of actuarial insurance assumptions equal to guaranteed mortality and dividend fund interest rates. The liability for annual dividends represents the accrual of annual dividends earned. Terminal dividends are accrued in proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy benefit liabilities are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on the Company’s experience that, together with interest and expense assumptions, includes a margin for adverse deviation. Benefit liabilities for traditional annuities during the accumulation period are equal to accumulated policyholders’ fund balances and, after annuitization, are equal to the present value of expected future payments. Interest rates used in establishing such liabilities range from 4.5%to6.3% (weighted average of 5.0%) for approximately 99.2% of life insurance liabilities and from 1.6% to 5.5% (weighted average of 4.8%) for annuity liabilities.
Individual health benefit liabilities for active lives are estimated using the net level premium method and assumptions as to future morbidity, withdrawals and interest. Benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest. While management believes its disability income (“DI”) reserves have been calculated on a reasonable basis and are adequate, there can be no assurance reserves will be sufficient to provide for future liabilities.
When the liabilities for future policy benefits plus the present value of expected future gross premiums for a product are insufficient to provide for expected future policy benefits and expenses for that product, DAC is written off and thereafter, if required, a premium deficiency reserve is established by a charge to earnings.
Funding agreements are also reported in Policyholders’ account balances in the consolidated balance sheets. As a member of the Federal Home Loan Bank of New York (“FHLBNY”), the Company has access to collateralized borrowings. The Company may also issue funding agreements to the FHLBNY. Both the collateralized borrowings and funding agreements would require the Company to pledge qualified mortgage-backed assets and/or government securities as collateral.
The Company has issued and continues to offer certain variable annuity products with guaranteed minimum death benefits (“GMDB”) and/or contain a guaranteed minimum living benefit (“GMLB,” and together with GMDB, the “GMxB features”) which, if elected by the policyholder after a stipulated waiting period from contract issuance,
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
guarantees a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of what the contract account value can purchase at then-current annuity purchase rates. This minimum lifetime annuity is based on predetermined annuity purchase rates applied to a guaranteed minimum income benefit (“GMIB”) base. The Company previously issued certain variable annuity products with and guaranteed income benefit (“GIB”) features, guaranteed withdrawal benefit for life (“GWBL”), guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) features. The Company has also assumed reinsurance for products with GMxB features.
Reserves for products that have GMIB features, but do not have no-lapse guarantee features, and products with GMDB features are determined by estimating the expected value of death or income benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated life based on expected assessments (i.e., benefit ratio). The determination of this estimated liability is based on models that involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, contract surrender and withdrawal rates, mortality experience, and, for contracts with the GMIB feature, GMIB election rates. Assumptions regarding separate account performance used for purposes of this calculation are set using a long-term view of expected average market returns by applying a RTM approach, consistent with that used for DAC amortization. There can be no assurance that actual experience will be consistent with management’s estimates.
Products that have a GMIB feature with a no-lapse guarantee rider (“GMIBNLG”), GIB, GWBL, GMWB and GMAB features and the assumed products with GMIB features (collectively “GMxB derivative features”) are considered either freestanding or embedded derivatives and discussed below under (“Embedded and Freestanding Insurance Derivatives”).
After the initial establishment of reserves, premium deficiency and loss recognition tests are performed each period end using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC would first be written off and thereafter, if required, a premium deficiency reserve would be established by a charge to earnings. Premium deficiency reserves have been recorded for the group single premium annuity business, certain interest-sensitive life contracts, structured settlements, individual disability income and major medical. Additionally, in certain instances the policyholder liability for a particular line of business may not be deficient in the aggregate to trigger loss recognition, but the pattern of earnings may be such that profits are expected to be recognized in earlier years followed by losses in later years.This pattern of profits followed by losses is exhibited in our VISL business and is generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. We accrue for these Profits Followed by Losses (“PFBL”) using a dynamic approach that changes over time as the projection of future losses change.
Embedded and Freestanding Insurance Derivatives
Reserves for products considered either embedded or freestanding derivatives are measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in Net derivative gains (losses). The estimated fair values of these derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees attributable to the guarantee. The projections of future benefits and future fees require capital markets and actuarial assumptions, including expectations concerning policyholder behavior. A risk-neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates.
Additionally, the Company cedes and assumes reinsurance of products with GMxB features, which are considered either an embedded or freestanding derivative and measured at fair value. The GMxB reinsurance contract asset and liabilities’ fair values reflect the present value of reinsurance premiums and recoveries and risk margins over a range of market-consistent economic scenarios.
Changes in the fair value of embedded and freestanding derivatives are reported in Net derivative gains (losses). Embedded derivatives in direct and assumed reinsurance contracts are reported in Future policyholders’ benefits and other policyholders’ liabilities and embedded derivatives in ceded reinsurance contracts are reported in the GMIB reinsurance contract asset, at fair value in the consolidated balance sheets.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Embedded and freestanding insurance derivatives fair values are determined based on the present value of projected future benefits minus the present value of projected future fees. At policy inception, a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits is attributed to the embedded derivative. The percentage of fees included in the fair value measurement is locked-in at inception. Fees above those amounts represent “excess” fees and are reported in Policy charges and fee income.
Policyholders’ Dividends
The amount of policyholders’ dividends to be paid (including dividends on policies included in the Closed Block) is determined annually by the board of directors of the issuing insurance company. The aggregate amount of policyholders’ dividends is related to actual interest, mortality, morbidity and expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by the Company.
Separate Accounts
Generally, Separate Accounts established under New York State and Arizona State Insurance Law are not chargeable with liabilities that arise from any other business of the Company. Separate Accounts assets are subject to General Account claims only to the extent Separate Accounts assets exceed separate accounts liabilities. Assets and liabilities of the Separate Account represent the net deposits and accumulated net investment earnings (loss) less fees, held primarily for the benefit of policyholders, and for which the Company does not bear the investment risk. Separate Accounts assets and liabilities are shown on separate lines in the consolidated balance sheets. Assets held in Separate Accounts are reported at quoted market values or, where quoted values are not readily available or accessible for these securities, their fair value measures most often are determined through the use of model pricing that effectively discounts prospective cash flows to present value using appropriate sector-adjusted credit spreads commensurate with the security’s duration, also taking into consideration issuer-specific credit quality and liquidity. Investment performance (including investment income, net investment gains (losses) and changes in unrealized gains (losses)) and the corresponding amounts credited to policyholders of such Separate Accounts are offset within the same line in the consolidated statements of income (loss). For 2018, 2017 and 2016, investment results of such Separate Accounts were losses of $7.2 billion, and gains of $16.7 billion and $8.2 billion, respectively.
Deposits to Separate Accounts are reported as increases in Separate Accounts assets and liabilities and are not reported in revenues or expenses. Mortality, policy administration and surrender charges on all policies including those funded by Separate Accounts are included in revenues.
The Company reports the General Account’s interests in Separate Accounts as Other trading in the consolidated balance sheets.
Broker-Dealer Revenues, Receivables and Payables
AXA Advisors and certain of the Company’s other subsidiaries provide investment management, brokerage and distribution services for affiliates and third parties. Third-party revenues earned from these services are reported in Other income in the Company’s consolidated statement of income (loss).
Receivables from and payables to clients include amounts due on cash and margin transactions. Securities owned by customers are held as collateral for receivables; such collateral is not reflected in the consolidated financial statements.
Internal-use Software
Capitalized internal-use software, included in Other assets in the consolidated balance sheets, is amortized on a straight-line basis over the estimated useful life of the software that ranges between three and five years. Capitalized amounts are periodically tested for impairment in accordance with the guidance on impairment of long-lived assets. An immediate charge to earnings is recognized if capitalized software costs no longer are deemed to be recoverable. In addition, service potential is periodically reassessed to determine whether facts and circumstances have compressed the software’s useful life such that acceleration of amortization over a shorter period than initially determined would be required.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Long-Term Debt
Liabilities for long-term debt are primarily carried at an amount equal to unpaid principal balance, net of unamortized discount or premium and debt issue costs. Original-issue discount or premium and debt-issue costs are recognized as a component of interest expense over the period the debt is expected to be outstanding, using the interest method of amortization. Interest expense is generally presented within Interest expense in the consolidated statements of income (loss). See Note 11 for additional information regarding long-term debt.
Income Taxes
The Company and certain of its consolidated subsidiaries and affiliates including the Company, file a consolidated Federalfederal income tax return. The Company provides for Federalfederal and state income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Current Federalfederal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred tax assets will not be realized.
Under accounting for uncertainty in income taxes guidance, the Company determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the consolidated financial statements. Tax positions are then measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement.
Recognition of Investment Management and Service Fees and Related Expenses
AB is a private partnership for Federal income tax purposesInvestment management, advisory and accordingly, is not subject to Federalservice fees
Reported as Investment management and state corporate income taxes. However, AB is subject to a 4.0% New York City unincorporated business tax (“UBT”). Domestic corporate subsidiaries of AB are subject to Federal, state and local income taxes. Foreign corporate subsidiaries are generally subject to taxesservice fees in the foreign jurisdictions where theyCompany’s consolidated statements of income (loss) are located.investment management and administrative service fees earned by AXA Equitable Funds Management Group, LLC (“AXA Equitable FMG”)as well as certain asset-based fees associated with insurance contracts.
AXA Equitable FMG provides investment management and administrative services, such as fund accounting and compliance services, to AXA Premier VIP Trust (“VIP Trust”), EQ Advisors Trust (“EQAT”) and 1290 Funds as well as two private investment trusts established in the Cayman Islands, AXA Allocation Funds Trust and AXA Offshore Multimanager Funds Trust (collectively, the “Other AXA Trusts”). The Company provides Federalcontracts supporting these revenue streams create a distinct, separately identifiable performance obligation for each day the assets are managed for the performance of a series of servicesthat are substantially the same and state income taxes onhave the undistributed earningssame pattern of non-U.S. corporate subsidiaries excepttransfer to the extent that such earningscustomer. Accordingly, these investment management, advisory, and administrative service base fees are permanently invested outside the United States.
Accountingrecorded over time as services are performed and Consolidation of VIE’s
For all new investment products and entities developed byentitle the Company (other than Collateralized Debt Obligations (“CDOs”)), the Company first determines whether the entity isto variable consideration. Base fees, generally calculated as a VIE, which involves determining an entity’s variability and variable interests, identifying the holderspercentage of the equity investment at risk and assessing the five characteristics of a VIE. Once an entity has been determined to be a VIE, the Company then identifies the primary beneficiary of the VIE. If the Company is deemed to be the primary beneficiary of the VIE, then the Company consolidates the entity.
The Company provides seed capital to its investment teams to develop new products and services for their clients. The Company’s original seed investment typically represents all or a majority of the equity investment in the new product is temporary in nature. The Company evaluates its seed investments on a quarterly basis and consolidates such investments as required pursuant to U.S. GAAP.
Management of the Company reviews quarterly its investment management agreements and its investments in, and other financial arrangements with, certain entities that hold client assets under management (“AUM”), are recognized as revenue at month-end when the transaction price no longer is variable and the value of the consideration is determined. These fees are not subject to determineclaw back and there is minimal probability that a significant reversal of the entities thatrevenue recorded will occur.
Sub-advisory and sub-administrative expenses associated with these services are calculated and recorded as the related services are performed in Other operating costs and expense in the consolidated statements of income (loss) as the Company is required to consolidate under this guidance. These entitiesacting in a principal capacity in these transactions and, as such, reflects these revenues and expenses on a gross basis.
Distribution services
Revenues from distribution services include fees received as partial reimbursement of expenses incurred in connection with the sale of certain mutual fund products, hedge funds structured products, group trusts, collectiveand the 1290 Funds and for the distribution primarily of EQAT and VIP Trust shares to separate accounts in connection with the sale of variable life and annuity contracts. The amount and timing of revenues recognized from performance of these distribution services often is dependent upon the contractual arrangements with the customer and the specific product sold as further described below.
Most open-end management investment trustscompanies, such as U.S. funds and limited partnerships.the EQAT and VIP Trusts and the 1290 Funds, have adopted a plan under Rule 12b-1 of the Investment Company Act that allows for certain share classes to
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
pay out of assets, distribution and service fees for the distribution and sale of its shares (“12b-1 Fees”). These open-end management investment companies have such agreements with the Company, and the Company has selling and distribution agreements pursuant to which it pays sales commissions to the financial intermediaries that distribute the shares. These agreements may be consolidatedterminated by its primary beneficiary, which generallyeither party upon notice (generally 30 days) and do not obligate the financial intermediary to sell any specific amount of shares.
The Company records 12b-1 fees monthly based upon a percentage of the net asset value (“NAV”) of the funds. At month-end, the variable consideration of the transaction price is definedno longer constrained as the party that has a controlling financial interest inNAV can be calculated and the VIE.value of consideration is determined. These services are separate and distinct from other asset management services as the customer can benefit from these services independently of other services. The Company accrues the corresponding 12b-1 fees paid to sub-distributors monthly as the expenses are incurred. The Company is deemed to have a controlling financial interestacting in a VIE if it has (i) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance,principal capacity in these transactions; as such, these revenues and (ii) the obligation to absorb losses of the VIE or the right to receive income from the VIE that potentially could be significant to the VIE. For purposes of evaluating (ii) above, fees paid to the Company as a decision maker or service providerexpenses are excluded if the fees are compensation for services provided commensurate with the level of effort required to be performed and the arrangement includes only customary terms, conditions or amounts present in arrangements for similar services negotiated at arm’s length.
If the Company has a variable interest in an entity that is determined not to be a VIE, the entity then is evaluated for consolidation under the voting interest entity (“VOE”) model. For limited partnerships and similar entities, the Company is deemed to have a controlling financial interest in a VOE, and would be required to consolidate the entity, if the Company owns a majority of the entity’s kick-out rights through voting limited partnership interests and other limited partners do not hold substantive participating rights (or other rights that would indicate that the Company does not control the entity). For entities other than limited partnerships, the Company is deemed to have a controlling financial interest in a VOE if it owns a majority voting interest in the entity.
The analysis performed to identify variable interests held, determine whether entities are VIEs or VOEs, and evaluate whether the Company has a controlling financial interest in such entities requires the exercise of judgment and is updatedrecorded on a continuousgross basis as circumstances change or new entities are developed. The primary beneficiary evaluation generally is performed qualitatively based on all facts and circumstances, including consideration of economic interests in the VIE held directly and indirectly through related parties and entities under common control, as well as quantitatively, as appropriate.
At December 31, 2016, the Insurance segment’s General Account held approximately $1,209 million of investment assets in the form of equity interests issued by non-corporate legal entities determined under the new guidance to be VIEs, such as limited partnerships and limited liability companies, including hedge funds, private equity funds, and real estate-related funds. As an equity investor, the Insurance segment is considered to have a variable interest in each of these VIEs as a result of its participation in the risks and/or rewards these funds were designed to create by their defined portfolio objectives and strategies. Primarily through qualitative assessment, including consideration of related party interests and/or other financial arrangements, if any, the Insurance segment was not identified as primary beneficiary of any of these VIEs, largely due to its inability to direct the activities that most significantly impact their economic performance. Consequently, the Company continues to reflect these equity interests in the consolidated balance sheetstatements of income (loss).
Other revenues
Also reported as Investment management and service fees in the Company’s consolidated statements of income (loss) are other revenues from contracts with customers, primarily consisting of mutual fund reimbursements and other brokerage income.
Other income
Revenues from contracts with customers reported as Other equity investmentsIncome in the Company’s consolidated statements of income (loss) primarily consist of advisory account fees and to applybrokerage commissions from the equity methodCompany’s subsidiary broker-dealer operations and sales commissions from the Company’s general agent for the distribution of accounting for these positions. The net assets of these non-consolidated VIEsnon-affiliate insurers’ life insurance and annuity products. These revenues are approximately $157,986 million. The Company’s maximum exposure to loss from its direct involvement with these VIEsrecognized at month-end when constraining factors, such as AUM and product mix, are resolved and the transaction pricing no longer is variable such that the carrying value of its investmentconsideration can be determined.
Discontinued Operations
The results of $1,209 millionoperations of a component of the Company that has been disposed of are reported in discontinued operations if certain criteria are met; such as if the disposal represents a strategic shift that has or will have a major effect on the Company’s operations and approximately $697 millionfinancial results. The results of unfunded commitments at December 31, 2016. The Company has no further economic interest in these VIEsAB are reflected in the form of guarantees, derivatives, credit enhancements or similar instrumentsCompany.’s consolidated financial statements as discontinued operations and, obligations.
As a result of adopting the new guidance, the Company identified for consolidation under the VIE model three investment funds sponsored by AB. In addition, the Company identified as a VIE an AB private equity fund previously consolidated at December 31, 2015 under the VOE model. The assets of these consolidated VIEstherefore, are presented within other investedas assets and cash and cash equivalents and liabilities of these consolidated VIEs are presented within other liabilitiesdisposed subsidiary on the face of the Company’s consolidated balance sheet at December 31, 2016; ownership interests not held bysheets and net income (loss) from discontinued operations, net of taxes and noncontrolling interest on the consolidated statements of income (loss). Intercompany transactions between the Company relating to these consolidated VIEs are presented either as redeemable or non-redeemable non-controlling interest, as appropriate.
In 2016, subsequentand AB prior to the initial adoption of the VIEs guidance, AB consolidated six additional investment funds that were classified as VIEs in which AB obtained a controlling financial interest due to its investment in those fundsdisposal have been eliminated. See Note 19 for information on discontinued operations and deconsolidated a VIE of which AB no longer was the primary beneficiary due to the redemption of its seed money from the fund. At the time of adoption of the new consolidation guidance, AXA financial consolidated total assets of $265 million, total liabilities of $14 million and redeemable non-controlling interest of $251 million in the consolidated balancetransactions with AB.
sheet. As of December 31, 2016 AXA financial consolidated $933 million of assets, liabilities of $293 million and redeemable non-controlling interest of $392 million associated with the consolidation of VIEs.
As of December 31, 2016, the net assets of investment products sponsored by AB that are non-consolidated VIEs are approximately $43,700 million and the Company’s maximum exposure to loss from its direct involvement with these VIEs is its investment of $13 million at December 31, 2016. The Company has no further commitments to or economic interest in these VIEs.
Assumption Updates and Model Changes
In 2018, the Company began conducting its annual review of our assumptions and models during the third quarter, consistent with industry practice. The annual review encompasses assumptions underlying the valuation of unearned revenue liabilities, embedded derivatives for our insurance business, liabilities for future policyholder benefits, DAC and deferred sales inducement assets (“DSI”). As a result of this review, some assumptions were updated, resulting in increases and decreases in the carrying values of these product liabilities and assets.
The net impact of assumption changes in thethirdquarter of 2018 decreased Policy charges and feeincomeby$12 million, decreased Policyholders’ benefits by$684 million, increased Net derivative losses by $1.1 billion, and decreased the Amortization of DAC by $165 million. This resulted in a decrease in the third quarter of 2018 in Income (loss) from operations, before income taxes of $228 million and decreased Net income (loss) by approximately $187 million.
In 2017, the Company made several assumption updates and model changes, including the following: (1) updated the expectation of long-term Separate Accounts volatility used in estimating policyholders’ benefits for variable annuities with GMDB and GMIB guarantees and variable universal life contracts with secondary guarantees; (2) updated the estimated duration used to calculate policyholders’ benefits for variable annuities with GMDB and GMIB guarantees
and the period over which DAC is amortized; (3) updated policyholder behavior assumptions based on emerging experience, including expectations of long-term lapse and partial withdrawal rates for variable annuities with GMxB features; (4) updated premium funding assumptions for certain universal life and variable universal life products with secondary guarantees; (5) completed its periodic review and updated its long-term mortality assumption for universal, variable universal and traditional life products; (6) updated the assumption for long-term General Account spread and yield assumptions in the DAC amortization and loss recognition testing calculations for universal life, variable universal life and deferred annuity business lines; (7) updated our maintenance expense assumption for universal life and variable universal life products; and (8) implemented other actuarial assumption updates and model changes, resulting in the full release of the reserve. The net impact of assumption changes in 2017 increased Policyholders’ benefits by $23 million, decreased the Amortization of DAC by $247 million, decreased Policy charges and fee income by $88 million, increased the fair value of our GMIB reinsurance asset by $1.5 billion and decreased the fair value of the GMIBNLG liability by $447 million. This resulted in an increase in Income (loss) from operations, before income taxes of $1.7 billion and increased Net income by approximately $1.1 billion.
In 2016, the Company made several assumption updates and model changes including the following (1) updated the premium funding assumption used in setting variable life policyholder benefit reserves; (2) made changes in the model used in calculating premium loads, which increased interest sensitive life policyholder benefit reserves; (3) updated its mortality assumption for certain VISLvariable interest-sensitive life (“VISL”) products as a result of favorable mortality experience for some of its older products and unfavorable mortality experience on some of its newer products and (4) updated the General Account spread and yield assumptions for certain VISL products to reflect lower expected investment yields.
The net impact of theseassumption updates and model changes and assumption updates in 2016 decreased policyholders’Policyholders’ benefits by $77$135 million, increased the amortizationAmortization of DAC by $289$193 million, increased Universal lifePolicy charges and investment-type product policy fee income by $22$35 million, decreased EarningsIncome (loss) from continuing operations, before income taxes by $189$23 million and decreased Net earningsincome by approximately $123$15 million. Included in these balances are out-of-period adjustments (“OOPA's”) which decreased Earnings from continuing operations before income taxes by $49 million in 2016.
In 2015Revision of Prior Year Financial Statements
During the fourth quarter of 2018, the Company announced it would raise cost of insurance (“COI”) rates foridentified certain UL policies issued between 2004 and 2007, which have both issue ages 70 and above and a current face value amount of $1 million and above, effective in 2016. The Company raised the COI rates for these policies as management expects future mortality and investment experience to be less favorable than what was anticipated when the original schedule of COI rates was established. This COI rate increase was larger than the increase that previously had been anticipated in management’s reserve assumptions. As a result, management updated the assumption to reflect the actual COI rate increase, resulting in a $71 million and $46 million increase in Earnings from continuing operations before income taxes and Net earnings, respectively, in 2015.
In 2015, expectations of long-term lapse and partial withdrawal rates for variable annuities with GMDB and GMIB guarantees were lowered based on emerging experience. This update increased expected future claim costs and the fair value of the GMIB reinsurance contract asset. Also in 2015, expectations of GMIB election rates were lowered for certain ages based on emerging experience. This decreased the expected future GMIB claim cost and the fair value of the GMIB reinsurance contract asset, while increasing the expected future GMDB claim cost. The impact of these assumption updates in 2015 were a net decrease in the fair value of the GMIB reinsurance contract asset of $746 million, a decrease in the GMDB/GMIB reserves of $637 million and a decrease in the amortization of DAC of $17 million. In 2015, this assumption update decreased Earnings from continuing operations before income taxes and Net earnings by approximately $92 million and $60 million, respectively.
In 2015, based upon management’s then current expectations of interest rates and future fund growth, the Company updated its reversion to the mean (“RTM”) assumption used to calculate GMDB/GMIB and VISL reserves and amortization DAC from 9.0% to 7.0%. The impact of this assumption update in 2015 was an increase in GMIB/GMDB reserves of $723 million, an increase in VISL reserves of $29 million and decrease in amortization of DAC of $67 million. In 2015, this assumption update decreased Earnings from continuing operations before income taxes and Net earnings by approximately $685 million and $445 million, respectively.
In 2015, expectations of long-term lapse rates for certain Accumulator® products at certain durations and moneyness levels were lowered based on emerging experience. This update increased expected future claim costs and the fair value of the GMIB reinsurance contract asset. The impact of this assumption update in 2015 was an increase in the fair value of the GMIB reinsurance contract asset of $216 million, an increase in the GMIB reserves of $65 million and a decrease in the amortization of DAC of $13 million. In 2015, this assumption update increased Earnings from continuing operations before income taxes and Net earnings by approximately $164 million and $107 million, respectively.
In 2015, the Company launched a lump sum payment option to certain contract holders with GMIB and GWBL benefits at the time their AAV falls to zero. As a result, the Company updated its future reserve assumptions to incorporate the expectation that some policyholders will utilize this option. The impact of this assumption update in 2015 resulted in a decrease in the fair value of the GMIB reinsurance contract asset of $263 million and a decrease in the GMIB reserves of
$55 million. In 2015, this assumption update decreased Earnings from continuing operations before income taxes and Net earnings by approximately $208 million and $135 million, respectively.
In 2014, the Company updated its assumptions of future GMIB costs as a result of lower expected short term lapses for those policyholders who did not accept the GMIB buyout offer that expired in third quarter 2014. The impacts of this refinement in 2014 resulted in an increase in the fair value of the GMIB reinsurance asset of $62 million and an increase in the GMIB reserves of $16 million. In 2014, this assumption update increased Earnings from continuing operations before income taxes and Net earnings by approximately $46 million and $30 million, respectively.
In addition, in 2014, the Company made a change in the fair value calculation of the GMIB reinsurance contract asset and GWBL, GIB and guaranteed minimum accumulation benefit (“GMAB”) liabilities, utilizing scenarios that explicitly reflect risk free bond and equity components separately (previously aggregated and including counterparty risk premium embedded in swap rates) and stochastic interest rates for projecting and discounting cash flows (previously a single yield curve). The net impacts of these changes in 2014that were a $510 million increase to the GMIB reinsurance contract asset and a $37 million increase in the GWBL, GIB and GMAB liability which are reportedincorrectly classified in the Company’s consolidated statements of Earnings (Loss) as Increase (decrease)cash flows. The Company has determined that these mis-classifications were not material to the financial statements of any period. However, in order to improve the fair valueconsistency and comparability of the reinsurance contract asset and Policyholders’ benefits, respectively. In 2014, these changes increased Earnings from continuing operations before income taxes and Net earnings by approximately $473 million and $307 million, respectively.
Out of Period Adjustments
In 2016, the Company recorded several out-of-period adjustments (“OOPA’s”) in its financial statements, primarily related to errors in the models used to calculate policyholders’ benefit reserves for certain VISL products . These OOPA’s resulted in a decrease of $4 million in total revenues and increased total benefits and other deductions by $40 million in 2016.
Additionally, in 2016, the Company recorded an income tax expense as an OOPA, related to the settlement of inter-company balances between AB and its foreign subsidiaries, which created deemed dividends under Section 956 of the U.S. Internal Revenue Code of 1986, as amended. As a result, the Company has been understating its income tax provision and income tax liability since 2010. As a result of the deemed dividend adjustment discussed above, the accumulated undistributed earnings permanently invested outside the U.S. will decrease significantly as of December 31, 2016. This OOPA resulted in an increase of $38 million in income tax expense and decreased Earnings attributable to noncontrolling interest by $27 million in 2016, respectively.
In 2016, total OOPA’s including those discussed above, decreased Earnings from operations, before income tax by $44 million and Net earnings by $67 million, respectively.
In 2016, the Company identified an error in the presentation of Universal life and investment-type product policy fee income and Premiums onmanagement revised the consolidated statements of earningscash flows for the year ended December 31, 2017. See Note 21 for further information.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company changed the presentation of the capitalization of deferred policy acquisition costs (“DAC”) in the consolidated statements of income for all prior periods presented herein by netting the capitalized amounts within the applicable expense line items, such as Compensation and benefits, Commissions and distribution plan payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of deferred acquisition costs. There was no impact on Net income (loss) or Comprehensive income of this reclassification.
The reclassification adjustments for the years ended December 31, 20152017 and 2014. The Company has revised2016 are presented in the table below. Capitalization of DAC reclassified to Compensation and benefits, Commissions and distribution plan payments, and Other operating costs and expenses reduced the amounts previously reported balances by decreasing Universal life and investment-type productin those expense line items, while the capitalization of DAC reclassified from the Amortization of deferred policy fee income and increasing Premiums by $366 million and $360 million in 2015 and 2014, respectively, to improve the consistency and comparability with the current period presentation. The errors did not impact Total Revenues or Earnings (loss) from operations, before income taxes, or Net earnings (loss) and were not considered material to previously issued financial statements.acquisition costs line item increases that expense line item.
In 2015, the Company recorded several OOPAs in its financial statements, primarily related to errors in the models used to calculate the initial fee liability amortization, affiliated ceded reserves and deferred cost of reinsurance for certain of its VISL products. In addition, the Company recorded an OOPA in 2015 related to an error in the model used to calculate the deferred cost of reinsurance with an un-affiliated reinsurer related to the reinsurance of the Company’s business. These OOPAs resulted in a decrease of $112 in total revenues, a $51 million decrease in total benefits and other deductions, a $61 million decrease in earnings (loss) from operations, before income taxes and a $40 million decrease in net earnings.
In 2014, the Company recorded several OOPAs in its financial statements primarily related to updates in the models used to calculate the fair value of the GMIB reinsurance asset and the GMIB and GMDB liabilities. In addition, the Company recorded an OOPA related to an understatement of the dividend of AB Units by AXA Equitable to AXA Financial during the year ended December 31, 2013 and the related deferred tax liability for the excess of the fair value of the AB Unit dividend over the recorded value. The net impact of the corrections to AXA Equitable’s shareholders’ equity and Net earnings was a decrease of $1 million and an increase of $73 million, respectively.94
Management has evaluated the impact
|
| | | | | | | |
| | Years Ended December 31, |
| | 2017 | | 2016 |
| | (in millions) |
| Reductions to expense line items: | | | |
| Compensation and benefits | $ | 128 |
| | $ | 128 |
|
| Commissions and distribution plan payments | 443 |
| | 460 |
|
| Other operating costs and expenses | 7 |
| | 6 |
|
| Total reductions | $ | 578 |
| | $ | 594 |
|
| | | | |
| Increase to expense line item: | | | |
| Amortization of deferred policy acquisition costs | $ | 578 |
| | $ | 594 |
|
3) INVESTMENTS
Fixed Maturities and Equity Securities
The following table providestables provide information relating to fixed maturities classified as AFS. As a result of the adoption of “Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01) on January 1, 2018 (see Note 2), equity securities are no longer classified and accounted for as AFS:available-for-sale securities.
Available-for-Sale Securities by Classification
|
| | | | | | | | | | | | | | | | | | | |
| Available-for-Sale Securities by Classification |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI(3) |
| | | | | | (In Millions) | | | | |
| December 31, 2016 | | | | | | | | | |
| Fixed Maturity Securities: | | | | | | | | | |
| Public corporate | $ | 12,418 |
| | $ | 675 |
| | $ | 81 |
| | $ | 13,012 |
| | $ | — |
|
| Private corporate | 6,880 |
| | 215 |
| | 55 |
| | 7,040 |
| | — |
|
| U.S. Treasury, government and agency | 10,739 |
| | 221 |
| | 624 |
| | 10,336 |
| | — |
|
| States and political subdivisions | 432 |
| | 63 |
| | 2 |
| | 493 |
| | — |
|
| Foreign governments | 375 |
| | 29 |
| | 14 |
| | 390 |
| | — |
|
| Commercial mortgage-backed | 415 |
| | 28 |
| | 72 |
| | 371 |
| | 7 |
|
Residential mortgage-backed(1) | 294 |
| | 20 |
| | — |
| | 314 |
| | — |
|
Asset-backed(2) | 51 |
| | 10 |
| | 1 |
| | 60 |
| | 3 |
|
| Redeemable preferred stock | 519 |
| | 45 |
| | 10 |
| | 554 |
| | — |
|
| Total Fixed Maturities | 32,123 |
| | 1,306 |
| | 859 |
| | 32,570 |
| | 10 |
|
| Equity securities | 113 |
| | — |
| | — |
| | 113 |
| | — |
|
| Total at December 31, 2016 | $ | 32,236 |
| | $ | 1,306 |
| | $ | 859 |
| | $ | 32,683 |
| | $ | 10 |
|
| December 31, 2015: | | | | | | | | | |
| Fixed Maturity Securities: | | | | | | | | | |
| Public corporate | $ | 12,890 |
| | $ | 688 |
| | $ | 202 |
| | $ | 13,376 |
| | $ | — |
|
| Private corporate | 6,818 |
| | 232 |
| | 124 |
| | 6,926 |
| | — |
|
| U.S. Treasury, government and agency | 8,800 |
| | 280 |
| | 305 |
| | 8,775 |
| | — |
|
| States and political subdivisions | 437 |
| | 68 |
| | 1 |
| | 504 |
| | — |
|
| Foreign governments | 397 |
| | 36 |
| | 18 |
| | 415 |
| | — |
|
| Commercial mortgage-backed | 591 |
| | 29 |
| | 87 |
| | 533 |
| | 9 |
|
Residential mortgage-backed(1) | 608 |
| | 32 |
| | — |
| | 640 |
| | — |
|
Asset-backed(2) | 68 |
| | 10 |
| | 1 |
| | 77 |
| | 3 |
|
| Redeemable preferred stock | 592 |
| | 57 |
| | 2 |
| | 647 |
| | — |
|
| Total Fixed Maturities | 31,201 |
| | 1,432 |
| | 740 |
| | 31,893 |
| | 12 |
|
| Equity securities | 34 |
| | — |
| | 2 |
| | 32 |
| | — |
|
| Total at December 31, 2015 | $ | 31,235 |
| | $ | 1,432 |
| | $ | 742 |
| | $ | 31,925 |
| | $ | 12 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI (4) |
| | (in millions) |
| December 31, 2018: | | | | | | | | | |
| Fixed Maturities: | | | | | | | | | |
| Corporate (1) | $ | 26,690 |
| | $ | 385 |
| | $ | 699 |
| | $ | 26,376 |
| | $ | — |
|
| U.S. Treasury, government and agency | 13,646 |
| | 143 |
| | 454 |
| | 13,335 |
| | — |
|
| States and political subdivisions | 408 |
| | 47 |
| | 1 |
| | 454 |
| | — |
|
| Foreign governments | 515 |
| | 17 |
| | 13 |
| | 519 |
| | — |
|
| Residential mortgage-backed (2) | 193 |
| | 9 |
| | — |
| | 202 |
| | — |
|
| Asset-backed (3) | 600 |
| | 1 |
| | 11 |
| | 590 |
| | 2 |
|
| Redeemable preferred stock | 440 |
| | 16 |
| | 17 |
| | 439 |
| | — |
|
| Total at December 31, 2018 | $ | 42,492 |
| | $ | 618 |
| | $ | 1,195 |
| | $ | 41,915 |
| | $ | 2 |
|
| | | | | | | | | | |
| December 31, 2017: | | | | | | | | | |
| Fixed Maturities: | | | | | | | | | |
| Corporate (1) | $ | 20,596 |
| | $ | 942 |
| | $ | 56 |
| | $ | 21,482 |
| | $ | — |
|
| U.S. Treasury, government and agency | 12,644 |
| | 676 |
| | 185 |
| | 13,135 |
| | — |
|
| States and political subdivisions | 414 |
| | 67 |
| | — |
| | 481 |
| | — |
|
| Foreign governments | 387 |
| | 27 |
| | 5 |
| | 409 |
| | — |
|
| Residential mortgage-backed (2) | 236 |
| | 15 |
| | — |
| | 251 |
| | — |
|
| Asset-backed (3) | 93 |
| | 3 |
| | — |
| | 96 |
| | 2 |
|
| Redeemable preferred stock | 461 |
| | 44 |
| | 1 |
| | 504 |
| | — |
|
| Total Fixed Maturities | 34,831 |
| | 1,774 |
| | 247 |
| | 36,358 |
| | 2 |
|
| Equity securities | 157 |
| | — |
| | — |
| | 157 |
| | — |
|
| Total at December 31, 2017 | $ | 34,988 |
| | $ | 1,774 |
| | $ | 247 |
| | $ | 36,515 |
| | $ | 2 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
____________
| |
| (1) | Corporate fixed maturities include both public and private issues. |
| |
| (2) | Includes publicly traded agency pass-through securities and collateralized mortgage obligations. |
| |
(2)(3) | Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans. |
| |
(3)(4) | Amounts represent OTTI losses in AOCI, which were not included in earningsincome (loss) in accordance with current accounting guidance. |
The contractual maturities of AFS fixed maturities at December 31, 20162018 are shown in the table below. Bonds not due at a single maturity date have been included in the table in the final year of maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Contractual Maturities of Available-for-Sale Fixed Maturities
| | | Available-for-Sale Fixed Maturities | |
| Contractual Maturities at December 31, 2016 | |
| | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value |
| | (In Millions) | (in millions) |
| December 31, 2018: | | | | |
| Due in one year or less | $ | 1,537 |
| | $ | 1,549 |
| $ | 2,085 |
| | $ | 2,090 |
|
| Due in years two through five | 7,736 |
| | 8,128 |
| 8,087 |
| | 8,141 |
|
| Due in years six through ten | 8,898 |
| | 9,005 |
| 14,337 |
| | 14,214 |
|
| Due after ten years | 12,673 |
| | 12,589 |
| 16,750 |
| | 16,239 |
|
| Subtotal | 30,844 |
| | 31,271 |
| 41,259 |
| | 40,684 |
|
| Commercial mortgage-backed securities | 415 |
| | 371 |
| |
| Residential mortgage-backed securities | 294 |
| | 314 |
| 193 |
| | 202 |
|
| Asset-backed securities | 51 |
| | 60 |
| 600 |
| | 590 |
|
| Redeemable preferred stocks | 519 |
| | 554 |
| |
| Total | $ | 32,123 |
| | $ | 32,570 |
| |
| Redeemable preferred stock | | 440 |
| | 439 |
|
| Total at December 31, 2018 | | $ | 42,492 |
| | $ | 41,915 |
|
The following table shows proceeds from sales, gross gains (losses) from sales and OTTI for AFS fixed maturities during 2016, 2015for the years ended December 31, 2018, 2017 and 2014:2016:
| | | | December 31, | For the Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In Millions) | (in millions) |
| Proceeds from sales | $ | 4,324 |
| | $ | 979 |
| | $ | 716 |
| $ | 7,136 |
| | $ | 7,232 |
| | $ | 4,324 |
|
| Gross gains on sales | $ | 111 |
| | $ | 33 |
| | $ | 21 |
| $ | 145 |
| | $ | 98 |
| | $ | 111 |
|
| Gross losses on sales | $ | (58 | ) | | $ | (8 | ) | | $ | (9 | ) | $ | (103 | ) | | $ | (211 | ) | | $ | (58 | ) |
| | | | | | | |
| Total OTTI | $ | (65 | ) | | $ | (41 | ) | | $ | (72 | ) | $ | (37 | ) | | $ | (13 | ) | | $ | (65 | ) |
| Non-credit losses recognized in OCI | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
| Credit losses recognized in earnings (loss) | $ | (65 | ) | | $ | (41 | ) | | $ | (72 | ) | |
| Credit losses recognized in net income (loss) | | $ | (37 | ) | | $ | (13 | ) | | $ | (65 | ) |
The following table sets forth the amount of credit loss impairments on AFS fixed maturity securitiesmaturities held by the Company at the dates indicated and the corresponding changes in such amounts.amounts:
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fixed Maturities - Credit Loss Impairments
| | | | 2016 | | 2015 | 2018 | | 2017 |
| | (In Millions) | (in millions) |
| Balances at January 1, | $ | (198 | ) | | $ | (254 | ) | $ | (10 | ) | | $ | (190 | ) |
| Previously recognized impairments on securities that matured, paid, prepaid or sold | 73 |
| | 97 |
| 1 |
| | 193 |
|
Recognized impairments on securities impaired to fair value this period(1) | (17 | ) | | (11 | ) | — |
| | — |
|
| Impairments recognized this period on securities not previously impaired | (46 | ) | | (22 | ) | (37 | ) | | (13 | ) |
| Additional impairments this period on securities previously impaired | (2 | ) | | (8 | ) | — |
| | — |
|
| Increases due to passage of time on previously recorded credit losses | — |
| | — |
| — |
| | — |
|
| Accretion of previously recognized impairments due to increases in expected cash flows | — |
| | — |
| — |
| | — |
|
| Balances at December 31, | $ | (190 | ) | | $ | (198 | ) | $ | (46 | ) | | $ | (10 | ) |
____________
| |
| (1) | Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost. |
Net unrealized investment gains (losses) on fixed maturities and equity securities classified as AFS are included in the consolidated balance sheets as a component of AOCI. The table below presents these amounts as of the dates indicated:
| | | | December 31, | As of December 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| | (In Millions) | (in millions) |
| AFS Securities: | | | | | | |
| Fixed maturities: | | | | | | |
| With OTTI loss | $ | 19 |
| | $ | 16 |
| $ | — |
| | $ | 1 |
|
| All other | 428 |
| | 676 |
| (577 | ) | | 1,526 |
|
| Equity securities | — |
| | (2 | ) | |
| Net Unrealized Gains (Losses) | $ | 447 |
| | $ | 690 |
| $ | (577 | ) | | $ | 1,527 |
|
Changes in net unrealized investment gains (losses) recognized in AOCI include reclassification adjustments to reflect amounts realized in Net earningsincome (loss) for the current period that had been part of OCI in earlier periods. The tables that follow below present a rollforwardroll-forward of net unrealized investment gains (losses) recognized in AOCI, split between amounts related to fixed maturity securitiesmaturities on which an OTTI loss has been recognized and all other:
Net Unrealized Gains (Losses) on Fixed Maturities with OTTI Losses
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gain (Losses) on Investments | | DAC | | Policyholders Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| | (In Millions) |
| Balance, January 1, 2016 | $ | 16 |
| | $ | — |
| | $ | (4 | ) | | $ | (5 | ) | | $ | 7 |
|
Net investment gains (losses) arising during the period | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) |
| Reclassification adjustment for OTTI losses: | | | | | | | | | |
| Included in Net earnings (loss) | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
Excluded from Net earnings (loss)(1) | — |
| | — |
| | — |
| | — |
| | — |
|
| Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
| DAC | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Deferred income taxes | — |
| | — |
| | — |
| | 2 |
| | 2 |
|
| Policyholders liabilities | — |
| | — |
| | (6 | ) | | — |
| | (6 | ) |
| Balance, December 31, 2016 | $ | 19 |
| | $ | (1 | ) | | $ | (10 | ) | | $ | (3 | ) | | $ | 5 |
|
| Balance, January 1, 2015 | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | (4 | ) | | $ | 6 |
|
| Net investment gains (losses) arising during the period | (7 | ) | | — |
| | — |
| | — |
| | (7 | ) |
| Reclassification adjustment for OTTI losses: | | | | | | | | | |
| Included in Net earnings (loss) | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
Excluded from Net earnings (loss)(1) | — |
| | — |
| | — |
| | — |
| | — |
|
| Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
| DAC | — |
| | — |
| | — |
| | — |
| | — |
|
| Deferred income taxes | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Policyholders liabilities | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| Balance, December 31, 2015 | $ | 16 |
| | $ | — |
| | $ | (4 | ) | | $ | (5 | ) | | $ | 7 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| | (in millions) |
| Balance, January 1, 2018 | $ | 1 |
| | $ | 1 |
| | $ | (1 | ) | | $ | (5 | ) | | $ | (4 | ) |
Net investment gains (losses) arising during the period | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Reclassification adjustment: | | | | | | | | | |
| Included in Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
|
| Excluded from Net income (loss) (1) | — |
| | — |
| | — |
| | — |
| | — |
|
| Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
| DAC | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Deferred income taxes | — |
| | — |
| | — |
| | 5 |
| | 5 |
|
| Policyholders’ liabilities | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Balance, December 31, 2018 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
| | | | | | | | | | |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| | (in millions) |
| Balance, January 1, 2017 | $ | 19 |
| | $ | (1 | ) | | $ | (10 | ) | | $ | (3 | ) | | $ | 5 |
|
| Net investment gains (losses) arising during the period | (18 | ) | | — |
| | — |
| | — |
| | (18 | ) |
| Reclassification adjustment: | | | | | | | | | |
| Included in Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
|
| Excluded from Net income (loss) (1) | — |
| | — |
| | — |
| | — |
| | — |
|
| Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
| DAC | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Deferred income taxes | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
| Policyholders’ liabilities | — |
| | — |
| | 9 |
| | — |
| | 9 |
|
| Balance, December 31, 2017 | $ | 1 |
| | $ | 1 |
| | $ | (1 | ) | | $ | (5 | ) | | $ | (4 | ) |
| |
| (1) | Represents “transfers in” related to the portion of OTTI losses recognized during the period that were not recognized in earningsincome (loss) for securities with no prior OTTI loss. |
All Other Net Unrealized Investment Gains (Losses) in AOCI
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| | (In Millions) |
| Balance, January 1, 2016 | $ | 674 |
| | $ | (82 | ) | | $ | (213 | ) | | $ | (133 | ) | | $ | 246 |
|
| Net investment gains (losses) arising during the period | (240 | ) | | — |
| | — |
| | — |
| | (240 | ) |
| Reclassification adjustment for OTTI losses: | | | | | | | | | |
| Included in Net earnings (loss) | (6 | ) | | — |
| | — |
| | — |
| | (6 | ) |
Excluded from Net earnings (loss)(1) | — |
| | — |
| | — |
| | — |
| | — |
|
| Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
| DAC | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) |
| Deferred income taxes | — |
| | — |
| | — |
| | 80 |
| | 80 |
|
| Policyholders liabilities | — |
| | — |
| | 24 |
| | — |
| | 24 |
|
| Balance, December 31, 2016 | $ | 428 |
| | $ | (87 | ) | | $ | (189 | ) | | $ | (53 | ) | | $ | 99 |
|
| Balance, January 1, 2015 | $ | 2,231 |
| | $ | (122 | ) | | $ | (368 | ) | | $ | (610 | ) | | $ | 1,131 |
|
| Net investment gains (losses) arising during the period | (1,562 | ) | | — |
| | — |
| | — |
| | (1,562 | ) |
| Reclassification adjustment for OTTI losses: | | | | | | | | | |
| Included in Net earnings (loss) | 5 |
| | — |
| | — |
| | — |
| | 5 |
|
Excluded from Net earnings (loss)(1) | — |
| | — |
| | — |
| | — |
| | — |
|
| Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
| DAC | — |
| | 40 |
| | — |
| | — |
| | 40 |
|
| Deferred income taxes | — |
| | — |
| | — |
| | 477 |
| | 477 |
|
| Policyholders liabilities | — |
| | — |
| | 155 |
| | — |
| | 155 |
|
| Balance, December 31, 2015 | $ | 674 |
| | $ | (82 | ) | | $ | (213 | ) | | $ | (133 | ) | | $ | 246 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| | (in millions) |
| Balance, January 1, 2018 | $ | 1,526 |
| | $ | (315 | ) | | $ | (232 | ) | | $ | (300 | ) | | $ | 679 |
|
| Net investment gains (losses) arising during the period | (2,098 | ) | | — |
| | — |
| | — |
| | (2,098 | ) |
| Reclassification adjustment: | | | | | | | | | |
| Included in Net income (loss) | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
| Excluded from Net income (loss) (1) | — |
| | — |
| | — |
| | — |
| | — |
|
| Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
| DAC | — |
| | 354 |
| | — |
| | — |
| | 354 |
|
| Deferred income taxes (2) | — |
| | — |
| | — |
| | 425 |
| | 425 |
|
| Policyholders’ liabilities | — |
| | — |
| | 177 |
| | — |
| | 177 |
|
| Balance, December 31, 2018 | $ | (577 | ) | | $ | 39 |
| | $ | (55 | ) | | $ | 125 |
| | $ | (468 | ) |
| | | | | | | | | | |
| Balance, January 1, 2017 | $ | 428 |
| | $ | (104 | ) | | $ | (188 | ) | | $ | (47 | ) | | $ | 89 |
|
| Net investment gains (losses) arising during the period | 1,085 |
| | — |
| | — |
| | — |
| | 1,085 |
|
| Reclassification adjustment: | | | | | | | | | |
| Included in Net income (loss) | 13 |
| | — |
| | — |
| | — |
| | 13 |
|
| Excluded from Net income (loss) (1) | — |
| | — |
| | — |
| | — |
| | — |
|
| Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
| DAC | — |
| | (211 | ) | | — |
| | — |
| | (211 | ) |
| Deferred income taxes | — |
| | — |
| | — |
| | (253 | ) | | (253 | ) |
| Policyholders’ liabilities | — |
| | — |
| | (44 | ) | | — |
| | (44 | ) |
| Balance, December 31, 2017 | $ | 1,526 |
| | $ | (315 | ) | | $ | (232 | ) | | $ | (300 | ) | | $ | 679 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
____________
| |
| (1) | Represents “transfers out” related to the portion of OTTI losses during the period that were not recognized in earningsincome (loss) for securities with no prior OTTI loss. |
| |
| (2) | Includes a $86 million income tax benefit from the impact of adoption of ASU 2018-02. |
The following tables disclose the fair values and gross unrealized losses of the 7941,471 issues at December 31, 20162018 and the 810620 issues at December 31, 20152017 of fixed maturities that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position for the specified periods at the dates indicated:
| | | | Less Than 12 Months | | 12 Months or Longer | | Total | Less Than 12 Months | | 12 Months or Longer | | Total |
| | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | | Fair Value | | Gross
Unrealized
Losses | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| | (In Millions) | (in millions) |
| December 31, 2016: | | | | | | | | | | | | |
| Fixed Maturity Securities: | | | | | | | | | | | | |
| Public corporate | $ | 2,455 |
| | $ | 75 |
| | $ | 113 |
| | $ | 6 |
| | $ | 2,568 |
| | $ | 81 |
| |
| Private corporate | 1,483 |
| | 38 |
| | 277 |
| | 17 |
| | 1,760 |
| | 55 |
| |
| December 31, 2018: | | | | | | | | | | | | |
| Fixed Maturities: | | | | | | | | | | | | |
| Corporate | | $ | 8,369 |
| | $ | 306 |
| | $ | 6,161 |
| | $ | 393 |
| | $ | 14,530 |
| | $ | 699 |
|
| U.S. Treasury, government and agency | 5,356 |
| | 624 |
| | — |
| | — |
| | 5,356 |
| | 624 |
| 2,636 |
| | 68 |
| | 3,154 |
| | 386 |
| | 5,790 |
| | 454 |
|
| States and political subdivisions | — |
| | — |
| | 18 |
| | 2 |
| | 18 |
| | 2 |
| — |
| | — |
| | 19 |
| | 1 |
| | 19 |
| | 1 |
|
| Foreign governments | 73 |
| | 3 |
| | 49 |
| | 11 |
| | 122 |
| | 14 |
| 109 |
| | 3 |
| | 76 |
| | 10 |
| | 185 |
| | 13 |
|
| Commercial mortgage-backed | 66 |
| | 5 |
| | 171 |
| | 67 |
| | 237 |
| | 72 |
| |
| Residential mortgage-backed | 47 |
| | — |
| | 4 |
| | — |
| | 51 |
| | — |
| — |
| | — |
| | 13 |
| | — |
| | 13 |
| | — |
|
| Asset-backed | 4 |
| | — |
| | 8 |
| | 1 |
| | 12 |
| | 1 |
| 558 |
| | 11 |
| | 6 |
| | — |
| | 564 |
| | 11 |
|
| Redeemable preferred stock | 218 |
| | 9 |
| | 12 |
| | 1 |
| | 230 |
| | 10 |
| 160 |
| | 12 |
| | 31 |
| | 5 |
| | 191 |
| | 17 |
|
| Total | $ | 9,702 |
| | $ | 754 |
| | $ | 652 |
| | $ | 105 |
| | $ | 10,354 |
| | $ | 859 |
| $ | 11,832 |
| | $ | 400 |
| | $ | 9,460 |
| | $ | 795 |
| | $ | 21,292 |
| | $ | 1,195 |
|
| December 31, 2015: | | | | | | | | | | | | |
| Fixed Maturity Securities: | | | | | | | | | | | | |
| Public corporate | $ | 3,091 |
| | $ | 129 |
| | $ | 359 |
| | $ | 73 |
| | $ | 3,450 |
| | $ | 202 |
| |
| Private corporate | 1,926 |
| | 102 |
| | 184 |
| | 22 |
| | 2,110 |
| | 124 |
| |
| | | | | | | | | | | | | |
| December 31, 2017: | | | | | | | | | | | | |
| Fixed Maturities: | | | | | | | | | | | | |
| Corporate | | $ | 2,102 |
| | $ | 17 |
| | $ | 1,163 |
| | $ | 39 |
| | $ | 3,265 |
| | $ | 56 |
|
| U.S. Treasury, government and agency | 3,538 |
| | 305 |
| | — |
| | — |
| | 3,538 |
| | 305 |
| 2,150 |
| | 6 |
| | 3,005 |
| | 179 |
| | 5,155 |
| | 185 |
|
| States and political subdivisions | 19 |
| | 1 |
| | — |
| | — |
| | 19 |
| | 1 |
| 20 |
| | — |
| | — |
| | — |
| | 20 |
| | — |
|
| Foreign governments | 73 |
| | 7 |
| | 39 |
| | 11 |
| | 112 |
| | 18 |
| 11 |
| | — |
| | 73 |
| | 5 |
| | 84 |
| | 5 |
|
| Commercial mortgage-backed | 67 |
| | 2 |
| | 261 |
| | 85 |
| | 328 |
| | 87 |
| |
| Residential mortgage-backed | 11 |
| | — |
| | 29 |
| | — |
| | 40 |
| | — |
| 18 |
| | — |
| | — |
| | — |
| | 18 |
| | — |
|
| Asset-backed | 11 |
| | — |
| | 17 |
| | 1 |
| | 28 |
| | 1 |
| 7 |
| | — |
| | 2 |
| | — |
| | 9 |
| | — |
|
| Redeemable preferred stock | 43 |
| | — |
| | 40 |
| | 2 |
| | 83 |
| | 2 |
| 7 |
| | — |
| | 12 |
| | 1 |
| | 19 |
| | 1 |
|
| Total | $ | 8,779 |
| | $ | 546 |
| | $ | 929 |
| | $ | 194 |
| | $ | 9,708 |
| | $ | 740 |
| $ | 4,315 |
| | $ | 23 |
| | $ | 4,255 |
| | $ | 224 |
| | $ | 8,570 |
| | $ | 247 |
|
The Company’s investments in fixed maturity securitiesmaturities do not include concentrations of credit risk of any single issuer greater than 10% of the consolidated equity of AXA Equitable,the Company, other than securities of the U.S. government, U.S. government agencies, and certain securities guaranteed by the U.S. government. The Company maintains a diversified portfolio of corporate securities across industries and issuers and does not have exposure to any single issuer in excess of 0.3%0.8% of total investments. The largest exposures to a single issuer of corporate securities held at December 31, 20162018 and 20152017 were $169$210 million and $157$182 million, respectively.
Corporate high yield securities, consisting primarily of public high yield bonds, are classified as other than investment grade by the various rating agencies, i.e., a rating below Baa3/BBB- or the National Association of Insurance Commissioners (“NAIC”) designation of 3 (medium investment grade), 4 or 5 (below investment grade) or 6 (in or near default). At December 31, 20162018 and 2015,2017, respectively, approximately $1,574$1,228 million and $1,310$1,309 million, or 4.9%2.9% and 4.2%3.8%, of the $32,123$42,492 million and $31,201$34,831 million aggregate amortized cost of fixed maturities held by the Company were considered to be other than investment grade. These securities had net unrealized losses(losses) and gains of $28$(30) million and $97$5 million at December 31, 20162018 and 2015,2017, respectively.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 20162018 and 2015,2017, respectively, the $105$795 million and $194$224 million of gross unrealized losses of twelve months or more were concentrated in corporate and commercial mortgage-backedU.S. Treasury, government and agency securities. In accordance with the policy described in Note 2, the Company concluded that an adjustment to earningsincome for OTTI for these securities was not warranted at either December 31, 20162018 or 2015. As of2017. At December 31, 2016,2018, the Company did not intend to sell the securities nor will it likely be required to dispose of the securities before the anticipated recovery of their remaining amortized cost basis.
The Company does not originate, purchase or warehouse residential mortgages and is not in the mortgage servicing business. The Company’s fixed maturity investment portfolio includes residential mortgage backed securities (“RMBS”) backed by subprime and Alt-A residential mortgages, comprised of loans made by banks or mortgage lenders to residential borrowers with lower credit ratings. The criteria used to categorize such subprime borrowers include Fair Isaac Credit Organization (“FICO”) scores, interest rates charged, debt-to-income ratios and loan-to-value ratios. Alt-A residential mortgages are mortgage loans where the risk profile falls between prime and subprime; borrowers typically have clean credit histories but the mortgage loan has an increased risk profile due to higher loan-to-value and debt-to-income ratios and/or inadequate documentation of the borrowers’ income. At December 31, 2016 and 2015, respectively, the Company owned $6 million and $7 million in RMBS backed by subprime residential mortgage loans, and $5 million and $6 million in RMBS backed by Alt-A residential mortgage loans. RMBS backed by subprime and Alt-A residential mortgages are fixed income investments supporting General Account liabilities.
At December 31, 2016,2018, the carrying value of fixed maturities that were non-income producing for the twelve months preceding that date was $5$1 million.
At December 31, 20162018 and 2015,2017, respectively, the amortized costfair value of the Company’s trading account securities was $9,177$15,166 million and $6,866 million with respective fair values of $9,134 million and $6,805$12,277 million. Also at December 31, 20162018 and 2015,2017, respectively, Tradingtrading account securities included the General Account’s investment in Separate Accounts, which had carrying values of $63$48 million and $82 million and costs of $46 million and $72$49 million.
Mortgage Loans
The payment terms of mortgage loans may from time to time be restructured or modified.
Troubled Debt Restructurings
The investment in troubled debt restructuredAt December 31, 2018 and 2017, the carrying values of problem commercial mortgage loans based on amortized cost, amounted to $15real estate that had been classified as non-accrual loans were $19 million and $16$19 million, at December 31, 2016 and 2015, respectively. Gross interest income on these loans included in net investment income (loss) totaled $0 million, $1 million and $1 million in 2016, 2015 and 2014, respectively. Gross interest income on restructured mortgage loans that would have been recorded in accordance with the original terms of such loans amounted to $0 million, $0 million and $4 million in 2016, 2015 and 2014, respectively. The TDR mortgage loan shown in the table below has been modified five times since 2011. The modifications extended the maturity from its original maturity of November 5, 2014 to March 5, 2017 and extended interest only payments through maturity. In November 2015, the recorded investment was reduced by $45 million in conjunction with the sale of majority of the underlying collateral and $32 million from a charge-off. The remaining $15 million mortgage loan balance reflects the value of the remaining underlying collateral and cash held in escrow, supporting the mortgage loan. Since the fair market value of the underlying real estate and cash held in escrow collateral is the primary factor in determining the allowance for credit losses, modifications of loan terms typically have no direct impact on the allowance for credit losses, and therefore, no impact on the financial statements.
Troubled Debt Restructuring - Modifications
|
| | | | | | | | | | |
| | Number | | Outstanding Recorded Investment |
| | of Loans | | Pre-Modification | | Post - Modification |
| | | | (Dollars In Millions) |
| Commercial mortgage loans | 1 |
| | $ | 15 |
| | $ | 15 |
|
There were no default payments on the above loan during 2016. There were no agricultural troubled debt restructuring mortgage loans in 2016.
Valuation Allowances for Mortgage Loans:
AllowanceThechange in the valuation allowance for credit losses for commercial mortgage loans forduring the years ended December 31, 2018, 2017 and 2016 2015 and 2014 arewas as follows:
| | | | | | | | | Commercial Mortgage Loans |
| | Commercial Mortgage Loans | 2018 | | 2017 | | 2016 |
| | 2016 | | 2015 | | 2014 | (in millions) |
| Allowance for credit losses: | (In Millions) | | | | | |
| Beginning Balance, January 1, | $ | 6 |
| | $ | 37 |
| | $ | 42 |
| $ | 8 |
| | $ | 8 |
| | $ | 6 |
|
| Charge-offs | — |
| | (32 | ) | | (14 | ) | — |
| | — |
| | — |
|
| Recoveries | (2 | ) | | (1 | ) | | — |
| (1 | ) | | — |
| | (2 | ) |
| Provision | 4 |
| | 2 |
| | 9 |
| — |
| | — |
| | 4 |
|
| Ending Balance, December 31, | $ | 8 |
| | $ | 6 |
| | $ | 37 |
| $ | 7 |
| | $ | 8 |
| | $ | 8 |
|
| Ending Balance, December 31,: | | | | | | |
| | | | | | | |
| Ending Balance, December 31, | | | | | | |
| Individually Evaluated for Impairment | $ | 8 |
| | $ | 6 |
| | $ | 37 |
| $ | 7 |
| | $ | 8 |
| | $ | 8 |
|
There were no allowances for credit losses for agricultural mortgage loans in 2016, 20152018, 2017 and 2014.
2016.
The following tables provide information relating to the loan-to-value and debt service coverage ratios for commercial and agricultural mortgage loans at December 31, 20162018 and 2015, respectively.2017. The values used in these ratio calculations were developed as part of the periodic review of the commercial and agricultural mortgage loan portfolio, which includes an evaluation of the underlying collateral value.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios
| | | | Debt Service Coverage Ratio | | | Debt Service Coverage Ratio (1) | | |
Loan-to-Value Ratio:(2) | Greater than 2.0x | | 1.8x to 2.0x | | 1.5x to 1.8x | | 1.2x to 1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total Mortgage Loans | Greater than 2.0x | | 1.8x to 2.0x | | 1.5x to 1.8x | | 1.2x to 1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total Mortgage Loans |
| | (In Millions) | (in millions) |
| December 31, 2018: | | | | | | | | | | | | | | |
Commercial Mortgage Loans(1) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 0% - 50% | $ | 738 |
| | $ | 95 |
| | $ | 59 |
| | $ | 56 |
| | $ | — |
| | $ | — |
| | $ | 948 |
| $ | 780 |
| | $ | 21 |
| | $ | 247 |
| | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 1,072 |
|
| 50% - 70% | 3,217 |
| | 430 |
| | 673 |
| | 1,100 |
| | 76 |
| | — |
| | 5,496 |
| 4,908 |
| | 656 |
| | 1,146 |
| | 325 |
| | 151 |
| | — |
| | 7,186 |
|
| 70% - 90% | 282 |
| | 65 |
| | 229 |
| | 127 |
| | 28 |
| | 46 |
| | 777 |
| 260 |
| | — |
| | 117 |
| | 370 |
| | 98 |
| | — |
| | 845 |
|
| 90% plus | — |
| | — |
| | 28 |
| | 15 |
| | — |
| | — |
| | 43 |
| — |
| | — |
| | — |
| | 27 |
| | — |
| | — |
| | 27 |
|
| Total Commercial Mortgage Loans | $ | 4,237 |
| | $ | 590 |
| | $ | 989 |
| | $ | 1,298 |
| | $ | 104 |
| | $ | 46 |
| | $ | 7,264 |
| $ | 5,948 |
| | $ | 677 |
| | $ | 1,510 |
| | $ | 746 |
| | $ | 249 |
| | $ | — |
| | $ | 9,130 |
|
Agricultural Mortgage Loans(1) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 0% - 50% | $ | 254 |
| | $ | 138 |
| | $ | 296 |
| | $ | 468 |
| | $ | 286 |
| | $ | 49 |
| | $ | 1,491 |
| $ | 282 |
| | $ | 147 |
| | $ | 267 |
| | $ | 543 |
| | $ | 321 |
| | $ | 51 |
| | $ | 1,611 |
|
| 50% - 70% | 141 |
| | 57 |
| | 209 |
| | 333 |
| | 219 |
| | 45 |
| | 1,004 |
| 112 |
| | 46 |
| | 246 |
| | 379 |
| | 224 |
| | 31 |
| | 1,038 |
|
| 70% - 90% | — |
| | — |
| | 2 |
| | 4 |
| | — |
| | — |
| | 6 |
| — |
| | — |
| | — |
| | 19 |
| | 27 |
| | — |
| | 46 |
|
| 90% plus | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Agricultural Mortgage Loans | $ | 395 |
| | $ | 195 |
| | $ | 507 |
| | $ | 805 |
| | $ | 505 |
| | $ | 94 |
| | $ | 2,501 |
| $ | 394 |
| | $ | 193 |
| | $ | 513 |
| | $ | 941 |
| | $ | 572 |
| | $ | 82 |
| | $ | 2,695 |
|
Total Mortgage Loans(1) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 0% - 50% | $ | 992 |
| | $ | 233 |
| | $ | 355 |
| | $ | 524 |
| | $ | 286 |
| | $ | 49 |
| | $ | 2,439 |
| $ | 1,062 |
| | $ | 168 |
| | $ | 514 |
| | $ | 567 |
| | $ | 321 |
| | $ | 51 |
| | $ | 2,683 |
|
| 50% - 70% | 3,358 |
| | 487 |
| | 882 |
| | 1,433 |
| | 295 |
| | 45 |
| | 6,500 |
| 5,020 |
| | 702 |
| | 1,392 |
| | 704 |
| | 375 |
| | 31 |
| | 8,224 |
|
| 70% - 90% | 282 |
| | 65 |
| | 231 |
| | 131 |
| | 28 |
| | 46 |
| | 783 |
| 260 |
| | — |
| | 117 |
| | 389 |
| | 125 |
| | — |
| | 891 |
|
| 90% plus | — |
| | — |
| | 28 |
| | 15 |
| | — |
| | — |
| | 43 |
| — |
| | — |
| | — |
| | 27 |
| | — |
| | — |
| | 27 |
|
| Total Mortgage Loans | $ | 4,632 |
| | $ | 785 |
| | $ | 1,496 |
| | $ | 2,103 |
| | $ | 609 |
| | $ | 140 |
| | $ | 9,765 |
| $ | 6,342 |
| | $ | 870 |
| | $ | 2,023 |
| | $ | 1,687 |
| | $ | 821 |
| | $ | 82 |
| | $ | 11,825 |
|
| | | | | | | | | | | | | | | |
| December 31, 2017: | | | | | | | | | | | | | | |
| Commercial Mortgage Loans (1) | | | | | | | | | | | | | | |
| 0% - 50% | | $ | 742 |
| | $ | — |
| | $ | 320 |
| | $ | 74 |
| | $ | — |
| | $ | — |
| | $ | 1,136 |
|
| 50% - 70% | | 4,088 |
| | 682 |
| | 1,066 |
| | 428 |
| | 145 |
| | — |
| | 6,409 |
|
| 70% - 90% | | 169 |
| | 110 |
| | 196 |
| | 272 |
| | 50 |
| | — |
| | 797 |
|
| 90% plus | | — |
| | — |
| | 27 |
| | — |
| | — |
| | — |
| | 27 |
|
| Total Commercial Mortgage Loans | | $ | 4,999 |
| | $ | 792 |
| | $ | 1,609 |
| | $ | 774 |
| | $ | 195 |
| | $ | — |
| | $ | 8,369 |
|
| Agricultural Mortgage Loans (1) | | | | | | | | | | | | | | |
| 0% - 50% | | $ | 272 |
| | $ | 149 |
| | $ | 275 |
| | $ | 515 |
| | $ | 316 |
| | $ | 30 |
| | $ | 1,557 |
|
| 50% - 70% | | 111 |
| | 46 |
| | 227 |
| | 359 |
| | 221 |
| | 49 |
| | 1,013 |
|
| 70% - 90% | | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
| 90% plus | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Agricultural Mortgage Loans | | $ | 383 |
| | $ | 195 |
| | $ | 502 |
| | $ | 878 |
| | $ | 537 |
| | $ | 79 |
| | $ | 2,574 |
|
| Total Mortgage Loans (1) | | | | | | | | | | | | | | |
| 0% - 50% | | $ | 1,014 |
| | $ | 149 |
| | $ | 595 |
| | $ | 589 |
| | $ | 316 |
| | $ | 30 |
| | $ | 2,693 |
|
| 50% - 70% | | 4,199 |
| | 728 |
| | 1,293 |
| | 787 |
| | 366 |
| | 49 |
| | 7,422 |
|
| 70% - 90% | | 169 |
| | 110 |
| | 196 |
| | 276 |
| | 50 |
| | — |
| | 801 |
|
| 90% plus | | — |
| | — |
| | 27 |
| | — |
| | — |
| | — |
| | 27 |
|
| Total Mortgage Loans | | $ | 5,382 |
| | $ | 987 |
| | $ | 2,111 |
| | $ | 1,652 |
| | $ | 732 |
| | $ | 79 |
| | $ | 10,943 |
|
__________
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| |
| (1) | The debt service coverage ratio is calculated using the most recently reported net operating income results from property operations divided by annual debt service. |
| |
(2) | The loan-to-value ratio is derived from current loan balance divided by the fair market value of the property. The fair market value of the underlying commercial properties is updated annually. |
Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Debt Service Coverage Ratio | | |
Loan-to-Value Ratio:(2) | Greater than 2.0x | | 1.8x to 2.0x | | 1.5x to 1.8x | | 1.2x to 1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total Mortgage Loans |
| | (In Millions) |
Commercial Mortgage Loans(1) | | | | | | | | | | | | | |
| 0% - 50% | $ | 533 |
| | $ | — |
| | $ | 102 |
| | $ | 12 |
| | $ | 24 |
| | $ | — |
| | $ | 671 |
|
| 50% - 70% | 1,392 |
| | 353 |
| | 741 |
| | 853 |
| | 77 |
| | — |
| | 3,416 |
|
| 70% - 90% | 141 |
| | — |
| | 206 |
| | 134 |
| | 124 |
| | 46 |
| | 651 |
|
| 90% plus | 63 |
| | — |
| | — |
| | 46 |
| | — |
| | — |
| | 109 |
|
| Total Commercial Mortgage Loans | $ | 2,129 |
| | $ | 353 |
| | $ | 1,049 |
| | $ | 1,045 |
| | $ | 225 |
| | $ | 46 |
| | $ | 4,847 |
|
Agricultural Mortgage Loans(1) | | | | | | | | | | | | | |
| 0% - 50% | $ | 204 |
| | $ | 116 |
| | $ | 277 |
| | $ | 432 |
| | $ | 256 |
| | $ | 51 |
| | $ | 1,336 |
|
| 50% - 70% | 146 |
| | 80 |
| | 192 |
| | 298 |
| | 225 |
| | 47 |
| | 988 |
|
| 70% - 90% | — |
| | — |
| | 2 |
| | 4 |
| | — |
| | — |
| | 6 |
|
| 90% plus | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Agricultural Mortgage Loans | $ | 350 |
| | $ | 196 |
| | $ | 471 |
| | $ | 734 |
| | $ | 481 |
| | $ | 98 |
| | $ | 2,330 |
|
Total Mortgage Loans(1) | | | | | | | | | | | | | |
| 0% - 50% | $ | 737 |
| | $ | 116 |
| | $ | 379 |
| | $ | 444 |
| | $ | 280 |
| | $ | 51 |
| | $ | 2,007 |
|
| 50% - 70% | 1,538 |
| | 433 |
| | 933 |
| | 1,151 |
| | 302 |
| | 47 |
| | 4,404 |
|
| 70% - 90% | 141 |
| | — |
| | 208 |
| | 138 |
| | 124 |
| | 46 |
| | 657 |
|
| 90% plus | 63 |
| | — |
| | — |
| | 46 |
| | — |
| | — |
| | 109 |
|
| Total Mortgage Loans | $ | 2,479 |
| | $ | 549 |
| | $ | 1,520 |
| | $ | 1,779 |
| | $ | 706 |
| | $ | 144 |
| | $ | 7,177 |
|
| |
(1) | The debt service coverage ratio is calculated using the most recently reported net operating income results from property operations divided by annual debt service. |
| |
| (2) | The loan-to-value ratio is derived from current loan balance divided by the fair market value of the property. The fair market value of the underlying commercial properties is updated annually. |
The following table provides information relating to the aging analysis of past due mortgage loans at December 31, 20162018 and 2015, respectively.2017, respectively:
Age Analysis of Past Due Mortgage LoanLoans
| | | | 30-59 Days | | 60-89 Days | | 90 Days Or > | | Total | | Current | | Total Financing Receivables | | Recorded Investment Or > 90 Days and Accruing | 30-59 Days | | 60-89 Days | | 90 Days or More | | Total | | Current | | Total Financing Receivables | | Recorded Investment 90 Days or More and Accruing |
| | (In Millions) | (in millions) |
| December 31, 2016: | | | | | | | | | | | | | | |
| December 31, 2018: | | | | | | | | | | | | | | |
| Commercial | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 7,264 |
| | $ | 7,264 |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | 27 |
| | $ | 27 |
| | $ | 9,103 |
| | $ | 9,130 |
| | $ | — |
|
| Agricultural | 9 |
| | 2 |
| | 6 |
| | 17 |
| | 2,484 |
| | 2,501 |
| | 6 |
| 18 |
| | 8 |
| | 42 |
| | 68 |
| | 2,627 |
| | 2,695 |
| | 40 |
|
| Total Mortgage Loans | $ | 9 |
| | $ | 2 |
| | $ | 6 |
| | $ | 17 |
| | $ | 9,748 |
| | $ | 9,765 |
| | $ | 6 |
| $ | 18 |
| | $ | 8 |
| | $ | 69 |
| | $ | 95 |
| | $ | 11,730 |
| | $ | 11,825 |
| | $ | 40 |
|
| December 31, 2015: | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| December 31, 2017: | | | | | | | | | | | | | | |
| Commercial | $ | — |
| | $ | — |
| | $ | 30 |
| | $ | 30 |
| | $ | 4,817 |
| | $ | 4,847 |
| | $ | — |
| $ | 27 |
| | $ | — |
| | $ | — |
| | $ | 27 |
| | $ | 8,342 |
| | $ | 8,369 |
| | $ | — |
|
| Agricultural | 12 |
| | 7 |
| | 4 |
| | 23 |
| | 2,307 |
| | 2,330 |
| | 4 |
| 49 |
| | 3 |
| | 22 |
| | 74 |
| | 2,500 |
| | 2,574 |
| | 22 |
|
| Total Mortgage Loans | $ | 12 |
| | $ | 7 |
| | $ | 34 |
| | $ | 53 |
| | $ | 7,124 |
| | $ | 7,177 |
| | $ | 4 |
| $ | 76 |
| | $ | 3 |
| | $ | 22 |
| | $ | 101 |
| | $ | 10,842 |
| | $ | 10,943 |
| | $ | 22 |
|
The following table provides information relating to impaired mortgage loans at December 31, 20162018 and 2015, respectively.2017, respectively:
Impaired Mortgage Loans
|
| | | | | | | | | | | | | | | | | | | |
| | | | Impaired Mortgage Loans | | |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment(1) | | Interest Income Recognized |
| | (In Millions) |
| December 31, 2016: | | | | | | | | | |
| With no related allowance recorded: | | | | | | | | | |
| Commercial mortgage loans - other | $ | 15 |
| | $ | 15 |
| | $ | — |
| | $ | 22 |
| | $ | — |
|
| Agricultural mortgage loans | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 15 |
| | $ | 15 |
| | $ | — |
| | $ | 22 |
| | $ | — |
|
| With related allowance recorded: | | | | | | | | | |
| Commercial mortgage loans - other | $ | 27 |
| | $ | 27 |
| | $ | (8 | ) | | $ | 48 |
| | $ | 2 |
|
| Agricultural mortgage loans | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 27 |
| | $ | 27 |
| | $ | (8 | ) | | $ | 48 |
| | $ | 2 |
|
| December 31, 2015: | | | | | | | | | |
| With no related allowance recorded: | | | | | | | | | |
| Commercial mortgage loans - other | $ | 46 |
| | $ | 46 |
| | $ | — |
| | $ | 15 |
| | $ | — |
|
| Agricultural mortgage loans | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 46 |
| | $ | 46 |
| | $ | — |
| | $ | 15 |
| | $ | — |
|
| With related allowance recorded: | | | | | | | | | |
| Commercial mortgage loans - other | $ | 63 |
| | $ | 63 |
| | $ | (6 | ) | | $ | 137 |
| | $ | 4 |
|
| Agricultural mortgage loans | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 63 |
| | $ | 63 |
| | $ | (6 | ) | | $ | 137 |
| | $ | 4 |
|
| |
(1) | Represents a five-quarter average of recorded amortized cost. |
Equity Method Investments |
| | | | | | | | | | | | | | | | | | | |
| | Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment (1) | | Interest Income Recognized |
| | (in millions) |
| December 31, 2018: | | | | | | | | | |
| With no related allowance recorded: | | | | | | | | | |
| Commercial mortgage loans - other | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Agricultural mortgage loans | 2 |
| | 2 |
| | — |
| | — |
| | — |
|
| Total | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| With related allowance recorded: | | | | | | | | | |
| Commercial mortgage loans - other | $ | 27 |
| | $ | 31 |
| | $ | (7 | ) | | $ | 27 |
| | $ | — |
|
| Agricultural mortgage loans | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 27 |
| | $ | 31 |
| | $ | (7 | ) | | $ | 27 |
| | $ | — |
|
| | | | | | | | | | |
| December 31, 2017: | | | | | | | | | |
| With no related allowance recorded: | | | | | | | | | |
| Commercial mortgage loans - other | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Agricultural mortgage loans | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| With related allowance recorded: | | | | | | | | | |
| Commercial mortgage loans - other | $ | 27 |
| | $ | 31 |
| | $ | (8 | ) | | $ | 27 |
| | $ | 2 |
|
| Agricultural mortgage loans | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | $ | 27 |
| | $ | 31 |
| | $ | (8 | ) | | $ | 27 |
| | $ | 2 |
|
Included in other equity investments are limited partnership interests, real estate joint ventures and investment companies accounted for under the equity method with
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
____________
(1)Represents a total carrying valuefive-quarter average of $1,295 million and $1,363 million, respectively, at December 31, 2016 and 2015. The Company’s total equity in net earnings (losses) for these limited partnership interests was $60 million, $71 million and $206 million, respectively, for 2016, 2015 and 2014.recorded amortized cost.
Derivatives and Offsetting Assets and Liabilities
The Company uses derivatives as part of its overall asset/liability risk management primarily to reduce exposures to equity market and interest rate risks. Derivative hedging strategies are designed to reduce these risks from an economic perspective and are all executed within the framework of a Derivative“Derivative Use PlanPlan” approved by applicable states’ insurance law. Derivatives are generally not accounted for using hedge accounting, with the NYDFS.exception of Treasury Inflation-Protected Securities (“TIPS”), which is discussed further below. Operation of these hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates, election rates, fund performance, market volatility and interest rates. A wide range of derivative contracts are used in these hedging programs, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, bond and bond-index total return swaps, swaptions, variance swaps and equity options, credit and foreign exchange derivatives, as well as bond and repo transactions to support the hedging. The derivative contracts are collectively managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in capital markets.
In addition, as part of its hedging strategy, the Company targets an asset level for all variable annuity products at or above a CTE98 level under most economic scenarios (CTE is a statistical measure of tail risk which quantifies the total asset requirement to sustain a loss if an event outside a given probability level has occurred. CTE98 denotes the financial resources a company would need to cover the average of the worst 2% of scenarios.)
Derivatives utilized to hedge exposure to Variable Annuities with Guarantee Features
The Company has issued and continues to offer certain variable annuity products with GMDB, GMIB and GIBGMxB features. The Company had previously issued certain variable annuity products with GWBL, guaranteed minimum withdrawal benefit (“GMWB”) and GMAB features (collectively, “GWBL and Other Features”). The risk associated with the GMDB feature is that under-performance of the financial markets could result in GMDB benefits, in the event of death, being higher than what accumulated policyholders’ account balances would support. The risk associated with the GMIB feature is that
under-performance of the financial markets could result in the present value of GMIB, benefits, in the event of annuitization, being higher than what accumulated policyholders’ account balances would support, taking into account the relationship between current annuity purchase rates and the GMIB guaranteed annuity purchase rates. The risk associated with the GIB and GWBL and Other Featuresproducts that have a GMxB derivative features liability is that under-performance of the financial markets could result in the GIB and GWBL and Other Features’GMxB derivative features’ benefits being higher than what accumulated policyholders’ account balances would support.
For GMDB, GMIB, GIB and GWBL and Other Features,GMxB features, the Company retains certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected actuarial assumptions for mortality, lapse and surrender, withdrawal and contractholderpolicyholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMDB, GMIB, GIB and GWBL and Other FeaturesGMxB features that result from financial markets movements. A portion of exposure to realized equity volatility is hedged using equity options and variance swaps and a portion of exposure to credit risk is hedged using total return swaps on fixed income indices. Additionally, the Company is party to total return swaps for which the reference U.S. Treasury securities are contemporaneously purchased from the market and sold to the swap counterparty. As these transactions result in a transfer of control of the U.S. Treasury securities to the swap counterparty, the Company derecognizes these securities with consequent gain or loss from the sale. The Company has also purchased reinsurance contracts to mitigate the risks associated with GMDB features and the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts issued by the Company.
The Company has in place a hedge program utilizing interest rate swaps to partially protect the overall profitability of future variable annuity sales against declining interest rates.
Derivatives utilized to hedge crediting rate exposure on SCS, SIO, MSO and IUL products/investment options
The Company hedges crediting rates in the Structured Capital Strategies®Strategies (“SCS”) variable annuity, Structured Investment Option in the EQUI-VEST®EQUI-VEST variable annuity series (“SIO”), Market Stabilizer Option®Option (“MSO”) in the variable life insurance products and Indexed Universal Life (“IUL”) insurance products. These products permit the contract owner to participate in the performance of an index, ETF or commodity price movement up to a cap for a set period of time. They also contain a protection feature, in which the Company will absorb, up to a certain percentage, the loss of value in an index, ETF or commodity price, which varies by product segment.
In order to support the returns associated with these features, the Company enters into derivative contracts whose payouts, in combination with fixed income investments, emulate those of the index, ETF or commodity price, subject
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
to caps and buffers.
Derivatives utilized to hedge risks associated with interest-ratebuffers without any basis risk arising from issuance of funding agreements
The Company issues fixed and floating rate funding agreements, to fund originated non-recourse commercial real estate mortgage loans, the terms of which may result in short term economic interest rate risk between mortgage loan commitment and mortgage loan funding. The company uses forward interest-rate swaps to protect against interest rate fluctuations during this period. Realized gains and losses from the forward interest rate swaps are amortized over the life of the loan in interest credited to policyholder’s account balances.
Derivatives utilized to hedge equity market risks associated with the General Account’s seed money investments in Separate Accounts, retail mutual funds and Separate Account fee revenue fluctuations
The Company’s General Account seed money investments in Separate Account equity funds and retail mutual funds exposes the Companydue to market risk, including equity market risk, which is partially hedged through equity-index futures contractsexposures, thereby substantially reducing any exposure to minimize such risk.
Periodically, the Company enters into futures on equity indices to mitigate the impact on netmarket-related earnings from Separate Account fee revenue fluctuations due to movements in the equity markets. These positions partially cover fees expected to be earned from the Company’s Separate Account products.
volatility.
Derivatives utilizedused for General Account Investment Portfolio
Beginning in the second quarter of 2013, theThe Company implementedmaintains a strategy in its General Account investment portfolio to replicate the credit exposure of fixed maturity securities otherwise permissible for investment under its investment guidelines through the sale of credit default swaps (“CDSs”). Under the terms of these swaps, the Company receives quarterly fixed premiums that, together with any initial amount paid or received at trade inception, replicate the credit spread otherwise currently obtainable by purchasing the referenced entity’s bonds of similar maturity. These credit derivatives generally have remaining terms of five years or less and are recorded at fair value with changes in fair value, including the yield component that emerges from initial amounts paid or received, reported in Net investment income (loss). The Company manages its credit exposure taking into consideration both cash and derivatives based positions and selects the reference entities in its replicated credit exposures in a manner consistent with its selection of fixed maturities. In addition, the Company has transactedgenerally transacts the sale of CDSs exclusively in single name reference entities of investment grade credit quality and with counterparties subject to collateral posting requirements. If there is an event of default by the reference entity or other such credit event as defined under the terms of the swap contract, the Company is obligated to perform under the credit derivative and, at the counterparty’s option, either pay the referenced amount of the contract less an auction-determined recovery amount or pay the referenced amount of the contract and receive in return the defaulted or similar security of the reference entity for recovery by sale at the contract settlement auction. To date, there have been no events of default or circumstances indicative of a deterioration in the credit quality of the named referenced entities to require or suggest that the Company will have to perform under these CDSs. The maximum potential amount of future payments the Company could be required to make under these credit derivatives is limited to the par value of the referenced securities which is the dollar-equivalentdollar or euro-equivalent of the derivative notional amount. The Standard North American CDS Contract (“SNAC”) or Standard European Corporate Contract (“STEC”) under which the Company executes these CDS sales transactions does not contain recourse provisions for recovery of amounts paid under the credit derivative.
Periodically, theThe Company purchasespurchased 30-year Treasury Inflation Protected Securities (“TIPS”)TIPS and other sovereign bonds, both inflation linked and non-inflation linked, as General Account investments and enters into asset or cross-currency basis swaps, to result in payment of the given bond’s coupons and principal at maturity in the bond’s specified currency to the swap counterparty in return for fixed dollar amounts. These swaps, when considered in combination with the bonds, together result in a net position that is intended to replicate a dollar-denominated fixed-coupon cash bond with a yield higher than a term-equivalent U.S. Treasury bond. At December 31, 2016 and 2015, respectively, the Company’s unrealized gains (losses) related to this program were $(97) million and $(4) million and reported in AOCI.
The Company implemented a strategy to hedge a portion of the credit exposure in its General Account investment portfolio by buying protection through a swap. These are swaps on the super“super senior tranchetranche” of the investment grade credit default swap index (“CDX index”).index. Under the terms of these swaps, the Company pays quarterly fixed premiums that, together with any initial amount paid or received at trade inception, serve as premiums paid to hedge the risk arising from multiple defaults of bonds referenced in the CDX index. These credit derivatives have terms of five years or less and are recorded at fair value with changes in fair value, including the yield component that emerges from initial amounts paid or received, reported in Net investment income (loss) from derivative instruments.gains (losses).
During third quarterIn 2016, the Company implemented a program to mitigate its duration gap using total return swaps for which the reference U.S. Treasury securities are sold to the swap counterparty under arrangements economically similar to repurchase agreements. As these transactions result in a transfer of control of the U.S. Treasury securities to the swap counterparty, the Company derecognizes these securities with consequent gain or loss from the sale. In 2016,Under this program, the Company derecognized approximately $995$3,905 million of U.S. Treasury securities for which the Company received proceeds of approximately $1,007$3,905 million at inception of the total return swap contract. Under the terms of these swaps, the Company retains ongoing exposure to the total returns of the underlying U.S. Treasury securities in exchange for a financing cost. At December 31, 2016,2018, the aggregate fair value of U.S. Treasury securities derecognized under this program was approximately $888$3,690 million. Reported in Other invested assets in the Company'sCompany’s balance sheet at December 31, 20162018 is approximately $(154)$24 million, representing the fair value of the total return swap contracts.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Derivatives used to hedge currency fluctuations on affiliated loans
The Company uses foreign exchange derivatives to reduce exposure to currency fluctuations that may arise from non-U.S.-dollar denominated financial instruments. The Company had a currency swap contract with AXA to hedge foreign exchange exposure from affiliated loans, which matured in March 2018.
The tables below present quantitative disclosures about the Company’s derivative instruments, including those embedded in other contracts required to be accounted for as derivative instruments.instruments:
Derivative Instruments by Category
At or For the Year Ended December 31, 20162018
|
| | | | | | | | | | | | | | | |
| | | | Fair Value | | |
| | Notional Amount | | Asset Derivatives | | Liability Derivatives | | Gains (Losses) Reported In Earnings (Loss) |
| | (In Millions) |
| Freestanding derivatives: | | | | | | | |
Equity contracts:(1) | | | | | | | |
| Futures | $ | 5,086 |
| | $ | 1 |
| | $ | 1 |
| | $ | (826 | ) |
| Swaps | 3,529 |
| | 13 |
| | 67 |
| | (290 | ) |
| Options | 11,465 |
| | 2,114 |
| | 1,154 |
| | 727 |
|
Interest rate contracts:(1) | | | | | | | |
| Floors | 1,500 |
| | 11 |
| | — |
| | 4 |
|
| Swaps | 18,933 |
| | 246 |
| | 1,163 |
| | (224 | ) |
| Futures | 6,926 |
| | — |
| | — |
| | — |
|
| Swaptions | — |
| | — |
| | — |
| | 87 |
|
Credit contracts:(1) | | | | | | | |
| Credit default swaps | 2,757 |
| | 20 |
| | 15 |
| | 15 |
|
Other freestanding contracts:(1) | | | | | | | |
| Foreign currency Contracts | 730 |
| | 52 |
| | 6 |
| | 45 |
|
| Margin | — |
| | 107 |
| | 6 |
| | — |
|
| Collateral | — |
| | 712 |
| | 748 |
| | — |
|
| Net investment income (loss) | | | | | | | (462 | ) |
| Embedded derivatives: | | | | | | | |
| GMIB reinsurance contracts | — |
| | 10,309 |
| | — |
| | (261 | ) |
GIB and GWBL and other features(2) | — |
| | — |
| | 164 |
| | (20 | ) |
SCS, SIO, MSO and IUL indexed features(3) | — |
| | — |
| | 887 |
| | (754 | ) |
| Balances, December 31, 2016 | $ | 50,926 |
| | $ | 13,585 |
| | $ | 4,211 |
| | $ | (1,497 | ) |
|
| | | | | | | | | | | | | | | |
| | | | Fair Value | | Gains (Losses)
Reported In
Earnings (Loss) |
| | Notional
Amount | | Asset
Derivatives | | Liability
Derivatives | |
| | (in millions) |
| Freestanding Derivatives (1) (4): | | | | | | | |
| Equity contracts: | | | | | | | |
| Futures | $ | 10,411 |
| | $ | — |
| | $ | — |
| | $ | 550 |
|
| Swaps | 7,697 |
| | 140 |
| | 168 |
| | 675 |
|
| Options | 21,698 |
| | 2,119 |
| | 1,163 |
| | (899 | ) |
| Interest rate contracts: | | | | | | | |
| Swaps | 27,003 |
| | 632 |
| | 194 |
| | (456 | ) |
| Futures | 11,448 |
| | — |
| | — |
| | 118 |
|
| Credit contracts: | | | | | | | |
| Credit default swaps | 1,282 |
| | 17 |
| | — |
| | (3 | ) |
| Other freestanding contracts: | | | | | | | |
| Foreign currency contracts | 2,097 |
| | 27 |
| | 14 |
| | 6 |
|
| Margin | — |
| | 7 |
| | 5 |
| | — |
|
| Collateral | — |
| | 3 |
| | 1,564 |
| | — |
|
| | | | | | | | |
| Embedded Derivatives: | | | | | | | |
| GMIB reinsurance contracts (4) | — |
| | 1,991 |
| | — |
| | (1,068 | ) |
| GMxB derivative features liability (2) (4) | — |
| | — |
| | 5,431 |
| | (786 | ) |
| SCS, SIO, MSO and IUL indexed features (3) (4) | — |
| | — |
| | 687 |
| | 853 |
|
| Balances, December 31, 2018 | $ | 81,636 |
| | $ | 4,936 |
| | $ | 9,226 |
| | $ | (1,010 | ) |
| |
(1) | Reported in Other invested assets in the consolidated balance sheets. |
| |
(2) | Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets. |
____________
(1)Reported in Other invested assets in the consolidated balance sheets.
(2)Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.
| |
| (3) | SCS, and SIO, indexed features are reported in Policyholders’ account balances; MSO and IUL indexed features are reported in Future policyholders’ benefits and other policyholders’ liabilitiesPolicyholders’ account balances in the consolidated balance sheets. |
(4)Reported in Net derivative gains (losses) in the consolidated statements of income (loss).
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments by Category
At or For the Year Ended December 31, 20152017
|
| | | | | | | | | | | | | | | |
| | | | Fair Value | | |
| | Notional Amount | | Asset Derivatives | | Liability Derivatives | | Gains (Losses) Reported In Earnings (Loss) |
| | (In Millions) |
| Freestanding derivatives: | | | | | | | |
Equity contracts:(1) | | | | | | | |
| Futures | $ | 7,089 |
| | $ | 2 |
| | $ | 3 |
| | $ | (84 | ) |
| Swaps | 1,359 |
| | 8 |
| | 21 |
| | (45 | ) |
| Options | 7,358 |
| | 1,042 |
| | 652 |
| | 14 |
|
Interest rate contracts:(1) | | | | | | | |
| Floors | 1,800 |
| | 61 |
| | — |
| | 12 |
|
| Swaps | 13,718 |
| | 351 |
| | 108 |
| | (8 | ) |
| Futures | 8,685 |
| | — |
| | — |
| | (81 | ) |
| Swaptions | — |
| | — |
| | — |
| | 118 |
|
Credit contracts:(1) | | | | | | | |
| Credit default swaps | 2,442 |
| | 16 |
| | 38 |
| | (14 | ) |
Other freestanding contracts:(1) | | | | | | | |
| Foreign currency Contracts | 263 |
| | 5 |
| | 4 |
| | 7 |
|
| Net investment income (loss) | | | | | | | (81 | ) |
| Embedded derivatives: | | | | | | | |
| GMIB reinsurance contracts | — |
| | 10,570 |
| | — |
| | (141 | ) |
GIB and GWBL and other features(2) | — |
| | — |
| | 184 |
| | (56 | ) |
SCS, SIO, MSO and IUL indexed features(3) | — |
| | — |
| | 310 |
| | (38 | ) |
| Balances, December 31, 2015 | $ | 42,714 |
| | $ | 12,055 |
| | $ | 1,320 |
| | $ | (316 | ) |
|
| | | | | | | | | | | | | | | |
| | | | Fair Value | | Gains (Losses)
Reported In
Earnings (Loss) |
| | Notional Amount | | Asset Derivatives | | Liability Derivatives | |
| | (in millions) |
| Freestanding Derivatives (1) (4): | | | | | | | |
| Equity contracts: | | | | | | | |
| Futures | $ | 2,950 |
| | $ | — |
| | $ | — |
| | $ | (655 | ) |
| Swaps | 4,587 |
| | 3 |
| | 125 |
| | (842 | ) |
| Options | 20,630 |
| | 3,334 |
| | 1,426 |
| | 1,203 |
|
| Interest rate contracts: | | | | | | | |
| Swaps | 18,988 |
| | 319 |
| | 190 |
| | 655 |
|
| Futures | 11,032 |
| | — |
| | — |
| | 125 |
|
| Credit contracts: | | | | | | | |
| Credit default swaps | 2,057 |
| | 34 |
| | 2 |
| | 21 |
|
| Other freestanding contracts: | | | | | | | |
| Foreign currency contracts | 1,297 |
| | 11 |
| | 2 |
| | (38 | ) |
| Margin | — |
| | 18 |
| | — |
| | — |
|
| Collateral | — |
| | 3 |
| | 1,855 |
| | — |
|
| | | | | | | | |
| Embedded Derivatives: | | | | | | | |
| GMIB reinsurance contracts (4) | — |
| | 10,488 |
| | — |
| | 69 |
|
| GMxB derivative features liability (2) (4) | — |
| | — |
| | 4,256 |
| | 1,592 |
|
| SCS, SIO, MSO and IUL indexed features (3) (4) | — |
| | — |
| | 1,698 |
| | (1,236 | ) |
| Balances, December 31, 2017 | $ | 61,541 |
| | $ | 14,210 |
| | $ | 9,554 |
| | $ | 894 |
|
____________
| |
(1) | Reported in Other invested assets in the consolidated balance sheets. |
| |
(2) | Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets. |
(1)Reported in Other invested assets in the consolidated balance sheets.
(2)Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.
| |
| (3) | SCS, SIO, MSO and SIOUIL indexed features are reported in Policyholders’ account balances; MSO and IUL indexed features are reported in Future policyholders’ benefits and other policyholders’ liabilitiesbalances in the consolidated balance sheets. |
(4)Reported in Net derivative gains (losses) in the consolidated statements of income (loss).
Equity-Based and Treasury Futures Contracts Margin
All outstanding equity-based and treasury futures contracts at December 31, 20162018 are exchange-traded and net settled daily in cash. At December 31, 2016,2018, the Company had open exchange-traded futures positions on: (i) the S&P 500, Russell 2000 and Emerging Market indices, having initial margin requirements of $209$245 million, (ii) the 2-year, 5-year and 10-year U.S. Treasury Notes on U.S. Treasury bonds and ultra-long bonds, having initial margin requirements of $28$70 million and (iii) the Euro Stoxx, FTSE 100, Topix, ASX 200 and European, Australasia, and Far East (“EAFE”) indices as well as corresponding currency futures on the Euro/U.S. dollar, Pound/U.S. dollar, Australian dollar/U.S. dollar, and Yen/U.S. dollar, having initial margin requirements of $15$25 million.
Credit RiskCollateral Arrangements
Although notional amount is the most commonly used measure of volume in the derivatives market, it is not used as a measure of credit risk. A derivative with positive fair value (a derivative asset) indicates existence of credit risk because the counterparty would owe money to the Company if the contract were closed at the reporting date. Alternatively, a derivative contract with negative fair value (a derivative liability) indicates the Company would owe money to the counterparty if the contract were closed at the reporting date. To reduce credit exposures in OTC derivative transactions the Company generally enters into master agreements that provide for a netting of financial exposures with the counterparty and allow for collateral arrangements as further described below under “ISDA Master Agreements.” The Company further controls and minimizes its counterparty exposure through a credit appraisal and approval process.
ISDA Master Agreements
Netting Provisions. The standardized “ISDA Master Agreement” under which the Company conducts its OTC derivative transactions includes provisions for payment netting. In the normal course of business activities, if there is more than one derivative transaction with a single counterparty, the Company will set-off the cash flows of those derivatives into a single amount to be exchanged in settlement of the resulting net payable or receivable with that counterparty. In the event of default, insolvency, or other similar event pre-defined under the ISDA Master Agreement that would result in termination of OTC derivatives transactions before their maturity, netting procedures would be applied to calculate a single net payable or receivable with the counterparty.
Collateral Arrangements.The Company generally has executed a CSACredit Support Annex (“CSA”) under the International Swaps and Derivatives Association Master Agreement (“ISDA Master AgreementAgreement”) it maintains with each of its OTCover-the-counter (“OTC”) derivative counterparties that requires both posting and accepting collateral either in the form of cash or high-quality securities, such as U.S. Treasury securities, U.S. government and government agency securities and investment grade corporate bonds. These CSAs are bilateral agreements that require collateral postings by the party “out-of-the-money” or in a net derivative liability position. Various thresholds for the amount and timing of collateralization of net liability positions are applicable. Consequently, the credit exposure of the Company’s OTC derivative contracts is limited to the net positive estimated fair value of those contracts at the reporting date after taking into consideration the existence of netting agreements and any collateral received pursuant to CSAs. Derivatives are recognized at fair value in the consolidated balance sheets and are reported either as assets in Other invested assets or as liabilities in Other liabilities, except for embedded insurance-related derivatives as described above and derivatives transacted with a related counterparty. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related CSA have been executed.
At December 31, 20162018 and 2015,2017, respectively, the Company held $755$1,564 million and $655$1,855 million in cash and securities collateral delivered by trade counterparties, representing the fair value of the related derivative agreements. ThisThe unrestricted cash collateral is reported in Cash and cash equivalents.Other
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
invested assets. The aggregate fair value of all collateralized derivative transactions that were in a liability position with trade counterparties December 31, 2016 and 2015, respectively, were $700 million and $5 million, for which the Company posted collateral of $820$3 million and $5$3 million at December 31, 20162018 and 2015,2017, respectively, in the normal operation of its collateral arrangements. Certain of the Company’s ISDA Master Agreements contain contingent provisions that permit the counterparty to terminate the ISDA Master Agreement if the Company’s credit rating falls below a specified threshold, however, the occurrence of such credit event would not impose additional collateral requirements.
Securities Repurchase and Reverse Repurchase Transactions
Securities repurchase and reverse repurchase transactions are conducted by the Company under a standardized securities industry master agreement, amended to suit the specificitiesrequirements of each respective counterparty. These agreements generally provide detail as to the nature of the transaction, including provisions for payment netting, establish parameters concerning the ownership and custody of the collateral securities, including the right to substitute collateral during the term of the agreement, and provide for remedies in the event of default by either party. Amounts due to/from the same counterparty under these arrangements generally would be netted in the event of default and subject to rights of set-off in bankruptcy. The Company’s securities repurchase and reverse repurchase agreements are accounted for as secured borrowing or lending arrangements, respectively and are reported in the consolidated balance sheets on a gross basis. The Company obtains or posts collateral generally in the form of cash, U.S. Treasury, corporate and government agency securities. The fair value of the securities to be repurchased or resold are monitored on a daily basis with additional collateral posted or obtained as necessary. Securities to be repurchased or resold are the same, or substantially the same, as those initially transacted under the arrangement. At December 31, 20162018 and 2015, the balance outstanding under reverse repurchase transactions was $0 million and $79 million, respectively. At December 31, 2016 and 2015,2017, the balance outstanding under securities repurchase transactions was $1,996$573 million and $1,890$1,887 million, respectively. The Company utilized these repurchase and reverse repurchase agreements for asset liability and cash management purposes. For other instruments used for asset liability management purposes, see “Policyholders’ Account Balances“Obligations under Funding Agreements” in Note 17 - Commitments and Future Policy Benefits” included in Note 2.Contingent Liabilities.
The following table presents information about the Insurance Segment’sCompany’s offsetting of financial assets and liabilities and derivative instruments at December 31, 2016.2018:
Offsetting of Financial Assets and Liabilities and Derivative Instruments
|
| | | | | | | | | | | |
| | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheets | | Net Amounts Presented in the Balance Sheets |
| | (In Millions) |
ASSETS(1) | | | | | |
| Description | | | | | |
| Derivatives: | | | | | |
| Equity contracts | $ | 2,128 |
| | $ | 1,219 |
| | $ | 909 |
|
| Interest rate contracts | 253 |
| | 1,162 |
| | (909 | ) |
| Credit contracts | 20 |
| | 14 |
| | 6 |
|
| Currency | 48 |
| | 1 |
| | 47 |
|
| Margin | 107 |
| | 6 |
| | 101 |
|
| Collateral | 712 |
| | 747 |
| | (35 | ) |
| Total Derivatives, subject to an ISDA Master Agreement | 3,268 |
| | 3,149 |
| | 119 |
|
| Total Derivatives, not subject to an ISDA Master Agreement | 4 |
| | — |
| | 4 |
|
| Total Derivatives | 3,272 |
| | 3,149 |
| | 123 |
|
| Other financial instruments | 2,063 |
| | — |
| | 2,063 |
|
| Other invested assets | $ | 5,335 |
| | $ | 3,149 |
| | $ | 2,186 |
|
| | | | | | |
| Securities purchased under agreement to resell | $ | — |
| | — |
| | $ | — |
|
|
| | | | | | | | | | | |
| | Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets |
| | (in millions) |
| Assets | | | | | |
| Total Derivatives | $ | 2,946 |
| | $ | 2,912 |
| | $ | 34 |
|
| Other financial instruments | 1,520 |
| | — |
| | 1,520 |
|
| Other invested assets | $ | 4,466 |
| | $ | 2,912 |
| | $ | 1,554 |
|
| | | | | | |
| Liabilities | | | | | |
| Total Derivatives | $ | 3,109 |
| | $ | 2,912 |
| | $ | 197 |
|
| Other financial liabilities | 1,263 |
| | — |
| | 1,263 |
|
| Other liabilities | $ | 4,372 |
| | $ | 2,912 |
| | $ | 1,460 |
|
| Securities sold under agreement to repurchase (1) | $ | 571 |
| | $ | — |
| | $ | 571 |
|
|
| | | | | | | | | | | |
| | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheets | | Net Amounts Presented in the Balance Sheets |
| | (In Millions) |
LIABILITIES(2) | | | | | |
| Description | | | | | |
| Derivatives: | | | | | |
| Equity contracts | $ | 1,219 |
| | $ | 1,219 |
| | $ | — |
|
| Interest rate contracts | 1,162 |
| | 1,162 |
| | — |
|
| Credit contracts | 14 |
| | 14 |
| | — |
|
| Currency | 1 |
| | 1 |
| | — |
|
| Margin | 6 |
| | 6 |
| | — |
|
| Collateral | 747 |
| | 747 |
| | — |
|
| Total Derivatives, subject to an ISDA Master Agreement | 3,149 |
| | 3,149 |
| | — |
|
| Total Derivatives, not subject to an ISDA Master Agreement | — |
| | — |
| | — |
|
| Total Derivatives | 3,149 |
| | 3,149 |
| | — |
|
| Other non-financial liabilities | 2,108 |
| | — |
| | 2,108 |
|
| Other liabilities | $ | 5,257 |
| | $ | 3,149 |
| | $ | 2,108 |
|
| | | | | | |
Securities sold under agreement to repurchase(3) | $ | 1,992 |
| | $ | — |
| | $ | 1,992 |
|
____________
| |
| (1) | Excludes Investment Management segment’s $13 million net derivative assets (including derivative assets of consolidated VIEs), $3 million long exchange traded options and $83 million of securities borrowed. |
| |
(2) | Excludes Investment Management segment’s $11 million net derivative liabilities (including derivative liabilities of consolidated VIEs), $1 million short exchange traded options. |
| |
(3) | Excludes expense of $4$2 million in securities sold under agreement to repurchase. |
The following table presents information about the Insurance segment’sCompany’s gross collateral amounts that are not offset in the consolidated balance sheets at December 31, 2016.2018.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Collateral Amounts Not Offset in the Consolidated Balance Sheets
|
| | | | | | | | | | | | | | | |
| | Fair Value of Assets | | Collateral (Received)/Held | | |
| | Financial Instruments | | Cash | | Net Amounts |
| | (In Millions) |
ASSETS(1) | | | | | | | |
| Counterparty A | $ | 46 |
| | $ | — |
| | $ | (48 | ) | | $ | (2 | ) |
| Counterparty B | (128 | ) | | — |
| | 132 |
| | 4 |
|
| Counterparty C | (116 | ) | | — |
| | 138 |
| | 22 |
|
| Counterparty D | 182 |
| | — |
| | (176 | ) | | 6 |
|
| Counterparty E | (65 | ) | | — |
| | 83 |
| | 18 |
|
| Counterparty F | (3 | ) | | — |
| | 16 |
| | 13 |
|
| Counterparty G | 219 |
| | — |
| | (214 | ) | | 5 |
|
| Counterparty H | 104 |
| | — |
| | (110 | ) | | (6 | ) |
| Counterparty I | (188 | ) | | — |
| | 203 |
| | 15 |
|
| Counterparty J | (93 | ) | | — |
| | 115 |
| | 22 |
|
| Counterparty K | 92 |
| | — |
| | (96 | ) | | (4 | ) |
| Counterparty L | (3 | ) | | — |
| | 3 |
| | — |
|
| Counterparty M | (105 | ) | | — |
| | 120 |
| | 15 |
|
| Counterparty N | 4 |
| | — |
| | — |
| | 4 |
|
| Counterparty Q | 10 |
| | — |
| | (11 | ) | | (1 | ) |
| Counterparty T | — |
| | — |
| | 2 |
| | 2 |
|
| Counterparty U | 1 |
| | — |
| | 10 |
| | 11 |
|
| Counterparty V | 96 |
| | — |
| | (101 | ) | | (5 | ) |
| Total Derivatives | $ | 53 |
| | $ | — |
| | $ | 66 |
| | $ | 119 |
|
| Other financial instruments | 2,067 |
| | — |
| | — |
| | 2,067 |
|
| Other invested assets | $ | 2,120 |
| | $ | — |
| | $ | 66 |
| | $ | 2,186 |
|
|
| | | | | | | | | | | | | | | |
| | Net Amounts Presented in the Balance Sheets | | Collateral (Received)/Held | | |
| | Financial Instruments | | Cash | | Net Amounts |
| | (In Millions) |
LIABILITIES(2) | | | | | | | |
| Counterparty D | $ | 767 |
| | $ | (767 | ) | | $ | — |
| | — |
|
| Counterparty M | 410 |
| | (410 | ) | | — |
| | — |
|
| Counterparty C | 302 |
| | (296 | ) | | (2 | ) | | 4 |
|
| Counterparty W | 513 |
| | (513 | ) | | — |
| | — |
|
Securities sold under agreement to repurchase(3) | $ | 1,992 |
| | $ | (1,986 | ) | | $ | (2 | ) | | $ | 4 |
|
|
| | | | | | | | | | | | | | | |
| | Net Amount Presented in the Balance Sheets | | Collateral (Received)/Held | | |
| | Financial Instruments | | Cash (3) | | Net Amount |
| | (in millions) |
| Assets | | | | | | | |
| Total Derivatives | $ | 1,397 |
| | $ | — |
| | $ | (1,363 | ) | | $ | 34 |
|
| Other financial instruments | 1,520 |
| | — |
| | — |
| | 1,520 |
|
| Other invested assets | $ | 2,917 |
| | $ | — |
| | $ | (1,363 | ) | | $ | 1,554 |
|
| | | | | | | | |
| Liabilities | | | | | | | |
| Total Derivatives | $ | 197 |
| | $ | — |
| | $ | — |
| | $ | 197 |
|
| Other financial liabilities | 1,263 |
| | — |
| | — |
| | 1,263 |
|
| Other liabilities | $ | 1,460 |
| | $ | — |
| | $ | — |
| | $ | 1,460 |
|
| Securities sold under agreement to repurchase (1) (2) (3) | $ | 571 |
| | $ | (588 | ) | | $ | — |
| | $ | (17 | ) |
____________
| |
| (1) | Excludes Investment Management segment’s cash collateral received of $1 million related to derivative assets (including those related to derivative assets of consolidated VIEs) and $83 million related to securities borrowed. |
| |
(2) | Excludes Investment Management segment’s cash collateral pledged of $8 million related to derivative liabilities (including those related to derivative liabilities of consolidated VIEs). |
| |
(3) | Excludes expense of $4$2 million in securities sold under agreement to repurchase. |
| |
| (2) | US Treasury and agency securities are in fixed maturities available-for-sale on the consolidated balance sheets. |
| |
| (3) | Cash is in Cash and cash equivalents on consolidated balance sheets. |
The following table presents information about repurchase agreements accounted for as secured borrowings in the consolidated balance sheets at December 31, 2016.2018:
Repurchase Agreement Accounted for as Secured Borrowings(1)
December 31, 2018
| | | | At December 31, 2016 | Remaining Contractual Maturity of the Agreements |
| | Remaining Contractual Maturity of the Agreements | Overnight and Continuous | | Up to 30 days | | 30-90 days | | Greater Than 90 days | | Total |
| | Overnight and
Continuous | | Up to 30 days | | 30-90 days | | Greater Than
90 days | | Total | (in millions) |
| | | (In Millions) | |
Securities sold under agreement to repurchase(2) | | | | | | | | | | |
| Securities sold under agreement to repurchase (1) | | | | | | | | | | |
| U.S. Treasury and agency securities | $ | — |
| | $ | 1,992 |
| | $ | — |
| | $ | — |
| | $ | 1,992 |
| $ | — |
| | $ | 571 |
| | $ | — |
| | $ | — |
| | $ | 571 |
|
| Total | $ | — |
| | $ | 1,992 |
| | $ | — |
| | $ | — |
| | $ | 1,992 |
| $ | — |
| | $ | 571 |
|
| $ | — |
| | $ | — |
| | $ | 571 |
|
____________
| |
| (1) | Excludes Investment Management segment’s $83 million of securities borrowed. |
| |
(2) | Excludes expense of $4$2 million in securities sold under agreement to repurchase. |
The following table presents information about the Insurance segment’sCompany’s offsetting of financial assets and liabilities and derivative instruments atDecember 31, 2015.2017.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Offsetting of Financial Assets and Liabilities and Derivative Instruments
|
| | | | | | | | | | | |
| | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheets | | Net Amounts Presented in the Balance Sheets |
| | (In Millions) |
ASSETS(1) | | | | | |
| Description | | | | | |
| Derivatives: | | | | | |
| Equity contracts | $ | 1,049 |
| | $ | 673 |
| | $ | 376 |
|
| Interest rate contracts | 389 |
| | 104 |
| | 285 |
|
| Credit contracts | 14 |
| | 37 |
| | (23 | ) |
| Total Derivatives, subject to an ISDA Master Agreement | 1,452 |
| | 814 |
| | 638 |
|
| Total Derivatives, not subject to an ISDA Master Agreement | 20 |
| | — |
| | 20 |
|
| Total Derivatives | 1,472 |
| | 814 |
| | 658 |
|
Other financial instruments(2) (4) | 1,271 |
| | — |
| | 1,271 |
|
Other invested assets(2) | $ | 2,743 |
| | $ | 814 |
| | $ | 1,929 |
|
| | | | | | |
| Securities purchased under agreement to resell | $ | 79 |
| | $ | — |
| | $ | 79 |
|
2017
|
| | | | | | | | | | | |
| | Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets |
| | (in millions) |
| Assets | | | | | |
| Total Derivatives | $ | 3,740 |
| | $ | 3,614 |
| | $ | 126 |
|
| Other financial instruments | 1,704 |
| | — |
| | 1,704 |
|
| Other invested assets | $ | 5,444 |
| | $ | 3,614 |
| | $ | 1,830 |
|
| | | | | | |
| Liabilities | | | | | |
| Total Derivatives | $ | 3,614 |
| | $ | 3,614 |
| | $ | — |
|
| Other financial liabilities | 1,242 |
| | — |
| | 1,242 |
|
| Other liabilities | $ | 4,856 |
| | $ | 3,614 |
| | $ | 1,242 |
|
| Securities sold under agreement to repurchase (1) | $ | 1,882 |
| | $ | — |
| | $ | 1,882 |
|
|
| | | | | | | | | | | |
| | Gross Amounts Recognized | | Gross Amounts Offset in the Balance Sheets | | Net Amounts Presented in the Balance Sheets |
| | (In Millions) |
LIABILITIES(3) | | | | | |
| Description | | | | | |
| Derivatives: | | | | | |
| Equity contracts | $ | 673 |
| | $ | 673 |
| | $ | — |
|
| Interest rate contracts | 104 |
| | 104 |
| | — |
|
| Credit contracts | 37 |
| | 37 |
| | — |
|
| Total Derivatives, subject to an ISDA Master Agreement | 814 |
| | 814 |
| | — |
|
| Total Derivatives, not subject to an ISDA Master Agreement | — |
| | — |
| | — |
|
| Total Derivatives | 814 |
| | 814 |
| | — |
|
| Other non-financial liabilities | 2,586 |
| | — |
| | 2,586 |
|
| Other liabilities | $ | 3,400 |
| | $ | 814 |
| | $ | 2,586 |
|
| | | | | | |
| Securities sold under agreement to repurchase | $ | 1,890 |
| | $ | — |
| | $ | 1,890 |
|
____________
| |
| (1) | Excludes Investment Management segment’s $13expense of $5 million net derivative assets, $6 million long exchange traded options and $75 million of securities borrowed. |
| |
(2) | Includes $141 million relatedincluded in Securities sold under agreements to accrued interest related to derivative instruments reported in other assetsrepurchase on the consolidated balance sheets. |
| |
(3) | Excludes Investment Management segment’s $12 million net derivative liabilities, $1 million short exchange traded options and $10 million of securities loaned. |
| |
(4) | Includes margin of $(2) million related to derivative instruments. |
The following table presents information about the Insurance segment’sCompany’s gross collateral amounts that are not offset in the consolidated balance sheets at December 31, 2015.2017:
Gross Collateral Amounts Not Offset in the Consolidated Balance Sheets
At December 31, 20152017
|
| | | | | | | | | | | | | | | |
| | Net Amounts Presented in the Balance Sheets | | Collateral (Received)/Held | | |
| | Financial Instruments | | Cash | | Net Amounts |
| | (In Millions) |
ASSETS(1) | | | | | | | |
| Counterparty A | $ | 52 |
| | $ | — |
| | $ | (52 | ) | | $ | — |
|
| Counterparty B | 9 |
| | — |
| | (7 | ) | | 2 |
|
| Counterparty C | 61 |
| | — |
| | (58 | ) | | 3 |
|
| Counterparty D | 222 |
| | — |
| | (218 | ) | | 4 |
|
| Counterparty E | 53 |
| | — |
| | (53 | ) | | — |
|
| Counterparty F | (2 | ) | | — |
| | 2 |
| | — |
|
| Counterparty G | 129 |
| | — |
| | (129 | ) | | — |
|
| Counterparty H | 16 |
| | (11 | ) | | (5 | ) | | — |
|
| Counterparty I | 44 |
| | — |
| | (39 | ) | | 5 |
|
| Counterparty J | 19 |
| | — |
| | (13 | ) | | 6 |
|
| Counterparty K | 17 |
| | — |
| | (17 | ) | | — |
|
| Counterparty L | 7 |
| | — |
| | (7 | ) | | — |
|
| Counterparty M | 11 |
| | — |
| | (10 | ) | | 1 |
|
| Counterparty N | 20 |
| | — |
| | — |
| | 20 |
|
| Counterparty Q | — |
| | — |
| | — |
| | — |
|
| Counterparty T | (3 | ) | | — |
| | 3 |
| | — |
|
| Counterparty U | — |
| | — |
| | 1 |
| | 1 |
|
| Counterparty V | 3 |
| | — |
| | (3 | ) | | — |
|
| Total Derivatives | $ | 658 |
| | $ | (11 | ) | | $ | (605 | ) | | $ | 42 |
|
Other financial instruments(2) (4) | 1,271 |
| | — |
| | — |
| | 1,271 |
|
Other invested assets(2) | $ | 1,929 |
| | $ | (11 | ) | | $ | (605 | ) | | $ | 1,313 |
|
| | | | | | | | |
| Counterparty M | $ | 28 |
| | $ | (28 | ) | | $ | — |
| | $ | — |
|
| Counterparty V | $ | 51 |
| | $ | (51 | ) | | $ | — |
| | $ | — |
|
| Securities purchased under agreement to resell | $ | 79 |
| | $ | (79 | ) | | $ | — |
| | $ | — |
|
LIABILITIES(3) | | | | | | | |
| | | | | | | | |
| Counterparty D | $ | 234 |
| | $ | (234 | ) | | $ | — |
| | — |
|
| Counterparty C | 1,033 |
| | (1,016 | ) | | (17 | ) | | — |
|
| Counterparty M | 623 |
| | (611 | ) | | (12 | ) | | — |
|
| Securities sold under agreement to repurchase | $ | 1,890 |
| | $ | (1,861 | ) | | $ | (29 | ) | | $ | — |
|
|
| | | | | | | | | | | | | | | |
| | Net Amount Presented in the Balance Sheets | | Collateral (Received)/Held | | |
| | Financial Instruments | | Cash (3) | | Net Amount |
| | (in millions) |
| Assets | | | | | | | |
| Total derivatives | $ | 1,954 |
| | $ | — |
| | $ | (1,828 | ) | | $ | 126 |
|
| Other financial instruments | 1,704 |
| | — |
| | — |
| | 1,704 |
|
| Other invested assets | $ | 3,658 |
| | $ | — |
| | $ | (1,828 | ) | | $ | 1,830 |
|
| | | | | | | | |
| Liabilities | | | | | | | |
| Other financial liabilities | $ | 1,242 |
| | $ | — |
| | $ | — |
| | $ | 1,242 |
|
| Other liabilities | $ | 1,242 |
| | $ | — |
| | $ | — |
| | $ | 1,242 |
|
| Securities sold under agreement to repurchase (1) (2) (3) | $ | 1,882 |
| | $ | (1,988 | ) | | $ | (21 | ) | | $ | (127 | ) |
____________
| |
| (1) | Excludes Investment Management segment’s cash collateral receivedexpense of $2$5 million relatedin securities sold under agreement to derivative assets and $75 million related to securities borrowed.repurchase. |
| |
| (2) | Includes $141 million of accrued interest related to derivative instruments reportedU.S. Treasury and agency securities are in other assetsfixed maturities available-for-sale on the consolidated balance sheets. |
| |
| (3) | Excludes Investment Management segment’sCash is included in Cash and cash collateral pledged of $12 million related to derivative liabilities and $10 million related to securities loaned.equivalents on consolidated balance sheets. |
| |
(4) | Includes margin of $(2) million related to derivative instruments. |
The following table presents information about repurchase agreements accounted for as secured borrowings in the consolidated balance sheets at December 31, 2015.2017:
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Repurchase Agreement Accounted for as Secured Borrowings(1)
At December 31, 2017
| | | | At December 31, 2015 | Remaining Contractual Maturity of the Agreements |
| | Remaining Contractual Maturity of the Agreements | Overnight and Continuous | | Up to 30 days | | 30-90 days | | Greater Than 90 days | | Total |
| | Overnight and
Continuous | | Up to 30 days | | 30-90 days | | Greater Than
90 days | | Total | (in millions) |
| | | (In Millions) | |
| Securities sold under agreement to repurchase | | | | | | | | | | |
| Securities sold under agreement to repurchase (1) | | | | | | | | | | |
| U.S. Treasury and agency securities | $ | — |
| | $ | 1,865 |
| | $ | 25 |
| | $ | — |
| | $ | 1,890 |
| $ | — |
| | $ | 1,882 |
| | $ | — |
| | $ | — |
| | $ | 1,882 |
|
| Total | $ | — |
| | $ | 1,865 |
| | $ | 25 |
| | $ | — |
| | $ | 1,890 |
| $ | — |
| | $ | 1,882 |
| | $ | — |
| | $ | — |
| | $ | 1,882 |
|
| Securities purchased under agreement to resell | | | | | | | | | | |
| Corporate securities | $ | — |
| | $ | 79 |
| | $ | — |
| | $ | — |
| | $ | 79 |
| |
| Total | $ | — |
| | $ | 79 |
| | $ | — |
| | $ | — |
| | $ | 79 |
| |
____________
| |
| (1) | Excludes Investment Management segment’s $75expense of $5 million ofin securities borrowed and $10 million of securities loaned.sold under agreements to repurchase on the consolidated balance sheets. |
Net Investment Income (Loss)
The following table breaks out Net investment income (loss) by asset category:
|
| | | | | | | | | | | |
| | Years Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Fixed maturities | $ | 1,540 |
| | $ | 1,365 |
| | $ | 1,418 |
|
| Mortgage loans on real estate | 494 |
| | 453 |
| | 461 |
|
| Real estate held for the production of income | (6 | ) | | 2 |
| | — |
|
| Repurchase agreement | — |
| | — |
| | 1 |
|
| Other equity investments | 123 |
| | 169 |
| | 55 |
|
| Policy loans | 201 |
| | 205 |
| | 210 |
|
| Trading securities | 128 |
| | 258 |
| | 64 |
|
| Other investment income | 69 |
| | 54 |
| | 16 |
|
| Gross investment income (loss) | 2,549 |
| | 2,506 |
| | 2,225 |
|
| Investment expenses (1) | (71 | ) | | (65 | ) | | (57 | ) |
| Net Investment Income (Loss) | $ | 2,478 |
| | $ | 2,441 |
| | $ | 2,168 |
|
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Fixed maturities | $ | 1,418 |
| | $ | 1,420 |
| | $ | 1,431 |
|
| Mortgage loans on real estate | 461 |
| | 338 |
| | 306 |
|
| Repurchase agreement | 1 |
| | 1 |
| | — |
|
| Other equity investments | 170 |
| | 84 |
| | 200 |
|
| Policy loans | 210 |
| | 213 |
| | 216 |
|
| Derivative investments | (462 | ) | | (81 | ) | | 1,605 |
|
| Trading securities | 80 |
| | 17 |
| | 63 |
|
| Other investment income | 44 |
| | 40 |
| | 49 |
|
| Gross investment income (loss) | 1,922 |
| | 2,032 |
| | 3,870 |
|
| Investment expenses | (66 | ) | | (56 | ) | | (55 | ) |
| Net Investment Income (Loss) | $ | 1,856 |
| | $ | 1,976 |
| | $ | 3,815 |
|
For 2016, 2015 and 2014, respectively, Net investment income (loss) from derivatives included $(4) million, $474 million and $899 million(1)Investment expenses includes expenses related to the management of realized gains (losses) on contracts closed during those periods and $(458) million, $(555) million and $706 million of unrealized gains (losses) on derivative positions at each respective year end.
the two buildings sold in 2016.
Net unrealized and realized gains (losses) on trading account equity securities are included in Net investment income (loss) in the consolidated statements of earningsincome (loss). The table below shows a breakdown of Net investment income from trading account securities during the yearyears ended 2016December 31, 2018, 2017 and 2015:
2016:
Net Investment Income (Loss) from Trading Securities
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Net investment gains (losses) recognized during the period on securities held at the end of the period | $ | (174 | ) | | $ | 63 |
| | $ | (45 | ) |
| Net investment gains (losses) recognized on securities sold during the period | (24 | ) | | (19 | ) | | (11 | ) |
| Unrealized and realized gains (losses) on trading securities | (198 | ) | | 44 |
| | (56 | ) |
| Interest and dividend income from trading securities | 326 |
| | 214 |
| | 120 |
|
| Net investment income (loss) from trading securities | $ | 128 |
| | $ | 258 |
| | $ | 64 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | Twelve Months Ended | | |
| | December 31,
2016 | | December 31,
2015 | | December 31,
2014 |
| | (In Millions) | | |
| Net investment gains (losses) recognized during the period on securities held at the end of the period | $ | (19 | ) | | $ | (63 | ) | | $ | — |
|
| Net investment gains (losses) recognized on securities sold during the period | (22 | ) | | 20 |
| | 22 |
|
| Unrealized and realized gains (losses) on trading securities | (41 | ) | | (43 | ) | | 22 |
|
| Interest and dividend income from trading securities | 121 |
| | 60 |
| | 41 |
|
| Net investment income (loss) from trading securities | $ | 80 |
| | $ | 17 |
| | $ | 63 |
|
Investment Gains (Losses), Net
Investment gains (losses), net including changes in the valuation allowances and OTTI are as follows:
| | | | | | | | | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In Millions) | (in millions) |
| Fixed maturities | $ | (3 | ) | | $ | (17 | ) | | $ | (54 | ) | $ | 6 |
| | $ | (130 | ) | | $ | (3 | ) |
| Mortgage loans on real estate | (2 | ) | | (1 | ) | | (3 | ) | — |
| | 2 |
| | (2 | ) |
| Other equity investments | (2 | ) | | (5 | ) | | (2 | ) | — |
| | 3 |
| | — |
|
| Other | 23 |
| | 3 |
| | 1 |
| (2 | ) | | — |
| | 23 |
|
| Investment Gains (Losses), Net | $ | 16 |
| | $ | (20 | ) | | $ | (58 | ) | |
| Investment gains (losses), net | | $ | 4 |
| | $ | (125 | ) | | $ | 18 |
|
For 2016, 2015the years ended December 31, 2018, 2017 and 2014,2016, respectively, investment results passed through to certain participating group annuity contracts as interestInterest credited to policyholders’ account balances totaled $4 million, $4 million and $5 million.
| |
4) | GOODWILL AND OTHER INTANGIBLE ASSETS |
The carrying value of goodwill related to AB totaled $3,584 million and $3,562 million at December 31, 2016 and 2015, respectively. The Company annually tests goodwill for recoverability at December 31. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of its investment in AB, the reporting unit, to its carrying value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not considered to be impaired and the second step of the impairment test is not performed. However, if the carrying value of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed by measuring the amount of impairment loss only if the result indicates a potential impairment. The second step compares the implied fair value of the reporting unit to the aggregated fair values of its individual assets and liabilities to determine the amount of impairment, if any. The Company also assesses this goodwill for recoverability at each interim reporting period in consideration of facts and circumstances that may indicate a shortfall of the fair value of its investment in AB as compared to its carrying value and thereby require re-performance of its annual impairment testing.
The Company primarily uses a discounted cash flow valuation technique to measure the fair value of its investment in AB for purpose of goodwill impairment testing. The cash flows used in this technique are sourced from AB’s current business plan and projected thereafter over the estimated life of the goodwill asset by applying an annual growth rate assumption. The present value amount that results from discounting these expected cash flows is then adjusted to reflect the noncontrolling interest in AB as well as taxes incurred at the Company level in order to determine the fair value of its investment in AB. At December 31, 2016 and 2015, the Company determined that goodwill was not impaired as the fair value of its investment in AB exceeded its carrying value at each respective date. Similarly, no impairments resulted from the Company’s interim assessments of goodwill recoverability during the periods then ended.
The gross carrying amount of AB related intangible assets was $625 million and $610 million at December 31, 2016 and 2015, respectively and the accumulated amortization of these intangible assets was $468 million and $439 million at December 31, 2016 and 2015, respectively. Amortization expense related to the AB intangible assets totaled $29 million, $28 million and $27 million for 2016, 2015 and 2014, respectively, and estimated amortization expense for each of the next five years is expected to be approximately $29 million.
At December 31, 2016 and 2015, respectively, net deferred sales commissions totaled $64 million and $99 million and are included within Other assets. The estimated amortization expense of deferred sales commissions, based on the December 31, 2016 net asset balance for each of the next five years is $32 million, $21 million, $8$3 million, $3 million and $0$4 million. The Company tests the deferred sales commission asset for impairment quarterly by comparing undiscounted future cash flows to the recorded value, net of accumulated amortization. Each quarter, significant assumptions used to estimate the future cash flows are updated to reflect management’s consideration of current market conditions on expectations made with respect to future market levels and redemption rates. As of December 31, 2016, the Company determined that the deferred sales commission asset was not impaired.
On September 23, 2016, AB acquired a 100% ownership interest in Ramius Alternative Solutions LLC (“RASL”), a global alternative investment management business that, as of the acquisition date, had approximately $2.5 billion in AUM. RASL offers a range of customized alternative investment and advisory solutions to a global institutional client base. On the acquisition date, AB made a cash payment of $21 million and recorded a contingent consideration payable of $12 million based on projected fee revenues over a five-year measurement period. The excess of the purchase price over the current fair value of identifiable net assets acquired resulted in the recognition of $22 million of goodwill. AB recorded $10 million of definite-lived intangible assets relating to investment management contracts.4) INTANGIBLE ASSETS
On June 20, 2014, AB acquired an approximate 82.0% ownership interest in CPH Capital Fondsmaeglerselskab A/S (“CPH”), a Danish asset management firm that managed approximately $3,000 million in global core equity assets for institutional investors, for a cash payment of $64 million and a contingent consideration payable of $9 million based on projected assets under management levels over a three-year measurement period. The excess of the purchase price over the fair value of identifiable assets acquired resulted in the recognition of $58 million of goodwill. AB recorded $24 million of finite-lived intangible assets relating to separately-managed account relationships and $4 million of indefinite-lived intangible assets relating to an acquired fund’s investment contract. AB also recorded redeemable non-controlling interest of $17 million relating to the fair value of the portion of CPH AB does not own. During 2015 and 2016, AB purchased additional shares of CPH, bringing AB’s ownership interest to 90.0% as of December 31, 2016.
Capitalized Software
Capitalized software, net of accumulated amortization, amounted to $170$115 million and $157$96 million at December 31, 20162018 and 2015, respectively.2017, respectively, and is recorded in Other assets. Amortization of capitalized software in 2018, 2017 and 2016 2015 and 2014 were $52was $35 million, $55$37 million and $50$42 million, respectively.respectively, recorded in other Operating costs and expenses in the consolidated statements of income (loss). Amortization expense for capitalized software is expected to be approximately $43 million in 2019, $47 million in 2020, $47 million in 2021, $47 million in 2022 and $47 million 2023.
5) CLOSED BLOCK
As a result of demutualization, the Company’s Closed Block was established in 1992 for the benefit of certain individual participating policies that were in force on that date. Assets, liabilities and earnings of the Closed Block are specifically identified to support its participating policyholders.
Assets allocated to the Closed Block inure solely to the benefit of the Closed Block policyholders and will not revert to the benefit of the Company. No reallocation, transfer, borrowing or lending of assets can be made between the Closed Block and other portions of the Company’s General Account, any of its Separate Accounts or any affiliate of the Company without the approval of the New York State Department of Financial Services (the “NYDFS”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the General Account.
The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in AOCI) represents the expected maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. As of January 1, 2001, the Company has developed an actuarial calculation of the expected timing of the Closed Block’s earnings.
If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has
insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.
Many expenses related to Closed Block operations, including amortization of DAC, are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block.
Summarized financial information for the AXA EquitableCompany’s Closed Block is as follows:
| | | | December 31, | As of December 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| | (In Millions) | (in millions) |
| CLOSED BLOCK LIABILITIES: | | | | |
| Closed Block Liabilities: | | | | |
| Future policy benefits, policyholders’ account balances and other | $ | 7,179 |
| | $ | 7,363 |
| $ | 6,709 |
| | $ | 6,958 |
|
| Policyholder dividend obligation | 52 |
| | 81 |
| |
| Policyholder’ dividend obligation | | — |
| | 19 |
|
| Other liabilities | 43 |
| | 100 |
| 47 |
| | 271 |
|
| Total Closed Block liabilities | 7,274 |
| | 7,544 |
| 6,756 |
| | 7,248 |
|
| ASSETS DESIGNATED TO THE CLOSED BLOCK: | | | | |
| Fixed maturities, available for sale, at fair value (amortized cost of $3,884 and $4,426) | 4,025 |
| | 4,599 |
| |
| Mortgage loans on real estate | 1,623 |
| | 1,575 |
| |
| | | | | |
| Assets Designated To The Closed Block: | | | | |
| Fixed maturities, available for sale, at fair value (amortized cost of $ 3,680 and $3,923) | | 3,672 |
| | 4,070 |
|
| Mortgage loans on real estate, net of valuation allowance of $- and $- | | 1,824 |
| | 1,720 |
|
| Policy loans | 839 |
| | 881 |
| 736 |
| | 781 |
|
| Cash and other invested assets | 444 |
| | 49 |
| 76 |
| | 351 |
|
| Other assets | 181 |
| | 258 |
| 179 |
| | 182 |
|
| Total assets designated to the Closed Block | 7,112 |
| | 7,362 |
| 6,487 |
| | 7,104 |
|
| | | | | |
| Excess of Closed Block liabilities over assets designated to the Closed Block | 162 |
| | 182 |
| 269 |
| | 144 |
|
| Amounts included in accumulated other comprehensive income (loss): | | | | |
| Net unrealized investment gains (losses), net of policyholder dividend obligation of $(52) and $(81) | 100 |
| | 103 |
| |
| Maximum Future Earnings To Be Recognized From Closed Block Assets and Liabilities | $ | 262 |
| | $ | 285 |
| |
| Amounts included in Accumulated other comprehensive income (loss): | | | | |
| Net unrealized investment gains (losses), net of policyholders’ dividend obligation of $- and $19 | | 8 |
| | 138 |
|
| Maximum future income to be recognized from closed block assets and liabilities | | $ | 277 |
| | $ | 282 |
|
AXA Equitable’s
The Company’s Closed Block revenues and expenses follow:
| | | | 2016 | | 2015 | | 2014 | Years ended December 31, |
| | (In Millions) | 2018 | | 2017 | | 2016 |
| REVENUES: | | | | | | |
| | | (in millions) |
| Revenues: | | | | | | |
| Premiums and other income | $ | 238 |
| | $ | 262 |
| | $ | 273 |
| $ | 194 |
| | $ | 224 |
| | $ | 212 |
|
| Investment income (loss) | 349 |
| | 368 |
| | 378 |
| |
| Net investment gains (losses) | (1 | ) | | 2 |
| | (4 | ) | |
| Net investment income (loss) | | 291 |
| | 314 |
| | 349 |
|
| Investment gains (losses), net | | (3 | ) | | (20 | ) | | (1 | ) |
| Total revenues | 586 |
| | 632 |
| | 647 |
| 482 |
| | 518 |
| | 560 |
|
| BENEFITS AND OTHER DEDUCTIONS: | | | | | | |
| | | | | | | |
| Benefits and Other Deductions: | | | | | | |
| Policyholders’ benefits and dividends | 548 |
| | 576 |
| | 597 |
| 471 |
| | 537 |
| | 522 |
|
| Other operating costs and expenses | 4 |
| | 4 |
| | 4 |
| 3 |
| | 2 |
| | 4 |
|
| Total benefits and other deductions | 552 |
| | 580 |
| | 601 |
| 474 |
| | 539 |
| | 526 |
|
| Net revenues, before income taxes | 34 |
| | 52 |
| | 46 |
| |
| Net income, before income taxes | | 8 |
| | (21 | ) | | 34 |
|
| Income tax (expense) benefit | (12 | ) | | (18 | ) | | (16 | ) | (3 | ) | | (36 | ) | | (12 | ) |
| Net Revenues (Losses) | $ | 22 |
| | $ | 34 |
| | $ | 30 |
| |
| Net income (losses) | | $ | 5 |
| | $ | (57 | ) | | $ | 22 |
|
A reconciliation of AXA Equitable’s policyholder the Company’s policyholders’dividend obligation follows:
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In Millions) |
| Balances, beginning of year | $ | 81 |
| | $ | 201 |
|
| Unrealized investment gains (losses) | (29 | ) | | (120 | ) |
| Balances, End of year | $ | 52 |
| | $ | 81 |
|
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in millions) |
| Balance, beginning of year | $ | 19 |
| | $ | 52 |
|
| Unrealized investment gains (losses) | (19 | ) | | (33 | ) |
| Balance, end of year | $ | — |
| | $ | 19 |
|
6) DAC AND POLICYHOLDER BONUS INTEREST CREDITS
Changes in the deferred policy acquisition cost asset for the years ended December 31, 2018, 2017 and 2016 were as follows: |
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Balance, beginning of year | $ | 4,492 |
| | $ | 5,025 |
| | $ | 5,079 |
|
| Capitalization of commissions, sales and issue expenses | 597 |
| | 578 |
| | 594 |
|
| Amortization: | | | | | |
| Impact of assumptions updates and model changes | 165 |
| | (247 | ) | | (193 | ) |
| All other | (596 | ) | | (653 | ) | | (449 | ) |
| Total amortization | (431 | ) | | (900 | ) | | (642 | ) |
| Change in unrealized investment gains and losses | 353 |
| | (211 | ) | | (6 | ) |
| Balance, end of year | $ | 5,011 |
| | $ | 4,492 |
| | $ | 5,025 |
|
113
| |
6) | CONTRACTHOLDER BONUS INTEREST CREDITS AND DEFERRED ACQUISITION COST |
Changes in the deferred asset for contractholderpolicyholder bonus interest credits are as follows:
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In Millions) |
| Balance, beginning of year | $ | 534 |
| | $ | 383 |
|
| Contractholder bonus interest credits deferred | 13 |
| | 17 |
|
| Other | — |
| | 174 |
|
| Amortization charged to income | (43 | ) | | (40 | ) |
| Balance, End of Year | $ | 504 |
| | $ | 534 |
|
Changes in deferred acquisition costs atfor the years ended December 31, 20162018, 2017 and 20152016 were as follows:
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In Millions) |
| Balance, beginning of year | $ | 4,469 |
| | $ | 4,271 |
|
| Capitalization of commissions, sales and issue expenses | 594 |
| | 615 |
|
| Amortization | (756 | ) | | (284 | ) |
| Change in unrealized investment gains and losses | (6 | ) | | 41 |
|
| Other | — |
| | (174 | ) |
| Balance, End of Year | $ | 4,301 |
| | $ | 4,469 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Balance, beginning of year | $ | 473 |
| | $ | 504 |
| | $ | 534 |
|
| Policyholder bonus interest credits deferred | 4 |
| | 6 |
| | 13 |
|
| Amortization charged to income | (51 | ) | | (37 | ) | | (43 | ) |
| Balance, end of year | $ | 426 |
| | $ | 473 |
| | $ | 504 |
|
7) FAIR VALUE DISCLOSURES
The accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, and identifies three levels of inputs that may be used to measure fair value:
| |
7)Level 1 | FAIR VALUE DISCLOSURESUnadjusted quoted prices for identical instruments in active markets. Level 1 fair values generally are supported by market transactions that occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| |
| Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, and inputs to model-derived valuations that are directly observable or can be corroborated by observable market data. |
| |
| Level 3 | Unobservable inputs supported by little or no market activity and often requiring significant management judgment or estimation, such as an entity’s own assumptions about the cash flows or other significant components of value that market participants would use in pricing the asset or liability. |
The Company uses unadjusted quoted market prices to measure fair value for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are measured using present value or other valuation techniques. The fair value determinations are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such adjustments do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value cannot be substantiated by direct comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument.
Management is responsible for the determination of the value of investments carried at fair value and the supporting methodologies and assumptions. Under the terms of various service agreements, the Company often utilizes independent valuation service providers to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual securities. These independent valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. As further described below with respect to specific asset classes, these inputs include, but are not limited to, market prices for recent trades and transactions in comparable securities, benchmark yields, interest rate yield curves, credit spreads, quoted prices for similar securities, and other market-observable information, as applicable. Specific attributes of the security being valued also are considered, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security- or issuer-specific information. When insufficient market observable information is available upon which to measure fair value, the Company either will request brokers knowledgeable about these securities to provide a non-binding quote or will employ internal valuation models. Fair values received from independent valuation service providers and brokers and those internally modeled or otherwise estimated are assessed for reasonableness.
Assets and liabilities measured at fair value on a recurring basis are summarized below. At December 31, 20162018 and 2015,December 31, 2017, no assets were required to be measured at fair value on a non-recurring basis. Fair value measurements are required on a non-recurring basis for certain assets, including goodwill and mortgage loans on real
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
estate, only when an OTTI or other event occurs. When such fair value measurements are recorded, they must be classified and disclosed within the fair value hierarchy.The Company recognizes transfers between valuation levels at the beginning of the reporting period.
Fair Value Measurements at December 31, 20162018 | | | | Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In Millions) | (in millions) |
| Assets | | | | | | | | | | | | | | |
| Investments: | | | | | | | | |
| Investments | | | | | | | | |
| Fixed maturities, available-for-sale: | | | | | | | | | | | | | | |
| Public Corporate | $ | — |
| | $ | 12,984 |
| | $ | 28 |
| | $ | 13,012 |
| |
| Private Corporate | — |
| | 6,223 |
| | 817 |
| | 7,040 |
| |
| Corporate (1) | | $ | — |
| | $ | 25,202 |
| | $ | 1,174 |
| | $ | 26,376 |
|
| U.S. Treasury, government and agency | — |
| | 10,336 |
| | — |
| | 10,336 |
| — |
| | 13,335 |
| | — |
| | 13,335 |
|
| States and political subdivisions | — |
| | 451 |
| | 42 |
| | 493 |
| — |
| | 416 |
| | 38 |
| | 454 |
|
| Foreign governments | — |
| | 390 |
| | — |
| | 390 |
| — |
| | 519 |
| | — |
| | 519 |
|
| Commercial mortgage-backed | — |
| | 22 |
| | 349 |
| | 371 |
| |
Residential mortgage-backed(1) | — |
| | 314 |
| | — |
| | 314 |
| |
Asset-backed(2) | — |
| | 36 |
| | 24 |
| | 60 |
| |
| Residential mortgage-backed (2) | | — |
| | 202 |
| | — |
| | 202 |
|
| Asset-backed (3) | | — |
| | 71 |
| | 519 |
| | 590 |
|
| Redeemable preferred stock | 218 |
| | 335 |
| | 1 |
| | 554 |
| 163 |
| | 276 |
| | — |
| | 439 |
|
| Subtotal | 218 |
| | 31,091 |
| | 1,261 |
| | 32,570 |
| |
| Total fixed maturities, available-for-sale | | 163 |
| | 40,021 |
| | 1,731 |
| | 41,915 |
|
| Other equity investments | 3 |
| | — |
| | 5 |
| | 8 |
| 12 |
| | — |
| | — |
| | 12 |
|
| Trading securities | 478 |
| | 8,656 |
| | — |
| | 9,134 |
| 218 |
| | 14,919 |
| | 29 |
| | 15,166 |
|
| Other invested assets: | | | | | | | | | | | | | | |
| Short-term investments | — |
| | 574 |
| | — |
| | 574 |
| — |
| | 412 |
| | — |
| | 412 |
|
| Assets of consolidated VIEs | 342 |
| | 205 |
| | 6 |
| | 553 |
| |
| Assets of consolidated VIEs/VOEs | | — |
| | — |
| | 19 |
| | 19 |
|
| Swaps | — |
| | (925 | ) | | — |
| | (925 | ) | — |
| | 423 |
| | — |
| | 423 |
|
| Credit Default Swaps | — |
| | 5 |
| | — |
| | 5 |
| |
| Futures | — |
| | — |
| | — |
| | — |
| |
| Credit default swaps | | — |
| | 17 |
| | — |
| | 17 |
|
| Options | — |
| | 960 |
| | — |
| | 960 |
| — |
| | 956 |
| | — |
| | 956 |
|
| Floors | — |
| | 11 |
| | — |
| | 11 |
| |
| Subtotal | 342 |
| | 830 |
| | 6 |
| | 1,178 |
| |
| Total other invested assets | | — |
| | 1,808 |
|
| 19 |
|
| 1,827 |
|
| Cash equivalents | 1,529 |
| | — |
| | — |
| | 1,529 |
| 2,160 |
| | — |
| | — |
| | 2,160 |
|
| Segregated securities | — |
| | 946 |
| | — |
| | 946 |
| |
| GMIB reinsurance contracts asset | — |
| | — |
| | 10,309 |
| | 10,309 |
| — |
| | — |
| | 1,991 |
| | 1,991 |
|
| Separate Accounts’ assets | 108,085 |
| | 2,818 |
| | 313 |
| | 111,216 |
| |
| Separate Accounts assets | | 105,159 |
| | 2,733 |
| | 374 |
| | 108,266 |
|
| Total Assets | $ | 110,655 |
| | $ | 44,341 |
| | $ | 11,894 |
| | $ | 166,890 |
| $ | 107,712 |
| | $ | 59,481 |
| | $ | 4,144 |
| | $ | 171,337 |
|
| | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | |
| GWBL and other features’ liability | $ | — |
| | $ | — |
| | $ | 164 |
| | $ | 164 |
| |
| GMxB derivative features’ liability | | $ | — |
| | $ | — |
| | $ | 5,431 |
| | $ | 5,431 |
|
| SCS, SIO, MSO and IUL indexed features’ liability | — |
| | 887 |
| | — |
| | 887 |
| — |
| | 687 |
| | — |
| | 687 |
|
| Liabilities of consolidated VIEs | 248 |
| | 2 |
| | — |
| | 250 |
| |
| Contingent payment arrangements | — |
| | — |
| | 18 |
| | 18 |
| |
| Total Liabilities | $ | 248 |
| | $ | 889 |
| | $ | 182 |
| | $ | 1,319 |
| $ | — |
| | $ | 687 |
| | $ | 5,431 |
| | $ | 6,118 |
|
| |
| (1) | Corporate fixed maturities includes both public and private issues. |
| |
| (2) | Includes publicly traded agency pass-through securities and collateralized obligations. |
| |
(2)(3) | Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans. |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements at December 31,
20152017 | | | | Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In Millions) | (in millions) |
| Assets | | | | | | | | | | | | | | |
| Investments: | | | | | | | | |
| Investments | | | | | | | | |
| Fixed maturities, available-for-sale: | | | | | | | | | | | | | | |
| Public Corporate | $ | — |
| | $ | 13,345 |
| | $ | 31 |
| | $ | 13,376 |
| |
| Private Corporate | — |
| | 6,537 |
| | 389 |
| | 6,926 |
| |
| Corporate (1) | | $ | — |
| | $ | 20,343 |
| | $ | 1,139 |
| | $ | 21,482 |
|
| U.S. Treasury, government and agency | — |
| | 8,775 |
| | — |
| | 8,775 |
| — |
| | 13,135 |
| | — |
| | 13,135 |
|
| States and political subdivisions | — |
| | 459 |
| | 45 |
| | 504 |
| — |
| | 441 |
| | 40 |
| | 481 |
|
| Foreign governments | — |
| | 414 |
| | 1 |
| | 415 |
| — |
| | 409 |
| | — |
| | 409 |
|
| Commercial mortgage-backed | — |
| | 30 |
| | 503 |
| | 533 |
| |
Residential mortgage-backed(1) | — |
| | 640 |
| | — |
| | 640 |
| |
Asset-backed(2) | — |
| | 37 |
| | 40 |
| | 77 |
| |
| Residential mortgage-backed (2) | | — |
| | 251 |
| | — |
| | 251 |
|
| Asset-backed (3) | | — |
| | 88 |
| | 8 |
| | 96 |
|
| Redeemable preferred stock | 258 |
| | 389 |
| | — |
| | 647 |
| 180 |
| | 324 |
| | — |
| | 504 |
|
| Subtotal | 258 |
| | 30,626 |
| | 1,009 |
| | 31,893 |
| |
| Total fixed maturities, available-for-sale | | 180 |
| | 34,991 |
| | 1,187 |
| | 36,358 |
|
| Other equity investments | 97 |
| | — |
| | 49 |
| | 146 |
| 13 |
| | — |
| | — |
| | 13 |
|
| Trading securities | 654 |
| | 6,151 |
| | — |
| | 6,805 |
| 180 |
| | 12,097 |
| | — |
| | 12,277 |
|
| Other invested assets: | | | | | | | | |
| Other invested assets | | | | | | | |
|
| Short-term investments | — |
| | 369 |
| | — |
| | 369 |
| — |
| | 763 |
| | — |
| | 763 |
|
| Assets of consolidated VIEs/VOEs | | — |
| | — |
| | 25 |
| | 25 |
|
| Swaps | — |
| | 230 |
| | — |
| | 230 |
| — |
| | 15 |
| | — |
| | 15 |
|
| Credit Default Swaps | — |
| | (22 | ) | | — |
| | (22 | ) | |
| Futures | (1 | ) | | — |
| | — |
| | (1 | ) | |
| Credit default swaps | | — |
| | 33 |
| | — |
| | 33 |
|
| Options | — |
| | 390 |
| | — |
| | 390 |
| — |
| | 1,907 |
| | — |
| | 1,907 |
|
| Floors | — |
| | 61 |
| | — |
| | 61 |
| |
| Currency Contracts | — |
| | 1 |
| | — |
| | 1 |
| |
| Subtotal | (1 | ) | | 1,029 |
| | — |
| | 1,028 |
| |
| Total other invested assets | | — |
| | 2,718 |
| | 25 |
| | 2,743 |
|
| Cash equivalents | 2,150 |
| | — |
| | — |
| | 2,150 |
| 1,908 |
| | — |
| | — |
| | 1,908 |
|
| Segregated securities | — |
| | 565 |
| | — |
| | 565 |
| — |
| | 9 |
| | — |
| | 9 |
|
| GMIB reinsurance contracts asset | — |
| | — |
| | 10,570 |
| | 10,570 |
| — |
| | — |
| | 10,488 |
| | 10,488 |
|
| Separate Accounts’ assets | 104,058 |
| | 2,964 |
| | 313 |
| | 107,335 |
| |
| Separate Accounts assets | | 118,983 |
| | 2,983 |
| | 349 |
| | 122,315 |
|
| Total Assets | $ | 107,216 |
| | $ | 41,335 |
| | $ | 11,941 |
| | $ | 160,492 |
| $ | 121,264 |
| | $ | 52,798 |
| | $ | 12,049 |
| | $ | 186,111 |
|
| | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | |
| GWBL and other features’ liability | $ | — |
| | $ | — |
| | $ | 184 |
| | $ | 184 |
| |
| GMxB derivative features’ liability | | $ | — |
| | $ | — |
| | $ | 4,256 |
| | $ | 4,256 |
|
| SCS, SIO, MSO and IUL indexed features’ liability | — |
| | 310 |
| | — |
| | 310 |
| — |
| | 1,698 |
| | — |
| | 1,698 |
|
| Contingent payment arrangements | — |
| | — |
| | 31 |
| | 31 |
| |
| Total Liabilities | $ | — |
| | $ | 310 |
| | $ | 215 |
| | $ | 525 |
| $ | — |
| | $ | 1,698 |
| | $ | 4,256 |
| | $ | 5,954 |
|
| |
| (1) | Corporate fixed maturities includes both public and private issues. |
| |
| (2) | Includes publicly traded agency pass-through securities and collateralized obligations. |
| |
(2)(3) | Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans. |
At December 31, 2016 and 2015, respectively, the fair value of public fixed maturities is approximately $24,918 million and $24,216 million or approximately 16.0% and 16.2% of the Company’s total assets measured at fair value on a recurring basis (excluding GMIB reinsurance contracts and segregated securities measured at fair value on a recurring basis). The fair values of the Company’s public fixed maturity securitiesmaturities are generally based on prices obtained from independent valuation service providers and for which the Company maintains a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. Although each security generally is priced by multiple independent valuation service providers, the Company ultimately uses the price received from the independent valuation service provider highest in the vendor hierarchy based on the respective asset type, with limited exception. To validate reasonableness, prices also
are internally reviewed by those with relevant expertise through comparison with directly observed recent market trades. Consistent with the fair value hierarchy, public fixed maturity securitiesmaturities validated in this manner generally are reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. If the pricing information received from independent valuation service providers is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process in accordance with the terms of the respective independent valuation service provider agreement. If as a result it is determined that the independent valuation service provider is able to reprice the security in a manner agreed as more consistent with current market observations, the security remains within Level 2. Alternatively, a Level 3
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
classification may result if the pricing information then is sourced from another vendor, non-binding broker quotes, or internally-developed valuations for which the Company’s own assumptions about market-participant inputs would be used in pricing the security.
At December 31, 2016 and 2015, respectively, the fair value of private fixed maturities is approximately $7,652 million and $7,677 million or approximately 4.9% and 5.1% of the Company’s total assets measured at fair value on a recurring basis. The fair values of some of the Company’s private fixed maturities are determined from prices obtained from independent valuation service providers. Prices not obtained from an independent valuation service provider are determined by using a discounted cash flow model or a market comparable company valuation technique. In certain cases, these models use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model or a market comparable company valuation technique may also incorporate unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the fair value measurement of a security, a Level 3 classification generally is made.
AsThe net fair value of the Company’s freestanding derivative positions as disclosed in Note 3 at December 31, 2016 and 2015, respectively, the net fair value of freestanding derivative positions is approximately $51 million and $659 million or approximately 8.2% and 64.1% of Other invested assets measured at fair value on a recurring basis. The fair values of the Company’s derivative positions are generally based on prices obtained either from independent valuation service providers or derived by applying market inputs from recognized vendors into industry standard pricing models. The majority of these derivative contracts are traded in the Over-The-Counter (“OTC”)OTC derivative market and are classified in Level 2. The fair values of derivative assets and liabilities traded in the OTC market are determined using quantitative models that require use of the contractual terms of the derivative instruments and multiple market inputs, including interest rates, prices, and indices to generate continuous yield or pricing curves, including overnight index swap (“OIS”) curves, and volatility factors, which then are applied to value the positions. The predominance of market inputs is actively quoted and can be validated through external sources or reliably interpolated if less observable. If the pricing information received from independent valuation service providers is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process in accordance with the terms of the respective independent valuation service provider agreement. If as a result it is determined that the independent valuation service provider is able to reprice the derivative instrument in a manner agreed as more consistent with current market observations, the position remains within Level 2. Alternatively, a Level 3 classification may result if the pricing information then is sourced from another vendor, non-binding broker quotes, or internally-developed valuations for which the Company’s own assumptions about market-participant inputs would be used in pricing the security.
At December 31, 2016 and 2015, respectively, investmentsInvestments classified as Level 1 comprise approximately 71.1% and 71.8% of assets measured at fair value on a recurring basis and primarily include redeemable preferred stock, trading securities, cash equivalents and Separate AccountsAccount assets. Fair value measurements classified as Level 1 include exchange-traded prices of fixed maturities, equity securities and derivative contracts, and net asset values for transacting subscriptions and redemptions of mutual fund shares held by Separate Accounts. Cash equivalents classified as Level 1 include money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less and are carried at cost as a proxy for fair value measurement due to their short-term nature.
At December 31, 2016 and 2015, respectively, investmentsInvestments classified as Level 2 comprise approximately 27.9% and 27.3% of assetsare measured at fair value on a recurring basis and primarily include U.S. government and agency securities and certain corporate debt securities, such as public and private fixed maturities. As market quotes generally are not readily available or accessible for these securities, their fair value measures are determined utilizing relevant information generated by market transactions involving comparable securities and often are based on model pricing techniques that effectively discount prospective cash flows to present value using appropriate sector-adjusted credit spreads commensurate with the security’s duration, also taking into consideration issuer-specific credit quality and liquidity. Segregated securities classified as Level 2 are U.S. Treasury Billsbills segregated by AB in a special reserve bank custody account for the exclusive benefit
of brokerage customers, as required by Rule 15c3-3 of the Exchange Act and for which fair values are based on quoted yields in secondary markets.
Observable inputs generally used to measure the fair value of securities classified as Level 2 include benchmark yields, reported secondary trades, issuer spreads, benchmark securities and other reference data. Additional observable inputs are used when available, and as may be appropriate, for certain security types, such as prepayment, default, and collateral information for the purpose of measuring the fair value of mortgage- and asset-backed securities. At December 31, 2016 and 2015, respectively, approximately $340 million and $673 million ofThe Company’s AAA-rated mortgage- and asset-backed securities are classified as Level 2 for which the observability of market inputs to their pricing models is supported by sufficient, albeit more recently contracted, market activity in these sectors.
The Company’s
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Certain Company products such as the SCS and EQUI-VEST variable annuity products, the IUL product, and in the MSO fund available in some life contracts offer investment options which permit the contract owner to participate in the performance of an index, ETF or commodity price. These investment options, which depending on the product and on the index selected can currently have 1, 3, 5, or 5 year6-year terms, provide for participation in the performance of specified indices, ETF or commodity price movement up to a segment-specific declared maximum rate. Under certain conditions that vary by product, e.g. holding these segments for the full term, these segments also shield policyholders from some or all negative investment performance associated with these indices, ETF or commodity prices. These investment options have defined formulaic liability amounts, and the current values of the option component of these segment reserves are accounted for as Level 2 embedded derivatives. The fair values of these embedded derivatives are based on pricesdata obtained from independent valuation service providers.
At December 31, 2016 and 2015, respectively,The Company’s investments classified as Level 3 comprise approximately 1.0% and 0.9% of assets measured at fair value on a recurring basis and primarily include commercial mortgage-backed securities (“CMBS”) and corporate debt securities, such as private fixed maturities. Determinations to classify fair value measures within Level 3 of the valuation hierarchy generally are based upon the significance of the unobservable factors to the overall fair value measurement. Included in the Level 3 classification at December 31, 2016 and 2015, respectively, were approximately $111 million and $119 million ofare fixed maturities with indicative pricing obtained from brokers that otherwise could not be corroborated to market observable data. The Company applies various due-diligencedue diligence procedures, as considered appropriate, to validate these non-binding broker quotes for reasonableness, based on its understanding of the markets, including use of internally-developed assumptions about inputs a market participant would use to price the security. In addition, approximately $373 million and $543 million of mortgage- and asset-backed securities including CMBS, are classified as Level 3 at December 31, 2016 and 2015, respectively. The Company utilizes prices obtained from an independent valuation service vendor to measure fair value of CMBS securities.3.
The Company also issues certain benefits on its variable annuity products that are accounted for as derivatives and are also considered Level 3. The GMIBNLG feature allows the policyholder to receive guaranteed minimum lifetime annuity payments based on predetermined annuity purchase rates applied to the contract’s benefit base if and when the contract account value is depleted and the NLG feature is activated. The GMWB feature allows the policyholder to withdraw at minimum, over the life of the contract, an amount based on the contract’s benefit base. The GWBL feature allows the policyholder to withdraw, each year for the life of the contract, a specified annual percentage of an amount based on the contract’s benefit base. The GMAB feature increases the contract account value at the end of a specified period to a GMAB base. The GIB feature provides a lifetime annuity based on predetermined annuity purchase rates if and when the contract account value is depleted. This lifetime annuity is based on predetermined annuity purchase rates applied to a GIB base.
Level 3 also includes the GMIB reinsurance contract assetassets which isare accounted for as derivative contracts. The GMIB reinsurance contract asset’sasset and liabilities’ fair value reflects the present value of reinsurance premiums and recoveries and risk margins over a range of market consistent economic scenarios while the GIB and GWBL and otherGMxB derivative features related liability reflects the present value of expected future payments (benefits) less fees, adjusted for risk margins and nonperformance risk, attributable to the GIB and GWBL and other featuresGMxB derivative features’ liability over a range of market-consistent economic scenarios.
The valuations of both the GMIB reinsurance contract asset and GIB and GWBL and other features’GMxB derivative features liability incorporate significant non-observable assumptions related to policyholder behavior, risk margins and projections of equity Separate Accountseparate account funds. The credit risks of the counterparty and of the Company are considered in determining the fair values of its GMIB reinsurance contract asset and GIB and GWBL and other features’GMxB derivative features liability positions, respectively, after taking into account the effects of collateral arrangements. Incremental adjustment to the swap curve adjusted for non-performance risk is made to the resulting fair values of the GMIB reinsurance contract asset and liabilities and GMIBNLG feature to reflect change in the claims-paying ratings of counterparties and the Company. Equity and fixed income volatilities were modeled to reflect current market volatilities. Due to the reinsurance treaties. unique, long duration of the GMIBNLG feature, adjustments were made to the equity volatilities to remove the illiquidity bias associated with the longer tenors and risk margins were applied to the non-capital markets inputs to the GMIBNLG valuations.
After giving consideration to collateral arrangements, the Company reduced the fair value of its GMIB reinsurance contract asset by $139$184 million and $123$69 million at December 31, 20162018 and 2015,2017, respectively, to recognize incremental counterparty non-performance risk. The unadjusted swap curve was determined to reflect
Lapse rates are adjusted at the contract level based on a level of general swap market counterparty risk; therefore, no adjustment was made for purpose of determining the fair valuecomparison of the GIBactuarially calculated guaranteed values and GWBL andthe current policyholder account value, which include other features’ liabilityfactors such as considering surrender charges. Generally, lapse rates are assumed to be lower in periods when a surrender charge applies. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in the money contracts are less likely
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
to lapse. For valuing the embedded derivative, at December 31, 2016. Equity and fixed income volatilities were modeled to reflectlapse rates vary throughout the current market volatility.
In second quarter 2014, the Company refined the fair value calculation of the GMIB reinsurance contract asset and GWBL, GIB and GMAB liabilities, utilizing scenarios that explicitly reflect risk free bond and equity components separately (previously aggregated and including counterparty risk premium embedded in swap rates) and stochastic interest rates for projecting and discountingperiod over which cash flows (previously a single yield curve). The net impacts of these refinements were a $510 million increase to the GMIB reinsurance contract asset and a $37 million increase in the GWBL, GIB and GMAB liability which are reported in the Company’s consolidated statements of Earnings (Loss) as Increase (decrease) in the fair value of the reinsurance contract asset and Policyholders’ benefits, respectively.projected.
The Company’s Level 3 liabilities include contingent payment arrangements associated with acquisitions in 2010, 2013 and 2014 by AB. At each reporting date, AB estimates the fair values of the contingent consideration expected to be paid based upon probability-weighted AUM and revenue projections, using unobservable market data inputs, which are included in Level 3 of the valuation hierarchy.
As of December 31, 2016, five of the Company’s consolidated VIEs that are open-end Luxembourg fundsVIEs/VOEs hold $6 million of investments that are classified as Level 3. They3 and primarily consist of corporate bonds that are vendor priced with no ratings available, bank loans, non-agency collateralized mortgage obligations and asset-backed securities.
In 2016,2018, AFS fixed maturities with fair values of $62$28 million were transferred out of Level 3 and into Level 2 principally due to the availability of trading activity and/or market observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $25$83 million were transferred from Level 2 into the Level 3 classification. During the third quarter of 2016, one of AB’s private securities went public and, due to a trading restriction period, $56 million was transferred from a Level 3 to a Level 2 classification. These transfers in the aggregate represent approximately 0.9% of total equity at December 31, 2016.2018.
In 2015,2017, AFS fixed maturities with fair values of $125$6 million were transferred out of Level 3 and into Level 2 principally due to the availability of trading activity and/or market observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $99$7 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 1.3%0.1% of total equity at December 31, 2015.
2017.
The table below presents a reconciliation for all Level 3 assets and liabilities at December 31, 2018, 2017 and 2016 2015 and 2014 respectively.respectively:
Level 3 Instruments
Fair Value Measurements
| | | | Corporate | | State and Political Sub-divisions | | Foreign Govts | | Commercial Mortgage- backed | | Residential Mortgage- backed | | Asset- backed | Corporate | | State and Political Subdivisions | | Foreign Governments | | Commercial Mortgage- backed | | Asset-backed |
| | (In Millions) | (in millions) |
| Balance, January 1, 2016 | $ | 420 |
| | $ | 45 |
| | $ | 1 |
| | $ | 503 |
| | $ | — |
| | $ | 40 |
| |
| Balance, January 1, 2018 | | $ | 1,139 |
| | $ | 40 |
| | $ | — |
| | $ | — |
| | $ | 8 |
|
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | | | | | | | | | | |
| Earnings (loss) as: | | | | | | | | | | | | |
| Income (loss) as: | | | | | | | | | | |
| Net investment income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 7 |
| | — |
| | — |
| | — |
| | (2 | ) |
| Investment gains (losses), net | 1 |
| | — |
| | — |
| | (67 | ) | | — |
| | — |
| (8 | ) | | — |
| | — |
| | — |
| | — |
|
| Subtotal | 1 |
| | — |
| | — |
| | (67 | ) | | — |
| | — |
| (1 | ) | | — |
| | — |
| | — |
| | (2 | ) |
| Other comprehensive income (loss) | 7 |
| | (2 | ) | | — |
| | 14 |
| | — |
| | 1 |
| (20 | ) | | (1 | ) | | — |
| | — |
| | (7 | ) |
| Purchases | 572 |
| | — |
| | — |
| | — |
| | — |
| | — |
| 322 |
| | — |
| | — |
| | — |
| | 550 |
|
| Sales | (142 | ) | | (1 | ) | | — |
| | (87 | ) | | — |
| | (8 | ) | (321 | ) | | (1 | ) | | — |
| | — |
| | (30 | ) |
Transfers into Level 3(1) | 25 |
| | — |
| | — |
| | — |
| | — |
| | — |
| 83 |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3(1) | (38 | ) | | — |
| | (1 | ) | | (14 | ) | | — |
| | (9 | ) | (28 | ) | | — |
| | — |
| | — |
| | — |
|
| Balance, December 31, 2016 | $ | 845 |
| | $ | 42 |
| | $ | — |
| | $ | 349 |
| | $ | — |
| | $ | 24 |
| |
| Balance, January 1, 2015 | $ | 380 |
| | $ | 47 |
| | $ | — |
| | $ | 715 |
| | $ | 2 |
| | $ | 53 |
| |
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | | |
| Earnings (loss) as: | | | | | | | | | | | | |
| Net investment income (loss) | 3 |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| |
| Investment gains (losses), net | 2 |
| | — |
| | — |
| | (38 | ) | | — |
| | — |
| |
| Subtotal | 5 |
| | — |
| | — |
| | (37 | ) | | — |
| | — |
| |
| Other comprehensive income (loss) | (25 | ) | | (1 | ) | | — |
| | 64 |
| | — |
| | (4 | ) | |
| Purchases | 60 |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| |
| Sales | (38 | ) | | (1 | ) | | — |
| | (175 | ) | | (2 | ) | | (9 | ) | |
Transfers into Level 3(1) | 99 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Transfers out of Level 3(1) | (61 | ) | | — |
| | — |
| | (64 | ) | | — |
| | — |
| |
| Balance, December 31, 2015 | $ | 420 |
| | $ | 45 |
| | $ | 1 |
| | $ | 503 |
| | $ | — |
| | $ | 40 |
| |
| Balance, December 31, 2018 | | $ | 1,174 |
| | $ | 38 |
| | $ | — |
| | $ | — |
| | $ | 519 |
|
Level 3 Instruments119
Fair Value Measurements
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Corporate | | State and Political Sub-divisions | | Foreign Govts | | Commercial Mortgage- backed | | Residential Mortgage- backed | | Asset- backed |
| | (In Millions) |
| Balance, January 1, 2014 | $ | 291 |
| | $ | 46 |
| | $ | — |
| | $ | 700 |
| | $ | 4 |
| | $ | 83 |
|
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Earnings (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 2 |
| | — |
| | — |
| | 2 |
| | — |
| | — |
|
| Investment gains (losses), net | 3 |
| | — |
| | — |
| | (89 | ) | | — |
| | — |
|
| Subtotal | 5 |
| | — |
| | — |
| | (87 | ) | | — |
| | — |
|
| Other comprehensive income (loss) | 6 |
| | 2 |
| | — |
| | 135 |
| | — |
| | 7 |
|
| Purchases | 162 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Sales | (30 | ) | | (1 | ) | | — |
| | (20 | ) | | (2 | ) | | (37 | ) |
Transfers into Level 3(1) | 15 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3(1) | (69 | ) | | — |
| | — |
| | (13 | ) | | — |
| | — |
|
| Balance, December 31, 2014 | $ | 380 |
| | $ | 47 |
| | $ | — |
| | $ | 715 |
| | $ | 2 |
| | $ | 53 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Redeem
able
Preferred
Stock | | Other Equity Investments(2) | | GMIB Reinsurance Asset | | Separate Accounts Assets | | GWBL and Other Features Liability | | Contingent
Payment
Arrangement |
| | (In Millions) | | |
| Balance, January 1, 2016 | $ | — |
| | $ | 49 |
| | $ | 10,570 |
| | $ | 313 |
| | $ | 184 |
| | 31 |
|
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Earnings (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Investment gains (losses), net | — |
| | — |
| | — |
| | 19 |
| | — |
| | — |
|
| Increase (decrease) in the fair value of reinsurance contracts | — |
| | — |
| | (419 | ) | | — |
| | — |
| | — |
|
| Policyholders’ benefits | — |
| | — |
| | — |
| | — |
| | (245 | ) | | — |
|
| Subtotal | — |
| | — |
| | (419 | ) | | 19 |
| | (245 | ) | | — |
|
Other comprehensive income (loss) | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
Purchases (3) | 1 |
| | — |
| | 223 |
| | 10 |
| | 225 |
| | 11 |
|
Sales (4) | — |
| | — |
| | (65 | ) | | — |
| | — |
| | — |
|
Settlements (5) | — |
| | — |
| | — |
| | (7 | ) | | — |
| | (24 | ) |
| Activities related to VIEs | — |
| | 20 |
| | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3(1) | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
Transfers out of Level 3(1) | — |
| | (56 | ) | | — |
| | (23 | ) | | — |
| | — |
|
| Balance, December 31, 2016 | $ | 1 |
| | $ | 11 |
| | $ | 10,309 |
| | $ | 313 |
| | $ | 164 |
| | $ | 18 |
|
| Balance, January 1, 2015 | $ | — |
| | $ | 61 |
| | $ | 10,711 |
| | $ | 260 |
| | $ | 128 |
| | 42 |
|
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Earnings (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Investment gains (losses), net | — |
| | 5 |
| | — |
| | 36 |
| | — |
| | — |
|
| Increase (decrease) in the fair value of reinsurance contracts | — |
| | — |
| | (327 | ) | | — |
| | — |
| | — |
|
| Policyholders’ benefits | — |
| | — |
| | — |
| | — |
| | (130 | ) | | — |
|
| Subtotal | — |
| | 5 |
| | (327 | ) | | 36 |
| | (130 | ) | | — |
|
Other comprehensive income(loss) | — |
| | 2 |
| | — |
| | — |
| | — |
| | |
Purchases (3) | — |
| | 1 |
| | 228 |
| | 26 |
| | 186 |
| | — |
|
Sales (4) | — |
| | (20 | ) | | (42 | ) | | (2 | ) | | — |
| | (11 | ) |
Settlements (5) | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
|
Transfers into Level 3(1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3(1) | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
|
| Balance, December 31, 2015 | $ | — |
| | $ | 49 |
| | $ | 10,570 |
| | $ | 313 |
| | $ | 184 |
| | $ | 31 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Corporate | | State and Political Subdivisions | | Foreign Governments | | Commercial Mortgage- backed | | Asset-backed |
| | (in millions) |
| Balance, January 1, 2017 | $ | 845 |
| | $ | 42 |
| | $ | — |
| | $ | 349 |
| | $ | 24 |
|
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | |
| Income (loss) as: | | | | | | | | | |
| Net investment income (loss) | 5 |
| | — |
| | — |
| | (2 | ) | | — |
|
| Investment gains (losses), net | 2 |
| | — |
| | — |
| | (63 | ) | | 15 |
|
| Subtotal | 7 |
| | — |
| | — |
| | (65 | ) | | 15 |
|
| Other comprehensive income (loss) | 4 |
| | (1 | ) | | — |
| | 45 |
| | (9 | ) |
| Purchases | 612 |
| | — |
| | — |
| | — |
| | — |
|
| Sales | (331 | ) | | (1 | ) | | — |
| | (329 | ) | | (21 | ) |
Transfers into Level 3 (1) | 7 |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 (1) | (5 | ) | | — |
| | — |
| | — |
| | (1 | ) |
| Balance, December 31, 2017 | $ | 1,139 |
| | $ | 40 |
| | $ | — |
| | $ | — |
| | $ | 8 |
|
| | | | | | | | | | |
| Balance, January 1, 2016 | $ | 420 |
| | $ | 45 |
| | $ | 1 |
| | $ | 503 |
| | $ | 40 |
|
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | |
| Income (loss) as: | | | | | | | | | |
| Investment gains (losses), net | 1 |
| | — |
| | — |
| | (67 | ) | | — |
|
| Subtotal | 1 |
| | — |
| | — |
| | (67 | ) | | — |
|
| Other comprehensive income (loss) | 7 |
| | (2 | ) | | — |
| | 14 |
| | 1 |
|
| Purchases | 572 |
| | — |
| | — |
| | — |
| | — |
|
| Sales | (142 | ) | | (1 | ) | | — |
| | (87 | ) | | (8 | ) |
| Transfers into Level 3 (1) | 25 |
| | — |
| | — |
| | — |
| | — |
|
| Transfers out of Level 3 (1) | (38 | ) | | — |
| | (1 | ) | | (14 | ) | | (9 | ) |
| Balance, December 31, 2016 | $ | 845 |
| | $ | 42 |
| | $ | — |
| | $ | 349 |
| | $ | 24 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Redeemable Preferred Stock | | Other Equity Investments (2) | | GMIB Reinsurance Asset | | Separate Account Assets | | GMxB Derivative Features Liability |
| | (in millions) |
| Balance, January 1, 2018 | $ | — |
| | $ | 25 |
| | $ | 10,488 |
| | $ | 349 |
| | $ | (4,256 | ) |
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | |
| Income (loss) as: | | | | | | | | | |
| Investment gains (losses), net | — |
| | — |
| | — |
| | 26 |
| | — |
|
| Net derivative gains (losses), excluding non-performance risk | — |
| | — |
| | (972 | ) | | — |
| | (296 | ) |
| Non-performance risk (4) | — |
| | — |
| | (96 | ) | | — |
| | (490 | ) |
| Subtotal | — |
| | — |
|
| (1,068 | ) |
| 26 |
|
| (786 | ) |
| Purchases (2) | — |
| | 29 |
| | 96 |
| | 5 |
| | (403 | ) |
| Sales (3) | — |
| | — |
| | (62 | ) | | (1 | ) | | 14 |
|
| Settlements | — |
| | — |
| | (7,463 | ) | | (5 | ) | | — |
|
| Activity related to consolidated VIEs/VOEs | — |
| | (6 | ) | | — |
| | — |
| | — |
|
| Transfers into Level 3 (1) | — |
| | 5 |
| | — |
| | — |
| | — |
|
| Transfers out of Level 3 (1) | — |
| | (5 | ) | | — |
| | — |
| | — |
|
| Balance, December 31, 2018 | $ | — |
| | $ | 48 |
| | $ | 1,991 |
| | $ | 374 |
| | $ | (5,431 | ) |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Redeem
able
Preferred
Stock | | Other
Equity
Investments(2) | | GMIB
Reinsurance
Asset | | Separate
Accounts
Assets | | GWBL
and Other
Features
Liability | | Contingent Payment Arrangement |
| | (In Millions) |
| Balance, January 1, 2014 | $ | 15 |
| | $ | 52 |
| | $ | 6,747 |
| | $ | 237 |
| | $ | — |
| | $ | 38 |
|
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Earnings (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
|
| Investment gains (losses), net | — |
| | 1 |
| | — |
| | 15 |
| | — |
| | — |
|
| Increase (decrease) in the fair value of reinsurance contracts | — |
| | — |
| | 3,774 |
| | — |
| | — |
| | — |
|
| Policyholders’ benefits | — |
| | — |
| | — |
| | — |
| | (8 | ) | | — |
|
| Subtotal | — |
| | 4 |
| | 3,774 |
| | 15 |
| | (8 | ) | | — |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| |
|
|
Purchases (3) | — |
| | 8 |
| | 225 |
| | 16 |
| | 136 |
| | 9 |
|
Sales (4) | (15 | ) | | (1 | ) | | (35 | ) | | (3 | ) | | — |
| | (5 | ) |
Settlements (5) | — |
| | — |
| | — |
| | (5 | ) | | — |
| | — |
|
Transfers into Level 3 (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 (1) | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
| Balance, December 31, 2014 | $ | — |
| | $ | 61 |
| | $ | 10,711 |
| | $ | 260 |
| | $ | 128 |
| | $ | 42 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Redeemable Preferred Stock | | Other Equity Investments (2) | | GMIB Reinsurance Asset | | Separate Account Assets | | GMxB Derivative Features Liability |
| | (in millions) |
| Balance, January 1, 2017 | $ | 1 |
| | $ | 40 |
| | $ | 10,313 |
| | $ | 313 |
| | $ | (5,473 | ) |
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | |
| Income (loss) as: | | | | | | | | | |
| Investment gains (losses), net | — |
| | — |
| | — |
| | 29 |
| | — |
|
| Net derivative gains (losses), excluding non-performance risk | — |
| | — |
| | (6 | ) | | — |
| | 1,443 |
|
| Non-performance risk (4) | — |
| | — |
| | 75 |
| | — |
| | 149 |
|
| Subtotal | — |
| | — |
| | 69 |
| | 29 |
| | 1,592 |
|
Other comprehensive income(loss) | (1 | ) | | — |
| | — |
| | — |
| | — |
|
| Purchases (2) | — |
| | — |
| | 221 |
| | 13 |
| | (381 | ) |
| Sales (3) | — |
| | — |
| | (115 | ) | | (2 | ) | | 6 |
|
| Settlements | — |
| | — |
| | — |
| | (4 | ) | | — |
|
| Activity related to consolidated VIEs/VOEs | — |
| | (15 | ) | | — |
| | — |
| | — |
|
Transfers into level 3 (1) | — |
| | — |
| | — |
| | — |
| | — |
|
| Transfers out of level 3 (1) | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance, December 31, 2017 | $ | — |
| | $ | 25 |
| | $ | 10,488 |
| | $ | 349 |
| | $ | (4,256 | ) |
| | | | | | | | | | |
| Balance, January 1, 2016 | $ | — |
| | $ | 1 |
| | $ | 10,582 |
| | $ | 313 |
| | $ | (5,266 | ) |
| Total gains (losses), realized and unrealized, included in: | | | | | | | | | |
| Income (loss) as: | | | | | | | | | |
| Investment gains (losses), net | — |
| | — |
| | — |
| | 19 |
| | — |
|
| Net derivative gains (losses), excluding non-performance risk | — |
| | — |
| | (242 | ) | | — |
| | (126 | ) |
| Non-performance risk (4) | — |
| | — |
| | (20 | ) | | — |
| | 263 |
|
| Subtotal | — |
| | — |
| | (262 | ) | | 19 |
| | 137 |
|
| Other comprehensive income (loss) | — |
| | (1 | ) | | — |
| | — |
| | — |
|
| Purchases (2) | 1 |
| | — |
| | 223 |
| | 10 |
| | (348 | ) |
| Sales (3) | — |
| | — |
| | (230 | ) | | — |
| | 4 |
|
| Settlements | — |
| | — |
| | — |
| | (7 | ) | | — |
|
| Activities related to consolidated VIEs/VOEs | — |
| | 40 |
| | — |
| | — |
| | — |
|
| Transfers into level 3 (1) | — |
| | — |
| | — |
| | 1 |
| | — |
|
| Transfers out of level 3 (1) | — |
| |
|
| | — |
| | (23 | ) | | — |
|
| Balance, December 31, 2016 | $ | 1 |
| | $ | 40 |
| | $ | 10,313 |
| | $ | 313 |
| | $ | (5,473 | ) |
______________
| |
| (1) | Transfers into/out of Level 3 classification are reflected at beginning-of-period fair values. |
| |
| (2) | Includes Level 3 amounts for Trading securitiesFor the GMIB reinsurance contract asset, and consolidated VIE investments.GMxB derivative features liability, represents attributed fee. |
| |
| (3) | For the GMIB reinsurance contract asset, and GWBL and other features reserves, represents premiums. |
| |
(4) | For the GMIB reinsurance contract asset, represents recoveries from reinsurers and for GWBL and otherGMxB derivative features reservesliability represents benefits paid. |
| |
(5)(4) | For contingent payment arrangements, it represents payments under the arrangement.The Company’s non-performance risk is recorded through Net derivative gains (losses). |
The table below details changes in unrealized gains (losses) for 20162018, 2017 and 20152016 by category for Level 3 assets and liabilities still held at December 31, 2018, 2017 and 2016 and 2015, respectively:
|
| | | | | | | | | | | | | | | | | | | |
| | Earnings (Loss) | | |
| | Net Investment Income (Loss) | | Investment Gains (Losses), Net | | Increase (Decrease) in the Fair Value of Reinsurance Contracts | | Policy- holders’ Benefits | | OCI |
| | (In Millions) |
| Level 3 Instruments | | | | | | | | | |
| Full Year 2016 | | | | | | | | | |
| Still Held at December 31, 2016 | | | | | | | | | |
| Change in unrealized gains (losses): | | | | | | | | | |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| Corporate | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 11 |
|
| State and political subdivisions | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Commercial mortgage-backed | — |
| | — |
| | — |
| | — |
| | 9 |
|
| Asset-backed | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Other fixed maturities, available-for-sale | — |
| | — |
| | — |
| | — |
| | — |
|
| Subtotal | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 20 |
|
| GMIB reinsurance contracts | — |
| | — |
| | (261 | ) | | — |
| | — |
|
Separate Accounts’ assets(1) | — |
| | 20 |
| | — |
| | — |
| | — |
|
| GWBL and other features’ liability | — |
| | — |
| | — |
| | (20 | ) | | — |
|
| Total | $ | — |
| | $ | 20 |
| | $ | (261 | ) | | $ | (20 | ) | | $ | 20 |
|
| Level 3 Instruments | | | | | | | | | |
| Full Year 2015 | | | | | | | | | |
| Still Held at December 31, 2015 | | | | | | | | | |
| Change in unrealized gains (losses): | | | | | | | | | |
| Fixed maturities, available-for-sale: | | | | | | | | | |
| Corporate | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (25 | ) |
| State and political subdivisions | — |
| | — |
| | — |
| | — |
| | (2 | ) |
| Commercial mortgage-backed | — |
| | — |
| | — |
| | — |
| | 61 |
|
| Asset-backed | — |
| | — |
| | — |
| | — |
| | (4 | ) |
| Other fixed maturities, available-for-sale | — |
| | — |
| | — |
| | — |
| | — |
|
| Subtotal | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 30 |
|
| GMIB reinsurance contracts | — |
| | — |
| | (141 | ) | | — |
| | — |
|
Separate Accounts’ assets(1) | — |
| | 36 |
| | — |
| | — |
| | — |
|
| GWBL and other features’ liability | — |
| | — |
| | — |
| | 184 |
| | — |
|
| Total | $ | — |
| | $ | 36 |
| | $ | (141 | ) | | $ | 184 |
| | $ | 30 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | Earnings (Loss) | |
| | Investment Gains (Losses), Net | | Net Derivative Gains (Losses) | | OCI |
| | (in millions) |
| Held as of December 31, 2018: | | | | | |
| Change in unrealized gains (losses): | | | | | |
| Fixed maturities, available-for-sale | | | | | |
| Corporate | $ | — |
| | $ | — |
| | $ | (18 | ) |
| State and political subdivisions | — |
| | — |
| | (1 | ) |
| Asset-backed | — |
| | — |
| | (7 | ) |
| Subtotal | — |
| | — |
| | (26 | ) |
| GMIB reinsurance contracts | — |
| | (1,068 | ) | | — |
|
| Separate Accounts assets (1) | 26 |
| | — |
| | — |
|
| GMxB derivative features liability | — |
| | (786 | ) | | — |
|
| Total | $ | 26 |
| | $ | (1,854 | ) | | $ | (26 | ) |
| | | | | | |
| Held as of December 31, 2017: | | | | | |
| Change in unrealized gains (losses): | | | | | |
| Fixed maturities, available-for-sale | | | | | |
| Corporate | $ | — |
| | $ | — |
| | $ | 4 |
|
| Commercial mortgage-backed | — |
| | — |
| | 45 |
|
| Asset-backed | — |
| | — |
| | (9 | ) |
| Subtotal | — |
| | — |
| | 40 |
|
| GMIB reinsurance contracts | — |
| | 69 |
| | — |
|
| Separate Accounts assets (1) | 29 |
| | — |
| | — |
|
| GMxB derivative features liability | — |
| | 1,592 |
| | — |
|
| Total | $ | 29 |
| | $ | 1,661 |
| | $ | 40 |
|
| | | | | | |
| Held as of December 31, 2016: | | | | | |
| Change in unrealized gains (losses): | | | | | |
| Fixed maturities, available-for-sale | | | | | |
| Corporate | $ | — |
| | $ | — |
| | $ | 11 |
|
| State and political subdivisions | — |
| | — |
| | (1 | ) |
| Commercial mortgage-backed | — |
| | — |
| | 9 |
|
| Asset-backed | — |
| | — |
| | 1 |
|
| Subtotal | — |
| | — |
| | 20 |
|
| GMIB reinsurance contracts | — |
| | (262 | ) | | — |
|
| Separate Accounts assets (1) | 20 |
| | — |
| | — |
|
| GMxB derivative features liability | — |
| | 137 |
| | — |
|
| Total | $ | 20 |
| | $ | (125 | ) | | $ | 20 |
|
(1) thereThere is an investment expense that offsets this investment gain (loss).
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table disclosestables disclose quantitative information about Level 3 fair value measurements by category for assets and liabilities as of December 31, 20162018 and 2015,2017, respectively.
Quantitative Information about Level 3 Fair Value Measurements
| | | | | | | | | | | | Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average |
| | Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | (in millions) | |
| Assets: | (In Millions) | | | |
| Investments: | | | | | |
| Fixed maturities, available-for-sale: | | | | | |
| Corporate | $ | 55 |
| | Matrix pricing model | | Spread over the industry-specific benchmark yield curve | | 0 bps - 565 bps | | $ | 93 |
| | Matrix pricing
model | | Spread over Benchmark | | 15 - 580 bps | | 104 bps |
| | 636 |
| | Market comparable companies | | EBITDA multiples Discount rate Cash flow Multiples | | 4.3x - 25.6x
7.0% - 17.8%
14.0x - 16.5x | | 881 |
| | Market
comparable
companies | | EBITDA multiples
Discount rate
Cash flow multiples | | 4.1x - 37.8x
6.4% - 16.5%
1.8x - 18.0x | | 12.1x
10.7%
11.4x |
| Asset-backed | 2 |
| | Matrix pricing model | | Spread over U.S. Treasury curve | | 25 bps - 687 bps | |
| Separate Accounts’ assets | 295 |
| | Third party appraisal | | Capitalization rate Exit capitalization rate Discount rate | | 4.8%
5.7%
6.6% | |
| Separate Accounts assets | | | 352 |
| | Third party appraisal | | Capitalization rate
Exit capitalization rate
Discount rate | | 4.4%
5.6%
6.5% | |
| | 3 |
| | Discounted cash flow | | Spread over U.S. Treasury curve Discount factor | | 273 bps - 512 bps
1.1% - 7.0% | | 1 |
| | Discounted cash flow | | Spread over U.S. Treasury curve
Discount factor | | 248 bps
5.1% | |
| GMIB reinsurance contract asset | 10,309 |
| | Discounted cash flow | | Lapse Rates Withdrawal rates GMIB Utilization Rates Non-performance risk Volatility rates—Equity | | 1.5% - 5.7%
0.0% - 8.0%
0.0% - 16.0%
5 bps - 17 bps
11.0% - 38.0% | | 1,991 |
| | Discounted cash flow | | Lapse rates
Withdrawal rates
Utilization rates
Non-performance risk
Volatility rates -
Equity
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115 | | 1.0% - 6.27%
0.0% - 8.0%
0.0% - 16.0%
74 - 159 bps
10.0% - 34.0%
0.01% - 0.18%
0.07% - 0.54%
0.42% - 42.0% | |
| Liabilities: | | | | | | | |
| GWBL and other features liability | 164 |
| | Discounted cash flow | | Lapse Rates Withdrawal rates Volatility rates—Equity | | 1.0% - 11.0%
0.0% - 8.0%
11.0% - 38.0% | |
| GMIBNLG | | | 5,341 |
| | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Annuitization
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115 | | 189 bps
0.8% - 26.2%
0.0% - 12.1%
0.0% - 100.0%
0.01% - 0.19%
0.06% - 0.53%
0.41% - 41.2% | |
| GWBL/GMWB | | | 130 |
| | Discounted cash flow | | Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity | | 0.5% - 5.7%
0.0% - 7.0%
100% after delay
10.0% - 34.0% | |
| GIB | | | (48 | ) | | Discounted cash flow | | Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity | | 0.5% - 5.7%
0.0% - 8.0%
0.0% - 16.0%
10.0% - 34.0% | |
| GMAB | | | 7 |
| | Discounted cash flow | | Lapse rates
Volatility rates - Equity | | 1.0% - 5.7%
10.0% - 34.0% | |
| |
| (1) | Mortality rates vary by age and demographic characteristic such as gender. Mortality rate assumptions are based on a combination of company and industry experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuating the embedded derivatives. |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Quantitative Information about Level 3 Fair Value Measurements
| | | | | | | | | | | | Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average |
| | Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | (in millions) | |
| Assets: | (In Millions) | | | |
| Investments: | | | | | |
| Fixed maturities, available-for-sale: | | | | | |
| Corporate | $ | 61 |
| | Matrix pricing model | | Spread over the industry-specific benchmark yield curve | | 50 bps - 565 bps | | $ | 53 |
| | Matrix pricing model | | Spread over the industry-specific benchmark yield curve | | 0 - 565 bps | | 125 bps |
| | 154 |
| | Market comparable companies | | EBITDA multiples
Discount rate
Cash flow Multiples | | 7.8x - 19.1x
7.0% - 12.6%
14.0x - 16.5x | | 789 |
| | Market comparable companies | | EBITDA multiples
Discount rate
Cash flow multiples | | 5.3x - 27.9x
7.2% - 17.0%
9.0x - 17.7x | | 12.9x 11.1% 13.1x |
| Asset-backed | 3 |
| | Matrix pricing model | | Spread over U.S. Treasury curve | | 30 bps - 687 bps | |
| Other equity investments | 10 |
| | Market comparable companies | | Revenue multiple
Marketable Discount | | 2.5x - 4.8x
30.0% | |
| Separate Accounts’ assets | 271 |
| | Third party appraisal | | Capitalization rate Exit capitalization rate Discount rate | | 4.9%
5.9%
6.7% | |
| Separate Accounts assets | | | 326 |
| | Third party appraisal | | Capitalization rate
Exit capitalization rate
Discount rate | | 4.6%
5.6%
6.6% | |
| | 7 |
| | Discounted cash flow | | Spread over U.S. Treasury curve Gross domestic product rate Discount factor | | 280 bps - 411 bps
0.0% - 1.09%
2.3% - 5.9% | | 1 |
| | Discounted
cash flow | | Spread over U.S. Treasury curve
Discount factor | | 243 bps
4.4% | |
| GMIB reinsurance contract asset | 10,570 |
| | Discounted cash flow | | Lapse Rates Withdrawal rates GMIB Utilization Rates Non-performance risk Volatility rates - Equity | | 0.6% - 5.7%
0.2% - 8.0%
0.0% - 15%
5 bps - 18 bps
9% - 35% | | 10,488 |
| | Discounted cash flow | | Lapse rates
Withdrawal rates
GMIB Utilization rates
Non-performance risk
Volatility rates - Equity
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115 | | 1.0% - 6.3%
0.0% - 8.0%
0.0% - 16.0%
5bps - 10bps
9.9% - 30.9%
0.01% - 0.18%
0.07% - 0.54%
0.42% - 42.0% | |
| Liabilities: | | | | | |
| GWBL and other features liability | 120 |
| | Discounted cash flow | | Lapse Rates Withdrawal rates Volatility rates - Equity | | 1.0% - 5.7%
0.0% - 7.0%
9% - 35% | |
| GMIBNLG | | | 4,149 |
| | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
NLG Forfeiture rates
Long-term equity volatility
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115 | | 1.0%
0.8% - 26.2%
0.0% - 12.4%
0.0% - 16.0%
0.6% - 2.1%
20.0%
0.01% - 0.19%
0.06% - 0.53%
0.41% - 41.2% | |
| GWBL/GMWB | | | 130 |
| | Discounted cash flow | | Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity | | 0.9% - 5.7%
0.0% - 7.0%
0.0% - 16.0%
9.9% - 30.9% | |
| GIB | | | (27 | ) | | Discounted cash flow | | Lapse rates
Volatility rates - Equity | | 0.5% - 11.0%
9.9% - 30.9% | |
| GMAB | | | 5 |
| | Discounted cash flow | | Lapse rates
Volatility rates - Equity | | 0.5% - 11.0%
9.9% - 30.9% | |
____________
| |
| (1) | Mortality rates vary by age and demographic characteristic such as gender. Mortality rate assumptions are based on a combination of company and industry experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuating the embedded derivatives. |
Excluded from the tables above at December 31, 20162018 and 2015,2017, respectively, are approximately $594$826 million and $865$392 million of Level 3 fair value measurements of investments for which the underlying quantitative inputs are not developed by the Company and are not readily available. The fair value measurements of these Level 3 investments comprise approximately 37.5% and 63.1% of total assets classified as Level 3 and represent only 0.4% and 0.6% of total assets measured at fair value on a recurring basis at December 31, 2016 and 2015 respectively. These investments primarily consist of certain privately placed debt securities with limited trading activity, including commercial mortgage-, residential mortgage- and asset-backed instruments, and their fair values generally reflect unadjusted prices obtained from independent valuation service providers and indicative, non-binding quotes obtained from third-party broker-dealers recognized as market participants. Significant increases or decreases in the fair value amounts received from these pricing sources may result in the Company’s reporting significantly higher or lower fair value measurements for these Level 3 investments.
Included in the tables above at December 31, 2016 and 2015, respectively, are approximately $691 million and $215 million fair value of privately placed, available-for-sale corporate debt securities classified as Level 3.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The fair value of private placement securities is determined by application of a matrix pricing model or a market comparable company value technique, representing approximately 81.8% and 51.2% of the total fair value of Level 3 securities in the corporate fixed maturities asset class.technique. The significant unobservable input to the matrix pricing model valuation technique is the spread over the industry-specific benchmark yield curve. Generally, an increase or decrease in spreads would lead to directionally inverse movement in the fair value measurements of these securities. The significant unobservable input to the market comparable company valuation technique is the discount rate. Generally, a significant increase (decrease) in the discount rate would result in significantly lower (higher) fair value measurements of these securities.
Residential mortgage-backed securities classified as Level 3 primarily consist of non-agency paper with low trading activity. Included in the tables above at December 31, 20162018 and 2015,2017, there were no Level 3 securities that were determined by
application of a matrix pricingmatrix-pricing model and for which the spread over the U.S. Treasury curve is the most significant unobservable input to the pricing result. Generally, a change in spreads wouldlead to directionally inverse movementin the fair value measurements of these securities.
Asset-backed securities classified as Level 3 primarily consist of non-agency mortgage loan trust certificates, including subprime and Alt-A paper, credit tenant loans, and equipment financings. Included in the tables above at December 31, 20162018 and 2015, are approximately 8.3% and 7.5%, respectively, of the total fair value of these Level 32017, there were no securities that iswere determined by the application of a matrix pricing model andmatrix-pricing for which the spread over the U.S. Treasury curve is the most significant unobservable input to the pricing result. Significant increases (decreases) in spreads would result in significantly lower (higher) fair value measurements.
Included in other equity investments classified as Level 3 are reporting entities’ venture capital securities in the Technology, Media and Telecommunications industries. The fair value measurements of these securities include significant unobservable inputs including an enterprise value to revenue multiples and a discount rate to account for liquidity and various risk factors. Significant increases (decreases) in the enterprise value to revenue multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the discount rate would result in a significantly lower (higher) fair value measurement.
Separate Accounts’Accounts assets classified as Level 3 in the table at December 31, 20162018 and 2015,2017, primarily consist of a private real estate fund with a fair value of approximately $295 million and $271 million, a private equity investment with a fair value of approximately $1 million and $2 million and mortgage loans with fair value of approximately $2 million and $5 million, respectively.loans. A third partythird-party appraisal valuation technique is used to measure the fair value of the private real estate investment fund, including consideration of observable replacement cost and sales comparisons for the underlying commercial properties, as well as the results from applying a discounted cash flow approach. Significant increase (decrease) in isolation in the capitalization rate and exit capitalization rate assumptions used in the discounted cash flow approach to the appraisal value would result in a higher (lower) measure of fair value. A discounted cash flow approach is applied to determine the private equity investment for which the significant unobservable assumptions are the gross domestic product rate formula and a discount factor that takes into account various risks, including the illiquid nature of the investment. A significant increase (decrease) in the gross domestic product rate would have a directionally inverse effect on the fair value of the security. With respect to the fair value measurement of mortgage loans a discounted cash flow approach is applied, a significant increase (decrease) in the assumed spread over U.S. TreasuriesTreasury securities would produce a lower (higher) fair value measurement. Changes in the discount rate or factor used in the valuation techniques to determine the fair values of these private equity investments and mortgage loans generally are not correlated to changes in the other significant unobservable inputs. Significant increase (decrease) in isolation in the discount rate or factor would result in significantly lower (higher) fair value measurements. The remaining Separate Accounts’ investments classified as Level 3 excluded from the table consist of mortgage- and asset-backed securities with fair values of approximately $12 million and $3 million at December 31, 2016 and $28 million and $7 million at December 31, 2015, respectively. These fair value measurements are determined using substantially the same valuation techniques as earlier described above for the Company’s General Account investments in these securities.
Significant unobservable inputs with respect to the fair value measurement of the Level 3 GMIB reinsurance contract asset and the Level 3 liabilities identified in the table above are developed using the Company data. Validations of unobservable inputs are performed to the extent the Company has experience. When an input is changed the model is updated and the results of each step of the model are analyzed for reasonableness.
The significant unobservable inputs used in the fair value measurement of the Company’s GMIB reinsurance contract asset are lapse rates, withdrawal rates and GMIB utilization rates. Significant increases in GMIB utilization rates or decreases in lapse or withdrawal rates in isolation would tend to increase the GMIB reinsurance contract asset.
Fair value measurement of the GMIB reinsurance contract asset and liabilities includes dynamic lapse and GMIB utilization assumptions whereby projected contractual lapses and GMIB utilization reflect the projected net amount of risks of the contract. As the net amount of risk of a contract increases, the assumed lapse rate decreases and the GMIB utilization increases. Increases in volatility would increase the asset.asset and liabilities.
The significant unobservable inputs used in the fair value measurement of the Company’s GMIBNLG liability are lapse rates, withdrawal rates, GMIB utilization rates, adjustment for Non-performance risk and NLG forfeiture rates. NLG forfeiture rates are caused by excess withdrawals above the annual GMIB accrual rate that cause the NLG
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
to expire. Significant decreases in lapse rates, NLG forfeiture rates, adjustment for non-performance risk and GMIB utilization rates would tend to increase the GMIBNLG liability, while decreases in withdrawal rates and volatility rates would tend to decrease the GMIBNLG liability.
The significant unobservable inputs used in the fair value measurement of the Company’s GMWB and GWBL liability are lapse rates and withdrawal rates. Significant increases in withdrawal rates or decreases in lapse rates in isolation would tend to increase these liabilities. Increases in volatility would increase these liabilities.
The three AB acquisition-related contingent consideration liabilities (with a combined fair value of $18 million and $31 million as of December 31, 2016 and 2015, respectively) are currently valued using projected AUM growth rates with a weighted average of 18.0% and 46.0%, revenue growth rates (with a range of 4.0% to 31.0%) and 43.0%, and a discount rate (with a range of 1.4% to 6.4%) and 3.0% as of December 31, 2016 and December 31, 2015, respectively.
The carrying values and fair values at December 31, 2016 and 2015 for financial instruments not otherwise disclosed in Notes 3 and 12 are presented in the table below. Certain financial instruments are exempt from the requirements for fair value disclosure, such as insurance liabilities other than financial guarantees and investment contracts, limited partnerships accounted for under the equity method and pension and other postretirement obligations.
The carrying values and fair values at December 31, 2018 and 2017 for financial instruments not otherwise disclosed in Note 3 are presented in the table below.
|
| | | | | | | | | | | | | | | | | | | |
| | Carrying Value | | Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (In Millions) |
| December 31, 2016: | | | | | | | | | |
| Mortgage loans on real estate | $ | 9,757 |
| | $ | — |
| | $ | — |
| | $ | 9,608 |
| | $ | 9,608 |
|
| Loans to affiliates | 703 |
| | — |
| | 775 |
| | — |
| | 775 |
|
| Policyholders liabilities: Investment contracts | 2,226 |
| | — |
| | — |
| | 2,337 |
| | 2,337 |
|
| Funding Agreements | 2,255 |
| | — |
| | 2,202 |
| | — |
| | 2,202 |
|
| Policy loans | 3,361 |
| | — |
| | — |
| | 4,257 |
| | 4,257 |
|
| Short-term debt | 513 |
| | — |
| | 513 |
| | — |
| | 513 |
|
| Separate Account Liabilities | 6,194 |
| | — |
| | — |
| | 6,194 |
| | 6,194 |
|
| December 31, 2015: | | | | | | | | | |
| Mortgage loans on real estate | $ | 7,171 |
| | $ | — |
| | $ | — |
| | $ | 7,257 |
| | 7,257 |
|
| Loans to affiliates | 1,087 |
| | — |
| | 795 |
| | 390 |
| | 1,185 |
|
| Policyholders liabilities: Investment contracts | 7,325 |
| | — |
| | — |
| | 7,430 |
| | 7,430 |
|
| Funding Agreements | 500 |
| | — |
| | 500 |
| | — |
| | 500 |
|
| Policy loans | 3,393 |
| | — |
| | — |
| | 4,343 |
| | 4,343 |
|
| Short-term debt | 584 |
| | — |
| | 584 |
| | — |
| | 584 |
|
| Separate Account Liabilities | 5,124 |
| | — |
| | — |
| | 5,124 |
| | 5,124 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Carrying Value | | Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in millions) |
| December 31, 2018: | | | | | | | | | |
| Mortgage loans on real estate | $ | 11,818 |
| | $ | — |
| | $ | — |
| | $ | 11,478 |
| | $ | 11,478 |
|
| Loans to affiliates | 600 |
| | — |
| | 603 |
| | — |
| | 603 |
|
| Policyholders’ liabilities: Investment contracts | 1,974 |
| | — |
| | — |
| | 2,015 |
| | 2,015 |
|
| FHLBNY funding agreements | 4,002 |
| | — |
| | 3,956 |
| | — |
| | 3,956 |
|
| Policy loans | 3,267 |
| | — |
| | — |
| | 3,944 |
| | 3,944 |
|
| Short-term and long-term debt | — |
| | — |
| | — |
| | — |
| | — |
|
| Loans from affiliates | 572 |
| | — |
| | 572 |
| | — |
| | 572 |
|
| Separate Accounts liabilities | 7,406 |
| | — |
| | — |
| | 7,406 |
| | 7,406 |
|
| | | | | | | | | | |
| December 31, 2017: | | | | | | | | | |
| Mortgage loans on real estate | $ | 10,935 |
| | $ | — |
| | $ | — |
| | $ | 10,895 |
| | $ | 10,895 |
|
| Loans to affiliates | 703 |
| | — |
| | 700 |
| | — |
| | 700 |
|
| Policyholders’ liabilities: Investment contracts | 2,068 |
| | — |
| | — |
| | 2,170 |
| | 2,170 |
|
| FHLBNY funding agreements | 3,014 |
| | — |
| | 3,020 |
| | — |
| | 3,020 |
|
| Policy loans | 3,315 |
| | — |
| | — |
| | 4,210 |
| | 4,210 |
|
| Short-term and long-term debt | 203 |
| | — |
| | 202 |
| | — |
| | 202 |
|
| Separate Accounts liabilities | 7,537 |
| | — |
| | — |
| | 7,537 |
| | 7,537 |
|
As our COLI policies are recorded at their cash surrender value, they are not required to be included in the table above. For further details of our accounting policies pertaining to COLI, see Note 2.
Fair values for commercial and agricultural mortgage loans on real estate are measured by discounting future contractual cash flows to be received on the mortgage loan using interest rates at which loans with similar characteristics and credit quality would be made. The discount rate is derived from takingbased on the appropriate U.S. Treasury rate with a like term to the remaining term of the loan and addingto which a spread reflective of the risk premium associated with the specific loan.loan is added. Fair values for mortgage loans anticipated to be foreclosed and problem mortgage loans are limited to the fair value of the underlying collateral, if lower.
Fair values for the Company’s long-term debt related to real estate joint ventures are determined by a third-party appraisal and assessed for reasonableness. The Company’s short-term debt primarily includes commercial paper issued by AB with short-term maturities and bookcarrying value approximates fair value. The fair values for the Company’s other long-term debt are determined by Bloomberg’s evaluated pricing service, which uses direct observations or observed comparables. The fair values of the Company’s borrowing and lending arrangements with AXA affiliated entities are determined from quotations provided by brokers knowledgeable about these securities and internally assessedin the same manner as for reasonableness,such transactions with third parties, including matrix pricing models for debt securities and discounted cash flow analysis for mortgage loans.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The fair value of policy loans is calculated by discounting expected cash flows based upon the U.S. treasury yield curve and historical loan repayment patterns.
FairThe fair values for FHLBNYof the Company’s funding agreements are determined from a matrix pricing model and are internally assessed for reasonableness. The matrix pricing model for FHLBNYby discounted cash flow analysis based on the indicative funding agreements utilizes an independently sourced Treasury curve which is separately sourced fromagreement rates published by the Barclays’ suite of curves.FHLB.
The fair values for the Company’s association plans contracts, supplementary contracts not involving life contingencies (“SCNILC”), deferred annuities and certain annuities, which are included in Policyholder’sPolicyholders’ account balances and liabilities for investment contracts with fund investments in Separate Accounts are estimated using projected cash flows discounted at rates reflecting current market rates. Significant unobservable inputs reflected in the cash flows include lapse rates and
withdrawal rates. Incremental adjustments may be made to the fair value to reflect non-performance risk. Certain other products such as Access Accounts and Escrow Shield Plus product reserves are held at book value.
| |
8) | GMDB, GMIB, GIB, GWBL AND OTHER FEATURES AND NO LAPSE GUARANTEE FEATURES |
A) 8) INSURANCE LIABILITIES
Variable Annuity Contracts – GMDB, GMIB, GIB and GWBL and Other Features
The Company has certain variable annuity contracts with GMDB, GMIB, GIB and GWBL and other features in-force that guarantee one of the following:
Return of Premium: the benefit is the greater of current account value or premiums paid (adjusted for withdrawals);
Ratchet: the benefit is the greatest of current account value, premiums paid (adjusted for withdrawals), or the highest account value on any anniversary up to contractually specified ages (adjusted for withdrawals);
Roll-Up: the benefit is the greater of current account value or premiums paid (adjusted for withdrawals) accumulated at contractually specified interest rates up to specified ages;
Combo: the benefit is the greater of the ratchet benefit or the roll-up benefit, which may include either a five year or an annual reset; or
Withdrawal: the withdrawal is guaranteed up to a maximum amount per year for life.
The following table summarizes theLiabilities for Variable Annuity Contracts with GMDB and GMIB Features and no NLG Feature
The change in the liabilities beforefor variable annuity contracts with GMDB and GMIB features and no NLG feature are summarized in the tables below. The amounts for the direct contracts (before reinsurance ceded,ceded) and assumed contracts are reflected in the Balance Sheetconsolidated balance sheets in futureFuture policy benefits and other policyholders’ liabilities:liabilities. The amounts for the ceded contracts are reflected in the consolidated balance sheets in Amounts due from reinsurers.
Change in Liability for Variable Annuity Contracts with GMDB and GMIB Features and
No NLG Feature
For the Years Ended December 31, 2018, 2017 and 2016
| | | | GMDB | | GMIB | | Total | GMDB | | GMIB |
| | (In Millions) | Direct | Ceded | | Direct | Ceded |
| Balance at January 1, 2014 | $ | 1,626 |
| | 4,203 |
| | $ | 5,829 |
| |
| Paid guarantee benefits | (231 | ) | | (220 | ) | | (451 | ) | |
| Other changes in reserve | 334 |
| | 1,661 |
| | 1,995 |
| |
| Balance at December 31, 2014 | 1,729 |
| | 5,644 |
| | 7,373 |
| |
| Paid guarantee benefits | (313 | ) | | (89 | ) | | (402 | ) | |
| Other changes in reserve | 1,570 |
| | (258 | ) | | 1,312 |
| |
| Balance at December 31, 2015 | 2,986 |
| | 5,297 |
| | 8,283 |
| |
| | | (in millions) |
| Balance at January 1, 2016 | | $ | 2,991 |
| $ | (1,430 | ) | | $ | 3,886 |
| $ | (10,575 | ) |
| Paid guarantee benefits | (357 | ) | | (280 | ) | | (637 | ) | (357 | ) | 174 |
| | (281 | ) | 230 |
|
| Other changes in reserve | 583 |
| | 560 |
| | 1,143 |
| 525 |
| (302 | ) | | 203 |
| 31 |
|
| Balance at December 31, 2016 | $ | 3,212 |
| | $ | 5,577 |
| | $ | 8,789 |
| 3,159 |
| (1,558 | ) | | 3,808 |
| (10,314 | ) |
| Paid guarantee benefits | | (354 | ) | 171 |
| | (151 | ) | 115 |
|
| Other changes in reserve | | 1,249 |
| (643 | ) | | 1,097 |
| (289 | ) |
| Balance at December 31, 2017 | | 4,054 |
| (2,030 | ) | | 4,754 |
| (10,488 | ) |
| Paid guarantee benefits | | (394 | ) | 70 |
| | (153 | ) | 61 |
|
| Other changes in reserve | | 994 |
| 1,853 |
| | (860 | ) | 8,435 |
|
| Balance at December 31, 2018 | | $ | 4,654 |
| $ | (107 | ) | | $ | 3,741 |
| $ | (1,992 | ) |
Related GMDB reinsurance ceded amounts were:
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
| | GMDB |
| | (In Millions) |
| Balance at January 1, 2014 | $ | 791 |
|
| Paid guarantee benefits | (114 | ) |
| Other changes in reserve | 155 |
|
| Balance at December 31, 2014 | 832 |
|
| Paid guarantee benefits | (148 | ) |
| Other changes in reserve | 746 |
|
| Balance at December 31, 2015 | 1,430 |
|
| Paid guarantee benefits | (174 | ) |
| Other changes in reserve | 302 |
|
| Balance at December 31, 2016 | $ | 1,558 |
|
Liabilities for Embedded and Freestanding Insurance Related Derivatives
The liability for the GMxB derivative features liability, the liability for SCS, SIO, MSO and IUL indexed features and the asset and liability for the GMIB reinsurance contracts are considered embedded or freestanding insurance derivatives and are reported at fair value. For the fair value of the assets and liabilitiesassociated with these embedded or freestanding insurance derivatives,see Note 7.
Account Values and Net Amount at Risk
The December 31, 2016 valuesAccount Values and Net Amount at Risk (“NAR”) for direct variable annuity contracts in force on such date with GMDB and GMIB features as of December 31, 2018 are presented in the following table.tables by guarantee type. For contracts with the GMDB feature, the net amount at riskNAR in the event of death is the amount by which the GMDB benefits exceedfeature exceeds the related account values.Account Values. For contracts with the GMIB feature, the net amount at riskNAR in the event of annuitizationis the amount by which the present value of the GMIB benefits exceedsexceed the related account values,Account Values, taking into account the relationship between current annuity purchase rates and the GMIB guaranteed annuity purchase rates. Since variable annuity contracts with GMDB guaranteesfeatures may also offer GMIB guarantees in the same contract, the GMDB and GMIB amounts listed are not mutually exclusive:exclusive.
Direct Variable Annuity Contracts with GMDB and GMIB Features
As of December 31, 2018
|
| | | | | | | | | | | | | | | | | | | |
| | Return of Premium | | Ratchet | | Roll-Up | | Combo | | Total |
| | (Dollars In Millions) |
| GMDB: | | | | | | | | | |
| Account values invested in: | | | | | | | | | |
| General Account | $ | 13,642 |
| | $ | 121 |
| | $ | 72 |
| | $ | 220 |
| | $ | 14,055 |
|
| Separate Accounts | $ | 40,736 |
| | $ | 8,905 |
| | $ | 3,392 |
| | $ | 33,857 |
| | $ | 86,890 |
|
| Net amount at risk, gross | $ | 237 |
| | $ | 154 |
| | $ | 2,285 |
| | $ | 16,620 |
| | $ | 19,296 |
|
| Net amount at risk, net of amounts reinsured | $ | 237 |
| | $ | 108 |
| | $ | 1,556 |
| | $ | 7,152 |
| | $ | 9,053 |
|
| Average attained age of contractholders | 51.2 |
| | 65.8 |
| | 72.3 |
| | 67.1 |
| | 55.1 |
|
| Percentage of contractholders over age 70 | 9.2 | % | | 37.1 | % | | 60.4 | % | | 40.6 | % | | 17.1 | % |
| Range of contractually specified interest rates | N/A |
| | N/A |
| | 3%-6% |
| | 3%-6.5% |
| | 3%-6.5% |
|
| GMIB: | | | | | | | | | |
| Account values invested in: | | | | | | | | | |
| General Account | N/A |
| | N/A |
| | $ | 33 |
| | $ | 321 |
| | $ | 354 |
|
| Separate Accounts | N/A |
| | N/A |
| | $ | 18,170 |
| | $ | 39,678 |
| | $ | 57,848 |
|
| Net amount at risk, gross | N/A |
| | N/A |
| | $ | 1,084 |
| | $ | 6,664 |
| | $ | 7,748 |
|
| Net amount at risk, net of amounts reinsured | N/A |
| | N/A |
| | $ | 334 |
| | $ | 1,675 |
| | $ | 2,009 |
|
| Weighted average years remaining until annuitization | N/A |
| | N/A |
| | 1.6 |
| | 1.3 |
| | 1.3 |
|
| Range of contractually specified interest rates | N/A |
| | N/A |
| | 3%-6% |
| | 3%-6.5% |
| | 3%-6.5% |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Guarantee Type |
| | Return of Premium | | Ratchet | | Roll-Up | | Combo | | Total |
| | (in millions; except age and interest rate) |
| Variable annuity contracts with GMDB features | | | | | | | | | |
| Account Values invested in: | | | | | | | | | |
| General Account | $ | 14,035 |
| | $ | 102 |
| | $ | 61 |
| | $ | 184 |
| | $ | 14,382 |
|
| Separate Accounts | 41,463 |
| | 8,382 |
| | 2,903 |
| | 30,406 |
| | 83,154 |
|
| Total Account Values | $ | 55,498 |
| | $ | 8,484 |
| | $ | 2,964 |
| | $ | 30,590 |
| | $ | 97,536 |
|
| | | | | | | | | | |
| Net Amount at Risk, gross | $ | 418 |
| | $ | 791 |
| | $ | 2,291 |
| | $ | 20,587 |
| | $ | 24,087 |
|
| Net Amount at Risk, net of amounts reinsured | $ | 418 |
| | $ | 772 |
| | $ | 1,615 |
| | $ | 20,587 |
| | $ | 23,392 |
|
| | | | | | | | | | |
| Average attained age of policyholders (in years) | 51.4 |
| | 67.0 |
| | 73.6 |
| | 69.0 |
| | 55.3 |
|
| Percentage of policyholders over age 70 | 10.0 | % | | 43.0 | % | | 65.5 | % | | 49.9 | % | | 18.8 | % |
| Range of contractually specified interest rates | N/A |
| | N/A |
| | 3% - 6% |
| | 3% - 6.5% |
| | 3% - 6.5% |
|
| | | | | | | | | | |
| Variable annuity contracts with GMIB features | | | | | | | | | |
| Account Values invested in: | | | | | | | | | |
| General Account | $ | — |
| | $ | — |
| | $ | 19 |
| | $ | 251 |
| | $ | 270 |
|
| Separate Accounts | — |
| | — |
| | 19,407 |
| | 33,428 |
| | 52,835 |
|
| Total Account Values | $ | — |
| | $ | — |
| | $ | 19,426 |
| | $ | 33,679 |
| | $ | 53,105 |
|
| | | | | | | | | | |
| Net Amount at Risk, gross | $ | — |
| | $ | — |
| | $ | 994 |
| | $ | 9,156 |
| | $ | 10,150 |
|
| Net Amount at Risk, net of amounts reinsured | $ | — |
| | $ | — |
| | $ | 309 |
| | $ | 8,268 |
| | $ | 8,577 |
|
| | | | | | | | | | |
| Average attained age of policyholders (in years) | N/A |
| | N/A |
| | 68.9 |
| | 68.8 |
| | 68.8 |
|
| Weighted average years remaining until annuitization | N/A |
| | N/A |
| | 1.7 |
| | 0.5 |
| | 0.6 |
|
| Range of contractually specified interest rates | N/A |
| | N/A |
| | 3% - 6% |
| | 3% - 6.5% |
| | 3% - 6.5% |
|
For more information about the reinsurance programs of the Company’s GMDB and GMIB exposure, see “Reinsurance”“Reinsurance Agreements” in Note 9.
The liability for SCS, SIO, MSO and IUL indexed features and the GIB and GWBL and other features, not included above, was $1,051 million and $494 million at December 31, 2016 and 2015, respectively, which are accounted for as embedded derivatives. The liability for GIB, GWBL and other features reflects the present value of expected future payments (benefits) less the fees attributable to these features over a range of market consistent economic scenarios.10.
Variable Annuity Inforce management. The Company continues to proactively manage its variable annuity in-force business. Since 2012, the Company has initiated several programs to purchase from certain contractholders the GMDB and GMIB riders contained in their Accumulator® contracts. In March 2016, a program to give contractholders an option to elect a full buyout of their rider or a new partial (50%) buyout of their rider expired. The Company believes that buyout programs are mutually beneficial to both the Company and contractholders who no longer need or want all or part of the GMDB or GMIB rider. To reflect the actual payments and reinsurance credit received from the buyout program that expired in March 2016 the Company recognized a $4 million increase to Net earnings in 2016. For additional information, see “Accounting for VA Guarantee Features” in Note 2.128
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
B) Separate Account Investments by Investment Category Underlying Variable Annuity Contracts with GMDB and GMIB Features
The total account valuesAccount Values of variable annuity contracts with GMDB and GMIB features include amounts allocated to the guaranteed interest option, which is part of the General Account and variable investment options that invest through Separate Accounts in variable insurance trusts. The following table presents the aggregate fair value of assets, by major investment category, held by Separate Accounts that support variable annuity contracts with GMDB and GMIB benefits and guarantees.features. The investment performance of the assets impacts the related account valuesAccount Values and, consequently, the net amount of riskNAR associated with the GMDB and GMIB benefits and guarantees. SinceBecause the Company’s variable annuity contracts withoffer both GMDB benefits and guarantees may also offer GMIB benefits and guarantees in each contract, thefeatures, GMDB and GMIB amounts listed are not mutually exclusive:exclusive.
Investment in Variable Insurance Trust Mutual Funds
| | | | December 31, | As of December 31, |
| | 2016 | | 2015 | 2018 | | 2017 |
| | (In Millions) | GMDB | | GMIB | | GMDB | | GMIB |
| GMDB: | | | | |
| | | (in millions) |
| Investment type: | | | | | | | | |
| Equity | $ | 69,625 |
| | $ | 66,230 |
| $ | 35,541 |
| | $ | 15,759 |
| | $ | 41,658 |
| | $ | 19,676 |
|
| Fixed income | 2,483 |
| | 2,686 |
| 5,173 |
| | 2,812 |
| | 5,469 |
| | 3,110 |
|
| Balanced | 14,434 |
| | 15,350 |
| 41,588 |
| | 33,974 |
| | 46,577 |
| | 38,398 |
|
| Other | 348 |
| | 374 |
| 852 |
| | 290 |
| | 968 |
| | 314 |
|
| Total | $ | 86,890 |
| | $ | 84,640 |
| $ | 83,154 |
| | $ | 52,835 |
| | $ | 94,672 |
| | $ | 61,498 |
|
| GMIB: | | | | |
| Equity | $ | 45,931 |
| | $ | 43,874 |
| |
| Fixed income | 1,671 |
| | 1,819 |
| |
| Balanced | 10,097 |
| | 10,696 |
| |
| Other | 149 |
| | 170 |
| |
| Total | $ | 57,848 |
| | $ | 56,559 |
| |
C) Hedging Programs for GMDB, GMIB, GIB and GWBL and Other Features
Beginning in 2003, AXA Equitablethe Company established a program intended to hedge certain risks associated first with the GMDB feature and, beginning in 2004, with the GMIB feature of the Accumulator®Accumulator series of variable annuity products. The program has also been extended to cover other guaranteed benefits as they have been made available. This program utilizes derivative contracts, such as exchange-traded equity, currency and interest rate futures contracts, total return and/or equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options, that collectively are managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in the capital markets. At the present time, this program hedges certain economic risks on products sold from 2001 forward, to the extent such risks are not externally reinsured. At December 31, 2016, the total account value and net amount at risk of the hedged variable annuity contracts were $51,961 million and $7,954 million, respectively, with the GMDB feature and $38,559 million and $3,285 million, respectively, with the GMIB and GIB feature.
These programs do not qualify for hedge accounting treatment. Therefore, gains (losses) on the derivatives contracts used in these programs, including current period changes in fair value, are recognized in netNet investment income (loss) in the period in which they occur, and may contribute to earningsincome (loss) volatility.
D) Variable and Interest-Sensitive Life Insurance Policies – No Lapse Guarantee- NLG
The no lapse guaranteeNLG feature contained in variable and interest-sensitive life insurance policies keeps them in force in situations where the policy value is not sufficient to cover monthly charges then due. The no lapse guaranteeNLG remains in effect so long as the policy meets a contractually specified premium funding test and certain other requirements.
The following table summarizeschange in the no lapse guaranteeliabilities for NLG liabilities, reflected in the General Account in Future policy benefits and other policyholders’ liabilities the related reinsurance reserve ceded, reflected in Amounts due from reinsurers and deferred cost of reinsurance, reflected in Other assets in the Consolidatedconsolidated balance sheets.sheets is summarized in the table below:
| | | | Direct Liability | | Reinsurance Ceded | | Net | Direct Liability | | Reinsurance Ceded | | Net |
| | (In Millions) | (in millions) |
| Balance at January 1, 2014 | $ | 829 |
| | $ | (441 | ) | | $ | 388 |
| |
| Other changes in reserves | 135 |
| | (114 | ) | | 21 |
| |
| Balance at December 31, 2014 | 964 |
| | (555 | ) | | 409 |
| |
| Other changes in reserves | 120 |
| | 16 |
| | 136 |
| |
| Balance at December 31, 2015 | 1,084 |
| | (539 | ) | | 545 |
| |
| Balance at January 1, 2016 | | $ | 1,144 |
| | $ | (510 | ) | | $ | 634 |
|
| Other changes in reserves | 118 |
| | (84 | ) | | 34 |
| 38 |
| | (96 | ) | | (58 | ) |
| Balance at December 31, 2016 | $ | 1,202 |
| | $ | (623 | ) | | $ | 579 |
| 1,182 |
| | (606 | ) | | 576 |
|
| Paid guarantee benefits | | (24 | ) | | — |
| | (24 | ) |
| Other changes in reserves | | (466 | ) | | (58 | ) | | (524 | ) |
| Balance at December 31, 2017 | | 692 |
| | (664 | ) | | 28 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | Direct Liability | | Reinsurance Ceded | | Net |
| | (in millions) |
| Paid guarantee benefits | (23 | ) | | — |
| | (23 | ) |
| Other changes in reserves | 118 |
| | (69 | ) | | 49 |
|
| Balance at December 31, 2018 | $ | 787 |
| | $ | (733 | ) | | $ | 54 |
|
9) REVENUE RECOGNITION
See “Revenue Recognition” in Note 2 for a description of the revenues presented in the table below. The adoption of ASC 606 had no material impact on revenue recognition in 2018. The table below presents the revenues recognized for the years ended December 31, 2018, 2017 and 2016, disaggregated by category:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Investment management, advisory and service fees: | | | | | |
| Base fees | $ | 728 |
| | $ | 720 |
| | $ | 674 |
|
| Distribution services | 301 |
| | 287 |
| | 277 |
|
| Total investment management and service fees | $ | 1,029 |
| | $ | 1,007 |
| | $ | 951 |
|
| | | | | | |
| Other income | $ | 33 |
| | $ | 35 |
| | $ | 23 |
|
For revenue related to AB, see Note 19.
10) REINSURANCE AGREEMENTS
The Company assumes and cedes reinsurance with other insurance companies. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Ceded reinsurance does not relieve the originating insurer of liability. The following table summarizes the effect of reinsurance:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | | | (in millions) | | |
| Direct premiums | $ | 836 |
| | $ | 880 |
| | $ | 850 |
|
| Reinsurance assumed | 186 |
| | 195 |
| | 206 |
|
| Reinsurance ceded | (160 | ) | | (171 | ) | | (176 | ) |
| Net premiums | $ | 862 |
| | $ | 904 |
| | $ | 880 |
|
| Policy charges and fee income ceded | $ | 467 |
| | $ | 718 |
| | $ | 640 |
|
| Policyholders’ benefits ceded | $ | 592 |
| | $ | 694 |
| | $ | 942 |
|
Ceded Reinsurance
The Company reinsures most of its new variable life, UL and term life policies on an excess of retention basis. The Company generally retains on a per life basis up to $25 million on each single-life policyfor single lives and $30 million on each second-to-die policy,for joint lives with the excess 100% reinsured. The Company also reinsures the entire risk on certain substandard underwriting risks and in certain other cases.
Effective February 1, 2018, AXA Equitable Life entered into a coinsurance reinsurance agreement (the “Coinsurance Agreement”) to cede 90% of its single premium deferred annuities (“SPDA”) products issued between 1978-2001 and its Guaranteed Growth Annuity (“GGA”) single premium deferred annuity products issued between 2001-2014. As a result of this agreement, AXA Equitable Life transferred securities with a market value of $604 million and cash of $31 million to equal the statutory reserves of approximately $635 million. As the risks transferred by AXA Equitable Life to the reinsurer under the Coinsurance Agreement are not considered insurance risks and therefore do not qualify for reinsurance accounting, AXA Equitable Life applied deposit accounting. Accordingly, AXA Equitable
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Life recorded the transferred assets of $635 million as a deposit asset recorded in Other assets, net of the ceding commissions paid to the reinsurer.
At December 31, 2016,2018 and 2017, the Company had reinsured with non-affiliates and affiliates in the aggregate approximately 3.8%2.9% and 49.3%3.5%, respectively, of its current exposure to the GMDB obligation on annuity contracts in-force and, subject to certain maximum amounts or caps in any one period, approximately 18.0%15.5% and 56.0%, respectively,16.8% of its current liability exposure, respectively, resulting from the GMIB feature. For additional information, see Note 8.8 .
Based on management’s estimates of future contract cash flows and experience, the estimated net fair values of the ceded GMIB reinsurance contracts, considered derivatives were $1,991 million and $10,488 million at December 31, 20162018 and 2015 were $10,3092017, respectively. The estimated fair values decreased $8,497 million and $10,570$268 million respectively. The increases (decreases) in fair value were $(261) during 2018 and 2016, respectively, and increased$174 million $(141) million and $3,964 million for 2016, 2015 and 2014, respectively.during2017.
At December 31, 20162018 and 2015, respectively,2017, third-party reinsurance recoverables related to insurance contracts amounted to $2,458$2,243 million and $2,420 million, respectively. Additionally, $1,689 million and $2,458$1,882 million of which $2,381 million and $2,005 millionthe amounts due from reinsurers related to threetwo specific reinsurers, which were Zurich Insurance Company Ltd. (AA - rating)rating by S&P), Chubb Tempest Reinsurance Ltd. (AA rating) and Connecticut GeneralPaul Revere Life Insurance Company (AA- rating)(A- rating by S&P). At December 31, 2016 and 2015, affiliated reinsurance recoverables related to insurance contracts amounted to $2,177 million and $2,009 million, respectively. A contingent liability exists with respect to reinsurance should the reinsurers be unable to meet their obligations.
Reinsurance payables related to insurance contracts were $125$113 million and $131$134 million, at December 31, 20162018 and 2015,2017, respectively.
The Company cedes substantially all of its group life and health business to a third partythird-party insurer. Insurance liabilities ceded totaled $82$62 million and $92$71 million at December 31, 20162018 and 2015,2017, respectively.
The Company also cedes a portion of its extended term insurance and paid-up life insurance and substantially all of its individual disability income business through various coinsurance agreements.
Assumed Reinsurance
In addition to the sale of insurance products, the Company currently acts as a professional retrocessionaire by assuming risk from professional reinsurers. The Company has also assumedassumes accident, life, health, annuity, aviation, special risk and space risks by participating in or reinsuring various reinsurance pools and arrangements. In addition to the sale of insurance products, AXA Equitable currently acts as a professional retrocessionaire by assuming life reinsurance from professional reinsurers. Reinsurance assumed reserves were $712 million and $716 million at December 31, 20162018 and 2015 were $734 million and $744 million,2017, respectively.
For affiliated reinsurance agreements with affiliates, see “Related Party Transactions” in Note 11.12.
The following table summarizes11) LONG-TERM DEBT
Disposition of Real Estate Joint Ventures
In March 2018, the effectCompany sold its interest in two consolidated real estate joint ventures to AXA France for a total purchase price of reinsurance:
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | | | (In Millions) | | |
| Direct premiums | $ | 850 |
| | $ | 820 |
| | $ | 844 |
|
| Reinsurance assumed | 206 |
| | 207 |
| | 211 |
|
| Reinsurance ceded | (176 | ) | | (173 | ) | | (181 | ) |
| Premiums | $ | 880 |
| | $ | 854 |
| | $ | 874 |
|
| Universal Life and Investment-type Product Policy Fee Income Ceded | $ | 640 |
| | $ | 645 |
| | $ | 630 |
|
| Policyholders’ Benefits Ceded | $ | 942 |
| | $ | 527 |
| | $ | 726 |
|
Individual Disability Income and Major Medical
Claim reserves and associated liabilities for individual DI and major medical policies were $1,918approximately $143 million, which resulted in a pre-tax loss of $0.2 million and $1,789the reduction of $202 million before ceded reserves of $1,849 million and $1,709 million atlong-term debt on the Company’s balance sheet for the year ended December 31, 20162018.
12) RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operating decisions. The Company has entered into a number of related party transactions with AXA and 2015, respectively. At December 31, 2016its subsidiaries that are not part of the Company (collectively, “AXA Affiliates”) and 2015, respectively, $1,676 millionother related parties that are described herein.
Since transactions with related parties may raise potential or actual conflicts of interest between the related party and $1,652 million of DI reservesthe Company, the Company is subject to Holdings’ related party transaction policy which requires certain related party transactions to be reviewed and associated liabilities were ceded through indemnity reinsurance agreements with a singular reinsurance group, rated AA-. Net incurred benefits (benefits paid plus changes in claim reserves) and benefits paid for individual DI and major medical policies are summarized below:approved by independent Audit Committee members.
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Incurred benefits related to current year | $ | 7 |
| | $ | 11 |
| | $ | 14 |
|
| Incurred benefits related to prior years | 15 |
| | 22 |
| | 16 |
|
| Total Incurred Benefits | $ | 22 |
| | $ | 33 |
| | $ | 30 |
|
| Benefits paid related to current year | $ | 17 |
| | $ | 18 |
| | $ | 20 |
|
| Benefits paid related to prior years | 15 |
| | 13 |
| | 11 |
|
| Total Benefits Paid | $ | 32 |
| | $ | 31 |
| | $ | 31 |
|
As of December 31, 2016 and 2015, the Company had $513 million and $584 million, respectively, in commercial paper outstanding with weighted average interest rates of approximately 0.9% and 0.5%, respectively, all of which is related to AB.
AB has a $1,000 million committed, unsecured senior revolving credit facility (“AB Credit Facility”) with a group of commercial banks and other lenders. The AB Credit Facility provides for possible increases in the principal amount by up to an aggregate incremental amount of $250 million, any such increase being subject to the consent of the affected lenders. The AB Credit Facility is available for AB and SCB LLC’s business purposes, including the support of AB’s $1,000 million commercial paper program. Both AB and SCB LLC can draw directly under the AB Credit Facility and management may draw on the AB Credit Facility from time to time. AB has agreed to guarantee the obligations of SCB LLC under the AB Credit Facility.
The AB Credit Facility contains affirmative, negative and financial covenants, which are customary for facilities of this type, including, among other things, restrictions on dispositions of assets, restrictions on liens, a minimum interest coverage ratio and a maximum leverage ratio. As of December 31, 2016, AB and SCB LLC were in compliance with these covenants. The AB Credit Facility also includes customary events of default (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or lender’s commitments may be terminated. Also, under such provisions, upon the occurrence of certain insolvency- or bankruptcy-related events of default, all amounts payable under the AB Credit Facility automatically would become immediately due and payable, and the lender’s commitments automatically would terminate.
On October 22, 2014, as part of an amendment and restatement, the maturity date of the AB Credit Facility was extended from January 17, 2017 to October 22, 2019. There were no other significant changes included in the amendment.
On December 1, 2016, AB entered into a $200 million, unsecured 364-day senior revolving credit facility (the “AB Revolver”) with a leading international bank and the other lending institutions that may be party thereto. The AB Revolver is available for AB's and SCB LLC's business purposes, including the provision of additional liquidity to meet funding requirements primarily related to SCB LLC's operations. Both AB and SCB LLC can draw directly under the AB Revolver and management expects to draw on the AB Revolver from time to time. AB has agreed to guarantee the obligations of SCB LLC under the AB Revolver. The AB Revolver contains affirmative, negative and financial covenants which are identical to those of the AB Credit Facility. As of December 31, 2016, AB had no amounts outstanding under the AB Revolver.
As of December 31, 2016 and 2015, AB and SCB LLC had no amounts outstanding under the AB Credit Facility. During 2016 and 2015, AB and SCB LLC did not draw upon the AB Credit Facility.
In addition, SCB LLC has four uncommitted lines of credit with three financial institutions. Three of these lines of credit permit SCB LLC to borrow up to an aggregate of approximately $225 million, with AB named as an additional borrower, while one line has no stated limit. As of December 31, 2016 and 2015, SCB LLC had no bank loans outstanding.131
| |
11) | RELATED PARTY TRANSACTIONS |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Cost Sharing and General Service Agreements
In the second quarter of 2018, AXA Equitable entered into a general services agreement with Holdings whereby AXA Equitable will benefit from the services received by Holdings from AXA Affiliates for a limited period following the Holdings IPO under a transition services agreement. The general services agreement with Holdings replaces existing cost-sharing and general service agreements with various AXA Affiliates. AXA Equitable continues to provide services to Holdings and various AXA Affiliates under a separate existing general services agreement with Holdings. Costs allocated to the Company from Holdings totaled $138 million for the year ended December 31, 2018 and are allocated based on cost center tracking of expenses. The cost centers are approved once a year and are updated based on business area needs throughout the year.
Loans to Affiliates. Affiliates:
Affiliate Loans
On April 20, 2018, AXA Equitable made a loan of $800 million to Holdings with an interest rate of 3.69% and maturing on April 20, 2021. Holdings repaid $200 million of the note on December 21, 2018. The unpaid principal balance of the note as of December 31, 2018 is $600 million.
In September 2007, AXA issued a $650$700 million 5.4%5.7% Senior Unsecured Note to the Company. In January 2018, AXA Equitable. The note pays interest semi-annually and was scheduled to mature on September 30, 2012. In March 2011, the maturity datepre-paid $50 million of the note was extended tonote. In April 2018, AXA pre-paid the remaining unpaid principal balance of this note.
Senior Surplus Notes
On December 30, 2020 and the interest rate was increased to 5.7%.
In June 2009, AXA Equitable sold real estate property valued at $1,100 million to a non-insurance subsidiary of AXA Financial in exchange for $700 million in cash and $400 million in 8.0% ten year term mortgage notes on the property reported in Loans to affiliates in the consolidated balance sheets. In November 2014, this loan was refinanced and a new $382 million, seven year term loan with an interest rate of 4.0% was issued. In January 2016, the property was sold and a portion of the proceeds was used to repay the $382 million term loan outstanding and a $65 million prepayment penalty.
In third quarter 2013, AXA Equitable purchased, at fair value, AXARE Arizona Company’s (“AXA Arizona”) $50 million note receivable from AXA for $54 million. AXA Arizona is a wholly-owned subsidiary of AXA Financial. This note pays interest semi-annually at an interest rate of 5.4% and matures on December 15, 2020.
Loans from Affiliates. In 2005,28, 2018, AXA Equitable, issued a $572 million senior surplus note due December 28, 2019 to AXA Financial in the amount of $325 million with anHoldings, which bears interest at a fixed rate of 6.0% which was scheduled3.75%, payable semi-annually. The surplus note is intended to mature on December 1, 2035. In December 2014,have priority in right of payments and in all other respects to any and all other surplus notes issued by AXA Equitable at any time. AXA Equitable repaid this note at par value plus interest accrued of $1 million to AXA Financial.on March 5, 2019.
In December 2008, Affiliate fees, revenue and expenses
Investment management and service fees and expenses
AXA Equitable issued a $500 million callable 7.1% surplus note to AXA Financial. The note paid interest semi-annually and was scheduled to mature on December 1, 2018. In June 2014, AXA Equitable repaid this note at par value plus interest accrued of $3 million to AXA Financial.
Expense reimbursements and cost sharing agreements. The Company provides personnel services, employee benefits, facilities, supplies and equipment under service agreements with AXA Financial, certain AXA Financial subsidiaries and affiliates to conduct their business. In addition, the Company, along with other AXA affiliates, participates in certain intercompany cost sharing and service agreements including technology and professional development arrangements. The associated costs related to the service and cost sharing agreements are allocated based on methods that management believes are reasonable, including a review of the nature of such costs and activities performed to support each company.
Affiliated distribution expense. AXA Equitable pays commissions and fees to AXA Distribution Holding and its subsidiaries (“AXA Distribution”) for sales of insurance products. The commissions and fees paid to AXA Distribution are based on various selling agreements.
Affiliated distribution revenue. AXA Distributors,FMG, a subsidiary of AXA Equitable, provides investment management and administrative services to EQAT, VIP Trust, 1290 Funds and Other AXA Trusts, all of which are considered related parties. Investment management and service fees earned are calculated as a percentage of assets under management and are recorded as revenue as the related services are performed.
AXA Investment Managers Inc. (“AXA IM”) and AXA Rosenberg Investment Management LLC (“AXA Rosenberg”) provide sub-advisory services with respect to certain portfolios of EQAT, VIP Trust and the Other AXA Trusts. Also, AXA IM and AXA Real Estate Investment Managers (“AXA REIM”) manage certain General Account investments. Fees paid to these affiliates are based on investment advisory service agreements with each affiliate.
Effective December 31, 2018, AXA Equitable transferred its interest in ABLP, AB Holdings and the General Partner to a newly formed subsidiary and distributed the shares of the subsidiary to its direct parent which subsequently distributed the shares to Holdings (the “AB Business Transfer”). Accordingly, AB’s related party transactions with AXA Affiliates and mutual funds sponsored by AB are now reflected as a discontinued operation in the Company’s consolidated financial statements for all periods presented. Investment management and other services provided by AB to mutual funds sponsored by AB prior to the AB Business Transfer will continue based upon the Company’s business needs. See Note 19 for further details of the AB Business Transfer and the discontinued operation.
Affiliated distribution revenue and expenses
AXA Distributors receives commissions and fee revenue from MONY America for sales of its insurance products. The commissions and fees earned from MONY America are based on the various selling agreements.
Affiliated investment advisory and administrative fees. FMG, a subsidiary of AXA Equitable provides investments advisorypays commissions and administrative servicesfees to EQAT, VIP Trust, 1290 FundsAXA Distribution Holding Corporation and other AXA affiliated trusts. Investment advisory and administrative fees earned are calculated as a percentage of assets under management and are recorded as revenue as the related services are performed.
Affiliated investment advisory and administrative expenses. AXA Investment Managersits subsidiaries (“AXA IM”), AXA Real Estate Investment Managers (“AXA REIM”Distribution”) for sales of insurance products. The commissions and AXA Rosenberg provide sub-advisory services to the Company’s retail mutual funds and certain investments of the Company’s General Account. Feesfees paid to these affiliatesAXA Distribution are based on investment advisory service agreements with each affiliate.various selling agreements.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Insurance related transactions
Prior to April 2018, AXA Equitable ceded to AXA RE Arizona, an indirect, wholly owned subsidiary of Holdings, a (i) 100% quota share of all liabilities for variable annuities with GMxB riders issued on or after January 1, 2006 and in-force on September 30, 2008 (the “GMxB Business”), (ii) 100% quota share of all liabilities for variable annuities with GMIB riders issued on or after May 1, 1999 through August 31, 2005 in excess of the liability assumed by two unaffiliated reinsurers, which are subject to certain maximum amounts or limitations on aggregate claims, and (iii) 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under certain series of universal life insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007.
On April 12, 2018, AXA Equitable completed the unwind of the reinsurance previously provided to AXA Equitable by AXA RE Arizona. Accordingly, all of the business previously ceded to AXA RE Arizona, with the exception of the GMxB Business, was novated to EQ AZ Life Re Company (“EQ AZ Life Re”), a newly formed captive insurance company organized under the laws of Arizona, which is an indirect wholly owned subsidiary of Holdings. Following the novation of business to EQ AZ Life Re, AXA RE Arizona was merged with and into AXA Equitable. Following AXA RE Arizona’s merger with and into AXA Equitable, the GMxB Business is not subject to any new internal or third-party reinsurance arrangements, though in the future AXA Equitable may reinsure the GMxB Business with third parties.
AXA RE Arizona novated the Life Business from AXA RE Arizona to EQ AZ Life Re as part of the GMxB Unwind. As a result, EQ AZ Life Re reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under UL insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007 and the Excess Risks.
The table below summarizesGMxB Unwind was considered a pre-existing relationship required to be effectively settled at fair value. The loss relating to this relationship resulted from the expenses reimbursed to/fromsettlement of the reinsurance contracts at fair value and the write-off of previously recorded assets and liabilities related to this relationship recorded in the Company’s historical accounts. The pre-tax loss recognized in the second quarter of 2018 was $2.6 billion ($2.1 billion net of tax). The Company wrote-off a $1.8 billion deferred cost of reinsurance asset which was previously reported in Other assets. Additionally, the remaining portion of the loss was determining by calculating the difference between the fair value of the assets received compared to the fair value of the assets and liabilities already recorded within the Company’s consolidated financial statements. The Company’s primary assets previously recorded were reinsurance recoverables, including the reinsurance recoverable associated with GMDB business. There was an approximate $400 million difference between the fair value of the GMDB recoverable compared to its carrying value which is accounted for under ASC 944.
The assets received and the assets removed were as follows: |
| | | | | | |
| | As of April 12, 2018 |
| | (in millions) |
| | Assets Received | Assets Removed |
| Assets at fair value: | | |
| Fixed income securities | $ | 7,083 |
| |
| Short-term investments | 205 |
| |
| Money market funds | 2 |
| |
| Accrued interest | 43 |
| |
| Derivatives | 282 |
| |
| Cash and cash equivalents | 1,273 |
| |
| Total | $ | 8,888 |
| |
| | | |
| Deferred cost of reinsurance asset | | $ | 1,839 |
|
| GMDB ceded reserves | | 2,317 |
|
| GMIB reinsurance contract asset | | 7,463 |
|
| Payable to AXA RE Arizona | | 270 |
|
| Total | | $ | 11,889 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Significant non-cash transactions involved in the unwind of the reinsurance previously provided to AXA Equitable Life by AXA RE Arizona included: (a) the increase in total investments includes non-cash activities of $7,615 million for assets received related to the recapture transaction, (b) cancellation of the $300 million surplus note between the Company and CommissionAXA RE Arizona, and fees received/paid by(c) settlement of the Company for 2016, 2015 and 2014:intercompany receivables/payables to AXA RE Arizona of $270 million. In addition, upon merging the remaining assets of AXA Re Arizona into AXA Equitable, $1.2 billion of deferred tax assets were recorded on the balance sheet through an adjustment to Capital in excess of par value.
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Expenses paid or accrued for by the Company: | | | | | |
| Paid or accrued expenses for services provided by AXA, AXA Financial and Affiliates | $ | 188 |
| | $ | 164 |
| | $ | 173 |
|
| Paid or accrued commission and fee expenses for sale of insurance products by AXA Distribution | 587 |
| | 603 |
| | 616 |
|
| Paid or accrued expenses for investment management services provided by AXA IM, AXA REIM and AXA Rosenberg | 2 |
| | 1 |
| | 1 |
|
| Total affiliated expenses paid or accrued for | 777 |
| | 768 |
| | 790 |
|
| Revenue received or accrued for by the Company: | | | | | |
| Amounts received or accrued for cost sharing services provided to AXA, AXA Financial and affiliates | 531 |
| | 491 |
| | 482 |
|
| Amounts received or accrued for commissions and fees earned for sale of MONY America's insurance products | 11 |
| | 13 |
| | 2 |
|
| Amounts received or accrued for investment management and administrative services provided to EQAT, VIP Trust, 1290 Funds and Other AXA Trusts | 674 |
| | 707 |
| | 711 |
|
| Total affiliated revenue received or accrued for | $ | 1,216 |
| | $ | 1,211 |
| | $ | 1,195 |
|
Insurance Related Transactions. The Company has implementedreinsurance arrangements with EQ AZ Life Re provide important capital management actionsbenefits to mitigate statutory reserve strain for certain level termAXA Equitable. At December 31, 2018, the Company’s GMIB reinsurance asset with EQ AZ Life Re had carrying values of $259 million and UL policies with secondary guaranteesis reported in Guaranteed minimum income benefit reinsurance asset, at fair value in the consolidated balance sheets. Ceded premiums and GMDB and GMIB riders on the Accumulator® products through reinsurance transactions withpolicy fee income in 2018 totaled approximately $100 million. Ceded claims paid in 2018 were $78 million.
Prior to April 2018, AXA RE Arizona.
The Company currently reinsuresEquitable reinsured to AXA RE Arizona, a 100% quota share of all liabilities for variable annuities with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. AXA RE Arizona also reinsuresreinsured a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under UL insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. The reinsurance arrangements with AXA RE Arizona provideprovided important capital management benefits to AXA Equitable. At December 31, 2016 and 2015,2017, the Company’s GMIB reinsurance asset with AXA RE Arizona had a carrying valuesvalue of $8,574$8,594 million and $8,741 million, respectively, and iswas reported in Guaranteed minimum income benefit reinsurance asset, at fair value in the consolidated balance sheets. Ceded premiums and universal life and policy fee income in 2016, 20152017 and 2014 related to the UL and no lapse guarantee riders2016 totaled approximately $447 million, $453$454 million and $453$447 million, respectively. Ceded claims paid in 2017 and 2016 2015were $213 million and 2014 were $65 million, $54 million and $83 million, respectively.
AXA EquitableThe Company receives statutory reserve credits for reinsurance treaties with AXA ArizonaEQ AZ Life Re to the extent that AXA ArizonaEQ AZ Life Re holds assets in an irrevocable trust (the “Trust”) ($9,376 million at. At December 31, 2016) and/or2018, EQ AZ Life Re held assets of $1.6 billion in the Trust, and had letters of credit ($3,660 million at December 31, 2016). These letters of credit$2.5 billion, which are guaranteed by AXA.Holdings. Under the reinsurance transactions, AXA ArizonaEQ AZ Life Re is permitted to transfer assets from the Trust under certain circumstances. The level of statutory reserves held by AXA ArizonaEQ AZ Life Re fluctuate based on market movements, mortality experience and policyholder behavior. Increasing reserve requirements may necessitate that additional assets be placed in trust and/or securing additional letters of credit, which could adversely impact AXA Arizona’sEQ AZ Life Re’s liquidity.
Various AXA affiliates, includingGlobal Life retrocedes a quota share portion of certain life and health risks of various AXA Affiliates to AXA Equitable cedeon a one-year term basis. Also, AXA Life Insurance Company Ltd. cedes a portion of theirits variable deferred annuity business to AXA Equitable.
Premiums earned in 2018, 2017 and 2016 were $20 million, $20 million and $20 million, respectively. Claims and expenses paid in 2018, 2017 and 2016 were $8 million, $5 million, and $6 million, respectively.
Reinsurance Ceded
AXA Equitable cedes a portion of its life, health and catastrophe insurance business through reinsurance agreements to AXA Global Life, an affiliate. AXA Global Life, in turn, retrocedes a quota share portion of these risks prior to 2008 to AXA Equitable on a one-year term basis.
AXA Equitable has entered into a Life Insurance Company Ltd (Japan), anCatastrophe Excess of Loss Reinsurance Agreement with a number of subscribing reinsurers, including AXA subsidiary, cedes a portionGlobal Life. AXA Global Life participates in 5% of their annuity business to AXA Equitable.
Various AXA Financial affiliates cede a portion of their life business through excess of retention treaties to AXA Equitable on a yearly renewal term basis.
the pool, pro-rata, across the upper and lower layers.
Premiums earned from the above mentioned affiliated reinsurance transactions in 2016, 2015 and 2014 totaled approximately $20 million, $21 million and $22 million, respectively. Claims and expenses paid for the above agreements in 2018, 2017 and 2016 2015 and 2014 were $6$4 million, $5$4 million, and $10$4 million, respectively.
In April 2015,Other Transactions
On October 1, 2018, AXA enteredFinancial merged with and into its direct parent, Holdings, with Holdings continuing as the surviving entity. As a mortality catastrophe bond based on general population mortality in each of France, Japan and the U.S. The purpose of the bond is to protectresult, Holdings assumed AXA against a severe worldwide pandemic. AXA Equitable entered into a stop loss reinsurance agreement with AXA Global Life to protect AXA EquitableFinancial’s obligations with respect to a deterioration in its claim experience following the occurrence of an extreme mortality event. Premiums and expenses associated with the reinsurance agreement were $4 million in both 2016 and 2015.
Commissions, fees and other income includesCompany, including obligations related to certain revenues for services provided to mutual funds managed by AB. These revenues are described below:
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Investment advisory and services fees | $ | 999 |
| | $ | 1,056 |
| | $ | 1,062 |
|
| Distribution revenues | 372 |
| | 415 |
| | 433 |
|
| Other revenues - shareholder servicing fees | 76 |
| | 85 |
| | 91 |
|
| Other revenues - other | 6 |
| | 5 |
| | 6 |
|
Other Transactions. Effective December 31, 2015, primary liability for the obligations of 134
AXA Equitable under the AXA Equitable Qualified Pension Plan (“AXA Equitable QP”) was transferred from AXA Equitable to AXA Financial under terms of an Assumption Agreement. For additional information regarding this transaction see “Employee Benefit Plans” in Note 12.EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In 2016,March 2018, AXA Equitable sold artworkits interest in two consolidated real estate joint ventures to AXA FinancialFrance for a total purchase price of approximately $143 million, which resulted in a pre-tax loss of $0.2 million and recognized a $20the reduction of $202 million gainof long-term debt on the sale. AXA Equitable used the proceeds received from this sale to make a $21 million donation to AXA Foundation, Inc. (the “Foundation”). The Foundation was organizedCompany’s balance sheet for the purpose of distributing grants to various tax-exempt charitable organizations and administering various matching gift programs for AXA Equitable, its subsidiaries and affiliates.
year ended December 31, 2018.
In 2016, AXA Equitable and Saum Sing LLC (“Saum Sing”), an affiliate, formed Broad Vista Partners LLC (“Broad Vista”), of which AXA Equitable owns 70% and Saum Sing owns 30% of Broad Vista.. On June 30, 2016, Broad Vista entered into a real estate joint venture with a third party and AXA Equitable invested approximately $25 million, reported in Other equity investments inmillion.
Insurance Coverage Provided by XL Catlin
On September 12, 2018, AXA Group acquired XL Catlin. Prior to the consolidated balance sheets.
| |
12) | EMPLOYEE BENEFIT PLANS |
acquisition, AXA Equitable Retirement Planshad ceded part of our disability income business to XL Catlin and asofDecember 31, 2018, the reserves ceded were $93 million.
Expenses and Revenues for 2018, 2017 and 2016
The table below summarizes the expenses reimbursed to/from the Company and the fees received/paid by the Company in connection with certain services described above for the years ended December 31, 2018, 2017 and 2016.
|
| | | | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Expenses paid or accrued for: | | | | | |
| Paid or accrued commission and fee expenses for sale of insurance products by AXA Distribution | $ | 613 |
| | $ | 608 |
| | $ | 587 |
|
| General services provided by AXA Affiliates | 109 |
| | 186 |
| | 188 |
|
| Investment management services provided by AXA IM, AXA REIM and AXA Rosenberg | 2 |
| | 5 |
| | 2 |
|
| Total | $ | 724 |
| | $ | 799 |
| | $ | 777 |
|
| | | | | | |
| Revenue received or accrued for: | | | | | |
| Investment management and administrative services provided to EQAT, VIP Trust, 1290 Funds and Other AXA Trusts | $ | 727 |
| | $ | 720 |
| | $ | 674 |
|
| General services provided to AXA Affiliates | 463 |
| | 439 |
| | 497 |
|
| Amounts received or accrued for commissions and fees earned for sale of MONY America’s insurance products | 44 |
| | 45 |
| | 43 |
|
| Total | $ | 1,234 |
| | $ | 1,204 |
| | $ | 1,214 |
|
13) EMPLOYEE BENEFIT PLANS
401(k)
AXA Equitable sponsors the AXA Equitable 401(k) Plan, a qualified defined contribution plan for eligible employees and financial professionals. The plan provides for both a company contribution and a discretionary profit-sharing contribution. Expenses associated with this 401(k) Plan were $19 million, $15 million and $16 million $18 millionfor the years ended December 31, 2018, 2017 and $18 million in 2016, 2015 and 2014, respectively. In December 2018 the Company announced a 3% Company match for the AXA Equitable 401(k) Plan beginning January 1, 2019. This match will supplement the existing Company contribution on eligible compensation.
Pension plan
AXA Equitable also sponsors the AXA Equitable Retirement Plan (the “AXA Equitable QP”), a frozen qualified defined benefit pension plan covering its eligible employees and financial professionals. This pension plan is non-contributory and its benefits are generally based on a cash balance formula and/or, for certain participants, years of service and average earningsincome over a specified period in the plan.
Effective December 31, 2015, primary liability for the obligations of AXA Equitable Life under the AXA Equitable Life QP was transferred from AXA Equitable Life to AXA Financial, and upon the merger of AXA Financial into Holdings, Holdings assumes primary liability under the terms
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
of an Assumption Agreement (the “Assumption Transaction”). Immediately preceding the Assumption Transaction, theAgreement. AXA Equitable QP had plan assets (held in a trust for the exclusive benefit of plan participants) with market value of approximately $2,236 million and liabilities of approximately $2,447 million. The assumption by AXA Financial and resulting extinguishment of AXA Equitable’s primary liability for its obligations under the AXA Equitable QP was recognized by AXA Equitable as a capital contribution in the amount of $211 million ($137 million, net of tax), reflecting the non-cash settlement of its net unfunded liability for the AXA Equitable QP at December 31, 2015. In addition, approximately $1,193 million ($772 million, net of tax) unrecognized net actuarial losses related to the AXA Equitable QP and accumulated in AOCI were also transferred to AXA Financial due to the Assumption Transaction. AXA EquitableLife remains secondarily liable for its obligations under the AXA Equitable Life QP and would recognize such liability in the event AXA FinancialHoldings does not perform under the terms of the Assumption Agreement.
AB Retirement Plans
AB maintainsThe AXA Equitable QP is not governed by a collective-bargaining agreement and is not under a financial improvement plan or a rehabilitation plan. For the Profit Sharing Plan for Employees of AB, a tax-qualified retirement plan for U.S. employees. Employer contributions under this plan are discretionaryyears ended December 31, 2018, 2017 and generally are limited2016, expenses related to the amount deductible for Federal income tax purposes.
AB also maintains a qualified, non-contributory, defined benefit retirement plan covering currentwere $60 million, $27 million and former employees who were employed by AB in the United States prior to October 2, 2000. AB’s benefits are based on years of credited service and average final base salary.
AB uses a December $31 measurement date for its pension plans.
millionThe funding policy of AB for its qualified pension plan is to satisfy its funding obligations each year in an amount not less than the minimum required by the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended by the Pension Protection Act of 2006 (the “Pension Act”), and not greater than the maximum it can deduct for Federal income tax purposesrespectively.. AB did not make a contribution to the AB Retirement Plan during 2016. AB currently estimates that it will contribute $4 million to the AB Retirement Plan during 2017. Contribution estimates, which are subject to change, are based on regulatory requirements, future market conditions and assumptions used for actuarial computations of the AB Retirement Plan’s obligations and assets. AB Management, at the present time, has not determined the amount, if any, of additional future contributions that may be required.
Net Periodic Pension Expense
Components of net periodic pension expense for the Company’s qualified plans were as follows:
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Service cost | $ | — |
| | $ | 8 |
| | $ | 9 |
|
| Interest cost | 6 |
| | 93 |
| | 107 |
|
| Expected return on assets | (5 | ) | | (159 | ) | | (155 | ) |
| Actuarial (gain) loss | 1 |
| | 1 |
| | 1 |
|
| Net amortization | — |
| | 110 |
| | 111 |
|
| Net Periodic Pension Expense | $ | 2 |
| | $ | 53 |
| | $ | 73 |
|
Changes in PBO
Changes in the PBO of the Company’s qualified plans were comprised of:
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In Millions) |
| Projected benefit obligation, beginning of year | $ | 129 |
| | $ | 2,657 |
|
| Service cost | — |
| | — |
|
| Interest cost | 6 |
| | 93 |
|
| Actuarial (gains) losses | 2 |
| | (6 | ) |
| Benefits paid | (5 | ) | | (169 | ) |
| Plan amendments and curtailments | — |
| | 1 |
|
| Projected Benefit Obligation | 132 |
| | 2,576 |
|
| Transfer to AXA Financial | — |
| | (2,447 | ) |
| Projected Benefit Obligation, End of Year | $ | 132 |
| | $ | 129 |
|
Changes in Plan Assets/Funded Status
The following table discloses the changes in plan assets andpresents the funded status of the Company’s qualified pension plans. The fair value of plan assets supportingplan.
|
| | | | | | | | |
| | | As of December 31, |
| | | 2018 | | 2017 |
| | | (in millions) |
| Legal Name of Plan: AXQ Equitable Retirement Plan | EIN# 13-5570651 | | | |
| Total Plan Assets | | $ | 1,993 |
| | $ | 2,325 |
|
| Accumulated Benefit Obligation | | $ | 2,039 |
| | $ | 2,389 |
|
| | | | | |
| Funded Status | | 97.8 | % | | 97.3 | % |
In addition to the AXA Equitable QP, liability was not impacted by the Assumption TransactionAXA Equitable Life sponsors a non-qualified retirement plan, a medical and the payment oflife retiree plan, benefits will continueand a post employment plan. The expenses related to be made from the plan assets held in trust for the exclusive benefit of plan participants.
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In Millions) |
| Pension plan assets at fair value, beginning of year | $ | 86 |
| | $ | 2,473 |
|
| Actual return on plan assets | 4 |
| | 24 |
|
| Contributions | — |
| | — |
|
| Benefits paid and fees | (3 | ) | | (175 | ) |
| Pension plan assets at fair value, end of year | 87 |
| | 2,322 |
|
| PBO (immediately preceding the Transfer to AXA Financial in 2015) | 132 |
| | 2,576 |
|
Excess of PBO Over Pension Plan Assets (immediately preceding the Transfer to AXA Financial in 2015) | (45 | ) | | (254 | ) |
| Transfer to AXA Financial | $ | — |
| | $ | 211 |
|
| Excess of PBO Over Pension Plan Assets, end of year | $ | (45 | ) | | $ | (43 | ) |
Amounts recognized in the accompanying consolidated balance sheets to reflect the funded status of these plans were accrued pension costs of $45$70 million, $37 million and $43$44 million at December 31, 2016 and 2015, respectively. The aggregate PBO/accumulated benefit obligation (“ABO”) and fair value of pension plan assets for plans with PBOs/ABOs in excess of those assets were $132 million and $87 million, respectively, at December 31, 2016 and $2,576 million and $2,322 million, respectively, at December 31, 2015.
Unrecognized Net Actuarial (Gain) Loss
The following table discloses the amounts included in AOCI at December 31, 2016 and 2015 that have not yet been recognized by AXA Equitable as components of net periodic pension cost.
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In Millions) |
| Unrecognized net actuarial gain (loss) | $ | (51 | ) | | $ | (49 | ) |
| Unrecognized prior service (cost) credit | (1 | ) | | (1 | ) |
| Total | $ | (52 | ) | | $ | (50 | ) |
The estimated net actuarial gain (loss) and prior service (cost) credit expected to be reclassified from AOCI and recognized as components of net periodic pension cost over the next year are approximately $(1.4) million and $(23,000), respectively.
Pension Plan Assets
The fair values of qualified pension plan assets are measured and ascribed to levels within the fair value hierarchy in a manner consistent with the invested assets of the Company that are measured at fair value on a recurring basis. See Note 2 for a description of the fair value hierarchy.
At December 31, 2016 and 2015, the total fair value of plan assets for the qualified pension plans was approximately $87 million and $86 million, respectively, all supporting the AB qualified retirement plan.
|
| | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Fixed Maturities | 18.0 | % | | 24.0 | % |
| Equity Securities | 61.0 |
| | 56.0 |
|
| Other | 21.0 |
| | 20.0 |
|
| Total | 100.0 | % | | 100.0 | % |
|
| | | | | | | | | | | | | | | |
| December 31, 2016: | Level 1 | | Level 2 | | Level 3 | | Total |
| Asset Categories | (In Millions) |
| Common and preferred equity | $ | 21 |
| | $ | — |
| | $ | — |
| | $ | 21 |
|
| Mutual funds | 47 |
| | — |
| | — |
| | 47 |
|
| Total assets in the fair value hierarchy | 68 |
| | — |
| | — |
| | 68 |
|
| Investments measured at net assets value | — |
| | — |
| | — |
| | 19 |
|
| Investments at fair value | $ | 68 |
| | $ | — |
| | $ | — |
| | $ | 87 |
|
| | | | | | | | |
| December 31, 2015: | | | | | | | |
| Asset Categories | | | | | | | |
| Common and preferred equity | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 22 |
|
| Mutual funds | 45 |
| | — |
| | — |
| | 45 |
|
| Total assets in the fair value hierarchy | 67 |
| | — |
| | — |
| | 67 |
|
| Investments measured at net assets value | — |
| | — |
| | — |
| | 19 |
|
| Investments at fair value | $ | 67 |
| | $ | — |
| | $ | — |
| | $ | 86 |
|
Plan asset guidelines for the AB qualified retirement plan specify an allocation weighting of 30% to 60% for return seeking investments (target of 40%), 10% to 30% for risk mitigating investments (target of 15%), 0% to 25% for diversifying investments (target of 17%) and 18% to 38% for dynamic asset allocation (target of 28%). Investments in mutual funds, hedge funds (and other alternative investments), and other commingled investment vehicles are permitted under the guidelines. Investments are permitted in overlay portfolios (regulated mutual funds) to complement the long-term strategic asset allocation. This portfolio overlay strategy is designed to manage short-term portfolio risk and mitigate the effect of extreme outcomes.
Discount Rate and Other Assumptions
In 2015 and 2014 the discount rate assumptions used by AXA Equitable to measure the benefits obligations and related net periodic cost of the AXA Equitable QP reflect the rates at which those benefits could be effectively settled. Projected nominal cash outflows to fund expected annual benefits payments under the AXA Equitable QP were discounted using a published high-quality bond yield curve for which AXA Equitable replaced its reference to the Citigroup-AA curve with the Citigroup Above-Median-AA curve beginning in 2014, thereby reducing the PBO of AXA Equitable’s qualified pension plan and the related charge to equity to adjust the funded status of the plan by $25 million in 2014. At December 31, 2015, AXA Equitable refined its calculation of the discount rate to use the discrete single equivalent discount rate for each plan as compared to its previous use of an aggregate, weighted average practical expedient. Use of the discrete approach at December 31, 2015 produced a discount rate for the AXA Equitable QP of 3.98% as compared to a 4.00% aggregate rate, thereby increasing the net unfunded PBO of the AXA Equitable QP immediately preceding the Assumption Transaction by approximately $4 million in 2015.
In fourth quarter 2015, the Society of Actuaries (SOA) released MP-2015, an update to the mortality projection scale issued last year by the SOA, indicating that while mortality data continued to show longer lives, longevity was increasing at a slower rate and lagging behind that previously suggested. For the year ended December 31, 2015 valuations of its defined benefits plans, AXA Equitable considered this new data as well as observations made from current practice regarding how best to estimate improved trends in life expectancies. As a result, AXA Equitable concluded to change the mortality projection scale used to measure and report its defined benefit obligations from 125% Scale AA to Scale BB, representing a reasonable “fit” to the results of the AXA Equitable QP mortality experience study and more aligned to current thinking in practice with respect to projections of mortality improvements. Adoption of that change increased the net unfunded PBO of the AXA Equitable QP immediately preceding the Assumption Transaction by approximately $83 million. At December 31, 2014, AXA Equitable modified its then-current use of Scale AA by adopting 125% Scale AA and introduced additional refinements to its projection of assumed mortality, including use of a full generational approach, thereby increasing the year-end 2014 valuation of the AXA Equitable QP PBO by approximately $54 million.
The following table discloses assumptions used to measure the Company’s pension benefit obligations and net periodic pension cost at and for the years ended December 31, 2016 and 2015. As described above, AXA Equitable refined its calculation of the discount rate for the year ended December 31, 2015 valuation of its defined benefits plans to use the discrete single equivalent discount rate for each plan as compared to its previous use of an aggregate, weighted average practical expedient.
|
| | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Discount rates: | | | |
| AXA Equitable QP, immediately preceding Transfer to AXA Financial | N/A |
| | 3.98 | % |
| Other AXA Equitable defined benefit plans | 3.48 | % | | 3.66 | % |
| AB Qualified Retirement Plan | 4.75 | % | | 4.3 | % |
| Periodic cost | 3.7 | % | | 3.6 | % |
| Rates of compensation increase: | | | |
| Benefit obligation | N/A |
| | 6.00 | % |
| Periodic cost | N/A |
| | 6.46 | % |
| Expected long-term rates of return on pension plan assets (periodic cost) | 6.5 | % | | 6.75 | % |
The expected long-term rate of return assumption on plan assets is based upon the target asset allocation of the plan portfolio and is determined using forward-looking assumptions in the context of historical returns and volatilities for each asset class.
Prior to 1987, participants’ benefits under the AXA Equitable QP were funded through the purchase of non-participating annuity contracts from AXA Equitable. Benefit payments under these contracts were approximately $6 million and $10 million for 2015 and 2014, respectively.
Future Benefits
The following table provides an estimate of future benefits expected to be paid in each of the next five years, beginning January 1,2018, 2017 and in the aggregate for the five years thereafter, all of which are subsequent to the Assumption Transaction. These estimates are based on the same assumptions used to measure the respective benefit obligations at December 31, 2016, and include benefits attributable to estimated future employee service.respectively.
|
| | | |
| | Pension Benefits |
| | (In Millions) |
| 2017 | $ | 4 |
|
| 2018 | 6 |
|
| 2019 | 6 |
|
| 2020 | 5 |
|
| 2021 | 6 |
|
| Years 2022-2026 | 38 |
|
AXA Financial Assumptions
In addition to the Assumption Transaction, since December 31, 1999, AXA Financial has legally assumed primary liability from AXA Equitable for all current and future liabilities of AXA Equitable under certain employee benefit plans that provide participants with medical, life insurance, and deferred compensation benefits; AXA Equitable remains secondarily liable. AXA Equitable reimburses AXA Financial, Inc. for costs associated with all of these plans, as described in Note 11.
| |
13) | SHARE-BASED AND OTHER COMPENSATION PROGRAMS |
AXA and AXA Financial sponsor various share-based compensation plans for eligible employees, financial professionals and non-officer directors of AXA Financial and its subsidiaries, including the Company. AB also sponsors its own unit option plans for certain of its employees.
CompensationsCompensation costs for 2016, 20152018, 2017 and 20142016 for share-based payment arrangements as further described herein are as follows:
| | | | 2016 | | 2015 | | 2014 | Years Ended December 31, |
| | (In Millions) | 2018 | | 2017 | | 2016 |
| Performance Units/Shares | $ | 17 |
| | $ | 18 |
| | $ | 10 |
| |
| | | (in millions) |
| Performance Shares (1) | | $ | 12 |
| | $ | 18 |
| | $ | 17 |
|
| Stock Options | 1 |
| | 1 |
| | 1 |
| 2 |
| | 1 |
| | 1 |
|
| AXA Shareplan | 14 |
| | 16 |
| | 10 |
| — |
| | 9 |
| | 14 |
|
| Restricted Units | 154 |
| | 174 |
| | 171 |
| |
Other Compensation plans(1) | 1 |
| | 2 |
| | — |
| |
| Restricted Stock Unit Awards (2) | | 16 |
| | 2 |
| | — |
|
| Other Compensation Plans (3) | | — |
| | — |
| | 1 |
|
| Total Compensation Expenses | $ | 187 |
| | $ | 211 |
| | $ | 192 |
| $ | 30 |
| | $ | 30 |
| | $ | 33 |
|
____________
| |
| (1) | Other compensation plans include Stock Appreciation Rights, Restricted StockReflects change to performance share retirement rules. Specifically, individuals who retire at any time after the grant date will continue to vest in their 2017 performance shares while individuals who retire prior to March 1, 2019 will forfeit all 2018 performance shares. |
| |
| (2) | Reflects a $10 million adjustment for awards in 2018 with graded vesting, service-only conditions from the graded to the straight-line attribution method. |
| |
| (3) | Includes stock appreciation rights and AXA Miles.employee stock purchase plans. |
U.S.In 2017 and prior years, equity awards for employees and directors were available under the umbrella of AXA’s global equity program. Accordingly, equity awards granted in 2017 and prior years were linked to AXA’s stock.
Following the IPO, Holdings has granted equity awards under the AXA Equitable Holdings, Inc. 2018 Omnibus Incentive Plan (the “Omnibus Plan”) which was adopted by Holdings on April 25, 2018. Awards under the Omnibus Plan are linked to Holdings’ common stock. As of December 31, 2018, the common stock reserved and available for issuance under the Omnibus Plan was 5.5 million shares.
2018 Equity Awards
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
All 2018 equity awards for Company employees and directors were granted under the Omnibus Plan. Accordingly, all grants discussed in this section will be settled in shares of Holdings’ common stock. As described below, Holdings made various grants of equity awards linked to the value of Holdings’ common stock in 2018. For awards with graded vesting schedules and service-only vesting conditions, including restricted stock units (“RSUs”) and other forms of share-based payment awards, the Company applies a straight-line expense attribution policy for the recognition of compensation cost. Actual forfeitures with respect to the 2018 grants were considered immaterial in the recognition of compensation cost.
Transaction Incentive Awards
On May 9, 2018, coincident with the IPO, Holdings granted one-time “Transaction Incentive Awards” to executive officers and certain other Company employees in the form of 0.6 million Holdings RSUs. Fifty percent of the Holdings RSUs will vest based on service over a two-year period from the IPO date (the “Service Units”), and fifty percent will vest based on service and a market condition (the “Performance Units”). The market condition is based on share price growth of at least 130% or 150% within a two or five-year period, respectively. If the market condition is not achieved, 50% of the Performance Units may still vest based on five years of continued service and the remaining Performance Units will be forfeited. The $6 million aggregate grant-date fair value of the 0.3 million Service Units was measured at the $20 IPO price of a Holdings share and will be charged to compensation expense over the stated requisite service periods.
The grant-date fair value of half of the Performance Units, or 0.2 million Holdings RSUs, was also measured at the $20 IPO price for a Holdings share as employees are still able to vest in these awards even if the share price growth targets are not achieved. The resulting $3 million for these awards will be charged to compensation expense over the five-year requisite service period. The grant-date fair value of $16.47 was used to value the remaining half of the Performance Units that are subject to risk of forfeiture for non-achievement of the Holdings share price conditions. The grant date fair value was measured using a Monte Carlo simulation from which a five-year requisite service period was derived, representing the median of the distribution of stock price paths on which the market condition is satisfied, over which the total $3 million compensation expense will be recognized. In 2018, the Company recognized compensation expense associated with the Transaction Incentive Awards of approximately $6 million.
Special IPO Grant
Also, on May 9, 2018, Holdings made a grant of 0.2 million Holdings RSUs to Company employees , or 50 restricted stock units to each eligible individual, that cliff vested on November 9, 2018. The grant-date fair value of the award was measured using the $20 IPO price for a Holdings share and the resulting $5 million has been recognized as compensation expense over the six-month service period ending November 9, 2018.
Annual Awards Under 2018 Equity Program
Annual awards under Holdings’ 2018 equity program consisted of a mix of equity vehicles including Holdings RSUs, Holdings stock options and Holdings performance shares. If Holdings pays any ordinary dividend in cash, all outstanding Holdings RSUs and performance shares will accrue dividend equivalents in the form of additional Holdings RSUs or performance shares to be settled or forfeited consistent with the terms of the related award.
Holdings RSUs
On May 17, 2018, Holdings granted 0.8 million Holdings RSUs to Company employees that vest ratably in equal annual installments over a three-year period on each of the first three anniversaries of March 1, 2018. The fair value of the award was measured using the closing price of the Holdings share on the grant date, and the resulting $18 million will be recognized as compensation expense over the shorter of the vesting term or the period up to the date at which the participant becomes retirement eligible but not prior to March 1, 2019.
Holdings Stock Options
On June 11, 2018, Holdings granted 0.9 million Holdings stock options to Company employees. These options expire on March 1, 2028 and have a three-year graded vesting schedule, with one-third vesting on each of the three anniversaries of March 1, 2018. The exercise price for the options is $21.34, which was the closing price of a Holdings share on the grant date. The weighted average grant date fair value per option was estimated at $4.61 using a Black-Scholes options pricing model. Key assumptions used in the valuation included expected volatility of 25.4% based on historical selected peer data, a weighted average expected term of 5.7 years as determined by the simplified method, an expected dividend yield of 2.44% based on Holdings’ expected annualized dividend, and a risk-
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
free interest rate of 2.83%. The total fair value of these options of approximately $4 million will be charged to expense over the shorter of the vesting period or the period up to the date at which the participant becomes retirement eligible but not prior to March 1, 2019. In 2018, the Company recognized expense associated with the June 11, 2018 option grant of approximately $2 million.
Holdings Performance Shares
On May 17, 2018, Holdings granted 0.4 million unearned Holdings performance shares to Company employees, subject to performance conditions and a cliff-vesting term ending March 1, 2021. The performance shares consist of two distinct tranches; one based on the Company’s return-on-equity targets (the “ROE Performance Shares”) and the other based on the Holdings’ relative total shareholder return targets (the “TSR Performance Shares”), each comprising approximately one-half of the award. Participants may receive from 0% to 200% of the unearned performance shares granted. The grant-date fair value of the ROE Performance Shares will be established once the 2019 and 2020 Non-GAAP ROE target are determined and approved.
The grant-date fair value of the TSR Performance Shares was measured at $23.17 using a Monte Carlo approach. Under the Monte Carlo approach, stock returns were simulated for Holdings and the selected peer companies to estimate the payout percentages established by the conditions of the award. The resulting $4 million aggregate grant-date fair value of the unearned TSR Performance Shares will be recognized as compensation expense over the shorter of the cliff-vesting period or the period up to the date at which the participant becomes retirement eligible but not prior to March 1, 2019. In 2018, the Company recognized expense associated with the TSR Performance Share awards of approximately $2 million.
Prior Equity Award Grants and Settlements
Prior to adoption of the Omnibus Plan, Company employees were granted AXA ordinary share options under the AXA Stock Option Plan for AXA Financial Employees and Associates (the “Stock Option Plan”) and are. There is no limitation in the Stock Option Plan on the number of shares that may be issued pursuant to option or other grants.
Employees were also granted AXA performance shares under the AXA International Performance Shares Plan established for each year (the “Performance Share Plan”). Prior to 2013 they were granted performance units under the AXA Performance Unit Plan.
Non-officer directors of AXA Financial and certain subsidiaries (including AXA Equitable) are granted restricted AXA ordinary shares (prior to 2011, AXA ADRs) and unrestricted AXA ordinary shares (prior to March 15, 2010, AXA ADRs) annually under The Equity Plan for Directors. They also were granted ADR stock options in years prior to 2014.
Performance Units and Performance Shares
2016 Grant. On June 6, 2016, under the terms of the Performance Share Plan, AXA awarded approximately 1.9 million unearned performance shares to employees of AXA Equitable. The extent to which 2016-2018 cumulative performance targets measuring the performance of AXA and the insurance related businesses of AXA Financial Group are achieved will determine the number of performance shares earned, which may vary between 0% and 130% of the number of performance shares at stake. The performance shares earned during this performance period will vest and be settled on the fourth anniversary of the award date. The plan will settle in AXA ordinary shares to all participants. In 2016, the expense associated with the June 6, 2016 grant of performance shares was approximately $10 million.
Settlement of 2013 Grant in 2016. On March 22, 2016, share distributions totaling approximately $55 million were made to active and former AXA Equitable employees in settlement of approximately 2.3 million performance shares earned under the terms of the 2013 Performance Share Plan.
2015 Grant. On June 19, 2015, under the terms of the 2015 Performance Share Plan, AXA awarded approximately 1.7 million unearned performance shares to employees of AXA Equitable. The extent to which 2015-2017 cumulative performance targets measuring the performance of AXA and the insurance related businesses of AXA Financial Group are achieved will determine the number of performance shares earned, which may vary in linear formula between 0% and 130% of the number of performance shares at stake. The performance shares earned during this performance period will vest and be settled on the fourth anniversary of the award date. The plan will settle in shares to all participants. In 2016 and 2015 the expense associated with the June 19, 2015 grant of performance shares were $4 million and $8 million, respectively.
Settlement of 2012 Grant in 2015.On April 2, 2015, cash distributions of approximately $53 million were made to active and former AXA Equitable employees in settlement of approximately 2.3 million performance units earned under the terms of the AXA Performance Unit Plan 2012.
2014 Grant. On March 24, 2014, under the terms of the 2014 Performance Share Plan, AXA awarded approximately 1.5 million unearned performance shares to employees of AXA Equitable. The extent to which 2014-2016 cumulative performance targets measuring the performance of AXA and the insurance-related businesses of AXA Financial Group are achieved will determine the number of performance shares earned, which may vary in linear formula between 0% and 130% of the number of performance shares at stake. The first tranche of the performance shares will vest and be settled on the third anniversary of the award date; the second tranche of these performance shares will vest and be settled on the fourth anniversary of the award date. The plan will settle in shares to all participants. In 2016, 2015 and 2014 the expense associated with the March 24, 2014 grant of performance shares was approximately $4 million, $4 million, and $9 million respectively.
Settlement of 2011 Grant in 2014. On April 3, 2014, cash distributions of approximately $26 million were made to active and former AXA Equitable employees in settlement of 1.0 million performance units earned under the terms of the AXA Performance Unit Plan 2011.
The fair values of awards made under these programsprior awards are measured at the grant date by reference to the closing price of the AXA ordinary share, and the result, as adjusted for achievement of performance targets and pre-vesting forfeitures, generally is attributed over the shorter of the requisite service period, the performance period, if any, or to the date at which retirement eligibility is achieved and subsequent service no longer is required for continued vesting of the award. Remeasurements
2017 Performance Shares Grant
On June 21, 2017, under the terms of fair value for subsequent price changes until settlement are made only for performance unit awards as they are settled in cash. Approximately 2the Performance Share Plan, AXA awarded approximately 1.7 million outstandingunearned performance shares are at risk to achievement of 2017Company employees. The extent to which 2017-2019 cumulative performance criteria, primarily representing all oftargets measuring the performance shares granted June 19, 2015of AXA and the second tranche of performance shares granted March 24, 2014, for which cumulative average 2015-2017 and 2014-2016 performance targetsCompany are achieved will determine the number of performance shares earned, under those awards,which may vary between 0% and 130% of the number of performance shares at stake. The performance shares earned during this performance period will vest and be settled on the fourth anniversary of the award date. The plan will settle in AXA ordinary shares to all participants. In 2018 and 2017, the expense associated with the June 21, 2017 grant of performance shares was approximately $4 million and $9 million, respectively.
Stock Options2016 Performance Shares Grant
2016 Grant.On June 6, 2016, 0.6 million options to purchase AXA ordinary shares were granted to employees of AXA Equitable under the terms of the Stock OptionPerformance Share Plan, at an exercise priceAXA awarded approximately 1.9 million unearned performance shares to Company employees of 21.52 euros. AllAXA Equitable. The extent to which 2017-2019 cumulative performance targets measuring the performance of those options have a five-year graded vesting schedule, with one-third vesting on eachAXA and the Company are achieved will determine the number of performance shares earned, which may vary between 0% and 130% of the third,number of performance shares at stake. The performance shares earned during this performance period will vest and be settled on the fourth and fifth anniversariesanniversary of the grantaward date. Of the total options awarded on June 6, 2016, 0.3 million are further subject to conditional vesting terms that require theThe plan will settle in AXA ordinary share priceshares to outperform the Euro Stoxx Insurance Index over a specified period. All of the options granted on June 6, 2016 have a ten-year term. The weighted average grant date fair value per option award was estimated at 1.85 euros using a Black-Scholes options pricing model with modification to measure the value of the conditional vesting feature. Key assumptions used in the valuation included expected volatility of 26.6%, a weighted average expected term of 8.1 years, an expected dividend yield of 6.49%all participants. In 2018, 2017 and a risk-free interest rate of 0.33%. The total fair value of these options (net of expected forfeitures) of approximately $1 million is charged to expense over the shorter of the vesting term or the period up to the date at which the participant becomes retirement eligible. In 2016, the Company recognized expensesexpense associated with the June 6, 20152016 grant of optionsperformance shares was approximately $4 million, $4 million and $10 million, respectively.
Settlement of 2014 Grant in 2017
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On March 24, 2017, share distributions totaling of approximately $0.6 million.
2015 Grant. On June 19, 2015, approximately 0.4$21 million optionswere made to purchaseactive and former AXA ordinaryEquitable employees in settlement of 2.3 million performance shares were granted to employees of AXA Equitableearned under the terms of the Stock OptionAXA Performance Share Plan at an exercise2014.
Other Grants
Prior to the IPO, non-officer directors were granted restricted AXA ordinary shares (prior to 2011, AXA ADRs) and unrestricted AXA ordinary shares (prior to March 15, 2010, AXA ADRs) annually under The Equity Plan for Directors.
AXA restricted stock units (“AXA RSUs”) were also granted to certain Company executives. The AXA RSUs are phantom AXA ordinary shares that, once vested, entitle the recipient to a cash payment based on the average closing price of 22.90 euros. All of those options have a five-year graded vesting schedule, with one-third vesting on each of the third, fourth, and fifth anniversaries of the grant date. Of the total options awarded on June 19, 2015, 0.2 million are further subject to conditional vesting terms that require the AXA ordinary share price to outperform the Euro Stoxx Insurance Index over a specified period. All of the options granted on June 19, 2015 have a ten-year term. The weighted average grant date fair value per option award was estimated at 1.58 euros using a Black-Scholes options pricing model with modification to measure the value of the conditional vesting feature. Key assumptions used in the valuation included expected volatility of 23.68%, a weighted average expected term of 8.2 years, an expected dividend yield of 6.29% and a risk-free interest rate of 0.92%. The total fair value of these options (net of expected forfeitures) of approximately $1 million is charged to expense over the shorter oftwenty trading days immediately preceding the vesting term or the period up to the date at which the participant becomes retirement eligible. In 2016 and 2015, the Company recognized expenses associated with the June 19, 2015 grantdate.
Summary of options of approximately $0.1 million and $0.3 million, respectively.
2014 Grant. On March 24, 2014, 0.4 million options to purchase AXA ordinary shares were granted to employees of AXA Equitable under the terms of the Stock Option Plan at an exercise price of 18.68 euros All of those options have a five-year graded vesting schedule, with one-third vesting on each of the third, fourth, and fifth anniversaries of the grant date. Of the total options awarded on March 24, 2014, 0.2 million are further subject to conditional vesting terms that require the AXA ordinary share price to outperform the Euro Stoxx Insurance Index over a specified period. All of the options granted on March 24, 2014 have a ten-year term. The weighted average grant date fair value per option award was
estimated at $2.89 using a Black-Scholes options pricing model with modification to measure the value of the conditional vesting feature. Key assumptions used in the valuation included expected volatility of 29.24%, a weighted average expected term of 8.2 years, an expected dividend yield of 6.38% and a risk-free interest rate of 1.54%. The total fair value of these options (net of expected forfeitures) of approximately $1 million is charged to expense over the shorter of the vesting term or the period up to the date at which the participant becomes retirement eligible. In 2016, 2015 and 2014 the Company recognized expenses associated with the March 24, 2014 grant of options of approximately $0.2 million, $0.2 million and $0.3 million, respectively.
Shares Authorized
There is no limitation in the Stock Option Plan or the Equity Plan for Directors on the number of shares that may be issued pursuant to option or other grants.
Activity
A summary of the activity in the AXA AXA Financial and ABHoldings option plans during 20162018 follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding |
| | EQH Shares | | AXA Ordinary Shares | | AXA ADRs (2) |
| | Number Outstanding (In 000’s) | | Weighted Average Exercise Price | | Number Outstanding (In 000’s) | | Weighted Average Exercise Price | | Number Outstanding (In 000’s) | | Weighted Average Exercise Price |
| Options Outstanding at January 1, 2018 | — |
| | $ | — |
| | 3,653 |
| | € | 17.36 |
| | 20 |
| | $ | 20.98 |
|
| Options granted | 869 |
| | $ | 21.34 |
| | — |
| | € | — |
| | — |
| | $ | — |
|
| Options exercised | — |
| | $ | — |
| | (337 | ) | | € | 11.80 |
| | — |
| | $ | — |
|
| Options forfeited, net | (35 | ) | | $ | 21.34 |
| | — |
| | € | — |
| | — |
| | $ | — |
|
| Options expired | — |
| | $ | — |
| | (707 | ) | | € | 17.45 |
| | (5 | ) | | $ | 35.25 |
|
| Options Outstanding at December 31, 2018 | 834 |
| | $ | 21.34 |
| | 2,609 |
| | € | 18.20 |
| | 15 |
| | $ | 15.37 |
|
| Aggregate Intrinsic Value (1) | | | $ | — |
| | | | € | 2,383 |
| | | | $ | 151 |
|
| Weighted Average Remaining Contractual Term (in years) | 9.16 |
| | | | 4.50 |
| | | | 0.58 |
| | |
| Options Exercisable at December 31, 2018 | — |
| | $ | — |
| | 1,369 |
| | € | 15.27 |
| | 15 |
| | $ | 15.37 |
|
| Aggregate Intrinsic Value (1) | | | $ | — |
| | | | € | 7,698 |
| | | | $ | 151 |
|
| Weighted Average Remaining Contractual Term (in years) | — |
| | | | 2.45 |
| | | | 0.58 |
| | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding |
| | AXA Ordinary Shares | | AXA ADRs(3) | | AB Holding Units |
| | Number Outstanding (In 000’s) | | Weighted Average Exercise Price | | Number Outstanding (In 000’s) | | Weighted Average Exercise Price | | Number Outstanding (In 000’s) | | Weighted Average Exercise Price |
| Options Outstanding at January 1, 2016 | 12,602.1 |
| | € | 21.39 |
| | 41.0 |
| | $ | 27.28 |
| | 5,398.5 |
| | $ | 47.59 |
|
| Options granted | 594.3 |
| | € | 21.52 |
| | — |
| | $ | — |
| | 54.5 |
| | $ | 22.6 |
|
| Options exercised | (568.2 | ) | | € | 14.93 |
| | — |
| | $ | — |
| | (358.3 | ) | | $ | 17.1 |
|
| Options forfeited, net |
|
| | € | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
| Options expired/reinstated | (3,092.0 | ) | | 27.8 |
| | 3.9 |
| | 26.06 |
| | (9.7 | ) | | $ | 65.0 |
|
| Options Outstanding at December 31, 2016 | 9,536.2 |
| | € | 21.02 |
| | 44.9 |
| | $ | 24.90 |
| | 5,085.0 |
| | $ | 49.5 |
|
Aggregate Intrinsic Value(1) | | | € | 30,077.2 |
| (2) | | | $ | 252.9 |
| | | | — |
|
| Weighted Average Remaining Contractual Term (in years) | 3.1 |
| | | | 1.89 |
| | | | 2.00 |
| | |
| Options Exercisable at December 31, 2016 | 7,169.4 |
| | € | 20.43 |
| | 44.8 |
| | $ | 24.90 |
| | 4,700.9 |
| | $ | 47.6 |
|
Aggregate Intrinsic Value(1) | | | € | 26,793.5 |
| | | | $ | 252.9 |
| | | | — |
|
| Weighted Average Remaining Contractual Term (in years) | 3.74 |
| | | | 1.89 |
| | | | 2.00 |
| | |
____________
| |
| (1) | Aggregate intrinsic value, presented in millions,thousands, is calculated as the excess of the closing market price on December 31, 20162018 of the respective underlying shares over the strike prices of the option awards. |
| |
(2) | The aggregate For awards with strike prices higher then market prices, intrinsic value on options outstanding, exercisable and expected to vest is negative and is therefore presentedshown as zero. |
| |
(3)(2) | AXA ordinary shares will be delivered to participants in lieu of AXA ADRs at exercise or maturity. |
No stock options were exercised in 2016. The intrinsic value related to exercises of stock options during 2015 and 2014 were approximately $0.2 million and $3 million respectively, resulting in amounts currently deductible for tax purposes of approximately $0.1 million, and $1 million, respectively, for the periods then ended. In 2015 and 2014, windfall tax benefits of approximately $0.1 million and $1 million, respectively, resulted from exercises of stock option awards.
At December 31, 2016, AXA Financial held 22,974 AXA ordinary shares in treasury at a weighted average cost of $23.95 per share, which were designated to fund future exercises of outstanding stock options.
For the purpose of estimating the fair value of stock option awards, the Company applies the Black-Scholes model and attributes the result over the requisite service period using the graded-vesting method. A Monte-Carlo simulation approach was used to model the fair value of the conditional vesting feature of the awards of options to purchase Holdings and AXA ordinary shares. Shown below are the relevant input assumptions used to derive the fair values of options awarded in 2016, 20152018, 2017 and 2014,2016, respectively.
| | | | AXA Ordinary Shares | | AB Holding Units | EQH Shares | | AXA Ordinary Shares (1) |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | 2018 | | 2018 | | 2017 | | 2016 |
| Dividend yield | 6.49 | % | | 6.29 | % | | 6.38 | % | | 7.1 | % | | 7.1 | % | | 8.4 | % | 2.44 | % | | NA | | 6.53 | % | | 6.49 | % |
| Expected volatility | 26.6 | % | | 23.68 | % | | 29.24 | % | | 31.0 | % | | 32.1 | % | | 48.9 | % | 25.40 | % | | NA | | 25.05 | % | | 26.6 | % |
| Risk-free interest rates | 0.33 | % | | 0.92 | % | | 1.54 | % | | 1.3 | % | | 1.5 | % | | 1.5 | % | 2.83 | % | | NA | | 0.59 | % | | 0.33 | % |
| Expected life in years | 8.1 |
| | 8.2 |
| | 8.2 |
| | 6.0 |
| | 6.0 |
| | 6.0 |
| 9.7 |
| | NA | | 8.8 |
| | 8.1 |
|
| Weighted average fair value per option at grant date | $ | 2.06 |
| | $ | 1.73 |
| | $ | 2.89 |
| | $ | 2.75 |
| | $ | 4.13 |
| | $ | 4.78 |
| $ | 4.61 |
| | NA | | $ | 2.01 |
| | $ | 2.06 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
____________
| |
| (1) | There were no options to buy AXA Ordinary Shares awarded during 2018. As such, the input assumptions for 2018 are not applicable. |
As of December 31, 2016,2018, approximately $1 million of unrecognized compensation cost related to unvested stock option awards, net of estimated pre-vesting forfeitures, is expected to be recognized by the Company over a weighted average period of 3.222.2 years. As of December 31, 2018, approximately $3 million of unrecognized compensation cost related to Holdings unvested stock option awards, net of estimated pre-vesting forfeitures, is expected to be recognized by the Company over a weighted average period of 0.8 years.
Options
The fair value of AXA stock options is calculated using the Black-Scholes option pricing model. The expected AXA dividend yield is based on market consensus. AXA share price volatility is estimated on the basis of implied volatility, which is checked against an analysis of historical volatility to ensure consistency. The risk-free interest rate is based on the Euro Swap Rate curve for the appropriate term. The effect of expected early exercise is taken into account through the use of an expected life assumption based on historical data.
Restricted Awards
Under The Equity Plan for Directors, AXA Financial grants non-officer directors of AXA Financial and certain subsidiaries (including AXA Equitable) restricted AXA ordinary shares. Likewise, AB awards restricted AB Holding units to independent members of its General Partner. In addition, under its Century Club Plan, awards of restricted AB Holding units that vest ratably over three years are made to eligible AB employees whose primary responsibilities are to assist in the distribution of company-sponsored mutual funds.
AXA Equitable has also granted restricted AXA ordinary share units (“RSUs”) to certain executives. The RSUs are phantom AXA ordinary shares that, once vested, entitle the recipient to a cash payment based on the average closingmarket price of a Holdings share is used as the AXA ordinary share overbasis for the twenty trading days immediately precedingfair value measure of a Holdings RSU. For purposes of determining compensation cost for stock-settled Holdings RSUs, fair value is fixed at the vesting date.grant date until settlement, absent modification to the terms of the award.
For 2016, 20152018, 2017 and 2014,2016, respectively, the Company recognized compensation costs of $154$16 million, $174$2 million and $171$0 million for outstanding restricted stock and AXA RSUs. The fair values of awards made under these programs are measured at the grant date by reference to the closing price of the unrestricted shares, and the result generally is attributed over the shorter of the requisite service period, the performance period, if any, or to the date at which retirement eligibility is achieved and subsequent service no longer is required for continued vesting of the award. Remeasurements of fair value for subsequent price changes until settlement are made only for AXA RSUs. At December 31, 2016,2018, approximately 19.22.3 million restricted Holdings and AXA ordinary shares and AB Holding unitshare awards remain unvested. At December 31, 2016, approximately $39 million of unrecognizedUnrecognized compensation cost related to these unvested awards totaled approximately $19 million, net of estimated pre-vesting forfeitures, and is expected to be recognized over a weighted average period of 2.61.2 years.
The following table summarizes restricted Holdings share and AXA ordinary share activity for 2016. In addition, approximately 84,611 RSUs were granted during 2016 with graded vesting over a 4-year service period.2018.
| | | | Shares of Restricted Stock | | Weighted Average Grant Date Fair Value | Shares of Holdings Restricted Stock (in thousands) | | Weighted Average Grant Date Fair Value | | Shares of AXA Restricted Stock (in thousands) | | Weighted Average Grant Date Fair Value |
| Unvested as of January 1, 2016 | 34,010 |
| | $ | 18.43 |
| |
| Unvested as of January 1, 2018 | | — |
| | $ | — |
| | 84 |
| | $ | 21.07 |
|
| Granted | 13,909 |
| | $ | 22.63 |
| 1,696 |
| | $ | 20.83 |
| | — |
| | $ | — |
|
| Cancelled | | 56 |
| | $ | 21.21 |
| | — |
| | $ | 26.64 |
|
| Vested | 11,613 |
| | $ | 23.81 |
| 381 |
| | $ | 21.09 |
| $ | — |
| 36 |
| | $ | 21.99 |
|
| Unvested as of December 31, 2016 | 36,306 |
| | $ | 24.46 |
| |
| Unvested as of December 31, 2018 | | 1,259 |
| | $ | 21.00 |
| $ | — |
| 48 |
| | $ | 20.38 |
|
Unrestricted Awards
Under the Equity Plan for Directors, AXA Financial provides a stock retainer to non-officer directors of AXA Financial and certain subsidiaries (including AXA Equitable). Pursuant to the terms of the retainer, the non-officer directors receive
AXA ordinary shares valued at $55,000 each year, paid on a semi-annual basis. These shares are not subject to any vesting requirement or other restriction. Employee Stock Purchase Plans
AXA Shareplan 2017
2016 AXA Shareplan.In 2016,2017, eligible employees of participating AXA Financial subsidiariesEquitable were offered the opportunity to purchase newly issued AXA ordinary shares, subject to plan limits, under the terms of AXA Shareplan, 2016.AXA’s annual global stock purchase plan. Eligibleemployees could have reserved a share purchase during the reservation period from August 29, 201628, 2017 through September 9, 20168, 2017 and could have canceled their reservation or elected to make a purchase for the first time during the retraction/subscription period from October 17, 201613, 2017 through October 19, 2016.17, 2017. The U.S. dollar purchase price wasdetermined by applying the U.S. dollar/Euro forward exchange rate on October 13, 201611, 2017 to the discounted formula subscription price in Euros. Investment Option A permitted participants to purchase AXA ordinary shares at a 20% formula discounted price of 15.53 euros/€20.19 per share. Investment Option B permitted participants to purchase AXA ordinary shares at an 8.63%8.98% formula discounted price of 17.73 euros/€22.96 per share on a leveraged basis with a guaranteed return of initial investment plus a portion of any appreciation in the undiscounted value of the total shares purchased. For purposes of determining the amount of any appreciation, the AXA ordinary share price will be measured over a fifty-twofifty-
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
two week period preceding the scheduled end date of AXA Shareplan 2016,2018, which is July 1, 2021.2022. All subscriptions became binding and irrevocable on October 19, 2016.17, 2017.
The Company recognized compensation expense of $9 million and $14 million $16 millionin the years ended December 31, 2017 and $10 million in 2016 2015 and 2014respectively, in connection with each respective year’s offering of AXA stock under the AXA Shareplan, representing the aggregate discount provided to AXA Equitable participants for their purchase of AXA stock under each of those plans, as adjusted for the post-vesting, five-year holding period. AXA Equitable participants in AXA Shareplan 2016, 20152017 and 20142016 primarily invested under Investment Option B for the purchase of approximately $6 million, $5of 4 million and $56 million AXA ordinary shares, respectively.
AXA Miles Program 2012Holdings Stock Purchase Plan
On March 16, 2012, under the terms ofDuring 2018, Holdings introduced the AXA MilesEquitable Holdings, Inc. Stock Purchase Program 2012, AXA granted 50 AXA Miles(“SPP”). Participants are able to every employeecontribute up to 100% of their eligible compensation and eligible financial professional of AXA Group for the purpose of enhancing long-term employee-shareholder engagement. Each AXA Mile representsreceive a phantom share of AXA stock that will convert to an actual AXA ordinary share at the end of a four-year vesting period provided the employee or financial professional remainsmatching contribution in the employ of the company or has retired from service. Half of each AXA Miles grant, or 25 AXA Miles, were subject to an additional vesting condition that required improvement in at least one of two AXA performance metrics in 2012 as compared to 2011. This vesting condition has been satisfied. On March 16, 2016, AXA ordinary share distributions totaling approximately $4 million were made to active and former AXA Equitable employees in settlement of approximately 0.2 million AXA Miles earned under the terms of the AXA Miles Program 2012.
AB Long-term Incentive Compensation Plans
AB maintains several unfunded long-term incentive compensation plans for the benefit of certain eligible employees and executives. The AB Capital Accumulation Plan was frozen on December 31, 1987 and no additional awards have been made, however, ACMC, LLC (“ACMC”), an indirect, wholly-owned subsidiary of AXA Equitable, is obligated to make capital contributions to AB in amountscash equal to benefits paid under this plan as well as other assumed contractual unfunded deferred compensation arrangements covering certain executives. Prior to changes implemented by AB in fourth quarter 2011, as further described below, compensation expense for the remaining active plans was recognized on a straight-line basis over the applicable vesting period. Prior to 2009, participants in these plans designated the percentages15% of their awards topayroll contribution, which will be allocated among notional investments in Holding units or certain investment products (primarily mutual funds) sponsored by AB. Beginning in 2009, annual awards granted under the Amended and Restated AB Incentive Compensation Award Program were in the form of restricted Holding units.
In fourth quarter 2011, AB implemented changes to AB’s employee long-term incentive compensation award. AB amended all outstanding year-end deferred incentive compensation awards of active employees (i.e., those employees employed as of December 31, 2011), so that employees who terminate their employment or are terminated without cause may continue to vest, so long as the employees do not violate the agreements and covenants set forth in the applicable award agreement, including restrictions on competition, employee and client solicitation, and a claw-back for failing to follow existing risk management policies. This amendment resulted in the immediate recognition in the fourth quarter of the cost of all unamortized deferred incentive compensation on outstanding awards from prior years that would otherwise have been expensed in future periods.
In addition, awards granted in 2012 contain the same vesting provisions and, accordingly, the Company’s annual incentive compensation expense reflect 100% of the expense associated with the deferred incentive compensation awarded in each year. This approach to expense recognition closely matches the economic cost of awarding deferred incentive compensation to the period in which the related service is performed.
AB engages in open-market purchases of AB Holding L.P. (“AB Holding”) units (“Holding units”) to help fund anticipated obligations under its incentive compensation award program, for purchases of Holding units from employees and other corporate purposes. During 2016 and 2015, AB purchased 10.5 million and 8.5 million Holding units for $237 million and $218 million respectively. These amounts reflect open-market purchases of 7.9 million and 5.8 million Holding units for $176 million and $151 million, respectively, with the remainder relating to purchases of Holding units from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards, offset by Holding units purchased by employees as part of a distribution reinvestment election.
During 2016, AB granted to employees and eligible directors 7.0 million restricted AB Holding unit awards (including 6.1 million granted in December for 2016 year-end awards). During 2015, AB granted to employees and eligible directors 7.4 million restricted AB Holding awards (including 7.0 million granted in December 2015 for year-end awards).
During 2016 and 2015, AB Holding issued 0.4 million and 0.5 million Holding units, respectively, upon exercise of options to buy AB Holding units. AB Holding used the proceeds of $6 million and $9 million, respectively, received from employees as payment in cash for the exercise price to purchase the equivalent number of newly-issued Holding units.
Effective July 1, 2013, management of AB and AB Holding retired all unallocated Holding units in AB’s consolidated rabbi trust. To retire such units, AB delivered the unallocated Holding units held in its consolidated rabbi trust to AB Holding in exchange for the same amount of AB units. Each entity then retired its respective units. As a result, on July 1, 2013, each of AB’s and AB Holding’s units outstanding decreased by approximately 13.1 million units. AB and AB Holding intend to retire additional units as AB purchases Holding units on the open market or from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards, if such units are not required to fund new employee awards in the near future. If a sufficient number of Holding units is not available in the rabbi trust to fund new awards, AB Holding will issue new Holding units in exchange for newly-issued AB units, as was done in December 2013.
The cost of the 2016 awards made in the form of restricted Holding units was measured, recognized, and disclosed as a share-based compensation program.
On July 1, 2010, the AB 2010 Long Term Incentive Plan (“2010 Plan”), as amended, was established, under which various types of Holding unit-based awards have been available for grant to its employees and eligible directors, including restricted or phantom restricted Holding unit awards, Holding unit appreciation rights and performance awards, and options to buy Holding units. The 2010 Plan will expire on June 30, 2020 and no awards under the 2010 PlanHoldings shares. Purchases will be made after that date. Underon the 2010 Plan,last trading day of each month at the aggregate number of Holding units with respect to which awards may be granted is 60 million, including no more than 30 million newly-issued Holding units. As of December 31, 2016, 0.4 million options to buy Holding units had been granted and 51.9 million Holding units net of forfeitures, were subject to other Holding unit awards made under the 2010 Plan. Holding unit-based awards (including options) in respect of 7.7 million Holding units were available for grant as of December 31, 2016.prevailing market rate.
15) INCOME TAXES
A summary of the income tax (expense) benefit in the consolidated statements of earningsincome (loss) follows:
| | | | | | | | | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In Millions) | (in millions) |
| Income tax (expense) benefit: | | | | | | | | | | |
| Current (expense) benefit | $ | (274 | ) | | $ | (19 | ) | | $ | (552 | ) | $ | 234 |
| | $ | (6 | ) | | $ | (274 | ) |
| Deferred (expense) benefit | 387 |
| | (167 | ) | | (1,143 | ) | 212 |
| | 1,216 |
| | 438 |
|
| Total | $ | 113 |
| | $ | (186 | ) | | $ | (1,695 | ) | $ | 446 |
| | $ | 1,210 |
| | $ | 164 |
|
The Federal income taxes attributable to consolidated operations are different from the amounts determined by multiplying the earnings before income taxes and noncontrolling interest by the expected Federal income tax rate of 35.0%.21%, 35% and 35% for 2018, 2017 and 2016, respectively. The sources of the difference and their tax effects are as follows:
| | | | | | | | | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In Millions) | (in millions) |
| Expected income tax (expense) benefit | $ | (152 | ) | | $ | (578 | ) | | $ | (2,140 | ) | $ | 311 |
| | $ | (542 | ) | | $ | 14 |
|
| Noncontrolling interest | 135 |
| | 124 |
| | 119 |
| (1 | ) | | — |
| | — |
|
| Separate Accounts investment activity | 160 |
| | 181 |
| | 116 |
| |
| Non-taxable investment income (loss) | 15 |
| | 8 |
| | 12 |
| 104 |
| | 241 |
| | 173 |
|
| Tax audit interest | (22 | ) | | 1 |
| | (6 | ) | (11 | ) | | (6 | ) | | (14 | ) |
| State income taxes | (8 | ) | | 1 |
| | (4 | ) | (1 | ) | | (3 | ) | | (6 | ) |
| AB Federal and foreign taxes | (15 | ) | | 2 |
| | 4 |
| |
| Tax settlement | — |
| | 77 |
| | 212 |
| |
| Tax settlements/uncertain tax position release | | — |
| | 221 |
| | — |
|
| Change in tax law | | 46 |
| | 1,308 |
| | — |
|
| Other | — |
| | (2 | ) | | (8 | ) | (2 | ) | | (9 | ) | | (3 | ) |
| Income tax (expense) benefit | $ | 113 |
| | $ | (186 | ) | | $ | (1,695 | ) | $ | 446 |
| | $ | 1,210 |
| | $ | 164 |
|
The Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted on December 22, 2017. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations where a company does not have the necessary information available to complete its accounting for certain income tax effects of the Tax Reform Act. In second quarter 2015,accordance with SAB 118, the Company recognizeddetermined reasonable estimates for certain effects of the Tax Reform Act and recorded those estimates as provisional amounts in the 2017 financial statements. The accounting for the income tax effects of the Tax Reform Act has been completed.
The components of change in tax law are as follows:
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
An income tax expense of $4 million from the revaluation of deferred tax assets and liabilities that existed at the time of enactment. The calculation of cumulative temporary differences has been refined.
An income tax expense of $13 million related to the decrease in federal tax benefit allowable for audit interest as a result of lower corporate tax rates.
An income tax benefit of $77$20 million related to settlement withreverse the IRS onsequestration fee applied to a portion of accumulated minimum tax credits in the appeal2017 financial statements. The Internal Revenue Service has since clarified that refundable minimum tax credits are not subject to sequestration.
During the fourth quarter of proposed adjustments to the Company’s 2004 and 2005 Federal corporate income tax returns.
In second quarter 2014,2018, the Company recognized a tax benefit of $212 million related to settlement ofadopted the IRS audit for tax years 2006 and 2007.
In February 2014, the IRS releasedInternal Revenue Ruling 2014-7, eliminating the IRS’ previous guidance related to the methodology to be followed in calculating the Separate Account dividends received deduction (“DRD”). However, there remains the possibility that the IRS and the U.S. Treasury will address, through subsequent guidance, the issues previously raisedService’s directive related to the calculation of tax reserves for variable annuity contracts. As a result of adoption of the DRD. The ultimate timing and substance of any such guidance is unknown. It is also possible thatdirective, the Company released audit interest accrued for uncertainties in the calculation of variable annuity tax reserves. The impact on the Separate Account DRD will be addressed in future legislation. Any such guidance or legislation could result inCompany’s financial statements was a benefit of $43 million.
During the elimination or reductionsecond quarter of 2017, the Company agreed to the Internal Revenue Service’s Revenue Agent’s Report for its consolidated 2008 and 2009 Federal corporate income tax returns. The impact on eitherthe Company’s financial statements and unrecognized tax benefits was a retroactive or prospective basis of the Separate Account DRD tax benefit that the Company receives.
As of December 31, 2016 and 2015, the Company had a current tax liability of $218$221 million and $592 million respectively.
.
The components of the net deferred income taxes are as follows:
| | | | | | | | | | | As of December 31, |
| | December 31, 2016 | | December 31, 2015 | 2018 | | 2017 |
| | Assets | | Liabilities | | Assets | | Liabilities | Assets | | Liabilities | | Assets | | Liabilities |
| | (In Millions) | (in millions) |
| Compensation and related benefits | $ | 88 |
| | $ | — |
| | $ | 93 |
| | $ | — |
| $ | 47 |
| | $ | — |
| | $ | 47 |
| | $ | — |
|
| Net operating loss | | 239 |
| | — |
| | — |
| | — |
|
| Reserves and reinsurance | — |
| | 1,786 |
| | — |
| | 1,740 |
| — |
| | 32 |
| | — |
| | 83 |
|
| DAC | — |
| | 1,197 |
| | — |
| | 1,253 |
| — |
| | 864 |
| | — |
| | 821 |
|
| Unrealized investment gains or losses | — |
| | 23 |
| | — |
| | 134 |
| |
| Unrealized investment gains (losses) | | 123 |
| | — |
| | — |
| | 298 |
|
| Investments | — |
| | 1,062 |
| | — |
| | 1,437 |
| 670 |
| | — |
| | — |
| | 997 |
|
| Net operating losses and credits | 394 |
| | — |
| | 424 |
| | — |
| |
| Tax credits | | 314 |
| | — |
| | 387 |
| | — |
|
| Other | 5 |
| | — |
| | — |
| | 25 |
| 14 |
| | — |
| | 67 |
| | — |
|
| Total | $ | 487 |
| | $ | 4,068 |
| | $ | 517 |
| | $ | 4,589 |
| $ | 1,407 |
| | $ | 896 |
| | $ | 501 |
| | $ | 2,199 |
|
As of December 31, 2016, the
The Company had $394$314 million and $387 million of AMT credits which do not expire.
The Company does not provide income taxes onfor the undistributed earnings of non-U.S. corporate subsidiaries except to the extent that such earnings are not permanently invested outside the United States. As ofyears ended December 31, 2016, $195 million of accumulated undistributed earnings of non-U.S. corporate subsidiaries were permanently invested outside the United States. At existing applicable income tax rates, additional taxes of approximately $79 million would need2018 and 2017, respectively, which are expected to be provided if such earnings were remitted.refunded or utilized against future taxable income.
At December 31, 2016 and 2015, of the total amountA reconciliation of unrecognized tax benefits $394 million(excluding interest and $344 million, respectively, would affect the effective rate.penalties) follows:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Balance at January 1, | $ | 205 |
| | $ | 444 |
| | $ | 406 |
|
| Additions for tax positions of prior years | 98 |
| | 28 |
| | 38 |
|
| Reductions for tax positions of prior years | (30 | ) | | (234 | ) | | — |
|
| Settlements with tax authorities | — |
| | (33 | ) | | — |
|
| Balance at December 31, | $ | 273 |
| | $ | 205 |
| | $ | 444 |
|
| | | | | | |
| Unrecognized tax benefits that, if recognized, would impact the effective rate | $ | 202 |
| | $ | 172 |
| | $ | 329 |
|
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. Interest and penalties included in the amounts of unrecognized tax benefits at December 31, 20162018 and 20152017 were $67$41 million and $52$23 million, respectively. For 2016, 20152018, 2017 and 2014,2016, respectively, there were $15$18 million, $(25)$(44) million and $(43)$15 million in interest expense (benefit) related to unrecognized tax benefits.
A reconciliation of unrecognized tax benefits (excluding interest and penalties) follows:
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Balance at January 1, | $ | 418 |
| | $ | 475 |
| | $ | 592 |
|
| Additions for tax positions of prior years | 39 |
| | 44 |
| | 56 |
|
| Reductions for tax positions of prior years | — |
| | (101 | ) | | (181 | ) |
| Additions for tax positions of current year | — |
| | — |
| | 8 |
|
| Balance at December 31, | $ | 457 |
| | $ | 418 |
| | $ | 475 |
|
During the second quarter of 2015, the Company reached a settlement with the IRS on the appeal of proposed adjustments to the Company’s 2004 and 2005 Federal corporate income tax returns. In 2015, the IRS commenced their examination of the 2008 and 2009 tax years, with prior years no longer subject to examination. It is reasonably possible that the total amountsamount of unrecognized tax benefitbenefits will change within the next 12 months due to the conclusion of IRS proceedings and the addition of new issues for open tax years. The possible change in the amount of unrecognized tax benefits cannot be estimated at this time.
As of December 31, 2018, tax years 2010 and subsequent remain subject to examination by the IRS.
| |
15) | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
16) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
AOCI represents cumulative gains (losses) on items that are not reflected in earningsincome (loss). The balances for the past three years follow:
|
| | | | | | | | | | | |
| | December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Unrealized gains (losses) on investments | $ | 44 |
| | $ | 261 |
| | $ | 1,142 |
|
| Foreign currency translation adjustments | (77 | ) | | (59 | ) | | (34 | ) |
| Defined benefit pension plans | (46 | ) | | (43 | ) | | (811 | ) |
| Total accumulated other comprehensive income (loss) | (79 | ) | | 159 |
| | 297 |
|
| Less: Accumulated other comprehensive (income) loss attributable to noncontrolling interest | 86 |
| | 69 |
| | 54 |
|
| Accumulated Other Comprehensive Income (Loss) Attributable to AXA Equitable | $ | 7 |
| | $ | 228 |
| | $ | 351 |
|
|
| | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Unrealized gains (losses) on investments (1) | $ | (484 | ) | | $ | 581 |
| | $ | (44 | ) |
| Defined benefit pension plans (2) | (7 | ) | | (51 | ) | | (46 | ) |
| Total accumulated other comprehensive income (loss) from continuing operations | (491 | ) | | 530 |
| | (90 | ) |
| Less: Accumulated other comprehensive (income) loss attributable to non-controlling interest | — |
| | 68 |
| | 86 |
|
| Accumulated other comprehensive income (loss) attributable to AXA Equitable | $ | (491 | ) | | $ | 598 |
| | $ | (4 | ) |
____________
| |
| (1) | 2018 includes a $86 million decrease to Accumulated other comprehensive loss from the impact of adoption of ASU 2018-02. |
| |
| (2) | 2018 includes a $3 million increase to Accumulated other comprehensive loss from the impact of adoption of ASU 2018-02. |
Immediately preceding the Assumption Transaction, the AXA Equitable QP had approximately $1,193 million unrecognized net actuarial losses in AOCI that were transferred to AXA Financial, resulting in an increase in AOCI and a decrease in additional paid in capital of $1,193 million ($772 million net of tax), the net impact to AXA Equitable’s consolidated Shareholder’s Equity was $0 million.
The components of OCI for the past three years ended December 31, 2018, 2017 and 2016, net of tax, follow:
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Foreign currency translation adjustments: | | | | | |
| Foreign currency translation gains (losses) arising during the period | $ | (18 | ) | | $ | (25 | ) | | $ | (21 | ) |
| (Gains) losses reclassified into net earnings (loss) during the period | — |
| | — |
| | — |
|
| Foreign currency translation adjustment | (18 | ) | | (25 | ) | | (21 | ) |
| Change in net unrealized gains (losses) on investments: | | | | | |
| Net unrealized gains (losses) arising during the year | (160 | ) | | (1,020 | ) | | 1,043 |
|
(Gains) losses reclassified into net earnings (loss) during the year(1) | 2 |
| | 12 |
| | 37 |
|
| Net unrealized gains (losses) on investments | (158 | ) | | (1,008 | ) | | 1,080 |
|
| Adjustments for policyholders liabilities, DAC, insurance liability loss recognition and other | (59 | ) | | 127 |
| | (111 | ) |
| Change in unrealized gains (losses), net of adjustments and (net of deferred income tax expense (benefit) of $(96), $(480) and $529) | (217 | ) | | (881 | ) | | 969 |
|
| Change in defined benefit plans: | | | | | |
| Net gain (loss) arising during the year | — |
| | — |
| | (95 | ) |
| Prior service cost arising during the year | — |
| | — |
| | — |
|
Less: reclassification adjustments to net earnings (loss) for:(2) | | | | | |
| Amortization of net (gains) losses included in net periodic cost | (3 | ) | | (4 | ) | | 72 |
|
| Amortization of net prior service credit included in net periodic cost | — |
| | — |
| | — |
|
| Change in defined benefit plans (net of deferred income tax expense (benefit) of $0, $(2) and $(15)) | (3 | ) | | (4 | ) | | (23 | ) |
| Total other comprehensive income (loss), net of income taxes | (238 | ) | | (910 | ) | | 925 |
|
| Less: Other comprehensive (income) loss attributable to noncontrolling interest | 17 |
| | 15 |
| | 29 |
|
| Other Comprehensive Income (Loss) Attributable to AXA Equitable | $ | (221 | ) | | $ | (895 | ) | | $ | 954 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Change in net unrealized gains (losses) on investments: | | | | | |
| Net unrealized gains (losses) arising during the year | $ | (1,663 | ) | | $ | 782 |
| | $ | (178 | ) |
| (Gains) losses reclassified into net income (loss) during the year (1) | (4 | ) | | 8 |
| | 2 |
|
| Net unrealized gains (losses) on investments | (1,667 | ) | | 790 |
| | (176 | ) |
| Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other | 437 |
| | (165 | ) | | (57 | ) |
| Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of $(310), $244, and $(97)) | (1,230 | ) | | 625 |
| | (233 | ) |
| Change in defined benefit plans: | | | | | |
| Less: Reclassification adjustments to Net income (loss) for: (2) | | | | | |
| Amortization of net (gains) losses included in net periodic cost | (4 | ) | | (5 | ) | | (3 | ) |
| Change in defined benefit plans (net of deferred income tax expense (benefit) of $0, $(2) and $(2)) | (4 | ) | | (5 | ) | | (3 | ) |
| Total other comprehensive income (loss), net of income taxes from continuing operations | (1,234 | ) | | 620 |
| | (236 | ) |
| Other comprehensive income (loss) from discontinued operations, net of income taxes | — |
| | (18 | ) | | 17 |
|
| Other comprehensive income (loss) attributable to AXA Equitable | $ | (1,234 | ) | | $ | 602 |
| | $ | (219 | ) |
____________
| |
| (1) | See “Reclassification adjustments” in Note 3. Reclassification amounts presented net of income tax expense (benefit) of $(1) million, $(6)$(5) million and $(19)$(1) million for 2016, 2015the years ended December 31, 2018, 2017 and 2014,2016, respectively. |
| |
| (2) | These AOCI components are included in the computation of net periodic costs (see “Employee Benefit Plans” in Note 12)13). Reclassification amounts presented net of income tax expense (benefit) of $0 $0million,$2 million and $2 million for the years ended December 31, 2018, 2017 and $(39) million for 2016, 2015 and 2014, respectively. |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Investment gains and losses reclassified from AOCI to net earningsincome (loss) primarily consist of realized gains (losses) on sales and OTTI of AFS securities and are included in Total investment gains (losses), net on the consolidated statements of earningsincome (loss). Amounts reclassified from AOCI to net earningsNet income (loss) as related to defined benefit plans primarily consist of amortizations of net (gains) losses and net prior service cost (credit) recognized as a component of net periodic cost and reported in Compensation and benefit expenses in the consolidated statements of earningsincome (loss). Amounts presented in the table above are net of tax.
17) COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
Litigation, regulatory and other loss contingencies arise in the ordinary course of the Company’s activities as a diversified financial services firm. The Company is a defendant in a number of litigation matters arising from the conduct of its business. In some of these matters, claimants seek to recover very large or indeterminate amounts, including compensatory, punitive, treble and exemplary damages. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages and other relief. Claimants are not always required to specify the monetary damages they seek or they may be required only to state an amount sufficient to meet a court’s jurisdictional requirements. Moreover, some jurisdictions allow claimants to allege monetary damages that far exceed any reasonably possible verdict. The variability in pleading requirements and past experience demonstrates that the monetary and other relief that may be requested in a lawsuit or claim often bears little relevance to the merits or potential value of a claim. Litigation against the Company includes a variety of claims including, among other things, insurers’ sales practices, alleged agent misconduct, alleged failure to properly supervise agents, contract administration, product design, features and accompanying disclosure, cost of insurance increases, the use of captive reinsurers, payments of death benefits and the reporting and escheatment of unclaimed property, alleged breach of fiduciary duties, alleged mismanagement of client funds and other matters.
As with other financial services companies, the Company periodically receives informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the Company or the financial services industry. It is the practice of the Company to cooperate fully in these matters.
The outcome of a litigation or regulatory matter is difficult to predict and the amount or range of potential losses associated with these or other loss contingencies requires significant management judgment. It is not possible to predict the ultimate outcome or to provide reasonably possible losses or ranges of losses for all pending regulatory matters, litigation and other loss contingencies. While it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company’s financial position, based on information currently known, management believes that neither the outcome of pending litigation and regulatory matters, nor potential liabilities associated with other loss contingencies, are likely to have such an effect. However, given the large and indeterminate amounts sought in certain litigation and the inherent unpredictability of all such matters, it is possible that an adverse outcome in certain of the Company’s litigation or regulatory matters, or liabilities arising from other loss contingencies, could, from time to time, have a material adverse effect upon the Company’s results of operations or cash flows in a particular quarterly or annual period.
For some matters, the Company is able to estimate a possible range of loss. For such matters in which a loss is probable, an accrual has been made. For matters where the Company, however, believes a loss is reasonably possible, but not probable, no accrual is required. For matters for which an accrual has been made, but there remains a reasonably possible range of loss in excess of the amounts accrued or for matters where no accrual is required, the Company develops an estimate of the unaccrued amounts of the reasonably possible range of losses. As of December 31, 2018, the Company estimates the aggregate range of reasonably possible losses, in excess of any amounts accrued for these matters as of such date to be up to approximately $95 million.
For other matters, the Company is currently not able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from plaintiffs and other parties, investigation of factual allegations, rulings by a court on motions or appeals, analysis by experts and the progress of settlement discussions. On a quarterly and
| |
16) | COMMITMENTS AND CONTINGENT LIABILITIES |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
annual basis, the Company reviews relevant information with respect to litigation and regulatory contingencies and updates the Company’s accruals, disclosures and reasonably possible losses or ranges of loss based on such reviews.
In August 2015, a lawsuit was filed in Connecticut Superior Court, Judicial Division of New Haven entitled Richard T. O’Donnell, on behalf of himself and all others similarly situated v. AXA Equitable Life Insurance Company. This lawsuit is a putative class action on behalf of all persons who purchased variable annuities from AXA Equitable, which were subsequently subjected to the volatility management strategy and who suffered injury as a result thereof. Plaintiff asserts a claim for breach of contract alleging that AXA Equitable Life implemented the volatility management strategy in violation of applicable law. In November 2015, the Connecticut Federal District Court transferred this action to the United States District Court for the Southern District of New York. In March 2017, the Southern District of New York granted AXA Equitable Life’s motion to dismiss the complaint. In April 2017, the plaintiff filed a notice of appeal. In April 2018, the United States Court of Appeals for the Second Circuit reversed the trial court’s decision with instructions to remand the case to Connecticut state court. In September 2018, the Second Circuit issued its mandate, following AXA Equitable Life’s notification to the court that it would not file a petition for writ of certiorari.The case was transferred in December 2018 and is pending in Connecticut Superior Court, Judicial District of Stamford. We are vigorously defending this matter.
In February 2016, a lawsuit was filed in the United States District Court for the Southern District of New York entitled Brach Family Foundation, Inc. v. AXA Equitable Life Insurance Company. This lawsuit is a putative class action brought on behalf of all owners of universal life (“UL”) policies subject to AXA Equitable Life’s COI rate increase. In early 2016, AXA Equitable Life raised COI rates for certain UL policies issued between 2004 and 2007, which had both issue ages 70 and above and a current face value amount of $1 million and above. A second putative class action was filed in Arizona in 2017 and consolidated with the Brach matter. The current consolidated amended class action complaint alleges the following claims: breach of contract; misrepresentations by AXA Equitable Life in violation of Section 4226 of the New York Insurance Law; violations of New York General Business Law Section 349; and violations of the California Unfair Competition Law, and the California Elder Abuse Statute. Plaintiffs seek; (a) compensatory damages, costs, and, pre- and post-judgment interest; (b) with respect to their claim concerning Section 4226, a penalty in the amount of premiums paid by the plaintiffs and the putative class; and (c) injunctive relief and attorneys’ fees in connection with their statutory claims. Five other federal actions challenging the COI rate increase are also pending against AXA Equitable and have been coordinated with the Brach action for the purposes of pre-trial activities. They contain allegations similar to those in the Brach action as well as additional allegations for violations of various states’ consumer protection statutes and common law fraud. Two actions are also pending against AXA Equitable in New York state court. AXA Equitable is vigorously defending each of these matters.
Leases
The Company has entered into operating leases for office space and certain other assets, principally information technology equipment and office furniture and equipment. Future minimum payments under non-cancelable operating leases for 20172019 and the four successive years are $218$81 million, $207$74 million, $194$69 million, $168$67 million, $159$63 million and $446$66 million thereafter. Minimum future sublease rental income on these non-cancelable operating leases for 20172019 and the four successive years is $32$12 million, $33$12 million, $32$12 million, $12 million, $12 million and $0 million thereafter.
Rent expense, which is amortized on a straight-line basis over the life of the lease, was $82 million, $78 million, $72 million, respectively, for the years ended December 31, 2018, 2017 and 2016, net of sublease income of $12 million, $16 million, $14$13 million, respectively, for the years ended December 31, 2018, 2017 and $44 million thereafter.2016.
Obligations under Funding Agreements
Entering into FHLBNY membership, borrowings and funding agreements requires the ownership of FHLBNY stock and the pledge of assets as collateral,collateral. AXA Equitable has purchased FHLBNY stock of $109$190 million and pledged collateral with a carrying value of $3,885 million,$6.1 billion, as of December 31, 2016.2018. AXA Equitable issues short-term funding agreements to the FHLBNY and uses the funds for asset liability and cash management purposes. AXA Equitable issues long termlong-term funding agreements to the FHLBNY and uses the funds for spread lending purposes. Funding agreements are reported in Policyholders'Policyholders’ account balances in the consolidated balance sheets. For other instruments used for asset/liability and cash management purposes, see “Derivative and offsetting assets and liabilities” included in Note 3.3. The table below summarizes AXA Equitable'sthe Company’s activity of funding agreements with the FHLBNY.
|
| | | | | | | | | | | | | |
| | Outstanding balance at end of year | | Maturity of Outstanding balance | | Issued during the Year | | Repaid during the year |
| December 31, 2016: | (In Millions) |
| Short-term FHLBNY funding agreements | $ | 500 |
| | less than one month | | $ | 6,000 |
| | $ | 6,000 |
|
| | | | | | | | |
| Long-term FHLBNY funding agreements | $ | 58 |
| | less than 4 years | | $ | 58 |
| | $ | — |
|
| | $ | 862 |
| | Less than 5 years | | $ | 862 |
| | $ | — |
|
| | $ | 818 |
| | great than five years | | $ | 818 |
| | $ | — |
|
| Total long term funding agreements | $ | 1,738 |
| | | | $ | 1,738 |
| | $ | — |
|
| Total FHLBNY funding agreements at December 31, 2016 | $ | 2,238 |
| | | | $ | 7,738 |
| | $ | 6,000 |
|
| | | | | | | | |
| December 31, 2015: | | | | | | | |
| Short-term FHLBNY funding agreements | $ | 500 |
| | less than one month | | $ | 6,000 |
| | $ | 6,000 |
|
Restructuring
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As part of the Company’s on-going efforts to reduce costs and operate more efficiently, from time to time, management has approved and initiated plans to reduce headcount and relocate certain operations. In 2016, 2015 and 2014, respectively, AXA Equitable recorded $21 million, $3 million and $42 million pre-tax charges related to severance and lease costs. The amounts recorded in 2014 included pre-tax charges of $25 million, respectively, related to the reduction in office space in the Company’s 1290 Avenue of the Americas, New York, NY headquarters. The restructuring costs and liabilities associated with the Company’s initiatives were as follows:
|
| | | | | | | | | | | |
| | December 31, |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Balance, beginning of year | $ | 89 |
| | $ | 113 |
| | $ | 122 |
|
| Additions | 35 |
| | 10 |
| | 21 |
|
| Cash payments | (18 | ) | | (32 | ) | | (24 | ) |
| Other reductions | — |
| | (2 | ) | | (6 | ) |
| Balance, End of Year | $ | 106 |
| | $ | 89 |
| | $ | 113 |
|
|
| | | | | | | | | | | | | |
| | Outstanding balance at end of period | | Maturity of outstanding balance | | Issued during the period | | Repaid during the period |
| | (in millions) |
| December 31, 2018: | | | | | | | |
| Short-term FHLBNY funding agreements | $ | 1,490 |
| | Less than one month | | $ | 7,980 |
| | $ | 6,990 |
|
| Long-term FHLBNY funding agreements | 1,621 |
| | Less than four years | | — |
| | — |
|
| | 98 |
| | Less than five years | | — |
| | — |
|
| | 781 |
| | Greater than five years | | — |
| | — |
|
| Total long-term funding agreements | 2,500 |
| | | | — |
| | — |
|
| Total FHLBNY funding agreements at December 31, 2018 (1) | $ | 3,990 |
| | | | $ | 7,980 |
| | $ | 6,990 |
|
| | | | | | | | |
| December 31, 2017: | | | | | | | |
| Short-term FHLBNY funding agreements | $ | 500 |
| | Less than one month | | $ | 6,000 |
| | $ | 6,000 |
|
| Long-term FHLBNY funding agreements | 1,244 |
| | Less than four years | | 324 |
| |
|
| | 377 |
| | Less than five years | | 303 |
| |
|
| | 879 |
| | Greater than five years | | 135 |
| |
|
| Total long-term funding agreements | 2,500 |
| | | | 762 |
| | $ | — |
|
| Total FHLBNY funding agreements at December 31, 2017 (1) | $ | 3,000 |
| | | | $ | 6,762 |
| | $ | 6,000 |
|
In an effort to further reduce its global real estate footprint, AB completed a comprehensive review of its worldwide office locations and began implementing a global space consolidation plan in 2012. This resulted in the sublease of office space primarily in New York as well as offices in England, Australia and various U.S. locations. In 2016, AB recorded new real estate charges of $18 million, resulting from new charges of $23 million relating to the further consolidation of office space at AB's New York offices, offset by changes in estimates related to previously recorded real estate charges of $5 million, which reflects the shortening of the lease term of AB's corporate headquarters from 2029 to 2024. Real estate charges are recorded in Other operating costs and expenses in the Company’s consolidated Statements of earnings (loss).____________
| |
| (1) | The $11 million and $14 million difference between the funding agreements carrying value shown in fair value table for 2018 and 2017, respectively, reflects the remaining amortization of a hedge implemented and closed, which locked in the funding agreements borrowing rates. |
Guarantees and Other Commitments
The Company provides certain guarantees or commitments to affiliates and others. At December 31, 2016,2018, these arrangements include commitments by the Company to provide equity financing of $697$927 million (including $249$280 million with affiliates)affiliates and $12 million on consolidated VIEs) to certain limited partnerships and real estate joint ventures under certain conditions. Management believes the Company will not incur material losses as a result of these commitments.
AXA Equitable is the obligor under certain structured settlement agreements it had entered into with unaffiliated insurance companies and beneficiaries. To satisfy its obligations under these agreements, AXA Equitable owns single premium annuities issued by previously wholly owned life insurance subsidiaries. AXA Equitable has directed payment under these annuities to be made directly to the beneficiaries under the structured settlement agreements. A contingent liability exists with respect to these agreements should the previously wholly owned subsidiaries be unable to meet their obligations. Management believes the need for AXA Equitable to satisfy those obligations is remote.
The Company had $18$18 million of undrawn letters of credit related to reinsurance at December 31, 2016.2018. The Company had $883$606 million of commitments under existing mortgage loan agreements at December 31, 2016.2018.
Pursuant to certain assumption agreements (the “Assumption Agreements”), AXA Financial legally assumed primary liability from AXA Equitable for all current and future liabilities of AXA Equitable under certain employee benefit plans that provide participants with medical, life insurance and deferred compensation benefits as well as under the AXA Equitable Retirement plan, a frozen qualified pension plan. AXA Equitable remains secondarily liable for its obligations under these plans and would recognize such liabilities in the event AXA Financial does not perform under the terms of the Assumption Agreements. On October 1, 2018, AXA Financial merged with and into its direct parent, Holdings, with Holdings continuing as the surviving entity. See Note 1 for further information.
18) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
For 2018, 2017 and 2016, respectively, AXA Equitable’s statutory net income (loss) totaled $3,120 million, $748 million and $679 million. Statutory surplus, Capital stock and Asset Valuation Reserve (“AVR”) totaled $7.9 billion and $8.7 billion at December 31, 2018 and 2017, respectively. At December 31, 2018, AXA Equitable, in accordance
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
with various government and state regulations, had $55 million of securities on deposit with such government or state agencies.
In 2018, AXA Equitable Life paid to its direct parent which subsequently distributed such amount to Holdings anordinary shareholder dividend of$1.1 billion. Also in 2018, AXA Equitable Life transferred its interests in ABLP, AB maintains Holding and the General Partner toAlpha Units Holdings, Inc., a guarantee innewly formed subsidiary, and distributed the shares of that subsidiary to its direct parent which subsequently distributed such shares to Holdings (the “AB Ownership Transfer”). The AB Ownership transfer was consideredan extraordinary dividend of $1.7 billion representing the equity value of Alpha Units Holdings, Inc. In connection with the AB Credit Facility. If SCB LLC is unable to meet its obligations, AB will pay the obligations when due or on demand. In addition, AB maintains guarantees totaling $425 million for the four of SCB LLC’s four uncommitted lines of credit.
AB maintains a guarantee with a commercial bank, under which it guarantees the obligations in the ordinary course of business of SCB LLC, Sanford C. Bernstein Limited (“SCBL”) and AllianceBernstein Holdings (Cayman) Ltd. (“AB Cayman”). AB also maintains three additional guarantees with other commercial banks under which it guarantees approximately $366 million of obligations for SCBL. In the event that SCB LLC, SCBL or AB Cayman is unable to meet its obligations, AB will pay the obligations when due or on demand.
During 2009, AB entered into a subscription agreement under which it committed to invest up to $35 million, as amended in 2011, in a venture capital fund over a six-year period. As of December 31, 2016 AB had funded $34 million of this commitment.
During 2010, as general partner of the AB U.S. Real Estate L.P. (the “Real Estate Fund”), AB committed to invest $25 million in the Real Estate Fund. As of December 31, 2016, AB had funded $21 million of this commitment.
During 2012, AB entered into an investment agreement under which it committed to invest up to $8 million in an oil and gas fund over a three-year period. As of December 31, 2016, AB had funded $6 million of this commitment.
AB has not been required to perform under any of the above agreements and currently have no liability in connection with these agreements.
Insurance Litigation
In July 2011, a derivative action was filed in the United States District Court of the District of New Jersey entitled Mary Ann Sivolella v.Ownership Transfer, AXA Equitable Life Insurance Companypaid an extraordinary cash dividend of $572 million and issued a surplus note to Holdings in the same amount. The surplus note was repaid on March 5, 2019.
In 2017, AXA Equitable Funds Management Group, LLC (“Sivolella Litigation”)Life did not pay shareholder dividends and a substantially similar action was filed in January 2013 entitled Sanford et al. v. AX Equitable FMG (“Sanford Litigation”). These lawsuits were filed on behalf of a total of twelve mutual funds and, among other things, seek recovery under (i) Section 36(b) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), for alleged excessive fees paid to2016, AXA Equitable and AXA Equitable Funds Management Group, LLC (“AXA Equitable FMG”) for investment management services and administrative services and (ii)paid $1.1 billion in shareholder dividends.
Dividend Restrictions
As a variety of other theories including unjust enrichment. The Sivolella Litigation anddomestic insurance subsidiary regulated by the Sanford Litigation were consolidated and a 25-day trial commenced in January 2016 and concluded in February 2016. In August 2016, the Court issued its decision in favor of AXA Equitable and AXA Equitable FMG, finding that the Plaintiffs had failed to meet their burden to demonstrate that AXA Equitable and AXA Equitable FMG breached their fiduciary duty in violation of Section 36(b) of the Investment Company Act or show any actual damages. In September 2016, the Plaintiffs filed a motion to amend the District Court’s trial opinion and to amend or make new findings of fact and/or conclusions of law. In December 2016, the Court issued an order denying the motion to amend and Plaintiffs filed a notice to appeal the District Court’s decision to the U.S. Court of Appeals for the Third Circuit.
In April 2014, a lawsuit was filed in the United States District Court for the Southern Districtinsurance laws of New York now entitled Ross v.State, AXA Equitable Life, Insurance Company. The lawsuit is a putative class action on behalf of all persons and entities that, between 2011 and March 11, 2014, directly or indirectly, purchased, renewed or paid premiums on life insurance policies issued by AXA Equitable (the “Policies”). The complaint alleges that AXA Equitable did not disclose in its New York statutory annual statements or elsewhere that the collateral for certain reinsurance transactions with affiliated reinsurance companies was supported by parental guarantees, an omission that allegedly caused AXA Equitable to misrepresent its “financial condition” and “legal reserve system.” The lawsuit seeks recovery under Section 4226 of the New York Insurance Law of all premiums paid by the class for the Policies during the relevant period. In July 2015, the Court granted AXA Equitable’s motion to dismiss for lack of subject matter jurisdiction. In April 2015, a second action in the United States District Court for the Southern District of New York was filed on behalf of a putative class of variable annuity holders with “Guaranteed Benefits Insurance Riders,” entitled Calvin W. Yarbrough, on behalf of himself and all others similarly situated v. AXA Equitable Life Insurance Company. The new action covers the same class period, makes substantially the same allegations, and seeks the same relief as the Ross action. In October 2015, the Court, on its own, dismissed the Yarbrough litigation on similar grounds as the Ross litigation. In December 2015, the Second Circuit denied the plaintiffs motion to consolidate their appeals but ordered that the appeals be heard together before a single panel of judges. In February 2017, the Second Circuit affirmed the decisions of the district court in favor of AXA Equitable.
In November 2014, a lawsuit was filed in the Superior Court of New Jersey, Camden County entitled Arlene Shuster, on behalf of herself and all others similarly situated v. AXA Equitable Life Insurance Company. This lawsuit is a putative class action on behalf of all AXA Equitable variable life insurance policyholders who allocated funds from their policy accounts to investments in AXA Equitable’s separate accounts, which were subsequently subjected to volatility-management strategy, and who suffered injury as a result thereof. The action asserts that AXA Equitable breached its variable life insurance contracts by implementing the volatility management strategy. In February 2016, the Court dismissed the complaint. In March 2016, the Plaintiff filed a notice of appeal. In August 2015, another lawsuit was filed in Connecticut Superior Court, Judicial Division of New Haven entitled Richard T. O’Donnell, on behalf of himself and all other similarly situated v. AXA Equitable Life Insurance Company. This lawsuit is a putative class action on behalf of all persons who purchased variable annuities from AXA Equitable which subsequently became subject to the volatility management strategy and who suffered injury as a result thereof. Plaintiff asserts a claim for breach of contract alleging that AXA Equitable implemented the volatility management strategy in violation of applicable law. In November 2015, the Connecticut Federal District Court transferred this action to the United States District Court for the Southern District of New York.
In February 2016, a lawsuit was filed in the United States District Court for the Southern District of New York entitled Brach Family Foundation, Inc. v. AXA Equitable Life Insurance Company. This lawsuit is a putative class action brought on behalf of all owners of UL policies subject to AXA Equitable’s cost of insurance (“COI”) increase. In early 2016, AXA Equitable raised COI rates for certain UL policies issued between 2004 and 2007, which had both issue ages 70 and above and a current face value amount of $1 million and above. The current complaint alleges a claim for breach of contract and a claim that the AXA Equitable made misrepresentations in violation of Section 4226 of the New York Insurance Law (“Section 4226”). Plaintiff seeks (a) with respect to its breach of contract claim, compensatory damages, costs, and, pre- and post-judgment interest, and (b) with respect to its claim concerning Section 4226, a penalty in the amount of premiums
paid by the Plaintiff and the putative class. AXA Equitable’s response to the complaint was filed in February 2017. Additionally, a separate putative class action and five individual actions challenging the COI increase have been filed against AXA Equitable.
AllianceBernstein Litigation
During the first quarter of 2012, AB received a legal letter of claim (the “Letter of Claim”) sent on behalf of Philips Pension Trustees Limited and Philips Electronics UK Limited (“Philips”), a former pension fund client, alleging that AB Limited (one of AB’s subsidiaries organized in the United Kingdom) was negligent and failed to meet certain applicable standards of care with respect to the initial investment in, and management of, a £500 million portfolio of U.S. mortgage-backed securities. Philips has alleged damages ranging between $177 million and $234 million, plus compound interest on an alleged $125 million of realized losses in the portfolio. On January 2, 2014, Philips filed a claim form (“Claim”) in the High Court of Justice in London, England, which formally commenced litigation with respect to the allegations in the Letter of Claim. By agreement dated November 26, 2016, the terms of which are confidential, this matter was settled. AB’s contribution to the settlement amount was paid by AB’s relevant insurance carriers.
Although the outcome of litigation and regulatory matters generally cannot be predicted with certainty, management intends to vigorously defend against the allegations made by the plaintiffs in the actions described above and believes that the ultimate resolution of the matters described therein involving AXA Equitable and/or its subsidiaries should not have a material adverse effect on the consolidated financial position of AXA Equitable. Management cannot make an estimate of loss, if any, or predict whether or not any of the matters described above will have a material adverse effect on AXA Equitable’s consolidated results of operations in any particular period.
In addition to the matters described above, a number of lawsuits, claims, assessments and regulatory inquiries have been filed or commenced against life and health insurers and asset managers in the jurisdictions in which AXA Equitable and its respective subsidiaries do business. These actions and proceedings involve, among other things, insurers’ sales practices, alleged agent misconduct, alleged failure to properly supervise agents, contract administration, product design, features and accompanying disclosure, cost of insurance increases, the use of captive reinsurers, payments of death benefits and the reporting and escheatment of unclaimed property, alleged breach of fiduciary duties, alleged mismanagement of client funds and other matters. In addition, a number of lawsuits, claims, assessments and regulatory inquiries have been filed or commenced against businesses in the jurisdictions in which AXA Equitable and its subsidiaries do business, including actions and proceedings related to alleged discrimination, alleged breaches of fiduciary duties in connection with qualified pension plans and other general business-related matters. Some of the matters have resulted in the award of substantial fines and judgments, including material amounts of punitive damages, or in substantial settlements. Courts, juries and regulators often have substantial discretion in awarding damage awards and fines, including punitive damages. AXA Equitable and its subsidiaries from time to time are involved in such actions and proceedings. While the ultimate outcome of such matters cannot be predicted with certainty, in the opinion of management no such matter is likely to have a material adverse effect on AXA Equitable’s consolidated financial position or results of operations. However, it should be noted that the frequency of large damage awards, including large punitive damage awards and regulatory fines that bear little or no relation to actual economic damages incurred, continues to create the potential for an unpredictable judgment in any given matter.
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18) | INSURANCE GROUP STATUTORY FINANCIAL INFORMATION |
AXA Equitable is restrictedrestrictions as to the amounts it may paypermitted to be paid as dividends and the amounts of any outstanding surplus notes permitted to AXA Financial. Under be repaid to Holdings.
New York InsuranceState insurance law provides that a domesticstock life insurer may not, without prior approval of the NYDFS,New York State Department of Financial Services (“NYDFS”), pay a dividend to its shareholdersstockholders exceeding an amount calculated basedunder one of two standards (the “Standards”). The first standard allows payment of an ordinary dividend out of the insurer’s earned surplus (as reported on the insurer’s most recent annual statement) up to a limit calculated pursuant to a statutory formula. This formula, would permit AXA Equitableprovided that the NYDFS is given notice and opportunity to pay shareholder dividendsdisapprove the dividend if certain qualitative tests are not greater than approximately $1,185 million during 2017. Paymentmet (the “Earned Surplus Standard”). The second standard allows payment of dividendsan ordinary dividend up to a limit calculated pursuant to a different statutory formula without regard to the insurer’s earned surplus. Dividends exceeding this amount requiresthese prescribed limits require the insurer to file a notice of its intent to declare suchthe dividends with the NYDFS who then has 30 days to disapproveand prior approval or non-disapproval from the distribution. For 2016, 2015 and 2014, respectively, AXA Equitable’s statutory net income (loss) totaled $679 million, $2,038 million and $1,664 million. Statutory surplus, capital stock and Asset Valuation Reserve (“AVR”) totaled $5,278 million and $5,895 million at December 31, 2016 and 2015, respectively. NYDFS.
In 2016,applying the Standards, AXA Equitable paid $1,050 million in shareholder dividends. In 2015,Life could pay ordinary dividends up to approximately $1.0 billion during 2019 or, if the amount under the Earned Surplus Standard was limited to the amount of AXA Equitable paid $767 millionLife’s positive unassigned funds as reported on its 2019 annual statement, $2.1 billion. However, in shareholder dividends and transferred approximately 10.0 million in Units ofconnection with the AB (fair value of $245 million) inOwnership Transfer, AXA Equitable Life agreed with the form ofNYDFS that it would not seek a dividend to AEFS. In 2014, AXA Equitable paid $382 million in shareholder dividends.of greater than $1.0 billion under the Earned Surplus Standard during 2019.
Prescribed and Permitted Accounting Practices
At December 31, 2016, AXA Equitable, in accordance with various government and state regulations, had $57 million of securities on deposit with such government or state agencies.
In 2015, AXA Equitable repaid $200 million of third party surplus notes at maturity. In 2014, AXA Equitable, with the approval of the NYDFS, repaid at par value plus accrued interest of $825 million of outstanding surplus notes to AXA Financial.
At December 31, 20162018 and for the year then ended, there were no differences in net income (loss) and capital and surplus resulting from practices prescribed and permitted by NYDFS and those prescribed by NAIC Accounting Practices and Procedures effective at December 31, 2016. 2018.
The NYDFS is completing its periodicCompany cedes a portion of their statutory examinationsreserves toEQ AZ Life Re, a captive reinsurer, as part of the books, recordsCompany’s capital management strategy.EQ AZ Life Reprepares financial statements in a special purpose framework for statutory reporting.
Differences between Statutory Accounting Principles and accounts of AXA Equitable for the years 2011 through 2015, but has not yet issued its final report.U.S. GAAP
Accounting practices used to prepare statutory financial statements for regulatory filings of stock life insurance companies differ in certain instances from U.S. GAAP. The differences between statutory surplus and capital stock determined in accordance with Statutory Accounting Principles (“SAP”) and total equity under U.S. GAAP are primarily: (a) the inclusion in SAP of an AVR intended to stabilize surplus from fluctuations in the value of the investment portfolio; (b) future policy benefits and policyholders’ account balances under SAP differ from U.S. GAAP due to differences between actuarial assumptions and reserving methodologies; (c) certain policy acquisition costs are expensed under SAP but deferred under U.S. GAAP and amortized over future periods to achieve a matching of revenues and expenses; (d) under SAP, Federal income taxes are provided on the basis of amounts currently payable with limited recognition of deferred tax assets while under U.S. GAAP, deferred taxes are recorded for temporary differences between the financial statements and tax basis of assets and liabilities where the probability of realization
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
is reasonably assured; (e) the valuation of assets under SAP and U.S. GAAP differ due to different investment valuation and depreciation methodologies, as well as the deferral of interest-related realized capital gains and losses on fixed income investments; (f) the valuation of the investment in AB and AB Holding under SAP reflectsreflected a portion of the market value appreciation rather than the equity in the underlying net assets as required under U.S. GAAP; (g) reporting the surplus notes as a component of surplus in SAP but as a liability in U.S. GAAP; (h) computer software development costs are capitalized under U.S. GAAP but expensed under SAP; (i) certain assets, primarily prepaid assets, are not admissible under SAP but are admissible under U.S. GAAP, (j) the fair valuing of all acquired assets and liabilities including intangible assets are required for U.S. GAAP purchase accounting and (k) cost of reinsurance which is recognized as expense under SAP and amortized over the life of the underlying reinsured policies under U.S. GAAP.
19)DISCONTINUED OPERATIONS
Distribution of AllianceBernstein to Holdings
Effective December 31, 2018, the Company and its subsidiaries transferred all economic interests in the business of AB to a newly created entity, Alpha Unit Holdings, LLC (“Alpha”). The Company distributed all equity interests in Alpha to AXA Equitable Financial Services, LLC, a wholly-owned subsidiary of Holdings. The AB transfer and subsequent distribution of Alpha equity interests (“the AB Business Transfer”) removed the authority to control the business of AB and as such AB’s operations are now reflected as a discontinued operation in the Company’s consolidated financial statements in all periods presented. Prior to the fourth quarter of 2018, the Company reported the operations of AB as its Investment Management and Research segment.
In connection with the transfer, the Company paid an extraordinary dividend in cash to Holdings in the amount of $572 million. The Company also issued a one-year senior surplus note to Holdings for $572 million that was repaid on March 5, 2019. See Note 12 for details of the senior surplus note.
Transactions Prior to Distribution
Intercompany transactions prior to the AB Business Transfer between the Company and AB were eliminated and excluded from the consolidated statements of income (loss) and consolidated balance sheets.
The table below presents AB’s revenues recognized in 2018, 2017 and 2016, disaggregated by category:
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| Investment management, advisory and service fees: | | | | | |
| Base fees | $ | 2,156 |
| | $ | 2,025 |
| | $ | 1,809 |
|
| Performance-based fees | 118 |
| | 95 |
| | 33 |
|
| Research services | 439 |
| | 450 |
| | 480 |
|
| Distribution services | 419 |
| | 412 |
| | 384 |
|
| Other revenues: |
|
| |
|
| |
|
|
| Shareholder services | 76 |
| | 75 |
| | 78 |
|
| Other | 35 |
| | 42 |
| | 21 |
|
| Total investment management and service fees | $ | 3,243 |
| | $ | 3,099 |
| | $ | 2,804 |
|
Transactions Ongoing after Distribution
After the AB Business Transfer, services provided by AB will consist primarily of an investment management service agreement and will be included in investment expenses and identified as a related party transaction.
Discontinued Operations
The following table presents the amounts related to the Net income (loss) of AB that has been reflected in Discontinued operations:
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) |
| REVENUES | | | | | |
| Net derivative gains (losses) | $ | 12 |
| | $ | (24 | ) | | $ | (16 | ) |
| Net investment income (loss) | 24 |
| | 142 |
| | 150 |
|
| Investment gains (losses), net: |
| |
| |
|
| Other investment gains (losses), net | — |
| | — |
| | (2 | ) |
| Total investment gains (losses), net | — |
| | — |
| | (2 | ) |
| Investment management and service fees | 3,243 |
| | 3,099 |
| | 2,804 |
|
| Total revenues | $ | 3,279 |
| | $ | 3,217 |
| | $ | 2,936 |
|
| | | | | | |
| BENEFITS AND OTHER DEDUCTIONS |
| |
| |
|
| Compensation and benefits | $ | 1,370 |
| | $ | 1,307 |
| | $ | 1,231 |
|
| Commissions and distribution related payments | 427 |
| | 415 |
| | 372 |
|
| Interest expense | 8 |
| | 6 |
| | 3 |
|
| Other operating costs and expenses | 727 |
| | 789 |
| | 699 |
|
| Total benefits and other deductions | 2,532 |
| | 2,517 |
| | 2,305 |
|
| Income (loss) from discontinued operations, before income taxes | 747 |
| | 700 |
| | 631 |
|
| Income tax (expense) benefit | (69 | ) | | (82 | ) | | (69 | ) |
| Net income (loss) from discontinued operations, net of taxes | 678 |
| | 618 |
| | 562 |
|
| Less: Net (income) loss attributable to the noncontrolling interest | (564 | ) | | (533 | ) | | (496 | ) |
| Net income (loss) from discontinued operations, net of taxes and noncontrolling interest | $ | 114 |
| | $ | 85 |
| | $ | 66 |
|
The following table presents the amounts related to the financial position of AB as of December 31, 2017. As the Company deconsolidated AB effective December 31, 2018, amounts related to AB’s financial position as of December 31, 2018 are not included in the Company’s consolidated balance sheet as of that date. The amounts as of December 31, 2017 have been reflected in either the Assets of disposed subsidiary or Liabilities of disposed subsidiary, as applicable, in the Company’s consolidated balance sheet:
Assets and Liabilities of Disposed Subsidiary |
| | | |
| | As of December 31, 2017 |
| | (in millions) |
| ASSETS | |
| Investments: | |
| Other equity investments | $ | 87 |
|
| Trading securities, at fair value | 351 |
|
| Other invested assets | 1,291 |
|
| Total investments | 1,729 |
|
| Cash and cash equivalents | 1,009 |
|
| Cash and securities segregated, at fair value | 816 |
|
| Broker-dealer related receivables | 2,158 |
|
| Intangible assets, net | 3,709 |
|
| Other assets | 414 |
|
| Total Assets of Disposed Subsidiary | $ | 9,835 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
| | As of December 31, 2017 |
| | (in millions) |
| LIABILITIES |
|
| Broker-dealer related payables | $ | 334 |
|
| Customer related payables | 2,229 |
|
| Long-term debt | 566 |
|
| Current and deferred income taxes | 404 |
|
| Other liabilities | 1,421 |
|
| Total Liabilities of Disposed Subsidiary | $ | 4,954 |
|
| | |
| Redeemable noncontrolling interest of disposed subsidiary | 602 |
|
| |
19)20) | BUSINESS SEGMENT INFORMATIONREVISION OF PRIOR PERIOD FINANCIAL STATEMENTS |
During the fourth quarter of 2018, the Company identified certain cash flows that were incorrectly classified in the Company’s consolidated statements of cash flows. The following tables reconcile segment revenues and earnings (loss) from operations before income taxesCompany has determined that these misclassifications were not material to total revenues and earnings (loss) as reported onthe financial statements of any period. These have been corrected in the comparative consolidated statements of cash flows for the year ended December 31, 2017 contained elsewhere in this filing.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company changed the presentation of the capitalization of deferred policy acquisition costs (“DAC”) in the consolidated statements of earningsincome for all prior periods presented herein by netting the capitalized amounts within the applicable expense line items, such as Compensation and benefits, Commissions and distribution plan payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of deferred acquisition costs. There was no impact on Net income (loss) and segment assets to total assets onor Comprehensive income of this reclassification. See Note 2 for further details of this reclassification.
Discontinued Operations
In addition, as further described in Note 19, as a result of the AB Business Transfer in the fourth quarter of 2018, AB’s operations are now reflected as a discontinued operation in the Company’s consolidated financial statements. The financial information for prior periods presented in the consolidated balance sheets, respectively.financial statements have been adjusted to reflect AB as a discontinued operation.
Consolidated Financial Statements as of and for the Year Ended December 31, 2017
The following tables present line items in the consolidated financial statements as of and for the year ended December 31, 2017 that have been affected by the revisions. This information has been corrected from the information previously presented in the 2017 Form 10-K. For these items, the tables detail the amounts as previously reported, the impact upon those line items due to the revisions, and the amounts as currently revised.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Segment revenues: | | | | | |
Insurance(1) | $ | 6,703 |
| | $ | 6,822 |
| | $ | 12,656 |
|
Investment Management(2) | 3,029 |
| | 3,025 |
| | 3,011 |
|
| Consolidation/elimination | (27 | ) | | (28 | ) | | (27 | ) |
| Total Revenues | $ | 9,705 |
| | $ | 9,819 |
| | $ | 15,640 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2017 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Balance Sheet: | | | | | | | | | |
| Assets: | | | | | | | | | |
| Deferred policy acquisition costs | $ | 4,547 |
| | $ | — |
| | $ | 4,547 |
| | $ | (55 | ) | | $ | 4,492 |
|
| Total Assets | $ | 225,985 |
| | $ | — |
| | $ | 225,985 |
| | $ | (55 | ) | | $ | 225,930 |
|
| | | | | | | | | | |
| Liabilities: | | | | | | | | | |
| Future policyholders’ benefits and other policyholders’ liabilities | 29,034 |
| | — |
| | 29,034 |
| | 36 |
| | 29,070 |
|
| Current and deferred taxes | 1,973 |
| | (404 | ) | | 1,569 |
| | (19 | ) | | 1,550 |
|
| Total Liabilities | 205,795 |
| | — |
| | 205,795 |
| | 17 |
| | 205,812 |
|
| Equity: | | | | | | | | | |
| Retained Earnings | 9,010 |
| | — |
| | 9,010 |
| | (72 | ) | | 8,938 |
|
| AXA Equitable Equity | 16,469 |
| | — |
| | 16,469 |
| | (72 | ) | | 16,397 |
|
| Total Equity | 19,564 |
| | — |
| | 19,564 |
| | (72 | ) | | 19,492 |
|
| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 225,985 |
| | $ | — |
| | $ | 225,985 |
| | $ | (55 | ) | | $ | 225,930 |
|
| |
(1) | Includes investment expenses charged by AB of approximately $50 million, $45 million and $40 million for 2016, 2015 and 2014, respectively, for services provided to the Company. |
| |
(2) | Intersegment investment advisory and other fees of approximately $77 million, $73 million and $67 million for 2016, 2015 and 2014, respectively, are included in total revenues of the Investment Management segment. |
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (In Millions) |
| Segment earnings (loss) from operations, before income taxes: | | | | | |
| Insurance | $ | (274 | ) | | $ | 1,033 |
| | $ | 5,512 |
|
Investment Management(1) | 706 |
| | 618 |
| | 603 |
|
| Consolidation/elimination | (1 | ) | | (1 | ) | | — |
|
| Total Earnings (Loss) from Operations, before Income Taxes | $ | 431 |
| | $ | 1,650 |
| | $ | 6,115 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Income (Loss): | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Policy charges and fee income | $ | 3,334 |
| | $ | — |
| | $ | — |
| | $ | 3,334 |
| | $ | (40 | ) | | $ | 3,294 |
|
| Net derivative gains (losses) | 890 |
| | — |
| | 24 |
| | 914 |
| | (20 | ) | | 894 |
|
| Total revenues | 11,733 |
| | — |
| | (3,217 | ) | | 8,516 |
| | (60 | ) | | 8,456 |
|
| Benefits and other deductions: | | | | | | | | | | | |
| Policyholders’ benefits | 3,462 |
| | — |
| | — |
| | 3,462 |
| | 11 |
| | 3,473 |
|
| Interest credited to policyholder’s account balances | 1,040 |
| | — |
| | — |
| | 1,040 |
| | (119 | ) | | 921 |
|
| Compensation and benefits | 1,762 |
| | (128 | ) | | (1,307 | ) | | 327 |
| | — |
| | 327 |
|
| Commissions and distribution related payments | 1,486 |
| | (443 | ) | | (415 | ) | | 628 |
| | — |
| | 628 |
|
| Amortization of deferred policy acquisition costs | 268 |
| | 578 |
| | — |
| | 846 |
| | 54 |
| | 900 |
|
| Other operating costs and expenses | 1,431 |
| | (7 | ) | | (789 | ) | | 635 |
| | — |
| | 635 |
|
| Total benefits and other deductions | 9,478 |
| | — |
| | (2,517 | ) | | 6,961 |
| | (54 | ) | | 6,907 |
|
| | | | | | | | | | | | |
| Income (loss) from continuing operations, before income taxes | 2,255 |
| | — |
| | (700 | ) | | 1,555 |
| | (6 | ) | | 1,549 |
|
| Income tax (expense) benefit from continuing operations | 1,139 |
| | — |
| | (111 | ) | | 1,028 |
| | 182 |
| | 1,210 |
|
| Net income (loss) from continuing operations | 3,394 |
| | — |
| | (811 | ) | | 2,583 |
| | 176 |
| | 2,759 |
|
| Net income (loss) | 3,394 |
| | — |
| | (533 | ) | | 2,861 |
| | (17 | ) | | 2,844 |
|
| Net income (loss) attributable to AXA Equitable | $ | 2,860 |
| | $ | — |
| | $ | — |
| | $ | 2,860 |
| | $ | (17 | ) | | $ | 2,843 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Comprehensive Income (Loss): | | | | | | | | | |
| Net income (loss) | $ | 3,394 |
| | $ | (533 | ) | | $ | 2,861 |
| | $ | (17 | ) | | $ | 2,844 |
|
| Change in unrealized gains (losses), net of reclassification adjustment | 563 |
| | — |
| | 563 |
| | 21 |
| | 584 |
|
| Other comprehensive income | 599 |
| | (18 | ) | | 581 |
| | 21 |
| | 602 |
|
| Comprehensive income (loss) | 3,993 |
| | (551 | ) | | 3,442 |
| | 4 |
| | 3,446 |
|
| Comprehensive income (loss) attributable to AXA Equitable | $ | 3,441 |
| | $ | — |
| | $ | 3,441 |
| | $ | 4 |
| | $ | 3,445 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Equity: | | | | | | | | | |
| Retained earnings, beginning of year | $ | 6,150 |
| | $ | — |
| | $ | 6,150 |
| | $ | (55 | ) | | $ | 6,095 |
|
| Net income (loss) attributable to AXA Equitable | 2,860 |
| | — |
| | 2,860 |
| | (17 | ) | | 2,843 |
|
| Retained earnings, end of period | 9,010 |
| | — |
| | 9,010 |
| | (72 | ) | | 8,938 |
|
| Accumulated other comprehensive income, beginning of year | 17 |
| | — |
| | 17 |
| | (21 | ) | | (4 | ) |
| Other comprehensive income (loss) | 581 |
| | — |
| | 581 |
| | 21 |
| | 602 |
|
| Accumulated other comprehensive income, end of year | 598 |
| | — |
| | 598 |
| | — |
| | 598 |
|
| Total AXA Equitable’s equity, end of year | 16,469 |
| | — |
| | 16,469 |
| | (72 | ) | | 16,397 |
|
| Total Equity, End of Year | $ | 19,564 |
| | $ | — |
| | $ | 19,564 |
| | $ | (72 | ) | | $ | 19,492 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | As Reported | | Presentation Reclassifi-cations | | Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Cash Flows: | | | | | | | |
| Net income (loss) (1) | $ | 3,394 |
| | $ | — |
| | $ | (17 | ) | | $ | 3,377 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
| Interest credited to policyholders’ account balances | 1,040 |
| | — |
| | (119 | ) | | 921 |
|
| Policy charges and fee income | (3,334 | ) | | — |
| | 40 |
| | (3,294 | ) |
| Net derivative (gains) losses | (890 | ) | | — |
| | 20 |
| | (870 | ) |
| Amortization and depreciation | (136 | ) | | 907 |
| | 54 |
| | 825 |
|
| Amortization of deferred sales commission | 32 |
| | (32 | ) | | — |
| | — |
|
| Amortization of other intangibles | 31 |
| | (31 | ) | | — |
| | — |
|
| Equity (income) loss from limited partnerships | — |
| | (157 | ) | | — |
| | (157 | ) |
| Distributions from joint ventures and limited partnerships | 140 |
| | (140 | ) | | — |
| | — |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | As Reported | | Presentation Reclassifi-cations | | Revisions | | As Revised |
| | (in millions) |
| Changes in: | | | | | | |
|
|
| Reinsurance recoverable | (416 | ) | | — |
| | (602 | ) | | (1,018 | ) |
| Deferred policy acquisition costs | 268 |
| | (268 | ) | | — |
| | — |
|
| Capitalization of deferred policy acquisition costs | — |
| | (578 | ) | | — |
| | (578 | ) |
| Future policy benefits | 1,511 |
| | — |
| | (322 | ) | | 1,189 |
|
| Current and deferred income taxes | (664 | ) | | — |
| | (510 | ) | | (1,174 | ) |
| Other, net | 189 |
| | 297 |
| | — |
| | 486 |
|
| Net cash provided by (used in) operating activities | $ | 1,077 |
| | $ | (2 | ) | | $ | (1,456 | ) | | $ | (381 | ) |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | | | |
| Short-term investments | $ | — |
| | $ | 2,204 |
| | $ | — |
| | $ | 2,204 |
|
| Payment for the purchase/origination of: | | | | | | | |
| Short-term investments | — |
| | (2,456 | ) | | — |
| | (2,456 | ) |
| Change in short-term investments | (264 | ) | | 254 |
| | 10 |
| | — |
|
| Other, net | 238 |
| | — |
| | 84 |
| | 322 |
|
| Net cash provided by (used in) investing activities | $ | (9,010 | ) | | $ | 2 |
| | $ | 94 |
| | $ | (8,914 | ) |
| Cash flows from financing activities: | | | | | | | |
| Policyholders’ account balances: | | | | | | | |
| Deposits | $ | 9,882 |
| | $ | — |
| | $ | (548 | ) | | $ | 9,334 |
|
| Withdrawals | (5,926 | ) | | — |
| | 2,000 |
| | (3,926 | ) |
| Transfer (to) from Separate Accounts | 1,656 |
| | — |
| | (90 | ) | | 1,566 |
|
| Net cash provided by (used in) financing activities | $ | 8,370 |
| | $ | — |
| | $ | 1,362 |
| | $ | 9,732 |
|
| |
| (1) | Net income (loss) includes $533 million in 2017 of interest expenses incurred on securities borrowed.the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss). |
Consolidated Financial Statements for the Year Ended December 31, 2016
The following table presents line items for the consolidated financial statements for the year ended December 31, 2016 that have been affected by the aforementioned adjustments and revisions. This information has been corrected from the information previously presented and restated in the 2017 Form 10-K. For these items, the table details the amounts as previously reported and the impact upon those line items due to the reclassifications to conform to the current presentation, adjustments for the discontinued operation, and revisions and the amounts as currently revised.
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| | (In Millions) |
| Segment assets: | | | |
| Insurance | $ | 190,628 |
| | $ | 182,738 |
|
Investment Management(1) | 13,139 |
| | 11,895 |
|
| Consolidation/elimination | (3 | ) | | (7 | ) |
| Total Assets | $ | 203,764 |
| | $ | 194,626 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Income (Loss): | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Policy charges and fee income | $ | 3,344 |
| | $ | — |
| | $ | — |
| | $ | 3,344 |
| | $ | (33 | ) | | $ | 3,311 |
|
| Net derivative gains (losses) | (1,211 | ) | | — |
| | 16 |
| | (1,195 | ) | | (126 | ) | | (1,321 | ) |
| Total revenues | 9,138 |
| | — |
| | (2,936 | ) | | 6,202 |
| | (159 | ) | | 6,043 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Benefits and other deductions: | | | | | | | | | | | |
| Interest credited to Policyholder’s account balances | 1,029 |
| | — |
| | — |
| | 1,029 |
| | (124 | ) | | 905 |
|
| Compensation and benefits | 1,723 |
| | (128 | ) | | (1,231 | ) | | 364 |
| | — |
| | 364 |
|
| Commissions and distribution related payments | 1,467 |
| | (460 | ) | | (372 | ) | | 635 |
| | — |
| | 635 |
|
| Amortization of deferred policy acquisition costs | 52 |
| | 594 |
| | — |
| | 646 |
| | (4 | ) | | 642 |
|
| Other operating costs and expenses | 1,458 |
| | (6 | ) | | (699 | ) | | 753 |
| | — |
| | 753 |
|
| Total benefits and other deductions | 8,516 |
| | — |
| | (2,305 | ) | | 6,211 |
| | (128 | ) | | 6,083 |
|
| Income (loss) from continuing operations, before income taxes | 622 |
| | — |
| | (631 | ) | | (9 | ) | | (31 | ) | | (40 | ) |
| Income tax (expense) benefit from continuing operations | 84 |
| | — |
| | 69 |
| | 153 |
| | 11 |
| | 164 |
|
| Net income (loss) from continuing operations | 706 |
| | — |
| | (562 | ) | | 144 |
| | (20 | ) | | 124 |
|
| Net income (loss) | 706 |
| | — |
| | (496 | ) | | 210 |
| | (20 | ) | | 190 |
|
| Net income (loss) attributable to AXA Equitable | $ | 210 |
| | $ | — |
| | $ | — |
| | $ | 210 |
| | $ | (20 | ) | | $ | 190 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Comprehensive Income (Loss): | | | | | | | | | |
| Net income (loss) | $ | 706 |
| | $ | (496 | ) | | $ | 210 |
| | $ | (20 | ) | | $ | 190 |
|
| Change in unrealized gains (losses), net of reclassification adjustment | (194 | ) | | — |
| | (194 | ) | | (21 | ) | | (215 | ) |
| Other comprehensive income | (215 | ) | | 17 |
| | (198 | ) | | (21 | ) | | (219 | ) |
| Comprehensive income (loss) | 491 |
| | (479 | ) | | 12 |
| | (41 | ) | | (29 | ) |
| Comprehensive income (loss) attributable to AXA Equitable | $ | 12 |
| | $ | — |
| | $ | 12 |
| | $ | (41 | ) | | $ | (29 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Equity: | | | | | | | | | |
| Retained earnings, beginning of year | $ | 6,990 |
| | $ | — |
| | $ | 6,990 |
| | $ | (35 | ) | | $ | 6,955 |
|
| Net income (loss) attributable to AXA Equitable | 210 |
| | — |
| | 210 |
| | (20 | ) | | 190 |
|
| Retained earnings, end of period | 6,150 |
| | — |
| | 6,150 |
| | (55 | ) | | 6,095 |
|
| Other comprehensive income (loss) | (198 | ) | | — |
| | (198 | ) | | (21 | ) | | (219 | ) |
| Accumulated other comprehensive income, end of period | 17 |
| | — |
| | 17 |
| | (21 | ) | | (4 | ) |
| Total AXA Equitable’s equity, end of period | $ | 11,508 |
| | $ | — |
| | $ | 11,508 |
| | $ | (76 | ) | | $ | 11,432 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | As Reported | | Presentation Reclassifications | | Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Cash Flows: | | | | | | | |
| Net income (loss) (1) | $ | 706 |
| | $ | — |
| | $ | (20 | ) | | $ | 686 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
| Interest credited to policyholders’ account balances | 1,029 |
| | — |
| | (124 | ) | | 905 |
|
| Policy charges and fee income | (3,344 | ) | | — |
| | 33 |
| | (3,311 | ) |
| Net derivative (gains) losses | 1,211 |
| | — |
| | 126 |
| | 1,337 |
|
| Amortization and depreciation | — |
| | 618 |
| | (4 | ) | | 614 |
|
| Amortization of deferred sales commission | 41 |
| | (41 | ) | | — |
| | — |
|
| Other depreciation and amortization | (98 | ) | | 98 |
| | — |
| | — |
|
| Amortization of other intangibles | 29 |
| | (29 | ) | | — |
| | — |
|
| Equity (income) loss from limited partnerships | — |
| | (91 | ) | | — |
| | (91 | ) |
| Return of real estate joint venture and limited partnerships | 126 |
| | (126 | ) | | — |
| | — |
|
| Changes in: | | | | | | | |
| Deferred policy acquisition costs | 52 |
| | (52 | ) | | — |
| | — |
|
| Capitalization of deferred policy acquisition costs | — |
| | (594 | ) | | — |
| | (594 | ) |
| Current and deferred income taxes | (742 | ) | | — |
| | (11 | ) | | (753 | ) |
| Other, net | (161 | ) | | 217 |
| | — |
| | 56 |
|
| Net cash provided by (used in) operating activities | $ | (461 | ) | | $ | — |
| | $ | — |
| | $ | (461 | ) |
| Cash flows from investing activities: | | | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | | | |
| Short-term investments | — |
| | 2,984 |
| | — |
| | 2,984 |
|
| Payment for the purchase/origination of: | | | | | | | |
| Short-term investments | — |
| | (3,187 | ) | | — |
| | (3,187 | ) |
| Change in short-term investments | (205 | ) | | 205 |
| | — |
| | — |
|
| Other, net | 409 |
| | (2 | ) | | — |
| | 407 |
|
| Net cash provided by (used in) investing activities | $ | (5,358 | ) | | $ | — |
| | $ | — |
| | $ | (5,358 | ) |
| |
| (1) | In accordance with SEC regulations,Net income (loss) includes $496 million in 2016 of the Investment Management segment includes securities with a fair valuediscontinued operations that are not included in Net income (loss) in the Consolidated Statements of $893 million and $460 million which have been segregated in a special reserve bank custody account at December 31, 2016 and 2015, respectively, for the exclusive benefit of securities broker-dealer or brokerage customers under the Exchange Act. They also include cash held in several special bank accounts for the exclusive benefit of customers. As of December 31, 2016 and December 31, 2015, $53 million and $55 million, respectively, of cash were segregated in these bank accounts.Income (Loss). |
21) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The unaudited quarterly financial information for the years ended December 31, 2018 and 2017 are summarized in the table below:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | (in millions) |
| 2018 | | | | | | | |
| Total revenues | $ | 1,139 |
| | $ | 1,621 |
| | $ | 27 |
| | $ | 4,164 |
|
| Total benefits and other deductions | 1,512 |
| | 4,278 |
| | 763 |
| | 1,879 |
|
| Net income (loss) | $ | (264 | ) | | $ | (2,084 | ) | | $ | (509 | ) | | $ | 1,936 |
|
| | | | | | | | |
| 2017 | | | | | | | |
| Total revenues | $ | 1,554 |
| | $ | 3,763 |
| | $ | 1,621 |
| | $ | 1,518 |
|
| Total benefits and other deductions | 1,921 |
| | 1,858 |
| | 1,708 |
| | 1,420 |
|
| Net income (loss) | $ | (201 | ) | | $ | 1,508 |
| | $ | 23 |
| | $ | 1,515 |
|
Net Income (Loss) Volatility
With the exception of the GMxB Unwind during the second quarter of 2018 that is further described in Note 12, the fluctuation in the Company’s quarterly Net income (loss) during 2018 and 2017 is not due to any specific events or transactions, but instead is driven primarily by the impact of changes in market conditions on the Company’s liabilities associated with GMxB features embedded in its variable annuity products, partially offset by derivatives the Company has in place to mitigate the movement in those liabilities. As those derivatives do not qualify for hedge accounting treatment, volatility in Net income (loss) result from the changes in value of the derivatives being recognized in the period in which they occur, with offsetting changes in the liabilities being partially recognized in the current period.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company revised the presentation of the capitalization of deferred policy acquisition costs (“DAC”) in the consolidated statements of income for all prior periods presented herein by netting the capitalized amounts within the applicable expense line items, such as Compensation and benefits, Commissions and distribution plan payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of deferred acquisition costs. There was no impact on Net income (loss) or Comprehensive income of this reclassification. See Note 2 for further details of this reclassification.
Revisions of Prior Period Interim Consolidated Financial Statements
The Company’s third quarter 2018 financial statements were revised to reflect the correction of errors identified by the Company in its previously issued financial statements. The impact of these errors was not considered to be material. However, in order to improve the consistency and comparability of the financial statements, management revised the Company’s consolidated financial statements for the three and six months ended March 31, 2018 and June 30, 2018, respectively, as well as the three and six months ended March 31, 2017 and June 30, 2017.
In addition, during the fourth quarter of 2018, the Company identified certain cash flows that were incorrectly classified in the Company’s historical consolidated statements of cash flows. The Company has determined that these mis-classifications were not material to the financial statements for any period. These misclassifications will be corrected in the comparative consolidated statements of cash flows for the three, six and nine months ended March 31, 2019, June 30, 2019 and September 30, 2019 that will appear in the Company’s first, second and third quarter 2019 Form 10-Q filings, respectively.
Discontinued Operations
In addition, as further described in Note 19, as a result of the AB Business Transfer effective as of December 31, 2018, AB’s operations are now reflected as Discontinued operations in the Company’s consolidated financial statements. The financial information for prior periods presented in the consolidated financial statements have been adjusted to reflect AB as Discontinued operations.
Revision of Consolidated Financial Statements as of and for the Three Months Ended March 31, 2018
The following tables present line items of the consolidated financial statements as of and for the three months ended March 31, 2018 that have been affected by the revisions. This information has been corrected from the information previously presented in the Company’s March 31, 2018 Form 10-Q. For these items, the tables detail the amounts as previously reported and the impact upon those line items due to the reclassifications to conform to the current presentation, adjustment for the discontinued operation, revisions and the amounts as currently revised. Prior period amounts have been reclassified to conform to current period presentation, where applicable, and are summarized in the accompanying tables.
|
| | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2018 |
| | As Pre-viously Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Balance Sheet: | | | | | | | | | |
| Assets: | | | | | | | | | |
| Deferred policy acquisition costs | 4,826 |
| | — |
| | 4,826 |
| | (119 | ) | | 4,707 |
|
| Total Assets | $ | 222,424 |
| | $ | — |
| | $ | 222,424 |
| | $ | (119 | ) | | $ | 222,305 |
|
| | | | | | | | | | |
| Liabilities: | | | | | | | | | |
| Future policyholders’ benefits and other policyholders’ liabilities | $ | 28,374 |
| | $ | — |
| | $ | 28,374 |
| | $ | (10 | ) | | $ | 28,364 |
|
| Current and deferred taxes | 1,728 |
| | (432 | ) | | 1,296 |
| | (38 | ) | | 1,258 |
|
| Other liabilities | 3,041 |
| | (1,941 | ) | | 1,100 |
| | 70 |
| | 1,170 |
|
| Total Liabilities | $ | 202,767 |
| | $ | — |
| | $ | 202,767 |
| | $ | 22 |
| | $ | 202,789 |
|
| Equity: | | | | | | | | | |
| Retained Earnings | $ | 8,824 |
| | $ | — |
| | $ | 8,824 |
| | $ | (141 | ) | | $ | 8,683 |
|
| AXA Equitable Equity | 15,545 |
| | — |
| | 15,545 |
| | (141 | ) | | 15,404 |
|
| Total Equity | 18,633 |
| | — |
| | 18,633 |
| | (141 | ) | | 18,492 |
|
| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 222,424 |
| | $ | — |
| | $ | 222,424 |
| | $ | (119 | ) | | $ | 222,305 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2018 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Income (Loss): | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Policy charges and fee income | $ | 869 |
| | $ | — |
| | $ | — |
| | $ | 869 |
| | $ | (8 | ) | | $ | 861 |
|
| Net derivative gains (losses) | (777 | ) | | — |
| | (2 | ) | | (779 | ) | | (38 | ) | | (817 | ) |
| Total Revenues | 2,031 |
| | — |
| | (846 | ) | | 1,185 |
| | (46 | ) | | 1,139 |
|
| Benefits and other deductions: | | | | | | | | | | | |
| Policyholders’ benefits | 489 |
| | — |
| | — |
| | 489 |
| | (9 | ) | | 480 |
|
| Interest credited to policyholders’ account balances | 338 |
| | — |
| | — |
| | 338 |
| | (83 | ) | | 255 |
|
| Compensation and benefits | 456 |
| | (33 | ) | | (344 | ) | | 79 |
| | 70 |
| | 149 |
|
| Commissions and distribution related payments | 371 |
| | (101 | ) | | (110 | ) | | 160 |
| | — |
| | 160 |
|
| Amortization of deferred policy acquisition costs | 10 |
| | 135 |
| | — |
| | 145 |
| | 64 |
| | 209 |
|
| Other operating costs and expenses | 440 |
| | (1 | ) | | (189 | ) | | 250 |
| | — |
| | 250 |
|
| Total benefits and other deductions | 2,115 |
| | — |
| | (645 | ) | | 1,470 |
| | 42 |
| | 1,512 |
|
| Income (loss) from continuing operations, before income taxes | (84 | ) | | — |
| | (201 | ) | | (285 | ) | | (88 | ) | | (373 | ) |
| Income tax (expense) benefit from continuing operations | 44 |
| | — |
| | 17 |
| | 61 |
| | 19 |
| | 80 |
|
| Net income (loss) from continuing operations | (40 | ) | | — |
| | (184 | ) | | (224 | ) | | (69 | ) | | (293 | ) |
| Net income (loss) | (40 | ) | | — |
| | (155 | ) | | (195 | ) | | (69 | ) | | (264 | ) |
| Net income (loss) attributable to AXA Equitable | $ | (194 | ) | | $ | — |
| | $ | — |
| | $ | (194 | ) | | $ | (69 | ) | | $ | (263 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2018 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Statements of Comprehensive Income (Loss): | | | | | | | | | |
| Net income (loss) | $ | (40 | ) | | $ | (155 | ) | | $ | (195 | ) | | $ | (69 | ) | | $ | (264 | ) |
| Comprehensive income (loss) | $ | (789 | ) | | $ | (162 | ) | | $ | (951 | ) | | $ | (69 | ) | | $ | (1,020 | ) |
| Comprehensive income (loss) attributable to AXA Equitable | $ | (950 | ) | | $ | — |
| | $ | (950 | ) | | $ | (69 | ) | | $ | (1,019 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2018 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Equity: | | | | | | | | | |
| Retained earnings, beginning of year | $ | 9,010 |
| | $ | — |
| | $ | 9,010 |
| | $ | (72 | ) | | $ | 8,938 |
|
| Net income (loss) | (194 | ) | | — |
| | (194 | ) | | (69 | ) | | (263 | ) |
| Retained earnings, end of period | 8,824 |
| | — |
| | 8,824 |
| | (141 | ) | | 8,683 |
|
| Total AXA Equitable’s equity, end of period | 15,545 |
| | | | 15,545 |
| | (141 | ) | | 15,404 |
|
| Total Equity, End of Period | $ | 18,633 |
| | $ | — |
| | $ | 18,633 |
| | $ | (141 | ) | | $ | 18,492 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2018 |
| | As Reported | | Presentation Reclassifi- cations | | Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Cash Flows: | | | | | | | |
| Net income (loss) (1) | $ | (40 | ) | | $ | — |
| | $ | (69 | ) | | $ | (109 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
| Interest credited to policyholders’ account balances | $ | 338 |
| | $ | — |
| | $ | (83 | ) | | $ | 255 |
|
| Policy charges and fee income | (869 | ) | | — |
| | 8 |
| | (861 | ) |
| Net derivative (gains) losses | 777 |
| | — |
| | 38 |
| | 815 |
|
| Amortization and depreciation | — |
| | 137 |
| | 64 |
| | 201 |
|
| Amortization of deferred sales commission | 7 |
| | (7 | ) | | — |
| | — |
|
| Other depreciation and amortization | (23 | ) | | 23 |
| | — |
| | — |
|
| Amortization of other Intangibles | 8 |
| | (8 | ) | | — |
| | — |
|
| Equity (income) loss from limited partnerships | — |
| | (39 | ) | | — |
| | (39 | ) |
| Distributions from joint ventures and limited partnerships | 25 |
| | (25 | ) | | — |
| | — |
|
| Changes in: |
|
| |
|
| |
|
| |
|
|
| Reinsurance recoverable | 2 |
| | — |
| | (149 | ) | | (147 | ) |
| Deferred policy acquisition costs | 10 |
| | (10 | ) | | — |
| | — |
|
| Capitalization of deferred policy acquisition costs | — |
| | (135 | ) | | — |
| | (135 | ) |
| Future policy benefits | (191 | ) | | — |
| | (7 | ) | | (198 | ) |
| Current and deferred income taxes | (52 | ) | | — |
| | 132 |
| | 80 |
|
| Other, net | (122 | ) | | 64 |
| | 70 |
| | 12 |
|
| Net cash provided by (used in) operating activities | $ | (21 | ) | | $ | — |
| | $ | 4 |
| | $ | (17 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2018 |
| | As Reported | | Presentation Reclassifi- cations | | Revisions | | As Revised |
| | (in millions) |
| Cash flows from investing activities: | | | | | | | |
| Proceeds from the sale/maturity/prepayment of: |
|
| |
|
| |
|
| |
|
|
| Trading account securities | $ | 1,606 |
| | $ | — |
| | $ | 77 |
| | $ | 1,683 |
|
| Real estate held for the production of income | — |
| | 140 |
| | — |
| | 140 |
|
| Short-term investments | — |
| | 688 |
| | — |
| | 688 |
|
| Other | 54 |
| | (140 | ) | | — |
| | (86 | ) |
| Payment for the purchase/origination of: |
|
| |
|
| |
|
| |
|
|
| Short-term investments | — |
| | (377 | ) | | — |
| | (377 | ) |
| Cash settlements related to derivative instruments | (14 | ) | | — |
| | (489 | ) | | (503 | ) |
| Change in short-term investments | 396 |
| | (311 | ) | | (85 | ) | | — |
|
| Other, net | (560 | ) | | — |
| | 153 |
| | (407 | ) |
| Net cash provided by (used in) investing activities | $ | (639 | ) | | $ | — |
| | $ | (344 | ) | | $ | (983 | ) |
| Cash flows from financing activities: | | | | | | | |
| Policyholders’ account balances: | | | | | | | |
| Deposits | $ | 2,366 |
| | $ | — |
| | $ | (468 | ) | | $ | 1,898 |
|
| Withdrawals | (1,322 | ) | | — |
| | 241 |
| | (1,081 | ) |
| Transfer (to) from Separate Accounts | (115 | ) | | — |
| | 567 |
| | 452 |
|
| Net cash provided by (used in) financing activities | $ | 1,040 |
| | $ | — |
| | $ | 340 |
| | $ | 1,380 |
|
________________
| |
20)(1) | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)Net income (loss) includes $154 million in the three months ended March 31, 2018 of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss). |
The quarterly results of operations for 2016 and 2015 are summarized below:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31 | | June 30 | | September 30 | | December 31 |
| | (In Millions) |
| 2016 | | | | | | | |
| Total Revenues | $ | 5,034 |
| | $ | 4,297 |
| | $ | 2,216 |
| | $ | (1,842 | ) |
| Total benefits and other deductions | $ | 2,580 |
| | $ | 2,721 |
| | $ | 2,246 |
| | $ | 1,727 |
|
| Net earnings (loss) | $ | 1,720 |
| | $ | 1,061 |
| | $ | 22 |
| | $ | (2,259 | ) |
| 2015 | | | | | | | |
| Total Revenues | $ | 3,567 |
| | $ | 220 |
| | $ | 5,714 |
| | $ | 318 |
|
| Total benefits and other deductions | $ | 2,437 |
| | $ | 1,973 |
| | $ | 2,375 |
| | $ | 1,384 |
|
| Net earnings (loss) | $ | 854 |
| | $ | (1,025 | ) | | $ | 2,275 |
| | $ | (640 | ) |
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedules
To the Board of Directors and Shareholder of
AXA Equitable Life Insurance Company:
Our auditsfollowing tables present line items of the consolidated financial statements referredas of June 30, 2018 and for the three and six months ended June 30, 2018 that have been affected by the revisions. This information has been corrected from the information previously presented in the Company’s June 30, 2018 2018 Form 10-Q. For these items, the tables detail the amounts as previously reported and the impact upon those line items due to the reclassifications to conform to the current presentation, the adjustment for the discontinued operation, revisions and the amounts as currently revised. Prior period amounts have been reclassified to conform to current period presentation, where applicable, and are summarized in our report datedthe accompanying tables.
|
| | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2018 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Balance Sheet: | | | | | | | | | |
| Assets: | | | | | | | | | |
| Deferred policy acquisition costs | $ | 4,786 |
| | $ | — |
| | $ | 4,786 |
| | $ | (76 | ) | | $ | 4,710 |
|
| Amounts due from reinsurers | 3,088 |
| | — |
| | 3,088 |
| | (9 | ) | | 3,079 |
|
| Current and deferred taxes | 159 |
| | 422 |
| | 581 |
| | 3 |
| | 584 |
|
| Total Assets | $ | 219,306 |
| | $ | — |
| | $ | 219,306 |
| | $ | (82 | ) | | $ | 219,224 |
|
| | | | | | | | | | |
| Liabilities: | | | | | | | | | |
| Future policyholders’ benefits and other policyholders’ liabilities | $ | 28,122 |
| | $ | — |
| | $ | 28,122 |
| | $ | (64 | ) | | $ | 28,058 |
|
| Total Liabilities | $ | 202,196 |
| | $ | — |
| | $ | 202,196 |
| | $ | (64 | ) | | $ | 202,132 |
|
| | | | | | | | | | |
| Equity: | | | | | | | | | |
| Retained Earnings | $ | 6,617 |
| | $ | — |
| | $ | 6,617 |
| | $ | (18 | ) | | $ | 6,599 |
|
| AXA Equitable Equity | 13,925 |
| | — |
| | 13,925 |
| | (18 | ) | | 13,907 |
|
| Total Equity | 16,964 |
| | — |
| | 16,964 |
| | (18 | ) | | 16,946 |
|
| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 219,306 |
| | $ | — |
| | $ | 219,306 |
| | $ | (82 | ) | | $ | 219,224 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Income (Loss): | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Policy charges and fee income | $ | 904 |
| | $ | — |
| | $ | — |
| | $ | 904 |
| | $ | (21 | ) | | $ | 883 |
|
| Net derivative gains (losses) | (312 | ) | | — |
| | — |
| | (312 | ) | | 27 |
| | (285 | ) |
| Total revenues | 2,439 |
| | — |
| | (824 | ) | | 1,615 |
| | 6 |
| | 1,621 |
|
| Benefits and other deductions: | | | | | | | | | | | |
| Policyholders’ benefits | 1,339 |
| | — |
| | — |
| | 1,339 |
| | (38 | ) | | 1,301 |
|
| Compensation and benefits | 466 |
| | (32 | ) | | (360 | ) | | 74 |
| | — |
| | 74 |
|
| Commissions and distribution related payments | 377 |
| | (112 | ) | | (106 | ) | | 159 |
| | — |
| | 159 |
|
| Amortization of deferred policy acquisition costs | 31 |
| | 145 |
| | 1 |
| | 177 |
| | 5 |
| | 182 |
|
| Other operating costs and expenses | 2,486 |
| | (1 | ) | | (172 | ) | | 2,313 |
| | — |
| | 2,313 |
|
| Total benefits and other deductions | 4,950 |
| | — |
| | (639 | ) | | 4,311 |
| | (33 | ) | | 4,278 |
|
| Income (loss) from continuing operations, before income taxes | (2,511 | ) | | — |
| | (185 | ) | | (2,696 | ) | | 39 |
| | (2,657 | ) |
| Income tax (expense) benefit from continuing operations | 553 |
| | — |
| | 8 |
| | 561 |
| | (9 | ) | | 552 |
|
| Net income (loss) from continuing operations | (1,958 | ) | | — |
| | (177 | ) | | (2,135 | ) | | 30 |
| | (2,105 | ) |
| Net income (loss) | (1,958 | ) | | — |
| | (156 | ) | | (2,114 | ) | | 30 |
| | (2,084 | ) |
| Net income (loss) attributable to AXA Equitable | $ | (2,114 | ) | | $ | — |
| | $ | — |
| | $ | (2,114 | ) | | $ | 30 |
| | $ | (2,084 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Comprehensive Income (Loss): | | | | | | | | | |
| Net income (loss) | $ | (1,958 | ) | | $ | (156 | ) | | $ | (2,114 | ) | | $ | 30 |
| | $ | (2,084 | ) |
| Comprehensive income (loss) | (2,278 | ) | | (142 | ) | | (2,420 | ) | | 30 |
| | (2,390 | ) |
| Comprehensive income (loss) attributable to AXA Equitable | $ | (2,420 | ) | | $ | — |
| | $ | (2,420 | ) | | $ | 30 |
| | $ | (2,390 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Income (Loss): | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Policy charges and fee income | $ | 1,773 |
| | $ | — |
| | $ | — |
| | $ | 1,773 |
| | $ | (29 | ) | | $ | 1,744 |
|
| Net derivative gains (losses) | (1,172 | ) | | — |
| | (2 | ) | | (1,174 | ) | | 72 |
| | (1,102 | ) |
| Total revenues | 4,387 |
| | — |
| | (1,670 | ) | | 2,717 |
| | 43 |
| | 2,760 |
|
| Benefits and other deductions: | | | | | | | | | | | |
| Policyholders’ benefits | 1,828 |
| | — |
| | — |
| | 1,828 |
| | (47 | ) | | 1,781 |
|
| Compensation and benefits | 992 |
| | (65 | ) | | (704 | ) | | 223 |
| | — |
| | 223 |
|
| Commissions and distribution related payments | 748 |
| | (213 | ) | | (216 | ) | | 319 |
| | — |
| | 319 |
|
| Amortization of deferred policy acquisition costs | 89 |
| | 280 |
| | 1 |
| | 370 |
| | 21 |
| | 391 |
|
| Other operating costs and expenses | 2,926 |
| | (2 | ) | | (361 | ) | | 2,563 |
| | — |
| | 2,563 |
|
| Total benefits and other deductions | 7,100 |
| | — |
| | (1,284 | ) | | 5,816 |
| | (26 | ) | | 5,790 |
|
| Income (loss) from continuing operations, before income taxes | (2,713 | ) | | — |
| | (386 | ) | | (3,099 | ) | | 69 |
| | (3,030 | ) |
| Income tax (expense) benefit from continuing operations | 622 |
| | — |
| | 25 |
| | 647 |
| | (15 | ) | | 632 |
|
| Net income (loss) from continuing operations | (2,091 | ) | | — |
| | (361 | ) | | (2,452 | ) | | 54 |
| | (2,398 | ) |
| Net income (loss) | (2,091 | ) | | — |
| | (311 | ) | | (2,402 | ) | | 54 |
| | (2,348 | ) |
| Net income (loss) attributable to AXA Equitable | $ | (2,401 | ) | | $ | — |
| | $ | — |
| | $ | (2,401 | ) | | $ | 54 |
| | $ | (2,347 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Comprehensive Income (Loss): | | | | | | | | | |
| Net income (loss) | $ | (2,091 | ) | | $ | (311 | ) | | $ | (2,402 | ) | | $ | 54 |
| | $ | (2,348 | ) |
| Comprehensive income (loss) | (3,160 | ) | | (305 | ) | | (3,465 | ) | | 54 |
| | (3,411 | ) |
| Comprehensive income (loss) attributable to AXA Equitable | $ | (3,463 | ) | | $ | — |
| | $ | (3,463 | ) | | $ | 54 |
| | $ | (3,409 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Equity: | | | | | | | | | |
| Retained earnings, beginning of year | $ | 9,010 |
| | $ | — |
| | $ | 9,010 |
| | $ | (72 | ) | | $ | 8,938 |
|
| Net income (loss) attributable to AXA Equitable | (2,401 | ) | | — |
| | (2,401 | ) | | 54 |
| | (2,347 | ) |
| Retained earnings, end of period | 6,617 |
| | — |
| | 6,617 |
| | (18 | ) | | 6,599 |
|
| Total AXA Equitable’s equity, end of period | 13,925 |
| | — |
| | 13,925 |
| | (18 | ) | | 13,907 |
|
| Total Equity, End of Period | $ | 16,964 |
| | $ | — |
| | $ | 16,964 |
| | $ | (18 | ) | | $ | 16,946 |
|
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | As Reported | | Presentation Reclassifi-cations | | Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Cash Flows: | | | | | | | |
| Net income (loss) (1) | $ | (2,091 | ) | | $ | — |
| | $ | 54 |
| | $ | (2,037 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
| Policy charges and fee income | (1,773 | ) | | — |
| | 29 |
| | (1,744 | ) |
| Net derivative (gains) losses | 1,172 |
| | — |
| | (72 | ) | | 1,100 |
|
| Amortization and depreciation | — |
| | 335 |
| | 21 |
| | 356 |
|
| Amortization of deferred sales commission | 13 |
| | (13 | ) | | — |
| | — |
|
| Other depreciation and amortization | (45 | ) | | 45 |
| | — |
| | — |
|
| Equity (income) loss from limited partnerships | — |
| | (60 | ) | | — |
| | (60 | ) |
| Distributions from joint ventures and limited partnerships | 44 |
| | (44 | ) | | — |
| | — |
|
| Cash received on the recapture of captive reinsurance | 1,099 |
| | — |
| | 174 |
| | 1,273 |
|
| Changes in: | | | | | | |
|
|
| Reinsurance recoverable | 15 |
| | — |
| | 166 |
| | 181 |
|
| Deferred policy acquisition costs | 89 |
| | (89 | ) | | — |
| | — |
|
| Capitalization of deferred policy acquisition costs | — |
| | (280 | ) | | — |
| | (280 | ) |
| Future policy benefits | 396 |
| | — |
| | (554 | ) | | (158 | ) |
| Current and deferred income taxes | (645 | ) | | — |
| | 167 |
| | (478 | ) |
| Other, net | 416 |
| | 104 |
| | (304 | ) | | 216 |
|
| Net cash provided by (used in) operating activities | $ | 1,190 |
| | $ | (2 | ) | | $ | (319 | ) | | $ | 869 |
|
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | | | |
| Trading account securities | 4,843 |
| | — |
| | 24 |
| | 4,867 |
|
| Real estate joint ventures | $ | — |
| | $ | 140 |
| | $ | — |
| | $ | 140 |
|
| Short-term investments | — |
| | 1,331 |
| | (24 | ) | | 1,307 |
|
| Other | 260 |
| | (140 | ) | | — |
| | 120 |
|
| Payment for the purchase/origination of: | | | | | | | |
| Short-term investments | — |
| | (1,081 | ) | | 205 |
| | (876 | ) |
| Cash settlements related to derivative instruments | (267 | ) | | — |
| | (489 | ) | | (756 | ) |
| Change in short-term investments | 248 |
| | (248 | ) | | — |
| | — |
|
| Other, net | 379 |
| | — |
| | 11 |
| | 390 |
|
| Net cash provided by (used in) investing activities | $ | (1,605 | ) | | $ | 2 |
| | $ | (273 | ) | | $ | (1,876 | ) |
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | As Reported | | Presentation Reclassifi-cations | | Revisions | | As Revised |
| | (in millions) |
| Cash flows from financing activities: | | | | | | | |
| Policyholders’ account balances: | | | | | | | |
| Deposits | $ | 5,227 |
| | $ | — |
| | $ | (1,107 | ) | | $ | 4,120 |
|
| Withdrawals | (2,611 | ) | | — |
| | 480 |
| | (2,131 | ) |
| Transfer (to) from Separate Accounts | (305 | ) | | — |
| | 1,219 |
| | 914 |
|
________________
| |
| (1) | Net income (loss) includes $310 million in the six months ended June 30, 2018 of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss). |
The following tables present line items of the consolidated statement of cash flows for the nine months ended September 30, 2018 that have been affected by the revisions. This information has been corrected from the information previously presented in the Company’s September 30, 2018 Form 10-Q. For these items, the tables detail the amounts as previously reported and the impact upon those line items due to the reclassifications to conform to the current presentation, the adjustment for the discontinued operation, revisions and the amounts as currently revised. Prior period amounts have been reclassified to conform to current period presentation, where applicable, and are summarized in the accompanying tables. Tables for the other consolidated financial statements as of or for the three and nine months ended September 30, 2018 are not presented as these revisions were already reflected in the Company’s September 30, 2018 Form 10-Q.
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
| | As Reported | | Presentation Reclassifi- cations | | Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Cash Flows: | | | | | | | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
| Amortization and depreciation | $ | — |
| | $ | 258 |
| | $ | — |
| | $ | 258 |
|
| Amortization of deferred sales commission | 17 |
| | (17 | ) | | — |
| | — |
|
| Other depreciation and amortization | (60 | ) | | 60 |
| | — |
| | — |
|
| Equity (income) loss from limited partnerships | — |
| | (83 | ) | | — |
| | (83 | ) |
| Distribution from joint ventures and limited partnerships | 63 |
| | (63 | ) | | — |
| | — |
|
| Cash received on the recapture of captive reinsurance | 1,099 |
| | — |
| | 174 |
| | 1,273 |
|
| Changes in: | | | | | | |
|
|
| Reinsurance recoverable | 20 |
| | — |
| | 86 |
| | 106 |
|
| Deferred policy acquisition costs | (129 | ) | | 129 |
| | — |
| | — |
|
| Capitalization of deferred policy acquisition costs | — |
| | (432 | ) | | — |
| | (432 | ) |
| Future policy benefits | (58 | ) | | — |
| | (541 | ) | | (599 | ) |
| Current and deferred income taxes | (264 | ) | | — |
| | (400 | ) | | (664 | ) |
| Other, net | 123 |
| | 146 |
| | 179 |
| | 448 |
|
| Net cash provided by (used in) operating activities | $ | 1,614 |
| | $ | (2 | ) | | $ | (502 | ) | | $ | 1,110 |
|
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2018 |
| | As Reported | | Presentation Reclassifi- cations | | Revisions | | As Revised |
| | (in millions) |
| Cash flows from investing activities: | | | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | | | |
| Trading account securities | $ | 6,913 |
| | $ | — |
| | $ | 77 |
| | $ | 6,990 |
|
| Real estate joint ventures | — |
| | 140 |
| | — |
| | 140 |
|
| Short-term investments | — |
| | 1,806 |
| | — |
| | 1,806 |
|
| Other | 344 |
| | (140 | ) | | — |
| | 204 |
|
| Short-term investments | — |
| | (1,530 | ) | | 204 |
| | (1,326 | ) |
| Cash settlements related to derivative instruments | (584 | ) | | — |
| | (492 | ) | | (1,076 | ) |
| Change in short-term investments | 350 |
| | (274 | ) | | (77 | ) | | (1 | ) |
| Other, net | 305 |
| | — |
| | (19 | ) | | 286 |
|
| Net cash provided by (used in) investing activities | $ | (2,990 | ) | | $ | 2 |
| | $ | (307 | ) | | $ | (3,295 | ) |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Policyholders’ account balances: | | | | | | | |
| Deposits | $ | 7,852 |
| | $ | — |
| | $ | (1,668 | ) | | $ | 6,184 |
|
| Withdrawals | (4,014 | ) | | — |
| | 760 |
| | (3,254 | ) |
| Transfer (to) from Separate Accounts | (338 | ) | | — |
| | 1,717 |
| | 1,379 |
|
| Net cash provided by (used in) financing activities | $ | 1,293 |
| | $ | — |
| | $ | 809 |
| | $ | 2,102 |
|
The following tables present line items of the consolidated financial statements as of and for the three months ended March 24,31, 20 that have been affected by the revisions. This information has been corrected from the information previously presented in the Company’s March 31, 2018 Form 10-Q. For these items, the tables detail the amounts as previously reported and the impact upon those line items due to the reclassifications to conform to the current presentation, the adjustment for the discontinued operation, revisions and the amounts as currently revised. Prior period amounts have been reclassified to conform to current period presentation, where applicable, and are summarized in the accompanying tables.
|
| | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2017 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Balance Sheet: | | | | | | | | | |
| Assets: | | | | | | | | | |
| Deferred policy acquisition costs | 4,961 |
| | — |
| | 4,961 |
| | (64 | ) | | 4,897 |
|
| Total Assets | $ | 210,013 |
| | $ | — |
| | $ | 210,013 |
| | $ | (64 | ) | | $ | 209,949 |
|
| | | | | | | | | | |
| Liabilities: | | | | | | | | | |
| Future policyholders’ benefits and other policyholders’ liabilities | 28,691 |
| | — |
| | 28,691 |
| | 66 |
| | 28,757 |
|
| Current and deferred taxes | 2,726 |
| | (562 | ) | | 2,164 |
| | (46 | ) | | 2,118 |
|
| Total Liabilities | $ | 195,091 |
| | $ | — |
| | $ | 195,091 |
| | $ | 20 |
| | $ | 195,111 |
|
| | | | | | | | | | |
| Equity: | | | | | | | | | |
| Retained Earnings | $ | 5,978 |
| | $ | — |
| | $ | 5,978 |
| | $ | (84 | ) | | $ | 5,894 |
|
| AXA Equitable Equity | 11,459 |
| | — |
| | 11,459 |
| | (84 | ) | | 11,375 |
|
| Noncontrolling interest | 3,046 |
| | — |
| | 3,046 |
| | — |
| | 3,046 |
|
| Total Equity | 14,505 |
| | — |
| | 14,505 |
| | (84 | ) | | 14,421 |
|
| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 210,013 |
| | $ | — |
| | $ | 210,013 |
| | $ | (64 | ) | | $ | 209,949 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2017 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Income (Loss): | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Policy charges and fee income | $ | 852 |
| | $ | — |
| | $ | — |
| | $ | 852 |
| | $ | (22 | ) | | $ | 830 |
|
| Net derivative gains (losses) | (362 | ) | | — |
| | 10 |
| | (352 | ) | | 7 |
| | (345 | ) |
| Total revenues | 2,314 |
| | — |
| | (745 | ) | | 1,569 |
| | (15 | ) | | 1,554 |
|
| Benefits and other deductions: | | | | | | | | | | | |
| Policyholders’ benefits | 975 |
| | — |
| | — |
| | 975 |
| | (3 | ) | | 972 |
|
| Interest credited to policyholders’ account balances | 279 |
| | — |
| | — |
| | 279 |
| | (30 | ) | | 249 |
|
| Compensation and benefits | 438 |
| | (33 | ) | | (322 | ) | | 83 |
| | — |
| | 83 |
|
| Commissions and distribution related payments | 382 |
| | (114 | ) | | (96 | ) | | 172 |
| | — |
| | 172 |
|
| Amortization of deferred policy acquisition costs | 29 |
| | 148 |
| | — |
| | 177 |
| | 63 |
| | 240 |
|
| Other operating costs and expenses | 381 |
| | (1 | ) | | (179 | ) | | 201 |
| | — |
| | 201 |
|
| Total benefits and other deductions | 2,489 |
| | — |
| | (598 | ) | | 1,891 |
| | 30 |
| | 1,921 |
|
| Income (loss) from continuing operations, before income taxes | (175 | ) | | — |
| | (147 | ) | | (322 | ) | | (45 | ) | | (367 | ) |
| Income tax (expense) benefit from continuing operations | 121 |
| | — |
| | 11 |
| | 132 |
| | 16 |
| | 148 |
|
| Net income (loss) from continuing operations | (54 | ) | | — |
| | (136 | ) | | (190 | ) | | (29 | ) | | (219 | ) |
| Net income (loss) | (54 | ) | | — |
| | (118 | ) | | (172 | ) | | (29 | ) | | (201 | ) |
| Net income (loss) attributable to AXA Equitable | $ | (172 | ) | | $ | — |
| | $ | — |
| | $ | (172 | ) | | $ | (29 | ) | | $ | (201 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2017 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Comprehensive Income (Loss): | | | | | | | | | |
| Net income (loss) | $ | (54 | ) | | $ | (118 | ) | | $ | (172 | ) | | $ | (29 | ) | | $ | (201 | ) |
| Change in unrealized gains (losses), net of reclassification adjustment | 92 |
| | — |
| | 92 |
| | 21 |
| | 113 |
|
| Total other comprehensive income (loss), net of income taxes | 127 |
| | (7 | ) | | 120 |
| | 21 |
| | 141 |
|
| Comprehensive income (loss) | 73 |
| | (125 | ) | | (52 | ) | | (8 | ) | | (60 | ) |
| Comprehensive income (loss) attributable to AXA Equitable | $ | (52 | ) | | $ | — |
| | $ | (52 | ) | | $ | (8 | ) | | $ | (60 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2017 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Equity: | | | | | | | | | |
| Retained earnings, beginning of year | $ | 6,150 |
| | $ | — |
| | $ | 6,150 |
| | $ | (55 | ) | | $ | 6,095 |
|
| Net income (loss) attributable to AXA Equitable | (172 | ) | | — |
| | (172 | ) | | (29 | ) | | (201 | ) |
| Retained earnings, end of period | 5,978 |
| | — |
| | 5,978 |
| | (84 | ) | | 5,894 |
|
| Accumulated other comprehensive income, beginning of year | 17 |
| | — |
| | 17 |
| | (21 | ) | | (4 | ) |
| Other comprehensive income (loss) | 120 |
| | — |
| | 120 |
| | 21 |
| | 141 |
|
| Accumulated other comprehensive income, end of period | 137 |
| | — |
| | 137 |
| | — |
| | 137 |
|
| Total AXA Equitable’s equity, end of period | 11,459 |
| | — |
| | 11,459 |
| | (84 | ) | | 11,375 |
|
| Total Equity, End of Period | $ | 14,505 |
| | $ | — |
| | $ | 14,505 |
| | $ | (84 | ) | | $ | 14,421 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2017 |
| | As Reported | | Presentation Reclassifi-cations | | Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Cash Flows: | | | | | | | |
| Net income (loss) (1) | $ | (54 | ) | | $ | — |
| | $ | (29 | ) | | $ | (83 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
| Interest credited to policyholders’ account balances | 279 |
| | — |
| | (30 | ) | | 249 |
|
| Policy charges and fee income | (852 | ) | | — |
| | 22 |
| | (830 | ) |
| Net derivative (gains) losses | 362 |
| | — |
| | (7 | ) | | 355 |
|
| Amortization and depreciation | — |
| | 229 |
| | 63 |
| | 292 |
|
| Amortization of deferred sales commission | 9 |
| | (9 | ) | | — |
| | — |
|
| Other depreciation and amortization | 36 |
| | (36 | ) | | — |
| | — |
|
| Amortization of other intangibles | 8 |
| | (8 | ) | | — |
| | — |
|
| Equity (income) loss from limited partnerships | — |
| | (39 | ) | | — |
| | (39 | ) |
| Distributions from joint ventures and limited partnerships | 26 |
| | (26 | ) | | — |
| | — |
|
| Changes in: | | | | | | | — |
|
| Reinsurance recoverable | (23 | ) | | — |
| | (173 | ) | | (196 | ) |
| Deferred policy acquisition costs | 29 |
| | (29 | ) | | — |
| | — |
|
| Capitalization of deferred policy acquisition costs | — |
| | (148 | ) | | — |
| | (148 | ) |
| Future policy benefits | 241 |
| | — |
| | 17 |
| | 258 |
|
| Current and deferred income taxes | (188 | ) | | — |
| | (6 | ) | | (194 | ) |
| Other, net | 151 |
| | 65 |
| | — |
| | 216 |
|
| Net cash provided by (used in) operating activities | $ | 18 |
| | $ | (1 | ) | | $ | (143 | ) | | $ | (126 | ) |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | | | |
| Short-term investments | — |
| | 631 |
| | — |
| | 631 |
|
| Payment for the purchase/origination of: | | | | | | |
|
|
| Short-term investments | — |
| | (376 | ) | | (289 | ) | | (665 | ) |
| Change in short-term investments | 254 |
| | (254 | ) | | — |
| | — |
|
| Other, net | 43 |
| | — |
| | 100 |
| | 143 |
|
| Net cash provided by (used in) investing activities | $ | (2,447 | ) | | $ | 1 |
| | $ | (189 | ) | | $ | (2,635 | ) |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2017 |
| | As Reported | | Presentation Reclassifi-cations | | Revisions | | As Revised |
| | (in millions) |
| Cash flows from financing activities: | | | | | | | |
| Policyholders’ account balances: | | | | | | | |
| Deposits | $ | 2,240 |
| | $ | — |
| | $ | 269 |
| | $ | 2,509 |
|
| Withdrawals | (785 | ) | | — |
| | (157 | ) | | (942 | ) |
| Transfer (to) from Separate Accounts | 176 |
| | — |
| | 220 |
| | 396 |
|
| Net cash provided by (used in) financing activities | $ | 2,306 |
| | $ | — |
| | $ | 332 |
| | $ | 2,638 |
|
________________
| |
| (1) | Net income (loss) includes $118 million in the three months ended March 31, 2017 of the discontinued operations that are not included in Net income (loss) in the Consolidated Statements of Income (Loss). |
The following tables present line items of the consolidated financial statements as of and for the three and six months ended June 30, 2017 appearingthat have been affected by the revisions. This information has been corrected from the information previously presented in this Annual Report onthe Company’s June 30, 2018 Form 10-K10-Q. For these items, the tables detail the amounts as previously reported and the impact upon those line items due to the reclassifications to conform to the current presentation, the adjustment for the discontinued operation, revisions and the amounts as currently revised. Prior period amounts have been reclassified to conform to current period presentation, where applicable, and are summarized in the accompanying tables.
|
| | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2017 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Balance Sheet: | | | | | | | | | |
| Assets: | | | | | | | | | |
| Deferred policy acquisition costs | 4,913 |
| | — |
| | 4,913 |
| | (63 | ) | | 4,850 |
|
| Total Assets | $ | 215,713 |
| | $ | — |
| | $ | 215,713 |
| | $ | (63 | ) | | $ | 215,650 |
|
| Liabilities: | | | | | | | | | |
| Future policyholders’ benefits and other policyholders’ liabilities | $ | 29,679 |
| | $ | — |
| | $ | 29,679 |
| | $ | 53 |
| | $ | 29,732 |
|
| Current and deferred taxes | 3,267 |
| | (542 | ) | | 2,725 |
| | (39 | ) | | 2,686 |
|
| Total Liabilities | $ | 199,095 |
| | $ | — |
| | $ | 199,095 |
| | $ | 14 |
| | $ | 199,109 |
|
| | | | | | | | | | |
| Equity: | | | | | | | | | |
| Retained Earnings | $ | 7,479 |
| | $ | — |
| | $ | 7,479 |
| | $ | (77 | ) | | $ | 7,402 |
|
| AXA Equitable Equity | 13,273 |
| | — |
| | 13,273 |
| | (77 | ) | | 13,196 |
|
| Total Equity | 16,257 |
| | — |
| | 16,257 |
| | (77 | ) | | 16,180 |
|
| Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 215,713 |
| | $ | — |
| | $ | 215,713 |
| | $ | (63 | ) | | $ | 215,650 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2017 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Income (Loss): | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Policy charges and fee income | $ | 846 |
| | $ | — |
| | $ | — |
| | $ | 846 |
| | $ | (12 | ) | | $ | 834 |
|
| Net derivative gains (losses) | 1,763 |
| | — |
| | 5 |
| | 1,768 |
| | 8 |
| | 1,776 |
|
| Total revenues | 4,548 |
| | — |
| | (781 | ) | | 3,767 |
| | (4 | ) | | 3,763 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2017 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| | | | | | | | | | | | |
| Benefits and other deductions: | | | | | | | | | | | |
| Policyholders’ benefits | 1,363 |
| | — |
| | — |
| | 1,363 |
| | (7 | ) | | 1,356 |
|
| Interest credited to policyholders’ account balances | 208 |
| | — |
| | — |
| | 208 |
| | (9 | ) | | 199 |
|
| Compensation and benefits | 450 |
| | (32 | ) | | (328 | ) | | 90 |
| | — |
| | 90 |
|
| Commissions and distribution related payments | 389 |
| | (116 | ) | | (103 | ) | | 170 |
| | — |
| | 170 |
|
| Amortization of deferred policy acquisition costs | (49 | ) | | 150 |
| | — |
| | 101 |
| | (1 | ) | | 100 |
|
| Other operating costs and expenses | 149 |
| | (2 | ) | | (208 | ) | | (61 | ) | | — |
| | (61 | ) |
| Total benefits and other deductions | 2,516 |
| | — |
| | (641 | ) | | 1,875 |
| | (17 | ) | | 1,858 |
|
| Income (loss) from continuing operations, before income taxes | 2,032 |
| | — |
| | (140 | ) | | 1,892 |
| | 13 |
| | 1,905 |
|
| Income tax (expense) benefit from continuing operations | (419 | ) | | — |
| | 11 |
| | (408 | ) | | (5 | ) | | (413 | ) |
| Net income (loss) from continuing operations | 1,613 |
| | — |
| | (129 | ) | | 1,484 |
| | 8 |
| | 1,492 |
|
| Net income (loss) | 1,613 |
| | — |
| | (113 | ) | | 1,500 |
| | 8 |
| | 1,508 |
|
| Net income (loss) attributable to AXA Equitable | $ | 1,500 |
| | $ | — |
| | $ | — |
| | $ | 1,500 |
| | $ | 8 |
| | $ | 1,508 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2017 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Comprehensive Income (Loss): | | | | | | | | | |
| Net income (loss) | $ | 1,613 |
| | $ | (113 | ) | | $ | 1,500 |
| | $ | 8 |
| | $ | 1,508 |
|
| Comprehensive income (loss) | 1,887 |
| | (93 | ) | | 1,794 |
| | 8 |
| | 1,802 |
|
| Comprehensive income (loss) attributable to AXA Equitable | $ | 1,794 |
| | $ | — |
| | $ | 1,794 |
| | $ | 8 |
| | $ | 1,802 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2017 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Income (Loss): | | | | | | | | | | | |
| Revenues: | | | | | | | | | | | |
| Policy charges and fee income | $ | 1,698 |
| | $ | — |
| | $ | — |
| | $ | 1,698 |
| | $ | (34 | ) | | $ | 1,664 |
|
| Net derivative gains (losses) | 1,362 |
| | — |
| | 15 |
| | 1,377 |
| | 54 |
| | 1,431 |
|
| Total revenues | 6,823 |
| | — |
| | (1,526 | ) | | 5,297 |
| | 20 |
| | 5,317 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2017 |
| | As Pre-viously
Reported | | Gross DAC Adjustment | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| Benefits and other deductions: | | | | | | | | | | | |
| Policyholders’ benefits | 2,338 |
| | — |
| | — |
| | 2,338 |
| | (10 | ) | | 2,328 |
|
| Compensation and benefits | 888 |
| | (65 | ) | | (650 | ) | | 173 |
| | — |
| | 173 |
|
| Commissions and distribution related payments | 771 |
| | (230 | ) | | (199 | ) | | 342 |
| | — |
| | 342 |
|
| Amortization of deferred policy acquisition costs | (20 | ) | | 298 |
| | — |
| | 278 |
| | 62 |
| | 340 |
|
| Other operating costs and expenses | 530 |
| | (3 | ) | | (387 | ) | | 140 |
| | — |
| | 140 |
|
| Total benefits and other deductions | 4,966 |
| | — |
| | (1,239 | ) | | 3,727 |
| | 52 |
| | 3,779 |
|
| Income (loss) from continuing operations, before income taxes | 1,857 |
| | — |
| | (287 | ) | | 1,570 |
| | (32 | ) | | 1,538 |
|
| Income tax (expense) benefit from continuing operations | (298 | ) | | — |
| | 22 |
| | (276 | ) | | 11 |
| | (265 | ) |
| Net income (loss) from continuing operations | 1,559 |
| | — |
| | (265 | ) | | 1,294 |
| | (21 | ) | | 1,273 |
|
| Net income (loss) | 1,559 |
| | — |
| | (231 | ) | | 1,328 |
| | (21 | ) | | 1,307 |
|
| Net income (loss) attributable to AXA Equitable | $ | 1,328 |
| | $ | — |
| | $ | — |
| | $ | 1,328 |
| | $ | (21 | ) | | $ | 1,307 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2017 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Comprehensive Income (Loss): | | | | | | | | | |
| Net income (loss) | $ | 1,559 |
| | $ | (231 | ) | | $ | 1,328 |
| | $ | (21 | ) | | $ | 1,307 |
|
| Change in unrealized gains (losses), net of reclassification adjustment | 386 |
| | — |
| | 386 |
| | 21 |
| | 407 |
|
| Other comprehensive income | 401 |
| | 13 |
| | 414 |
| | 21 |
| | 435 |
|
| Comprehensive income (loss) attributable to AXA Equitable | $ | 1,742 |
| | $ | — |
| | $ | 1,742 |
| | $ | — |
| | $ | 1,742 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2017 |
| | As Pre-viously
Reported | | Dis-continued Operations Adjustment | | As Adjusted | | Impact of Revisions | | As Revised |
| | (in millions) |
| Statements of Equity: | | | | | | | | | |
| Retained earnings, beginning of year | $ | 6,151 |
| | $ | — |
| | $ | 6,151 |
| | $ | (56 | ) | | $ | 6,095 |
|
| Net income (loss) attributable to AXA Equitable | 1,328 |
| | — |
| | 1,328 |
| | (21 | ) | | 1,307 |
|
| Retained earnings, end of period | 7,479 |
| | — |
| | 7,479 |
| | (77 | ) | | 7,402 |
|
| Accumulated other comprehensive income, beginning of year | 17 |
| | — |
| | 17 |
| | (21 | ) | | (4 | ) |
| Other comprehensive income (loss) | 414 |
| | — |
| | 414 |
| | 21 |
| | 435 |
|
| Accumulated other comprehensive income, end of period | 431 |
| | — |
| | 431 |
| | — |
| | 431 |
|
| Total AXA Equitable’s equity, end of period | 13,273 |
| | — |
| | 13,273 |
| | (77 | ) | | 13,196 |
|
| Noncontrolling interest, end of period | 2,984 |
| | — |
| | 2,984 |
| | — |
| | 2,984 |
|
| Total Equity, End of Period | $ | 16,257 |
| | $ | — |
| | $ | 16,257 |
| | $ | (77 | ) | | $ | 16,180 |
|
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2017 |
| | As Reported | | Presentation Reclassifi-cations | | Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Cash Flows: | | | | | | | |
| Net income (loss) (1) | $ | 1,559 |
| | $ | — |
| | $ | (21 | ) | | $ | 1,538 |
|
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
| Policy charges and fee income | (1,698 | ) | | — |
| | 34 |
| | (1,664 | ) |
| Net derivative (gains) losses | (1,362 | ) | | — |
| | (54 | ) | | (1,416 | ) |
| Amortization and depreciation | — |
| | 233 |
| | 62 |
| | 295 |
|
| Amortization of deferred sales commission | 17 |
| | (17 | ) | | — |
| | — |
|
| Other depreciation and amortization | (61 | ) | | 61 |
| | — |
| | — |
|
| Equity (income) loss from limited partnerships | — |
| | (65 | ) | | — |
| | (65 | ) |
| Distribution from joint ventures and limited partnerships | 50 |
| | (50 | ) | | — |
| | — |
|
| Changes in: | | | | | | |
|
|
| Reinsurance recoverable | (194 | ) | | — |
| | (354 | ) | | (548 | ) |
| Deferred policy acquisition costs | 43 |
| | (43 | ) | | — |
| | — |
|
| Capitalization of deferred policy acquisition costs | (63 | ) | | (235 | ) | | — |
| | (298 | ) |
| Future policy benefits | 1,303 |
| | — |
| | 45 |
| | 1,348 |
|
| Current and deferred income taxes | 204 |
| | — |
| | 3 |
| | 207 |
|
| Other, net | 84 |
| | 115 |
| | — |
| | 199 |
|
| Net cash provided by (used in) operating activities | $ | (75 | ) | | $ | (1 | ) | | $ | (285 | ) | | $ | (361 | ) |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Proceeds from the sale/maturity/prepayment of: | | | | | | | |
| Short-term investments | $ | — |
| | $ | 1,078 |
| | $ | — |
| | $ | 1,078 |
|
| Payment for the purchase/origination of: | | | | | | |
|
|
| Short-term investments | — |
| | (1,599 | ) | | — |
| | (1,599 | ) |
| Change in short-term investments | (508 | ) | | 522 |
| | (14 | ) | | $ | — |
|
| Other, net | 243 |
| | — |
| | (197 | ) | | 46 |
|
| Net cash provided by (used in) investing activities | $ | (3,588 | ) | | $ | 1 |
| | $ | (211 | ) | | $ | (3,798 | ) |
| Cash flows from financing activities: | | | | | | | |
| Policyholders’ account balances: | | | | | | | |
| Deposits | $ | 4,109 |
| | $ | — |
| | $ | 784 |
| | $ | 4,893 |
|
| Withdrawals | (1,557 | ) | | — |
| | (284 | ) | | (1,841 | ) |
| Transfer (to) from Separate Accounts | 767 |
| | — |
| | (4 | ) | | 763 |
|
| Net cash provided by (used in) financing activities | $ | 4,182 |
| | $ | — |
| | $ | 496 |
| | $ | 4,678 |
|
| |
| (1) | Net income (loss) includes $231 million in the six months ended June 30, 2017 of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss). |
The following tables present line items in the consolidated statement of cash flows for the nine months ended September 30, 2017 financial information that has been affected by the revisions. This information has been corrected from the information previously presented in the Company’s September 30, 2018 Form 10-Q. For these items, the tables detail the amounts as previously reported and the impact upon those line items due to the reclassifications to conform to the current presentation, the adjustment for the discontinued operation, revisions and the amounts as currently revised. Prior period amounts have been reclassified to conform to current period presentation, where applicable, and are summarized in the accompanying tables. Tables for the other consolidated financial statements as of and for the three and nine months ended September 30, 2017 are not included as these revisions were already reflected in the Company’s September 30, 2018 Form 10-Q.
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 |
| | As Reported | | Presentation Reclassifi- cations | | Revisions | | As Revised |
| | (in millions) |
| Consolidated Statement of Cash Flows: | | | | | | | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
| Amortization and depreciation | $ | — |
| | $ | 432 |
| | $ | — |
| | $ | 432 |
|
| Other depreciation and amortization | (67 | ) | | 67 |
| | — |
| | — |
|
| Equity (income) loss from limited partnerships | — |
| | (103 | ) | | — |
| | (103 | ) |
| Distribution from joint ventures and limited partnerships | 94 |
| | (94 | ) | | — |
| | — |
|
| Changes in: | | | | | | | |
| Reinsurance recoverable | (361 | ) | | — |
| | (455 | ) | | (816 | ) |
| Deferred policy acquisition costs | 42 |
| | (42 | ) | | — |
| | — |
|
| Capitalization of deferred policy acquisition costs | — |
| | (433 | ) | | — |
| | (433 | ) |
| Future policy benefits | 1,146 |
| | — |
| | 168 |
| | 1,314 |
|
| Current and deferred income taxes | 640 |
| | — |
| | (389 | ) | | 251 |
|
| Other, net | 617 |
| | 197 |
| | — |
| | 814 |
|
| Net cash provided by (used in) operating activities | $ | 994 |
| | $ | (1 | ) | | $ | (676 | ) | | $ | 317 |
|
| |
|
| |
|
| |
|
| |
|
|
| Cash flows from investing activities: |
|
| |
|
| |
|
| |
|
|
| Proceeds from the sale/maturity/prepayment of: |
|
| |
|
| |
|
| |
|
|
| Short-term investments | $ | — |
| | $ | 1,909 |
| | $ | — |
| | $ | 1,909 |
|
| Payment for the purchase/origination of: | | | | | | | |
| Short-term investments | — |
| | (2,174 | ) | | — |
| | (2,174 | ) |
| Change in short-term investments | (266 | ) | | 266 |
| | — |
| | — |
|
| Other, net | (258 | ) | | — |
| | 203 |
| | (55 | ) |
| Net cash provided by (used in) investing activities | $ | (5,231 | ) | | $ | 1 |
| | $ | 203 |
| | $ | (5,027 | ) |
| |
|
| |
|
| |
|
| |
|
|
| Cash flows from financing activities: | | | | | | | |
| Policyholders’ account balances: | | | | | | | |
| Deposits | $ | 5,871 |
| | $ | — |
| | $ | 1,116 |
| | $ | 6,987 |
|
| Withdrawals | (2,574 | ) | | — |
| | (244 | ) | | (2,818 | ) |
| Transfer (to) from Separate Accounts | 1,617 |
| | — |
| | (399 | ) | | 1,218 |
|
| Net cash provided by (used in) financing activities | $ | 5,460 |
| | $ | — |
| | $ | 473 |
| | $ | 5,933 |
|
22) SUBSEQUENT EVENTS
AXA Equitable Life Insurance Company also includedHoldings, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”)
In November 2018, Holdings’ Board of Directors and AXA, as Holdings’ then controlling stockholder, adopted the 2019 Plan, which became effective January 1, 2019, with a total of 5.2 million shares of common stock reserved for issuance thereunder. On February 25, 2019, the Compensation Committee of Holdings’ Board of Directors approved an auditamendment to the 2019 Plan increasing the amount of shares of Holdings’ common stock available for issuance in connection with equity awards granted under the 2019 Plan by two million shares. The holder of a majority of the financial statement schedules listed inoutstanding shares of Holdings’ common stock executed a written consent approving the Indexincrease on February 28, 2019.
AXA Secondary Offering of Holdings Common Stock and Holdings Share Buy-back
On March 25, 2019, AXA completed a follow-on secondary offering of 46 million shares of common stock of Holdings and the sale to Consolidated Financial Statements and SchedulesHoldings of 30 million shares of common stock of Holdings. Following the completion of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects,secondary offering and the information set forth therein when read in conjunction withshare buyback by Holdings, AXA owns 48.3% of the related consolidated financial statements.shares of common stock of Holdings. As a result, Holdings is no longer a majority owned subsidiary of AXA.
/s/ PricewaterhouseCoopers LLP
Repayment of Senior Surplus Note
On December 28, 2018, the Company, issued a $572 million senior surplus note due December 28, 2019 to Holdings, which bears interest at a fixed rate of 3.75%, payable semi-annually. The Company repaid this note on March 24, 20175, 2019.
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE I
SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 20162018
|
| | | | | | | | | | | |
| | Cost (1) | | Fair Value | | Amount at Which Shown on Balance Sheet |
| | (in millions) |
| Fixed Maturities: | | | | | |
| U.S. government, agencies and authorities | $ | 13,646 |
| | $ | 13,335 |
| | $ | 13,335 |
|
| State, municipalities and political subdivisions | 408 |
| | 454 |
| | 454 |
|
| Foreign governments | 515 |
| | 519 |
| | 519 |
|
| Public utilities | 4,614 |
| | 4,569 |
| | 4,569 |
|
| All other corporate bonds | 22,076 |
| | 21,807 |
| | 21,807 |
|
| Residential mortgage-backed | 193 |
| | 202 |
| | 202 |
|
| Asset-backed | 600 |
| | 590 |
| | 590 |
|
| Redeemable preferred stocks | 440 |
| | 439 |
| | 439 |
|
| Total fixed maturities | 42,492 |
| | 41,915 |
| | 41,915 |
|
| Mortgage loans on real estate (2) | 11,825 |
| | 11,478 |
| | 11,818 |
|
| Real estate held for the production of income | 52 |
| | 52 |
| | 52 |
|
| Policy loans | 3,267 |
| | 3,944 |
| | 3,267 |
|
| Other equity investments | 1,103 |
| | 1,144 |
| | 1,144 |
|
| Trading securities | 15,361 |
| | 15,166 |
| | 15,166 |
|
| Other invested assets | 1,554 |
| | 1,554 |
| | 1,554 |
|
| Total Investments | $ | 75,654 |
| | $ | 75,253 |
| | $ | 74,916 |
|
|
| | | | | | | | | | | |
| Type of Investment | Cost(A) | | Fair Value | | Carrying Value |
| | (In Millions) |
| Fixed Maturities: | | | | | |
| U.S. government, agencies and authorities | $ | 10,739 |
| | $ | 10,336 |
| | $ | 10,336 |
|
| State, municipalities and political subdivisions | 432 |
| | 493 |
| | 493 |
|
| Foreign governments | 365 |
| | 378 |
| | 378 |
|
| Public utilities | 3,437 |
| | 3,617 |
| | 3,617 |
|
| All other corporate bonds | 16,663 |
| | 17,224 |
| | 17,224 |
|
| Redeemable preferred stocks | 487 |
| | 522 |
| | 522 |
|
| Total fixed maturities | 32,123 |
| | 32,570 |
| | 32,570 |
|
| Equity securities: | | | | | |
| Common stocks: | | | | | |
Industrial, miscellaneous and all other(B) | 113 |
| | 113 |
| | 113 |
|
| Mortgage loans on real estate | 9,765 |
| | 9,608 |
| | 9,757 |
|
| Policy loans | 3,361 |
| | 4,257 |
| | 3,361 |
|
Other limited partnership interests and equity investments(B) | 1,295 |
| | 1,295 |
| | 1,295 |
|
| Trading securities | 9,177 |
| | 9,134 |
| | 9,134 |
|
| Other invested assets | 2,186 |
| | 2,186 |
| | 2,186 |
|
| Total Investments | $ | 58,020 |
| | $ | 59,163 |
| | $ | 58,416 |
|
_____________
| |
(A)(1) | Cost for fixed maturities represents original cost, reduced by repayments and writedownswrite-downs and adjusted for amortization of premiums or accretion of discount; cost for equity securities represents original cost reduced by writedowns;write-downs; cost for other limited partnership interests represents original cost adjusted for equity in earnings and reduced by distributions. |
| |
(B) | Included in Other Equity Investments. |
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment | | Deferred Policy Acquisition Costs | | Policyholders’ Account Balances | | Future Policy Benefits and other Policyholders’ Funds | | Policy Charges And Premium Revenue | | Net Investment Income (Loss)(1) | | Policyholders’ Benefits and Interest Credited | | Amortization of Deferred Policy Acquisition Costs | | Other Operating Expense(2) |
| | | (In Millions) |
| Insurance | | $ | 4,301 |
| | $ | 38,782 |
| | $ | 25,358 |
| | $ | 4,303 |
| | $ | 1,671 |
| | $ | 4,448 |
| | $ | 162 |
| | $ | 2,367 |
|
| Investment Management | | — |
| | — |
| | — |
| | — |
| | 135 |
| | — |
| | — |
| | 2,323 |
|
| Consolidation/ Elimination | | — |
| | — |
| | — |
| | — |
| | 50 |
| | — |
| | — |
| | (26 | ) |
| Total | | $ | 4,301 |
| | $ | 38,782 |
| | $ | 25,358 |
| | $ | 4,303 |
| | $ | 1,856 |
| | $ | 4,448 |
| | $ | 162 |
| | $ | 4,664 |
|
| |
(1) | Net investment income (loss) is based upon specific identification of portfolios within segments. |
| |
| (2) | Operating expenses are principally incurred directlyBalance Sheet amount for mortgage loans on real estate represents original cost adjusted for amortization of premiums or accretion of discount and reduced by a segment.valuation allowance. |
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2015
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment | | Deferred Policy Acquisition Costs | | Policyholders’ Account Balances | | Future Policy Benefits and other Policyholders’ Funds | | Policy Charges And Premium Revenue | | Net Investment Income (Loss)(1) | | Policyholders’ Benefits and Interest Credited | | Amortization of Deferred Policy Acquisition Costs | | Other Operating Expense(2) |
| | | (In Millions) |
| Insurance | | $ | 4,469 |
| | $ | 33,033 |
| | $ | 24,531 |
| | $ | 4,062 |
| | $ | 1,898 |
| | $ | 3,777 |
| | $ | (331 | ) | | $ | 2,343 |
|
| Investment Management | | — |
| | — |
| | — |
| | — |
| | 33 |
| | — |
| | — |
| | 2,407 |
|
| Consolidation/ Elimination | | — |
| | — |
| | — |
| | — |
| | 45 |
| | — |
| | — |
| | (27 | ) |
| Total | | $ | 4,469 |
| | $ | 33,033 |
| | $ | 24,531 |
| | $ | 4,062 |
| | $ | 1,976 |
| | $ | 3,777 |
| | $ | (331 | ) | | $ | 4,723 |
|
| |
(1) | Net investment income (loss) is based upon specific identification of portfolios within segments. |
| |
(2) | Operating expenses are principally incurred directly by a segment. |
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2014173
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment | | Deferred Policy Acquisition Costs | | Policyholders’ Account Balances | | Future Policy Benefits and other Policyholders’ Funds | | Policy Charges And Premium Revenue | | Net Investment Income (Loss)(1) | | Policyholders’ Benefits and Interest Credited | | Amortization of Deferred Policy Acquisition Costs | | Other Operating Expense(2) |
| | | (In Millions) |
| Insurance | | $ | 4,271 |
| | $ | 31,848 |
| | $ | 23,484 |
| | $ | 3,989 |
| | $ | 3,760 |
| | $ | 4,894 |
| | $ | (413 | ) | | $ | 2,663 |
|
| Investment Management | | — |
| | — |
| | — |
| | — |
| | 15 |
| | — |
| | — |
| | 2,408 |
|
| Consolidation/ Elimination | | — |
| | — |
| | — |
| | — |
| | 40 |
| | — |
| | — |
| | (27 | ) |
| Total | | $ | 4,271 |
| | $ | 31,848 |
| | $ | 23,484 |
| | $ | 3,989 |
| | $ | 3,815 |
| | $ | 4,894 |
| | $ | (413 | ) | | $ | 5,044 |
|
| |
(1) | Net investment income (loss) is based upon specific identification of portfolios within segments. |
| |
(2) | Operating expenses are principally incurred directly by a segment. |
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE IV
REINSURANCE(A) (1)
AT ORAS OF AND FOR THE YEARS ENDED DECEMBER 31, 2016, 20152018, 2017 AND 20142016
|
| | | | | | | | | | | | | | | | | | |
| | Gross Amount | | Ceded to Other Companies | | Assumed from Other Companies | | Net Amount | | Percentage of Amount Assumed to Net |
| | (in millions) |
| As of December 31, 2018 | | | | | | | | | |
| Life insurance in-force | $ | 390,374 |
| | $ | 69,768 |
| | $ | 30,322 |
| | $ | 350,928 |
| | 8.6 | % |
| | | | | | | | | | |
| For the year ended December 31, 2018 | | | | | | | | | |
| Premiums: | | | | | | | | | |
| Life insurance and annuities | $ | 787 |
| | $ | 128 |
| | $ | 177 |
| | $ | 836 |
| | 21.2 | % |
| Accident and health | 49 |
| | 32 |
| | 9 |
| | 26 |
| | 34.6 | % |
| Total Premiums | $ | 836 |
| | $ | 160 |
| | $ | 186 |
| | $ | 862 |
| | 21.6 | % |
| | | | | | | | | | |
| As of December 31, 2017 | | | | | | | | | |
| Life insurance in-force (2) | $ | 392,926 |
| | $ | 73,843 |
| | $ | 30,300 |
| | $ | 349,383 |
| | 8.7 | % |
| | | | | | | | | | |
| For the year ended December 31, 2017 | | | | | | | | | |
| Premiums: | | | | | | | | | |
| Life insurance and annuities | $ | 826 |
| | $ | 135 |
| | $ | 186 |
| | $ | 877 |
| | 21.2 | % |
| Accident and health | 54 |
| | 36 |
| | 9 |
| | 27 |
| | 33.3 | % |
| Total Premiums | $ | 880 |
| | $ | 171 |
| | $ | 195 |
| | $ | 904 |
| | 21.6 | % |
| | | | | | | | | | |
| As of December 31, 2016 | | | | | | | | | |
| Life insurance in-force | $ | 399,230 |
| | $ | 78,760 |
| | $ | 31,722 |
| | $ | 352,192 |
| | 9.0 | % |
| | | | | | | | | | |
| For the year ended December 31, 2016 | | | | | | | | | |
| Premiums: | | | | | | | | | |
| Life insurance and annuities | $ | 790 |
| | $ | 135 |
| | $ | 197 |
| | $ | 852 |
| | 23.1 | % |
| Accident and health | 60 |
| | 41 |
| | 9 |
| | 28 |
| | 32.1 | % |
| Total Premiums | $ | 850 |
| | $ | 176 |
| | $ | 206 |
| | $ | 880 |
| | 23.4 | % |
|
| | | | | | | | | | | | | | | | | | |
| | Gross Amount | | Ceded to Other Companies | | Assumed from Other Companies | | Net Amount | | Percentage of Amount Assumed to Net |
| | (Dollars In Millions) |
| 2016 | | | | | | | | | |
| Life Insurance In-Force | $ | 399,230 |
| | $ | 78,760 |
| | $ | 31,722 |
| | $ | 352,192 |
| | 9.0 | % |
| Premiums: | | | | | | | | | |
| Life insurance and annuities | $ | 790 |
| | $ | 135 |
| | $ | 197 |
| | $ | 852 |
| | 23.1 | % |
| Accident and health | 60 |
| | 41 |
| | 9 |
| | 28 |
| | 32.1 | % |
| Total Premiums | $ | 850 |
| | $ | 176 |
| | $ | 206 |
| | $ | 880 |
| | 23.4 | % |
| 2015 | | | | | | | | | |
| Life Insurance In-Force | $ | 406,240 |
| | $ | 82,927 |
| | $ | 31,427 |
| | $ | 354,740 |
| | 8.9 | % |
| Premiums: | | | | | | | | | |
| Life insurance and annuities | $ | 753 |
| | $ | 128 |
| | $ | 197 |
| | $ | 822 |
| | 24.0 | % |
| Accident and health | 67 |
| | 45 |
| | 10 |
| | 32 |
| | 31.3 | % |
| Total Premiums | $ | 820 |
| | $ | 173 |
| | $ | 207 |
| | $ | 854 |
| | 24.2 | % |
| 2014 | | | | | | | | | |
| Life Insurance In-Force | $ | 412,215 |
| | $ | 87,177 |
| | $ | 31,767 |
| | $ | 356,805 |
| | 8.9 | % |
| Premiums: | | | | | | | | | |
| Life insurance and annuities | $ | 775 |
| | $ | 132 |
| | $ | 199 |
| | $ | 842 |
| | 23.6 | % |
| Accident and health | 69 |
| | 49 |
| | 12 |
| | 32 |
| | 37.5 | % |
| Total Premiums | $ | 844 |
| | $ | 181 |
| | $ | 211 |
| | $ | 874 |
| | 24.1 | % |
| |
(A)(1) | Includes amounts related to the discontinued group life and health business. |
| |
| (2) | Previously reported amounts for “Life insurance in-force—Ceded to other companies” of $41,330 million and “Net amount” of $381,896 have been revised due to an error. |
Part II, Item 9.
AXA EQUITABLE LIFE INSURANCE COMPANY
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part II, Item 9A
CONTROLS AND PROCEDURES
Evaluation of disclosure controlsDisclosure Controls and proceduresProcedures
An evaluation was performed underThe management of the supervision andCompany, with the participation of management, including the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer of(CFO), has evaluated the effectiveness of the design and operation of AXA Equitable Life Insurance Company (“AXA Equitable”) and its subsidiaries’ (together, the “Company”)Company’s disclosure controls and procedures (as defined in RulesRule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934)1934a) as of December 31, 2016. Based on that2018, as amended. This evaluation management, including the Chief Executive Officer and Chief Financial Officer, concluded that the AXA Equitable’sis performed to determine if our disclosure controls and procedures are effective.effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms.
Due to the material weaknesses described below, the Company’s CEO and CFO, concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2018.
Management’s annual report on internal control over financial reporting
Management, including the Chief Executive OfficerCEO and Chief Financial Officer of AXA Equitable,CFO, is responsible for establishing and maintaining adequate internal control over AXA Equitable’s financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934)1934, as amended).
All internal Internal control systems,over financial reporting, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective internal control over financial reporting may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
AXA Equitable’s The Company’s management, including the Company’s CEO and CFO, assessed the effectiveness of its internal control over financial reporting as of December 31, 20162018 in relation to the criteria for effective internal control over financial reporting described in Internal Control –- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment under those criteria, managementCommission (“COSO”).
Management concluded that AXA Equitable’sthe Company did not maintain effective internal control over financial reporting as of December 31, 2018, based on the criteria in Internal Control-Integrated Framework (2013) issued by COSO due to the two material weaknesses described below.
Management’s report regarding internal control over financial reporting was effective as of December 31, 2016.
This annual report does not include an attestation report of AXA Equitable’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by AXA Equitable’sthe Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit AXA Equitablethe Company to provide only management’s report in thisits annual report.
ChangesIdentification of Material Weaknesses
As previously reported, the Company identified two material weaknesses in the design and operation of the Company’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company’s management, including the Company’s CEO and CFO, have concluded that we do not:
There
| |
| (i) | maintain effective controls to timely validate actuarial models are properly configured to capture all relevant product features provide reasonable assurance timely reviews of assumptions and data have occurred, and, as a result, errors were identified in future policyholders’ benefits and deferred policy acquisition costs balances; and |
(ii) maintain sufficient experienced personnel to prepare the Company’s consolidated financial statements and to verify consolidating and adjusting journal entries are completely and accurately recorded to the appropriate accounts and, as a result, errors were identified in the consolidated financial statements, including in the presentation and disclosure between sections of the statements of cash flows.
These material weaknesses resulted in misstatements in the Company’s previously issued annual and interim financial statements and resulted in:
| |
| (i) | the revision of the interim financial statements for the nine, six, and three months ended September 30, June 30, and March 31, 2018 and 2017, respectively, and the annual financial statements for the year ended December 31, 2017; |
| |
| (ii) | the revision for the three and six months ended March 31, 2018, and June 30, 2018, respectively, as well as the three, six and nine months ended March 31, 2017, June 30, 2017 and September 30, 2017, respectively and for the years ended December 31, 2017 and 2016 |
| |
| (iii) | the revision of the interim financial statements for the three months ended March 31, 2018, the nine months ended September 30, 2017, the six months ended June 30, 2017 and the annual financial statements for the years ended December 31, 2017 and 2016 and |
(iv) the restatement of the annual financial statements for the year ended December 31, 2016, the revision to each of the quarterly interim periods for 2017 and 2016, and the revision of the annual financial statements for the year ended December 31, 2015.
These revisions and restatements were directly related to the material weaknesses described above and not indicative of any new material weaknesses. Until remediated, there is a reasonable possibility that these material weaknesses could result in a material misstatement of the Company’s consolidated financial statements or disclosures that would not be prevented or detected.
Remediation Status of Material Weaknesses
Management continues to execute its plan moving towards remediation of the material weaknesses. Since identifying the material weaknesses, management has performed the following activities:
Material Weakness Related to Actuarial Models, Assumptions and Data
We have designed and implemented an enhanced model validation control framework, including a rotational schedule to periodically validate all U.S. GAAP models.
We have designed and implemented enhanced controls and governance processes for new model implementations.
We have designed and implemented enhanced controls for model changes.
We have designed and implemented enhanced controls over the annual assumption setting process, including a comprehensive master assumption inventory and risk framework.
We have completed a current state assessment of significant data flows feeding actuarial models and assumptions. We have initiated a validation review and a control design assessment of these data flows.
We are in the process of completing a comprehensive plan for enhancing the process and controls over the reliability of data feeding significant actuarial models.
Material Weakness Related to Insufficient Personnel and Journal Entry Process
With respect to insufficient personnel, we have strengthened our finance team by adding approximately 25 employees to the Accounting and Financial Reporting areas. Of these additional resources, eleven have a CPA license, eight have worked at a “Big 4” public accounting firm and the remainder have worked in a finance area within a public company. We have conducted both specific job-related training and general training on SOX controls and U.S. GAAP related technical topics to new and existing staff.
To improve controls over journal entries, a less controlled secondary process that was used for consolidating certain entities, reflecting adjustments to prior periods and generating the business segment disclosures, has been eliminated. Beginning with third quarter 2018, all journal entries are recorded in the Company’s general ledger and the secondary process is no longer necessary.
We have enhanced the controls over journal entries through the implementation of new standards designed to ensure effective review and approval of journal entries with sufficient supporting documentation.
We have designed and implemented new management review controls within the period end financial reporting process that will operate at a level of precision sufficient to detect errors that could result in a material misstatement.
While progress has been made to remediate both material weaknesses, as of December 31, 2018, we are still in the process of developing and implementing the enhanced processes and procedures and testing the operating effectiveness of these improved controls. We believe our actions will be effective in remediating the material weaknesses, and we continue to devote significant time and attention to these efforts. In addition, the material weaknesses will not be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. Accordingly, the material weaknesses are not remediated as of December 31, 2018.
Changes in Internal Control over Financial Reporting
We have undertaken the following activities which represent changes to AXA Equitable’sin our internal control over financial reporting that occurred(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 20162018 that have materially affected or are reasonably likely to materially affect, AXA Equitable’sour internal control over financial reporting:
Implementation of an enhanced model validation control framework to periodically re-validate all U.S. GAAP models.
Design and implementation of new management review controls within the period-end financial reporting process that will operate at a level of precision sufficient to detect errors that could result in a material misstatement.
As described above, the Company continues to design and implement additional controls in connection with its remediation plan. These remediation efforts related to the material weaknesses described above represent changes in our internal control over financial reporting for the quarter ended December 31, 2018 that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II, Item 9B.
OTHER INFORMATION
None.
Part III, Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
BOARD OF DIRECTORSOmitted pursuant to General Instruction I to Form 10-K.
The Board currently consists of ten members, including our Chairman of the Board, President and Chief Executive Officer, two senior executives of AXA and seven independent members.
The Board holds regular quarterly meetings, generally in February, May, September, and November of each year, and holds special meetings or takes action by unanimous written consent as circumstances warrant. The Board has standing Executive, Audit, Organization and Compensation, and Investment Committees, each of which is described in further detail below. Each of the Directors attended at least 75% of the Board and committee meetings to which he or she was assigned during 2016, except Mr. Buberl.
The current members of our Board are as follows:
Mark Pearson
Mr. Pearson, age 58, has been a Director of AXA Equitable since January 2011 and currently serves as our Chairman of the Board, President and Chief Executive Officer. From February 2011 through September 2013, he served as Chairman of the Board and Chief Executive Officer. Mr. Pearson also serves as President and Chief Executive Officer of AXA Financial since February 2011. Mr. Pearson is also a member of the AXA Group Management Committee. Mr. Pearson joined AXA in 1995 with the acquisition of National Mutual Holdings and was appointed Regional Chief Executive of AXA Asia Life in 2001. In 2008, he became President and Chief Executive Officer of AXA Japan Holding Co. Ltd. (“AXA Japan”) and was appointed a member of the Executive Committee of AXA. Before joining AXA, Mr. Pearson spent approximately 20 years in the insurance sector, assuming several senior manager positions at Hill Samuel, Schroders National Mutual Holdings and Friends Provident. Mr. Pearson is a Fellow of the Chartered Association of Certified Accountants and is a member of the Board of Directors of the American Council of Life Insurers and the Financial Services Roundtable. Mr. Pearson is also a director of AXA Financial (since January 2011), MONY America (since January 2011) and AllianceBernstein Corporation (since February 2011).
Mr. Pearson brings to the Board diverse financial services experience developed though his service as an executive, including as a Chief Executive Officer, to AXA Financial, AXA Japan and other AXA affiliates.
Thomas Buberl
Mr. Buberl, age 43, has been a director of AXA Equitable since May 2016. Mr. Buberl has served as Chief Executive Officer of AXA since September 2016. From March 2016 to August 2016, Mr. Buberl served as Deputy Chief Executive Officer of AXA. Prior thereto, Mr. Buberl served as Chief Executive Officer of AXA Konzern AG (May 2012 to March 2016), Chief Executive Officer for the global business line for the Health Business (March 2015 to March 2016) and Chief Executive Officer for the global business line for the Life and Savings Business (January 2016 to March 2016). From November 2008 to April 2012, Mr. Buberl served as Chief Executive Officer for Switzerland of Zurich Financial Services (“Zurich”). Prior to joining Zurich, Mr. Buberl held various management positions with Boston Consulting Group (February 2000 to October 2005) and Winterthur Group (November 2005 to October 2008). Mr. Buberl is also a director of AXA Financial and MONY America since May 2016 and various other subsidiaries and affiliates of the AXA Group.
Mr. Buberl brings to the Board his extensive experience and key leadership skills developed through his service as an executive, including invaluable perspective as the Chief Executive Officer of AXA. The Board also benefits from his perspective as a member of the AXA Group Management Committee.
Ramon de Oliveira
Mr. de Oliveira, age 62, has been a Director of AXA Equitable since May 2011. Mr. de Oliveira has been a member of AXA’s Board of Directors since April 2010, where he serves on the Finance Committee (Chair) and Audit Committee, and from April 2009 to May 2010, he was a member of AXA’s Supervisory Board. He is currently the Managing Director of the consulting firm Investment Audit Practice, LLC, based in New York, NY. From 2002 to 2006, Mr. de Oliveira was an adjunct professor of Finance at Columbia University. Prior thereto, starting in 1977, he spent 24 years at JP Morgan & Co. where he was Chairman and Chief Executive Officer of JP Morgan Investment Management and was also a member of the firm’s Management Committee since its inception in 1995. Upon the merger with Chase Manhattan Bank in 2001, Mr. de Oliveira was the only executive from JP Morgan & Co. asked to join the Executive Committee of the new firm with operating responsibilities. Mr. de Oliveira is currently a member of the Board of Directors of Investment Audit Practice, LLC, Fonds de Dotation du Louvre and JACCAR Holdings. Previously
he was a Director of JP Morgan Suisse, American Century Company, Inc., SunGard Data Systems and The Hartford Insurance Company. Mr. de Oliveira is also a director of AXA Financial and MONY America since May 2011.
Mr. de Oliveira brings to the Board extensive financial services experience, and key leadership and analytical skills developed through his roles within the financial services industry and academia. The Board also benefits from his perspective as a director of AXA and as a former director of other companies.
Paul Evans
Mr. Evans, age 51, has been a director of AXA Equitable since November 2016. Mr. Evans has served as Group Chief Executive Officer of AXA Global Life, Savings and Health and has been a member of the AXA Group Management Committee since July 2016. Prior thereto, Mr. Evans served as Group Chief Executive Officer of AXA UK and Ireland (from 2010 to June 2016) and Chairman of AXA Corporate Solutions (from 2015 to June 2016). From 2003 to 2010, Mr. Evans served as Chief Executive Officer of AXA Life in the UK and between 2001 and May 2003, Mr. Evans served as Group Finance Director of AXA UK and Ireland. Prior to joining AXA in 2000, Mr. Evans spent thirteen years with PricewaterhouseCoopers. From 2014 to June 2016, Mr. Evans served as Chairman of the Association of British Insurers. Mr. Evans is also a director of AXA Financial and MONY America since November 2016 and various other subsidiaries and affiliates of the AXA Group.
Mr. Evans brings to the Board his extensive experience and key leadership skills developed through his service as an executive with AXA, including as Group Chief Executive Officer of AXA Global Life, Savings and Health. The Board also benefits from his perspective as a member of the AXA Group Management Committee.
Barbara Fallon-Walsh
Ms. Fallon-Walsh, age 64, has been a Director of AXA Equitable since May 2012. Ms. Fallon-Walsh was with The Vanguard Group, Inc. (“Vanguard”) from 1995 until her retirement in 2012, where she held several executive positions, including Head of Institutional Retirement Plan Services from 2006 through 2011. Ms. Fallon-Walsh started her career at Security Pacific Corporation in 1979 and held a number of senior and executive positions with the company, which merged with Bank of America in 1992. From 1992 until joining Vanguard in 1995, Ms. Fallon-Walsh served as Executive Vice President, Bay Area Region and Los Angeles Gold Coast Region for Bank of America. Ms. Fallon-Walsh is currently a member of the Boards of Directors of AXA Investment Managers S.A. (“AXA IM”), where she serves on the Audit and Risk Committee and the Remuneration Committee, and of AXA IM Inc. and AXA Rosenberg Group LLC (“AXA Rosenberg”). Ms. Fallon-Walsh is also a director of AXA Financial and MONY America since May 2012.
Ms. Fallon-Walsh brings to the Board extensive financial services and general management expertise through her executive positions at Vanguard, Bank of America and Security Pacific National Bank and through her perspective as a director of AXA IM, AXA IM Inc. and AXA Rosenberg. The Board also benefits from her extensive knowledge of the retirement business.
Daniel G. Kaye
Mr. Kaye, age 62, has been a Director of AXA Equitable since September 2015. From January 2013 to May 2014, Mr. Kaye served as Interim Chief Financial Officer and Treasurer of HealthEast Care System (“HealthEast”). Prior to joining HealthEast, Mr. Kaye spent 35 years with Ernst & Young LLP (“Ernst & Young”) from which he retired in 2012. Throughout his time at Ernst & Young, where he was an audit partner for 25 years, Mr. Kaye enjoyed a track record of increasing leadership and responsibilities, including serving as the New England Managing Partner and the Midwest Managing Partner of Assurance. Mr. Kaye was a member of the Board of Directors of Ferrellgas Partners L.P. (“Ferrellgas”) from August 2012 to November 2015 where he served on the Audit Committee and Corporate Governance and Nominating Committee (Chair). Mr. Kaye is a Certified Public Accountant and National Association of Corporate Directors (NACD) Board Leadership Fellow. Mr. Kaye is also a director of AXA Financial and MONY America since September 2015.
Mr. Kaye brings to the Board invaluable expertise as an audit committee financial expert, and extensive financial services and insurance industry experience and his general knowledge and experience in financial matters developed through his roles at Ernst & Young and HealthEast. The Board also benefits from his experience as a director of Ferrellgas.
Kristi A. Matus
Ms. Matus, age 48, has been a Director of AXA Equitable since September 2015. From July 2014 to May 2016, Ms. Matus served as Executive Vice President and Chief Financial & Administrative Officer of athenahealth, Inc. (“athenahealth”). Prior to joining athenahealth, Ms. Matus served as Executive Vice President and Head of Government Services of Aetna, Inc. (“Aetna”) from February 2012 to July 2013. Prior to Aetna, she held several senior leadership roles at United Services Automobile Association (“USAA”), including Executive Vice President and Chief Financial Officer from 2008 to 2012. She began her career at the Aid Association for Lutherans, where she held various financial and operational roles for over a decade. Ms. Matus is currently a
member of the Board of Directors of Tru Optik Data Corp. (“Tru Optik”) and Jordan Health Services, Inc. (“Jordan Health”). Ms. Matus is also a director of AXA Financial and MONY America since September 2015.
Ms. Matus brings to the Board extensive management expertise, finance, corporate governance and key leadership skills developed through her roles at athenahealth, Aetna and USAA. The Board also benefits from her experience as a director of Tru Optik and Jordan Health.
Bertram L. Scott
Mr. Scott, age 65, has been a Director of AXA Equitable since May 2012. Mr. Scott has served as Senior Vice President of population health of Novant Health, Inc. since February 2015. From November 2012 through December 2014, Mr. Scott served as President and Chief Executive Officer of Affinity Health Plans. From June 2010 to December 2011, Mr. Scott served as President, U.S. Commercial of CIGNA Corporation. Prior thereto, he served as Executive Vice President of TIAA-CREF from 2000 to June 2010 and as President and Chief Executive Officer of TIAA-CREF Life Insurance Company from 2000 to 2007. Mr. Scott is currently a member of the Board of Directors of Becton, Dickinson and Company, where he serves on the Audit Committee (Chair) and Compensation and Benefits Committee, and Lowe’s Companies, Inc., where he serves on the Audit Committee and Governance Committee. Mr. Scott is also a director of AXA Financial and MONY America since May 2012.
Mr. Scott brings to the Board invaluable expertise as an audit committee financial expert, and strong strategic and operational expertise acquired through the variety of executive roles in which he has served during his career. The Board also benefits from his perspective as a director of Becton, Dickinson and Company and Lowe’s Companies, Inc.
Lorie A. Slutsky
Ms. Slutsky, age 64, has been a Director of AXA Equitable since September 2006. Ms. Slutsky has served as President and Chief Executive Officer of The New York Community Trust, a community foundation that manages a $2.5 billion endowment and annually grants more than $150 million to non-profit organizations, since January 1990. Ms. Slutsky was a board member of the Independent Sector and co-chaired its National Panel on the Non-Profit Sector, which focused on reducing abuse and improving governance practices at non-profits. She also served on the Board of Directors of BoardSource from 1999 to 2008 and served as its Chair from 2005 to 2007. She also served on the Board of Directors of the Council on Foundations from 1989 to 1995 and as its Chair from 1992 to 1994. Ms. Slutsky served as Trustee and Chair of the Budget Committee of Colgate University from 1989 to 1997. Ms. Slutsky is also a director of AXA Financial and MONY America (since September 2006) and AllianceBernstein Corporation (since July 2002).
Ms. Slutsky brings to the Board extensive corporate governance experience through her executive and managerial roles at The New York Community Trust, BoardSource and various other non-profit organizations.
Richard C. Vaughan
Mr. Vaughan, age 67, has been a Director of AXA Equitable since May 2010. From 1995 to May 2005, Mr. Vaughan served as Executive Vice President and Chief Financial Officer of Lincoln Financial Group (“Lincoln”). Mr. Vaughan joined Lincoln in July 1990 as Senior Vice President and Chief Financial Officer of Lincoln’s Employee Benefits Division. In June 1992, Mr. Vaughan was appointed Chief Financial Officer of Lincoln and was promoted to Executive Vice President of Lincoln in January 1995. Mr. Vaughan is a member of the Board of Directors of MBIA Inc., where he serves on the Finance and Risk Committee (Chair), Audit Committee and Executive Committee. Previously, Mr. Vaughan was also a Director of The Bank of New York and Davita, Inc. Mr. Vaughan is also a director of AXA Financial and MONY America since May 2010.
Mr. Vaughan brings to the Board invaluable expertise as an audit committee financial expert, and extensive financial services and insurance industry experience and his general knowledge and experience in financial matters, including as a Chief Financial Officer. The Board also benefits from his perspective as a director of MBIA, Inc. and as a former director to other public companies.
EXECUTIVE OFFICERS
The current executive officers (other than Mr. Pearson, whose biography is included above in the Board of Directors information) are as follows:
Josh Braverman, Senior Executive Director
Mr. Braverman, age 50, joined AXA Equitable in 2009 and currently serves as Senior Executive Director. Mr. Braverman is responsible for the management of the Company’s legacy book of annuities and life insurance products. Prior to this role, Mr. Braverman most recently served as Senior Executive Director, Chief Investment Officer and Treasurer. In this role, Mr. Braverman was responsible for, among other things, the overall investment strategy of our general account investment portfolio, managing our financing and liquidity requirements, and developing and implementing our derivatives and hedging strategy. Prior to joining
AXA Equitable, Mr. Braverman was the Global Head of Derivatives at Aegon N.V. from 2003 to 2009. Previously, Mr. Braverman worked for the U.S. Department of Treasury as a sovereign debt advisor, Deutsche Bank as Director of mortgage derivatives trading and Goldman Sachs as Vice President, Fixed Income Proprietary Trading.
Marine de Boucaud, Senior Executive Director and Chief Human Resources Officer
Ms. de Boucaud, age 48, joined AXA Equitable in July 2016 and currently serves as Senior Executive Director and Chief Human Resources Officer. Ms. de Boucaud is responsible for developing and executing a business-aligned human capital management strategy focused on leadership development, talent management and total rewards. Ms. de Boucaud also oversees internal communications and the AXA Foundation. Prior to joining AXA Equitable, Ms. de Boucaud served as the Head of Human Resources of AXA France from October 2012 to June 2016. Ms. de Boucaud began her career with AXA in 2010 as the Head of Talent Management. Prior to joining AXA, Ms. de Boucaud was a senior consultant at Spencer Stuart from March 2008 to September 2010. Prior to joining Spencer Stuart, Ms. de Boucaud held various roles on increasing responsibility at Korn Ferry Whitehead Mann, Jouve & Associés and BNP Paribas.
Dave S. Hattem, Senior Executive Director and General Counsel
Mr. Hattem, age 60, joined AXA Equitable in 1994 and currently serves as Senior Executive Director and General Counsel. Mr. Hattem is responsible for oversight of the Law Department, including the National Compliance Office, setting the strategic direction of the Department and ensuring the business areas are advised as to choices and opportunities available under existing law to enable company goals. Prior to his election as general counsel in 2010, Mr. Hattem served as senior vice president and deputy general counsel, taking on this role in 2004. Prior to joining AXA Equitable, Mr. Hattem served in several senior management positions in the Office of the United States Attorney for the Eastern District of New York. Mr. Hattem began his professional legal career as an Associate in the Litigation Department of Barrett Smith Schapiro Simon & Armstrong. Mr. Hattem is a member of the Board of Directors of The Life Insurance Council of New York.
Michael B. Healy, Senior Executive Director and Chief Information Officer
Mr. Healy, age 49, joined AXA Equitable in 2006 and currently serves as Senior Executive Director and Chief Information Officer. Mr. Healy is responsible for the information technology function, directing all systems strategy and delivery, including infrastructure, application development, corporate architecture and electronic commerce. Mr. Healy is also responsible for the overall management of AXA Equitable’s relationship with AXA Technology Services, the AXA company that provides global technology infrastructure service and support. Prior to this role, Mr. Healy served as chief operations officer of our information technology organization, responsible for overseeing the day-to-day operations of that organization. Prior to joining AXA Equitable, Mr. Healy served as a senior vice president at Marsh & McLennan and in managerial roles at PricewaterhouseCoopers
Adrienne Johnson, Senior Executive Director and Chief Transformation Officer
Ms. Johnson, age 47, joined AXA Equitable in February 1999 and currently serves as Senior Executive Director and Chief Transformation Officer. Ms. Johnson is responsible for operations, corporate sourcing and procurement, corporate real estate, data and strategic taskforces. Ms. Johnson leads the transformation team in supporting the businesses growth of priority segments and distribution transformation, and works closely with AXA’s customer team to shape the customer experience. Prior to this role, Ms. Johnson most recently served as Managing Director and Chief Auditor from April 2012 to September 2016 and led the Strategic Initiatives Group from 2007 to April 2012. Prior to joining AXA Equitable, Ms. Johnson held positions with Enterprise IG, a part of the WPP Group, AIG Trading Group, Morgan Stanley and Shearson Lehman Brothers.
Anders Malmstrom, Senior Executive Director and Chief Financial Officer
Mr. Malmstrom, age 49, joined AXA Equitable in June 2012 and currently serves as Senior Executive Director and Chief Financial Officer. Mr. Malmstrom is responsible for all actuarial and investment functions, with oversight of the controller, tax, expense management and distribution finance areas. Prior to joining AXA Equitable, Mr. Malmstrom was a member of the Executive Board and served as the Head of the Life Business at AXA Winterthur. Prior to joining AXA Winterthur in January 2009, Mr. Malmstrom was a Senior Vice President at Swiss Life, where he was also a member of the Management Committee. Mr. Malmstrom joined Swiss Life in 1997, and held several positions of increasing responsibility during his tenure.
Brian Winikoff, Senior Executive Director and Head of U.S. Life, Retirement and Wealth Management
Mr. Winikoff, age 44, joined AXA Equitable in July 2016 and currently serves as Senior Executive Director and Head of U.S. Life, Retirement and Wealth Management. Mr. Winikoff is responsible for all aspects of the U.S. life, retirement and wealth management business, which includes financial protection, wealth management, employee benefits, employee sponsored and individual annuity. Mr. Winikoff also leads AXA Equitable Funds Management Group. Prior to joining AXA Equitable, Mr. Winikoff served as President and Chief Executive Officer of Crump Life Insurance Services, Inc. (“Crump”). Prior thereto, Mr. Winikoff served in multiple roles at Crump from 2002 to 2008, including as Chief Financial Officer and Vice President, Investor Relations and Corporate Finance. From 2000 to 2002, Mr. Winikoff served as Vice President of Finance, Corporate Treasurer and Head of Investor Relations for LoudCloud Inc., an IT outsource provider.
CORPORATE GOVERNANCE
Committees of the Board
The Executive Committee of the Board (“Executive Committee”) is currently comprised of Mr. Pearson (Chair), Mr. Buberl, Ms. Fallon-Walsh, Ms. Slutsky and Mr. Vaughan. The function of the Executive Committee is to exercise the authority of the Board in the management of AXA Equitable between meetings of the Board with the exceptions set forth in AXA Equitable's By-Laws. The Executive Committee held no meetings in 2016.
The Audit Committee of the Board (“Audit Committee”) is currently comprised of Mr. Vaughan (Chair), Ms. Fallon-Walsh, Mr. Kaye and Mr. Scott. The primary purposes of the Audit Committee are to: (i) assist the Board of Directors in its oversight of the (1) adequacy and effectiveness of the internal control and risk management frameworks, (2) financial reporting process and the integrity of the publicly reported results and disclosures made in the financial statements and (3) effectiveness and performance of the internal and external auditors and the independence of the external auditor; (ii) approve (1) the appointment, compensation and retention of the external auditor in connection with the annual audit and (2) the audit and non-audit services to be performed by the external auditor and (iii) resolve any disagreements between management and the external auditor regarding financial reporting. The Board has determined that each of Messrs. Vaughan, Kaye and Scott is an “audit committee financial expert” within the meaning of Item 407(d) of Regulation S-K. The Board has also determined that each member of the Audit Committee is financially literate. The Audit Committee met eight times in 2016.
The Organization and Compensation Committee of the Board (“OCC”) is currently comprised of Ms. Slutsky (Chair), Ms. Fallon-Walsh, Ms. Matus and Mr. Scott. The primary purpose of the OCC is to: (i) recommend to the Board individuals to become Board members and the composition of the Board and its Committees; (ii) recommend to the Board the selection of executive management and to receive reports on succession planning for executive management; and (iii) be responsible for general oversight of compensation and compensation related matters. The OCC held four meetings in 2016.
The Investment Committee of the Board (“Investment Committee”) is currently comprised of Ms. Fallon-Walsh (Chair), Mr. Buberl, Mr. de Oliveira, Mr. Kaye, Mr. Pearson and Mr. Vaughan. The primary purpose of the Investment Committee is to oversee the investments of AXA Equitable by (i) taking actions with respect to the acquisition, management and disposition of investments and (ii) reviewing investment risk, exposure and performance, as well as the investment performance of products and accounts managed on behalf of third parties. The Investment Committee met four times in 2016.
Independence of Certain DirectorsAlthough not subject to the independence standards of the New York Stock Exchange, as a best practice we have applied the independence standards required for listed companies of the New York Stock Exchange to the current members of the Board of Directors. At the February 2017 meeting, applying these standards, the Board of Directors determined that each of Mr.de Oliveira, Ms. Fallon-Walsh, Mr. Kaye, Ms. Matus, Mr. Scott, Ms. Slutsky and Mr. Vaughan is independent.
Code of Ethics
All of our officers and employees, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, are subject to the AXA Financial Policy Statement on Ethics (the “Code of Ethics”), a code of ethics as defined under Regulation S-K.
The Code of Ethics complies with Section 406 of the Sarbanes-Oxley Act of 2002 and is available on our website at www.axa.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding certain amendments to or waivers from provisions of the Code of Ethics that apply to our chief executive officer, chief financial officer and chief accounting officer by posting such information on our website at the above address. To date, there have been no such amendments or waivers.
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
Part III, Item 11.
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
This section provides an overview of the goals and principal components of AXA Equitable’s executive compensation program and describes how the compensation of the “Named Executive Officers” is determined. For 2016, the Named Executive Officers were:
Mark Pearson, Chairman of the Board, President and Chief Executive Officer
Anders Malmstrom, Senior Executive Director and Chief Financial Officer
Brian Winikoff, Senior Executive Director and Head of U.S. Life, Retirement and Wealth Management
Dave Hattem, Senior Executive Director and General Counsel
Michael Healy, Senior Executive Director and Chief Information Officer
Sharon Ritchey, Senior Executive Director and Chief Customer Officer through December 30, 2016
Priscilla Brown, Senior Executive Director and Chief Marketing Officer through August 31, 2016
The details of each Named Executive Officer’s compensation may be found in the Summary Compensation Table and other compensation tables included in this Item 11.
Compensation Program Overview
Goal
The overriding goal of AXA Equitable’s executive compensation program is to attract, retain and motivate top-performing executive officers who will dedicate themselves to the long-term financial and operational success of AXA Equitable, AXA Financial and AXA Financial Group’s insurance-related businesses (“AXA Financial Life and Savings Operations”) as well as our ultimate parent and shareholder, AXA. Accordingly, as further described below, the program incorporates metrics which measure that success.
Since the executive officers of AB are principally responsible for the success of the Investment Management Segment, they do not participate in AXA Equitable’s executive compensation program. AB maintains separate compensation plans and programs, the details of which may be found in the AB 10-K.
Philosophy and Strategy
To achieve its goal, AXA Equitable’s executive compensation program is structured to foster a pay-for-performance management culture by:
providing total compensation opportunities that are competitive with the levels of total compensation available at the large diversified financial services companies with which the AXA Financial Group most directly competes in the marketplace;
making performance-based variable compensation the principal component of executive pay to drive superior performance by basing a significant portion of the executive officers’ financial success on the financial and operational success of AXA Financial Life and Savings Operations and AXA;
setting performance objectives and targets for variable compensation arrangements that provide individual executives with the opportunity to earn above-median compensation by achieving above-target results;
establishing equity-based arrangements that align the executives’ financial interests with those of AXA by ensuring the executives have a material financial stake in the rising equity value of AXA and the business success of its affiliates; and
structuring compensation packages and outcomes to foster internal equity.
Compensation Components
To support this pay-for-performance strategy, the Total Compensation Program provides a mix of fixed and variable compensation components that bases the majority of each executive’s compensation on the success of AXA Financial Life and Savings Operations and AXA as well as an assessment of each executive’s overall contribution to that success.
Fixed Component
The fixed compensation component of the Total Compensation Program, base salary, falls within the market median of the large diversified financial services companies that are the AXA Financial Group’s major competitors and is meant to fairly and competitively compensate executives for their positions and the scope of their responsibilities.
Variable Components
The variable compensation components of the Total Compensation Program, the short-term incentive compensation program and equity-based awards, give executives the opportunity to receive compensation at the median of the market if they meet various corporate and individual financial and operational goals and to receive compensation above the median if they exceed their goals. The variable compensation components measure and reward performance with short-term and long-term focuses.
The short-term incentive compensation program focuses executives on annual corporate and business unit goals that, when attained, drive AXA’s global success. It also serves as the primary means for differentiating, recognizing and most directly rewarding individual executives for their personal achievements and leadership based on both qualitative and quantitative results.
Equity-based awards are structured to reward long-term value creation. Performance share awards granted in 2014 will vest partially after three years and partially after four years. Performance shares granted in 2015 and 2016 will vest after four years. Stock options are intended to focus executives on a longer time horizon. Stock options are typically granted with vesting schedules of four or five years and terms of 10 years so that they effectively merge a portion of each executive’s compensation with the long-term financial success of AXA. AXA Equitable is confident that the direct alignment of the long-term interests of the executives with those of AXA, combined with the multi-year vesting and performance periods of its equity-based awards, promotes executive retention, focuses executives on gearing their performances to long-term value-creation strategies and discourages excessive risk-taking.
How Compensation Decisions Are Made
Role of the AXA Board of Directors
The global framework governing the executive compensation policies for AXA Group and its U.S. subsidiaries, including AXA Equitable, is set and administered at the AXA level through the operations of AXA’s Board of Directors. The AXA Board of Directors (i) reviews the compensation policies that apply to executives of AXA Group worldwide, which are then adapted to local law, conditions and practices by the boards of directors and compensation committees of AXA’s subsidiaries, (ii) sets annual caps on equity-based awards, (iii) reviews and approves all AXA equity-based compensation programs prior to their implementation and (iv) approves individual grants of equity-based awards.
The Compensation and Governance Committee of the AXA Board of Directors is responsible for reviewing the compensation of key executives of the AXA Group, including Mr. Pearson. The Compensation and Governance Committee also recommends to the AXA Board of Directors the amount of equity-based awards to be granted to the members of the Management Committee, an internal committee established to assist the Chief Executive Officer of AXA with the operational management of the AXA Group. Mr. Pearson is a member of the Management Committee. The Compensation and Governance Committee is exclusively composed of directors determined to be independent by the AXA Board of Directors in accordance with the criteria set forth in the Corporate Governance Code for French listed companies (a code of corporate governance principles issued by the French Association of Private Companies (Association Française des Entreprises Privées - AFEP) and the French Confederation of Business Enterprises (Mouvement des Entreprises de France - MEDEF). The Senior Independent Director is the Chairman of the Committee. The Chairman of the Board of Directors of AXA and the Chief Executive Officer of AXA, although not members of the Committee, also take part in its work and attend its meetings unless their personal performance or compensation is being discussed.
Role of the Organization and Compensation Committee of the Board of Directors of AXA Equitable
Within the global framework of executive compensation policies that AXA has established, direct responsibility for overseeing the development and administration of the executive compensation program for AXA Equitable falls to the Organization and Compensation Committee (the “OCC”) of the Board of Directors of AXA Equitable (the “Board of Directors”). The OCC consists of four members, all of whom were determined to be independent directors by the Board of Directors under New York Stock Exchange standards as of February 16, 2017. In implementing AXA’s global compensation program at the entity level, the OCC is aided by the Chief Executive Officer of AXA who, while not a formal member of the OCC, is a member of the Board of Directors and participates in the OCC’s deliberations related to compensation issues and assists in ensuring coordination with AXA’s global compensation policies.
The OCC is primarily responsible for general oversight of compensation and compensation related matters, including reviewing new benefit plans, equity-based plans and the compensation practices of AXA Equitable to ensure they support AXA Equitable’s business strategy and meet the objectives set by AXA for its global compensation policy. Also, in accordance with New York Insurance Law, the OCC is responsible for evaluating the performance of AXA Equitable’s principal officers and comparably paid employees (as determined under New York Insurance Law) and recommending their compensation, including their salaries and variable compensation, to the Board of Directors for its discussion and approval. As of February 16, 2017, Mr. Pearson, Mr. Malmstrom and Mr. Winikoff were principal officers and Mr. Hattem was a comparably paid employee (the “Approval Named Executive Officers”).
The OCC is also responsible for:
reviewing all other senior executive compensation arrangements;
supervising the policies relating to compensation of officers and employees; and
reviewing and approving corporate goals and objectives included in variable compensation arrangements and evaluating executive management performance in light of those goals and objectives.
Role of the Chief Executive Officer
As Chief Executive Officer of AXA Equitable, Mr. Pearson assists the OCC in its review of the total compensation of all the Named Executive Officers except himself. Mr. Pearson provides the OCC with his assessment of the performance of each Named Executive Officer relative to the corporate and individual goals and other expectations set for the Named Executive Officer for the preceding year. Based on these assessments, he then provides his recommendations for each Named Executive Officer’s total compensation and the appropriate goals for each in the year to come. However, the OCC is not bound by his recommendations.
Other than the Chief Executive Officer, no Named Executive Officer plays a decision-making role in determining the compensation of any other Named Executive Officer.
Role of AXA Equitable Human Resources
AXA Equitable Human Resources supports the OCC’s work on executive compensation matters and is responsible for many of the organizational and administrative tasks that underlie the compensation review and determination process and making presentations on various topics. Human Resources’ efforts include, among other things:
evaluating the compensation data from peer groups, national executive pay surveys and other sources for the Named Executive Officers and other officers as appropriate;
gathering and correlating performance ratings and reviews for individual executive officers, including the Named Executive Officers;
reviewing executive compensation recommendations against appropriate market data and for internal consistency and equity; and
reporting to, and answering requests for information from, the OCC.
Human Resources officers also coordinate and share information with their counterparts at our ultimate parent company, AXA, and take part in its annual comprehensive review of the total compensation of executive officers, as described below in the section entitled “Executive Compensation Review.”
Role of Compensation Consultant
Towers Watson continues to be retained by AXA Equitable to serve as an executive compensation consultant. Towers Watson provides various services including advising AXA Equitable management on issues relating to AXA Equitable’s executive compensation practices and providing market information and analysis regarding the competitiveness of the Total Compensation Program.
During 2016, Towers Watson performed the following specific services for AXA Equitable management:
prepared a comparative review of the total compensation of Mr. Pearson against that received by chief executive officers at peer companies;
provided periodic updates on legal, accounting and other developments and trends affecting compensation and benefits generally and executive compensation specifically;
offered a competitive review of total compensation (including base salary, targeted and actual annual incentives, annualized value of long-term incentives, welfare and retirement benefits) against selected peer companies, covering specific groups of executive positions;
conducted a comprehensive review of the risk profile of AXA Equitable’s short-term and long-term incentive compensation plans, as well as certain wholesale distribution sales plans maintained by an AXA Equitable subsidiary;
prepared an independent director compensation study; and
assisted in analyzing general reports published by third party national compensation consultants on corporate compensation and benefits.
Although AXA Equitable management has full authority to approve all fees paid to Towers Watson, determine the nature and scope of its services, evaluate its performance and terminate its engagement, the OCC reviewed the services to be provided by Towers Watson in 2016 as well as the related fees. The total amount of fees paid to Towers Watson by AXA Equitable in 2016 for executive compensation services was approximately $95,000. The AXA Financial Group may also pay fees to Towers Watson from time to time for actuarial or other services unrelated to its compensation programs. AXA and other AXA affiliates may also pay fees to Towers Watson for various services. Specifically, AXA pays fees for services in connection with its Executive Compensation Review described below.
Executive Compensation Review
In addition to the foregoing processes, each year, AXA Human Resources conducts a comprehensive review of the total compensation paid to the top approximately 200 executives of AXA Group worldwide, including all the Named Executive Officers except Mr. Pearson since compensation of the members of AXA’s Management Committee is reviewed separately by the Compensation and Governance Committee of the AXA Board of Directors. The Management Committee participates in this review which focuses on each executive’s performance over the last year and the decisions made about the executive’s compensation in light of that performance. AXA Equitable Human Resources provides detailed information to AXA Human Resources in preparation for the review.
Use Of Competitive Compensation Data
Because AXA Equitable competes most directly for executive talent with large diversified financial services companies, AXA Equitable regards it as essential to regularly review the competitiveness of the Total Compensation Program for its executives to ensure that they are provided compensation opportunities that compare favorably with the levels of total compensation offered to similarly situated executives by peer companies. A variety of sources of compensation information are used to benchmark the competitive market for AXA Equitable executives, including the Named Executive Officers.
Primary Compensation Data Source
For all Named Executive Officers, AXA Equitable currently relies primarily on the Towers Watson U.S. Diversified Insurance Study of Executive Compensation for information to compare their total compensation to the total compensation reported for equivalent executive officer positions at peer companies. For the 2015 study (which was used in determining 2016 target compensation), the companies included:
|
| | | | |
AFLAC | | Lincoln Financial | | Principal Financial Group |
AIG | | Massachusetts Mutual | | Prudential Financial |
Allstate | | MetLife | | Securian Financial Group |
CIGNA | | Nationwide | | Sun Life Financial |
CNO Financial | | New York Life | | Thrivent Financial for Lutherans |
Genworth Financial | | Northwestern Mutual | | TIAA-CREF |
Guardian Life | | OneAmerica Financial Partners | | Transamerica |
Hartford Financial Services | | Pacific Life | | Unum Group |
John Hancock | | Phoenix Companies | | USAA |
| | | | Voya Financial Services |
Other Compensation Data Sources
The above U.S. compensation data source is supplemented with additional information from general surveys of corporate compensation and benefits published by various national compensation consulting firms. AXA Equitable also participates in surveys conducted by Mercer, McLagan Partners, Towers Watson and LOMA Executive Survey to benchmark both the executive and non-executive compensation programs.
All these information sources are employed to measure and compare actual pay levels not only on a total compensation basis but also by breaking down the Total Compensation Program component by component to review and compare specific compensation elements as well as the particular mixes of fixed versus variable, short-term versus long-term and cash versus equity-based compensation at peer companies. This information, as collected and reviewed by Human Resources, is submitted to the OCC for review and discussion.
Pricing Philosophy
AXA Equitable’s compensation practices are designed with the aid of the market data to set the total target compensation of each Named Executive Officer at the median for total compensation with respect to the pay for comparable positions at peer companies. The analysis takes into account certain individual factors such as the specific characteristics and responsibilities of a particular Named Executive Officer’s position as compared to similarly situated executives at peer companies. Differences in the amounts of total compensation for the Named Executive Officers in 2016 resulted chiefly from differences in each executive’s level of responsibilities, tenure, performance and appropriate benchmark data as well as general considerations of internal consistency and equity.
Components Of The Total Rewards Program
The Total Rewards Program for the Named Executive Officers consists of six components. These components include the three components of the Total Compensation Program (i.e., base salary, short-term incentive compensation and equity-based awards) as well as: (i) retirement, financial protection and other compensation and benefit programs, (ii) severance and change-in-control benefits and (iii) perquisites.
Base Salary
The primary purpose of base salary is to compensate each Named Executive Officer fairly based on the position held, the Named Executive Officer’s career experience, the scope of the position’s responsibilities and the Named Executive Officer’s own performance, all of which are reviewed with the aid of market survey data. Using this data, a 50th percentile pricing philosophy is maintained, comparing base salaries against the median for comparable salaries at peer companies, unless exceptional conditions require otherwise (for example, a base salary may include an additional amount in lieu of a housing or education allowance) or a
Named Executive Officer’s experience and tenure warrant a lower initial salary with an adjustment to market over time. Once set, base salaries for the Named Executive Officers are typically not increased, except to reflect a change in job responsibility, a sustained change in the market compensation for the position or a market adjustment for a Named Executive Officer whose initial base salary was set below the 50th percentile.
Mr. Pearson is the only Named Executive Officer with an employment agreement. Under this agreement, Mr. Pearson’s employment will continue until he is age 65 unless the employment agreement is terminated earlier by either party on 30 days’ prior written notice. Mr. Pearson is entitled to a minimum rate of base salary of $1,225,000 per year, except that his rate of base salary may be decreased in the case of across-the-board salary reductions similarly affecting all AXA Equitable officers with the title of Executive Director or higher.
Mr. Hattem’s annual rate of base salary was increased in 2016 by $50,000 to reflect a sustained change in market compensation and by an additional $9,000 (for a total base salary increase of $59,000) to offset the elimination of a fringe benefit. Mr. Healy’s annual rate of base salary was increased in 2016 by $25,000 to reflect a sustained change in market compensation. None of the Named Executive Officers other than Mr. Hattem or Mr. Healy received an increase in their annual rate of base salary in 2016.
The amount of base salary earned by each Named Executive Officer in 2016 was:
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| | | |
| Named Executive Officer | Base Salary |
|
| Mr. Pearson | $ | 1,250,744 |
|
| Mr. Malmstrom | $ | 658,228 |
|
| Mr. Winikoff | $ | 332,950 |
|
| Mr. Hattem | $ | 599,893 |
|
| Mr. Healy | $ | 395,090 |
|
| Ms. Ritchey | $ | 600,495 |
|
| Ms. Brown | $ | 382,749 |
|
The base salaries earned by the Named Executive Officers in 2016, 2015 and 2014 are reported in the Summary Compensation Table included in this Item 11.
Short-Term Incentive Compensation Program
Annual variable cash awards for the Named Executive Officers are available under The AXA Equitable Short-Term Incentive Compensation Program (the “STIC Program”).
The purpose of the STIC Program is to:
align incentive awards with corporate strategic objectives and reward participants based on both company and individual performance;
enhance the performance assessment process with a focus on accountability;
establish greater compensation differentiation based on performance;
provide competitive total compensation opportunities; and
attract, motivate and retain top performers.
The STIC Program awards are typically paid in March of each year, following review of each participant’s performance and achievements over the course of the preceding fiscal year. Awards can vary from year to year, and differ by participant, depending primarily on the business and operational results of AXA Financial Life and Savings Operations, as measured by the performance objectives under the STIC Program with a discretionary adjustment as described below under “Discretionary Adjustment by Management Committee,” as well as the participant’s individual contributions to those results. No individual is guaranteed any award under the STIC Program, except for certain limited guarantees for new hires. For example, Mr. Winikoff, who joined the company in 2016, was guaranteed a minimum STIC Program award of $900,000 for 2016.
Individual Targets
Initially, individual award targets are assigned to each STIC Program participant based on evaluations of competitive market data for his or her position. These individual award targets are reviewed each year and may be increased or decreased, but generally remain constant from year to year unless there has been a significant change in the level of the participant’s responsibilities or a
proven and sustained change in the market compensation for the position. For example, Mr. Hattem’s STIC Program award target increased by $50,000 in 2016 due to a sustained change in the market compensation for the position.
STIC Program Pool
All the money available to pay STIC Program awards to Senior Executive Directors of AXA Equitable comes from, and is limited by, a cash pool (the “Executive STIC Pool”) from which the awards are paid. The size of this pool is determined each year by a formula under which the sum of all the individual award targets established for all the Executive STIC Pool participants for the year is multiplied by a funding percentage (the “Funding Percentage”). The Funding Percentage is determined by combining the individual performance percentages for AXA Financial Life and Savings Operations (weighted 90%) and AXA Group (weighted 10%) which measure their performance against certain financial and other targets.
After the performance percentage for AXA Financial Life and Savings Operations is determined, it may be adjusted positively or negatively by the Management Committee, as described below, before being combined with the AXA Group performance percentage to arrive at the Funding Percentage.
Mr. Pearson’s STIC Program award is determined independently of the Executive STIC Pool and is based 20% on AXA Group’s performance (which reflects his broader range of performance responsibilities within AXA Group worldwide as a member of the Management Committee), 30% on the performance of AXA Financial Life and Savings Operations (measured in the same manner as for the Executive STIC Pool) and 50% on his individual performance.
The 2016 STIC Program awards for Mr. Malmstrom, Mr. Winikoff and Mr. Hattem were paid from the Executive STIC Pool for 2016. Since Mr. Healy was not a Senior Executive Director during 2016, his 2016 STIC Program award was paid from a cash pool from which the awards of all Executive and Managing Directors of AXA Equitable were paid (the “Director STIC Pool”). The size of this pool was determined by a formula under which the sum of all the individual award targets established for all the Director STIC Pool participants for the year was multiplied by the performance percentage for AXA Financial Life and Savings Operations, measured in the same manner as for the Executive STIC Pool.
Ms. Ritchey and Ms. Brown did not receive 2016 STIC Program awards since they terminated employment with AXA Equitable during 2016.
Performance Percentages
To determine the performance percentage for AXA Financial Life and Savings Operations, various performance objectives are established for AXA Financial Life and Savings Operations, and a target is set for each one. Each performance objective is separately subject to a 150% cap and a 50% cliff. For example, if a particular performance objective is weighted 15% for AXA Financial Life and Savings Operations, 15% will be added to the overall performance percentage for AXA Financial Life and Savings Operations if that target is met, regardless of AXA Financial Life and Savings Operations’ performance on its other objectives. If the target for that performance objective is exceeded, the amount added to the overall performance percentage for AXA Financial Life and Savings Operations will be increased up to a maximum of 22.5% (150% x 15%). If the target for the performance objective is not met, the amount added to the performance percentage will be decreased down to a threshold of 7.5% (50% x 15%). If performance is below the threshold for a performance objective, 0% will be added to AXA Financial Life and Savings Operations’ overall performance percentage.
AXA Financial Life and Savings Operations - The following grid presents the targets for each of the performance objectives used to measure the performance of AXA Financial Life and Savings Operations in 2016, along with their relative weightings. The performance objectives for AXA Financial Life and Savings Operations and their relative weightings are standardized for AXA Group life and savings companies in mature markets worldwide and, accordingly, are not measures calculated and presented in accordance with U.S. GAAP.
|
| | | | | |
| AXA Financial Life and Savings Operations Performance Objectives | Weighting | | Target (1) |
Underlying earnings(2) | 45.0 | % | | 879 |
|
Gross Written Premiums(3) | 20.0 | % | | 3,300 |
|
Return on Equity (Cash)(4) | 10.0 | % | | 17.1 | % |
Customer Centricity(5) | | | |
| Customer Experience Tracking | 20.0 | % | | 76.7 | % |
| Brand Preference Tracking | 5.0 | % | | 46.0 | % |
| |
(1) | All numbers other than those stated in percentages are in millions of U.S. dollars. |
| |
(2) | “Underlying earnings” means adjusted earnings excluding net capital gains or losses attributable to shareholders. “Adjusted earnings” means net income before the impact of exceptional and discontinued operations, certain integration and restructuring costs, goodwill and other related intangibles and profit or loss on financial assets accounted for under the fair value option and derivatives. Underlying earnings and adjusted earnings are measured using International Financial Reporting Standards (“IFRS”) since AXA uses IFRS as its principal method of accounting. Note that, in addition to the underlying earnings of AXA Financial Life and Savings Operations, this performance objective also includes the underlying earnings of AXA Corporation Solutions Life Reinsurance Company (an AXA Group affiliate that is managed by AXA Equitable personnel) and AXA Financial. |
| |
(3) | “Gross Written Premiums” means total premiums (first year premiums plus renewal premiums) for pure life insurance protection business. |
| |
(4) | “Return on Equity (Cash)” means the expected dividends to be paid to AXA divided by the average short-term economic capital. Short-term economic capital measures the portion of the available financial resources that could be lost in a year if a 1 in 200 year “shock” were to occur. |
| |
(5) | “Customer Centricity” is comprised of two components - Customer Experience Tracking and Brand Preference Tracking. Generally, Customer Experience Tracking measures customers’ level of satisfaction based on the responses received for a certain customer survey question. Negative responses are subtracted from positive responses to obtain a net satisfaction index. Brand Preference Tracking measures "intent to purchase" among clients who currently own a life insurance or annuity product based on the percentage of favorable responses received for certain customer survey questions. |
Since the performance objectives are meant to cover only the key performance indicators for a year, there are generally no more than five objectives. The performance objectives and their relative weightings are determined based on AXA’s strategy and focus and they may change from year to year as different metrics may become more relevant. Underlying earnings is generally the most highly weighted performance objective, however, reflecting AXA’s belief that it is the strongest indicator of performance for a year and should be the dominant metric to determine a STIC Program participant’s STIC Program award.
The 2016 STIC Program eliminated the Economic Expenses performance objective that was included in the 2015 STIC Program and weighted at 10%. Accordingly, an additional 5% weighting was added to each of the Underlying Earnings and Gross Written Premiums performance objectives. Also, Return on Capital was replaced by Return on Equity (Cash) since Return on Equity (Cash) is less market-driven and a better measurement of management performance.
For 2016, actual Underlying Earnings and Return on Equity (Cash) slightly exceeded target while actual Gross Written Premiums were slightly below target. The actual results for Brand Preference Tracking and Customer Experience Tracking exceeded target, with Brand Preference Tracking’s contribution to the overall performance percentage for AXA Financial Life and Savings Operations hitting its cap of 7.5%.
AXA Group -- AXA Group’s performance percentage is primarily based on underlying earnings per share (65%). Adjusted return on equity (15%) and customer experience tracking (20%) are also considered. For this purpose, “adjusted return on equity” means adjusted earnings (as defined above) divided by average shareholder’s equity excluding undated subordinated debt and other comprehensive income.
Discretionary Adjustment by the Management Committee
As stated above, the performance percentage for AXA Financial Life and Savings Operations may be adjusted by the Management Committee before being combined with AXA’s performance percentage to arrive at the Funding Percentage for the Executive STIC Pool. When making this adjustment, the Management Committee generally considers whether any uncontrollable factors such as market fluctuations may have unduly influenced AXA Financial Life and Savings Operations’ results with respect to the performance objectives listed above and may increase or decrease the performance percentage by 15%, subject to an overall cap
of 150% for the performance percentage. With respect to 2016, the Management Committee made a negative adjustment to the performance percentage to reflect its belief that market fluctuations unduly impacted the results for Customer Experience Tracking in a positive manner.
Individual Determinations
Once the Executive STIC Pool and Director STIC Pool are determined, they are allocated to the participants in the pool based on their individual performance and demonstrated leadership behaviors. As stated above, no participant is guaranteed his or her target award or any award under the STIC Program except for certain limited guarantees for new hires, such as Mr. Winikoff’s guarantee of a minimum STIC Program award of $900,000 for 2016.
The OCC reviewed the performance of each Named Executive Officer during 2016 as well as Management’s recommendations for each Named Executive Officer’s STIC Program award, except for Ms. Brown and Ms. Ritchey since they terminated employment with AXA Equitable in 2016. Based on its subjective determination of each Named Executive Officer’s performance, the OCC made its recommendations as to the maximum STIC Program award for each Approval Named Executive Officer to the AXA Equitable Board of Directors and recommended the amount of the STIC Program award to be paid to Mr. Healy to Mr. Pearson. The AXA Equitable Board of Directors approved the final maximum award amounts for the Approval Named Executive Officers and delegated authority to the Chief Executive Officer of AXA to determine the final award amount for Mr. Pearson and to Mr. Pearson to determine the final award amount for the other Approval Named Executive Officers.
In making its recommendation for Mr. Winikoff, the OCC took into account that his guaranteed minimum STIC Program award of $900,000 for 2016 was based on his annual STIC Program award target without any pro-ration to reflect his half year of service. For the other Named Executive Officers, the OCC took into account the factors that it deemed relevant, including the following accomplishments achieved in 2016 by the Named Executive Officers and the Funding Percentage. Since the Named Executive Officers are responsible for the success of each of AXA Equitable, AXA Financial and AXA Financial Life and Savings Operations, the OCC considered all related 2016 accomplishments. The OCC also consider the Named Executive Officers’ contribution to the AXA Group worldwide. The accomplishments and contributions considered included:
|
| |
Executive | Accomplishments |
Mr. Pearson | •
Drove strong 2016 performance of AXA Financial Group, meeting or exceeding all goals for earnings, productivity, cash return on equity, capital management, customer satisfaction and risk management.•
Drove the company’s strategy, including overseeing the successful development of plans to meet AXA’s Ambition 2020 goals and the company’s role in influencing legal and regulatory developments such as the Department of Labor fiduciary rule and the NAIC reserve and capital framework.•
Implemented executive management changes and restructured the AXA Equitable Executive Committee, including adding a Chief Transformation Officer and Head of In-Force Business to better position the company for the execution of its strategic plan.•
Continued to set a strong tone at the top with respect to workplace and diversity issues, resulting in AXA Equitable receiving certification as a “Great Place to Work” for the first time by an independent workplace authority and a 100% rating by the Human Rights Campaign Foundation’s Corporate Equality Index for the fourth year in a row.•
Broadened personal visibility with employees and field force by instituting a program of leadership roundtables, CEO dialogues and branch visits. Also raised the profile of AXA in the industry through activities in industry groups.•
Served as an influential member of AXA’s Management Committee and implemented and chaired a new executive committee for AXA companies in the US, identifying synergies and cost-saving opportunities and sharing best practices. |
Mr. Malmstrom | •
Actively managed capital including reducing debt to AXA Group and delivering AXA Equitable dividends of over $1 billion while ensuring capital and solvency levels remained in excess of risk tolerance levels.•
Actively managed assets, including implementing a number of yield enhancement initiatives for the General Account and the hedging of separate account fee exposure to domestic equity.•
Successfully led the company’s efficiency efforts, including sponsoring an efficiency task force which exceeded 2016 savings targets and identifying action plans to meet AXA’s Ambition 2020 savings targets.•
Successfully led the strategic planning process, providing insight on margin and revenue streams for each business area and identifying mitigating actions to close the gap to targets.•
Led local efforts to shape positive investor and rating agency perceptions for AXA Group which were well-received.•
Played key role in the company’s and the industry’s efforts related to the NAIC reserve and capital framework. |
Mr. Hattem | •
Provided strong leadership, oversight and team support in connection with a decisive victory in the Sivollela case, a high-profile excessive fee litigation case closely watched by the mutual fund industry.•
Successfully led company efforts with respect to several significant regulatory developments that required analysis, initiatives to influence rule-making and compliance program development, including the Department of Labor fiduciary rule.•
Developed effective controls in response to dynamic legal and regulatory environment and managed relationship with key regulators such as the SEC, FINRA and the New York State Department of Financial Services.•
Effectively oversaw all legal work related to key corporate initiatives such as the increased level of investment and hedging programs and the continued expansion of the proprietary fund complex while containing related outside counsel costs.•
Acted as key advisor to Mr. Pearson throughout Board and executive management changes and restructure of the AXA Equitable Executive Committee.•
Actively developed leaders in the Law Department, enabling internal promotions, and recruited high quality talent to fill open positions while furthering our diversity goals.•
Sponsored the law department’s well-received Cyber Security Conference which brought together leading cyber security talent from a variety of companies. |
Mr. Healy | •
Delivered the IT Agile Transformation Program resulting in significant productivity savings.•
Successfully implemented new employee benefits platform using cloud services and innovative technology to differentiate the company in the marketplace•
Continued strengthening the company’s IT security practices, including alignment with industry frameworks.•
Actively led the fraud response technology team and delivered the long-term strategy for an organizational fraud hub.•
Achieved highest employee engagement survey scores for AXA IT organizations worldwide and top scores in the AXA Financial Group.•
Recognized as a leader in the implementation of the AXA group IT strategy across all projects and programs. |
No specific weight was assigned to any particular factor and all were evaluated in the aggregate to arrive at the recommended STIC Program award for each of the Named Executive Officers. Mr. Malmstrom and Mr. Hattem, who were paid their STIC Program awards from the Executive STIC Pool, received a percentage of their STIC Program award target that was approximately equal and greater than the Funding Percentage for the Executive STIC Pool, respectively. Mr. Pearson received a STIC Program award equal to approximately 102% of his STIC Program award target. Mr. Healy, who was paid his STIC Program award from the Director STIC Pool, received a percentage of his STIC Program award target that was greater than the performance percentage for AXA Financial Life and Savings Operations. Mr. Winikoff received his guaranteed minimum STIC Program award.
The 2016 STIC Program award targets and actual STIC Program awards for the Named Executive Officers (other than Mr. Ritchey and Ms. Brown who terminated employment in 2016) were:
|
| | | | | | |
| Named Executive Officer | Target Award | Actual Award |
| Mr. Pearson | $ | 2,128,400 |
| $ | 2,164,000 |
|
| Mr. Malmstrom | $ | 800,000 |
| $ | 850,000 |
|
| Mr. Winikoff | $ | 900,000 |
| $ | 900,000 |
|
| Mr. Hattem | $ | 650,000 |
| $ | 750,000 |
|
| Mr. Healy | $ | 350,000 |
| $ | 402,000 |
|
The STIC Program awards and bonuses earned by the Named Executive Officers in 2016, 2015 and 2014 are reported in the Summary Compensation Table included in this Item 11.
Equity-Based Awards
The value of the equity-based awards is linked to the performance of AXA’s stock. The purpose of the equity-based awards is to:
align strategic interests of award recipients with those of our ultimate parent and shareholder, AXA;
provide competitive total compensation opportunities;
focus on achievement of medium-range and long-term strategic business objectives; and
attract, motivate and retain top performers.
Annual equity-based awards for eligible employees, including the Named Executive Officers, are available under the umbrella of AXA’s global equity program. Equity-based awards may also be granted from time to time to executive officers outside of AXA’s global equity program as part of a sign-on package or as a retention vehicle.
Annual Awards Process
Annual equity-based awards under AXA’s global equity program are subject to the oversight of the AXA Board of Directors, which is authorized to approve all annual equity programs prior to their implementation and to approve all individual grants. The AXA Board of Directors also sets the size of the equity pool each year, after considering the amounts authorized by shareholders for equity-based awards (AXA’s shareholders authorize a global cap for equity-based awards every three to four years) and the recommendations of chief executive officers or boards of directors of affiliates worldwide on the number of stock option and other grants for the year. The pools are allocated annually among AXA Group affiliates based on each affiliate’s contribution to AXA Group’s financial results during the preceding year and with consideration for specific local needs (e.g., market competitiveness, consistency with local practices, group development).
The AXA Board of Directors sets the mix of equity-based awards for individual grants, which is standardized through AXA Group worldwide. Since 2004, there has been a decreasing reliance on stock options in equity-based awards. For example, in 2016, equity grants were awarded entirely in performance shares at the senior and junior employee levels. Executive officers have continued to receive a portion of their grant in stock options, however, since stock options are a long-term award and AXA believes that executive officers are required to have a more significant long-term focus than senior or junior employees.
Each Named Executive Officer is eligible to receive an annual equity-based award. Individual equity-based award targets are assigned to each of the Named Executive Officers other than Mr. Pearson based on evaluations of competitive market data for his or her position. These individual award targets are reviewed each year and may be increased or decreased, but generally remain constant from year to year unless there has been a significant change in the level of the Named Executive Officer’s responsibilities or a proven and sustained change in the market compensation for the position. For example, Mr. Hattem’s equity-based award target increased in 2016. This increase will apply to Mr. Hattem’s annual equity-based award granted in 2017. For Mr. Pearson, his equity-based award target is based on his actual award for the prior year.
Each year, the OCC submits recommendations to the AXA Board of Directors with respect to annual equity-based awards for the Named Executive Officers, taking into account the available equity pool allocation and based on a review of each officer’s potential future contributions, consideration of the importance of retaining the officer in his or her current position and a review of competitive market data relating to equity-based awards for similar positions at peer companies, as described above in the section entitled, “Use of Competitive Compensation Data.” The AXA Board of Directors approves the individual grants as it deems appropriate.
2016 Annual Award Grants
Each Named Executive Officer other than Mr. Winikoff received an equity-based award grant on June 6, 2016. For the Named Executive Officers other than Mr. Healy, these grants involved a mix of two components: (1) AXA ordinary share options granted under the AXA Stock Option Plan and (2) performance shares granted under the 2016 Performance Share Plan. Mr. Healy’s equity-based award grant consisted solely of performance shares.
The awards to the Named Executive Officers were granted using U.S. dollar values. The U.S. dollar values for the Named Executive Officers other than Mr. Healy were allocated between stock options and performance shares in accordance with the mix determined by the AXA Board of Directors. For this purpose, the value of the stock options and performance shares granted were determined using a Black-Scholes pricing methodology which was based on assumptions which differ from the assumptions used in determining an option’s or performance share’s grant date fair value reflected in the Summary Compensation Table which is based on FASB ASC Topic 718.
The amounts granted to the Named Executive Officers were as follows:
|
| | | | |
| Named Executive Officer | Stock Options |
| Performance Shares |
|
| Mr. Pearson | 186,069 |
| 106,326 |
|
| Mr. Malmstrom | 56,484 |
| 32,277 |
|
| Mr. Hattem | 60,016 |
| 34,294 |
|
| Mr. Healy | — |
| 16,782 |
|
| Ms. Ritchey | 42,362 |
| 24,208 |
|
| Ms. Brown | 21,181 |
| 12,104 |
|
Since he began his employment with AXA Equitable after the annual equity-based award grant date for 2016, Mr. Winikoff received a sign-on equity-based award grant of restricted stock units in lieu of a grant of stock options and performance shares as described below in “2016 One-Time Awards.”
Ms. Ritchey and Ms. Brown each forfeited their 2016 performance shares grant due to their termination of employment in 2016.
2016 Stock Option Award Grants
The stock option awards granted to the Named Executive Officers on June 6, 2016 have a 10-year term and a vesting schedule of five years, with one-third of the grant vesting on each of the third, fourth and fifth anniversaries of the grant, provided that the last third will vest on June 6, 2021 only if the AXA ordinary share performs at least as well as the Stoxx Insurance Index ("SXIP Index") over a specified period of at least three years. This performance condition applies to all of Mr. Pearson’s options. The exercise price for the options is 21.52 euro, which was the average of the closing prices for the AXA ordinary share on Euronext Paris SA over the 20 trading days immediately preceding June 6, 2016.
In the event of a Named Executive Officer’s retirement, the stock options continue to vest and may be exercised until the end of the term, except in the case of misconduct. Accordingly, since Mr. Hattem and Mr. Pearson are currently eligible to retire, these stock options will not be forfeited due to any service condition.
2016 Performance Share Award Grants
A performance share is a “phantom” share of AXA stock that, once earned and vested, provides the right to receive an AXA ordinary share at the time of payment. Performance shares are granted unearned. Under the 2016 Performance Shares Plan, the number of shares that is earned is determined at the end of a three-year performance period, starting on January 1, 2016 and ending on December 31, 2018, by multiplying the number of shares granted by a performance percentage that is determined as described below. If no dividend is proposed for payment by the AXA Board of Directors to AXA’s shareholders for 2016 or 2017 or 2018,
the performance percentage for the grant will be divided in half. The performance shares granted to the Named Executive Officers on June 6, 2016 have a cliff vesting schedule of four years.
The performance percentage for the 2016 Performance Share Plan initially will be determined based: (a) 40% on AXA Group’s performance with respect to adjusted earnings per share, (b) 50% on AXA Financial Life and Savings Operations’ performance with respect to adjusted earnings and underlying earnings (each weighted 50%) and (c) 10% on AXA Group’s score on the DJSI World, a Dow Jones sustainability index which tracks the performance of the world’s sustainability leaders. A positive or negative adjustment of 5% will then be made to the performance percentage based on AXA Group’s relative performance against a selection of its peers with respect to total shareholder return. The components of the performance percentage and their targets are determined by the AXA Board of Directors based on their review of AXA's strategic objectives, market practices and regulatory changes.
Generally, if performance targets are met, 100% of the performance shares initially granted is earned. Performance that exceeds the targets results in increases in the number of shares earned, subject to a cap of 130% of the initial number of shares. Performance that falls short of targets results in a decrease in the number of shares earned with a possible forfeiture of all shares. Since AXA uses IFRS as its principal method of accounting, AXA Group’s adjusted earnings per share and AXA Financial Life and Savings Operations’ adjusted earnings and underlying earnings are calculated using IFRS. Accordingly, they are not measures calculated and presented in accordance with U.S. GAAP.
The settlement of 2016 performance shares will be made in AXA ordinary shares on June 6, 2020. The 2016 plan provides that, in the case of retirement, a participant is treated as if he or she continued employment until the settlement date. Accordingly, Mr. Hattem and Mr. Pearson will still receive a payout under this plan if they choose to retire prior to the end of the vesting period.
2016 One-Time Awards
On July 5, 2016, Mr. Winikoff received a sign-on equity-based grant of 84,611 restricted stock units (“RSUs”). These RSUs will vest ratably over a four-year period and be paid out in cash within 30 days after the vesting date. This grant was approved by the OCC and the Board of Directors.
Detailed information on the RSU, stock option and performance share grants for each of the Named Executive Officers in 2016 is reported in the 2016 Grants of Plan-Based Awards Table included in this Item 11.
2016 Payouts from Prior Year Awards
In 2016, certain Named Executive Officers received the payout of their performance shares under the 2013 Performance Share Plan. The 2013 Performance Share Plan was similar to the 2016 Performance Share Plan except that 100% of the shares earned were vested after three years, on March 22, 2016. Also, AXA Financial Life and Savings Operations’ performance over a two-year performance period (i.e., January 1, 2013 through December 31, 2015) counted for two-thirds and AXA Group’s performance over the same period counted for one-third toward the performance percentage for that plan. AXA Group’s performance was based on net income per share while AXA Financial Life and Savings Operations’ performance was based on net income (weighted 50%) and underlying earnings (weighted 50%). The performance percentage that was ultimately achieved under the plan was 119.58%, based on AXA Financial Life and Savings Operations’ performance of 130% and AXA Group’s performance of 98.74%.
On March 16, 2012, eligible AXA Group employees worldwide, including certain of the Named Executive Officers, were each granted 50 AXA miles. AXA miles were “phantom” shares of AXA stock that were eligible to be converted to actual AXA ordinary shares at the end of a four-year vesting period. 25 of the AXA miles granted in 2012 were subject to a performance condition requiring that at least one of the following two metrics must have improved in 2012 in order for them to convert to actual shares: AXA’s underlying earnings per share (1.57 euro in 2011) or AXA’s customer scope index (79.3 in 2011). Since this performance condition was met, all 50 AXA miles vested on March 16, 2016.
Detailed information on the payouts of 2013 performance shares and 2012 AXA miles in 2016 is reported in the 2016 Option Exercises and Stock Vested Table included in this Item 11.
Other Compensation and Benefit Programs
AXA Equitable believes that a comprehensive benefits program which offers long-term financial support and security for all employees plays a critical role in attracting and retaining high caliber executives. Accordingly, all employees, including the Named Executive Officers, are offered a benefits program that includes group health and disability coverage, group life insurance and various deferred compensation and retirement benefits. In addition, as discussed below, AXA Equitable offers certain benefit programs for executives that are not available to non-executive employees. The overall program is periodically reviewed to ensure
that the benefits it provide continue to serve business objectives and remain cost-effective and competitive with the programs offered by large diversified financial services companies.
Qualified Retirement Plans
AXA Equitable believes that qualified retirement plans encourage long-term service. Accordingly, the following qualified retirement plans are offered to eligible employees, including the Named Executive Officers:
AXA Equitable 401(k) Plan (the “401(k) Plan”)
AXA Equitable sponsors the 401(k) Plan, a tax-qualified defined contribution plan, for its eligible employees, including the Named Executive Officers. Eligible employees may contribute to the 401(k) Plan on a before tax, after-tax, or Roth 401(k) basis (or any combination of the foregoing), up to plan and tax law limits. The 401(k) Plan also provides participants with the opportunity to earn a discretionary profit sharing contribution and a company contribution. The discretionary profit sharing contribution for a calendar year is based on company performance for that year and ranges from 0% to 4% of annual eligible compensation (subject to tax law limits). Any contribution for a calendar year is expected to be made in the first quarter of the following year. A profit sharing contribution of 1% of annual eligible compensation is expected to be made for the 2016 plan year. The company contribution for a calendar year is based on the following formula and is subject to tax law limits: (i) 2.5% of eligible compensation up to the Social Security Wage Base ($118,500 in 2016) plus, (ii) 5.0% of eligible compensation in excess of the Social Security Wage Base, up to the qualified plan compensation limit ($265,000 in 2016).
AXA Equitable Retirement Plan (the “Retirement Plan”)
AXA Equitable sponsors the Retirement Plan, a tax-qualified defined benefit plan for eligible employees which was frozen effective December 31, 2013. The Retirement Plan provides for retirement benefits upon reaching age sixty-five and has provisions for early retirement, death benefits and benefits upon termination of employment for vested participants. It has a three-year cliff-vesting schedule. Mr. Pearson, Mr. Hattem and Mr. Healy participated in the plan prior to its freeze.
Prior to its freeze, the Retirement Plan provided a cash balance benefit whereby AXA Equitable established a notional account in the name of each Retirement Plan participant. The notional account was credited with deemed pay credits equal to 5% of eligible compensation up to the Social Security Wage Base plus 10% of eligible compensation above the Social Security Wage Base up to the qualified plan compensation limit. These notional accounts continue to be credited with deemed interest credits.
For certain grandfathered participants, the Retirement Plan provides benefits under a traditional defined benefit formula based on final average pay, estimated Social Security benefits and years of service. None of the Named Executive Officers are grandfathered participants.
Excess Plans
AXA Equitable believes that excess plans are an important component of competitive market-based compensation in both its peer group and generally. Accordingly, the following excess plan benefits are offered to eligible employees, including the Named Executive Officers:
Excess 401(k) Contributions
AXA Equitable provides excess 401(k) contributions for participants in the 401(k) Plan with eligible compensation in excess of the qualified plan compensation limit. These contributions are equal to 10% of the participant’s (i) eligible compensation in excess of the qualified plan compensation limit and (ii) voluntary deferrals to the AXA Equitable Post-2004 Variable Deferred Compensation Plan for Executives for the applicable year, and are made to accounts established for participants under the AXA Equitable Post-2004 Variable Deferred Compensation Plan for Executives. All the Named Executive Officers were eligible to receive excess 401(k) contributions in 2016.
AXA Equitable Excess Retirement Plan (the “Excess Plan”)
AXA Equitable sponsors the Excess Plan, a nonqualified defined benefit plan for eligible employees which was frozen effective December 31, 2013. Prior to its freeze, the Excess Plan allowed eligible employees, including Mr. Pearson, Mr. Hattem and Mr. Healy, to earn retirement benefits in excess of what was permitted under the Code with respect to the Retirement Plan. Specifically, the Excess Plan permitted participants to accrue and be paid benefits that they would have earned and been paid under the Retirement Plan but for certain Code limits.
Voluntary Non-Qualified Deferred Compensation Plan
AXA Equitable believes that compensation deferral is a cost-effective method of enhancing the savings of executives. Accordingly, AXA Equitable sponsors the following plans:
The AXA Equitable Post-2004 Variable Deferred Compensation Plan for Executives (the “Post-2004 Plan”)
AXA Equitable sponsors the Post-2004 Plan which allows eligible employees to defer the receipt of certain compensation, including base salary and STIC Program awards. The amount deferred is credited to a bookkeeping account established in the participant’s name and participants may choose from a range of nominal investments according to which their accounts rise or decline. Participants annually elect the amount they want to defer, the date on which payment of their deferrals will begin and the form of payment. In addition, as mentioned above, excess 401(k) contributions are made to accounts established for eligible employees under the Post-2004 Plan.
The AXA Equitable Variable Deferred Compensation Plan for Executives (the “VDCP”)
The VDCP is the predecessor plan to the Post-2004 Plan. Like the Post-2004 Plan, it allowed eligible employees to defer the receipt of compensation. To preserve its grandfathering from the provisions of Internal Revenue Code Section 409A (“Section 409A”), the VDCP was frozen in 2004 so that no amounts earned or vested after 2004 may be deferred under the VDCP. Section 409A imposes stringent requirements which covered nonqualified deferred compensation arrangements must meet to avoid the imposition of additional taxes, including a 20% additional income tax, on the amounts deferred under the arrangements.
Financial Protection
The AXA Equitable Executive Survivor Benefits Plan (the “ESB Plan”)
AXA Equitable sponsors the ESB Plan which offers financial protection to a participant’s family in the case of his or her death. Eligible employees may choose up to four levels of coverage and the form of benefit to be paid at each level. Each level provides a benefit equal to one times the participant’s eligible compensation and offers different coverage choices. Generally, the participant can choose between a life insurance death benefit and a deferred compensation benefit payable upon death at each level.
For additional information on 401(k) Plan benefits and excess 401(k) contributions for the Named Executive Officers as well as amounts voluntarily deferred by Mr. Hattem under the Post-2004 Plan and the VDCP, see the Summary Compensation Table and Nonqualified Deferred Compensation Table included in this Item 11. For additional information on Retirement Plan, Excess Plan and ESB Plan benefits for the Named Executive Officers, see the Pension Benefits Table included in this item 11.
Severance and Change in Control Benefits
AXA Equitable maintains severance pay arrangements to provide temporary income to all employees following an involuntary termination of employment. The Named Executive Officers are also eligible for additional severance benefits as described below. In addition, AXA Equitable offers certain limited change in control benefits to provide a moderate level of protection to employees to help reduce anxiety that may accompany a change in control.
The AXA Equitable Severance Benefit Plan (the “Severance Plan”)
AXA Equitable sponsors the Severance Plan to provide severance benefits to eligible employees whose jobs are eliminated for specific defined reasons. The Severance Plan generally bases severance payments to eligible employees on length of service or base salary. Payments are capped at 52 weeks of base salary or, in some cases, $300,000. To obtain benefits under the Severance Plan, participants must execute a general release and waiver of claims against AXA Equitable and affiliates. For Named Executive Officers, the general release and waiver of claims typically includes non-competition and non-solicitation provisions.
The AXA Equitable Supplemental Severance Plan for Executives (the “Supplemental Severance Plan”)
AXA Equitable sponsors the Supplemental Severance Plan for officers at the level of Executive Director or above. The Supplemental Severance Plan is intended solely to supplement, and is not duplicative of, any severance benefits for which an executive may be eligible under the Severance Plan. The Supplemental Severance Plan provides that eligible executives will receive, among other benefits:
Severance payments equal to 52 weeks’ of base salary, reduced by any severance payments for which the executive may be eligible under the Severance Plan;
Additional severance payments equal to the greater of:
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◦ | The most recent short-term incentive compensation award paid to the executive; |
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◦ | The average of the three most recent short-term incentive compensation awards paid to the executive; and |
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◦ | The annual target short-term incentive compensation award for the executive for the year in which he or she receives notice of job elimination; |
An additional year of participation in the ESB Plan; and
A lump sum payment equal to the sum of: (a) the executive’s short-term incentive compensation for the year in which the executive receives notice of job elimination, pro-rated based on the number of the executive’s full calendar months of service in that year and (b) $40,000.
Mr. Pearson’s Employment Agreement.
Mr. Pearson waived the right to receive any benefits under the Severance Plan or the Supplemental Severance Plan. Rather, his employment agreement provides that, if his employment is terminated by AXA Equitable prior to his attaining age 65 other than for cause, excessive absenteeism or death, or Mr. Pearson resigns for “good reason,” Mr. Pearson will be entitled to certain severance benefits, including (i) severance pay equal to the sum of two years of salary and two times the greatest of: (a) Mr. Pearson’s most recent bonus, (b) the average of Mr. Pearson’s last three bonuses and (c) Mr. Pearson’s target bonus for the year in which termination occurred, (ii) a pro-rated bonus at target for the year of termination and (iii) a cash payment equal to the additional employer contributions that Mr. Pearson would have received under the 401(k) Plan and its related excess plan for the year of his termination if those plans provided employer contributions on his severance pay and all of his severance pay was paid in that year.
For this purpose, “good reason” includes a material reduction in Mr. Pearson’s duties or authority, the removal of Mr. Pearson from his positions, AXA Equitable requiring Mr. Pearson to be based at an office more than 75 miles from New York City, a diminution of Mr. Pearson’s titles, a material failure by the company to comply with the agreement’s compensation provisions, a failure of the company to secure a written assumption of the agreement by any successor company and a change in control of AXA Financial (provided that Mr. Pearson delivers notice of termination within 180 days after the change in control). The severance benefits are contingent upon Mr. Pearson releasing all claims against AXA Equitable and its affiliates and his entitlement to severance pay will be discontinued if he provides services for a competitor. Also, in the event of a termination of Mr. Pearson’s employment by AXA Equitable without cause or Mr. Pearson’s resignation due to a change in control, Mr. Pearson’s severance benefits will cease after one year if certain performance conditions are not met for each of the two consecutive fiscal years immediately preceding the year of termination.
Mr. Winikoff’s Severance Arrangement.
Mr. Winikoff’s severance arrangement with the company provides that, if Mr. Winikoff’s employment is terminated by the company without cause or by Mr. Winikoff for “good reason:”
any outstanding RSUs granted to Mr. Winikoff would immediately vest and be paid out in cash on their otherwise applicable payment dates and
he would be eligible to receive a payment equal to (i) two times his annual base salary plus his STIC Program award target for the year in which his employment is terminated, reduced by (ii) any severance pay for which he may be otherwise eligible under the Severance Plan or the Supplemental Severance Plan. This payment would be contingent on all other terms and conditions of the Severance Plan and Supplemental Severance Plan, including the execution of a general release and waiver of claims against AXA Equitable and affiliates.
For this purpose, “good reason” includes: (a) relocation of his position to a work site that is more than 35 miles away from 1290 Avenue of the Americas, New York City, (b) a material reduction in his compensation (other than in connection with, and substantially proportionate to, reductions by the company of the compensation of other similarly situated senior executives), (c) a material diminution in his duties, authority or responsibilities and (d) a material change in the lines of reporting such that he no longer reports to the company’s President and Chief Executive Officer.
Ms. Ritchey’s Separation Agreement
Ms. Ritchey entered into a separation agreement and general release with AXA EquitableOmitted pursuant to which she terminated employment on December 30, 2016. She will receive severance benefits in accordance with the Severance Plan and Supplemental Severance Plan as well as a lump sum payment of $1,285,877. Ms. Ritchey’s separation agreement and general release contains standard provisions relatedGeneral Instruction I to confidentiality, non-disparagement and non-solicitation.
Ms. Brown’s Separation Agreement
Ms. Brown entered into a separation agreement and general release with AXA Equitable pursuant to which she terminated employment on August 31, 2016. She received severance benefits in accordance with the Severance Plan and Supplemental Severance Plan as well as a lump sum payment of $1,180,821. Ms. Brown’s separation agreement and general release contains standard provisions related to confidentiality, non-disparagement and non-solicitation.
Change in Control Benefits
Change in control benefits are provided for stock options granted under the Stock Option Plan. Under that plan, if there is a change in control of AXA Financial, all stock options will become immediately exercisable for their term regardless of the otherwise applicable exercise schedule.
Mr. Pearson’s employment agreement also provides for change in control benefits as described above in “Mr. Pearson’s Employment Agreement.”
For additional information on severance and change in control benefits for the Named Executive Officers, see “Potential Payments Upon Termination of Change in Control” in this Item 11.
Perquisites
The Named Executive Officers receive limited perquisites. Specifically, each of the Named Executive Officers may use a car and driver for personal purposes from time to time and may occasionally bring spouses and guests on private aircraft flights otherwise being taken for business reasons. Also, financial planning and tax preparation services are provided for the Named Executive Officers to help ensure their peace of mind so that they are not unnecessarily distracted from focusing on the company’s business.
Pursuant to his employment agreement, Mr. Pearson is entitled to unlimited personal use of a car and driver, two business class trips to the United Kingdom per year with his spouse, expatriate tax services, a company car for his personal use, excess liability insurance coverage, and repatriation costs.
The incremental costs of perquisites for the Named Executive Officers during 2016 are included in the column entitled “All Other Compensation” in the Summary Compensation Table included in this Item 11.
Other Compensation Policies
Clawbacks
In the event an individual’s employment is terminated for cause, all stock options granted under the Stock Option Plan held by the individual are forfeited as of the date of termination. In addition, if an individual retires and induces others to leave the employment of an AXA affiliate, misuses confidential information learned while in the employ of AXA affiliate or otherwise acts in a manner that is substantially detrimental to the business or reputation of any AXA affiliate, all outstanding stock options held by the individual will be forfeited.
Share Ownership Policy
AXA Equitable does not have stock ownership guidelines. However, any executives who are subject to AXA’s stock ownership policy as members of AXA’s Management Committee are required to meet AXA’s requirements for holding AXA Stock. Those requirements are expressed as a multiple of base salary, with members of AXA’s Management Committee (such as Mr. Pearson) required to hold the equivalent of their base salary multiplied by two.
Derivatives Trading and Hedging Policies
The AXA Financial Group’s reputation for integrity and high ethical standards in the conduct of its affairs is of paramount importance to it. To preserve this reputation, all employees of the AXA Financial Group, including the Named Executive Officers, are subject to the AXA Financial Insider Trading Policy. This policy prohibits, among other items, all short sales of securities of AXA and its publicly-traded subsidiaries and any hedging of equity compensation awards (including stock option, performance unit, performance share or similar awards) or the securities underlying those awards. Members of AXA’s Management Committee must pre-clear with the AXA Group General Counsel any derivatives transactions with respect to AXA securities and/or the securities of other AXA Group publicly-traded subsidiaries (including AllianceBernstein).
Impact of Accounting and Tax Rules
Code Section 162(m) limits tax deductions relating to executive compensation of certain executives of publicly held companies. Because neither AXA Financial nor any of its subsidiaries within the Insurance Segment, including AXA Equitable, is deemed to be publicly held for purposes of Code Section 162(m), these limitations are not applicable to the executive compensation program described above.
AXA Equitable’s nonqualified deferred compensation arrangements that are subject to Section 409A are designed to comply with the requirements of Section 409A to avoid additional income taxes.
Accounting and tax impacts are also considered in the design of equity-based award programs.
COMPENSATION COMMITTEE REPORT
The members of the AXA Equitable Organization and Compensation Committee reviewed and discussed with management the Compensation Discussion and Analysis above and, based on such review and discussion, recommended its inclusion in this Form 10-K.
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Lorie A. Slutsky (Chair) | | Barbara Fallon-Walsh |
Bertram L. Scott | | Kristi A. Matus |
CONSIDERATION OF RISK MATTERS IN DETERMINING COMPENSATION
AXA Equitable has considered whether its compensation practices are reasonably likely to have a material adverse effect on AXA Equitable and determined that they do not. When conducting the analysis, AXA Equitable considered that its programs have a number of features that contribute to prudent decision-making and avoid an incentive to take excessive risk. The overall design and metrics of AXA Equitable’s incentive compensation program effectively balance performance over time, considering both company earnings and individual results with multi-year vesting and performance periods. AXA Equitable’s short-term incentive program further mitigates risk by permitting discretionary adjustments for both funding and granting purposes. AXA Equitable also considered that its general risk management controls, oversight of programs, award review and governance processes preclude decision-makers from taking excessive risk to achieve targets under the compensation plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the OCC during 2016 included: Ms. Slutsky, Ms. Fallon-Walsh, Ms. Matus and Mr. Scott. No member of the OCC has served as an officer or employee of AXA Equitable or its subsidiaries. During 2016, (a) none of our executive officers served as a member of the compensation committee of any entity for which a member of our Board served as an executive officer and (b) none of our executive officers served as a director of another entity, any of whose executive officers served on the OCC.
For additional information about the Organization and Compensation Committee, see “Directors, Executive Officers and Corporate Governance”.
SUMMARY COMPENSATION TABLE
The following table presents the total compensation of our Named Executive Officers for services performed for the AXA Financial Group for the years ended December 31, 2016, December 31, 2015, and December 31, 2014, except that no information is provided for years prior to 2016 for Mr. Winikoff, Mr. Healy, Ms. Ritchey and Ms. Brown since they were not Named Executive Officers in those years.
The amounts listed in this table as well as all other executive compensation tables reflect all payments made to the Named Executive Officers by AXA Equitable even though a portion of these costs may have been reimbursed by certain affiliates pursuant to various service agreements. The total compensation reported in the following table includes items such as salary and non-equity incentive compensation as well as the grant date fair value of performance shares, RSUs and stock options. The performance shares, RSUs and stock options may never become payable or may end up with a value that is substantially different from the value reported here. The amounts in the Total column do not represent “Total Compensation” as described in the Compensation Discussion and Analysis.
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| Name | | Fiscal Year | | Salary(1) | | Bonus(2) | | Stock Awards(3) | | Option Awards(4) | | Non-Equity Incentive Compensation(5) | | Change in Pension Value and Nonqualified Deferred Compensation Earnings(6) | | All Other Compensation(7) | | Total |
| Pearson, Mark | | 2016 | | $1,250,744 | | | | $2,010,449 | | $382,419 | | $2,164,000 | | $393,441 | | $389,201 | | $6,590,254 |
| Chairman, President and | | 2015 | | $1,250,744 | | | | $1,681,267 | | $261,309 | | $2,341,000 | | | | $573,100 | | $6,107,420 |
| Chief Executive Officer | | 2014 | | $1,247,637 | | | | $1,543,806 | | $357,095 | | $2,439,000 | | $1,514,357 | | $695,232 | | $7,797,127 |
| Malmstrom, Anders | | 2016 | | $658,228 | | | | $496,993 | | $116,089 | | $850,000 | | $280,596 | | $172,895 | | $2,574,801 |
| Senior Executive | | 2015 | | $658,228 | | | | $350,014 | | $61,295 | | $940,000 | | $22,125 | | $165,337 | | $2,196,999 |
| Director and Chief | | 2014 | | $658,228 | | | | $380,912 | | $96,383 | | $700,000 | | $22,498 | | $368,629 | | $2,226,650 |
| Financial Officer | | | | | | | | | | | | | | | | | | |
| Winikoff, Brian | | 2016 | | $332,950 | | | | $1,599,925 | | | | $900,000 | | | | $20,054 | | $2,852,929 |
| Senior Executive Director | | | | | | | | | | | | | | | | | | |
| and Head of US Life, | | | | | | | | | | | | | | | | | | |
| Retirement and Wealth Management | | | | | | | | | | | | | | | | | | |
| Hattem, Dave | | 2016 | | $599,893 | | | | $648,443 | | $123,348 | | $750,000 | | $238,250 | | $134,224 | | $2,494,158 |
| Senior Executive | | 2015 | | $551,331 | | 47,596 |
| | $429,728 | | $66,791 | | $720,000 | | $16,467 | | $159,859 | | $1,991,772 |
| Director and | | 2014 | | $545,578 | | | | $421,988 | | $98,216 | | $720,000 | | $916,770 | | $152,943 | | $2,855,495 |
| General Counsel | | | | | | | | | | | | | | | | | | |
| Healy, Michael | | 2016 | | $395,090 | | | | $258,405 | | | | $402,000 | | $162,425 | | $66,568 | | $1,284,488 |
| Senior Executive Director | | | | | | | | | | | | | | | | | | |
| and Chief Information Officer | | | | | | | | | | | | | | | | | | |
| Ritchey, Sharon | | 2016 | | $600,495 | | | | $372,749 | | $87,065 | | | | $182,141 | | $3,475,308 | | $4,717,758 |
| Senior Executive Director | | | | | | | | | | | | | | | | | | |
| and Chief Customer Officer | | | | | | | | | | | | | | | | | | |
| Brown, Priscilla | | 2016 | | $382,749 | | | | $186,374 | | $43,532 | | | | $269,361 | | $2,911,908 | | $3,793,924 |
| Senior Executive Director | | | | | | | | | | | | | | | | | | |
| and Chief Marketing Officer | | | | | | | | | | | | | | | | | | |
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(1) | The amounts in this column reflect actual salary paid in each year. |
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(2) | No bonuses were paid to the Named Executive Officers in 2016, 2015 or 2014 except that Mr. Hattem was paid a bonus in May 2015 to compensate him for the loss of stock options due to regulatory and other constraints prohibiting his exercise. |
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(3) | For Mr. Winikoff, this column reflects the grant date fair value of his sign-on RSU grant. For all other Named Executive Officers, the amounts reported in this column represent the aggregate grant date fair value of performance shares awarded in each year in accordance with FASB ASC Topic 718, and the assumptions made in calculating them can be found in Note 13 of the Notes to the Consolidated Financial Statements. The performance share grants were valued at target which represents the probable outcome at grant date. A maximum payout for the performance share grants, valued at the grant date fair value, would result in values of: |
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| | 2016 | 2015 | 2014 |
| Mr. Pearson | $ | 2,613,584 |
| $ | 2,185,653 |
| $ | 2,006,948 |
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| Mr. Malmstrom | $ | 646,091 |
| $ | 455,027 |
| $ | 495,186 |
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| Mr. Hattem | $ | 842,976 |
| $ | 558,656 |
| $ | 548,584 |
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| Mr. Healy | $ | 335,927 |
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| Ms. Ritchey | $ | 484,574 |
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| Ms. Brown | $ | 242,286 |
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The 2016 performance share grants as well as Mr. Winikoff’s sign-on RSU grant are described in more detail below in “Supplemental Information for Summary Compensation and Grants of Plan-Based Awards Tables.”
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(4) | The amounts reported in this column represent the aggregate grant date fair value of stock options awarded in each year in accordance with FASB ASC Topic 718, and the assumptions made in calculating them can be found in Note 13 of the Notes to the Consolidated Financial Statements. The 2016 stock option grants are described in more detail below in “Supplemental Information for Summary Compensation and Grants of Plan-Based Awards Tables.” |
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(5) | The amounts reported for 2016 are the awards paid in February 2017 to each of the Named Executive Officers based on their 2016 performance. The amounts reported for 2015 are the awards paid in February 2016 to each of the Named Executive Officers based on their 2015 performance. The amounts reported for 2014 are the awards paid in February 2015 to each of the Named Executive Officers based on their 2014 performance. |
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(6) | The amounts reported represent the increase in the actuarial present value of accumulated pension benefits for the Named Executive Officer. The Named Executive Officers did not have any above-market earnings on non-qualified deferred compensation in 2016, 2015 or 2014. For more information regarding the pension benefits for each Named Executive Officer, see the Pension Benefits as of December 31, 2016 Table below. |
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(7) | The following table provides additional details for the compensation information found in the All Other Compensation column. |
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| Name | | Auto(a) | | Excess Liability Insurance(b) | | Financial Advice(c) | | 401k Plan Contributions(d) | | Excess 401(k) Contributions(e) | Other Perquisites/ Benefits(f) | | Total |
| Pearson, Mark | 2016 | | $ | 11,469 |
| | $ | 8,110 |
| | $ | 24,220 |
| | $ | 12,938 |
| | $ | 332,464 |
| | | $ | 389,201 |
|
| | 2015 | | $ | 17,874 |
| | $ | 8,110 |
| | $ | 34,610 |
| | $ | 16,913 |
| | $ | 342,264 |
| $ | 153,329 |
| | $ | 573,100 |
|
| | 2014 | | $ | 21,124 |
| | $ | 4,820 |
| | $ | 26,630 |
| | $ | 16,575 |
| | $ | 342,253 |
| $ | 283,830 |
| | $ | 695,232 |
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| Malmstrom, Anders | 2016 | | $ | 333 |
| | | | $ | 25,980 |
| | $ | 12,938 |
| | $ | 133,323 |
| $ | 321 |
| | $ | 172,895 |
|
| | 2015 | | $ | 839 |
| | | | $ | 29,190 |
| | $ | 16,913 |
| | $ | 109,323 |
| $ | 9,072 |
| | $ | 165,337 |
|
| | 2014 | | $ | 399 |
| | | | $ | 22,375 |
| | | | | $ | 345,855 |
| | $ | 368,629 |
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| Winikoff, Brian | 2016 | | | | | | | | $ | 12,938 |
| | $ | 6,795 |
| $ | 321 |
| | $ | 20,054 |
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| Hattem, Dave | 2016 | | $ | 51 |
| | | | | | $ | 12,938 |
| | $ | 114,487 |
| $ | 6,748 |
| | $ | 134,224 |
|
| | 2015 | | $ | 6,157 |
| | | | $ | 17,524 |
| | $ | 16,913 |
| | $ | 109,558 |
| $ | 9,707 |
| | $ | 159,859 |
|
| | 2014 | | | | | | $ | 15,000 |
| | $ | 16,575 |
| | $ | 115,820 |
| $ | 5,548 |
| | $ | 152,943 |
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| Healy, Michael | 2016 | | | | | | | | $ | 12,938 |
| | $ | 53,309 |
| $ | 321 |
| | $ | 66,568 |
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| Ritchey, Sharon | 2016 | | | | | | $ | 18,925 |
| | $ | 12,938 |
| | $ | 98,339 |
| $ | 3,345,106 |
| | $ | 3,475,308 |
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| Brown, Priscilla | 2016 | | | | | | $ | 18,825 |
| | $ | 12,938 |
| | $ | 77,529 |
| $ | 2,802,616 |
| | $ | 2,911,908 |
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a. | Pursuant to his employment agreement, Mr. Pearson is entitled to the business and personal use of a dedicated car and driver. The personal use of this vehicle for 2016 was valued based on a formula considering the annual lease value of the vehicle, the compensation of the driver and the cost of fuel. The other Named Executive Officers may use cars and drivers for personal matters from time to time. The value for each executive’s car use is based on a similar formula taking into account the annual lease value of the vehicle and the compensation of the driver. |
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b. | AXA Equitable pays the premiums for excess liability insurance coverage for Mr. Pearson pursuant to his employment agreement. The amounts in this column reflect the actual amount of the premiums paid for each year. |
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c. | AXA Equitable pays for financial planning and tax preparation services for each of the Named Executive Officers. The amounts in this column reflect the actual amounts paid to the service provider for each year. |
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d. | This column includes the amount of any employer profit sharing contributions and company contributions received by each Named Executive Officer under the 401(k) Plan for 2016 ($2,650 for each applicable Named Executive Officer for the profit sharing contributions and $10,288 for each applicable Named Executive Officer for the company contributions). |
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e. | This column includes the amount of any excess 401(k) contributions made by the company to the Post-2004 Plan for each Named Executive Officer. |
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Mr. Malmstrom | $321 - cost related to having a guest accompany him to a company event |
Mr. Winikoff | $321 - cost related to having a guest accompany him to a company event |
Mr. Hattem | $503 - one month of parking
$6,245 - cost related to having a cost accompany him to company events
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Mr. Healy | $321 - cost related to having a guest accompany him to a company event |
Ms. Ritchey | $22,719 - payment for temporary housing related to relocation and tax gross-up related to that payment
$1,296,509 - severance pay under the Supplemental Severance Plan
$2,025,877 - lump sum payment under the Supplemental Severance Plan plus an additional lump sum paid upon separation
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Ms. Brown | $34,308 - payout of unused paid time off
$1,180,821 - severance pay under the Supplemental Severance Plan
$1,587,487 - lump sum payment under the Supplemental Severance Plan plus an additional lump sum paid upon separation
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2016 GRANTS OF PLAN-BASED AWARDS
The following table provides additional information about plan-based compensation disclosed in the Summary Compensation Table. This table includes both equity and non-equity awards granted during 2016.
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| | | | | | | | | | | | | |
| | | OCC Approval Date (1) | Estimated Future Payouts Under Non-Equity Incentive Plan Awards(2) | Estimated Future Payouts Under Equity Incentive Plan Awards(3) | All Other
Stock
Awards:
Number of
Shares of Stocks or Units (#) | All Other Option Awards: Number of Securities Underlying Options (#) | Exercise or Base Price of Option Awards(4) ($/Sh) | Closing Market Price on Date of Grant | Grant Date Fair Value of Stock and Option Awards(5) ($) |
| Name | Grant Date | Threshold ($) | Target ($) | Maximum ($) | Threshold (#) | Target (#) | Maximum (#) |
Pearson, Mark | | | $— | $2,128,400 | N/A | | | | | | | | |
| | 6/6/2016 | 2/18/2016 | | | | — | 186,069 | 186,069 | | | $24.00 | $24.76 | $382,419 |
| | 6/6/2016 | 2/18/2016 | | | | — | 106,326 | 138,224 | | | | | $2,010,449 |
| Malmstrom, Anders | | | $— | $800,000 | N/A | | | | | | | | |
| | 6/6/2016 | 2/18/2016 | | | | — | 18,828 | 18,828 | | 37,656 | $24.00 | $24.76 | $116,089 |
| | 6/6/2016 | 2/18/2016 | | | | — | 32,277 | 41,960 | | | | | $496,993 |
| Winikoff, Brian | | | $900,000 | $900,000 | N/A | | | | | | | | |
| | 6/6/2016 | 2/18/2016 | | | | — | | | | | N/A | N/A | |
| | 6/6/2016 | 2/18/2016 | | | | — | | | | | | | |
| | 7/5/2016 | | | | | | | | 84,611 | | | | $1,599,925 |
Hattem, Dave | | | $— | $650,000 | N/A | | | | | | | | |
| | 6/6/2016 | 2/18/2016 | | | | — | 20,004 | 20,004 | | 40,012 | $24.00 | $24.76 | $123,348 |
| | 6/6/2016 | 2/18/2016 | | | | — | 34,294 | 44,582 | | | | | $648,443 |
| Healy, Michael | | | $— | $350,000 | N/A | | | | | | | | |
| | 6/6/2016 | 2/18/2016 | | | | — | | | | | N/A | N/A | |
| | 6/6/2016 | 2/18/2016 | | | | — | 16,782 | 21,817 | | | | | $258,405 |
| Ritchey, Sharon | | | $— | $700,000 | N/A | | | | | | | | |
| | 6/6/2016 | 2/18/2016 | | | | — | 14,120 | 14,120 | | 28,242 | $24.00 | $24.76 | $87,065 |
| | 6/6/2016 | 2/18/2016 | | | | — | 24,208 | 31,470 | | | | | $372,749 |
| Brown, Priscilla | | | $— | $550,000 | N/A | | | | | | | | |
| | 6/6/2016 | 2/18/2016 | | | | — | 7,059 | 7,059 | | 14,122 | $24.00 | $24.76 | $43,532 |
| | 6/6/2016 | 2/18/2016 | | | | — | 12,104 | 15,735 | | | | | $186,374 |
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(1) | This column shows the date on which the OCC approved the recommendation of the grants to the AXA Board of Directors. |
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(2) | The target column shows the target award for 2016 for each Named Executive Officer under the STIC Program assuming the plan was 100% funded. There is no minimum or maximum award for any participant in this plan. The actual 2016 awards granted to the Named Executive Officers are listed in the Non-Equity Incentive Compensation column of the Summary Compensation Table. |
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(3) | The second row for each Named Executive Officer shows the stock options granted under the Stock Option Plan on June 6, 2016. The third row for each Named Executive Officer shows the performance shares granted under the 2016 Performance Share Plan on June 6, 2016. The fourth row for Mr. Winikoff reflects his sign-on RSU grant. |
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(4) | The exercise price for the stock options granted on June 6, 2016 is equal to the average of the closing prices for the AXA ordinary share on Euronext Paris SA over the 20 trading days immediately preceding June 6, 2016. For purposes of this table, the exercise price was converted to U.S. dollars using the euro to U.S. dollar exchange rate on June 5, 2016. |
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(5) | The amounts in this column represent the aggregate grant date fair value of stock options and performance shares granted in 2016 in accordance with FASB ASC Topic 718. The performance share grants were valued at target which represents the probable outcome at grant date. |
SUPPLEMENTAL INFORMATION FOR SUMMARY COMPENSATION AND GRANTS OF PLAN-BASED AWARDS TABLES
2016 Stock Option Award Grants
The stock option awards granted to the Named Executive Officers on June 6, 2016 have a 10-year term and a vesting schedule of five years, with one-third of the grant vesting on each of the third, fourth and fifth anniversaries of the grant, provided that the last third will vest on June 6, 2021 only if the AXA ordinary share performs at least as well as the SXIP Index over a specified period of at least three years. This performance condition applies to all of Mr. Pearson’s options. The exercise price for the options is 21.52 euro, which was the average of the closing prices for the AXA ordinary share on Euronext Paris SA over the 20 trading days immediately preceding June 6, 2016.
In the event of a Named Executive Officer’s retirement, the stock options continue to vest and may be exercised until the end of the term, except in the case of misconduct. Accordingly, since Mr. Hattem and Mr. Pearson are currently eligible to retire, these stock options will not be forfeited due to any service condition.
2016 Performance Share Award Grants
A performance share is a “phantom” share of AXA stock that, once earned and vested, provides the right to receive an AXA ordinary share at the time of payment. Performance shares are granted unearned. Under the 2016 Performance Shares Plan, the number of shares that is earned is determined at the end of a three-year performance period, starting on January 1, 2016 and ending on December 31, 2018, by multiplying the number of shares granted by a performance percentage that is determined as described below. If no dividend is proposed for payment by the AXA Board of Directors to AXA’s shareholders for 2016 or 2017 or 2018, the performance percentage for the grant will be divided in half. The performance shares granted to the Named Executive Officers on June 6, 2016 have a cliff vesting schedule of four years.
The performance percentage for the 2016 Performance Share Plan initially will be determined based: (a) 40% on AXA Group’s performance with respect to adjusted earnings per share, (b) 50% on AXA Financial Life and Savings Operations’ performance with respect to adjusted earnings and underlying earnings (each weighted 50%) and (c) 10% on AXA Group’s score on the DJSI World, a Dow Jones sustainability index which tracks the performance of the world’s sustainability leaders. A positive or negative adjustment of 5% will then be made to the performance percentage based on AXA Group’s relative performance against a selection of its peers with respect to total shareholder return. The components of the performance percentage and their targets are determined by the AXA Board of Directors based on their review of AXA's strategic objectives, market practices and regulatory changes.
Generally, if performance targets are met, 100% of the performance shares initially granted is earned. Performance that exceeds the targets results in increases in the number of shares earned, subject to a cap of 130% of the initial number of shares. Performance that falls short of targets results in a decrease in the number of shares earned with a possible forfeiture of all shares. Since AXA uses IFRS as its principal method of accounting, AXA Group’s adjusted earnings per share and AXA Financial Life and Savings Operations’ adjusted earnings and underlying earnings are calculated using IFRS. Accordingly, they are not measures calculated and presented in accordance with U.S. GAAP.
The settlement of 2016 performance shares will be made in AXA ordinary shares on June 6, 2020. The 2016 plan provides that, in the case of retirement, a participant is treated as if he or she continued employment until the settlement date. Accordingly, Mr. Hattem and Mr. Pearson will still receive a payout under this plan if they choose to retire prior to the end of the vesting period.
Due to their termination of employment with AXA Equitable during 2016, both Ms. Ritchey and Ms. Brown have forfeited all of their performance shares, including the 2016 grant.
Mr. Winikoff’s RSUs Grant
On July 5, 2016, Mr. Winikoff received a sign-on equity-based grant of 84,611 RSUs. These RSUs will vest ratably over a four-year period and be paid out in cash within 30 days after the vesting date.
OUTSTANDING EQUITY AWARDS AS OF DECEMBER 31, 2016
The following table lists outstanding equity grants for each Named Executive Officer as of December 31, 2016. The table includes outstanding equity grants from past years as well as the current year.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | OPTION AWARDS | | STOCK AWARDS |
| Name | | Number of Securities Underlying Unexercised Options(#) Exercisable(1) | | Number of Securities Underlying Unexercised Options(#) Unexercisable(1) | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options(1) (#) | | Option Exercise Price(2) ($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested(3) (#) | | Market Value of Shares or Units of Stock That Have Not Vested ($) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested(4) (#) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
| Pearson, Mark | | 5,874 |
| | | | 2,936 |
| | $ | 44.60 |
| | 05/10/17 | | 45,734 |
| | $ | 1,156,274 |
| | 226,395 |
| | $ | 5,723,852 |
|
| | | 5,874 |
| | | | 2,936 |
| | $ | 33.21 |
| | 04/01/18 | | | | | | | | |
| | | 34,574 |
| | | | | | $ | 21.59 |
| | 06/10/19 | | | | | | | | |
| | | 60,500 |
| | | | | | $ | 21.08 |
| | 03/19/20 | | | | | | | | |
| | | 137,500 |
| | | | | | $ | 20.63 |
| | 03/18/21 | | | | | | | | |
| | | 116,000 |
| | | | | | $ | 15.96 |
| | 03/16/22 | | | | | | | | |
| | | 93,334 |
| | | | 46,666 |
| | $ | 17.83 |
| | 03/22/23 | | | | | | | | |
| | | | | | | 123,400 |
| | $ | 25.74 |
| | 03/24/24 | | | | | | | | |
| | | | | | | 145,458 |
| | $ | 26.12 |
| | 06/19/25 | | | | | | | | |
| | | | | | | 186,069 |
| | $ | 24.00 |
| | 06/06/26 | | | | | | | | |
| Malmstrom, Anders | | | | | | 11,644 |
| | $ | 17.83 |
| | 03/22/23 | | 13,491 |
| | $ | 341,087 |
| | 64,422 |
| | $ | 1,628,755 |
|
| | | | | 24,414 |
| | 12,206 |
| | $ | 25.74 |
| | 03/24/24 | | | | | | | | |
| | | | | 24,786 |
| | 12,393 |
| | $ | 26.12 |
| | 06/19/25 | | | | | | | | |
| | | | | 37,656 |
| | 18,828 |
| | $ | 24.00 |
| | 06/06/26 | | | | | | | | |
| Winikoff, Brian | | | | | | | | | | | | | | | | 84,611 |
| | $ | 2,139,185 |
|
| Hattem, Dave | | 4,674 |
| | | | 2,335 |
| | $ | 45.72 |
| | 05/10/17 | | 12,501 |
| | $ | 316,058 |
| | 65,639 |
| | $ | 1,659,524 |
|
| | | 4,506 |
| | | | 2,251 |
| | $ | 33.21 |
| | 04/01/18 | | | | | | | | |
| | | 20,882 |
| | | | | | $ | 20.63 |
| | 03/18/21 | | | | | | | | |
| | | 21,953 |
| | | | | | $ | 15.96 |
| | 03/16/22 | | | | | | | | |
| | | 21,350 |
| | | | 10,673 |
| | $ | 17.83 |
| | 03/22/23 | | | | | | | | |
| | | | | 22,626 |
| | 11,314 |
| | $ | 25.74 |
| | 03/24/24 | | | | | | | | |
| | | | | 24,786 |
| | 12,393 |
| | $ | 26.12 |
| | 06/19/25 | | | | | | | | |
| | | | | 40,012 |
| | 20,004 |
| | $ | 24.00 |
| | 06/06/26 | | | | | | | | |
| Healy, Michael | | 354 |
| | | | | | $ | 45.72 |
| | 05/10/17 | | 9,593 |
| | $ | 242,536 |
| | 39,811 |
| | $ | 1,006,525 |
|
| | | 1,635 |
| | | | | | $ | 33.21 |
| | 04/01/18 | | | | | | | | |
| | | 1,703 |
| | | | | | $ | 21.08 |
| | 03/19/20 | | | | | | | | |
| | | 4,349 |
| | | | | | $ | 20.63 |
| | 03/18/21 | | | | | | | | |
| | | 10,976 |
| | | | | | $ | 15.96 |
| | 03/16/22 | | | | | | | | |
| Ritchey, Sharon | | | | 24,414 |
| | 12,206 |
| | $ | 25.74 |
| | 03/24/24 | | | | | | | | |
| | | | | 24,786 |
| | 12,393 |
| | $ | 26.12 |
| | 06/19/25 | | | | | | | | |
| | | | | 28,242 |
| | 14,120 |
| | $ | 24.00 |
| | 06/06/26 | | | | | | | | |
| Brown, Priscilla | | | | 12,394 |
| | 6,196 |
| | $ | 26.12 |
| | 06/19/25 | | | | | | | | |
| | | | | 14,122 |
| | 7,059 |
| | $ | 24.00 |
| | 06/06/26 | | | | | | | | |
| |
(1) | All stock options have ten-year terms. All stock options granted after 2013 have a vesting schedule of five years, with one-third of the grant vesting on each of the third, fourth and fifth anniversaries of the grant, and all stock options granted in 2008 through 2013 have a vesting schedule of four years, with one-third of the grant vesting on each of the second, third and fourth anniversaries of the grant |
date; provided that for all these grants the last third will vest only if the AXA ordinary share performs at least as well as the SXIP Index during a specified period (this condition applies to all options granted to Mr. Pearson after 2011). All stock options granted in 2007 are vested with the exception of the last third of the grants made to Mr. Pearson and Mr. Hattem. These stock options will vest only if the AXA ordinary share performs at least as well as the SXIP Index during a specified period.
| |
(2) | All stock options have euro exercise prices. All euro exercise prices have been converted to U.S. dollars based on the euro to U.S. dollar exchange rate on the day prior to the grant date. The actual U.S. dollar equivalent of the exercise price will depend on the exchange rate at the date of exercise. |
| |
(3) | This column reflects earned but unvested performance shares granted in 2014 with a vesting date of March 24, 2017. |
| |
(4) | For Mr. Winikoff, this column reflects his sign-on RSU grant. His RSUs will vest ratably over a four-year period and be paid out in cash within 30 days after the vesting date. For the other Named Executive Officers, this column reflects unearned and unvested performance shares granted in 2014, 2015 and 2016 as follows: |
|
| | | |
| | 2014 Performance Shares vesting 3/24/18 | 2015 Performance Shares vesting 6/19/19 | 2016 Performance
Shares vesting 6/6/20 |
| Mr. Pearson | 36,950 | 83,119 | 106,326 |
| Mr. Malmstrom | 10,900 | 21,245 | 32,277 |
| Mr. Hattem | 10,100 | 21,245 | 34,294 |
| Mr. Healy | 7,750 | 15,279 | 16,782 |
OPTION EXERCISES AND STOCK VESTED IN 2016
The following table summarizes the value received from stock option exercises and stock awards vested during 2016.
|
| | | | | | | | | | | | | |
| | | OPTION AWARDS | | STOCK AWARDS |
| Name | | Number of Shares Acquired on Exercise(1) (#) | | Value Realized on Exercise(2) ($) | | Number of Shares Acquired on Vesting(3) # | | Value Realized on Vesting(4) ($) |
| Pearson, Mark | | | | | | 100,449 | | $ | 2,401,712 |
|
| Malmstrom, Anders | | 26,890 |
| | $ | 291,909 |
| | 25,108 | | $ | 600,314 |
|
| Winikoff, Brian | | | | | | | | |
| Hattem, Dave | | | | | | 23,020 | | $ | 550,390 |
|
| Healy, Michael | | | | | | 24,412 | | $ | 583,672 |
|
| Ritchey, Sharon | | | | | | | | |
| Brown, Priscilla | | | | | | | | |
| |
(1) | This column reflects the number of options that Mr. Malmstrom exercised in 2016. |
| |
(2) | Mr. Malmstrom immediately sold all shares acquired upon option exercise. This column reflects the actual sale price received less the exercise price. |
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(3) | For Mr. Pearson, this column reflects the number of performance shares he earned under the 2013 AXA International Performance Shares Plan that vested on March 22, 2016. For the other Named Executive Officers, this column reflects 50 AXA miles that vested on March 16, 2016 in addition to their performance shares earned under the 2013 AXA International Performance Shares Plan. For a description of the 2013 AXA Performance Shares Plan and AXA Miles, please see “Compensation Discussion and Analysis” included in this item 11.
|
| |
(4) | The value of the performance shares that vested in 2016 was determined based on the average of the high and low AXA ordinary share price on the vesting date, converted to US dollars using the European Central Bank reference rate on the vesting date. The value of the AXA miles that vested in 2016 was determined based on the actual sale price obtained by AXA Miles recipients who elected to have the plan administrator sell their AXA ordinary shares on the date of vesting. |
PENSION BENEFITS AS OF DECEMBER 31, 2016
The following table lists the pension program participation and actuarial present value of each Named Executive Officer’s defined benefit pension at December 31, 2016. Note that Mr. Malmstrom, Mr. Winikoff, Ms. Ritchey and Ms. Brown did not participate in the Retirement Plan or the Excess Plan since they were not eligible to participate in these plans prior to their freeze.
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| | | | | | | | | | |
| Name | | Plan Name(1) | | Number of Years Credited Service (#) | | Present Value of Accumulated Benefit ($) | | Payments during the last fiscal year ($) |
| Pearson, Mark | | AXA Equitable Retirement Plan | | 3 | | $ | 67,096 |
| | — |
| | | AXA Equitable Excess Retirement Plan | | 3 | | $ | 672,728 |
| | — |
| | | AXA Equitable Executive Survivor Benefit Plan | | 22 | | $ | 3,313,530 |
| | — |
| Malmstrom, Anders | | AXA Equitable Retirement Plan | | — | | $ | — |
| | — |
| | | AXA Equitable Excess Retirement Plan | | — | | $ | — |
| | — |
| | | AXA Equitable Executive Survivor Benefit Plan | | 5 | | $ | 331,396 |
| | — |
| Winikoff, Brian | | AXA Equitable Retirement Plan | | — | | $ | — |
| | — |
| | | AXA Equitable Excess Retirement Plan | | — | | $ | — |
| | — |
| | | AXA Equitable Executive Survivor Benefit Plan | | — | | $ | — |
| | — |
| Hattem, Dave | | AXA Equitable Retirement Plan | | 19 | | $ | 492,310 |
| | — |
| | | AXA Equitable Excess Retirement Plan | | 19 | | $ | 1,026,271 |
| | — |
| | | AXA Equitable Executive Survivor Benefit Plan | | 23 | | $ | 1,943,732 |
| | — |
| Healy, Michael | | AXA Equitable Retirement Plan | | 6 | | $ | 147,849 |
| | — |
| | | AXA Equitable Excess Retirement Plan | | 6 | | $ | 159,410 |
| | — |
| | | AXA Equitable Executive Survivor Benefit Plan | | 10 | | $ | 145,355 |
| | — |
| Ritchey, Sharon | | AXA Equitable Retirement Plan | | — | | $ | — |
| | — |
| | | AXA Equitable Excess Retirement Plan | | — | | $ | — |
| | — |
| | | AXA Equitable Executive Survivor
Benefit Plan | | 3 | | $ | 321,178 |
| | — |
| Brown, Priscilla | | AXA Equitable Retirement Plan | | — | | $ | — |
| | — |
| | | AXA Equitable Excess Retirement Plan | | — | | $ | — |
| | — |
| | | AXA Equitable Executive Survivor
Benefit Plan | | 2 | | $ | 269,361 |
| | — |
| |
(1) | The December 31, 2016 liabilities for the Retirement Plan, the Excess Plan, and the ESB Plan were calculated using the same participant data, plan provisions and actuarial methods and assumptions used for financial reporting purposes, except that a retirement age of 65 is assumed for all calculations. The assumptions used include: |
a discount rate of 3.81% for the Retirement Plan;
a discount rate of 3.69% for the Excess Plan;
a discount rate of 3.92% for the ESB Plan and
the RP-2000 mortality table projected on a full generational basis using Scale BB.
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(2) | Credited service for purposes of the Retirement Plan and the Excess Plan does not include an executive’s first year of service and does not include any service after the freeze of the plans on December 31, 2013. Pursuant to his employment agreement, Mr. Pearson’s credited service for purposes of the ESB Plan includes approximately 16 years of service with AXA Equitable affiliates. However, this additional credited service does not result in any benefit augmentation for Mr. Pearson. |
The Retirement Plan
The Retirement Plan is a tax-qualified defined benefit plan for eligible employees. The Retirement Plan was frozen effective December 31, 2013.
Participants became vested in their benefits under the Retirement Plan after three years of service. Participants are eligible to retire and begin receiving benefits under the Retirement Plan: (a) at age 65 (the “normal retirement date”) or (b) if they are at least age 55 with at least 5 full years of service (an “early retirement date”).
Prior to the freeze, the Retirement Plan provided a cash balance benefit whereby AXA Equitable established a notional account for each Retirement Plan participant. This notional account was credited with deemed pay credits equal to 5% of eligible compensation up to the Social Security wage base plus 10% of eligible compensation above the Social Security wage base. Eligible compensation included base salary and short-term incentive compensation and was subject to limits imposed by the Internal Revenue Code. These notional accounts continue to be credited with deemed interest credits. For pay credits earned on or after April 1, 2012 up to December 31, 2013, the interest rate is determined annually based on the average discount rates for one-year Treasury Constant Maturities. For pay credits earned prior to April 1, 2012, the annual interest rate is the greater of 4% and a rate derived from the average discount rates for one-year Treasury Constant Maturities. For 2016, pay credits earned prior to April 1, 2012 received an interest crediting rate of 4% while pay credits earned on or after April 1, 2012 received an interest crediting rate of .5%.
Participants elect the time and form of payment of their cash balance account after they separate from service. The normal form of payment depends on a participant’s marital status as of the payment commencement date. If the participant is unmarried, the normal form will be a single life annuity. If the participant is married, the normal form will be a 50% joint and survivor annuity. Subject to spousal consent requirements, participants may elect the following optional forms of payment for their cash balance account:
Single life annuity;
Optional joint and survivor annuity of any whole percentage between 1% and 100%; and
Lump sum.
Mr. Pearson, Mr. Hattem and Mr. Healy are each entitled to a frozen cash balance benefit under the Retirement Plan. Mr. Pearson and Mr. Hattem are currently eligible for early retirement under the plan.
Note that, for certain grandfathered participants, the Retirement Plan provides benefits under a traditional defined benefit formula based on final average pay, estimated Social Security benefits and years of service. None of the Named Executive Officers are grandfathered participants.
The Excess Plan
The purpose of the Excess Plan, which was frozen as of December 31, 2013 was to allow eligible employees to earn retirement benefits in excess of those permitted under the Retirement Plan. Specifically, the Retirement Plan is subject to rules under the Internal Revenue Code that cap both the amount of eligible earnings that may be taken into account for determining benefits under the Retirement Plan and the amount of benefits that the Retirement Plan may pay annually. Prior to the freeze of the Retirement Plan, the Excess Plan permitted participants to accrue and be paid benefits that they would have earned and been paid under the Retirement Plan but for these limits. The Excess Plan is an unfunded plan and no assets are actually set aside in participants’ names.
The Excess Plan was amended effective September 1, 2008 to comply with the provisions of Code Section 409A. Pursuant to the amendment, a participant’s Excess Plan benefits vested after 2005 will generally be paid in a lump sum on the first day of the month following the month in which separation from service occurs, provided that payment will be delayed six months for “specified employees” (generally, the fifty most highly-compensated officers of AXA Group), unless the participant made a special one-time election with respect to the time and form of payment of those benefits by November 14, 2008. None of Mr. Pearson, Mr. Hattem and Mr. Healy made a special election. The time and form of payment of Excess Plan benefits that vested prior to 2005 is the same as the time and form of payment of the participant’s Retirement Plan benefits.
The ESB Plan
The ESB Plan offers financial protection to a participant’s family in the case of his or her death. Eligible employees may choose up to four levels of coverage and the form of benefit to be paid at each level. Each level provides a benefit equal to one times the participant’s eligible compensation (generally, base salary plus the higher of: (a) most recent short-term incentive compensation award and (b) the average of the three highest short-term incentive compensation awards), subject to an overall $25 million cap. Each level offers different coverage choices. Generally, the participant can choose between a life insurance death benefit and a deferred compensation benefit payable upon death at each level. Participants are not required to contribute to the cost of Level 1 or Level 2 coverage but are required to contribute annually to the cost of any options elected under Levels 3 and 4 until age 65.
Level 1 coverage continues after retirement until the participant attains age 65. Level 2, Level 3 and Level 4 coverage continue after retirement until the participant’s death, provided that, for Level 3 and Level 4 coverage, all required participant contributions are made.
Level 1
A participant can choose between the following two options at Level 1:
Lump Sum Option - Under the Lump Sum Option, a life insurance policy is purchased on the participant’s life. At the death of the participant, the participant’s beneficiary receives a tax-free lump sum death benefit from the policy. The participant is taxed annually on the value of the life insurance coverage provided.
Survivor Income Option - Upon the participant’s death, the Survivor Income Option provides the participant’s beneficiary with 15 annual payments approximating the value of the Lump Sum Option or a payment equal to the amount of the lump sum. The payments will be taxable but the participant is not subject to annual taxation.
Level 2
At Level 2, a participant can choose among the Lump Sum Option and Survivor Income Option, described above, and the following option:
Surviving Spouse Benefit Option - The Surviving Spouse Benefit Option provides the participant’s spouse with monthly income equal to about 25% of the participant’s monthly compensation (with an offset for social security). The payments are taxable but there is no annual taxation to the participant. The duration of the monthly income depends on the participant’s years of service (with a minimum duration of 5 years).
Levels 3 and 4
At Levels 3 and 4, a participant can choose among the Lump Sum Option and Survivor Income Option, described above and the following option:
Surviving Spouse Income Addition Option - The Surviving Spouse Income Addition Option provides monthly income to the participant’s spouse for life equal to 10% of the participant’s monthly compensation. The payments are taxable but there is no annual taxation to the participant.
NON-QUALIFIED DEFERRED COMPENSATION TABLE AS OF DECEMBER 31, 2016
The following table provides information on (i) compensation Mr. Hattem has elected to defer and (ii) the excess 401(k) contributions received by the Named Executive Officers.
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| | | | | | | | | | | | | | | | | | | | |
| Name | | | | Executive Contributions in Last FY($) | | Registrant Contributions in Last FY(1)($) | | Aggregate Earnings in Last FY(2)($) | | Aggregate Withdrawals/ Distributions($) | | Aggregate Balance at Last FYE(3)($) |
| Pearson, Mark | | The Post-2004 Variable Deferred Compensation Plan | | | | $ | 332,464 |
| | $ | 51,280 |
| | | | $ | 1,061,076 |
|
| Malmstrom, Anders | | The Post-2004 Variable Deferred Compensation Plan | | | | $ | 133,323 |
| | $ | 25,925 |
| | | | $ | 265,892 |
|
| Winikoff, Brian | | The Post-2004 Variable Deferred Compensation Plan | | | | $ | 6,795 |
| | | | | | $ | 6,795 |
|
| Hattem, Dave | | The Post-2004 Variable Deferred Compensation Plan | | | | $ | 114,487 |
| | $ | 45,152 |
| | $ | 92,784 |
| | $ | 655,600 |
|
| | | The Variable Deferred Compensation Plan | | | | | | $ | 98,658 |
| | | | $ | 1,185,622 |
|
| Healy, Michael | | The Post-2004 Variable Deferred Compensation Plan | | | | $ | 53,309 |
| | $ | 13,690 |
| | | | $ | 169,945 |
|
| Ritchey, Sharon | | The Post-2004 Variable Deferred Compensation Plan | | | | $ | 98,339 |
| | $ | 10,530 |
| | | | $ | 233,550 |
|
| Brown, Priscilla | | The Post-2004 Variable Deferred Compensation Plan | | | | $ | 77,529 |
| | $ | 7,979 |
| | | | $ | 166,851 |
|
| |
(1) | The amounts reported in this column are also reported in the “All Other Compensation” column of the 2016 Summary Compensation Table above. |
| |
(2) | The amounts reported in this column are not reported in the 2016 Summary Compensation Table. |
| |
(3) | The amounts in this column that were previously reported as compensation in the Summary Compensation Table for previous years are: |
|
| |
Mr. Pearson | $684,517 |
Mr. Malmstrom | $109,323 |
Mr. Hattem | $225,378 |
The Post-2004 Plan
The above table reflects the excess 401(k) contributions made by AXA Equitable to the eligible Named Executive Officers under the Post-2004 Plan as well as amounts deferred by Mr. Hattem under the plan.
The Post-2004 Plan allows eligible employees to defer the receipt of up to 25% of their base salary and short-term incentive compensation. Deferrals are credited to a bookkeeping account in the participant’s name on the first day of the month following the month in which the compensation otherwise would have been paid to him or her. The account is used solely for record keeping purposes and no assets are actually placed into any account in the participant’s name.
Account balances in the Post-2004 Plan are credited with gains and losses as if invested in the available earnings crediting options chosen by the participant. The Post-2004 Plan currently offers a variety of earnings crediting options which are among those offered by the AXA Premier VIP Trust and EQ Advisors Trust.
Each year, participants in the Post-2004 Plan can elect to make deferrals into an account they have already established under the plan or they may open a new account, provided that they may not allocate any new deferrals into an account if they are scheduled to receive payments from the account in the next calendar year. When participants establish an account, they must elect the form and timing of payments for that account. They may receive payments of their account balance in a lump sum or in any combination of lump sum and/or annual installments paid over consecutive years. They may elect to commence payments from an account in July or December of any year after the year following the deferral election provided that payments must commence by the first July or December following age 71.
In addition, AXA Equitable provides excess 401(k) contributions in the Post-2004 Plan for participants in the 401(k) Plan with eligible compensation in excess of the qualified plan compensation limit. These contributions are equal to 10% of the participant’s (i) eligible compensation in excess of the qualified plan compensation limit ($265,000 in 2016 and 2016) and (ii) voluntary deferrals to the Post-2004 Plan for the applicable year.
The Variable Deferred Compensation Plan for Executives (the “VDCP”)
The above table also reflects amounts deferred by Mr. Hattem under the VDCP. Under the VDCP, eligible employees were permitted to defer the receipt of up to 25% of their base salary and short-term incentive compensation. Deferrals were credited to a bookkeeping account in the participant’s name on the first day of the month following the month in which the compensation otherwise would have been paid to him or her. The account is used solely for record keeping purposes and no assets are actually placed into any account in the participant’s name. The VDCP was frozen as of December 31, 2004 so that no amounts earned or vested after 2004 can be deferred under the VDCP.
Account balances in the VDCP that are attributable to deferrals of base salary and short-term incentive compensation are credited with gains and losses as if invested in the available earnings crediting options chosen by the participant. The VDCP currently offers a variety of earnings crediting options which are among those offered by the AXA Premier VIP Trust and EQ Advisors Trust.
Participants in the VDCP could elect to credit their deferrals to in-service or retirement distribution accounts. For retirement accounts, payments may be received in any combination of a lump sum and/or annual installments paid in consecutive years. Payments may begin in any January or July following the participant’s termination date, but they must begin by either the first January or the first July following the later of: (a) the participant’s attainment of age 65 and (b) the date that is thirteen months following the participant’s termination date. For in-service accounts, payments are made to the participant in December of the year elected by the participant in a lump sum or in up to five annual installments over consecutive years.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The table below and the accompanying text present the hypothetical payments and benefits that would have been payable if the Named Executive Officers other than Ms. Ritchey and Ms. Brown terminated employment, or a change-in-control of AXA Financial occurred, on December 31, 2016 (the “Trigger Date”) and uses the closing price of the AXA ordinary share on December 30, 2016, converted to U.S. dollars where applicable. Since Ms. Ritchey and Ms. Brown actually terminated employment with AXA Equitable in 2016, only the terms of their actual separation agreements are discussed.
Except for Ms. Ritchey and Ms. Brown, the payments and benefits described below are hypothetical only, as no such payments or benefits have been paid or made available. Hypothetical payments or benefits that would be due under arrangements that are generally available on the same terms to all salaried employees are not described.
The Named Executive Officers (other than Ms. Ritchey and Ms. Brown) would have been entitled to the following payments and benefits if they retired on the Trigger Date. For this purpose, “retirement” means termination of service on or after the normal retirement date or any early retirement date under the Retirement Plan. Note that the only Named Executive Officers eligible to retire on the Trigger Date were Mr. Pearson and Mr. Hattem.
Short-Term Incentive Compensation: The executives would have received short-term incentive compensation awards for 2016 under the Retiree Short-Term Incentive Compensation Program in the following amounts:
|
| |
Mr. Pearson | $2,128,400 |
Mr. Hattem | $650,000 |
Stock Options: All stock options granted to the executives would have continued to vest and be exercisable until their expiration date, except in the case of misconduct (for which the options would be forfeited). The value of the stock options that would have vested after 2016 for each of Mr. Pearson and Mr. Hattem are:
|
| |
Mr. Pearson | $1,849,639 |
Mr. Hattem | $509,813 |
Performance Shares: The executives would have been treated as if they continued in the employ of the company until the end of the vesting period for purposes of their performance share awards. Accordingly, they would have received performance share plan payouts at the same time and in the same amounts as they would have received such payouts if they had not retired. The estimated values of those payouts assuming target performance are:
|
| |
Mr. Pearson | $6,880,126 |
Mr. Hattem | $1,975,581 |
Retirement Benefits: The executives would have been entitled to the benefits described in the pension and nonqualified deferred compensation tables above.
Medical Benefits: The executives would have been entitled to access to retiree medical coverage without any company subsidy.
ESB Plan: The executives would have been entitled to continuation of their participation in the ESB Plan described above.
Voluntary Termination Other Than Retirement
Mr. Healy and Mr. Malmstrom
If Mr. Healy and Mr. Malmstrom had voluntarily terminated employment on the Trigger Date:
Short-Term Incentive Compensation: The executives would not have been entitled to any STIC Program awards for 2016.
Stock Options: All stock options granted to the executives would have been forfeited on the termination date.
Performance Shares: The executives would have forfeited all performance shares on the termination date.
Retirement Benefits: The executives would have been entitled to the benefits described in the pension and nonqualified deferred compensation tables above, except that they would no longer be entitled to any benefits under the ESB Plan.
Mr. Winikoff
If Mr. Winikoff had voluntarily terminated on the Trigger Date for “good reason:”
any outstanding RSUs granted to Mr. Winikoff would have immediately vested and been paid out in cash on their otherwise applicable payment dates (estimated value of $2,139,185) and
he would have been eligible to receive a payment of $3,200,000 (equal to two times his annual base salary plus his STIC Program award target for 2016). This payment would have been contingent on the execution of a general release and waiver of claims against AXA Equitable and affiliates.
For this purpose, “good reason” includes: (a) relocation of his position to a work site that is more than 35 miles away from 1290 Avenue of the Americas, New York City, (b) a material reduction in his compensation (other than in connection with, and substantially proportionate to, reductions by the company of the compensation of other similarly situated senior executives), (c) a material diminution in his duties, authority or responsibilities and (d) a material change in the lines of reporting such that he no longer reports to the company’s President and Chief Executive Officer.
Regardless of whether the voluntary termination was for “good reason,” Mr. Winikoff would have been entitled to the benefits described in the pension and nonqualified deferred compensation tables above, except that they would no longer be entitled to any benefits under the ESB Plan.
Mr. Pearson
If Mr. Pearson had voluntarily terminated on the Trigger Date for “Good Reason” as described below, he would have been entitled to: (i) severance pay equal to the sum of two years of salary and two times the greatest of: (a) Mr. Pearson’s most recent STIC Program award, (b) the average of Mr. Pearson’s last three STIC Program awards and (c) Mr. Pearson’s target STIC Program award for the year in which termination occurred, (ii) a pro-rated STIC Program award at target for the year of termination and (iii) a cash payment equal to the additional employer contributions that Mr. Pearson would have received under the 401(k) Plan and its related excess plan for the year of his termination if those plans provided employer contributions on his severance pay and all of his severance pay was paid in that year.
For this purpose, “Good Reason” includes a material reduction in Mr. Pearson’s duties or authority, the removal of Mr. Pearson from his positions, AXA Equitable requiring Mr. Pearson to be based at an office more than 75 miles from New York City, a diminution of Mr. Pearson’s titles, a material failure by the company to comply with the agreement’s compensation provisions, a failure of the company to secure a written assumption of the agreement by any successor company and a change in control of AXA Financial (provided that Mr. Pearson delivers notice of termination within 180 days after the change in control). The severance benefits are contingent upon Mr. Pearson releasing all claims against AXA Equitable and its affiliates and his entitlement to severance pay will be discontinued if he provides services for a competitor. Also, in the event of a termination of Mr. Pearson’s employment by AXA Equitable without cause or Mr. Pearson’s resignation due to a change in control, Mr. Pearson’s severance benefits will cease after one year if certain performance conditions are not met for each of the two consecutive fiscal years immediately preceding the year of termination.
Mr. Pearson would have received the following amounts if he had voluntarily terminated for Good Reason on the Trigger Date and released all claims against AXA Equitable and its affiliates:
|
| | | |
| Severance Pay | $ | 7,315,333 |
|
| Pro-Rated Bonus | $ | 2,128,400 |
|
| Cash Payment | $ | 731,533 |
|
In addition, because Mr. Pearson was eligible to retire on the Trigger Date, he would have been eligible for the retirement benefits described above, regardless of whether he terminated for Good Reason.
Mr. Hattem
Because Mr. Hattem was eligible to retire on the Trigger Date, he would have been eligible for the retirement benefits described above.
Death
If the Named Executive Officers had terminated employment due to death on the Trigger Date:
Short-Term Incentive Compensation: The executives’ estates would not have been entitled to any STIC Program awards for 2016.
Stock Options: All stock options would have immediately vested and would have continued to be exercisable until the earlier of their expiration date and the six-month anniversary of the date of death. The estimated values of the stock options with accelerated vesting are:
|
| |
Mr. Pearson | $1,849,639 |
Mr. Malmstrom | $518,954 |
Mr. Winikoff | — |
Mr. Hattem | $509,813 |
Mr. Healy | — |
Performance Shares: The total number of performance shares granted in 2015 and 2016 and the second half of the performance shares granted in 2014 would have been multiplied by an assumed performance factor of 1.3 and the first half of the performance shares granted in 2014 would have been multiplied by the actual performance factor for that tranche. The performance shares would have been paid in AXA ordinary shares to the executive’s heirs within 90 days following death. The estimated values of those payouts are:
|
| |
Mr. Pearson | $8,597,281 |
Mr. Malmstrom | $2,458,469 |
Mr. Winikoff | — |
Mr. Hattem | $2,473,439 |
Mr. Healy | $1,551,019 |
Restricted Stock Units: Mr. Winikoff’s RSUs would have immediately vested in full for an estimated value of $2,139,185.
Retirement Benefits: The executives’ heirs would have been entitled to the benefits described in the pension and nonqualified deferred compensation tables above.
Involuntary Termination Without Cause
Named Executive Officers Other than Mr. Pearson
The Named Executive Officers, excluding Mr. Pearson, would have been eligible for severance benefits under the Severance Benefit Plan, as supplemented by the Supplemental Severance Plan (collectively, the “Severance Plan”), if an involuntary termination of employment had occurred on the Trigger Date that satisfied the conditions in the Severance Plan. To receive benefits, the executives would have been required to sign a separation agreement including a release of all claims against AXA Equitable and its affiliates and non-solicitation provisions.
The severance benefits would have included:
severance pay equal to 52 weeks’ of base salary;
additional severance pay equal to the greater of: (i) the most recent STIC Program award paid to the executive, (ii) the average of the three most recent STIC Program awards paid to the executive or (iii) the executive’s target STIC Program award for 2016;
a lump sum payment equal to the sum of: (i) the executive’s target STIC Program award for 2016 and (ii) $40,000; and
one year’s continued participation in the ESB Plan.
The Named Executive Officers would have had a one-year severance period. If a Named Executive Officer would have been eligible to retire prior to the end of the severance period, all stock options granted to the Named Executive Officer would have continued to vest and be exercisable until their expiration date, except in the case of misconduct (for which the options would be forfeited). Also, the Named Executive Officer would have been treated as if he continued in the employ of AXA Equitable until the end of the vesting period for his performance shares.
In addition to the above, Mr. Winikoff would have received the following:
the immediately vesting of his outstanding RSUs for an estimated value of $2,139,185 and
a payment equal to (i) two times his annual base salary plus his STIC Program award target for 2016, reduced by (ii) any severance pay for which he would otherwise eligible under the Severance Plan or the Supplemental Severance Plan. This
payment would be contingent on all other terms and conditions of the Severance Plan and Supplemental Severance Plan, including the execution of a general release and waiver of claims against AXA Equitable and affiliates.
The following table lists the payments that the executives would have received if they were involuntarily terminated under the Severance Plan on the Trigger Date as well as the implications for their stock option and performance shares awards:
|
| | | | | | | | |
| | | Severance Benefits | | Equity Grants |
| Name | | Severance | | Lump Sum Payment | | Stock Options | | Performance Shares |
| Malmstrom, Anders | | $1,595,704 | | $840,000 | | Options would continue to vest and be exercisable until the earlier of their expiration date and 30 days after the end of the one-year severance period. | | Forfeited |
| Winikoff, Brian | | $3,200,000 | | $415,000 | | Options would continue to vest and be exercisable until the earlier of their expiration date and 30 days after the end of the one-year severance period. | | Forfeited |
| Hattem, Dave | | $1,347,040 | | $690,000 | | Continued vesting in all options and ability to exercise the options through expiration date. | | Would receive payouts in the same time and in the same amounts as if he had continued to be employed. |
| Healy, Michael | | $803,836 | | $390,000 | | Options would continue to vest and be exercisable until the earlier of their expiration date and 30 days after the end of the one-year severance period. | | Forfeited |
Mr. Pearson
Under Mr. Pearson’s employment agreement, he waived any right to participate in the Severance Plan. Rather, if Mr. Pearson’s employment had been terminated without “Cause” on the Trigger Date, he would have been entitled to the same benefits as termination for Good Reason as described above, subject to the same conditions. “Cause” is defined in Mr. Pearson’s employment agreement as: (i) willful failure to perform substantially his duties after reasonable notice of his failure, (ii) willful misconduct that is materially injurious to the company, (iii) conviction of, or plea of nolo contedere to, a felony or (iv) willful breach of any written covenant or agreement with the company to not disclose information pertaining to them or to not compete or interfere with the company.
Ms. Ritchey’s Separation Agreement
Ms. Ritchey entered into a separation agreement and general release with AXA Equitable pursuant to which she terminated employment on December 30, 2016. Payments related to her separation include:
$1,296,509 severance pay under the terms of the Severance Plan
$740,000 lump sum payment under the terms of the Severance Plan
Additional lump sum payment of $1,285,877.
Ms. Brown’s Separation Agreement
Ms. Brown entered into a separation agreement and general release with AXA Equitable pursuant to which she terminated employment on August 31, 2016. Payments related to her separation include:
$1,180,821 severance pay under the terms of the Severance Plan
$406,666 lump sum payment under the terms of the Severance Plan
Additional lump sum payment of $1,180,821.
Change-in-Control
With the exception of Mr. Pearson, none of the Named Executive Officers are entitled to any special benefits upon a change-in-control of AXA Financial other than the benefits provided for all stock options granted under the Stock Option Plan. For those options, if there is a change in control of AXA Financial, all unvested options will become immediately exercisable for their term regardless of the otherwise applicable exercise schedule. The value of the stock options that would have immediately vested for each Named Executive Officer is:
|
| |
Mr. Pearson | $1,849,639 |
Mr. Malmstrom | $518,954 |
Mr. Winikoff | — |
Mr. Hattem | $509,813 |
Mr. Healy | — |
As mentioned above, Mr. Pearson’s employment agreement provides that “good reason” includes Mr. Pearson’s termination of employment in the event of a change in control (provided that Mr. Pearson delivers notice of termination within 180 days after the change in control). Accordingly, Mr. Pearson would have been entitled to the benefits described above for a voluntary termination for “good reason,” subject to the same conditions. For this purpose, a change in control includes: (a) any person becoming the beneficial owner of more than 50% of the voting stock of AXA Financial, (b) AXA and its affiliates ceasing to control the election of a majority of the AXA Financial Board of directors and (c) approval by AXA Financial’s stock holders of a reorganization, merger or consolidation or sale of all or substantially all of the assets of AXA Financial unless AXA and its affiliates owned directly or indirectly more than 50% of voting power of the company resulting from such transaction.
2016 DIRECTOR COMPENSATION TABLE
The following table provides information on compensation that was paid to our directors for 2016 services. Each of our directors serves on the boards of AXA Financial, AXA Equitable and MONY Life Insurance Company of America. The amounts below include amounts paid for the directors’ services for all three boards.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Name | | Fees Earned or Paid in Cash(1) ($) | | Stock Awards(2) ($) | | Option Awards(3) ($) | | Non-Equity Incentive Plan Compensation ($) | | Change in Pension Value and Non-qualified Deferred Compensation Earnings ($) | | All Other Compensation(4) ($) | | Total ($) |
| Buberl, Thomas | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| De Castries, Henri (5) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 271,700 |
| | $ | 271,700 |
|
| Duverne, Denis | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 181,454 |
| | $ | 181,454 |
|
| De Oliveira, Ramon | | $ | 82,200 |
| | $ | 99,983 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 995 |
| | $ | 183,178 |
|
| Evans, Paul | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Fallon-Walsh, Barbara | | $ | 122,600 |
| | $ | 99,983 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,702 |
| | $ | 224,285 |
|
| Kaye, Daniel | | $ | 97,800 |
| | $ | 99,983 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,720 |
| | $ | 199,503 |
|
| Kraus, Peter S. (6) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Matus, Kristi | | $ | 79,800 |
| | $ | 99,983 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 568 |
| | $ | 180,351 |
|
| Scott, Bertram | | $ | 93,000 |
| | $ | 99,983 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,488 |
| | $ | 194,471 |
|
| Slutsky, Lorie A. | | $ | 91,000 |
| | $ | 99,983 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,135 |
| | $ | 192,118 |
|
| Vaughan, Richard C. | | $ | 117,800 |
| | $ | 99,983 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,900 |
| | $ | 219,683 |
|
| |
(1) | For 2016, each of the non-officer directors received the following cash compensation: |
•$75,000 cash retainer (pro-rated for partial years of service);
•$1,200 for each special board meeting attended;
•$1,500 for each Audit Committee meeting attended; and
•$1,200 for all other Committee meetings attended.
In addition, the Chairpersons of the Organization and Compensation Committee, the Investment Committee and the Investment and Finance Committee each received a $10,000 retainer and the Chairman of the Audit Committee received a $20,000 retainer.
| |
(2) | The amounts reported in this column represent the aggregate grant date fair value of restricted and unrestricted stock awarded in 2016 in accordance with FASB ASC Topic 718, and the assumptions made in calculating them can be found in Note 13 of the Notes to the |
Consolidated Financial Statements. As of December 31, 2016, our directors had outstanding restricted stock awards in the following amounts:
|
| |
Mr. De Oliveira | 5,514 |
Ms. Fallon-Walsh | 5,514 |
Mr. Kaye | 1,987 |
Ms. Matus | 1,987 |
Ms. Scott | 5,514 |
Ms. Slutsky | 5,514 |
Mr. Vaughan | 5,514 |
| |
(3) | As of December 31, 2016, our directors had outstanding stock options in the following amounts: |
|
| |
Mr. De Oliveira | 4,361 |
Ms. Fallon-Walsh | 2,127 |
Ms. Scott | 2,127 |
Ms. Slutsky | 10,102 |
Mr. Vaughan | 6,303 |
| |
(4) | For Mr. De Castries, this column lists amounts received for services performed for AXA Financial. For Mr. Duverne, this column lists amounts received for services performed for AXA Financial and amounts paid by the company for his spouse to accompany him to a business event. For all other directors, this column lists premiums paid by the company for $125,000 of group life insurance coverage and any amounts paid by the company for a director’s spouse to accompany the director on a business trip or to a business event. |
| |
(5) | Mr. De Castries resigned as a director, effective September 1, 2016. |
| |
(6) | Mr. Kraus resigned as a director, effective November 18, 2016. |
The Equity Plan for Directors
Under the current terms of The Equity Plan for Directors (the “Equity Plan”), non-officer directors are granted the following each year:
a restricted stock award of $45,000 (granted in the first quarter); and
a stock retainer of $55,000, payable in two installments in June and December.
For calendar years prior to 2014, non-officer directors were also granted option awards each year.
Stock Options
The value of the stock option grants were determined using the Black-Scholes methodology or other methodology used with respect to option awards contemporaneously made to employees. The options are subject to a four-year vesting schedule whereby one-third of each grant vests on the second, third and fourth anniversaries of the grant date.
Restricted Stock
The number of shares of restricted stock to be granted to each non-officer director is determined by dividing $45,000 by the fair market value of the stock on the applicable grant date (rounded down to the nearest whole number). During the restricted period, the directors are entitled to exercise full voting rights on the restricted stock and receive all dividends and distributions. The restricted stock has a three-year cliff vesting schedule.
Termination of Service
In the event a non-officer director dies or, after completing one year of service, is removed without cause, is not reelected, retires or resigns: (a) his or her options will become fully vested and exercisable at any time prior to the earlier of the expiration of the grant or five years from termination of service and (b) his or her restricted stock will immediately become non-forfeitable; provided that if the director performs an act of misconduct, all of his or her options and restricted stock then outstanding will become forfeited. Upon any other type of termination, all outstanding options and restricted stock are forfeited.
Deferrals of Restricted Stock and Stock Retainer
Non-officer directors may elect to defer receipt of at least ten percent of their stock retainer and/or restricted stock awards. Upon deferral, the director receives deferred stock units in the same number and with the same vesting restrictions, if any, as the underlying awards. The director is entitled to receive dividend equivalents on such deferred stock units, if applicable. The deferred stock units will be distributed in stock on an elected distribution date or upon the occurrence of certain events.
Change in Control
Upon a change in control of AXA Financial, unless the awards will be assumed or substituted following the change in control: (a) the options will either become fully exercisable or cancelled in exchange for a payment in cash equal to the excess, if any, of the change in control price over the exercise price, and (b) the restricted stock will become immediately non-forfeitable.
Charitable Award Program for Directors
Under the Charitable Award Program for Directors, a non-officer director may designate up to five charitable organizations and/or education institutions to receive an aggregate donation of $500,000 after his or her death. Although the company may purchase life insurance policies insuring the lives of the participants to financially support the program, it has not elected to do so.
Matching Gifts
Non-officer directors may participate in AXA Foundation’s Matching Gifts program. Under this program, the AXA Foundation matches donations made by participants to public charities of $50 or more, up to $2,000 per year.
Business Travel Accident
All directors are covered for accidental loss of life while traveling to, or returning from:
board or committee meetings;
trips taken at our request; and
trips for which the director is compensated.
Each director is covered up to four times their annual compensation, subject to certain maximums.
Director Education
All directors are encouraged to attend director education programs as they deem appropriate to stay abreast of developments in corporate governance and best practices relevant to their contribution to the board generally, as well as to their responsibilities in their specific committee assignments and other roles. We generally reimburse non-officer directors for the cost to attend director education programs offered by third parties, including related reasonable travel and lodging expenses, up to a maximum amount of $5,000 per director each calendar year.
The Post-2004 Variable Deferred Compensation Plan for Directors
Non-officer directors may defer up to 100% of their annual cash retainer and meetings fees under The Post-2004 Variable Deferred Compensation Plan for Directors (the “Deferral Plan”). Deferrals are credited to a bookkeeping account in the director’s name in the month that the compensation otherwise would have been paid to him or her. The account is used solely for record keeping purposes and no assets are actually placed into any account in the director’s name. The minimum deferral is 10%.
Account balances in the Deferral Plan are credited with gains and losses as if invested in the available earnings crediting options chosen by the participant. The Deferral Plan currently offers a variety of earnings crediting options which are among those offered by the AXA Premier VIP Trust and EQ Advisors Trust.
Participants in the Deferral Plan elect the form and timing of payments from their accounts. Payments may be received in any combination of a lump sum and/or annual installments paid in consecutive years. Payments may begin in any July or December after the year of deferral, but they must begin by the first July or the first December following age 70 (72 in the case of certain grandfathered directors). Participants make alternate elections in the event of separation from service prior to the specified payment date and death prior to both the specified payment date and separation from service.
The Deferral Plan was designed, and is intended to be administered, in accordance with the requirements of Code Section 409A.
Part III, Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSOmitted pursuant to General Instruction I to Form 10-K.
We are an indirect, wholly-owned subsidiary of AXA Financial. AXA Financial’s common stock is 100% owned by AXA and its subsidiaries.
For insurance regulatory purposes, the shares of common stock of AXA Financial beneficially owned by AXA and its subsidiaries have been deposited into a voting trust (“Voting Trust”), the term of which has been extended until April 29, 2021. The current trustees of the Voting Trust (the “Voting Trustees”) are Denis Duverne and Mark Pearson.
AXA and any other holder of voting trust certificates remain the beneficial owner of the shares deposited by it, except that the Trustees are entitled to exercise all voting rights attached to the deposited shares so long as such shares remain subject to the Voting Trust. In voting the deposited shares, the Trustees must act to protect the legitimate economic interests of AXA and any other holders of voting trust certificates (but with a view to ensuring that certain indirect minority shareholders of AXA do not exercise control over AXA Financial or AXA Equitable). All dividends and distributions (other than those that are paid in the form of shares required to be deposited in the Voting Trust) in respect of deposited shares are paid directly to the holders of voting trust certificates. If a holder of voting trust certificates sells or transfers deposited shares to a person who is not an AXA Party and is not (and does not, in connection with such sale or transfer, become) a holder of voting trust certificates, the shares sold or transferred will be released from the Voting Trust. The initial term of the Voting Trust ended in 2002and the term of the Voting Trust has been extended, with the prior approval of the NYDFS, until April 29, 2021. Future extensions of the term of the Voting Trust remain subject to the prior approval of the NYDFS.
SECURITY OWNERSHIP BY MANAGEMENT
The following tables set forth, as of December 31, 2016, certain information regarding the beneficial ownership of common stock of AXA and of AB Holding Units and AB Units by each of our directors and executive officers and by all of our directors and executive officers as a group.
AXA Common Stock(1)
|
| | | | |
Name of Beneficial Owner | | Number of Shares and Nature of Beneficial Ownership | | Percent of Class |
Mark Pearson(2)
| | 855,687 | | * |
Thomas Buberl(3)
| | 220,672 | | * |
Ramon de Oliveria(4)
| | 29,686 | | * |
Paul Evans(5)
| | 239,269 | | * |
Barbara Fallon-Walsh(6)
| | 20,965 | | * |
Daniel G. Kaye | | 5,038 | | * |
Kristi A. Matus | | 5,038 | | * |
Bertram L. Scott(7)
| | 20,970 | | * |
Lorie A. Slutsky(8)
| | 49,363 | | * |
Richard C. Vaughan(9)
| | 35,978 | | * |
Josh Braverman(10)
| | 106,063 | | * |
Marine de Boucaud(11)
| | 25,081 | | * |
Dave S. Hattem(12)
| | 151,582 | | * |
Michael Healy(13)
| | 83,096 | | * |
Adrienne Johnson(14)
| | 81,130 | | * |
Anders Malmstrom(15)
| | 78,995 | | * |
Brian Winikoff | | — | | * |
All directors, director nominees and executive officers as a group (17 persons)(16)
| | 2,008,613 | | * |
| |
* | Number of shares listed represents less than 1% of the outstanding AXA common stock. |
| |
(1) | Holdings of AXA American Depositary Shares (“ADS”) are expressed as their equivalent in AXA ordinary shares. Each AXA ADS represents the right to receive one AXA ordinary share. |
| |
(2) | Includes 453,656 shares Mr. Pearson can acquire within 60 days under option plans. Also includes 272,129 unvested AXA performance shares |
| |
(3) | Includes 102,716 unvested AXA performance shares. |
| |
(4) | Includes 3,652 shares Mr. de Oliveira can acquire within 60 days under option plans. |
| |
(5) | Includes 113,402 shares Mr. Evans can acquire within 60 days under option plans. Also includes 106,094 unvested AXA performance shares. |
| |
(6) | Includes (i) 1,418 shares Ms. Fallon-Walsh can acquire within 60 days under option plans and (ii) 18,964 deferred stock units under The Equity Plan for Directors. |
| |
(7) | Includes (i) 1,418 shares Mr. Scott can acquire within 60 days under option plans and (ii) 17,288 deferred stock units under The Equity Plan for Directors. |
| |
(8) | Includes (i) 9,393 shares Ms. Slutsky can acquire within 60 days under options plans and (ii) 39,970 deferred stock units under The Equity Plan for Directors. |
| |
(9) | Includes 5,594 shares Mr. Vaughan can acquire within 60 days under option plans. |
| |
(10) | Includes 53,176 shares Mr. Braverman can acquire within 60 days under option plans. Also includes 52,887 unvested AXA performance shares. |
| |
(11) | Includes 25,081 unvested AXA performance shares. |
| |
(12) | Includes 73,365 shares Mr. Hattem can acquire within 60 days under option plans. Also includes 78,140 unvested AXA performance shares. |
| |
(13) | Includes 19,017 shares Mr. Healy can acquire within 60 days under option plans. Also includes 49,404 unvested AXA performance shares. |
| |
(14) | Includes 35,049 shares Ms. Johnson can acquire within 60 days under option plans. Also includes 33,980 unvested AXA performance shares. |
| |
(15) | Includes 77,913 unvested AXA performance shares. |
| |
(16) | Includes 769,140 shares the directors and executive officers as a group can acquire within 60 days under option plans. |
AB Holding Units and AB Units
|
| | | | | | |
| | AllianceBernstein Holding L.P. | | AllianceBernstein L.P. |
Name of Beneficial Owner | | Number of Units | | Percent of Class | | Number of Units |
Mark Pearson(1)
| | — | | * | | — |
Thomas Buberl(1)
| | — | | * | | — |
Ramon de Oliveira(1)
| | — | | * | | — |
Paul Evans(1)
| | — | | * | | — |
Barbara Fallon-Walsh(1)
| | — | | * | | — |
Daniel G. Kaye(1)
| | — | | * | | — |
Kristi A. Matus(1)
| | — | | * | | — |
Bertram L. Scott(1)
| | — | | * | | — |
Lorie A. Slutsky(1) (2)
| | 72,227 | | * | | — |
Richard C. Vaughan(1)
| | — | | * | | — |
Marine de Boucaud(1)
| | — | | * | | — |
Josh Braverman(1)
| | — | | * | | — |
Dave S. Hattem(1)
| | — | | * | | — |
Michael Healy | | — | | * | | — |
Adrienne Johnson(1)
| | — | | * | | — |
Anders Malmstrom(1)
| | — | | * | | — |
Brian Winikoff(1)
| | — | | * | | — |
All directors, director nominees and
executive officer of as a group (17 persons)(3)
| | 72,227 | | * | | — |
| |
* | Number of Holding Units listed represents less than 1% of the Units outstanding. |
| |
(1) | Excludes units beneficially owned by AXA and its subsidiaries. |
| |
(2) | Includes 39,398 Holding Units Ms. Slutsky can acquire within 60 days under an AB option plan. |
| |
(3) | Includes 39,410 Holding Units the directors and executive officers as a group can acquire within 60 days under an AB option plan. |
Part III, Item 13.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
POLICIES AND PROCEDURES REGARDING TRANSACTIONS WITH RELATED PERSONS
Insurance
AXA Financial, our indirect parent company, has formal policies covering its employees and directors and the employees and directors of its subsidiaries that are designed to avoid conflicts of interests that may arise in certain related party transactions. For example, employees of AXA Financial and its subsidiaries are subject to the Code of Ethics. The Code of Ethics includes provisions designed to avoid conflicts of interests that may lead to divided loyalties by requiring that employees, among other things, not exercise any responsibility in a transaction in which they have an interest, receive certain approvals before awarding any contract to a relative or close personal friend and not take for their own benefit business opportunities developed or learned of during the course of employment. Similarly, AXA Equitable’s non-officer directors are subject to the AXA Financial Policy Statement on Interests of Directors and Contracts With Directors And Their Relatives for Non-Officer Directors (the “Policy Statement”). The Policy Statement includes provisions designed to maintain the directors’ independent judgment by requiring, among other things, disclosure of interests in any proposed transaction and abstention from voting if a director has a significant financial interest in the transaction or the transaction is with a business organization in which the director has an official affiliation. It further prohibits certain credit related transactions and requires disclosure of potential contracts with and employment of close relatives. Each director must submit a report annually regarding his or her compliance with the Policy Statement.
Other than as set forth above, AXA Equitable does not have written policies regarding the employment of immediate family members of any of its related persons. Compensation and benefits for all of AXA Equitable’s employees are established in accordance with AXA Equitable’s employment and compensation practices applicable to employees with equivalent qualifications and responsibilities who hold similar positions.
As a wholly-owned subsidiary of AXA Financial, and ultimately of AXA, AXA Equitable (and its subsidiaries) enter into various transactions with both AXA Financial and AXA and their subsidiaries in the normal course of business including, among others, service agreements, reinsurance transactions, and lending and other financing arrangements. While there is no formal written policy for the review and approval of transactions between AXA Equitable and AXA and/or AXA Financial, such transactions are routinely subject to a review and/or approval process. For example, payments made by AXA Equitable to AXA and its subsidiaries or received by AXA Equitable from AXA and its subsidiariesOmitted pursuant to certain intercompany service or other agreements (“Intercompany Agreements”) are reviewed with the Audit Committee on an annual basis. The amount paid or received by AXA Equitable for any personnel, property and services provided under such Intercompany Agreements must be reasonable. Additionally, Intercompany AgreementsGeneral Instruction I to which AXA Equitable is a party are subject to the approval of the NYDFS pursuant to New York’s insurance holding company systems act.
In practice, any proposed related party transaction which management deems to be significant or outside of the ordinary course of business would be submitted to the Board of Directors for its approval.
Investment Management
The partnership agreements for each of AB Holding and AB expressly permits AXA and its affiliates, which includes AXA Equitable and its affiliates (collectively, “AXA Affiliates”), to provide services to AB Holding and AB if the terms of the transaction are approved by AllianceBernstein Corporation (the “General Partner”) in good faith as being comparable to (or more favorable to each such partnership than) those that would prevail in a transaction with an unaffiliated party. This requirement is conclusively presumed to be satisfied as to any transaction or arrangement that (i) in the reasonable and good faith judgment of the General Partner, meets that unaffiliated party standard, or (ii) has been approved by a majority of those directors of the General Partner who are not also directors, officers or employees of an affiliate of the General Partner.
In practice, AB’s management pricing committees review investment advisory agreements with AXA Affiliates, which is the manner in which the General Partner reaches a judgment regarding the appropriateness of the fees. Other transactions with AXA Affiliates are submitted to AB’s audit committee for review and approval. AB is not aware of any transaction during 2016 between it and any related person with respect to which these procedures were not followed.
AB’s relationships with affiliates of AXA are also subject to the applicable provisions of the insurance laws and regulations of New York and other states. Under such laws and regulations, the terms of certain investment advisory and other agreements AB
enters into with affiliates of AXA are required to be fair and equitable and charges or fees for services performed must be reasonable. Also, in some cases, the agreements are subject to regulatory approval.
AB has written policies regarding the employment of immediate family members of any of its related persons. Compensation and benefits for all of its employees are established in accordance with AB’s human resources practices, taking into consideration the defined guidelines, responsibilities and nature of the role.
For additional information about AB’s related party transactions, see the ABForm 10-K.
TRANSACTIONS BETWEEN THE COMPANY AND AFFILIATES
The following tables summarize transactions between the Company and related persons during 2016. The first set of tables summarize services that related persons provided to the Company, and the second set of tables summarize services that The Company provided to related persons:
|
| | | | |
INSURANCE(1)
|
Parties(3)
| | General Description of Relationship | | Amount Paid or
Accrued in 2016
|
AXA Distribution and its subsidiaries(2)
| | We pay commissions and fees to AXA Distribution and its subsidiaries for the sale of our insurance products. | | $586,980,259 |
AXA Technology Services America, Inc. (“AXA Tech”) | | AXA Tech provides certain technology related services, including data processing services and functions. | | $95,700,000 |
AXA Financial | | We reimburse AXA Financial for expenses related to certain employee compensation and benefits. | | $52,930,629 |
AXA Group Solutions Pvt. Ltd. (“AXA Group Solutions”) | | AXA Group Solutions provides maintenance and development support for applications. | | $26,802,339 |
GIE Informatique AXA
(“GIE Informatique”) | | GIE Informatique provides certain services, including but not limited to marketing and branding, finance and control, strategy, business support and development and audit, and legal. | | $15,675,000 |
AXA Business Service Private Ltd. (“ABS”) | | ABS provides certain policy administration services, including policy records updates, account maintenance, certain claim review and approval services and employee records updates and reporting services. | | $14,401,225 |
AXA Global Life | | AXA Global Life provides certain services to our life business and advice on our strategic initiative. | | $1,200,000 |
AXA Investment Managers Inc. (“AXA IM”) and AXA Rosenberg Investment Management LLC (“AXA Rosenberg”) | | AXA IM and AXA Rosenberg provide sub-advisory services to our retail mutual funds. | | $197,868 |
GIE AXA Universite
(“GIE Universite”)
| | GIE Universite provides management training seminars to our management employees. | | $56,428 |
|
| | | | |
INVESTMENT MANAGEMENT(4)
|
Parties(3)
| | General Description of Relationship | | Amount Paid or
Accrued in 2016
|
AXA Advisors(5)
| | AXA Advisors distributes certain of AB’s retail products and provides private wealth management referrals. | | $16,077,000 |
ABS | | ABS provides data processing services and support for certain investment operations functions. | | $5,475,000 |
AXA Technology Services India Pvt. Ltd. (“AXA Tech India”) | | AXA Tech India provides certain data processing services and functions. | | $5,327,000 |
AXA Advisors(5)
| | AXA Advisors sells shares of ABs mutual funds under distribution services and educational support agreements. | | $1,653,000 |
AXA Group Solutions | | AXA Group Solutions provides maintenance and development support for applications. | | $1,110,000 |
AXA Wealth | | AXA Wealth provides portfolio-related services for assets AB manages under the AXA Corporate Trustee Investment Plan. | | $908,000 |
GIE | | GIE provides cooperative technology development and procurement services to AB. | | $416,000 |
| |
(1) | AXA Equitable or one of its subsidiaries is a party to each transaction. |
| |
(2) | AXA Distribution is an indirect wholly-owned subsidiary of AXA Financial. Its subsidiaries include AXA Advisors, AXA Network, and PlanConnect LLC. |
| |
(3) | Each entity is an indirect wholly-owned subsidiary of AXA. |
| |
(4) | AB or one of its subsidiaries is a party to each transaction. |
| |
(5) | AXA Advisors is an indirect wholly-owned subsidiary of AXA Financial. |
|
| | | | |
INSURANCE(1)
|
Parties(5)
| | General Description of Relationship | | Amount Received or
Accrued in 2016
|
AXA Distribution and its subsidiaries(4)
| | We provide certain services, including personnel, employee benefits, facilities, supplies and equipment, to AXA Distribution and its subsidiaries. | | $379,140,810 |
MONY America(2)
| | We provide certain services, including personnel, employee benefits, facilities, supplies and equipment, to MONY America | | $129,215,429 |
MONY America(2)
| | We receive commissions and fees from MONY America for the sale of insurance products. | | $10,598,867 |
AXA Tech, AXA IM, AXA LM, AXA REIM, AXA Rosenberg and AXA Strategic Venture | | Employees of these entities and/or their subsidiaries are enrolled in certain of our employee benefit plans and we provide certain facilities to AXA Tech. | | $9,500,000 |
GIE | | We administer the AXA Group Intranet site. | | $4,400,000 |
U.S. Financial Life Insurance Company (“USFL”)(3)
| | We provide certain services, including personnel, employee benefits, facilities, supplies, and equipment to USFL | | $3,944,740 |
AXA Corporate Solutions Life Reinsurance Company (“ACS”) | | We provide certain administrative services to ACS including, but not limited to marketing, branding, finance, strategy and legal. | | $3,500,000 |
AXA Equitable Life and Annuity Company (“AXA L&A”)(7)
| | We provide certain services, including personnel, employee benefits, facilities, supplies and equipment, to AXA L&A. | | $742,607 |
MONY Life Insurance Company of the Americas, Ltd (“MLICA”)(10)
| | We provide certain services, including personnel, employee benefits, facilities, supplies, and equipment to MLICA | | $253,602 |
AXA Arizona(6)
| | We provide certain services, including personnel, employee benefits, facilities, supplies and equipment to AXA Arizona. | | $137,948 |
177
|
| | | | |
INVESTMENT MANAGEMENT(8)
|
Parties(5)
| | General Description of Relationship(9)
| | Accrued in 2016
|
AXA AB Funds | | AB provides investment management distribution and shareholder servicing related services | | $16,070,000 |
AXA Life Japan Limited | | | | $14,771,000 |
AXA Switzerland Life | | | | $9,600,000 |
AXA Arizona(6)
| | | | $8,735,000 |
AXA U.K. Pensions Scheme | | | | $7,615,000 |
AXA France | | | | $6,947,000 |
AXA Hong Kong Life | | | | $6,677,000 |
AXA Germany | | | | $3,004,000 |
AXA Belgium | | | | $2,240,000 |
AXA Switzerland Property & Casualty | | | | $1,280,000 |
MONY America(2)
| | | | $1,279,000 |
AXA Mediterranean | | | | $766,000 |
AXA Corporate Solutions | | | | $521,000 |
AIM Deutschland GmbH | | | | $469,000 |
AXA Investment Managers, Ltd. Paris | | | | $395,000 |
USFL(3)
| | | | $392,000 |
AXA General Insurance Hong Kong Ltd. | | | | $250,000 |
AXA Investment Managers Ltd. | | | | $188,000 |
AXA Insurance Company | | | | $143,000 |
AXA Life Singapore | | | | $142,000 |
Coliseum Reinsurance | | | | $127,000 |
AXA MPS | | | | $107,000 |
| |
(1) | AXA Equitable or one of its subsidiaries is a party to each transaction. |
| |
(2) | MONY America is an indirect wholly-owned subsidiary of AXA Financial. |
| |
(3) | USFL is an indirect wholly-owned subsidiary of AXA Financial. |
| |
(4) | AXA Distribution is an indirect wholly-owned subsidiary of AXA Financial. Its subsidiaries include AXA Advisors, AXA Network, and PlanConnect LLC. |
| |
(5) | Each entity is an indirect wholly owned subsidiary of AXA. |
| |
(6) | AXA Arizona is an indirect wholly owned subsidiary of AXA Financial. |
| |
(7) | AXA L&A is an indirect wholly-owned subsidiary of AXA Financial. |
| |
(8) | AB or one of its subsidiaries is a party to each transaction. |
| |
(9) | AB provides investment management services unless otherwise indicated. |
| |
(10) | MLICA is an indirect wholly-owned subsidiary of AXA Financial. |
ADDITIONAL TRANSACTIONS WITH RELATED PERSONS
Reinsurance
AXA Equitable ceded to AXA Arizona a 100% quota shareTable of all liabilities for variable annuity with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under universal life insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. Ceded premiums in 2016 to AXA Arizona totaled $446,647,478. Ceded claims paid in 2016 were $64,724,232.Contents
Various AXA affiliates, including AXA Equitable, cede a portion of their life, health and catastrophe insurance business through reinsurance agreements to AXA Global Life. AXA Global Life, in turn, retrocedes a quota share portion of these risks prior to 2008 to AXA Equitable on a one-year term basis.
AXA Life Insurance Company Ltd (Japan), an AXA subsidiary, cedes a portion of its annuity business to AXA Equitable.
Various AXA Financial affiliates cede a portion of their life business through excess of retention treaties to AXA Equitable on a yearly renewal term basis.
Premiums earned from the above mentioned affiliated reinsurance transactions in 2016 totaled $20,334,308. Claims and expenses paid in 2016 were $6,136,477.
In April 2015, AXA entered into a mortality catastrophe bond based on general population mortality in each of France, Japan and the U.S. The purpose of the bond is to protect AXA against a severe worldwide pandemic. AXA Equitable entered into a stop loss reinsurance agreement with AXA Global Life to protect AXA Equitable with respect to a deterioration in its claim experience following the occurrence of an extreme mortality event. Premiums and expenses associated with the reinsurance agreement were $3,655,000 in 2016.
Loans to Affiliates
In September 2007, AXA issued a $650 million 5.4% Senior Unsecured Note to AXA Equitable. The note pays interest semi-annually and was scheduled to mature on September 30, 2012. In March 2011, the maturity date of the note was extended to December 30, 2020 and the interest rate was increased to 5.7%.
In June 2009, AXA Equitable sold real estate property valued at $1,100 million to a non-insurance subsidiary of AXA Financial in exchange for $700 million in cash and $400 million in 8.0% ten year term mortgage notes on the property reported in Loans to affiliates in the consolidated balance sheets. In November 2014, this loan was refinanced and a new $382 million, seven year term loan with an interest rate of 4.0% was issued. In January 2016, the property was sold and a portion of the proceeds was used to repay the $382 million term loan outstanding and a $65 million prepayment penalty.
In third quarter 2013, AXA Equitable purchased at fair value, AXA Arizona’s $50 million note receivable from AXA for $56 million. This note pays interest semi-annually at an interest rate of 5.4% and matures on December 15, 2020.
Other Transactions
In 2016, AXA Equitable sold artwork to AXA Financial and recognized a $20,000,000 gain on the sale. AXA Equitable used the proceeds received from this sale to make a $21,000,000 donation to AXA Foundation, Inc. (the “Foundation”). The Foundation was organized for the purpose of distributing grants to various tax-exempt charitable organizations and administering various matching gift programs for AXA Equitable, its subsidiaries and affiliates.
In 2016, AXA Equitable and Saum Sing LLC (“Saum Sing”), an affiliate, formed Broad Vista Partners LLC (“Broad Vista”), AXA Equitable owns 70% and Saum Sing owns 30% of Broad Vista. On June 30, 2016, Broad Vista entered into a real estate joint venture with a third party and AXA Equitable invested approximately $24,575,000, reported in Other equity investments in the consolidated balance sheets.
DIRECTOR INDEPENDENCE
See “Corporate Governance – Independence of Certain Directors” in Part III, Item 10 of this Report.
Part III, Item 14.
PRINCIPAL ACCOUNTINGACCOUNTANT FEES AND SERVICES
The following table presentsIn 2018 and 2017, PricewaterhouseCoopers LLP ("PwC") served as the principal external auditing firm for our parent company. Subsidiaries, including AXA Equitable Life, are allocated PwC fees for professional auditattributable to services rendered by PricewaterhouseCoopers LLP (“PwC”) for the auditPwC to each subsidiary. PwC fees allocated to AXA Equitable Life along with a description of the Company’s annual financial statements for 2016 and 2015, and fees for other services rendered by PwC:PwC to AXA Equitable Life are detailed below for the periods indicated.
| | | | 2016 | | 2015 | 2018 | | 2017 |
| | (In Thousands) | (in millions) |
| Principal Accounting Fees and Services: | | | | | | |
| Audit fees | $ | 10,536 |
| | $ | 11,437 |
| $ | 7 |
| | $ | 12 |
|
| Audit related fees | 3,842 |
| | 3,485 |
| 3 |
| | 4 |
|
| Tax fees | 1,995 |
| | 2,155 |
| — |
| | 2 |
|
| All other fees | 628 |
| | 23 |
| — |
| | — |
|
Total | $ | 17,001 |
| | $ | 17,100 |
| $ | 10 |
| | $ | 18 |
|
_______________
Audit fees for AXA Financial and AXA Equitable are paid pursuant to a single engagement letter with PwC.
| |
| (1) | Does not include fees of $11.5 million and $11.7 million for 2018 and 2017, respectively, that were paid directly by AB to PwC. For more information on these fees, see AB's Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC. |
Audit related fees in both years principally consist of fees for audits of financial statements of certain employee benefit plans, internal control related reviews and services and accounting consultation.
Tax fees consist of fees for tax preparation, consultation and compliance services.
All other fees consist of miscellaneous non-audit services.
AXA Equitable’s audit committee has determined that all services to be provided by its independent registered public accounting firm must be reviewed and approved by the audit committee on a case-by-case basis provided, however, that the audit committee has delegated to its chairperson the ability to pre-approve any non-audit engagement where the fees are expected to be less than or equal to $200,000 per engagement. Any exercise of this delegated authority by the audit committee chairperson is required to be reported at the next audit committee meeting.
AB’s audit committee has a policy to pre-approve audit and non-audit service engagements with the independent registered public accounting firm. The independent registered public accounting firm must provide annually a comprehensive and detailed schedule of each proposed audit and non-audit service to be performed. The audit committee then affirmatively indicates its approval of the listed engagements. Engagements that are not listed, but that are of similar scope and size to those listed and approved, may be deemed to be approved, if the fee for such service is less than $100,000. In addition, each audit committee has delegated to its chairman the ability to approve any permissible non-audit engagement where the fees are expected to be less than $100,000.
All services provided by PwC in 20162018 were pre-approved in accordance with the procedures described above.
Part IV, Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
| (A) | The following documents are filed as part of this report: |
The financial statements are listed in the Index to Consolidated Financial Statements and Schedules on page 99. |
| | |
| | | Page Number |
| 1. | | |
| 2. | Financial Statement Schedules: | |
| | | |
| | | |
| 3. | | |
| |
2. | Consolidated Financial Statement Schedules |
The consolidated financial statement schedules are listed in the Index to Consolidated Financial Statements and Schedules on page 99.
The exhibits are listed in the Index to Exhibits that begins on page E1.
Part IV, Item 16.
FORM 10-K SUMMARY
None.
INDEX TO EXHIBITS
|
| | | | |
| Number | | Description | | Method of Filing |
| | Restated Charter of AXA Equitable, as amended September 16, 2010 | | Filed as Exhibit 3.1 to registrant’s Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference |
| | Restated By-laws of Equitable Life, as amended November 21, 1996 | | Filed as Exhibit 3.2(a) to registrant’s Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference |
| | Consent of PricewaterhouseCoopers LLP | | Filed herewith |
| | Section 302 Certification made by the registrant’s Chief Executive Officer | | Filed herewith |
| | Section 302 Certification made by the registrant’s Chief Financial Officer | | Filed herewith |
| | Section 906 Certification made by the registrant’s Chief Executive Officer | | Filed herewith |
| | Section 906 Certification made by the registrant’s Chief Financial Officer | | Filed herewith |
| 101.INS | | XBRL Instance Document | | Filed herewith |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith |
| 101.LAB | | XBRL Taxonomy Label Linkbase Document | | Filed herewith |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, AXA Equitable Life Insurance Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.authorized, on March 28, 2019.
|
| | |
Date: March 24, 2017 | AXA EQUITABLE LIFE INSURANCE COMPANY |
| | By: | /s/ Mark Pearson |
| | Name: | Mark Pearson |
| | | Chairman of the Board, President and Chief Executive Officer and Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.March 28, 2019.
|
| | |
| | |
| /s/ Mark Pearson | | Chairman of the Board, President and
Chief Executive Officer and Director | | March 24, 2017 |
| Mark Pearson | | | |
| | | | |
/s/ Anders MalmstromB. Malmström | | Senior Executive Director and Chief Financial Officer | | March 24, 2017 |
Anders B. Malmstrom | | Malmström | |
| | | | |
| /s/ Andrea M. Nitzan | | Executive Director, Chief Accounting Officer and Controller | | March 24, 2017 |
| Andrea M. Nitzan | | | |
| | | | |
| /s/ Thomas Buberl | | Director | | March 24, 2017 |
| Thomas Buberl | | | |
| | | | | |
/s/ Ramon de OliveiraGérald Harlin | | Director | | March 24, 2017 |
Ramon E de Oliveira | | Gérald Harlin | |
| | | | |
/s/ Paul J. Evans | | Director | | March 24, 2017 |
Paul J. Evans | | | |
| | | | |
/s/ Barbara Fallon-Walsh | | Director | | March 24, 2017 |
Barbara A. Fallon-Walsh | | | |
| | | | |
| /s/ Daniel G. Kaye | | Director | | March 24, 2017 |
| Daniel G. Kaye | | | |
| | | | |
| /s/ Kristi A. Matus | | Director | | March 24, 2017 |
| Kristi A. Matus | | | |
| | | | | |
/s/ Bertram L. ScottGeorge H. Stansfield | | Director | | March 24, 2017 |
Bertram L. Scott | | George H. Stansfield | |
| | | | | |
/s/ Lorie A. SlutskyCharles G.T. Stonehill | | Director | | March 24, 2017 |
Lorie A. Slutsky | | | |
| | | | |
/s/ Richard C. Vaughan | | Director | | March 24, 2017 |
Richard C. Vaughan | | Charles G.T. Stonehill | |
INDEX TO EXHIBITS
|
| | | | | | |
Number | | Description | | Method of Filing | | Tag Value |
2.1 | | Stock Purchase Agreement dated as of August 30, 2000 among CSG, AXA, Equitable Life, AXA Participations Belgium and AXA Financial | | Filed as Exhibit 2.1 to AXA Financial’s Current Report on Form 8-K dated November 14, 2000 and incorporated herein by reference | | |
2.2 | | Letter Agreement dated as of October 6, 2000 to the Stock Purchase Agreement among CSG, AXA, Equitable Life, AXA Paticipations Belgium and AXA Financial | | Filed as Exhibit 2.2 to AXA Financial’s Current Report on Form 8-K dated November 14, 2000 and incorporated herein by reference | | |
3.1 | | Restated Charter of AXA Equitable, as amended September 16, 2010 | | Filed as Exhibit 3.1 to registrant’s Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference | | |
3.2 | | Restated By-laws of Equitable Life, as amended November 21, 1996 | | Filed as Exhibit 3.2(a) to registrant’s Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference | | |
10.1 | | Cooperation Agreement, dated as of July 18, 1991, as amended among Equitable Life, AXA Financial and AXA | | Filed as Exhibit 10(d) to AXA Financial’s Form S-1 Registration Statement (No. 33- 48115), dated May 26, 1992 and incorporated herein by reference | | |
10.2 | | Letter Agreement, dated May 12, 1992, among AXA Financial, Equitable Life and AXA | | Filed as Exhibit 10(e) to AXA Financial’s Form S-1 Registration Statement (No. 33- 48115), dated May 26, 1992 and incorporated herein by reference | | |
10.3 | | Distribution and Servicing Agreement between AXA Advisors (as Successor to Equico Securities, Inc.) and Equitable Life dated as of May 1, 1994 | | Filed as Exhibit 10.7 to registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference | | |
10.4 | | Agreement for Cooperative and Joint Use of Personnel, Property and Services between Equitable Life and AXA Advisors dated as of September 21, 1999 | | Filed as Exhibit 10.8 to registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference | | |
10.5 | | General Agent Sales Agreement between Equitable Life and AXA Network, dated as of January 1, 2000 | | Filed as Exhibit 10.9 to registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference | | |
10.6 | | Agreement for Services by Equitable Life to AXA Network dated as of January 1, 2000 | | Filed as Exhibit 10.10 to registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference | | |
13.1 | | AB Risk Factors | | Filed herewith | | EX-13.1 |
21 | | Subsidiaries of the registrant | | Filed herewith | | EX-21 |
31.1 | | Section 302 Certification made by the registrant’s Chief Executive Officer | | Filed herewith | | EX-31.1 |
31.2 | | Section 302 Certification made by the registrant’s Chief Financial Officer | | Filed herewith | | EX-31.2 |
32.1 | | Section 906 Certification made by the registrant’s Chief Executive Officer | | Filed herewith | | EX-32.1 |
32.2 | | Section 906 Certification made by the registrant’s Chief Financial Officer | | Filed herewith | | EX-32.2 |
101.INS | | XBRL Instance Document | | Filed herewith | | EX-101.INS |
101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith | | EX-101.SCH |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith | | EX-101.CAL |
101.LAB | | XBRL Taxonomy Label Linkbase Document | | Filed herewith | | EX-101.LAB |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith | | EX-101.PRE |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith | | EX-101.DEF |