UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018 March 31, 2019
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-38469
AXA Equitable Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 90-0226248 |
(State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | (I.R.S. Employer Identification No.) |
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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)
Not applicable
(Former name, former address, and former fiscal year if changed since last report.)
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 x No ¨
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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an “emerging growth company”. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ¨
| | Accelerated filer | | ¨
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Non-accelerated filer | | x (Do not check if a smaller reporting company) | | Smaller reporting company | | ¨
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Emerging growth company | | ¨
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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¨ No x
Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class | | Trading Symbol | | Name of Exchange on which registered |
Common Stock | | EQH | | New York Stock Exchange |
As of August 13, 2018, 561,000,000May 9, 2019, 491,138,042 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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| - OTHER INFORMATION | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
Certain of the statements included or incorporated by reference in this Quarterly Report on Form 10-Q 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 Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “intends,” “seeks,” “aims,” “plans,” “assumes,” “estimates,” “projects,” “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 Holdings, Inc. (“Holdings”) and its consolidated subsidiaries. “We,” “us” and “our” refer to Holdings and its consolidated subsidiaries, unless the context refers only to Holdings as a corporate entity. The term “ABLP” refers to AllianceBernstein L.P., a Delaware limited partnership and “AB Holding” refers to AllianceBernstein Holding L.P., a Delaware limited partnership (ABLP and AB Holding, together, “AB”). There can be no assurance that future developments affecting Holdings will be those anticipated by management. Forward-looking statements include, without limitation, all matters that are not historical facts.
Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you thatThese forward-looking statements are not guaranteesa guarantee of future performance or outcomes and that actual performanceinvolve risks and outcomes, including, without limitation, our actual results of operations or financial condition, may differ materially from those made in or suggested by the forward-looking statements contained herein. In addition, even if our results of operations, financial conditionuncertainties, and cash flowsthere are consistent with the forward-looking statements contained herein, those results may not be indicative of results in subsequent periods. Newcertain important factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to predict all of them. Factors that could cause actual results and outcomes to differ, possibly materially, from thoseexpectations or estimates reflected in such forward-looking statements, include, without limitation:
Adverseincluding, among others: (i) conditions in the global capitalfinancial markets and economy, including equity market declines and volatility, interest rate fluctuations, impacts on our goodwill and changes in liquidity and access to and cost of capital; (ii) operational factors, including reliance on the economy;
Variablepayment of dividends to Holdings by its subsidiaries, remediation of our material weaknesses, fulfilling our obligations related to being a public company, indebtedness, elements of our business strategy not being effective in accomplishing our objectives, protection of confidential customer information or proprietary 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 financial institutions, defaults, errors or omissions by third parties and affiliates and gross unrealized losses on fixed maturity and equity securities; (iv) our reinsurance and hedging programs; (v) our products, structure and product distribution, including variable annuity guaranteed benefits features within certain of our products;
Inadequacyproducts, complex regulation and administration of our reinsuranceproducts, variations in statutory capital requirements, financial strength and hedging programs;
Competitionclaims-paying ratings and key product distribution relationships; (vi) estimates, assumptions and valuations, including risk management policies and procedures, potential inadequacy of reserves, actual mortality, longevity and morbidity experience differing from other insurance companies, banks, asset managerspricing expectations or reserves, amortization of deferred acquisition costs and other financial institutions;
The failure of our new business strategy in accomplishing our objectives;
Risks related tomodels; (vii) our Investment Management and Research segment, including significant fluctuations in AB’s assets under management, (“AUM”), the industry-wide shift from actively-managed investment services to passive services and potential termination of investment advisory agreement, inability to deliver consistent performance, the quantitative models AB uses in certain of its investment services containing errors, and fluctuations in exchange rates;
Inability to recruit, motivate and retain key employees and experienced and productive financial professionals;
The amount of statutory capital we have and must hold to meet our statutory capital requirements and our financial strength and credit ratings varying significantly from time to time;
Holdings’ dependence on the ability of its subsidiaries to pay dividends and other distributions to Holdings, and the failure of its insurance subsidiaries to generate sufficient statutory earnings or have sufficient statutory surplus to enable them to pay ordinary dividends;
Operational failures, failure of information systems or failure to protect the confidentiality of customer information, including by service providers, or losses due to defaults, errors or omissions by third parties and affiliates;
Risks related to strategic transactions;
The occurrence of a catastrophe, including natural or man-made disasters;
Failure to protect our intellectual property and infringement claims by a third party;
Our investment advisory agreements with clients, and selling and distribution agreements with various financial intermediaries and consultants, being subject to termination or non-renewal on short notice;
Failure of our insurance to fully cover potential exposures;
Changes in accounting standards;
Risks and increased complianceagreements; (viii) legal and regulatory costs due to certain of our administrative operations and offices being located internationally;
Our counterparties’ requirements to pledge collateral or make payments related to declines in estimated fair value of specified assets and changes in the actual or perceived soundness or condition of other financial institutions and market participants;
Gross unrealized losses on fixed maturity and equity securities, illiquid investments and defaults on investments;
Changes to policyholder behavior assumptions under the contracts reinsured to our affiliated captives, the performance of their hedging program, their liquidity needs, their overall financial results and changes in regulatory requirements regarding the use of captives;
The failure to administer or meet any of the complex product and regulatory requirements of our retirement and protection products;
Changes in statutory reserve or other requirements;
A downgrade in our financial strength and claims-paying ratings;
Consolidation of or a loss of, or significant change in, key product distribution relationships;
The failure of our risk management policies and procedures to be adequate to identify, monitor and manage risks;
Inadequate reserves due to differences between our actual experience and management’s estimates and assumptions;
Mortality, longevity and morbidity rates or persistency rates differing significantly from our pricing expectations;
The acceleration of the amortization of deferred acquisition costs (“DAC”);
Inherent uncertainty in our financial models that rely on a number of estimates, assumptions and projections;
Subjective determination of the amount of allowances and impairments taken on our investments;
Changes in the partnership structure of AB Holding and ABLP or changes in the tax law governing partnerships;
U.S.risks, including federal and state legislative and regulatory actionlegislation affecting financial institutions, insurance regulation and changes in supervisorytax reform; (ix) risks related to our continuing relationship with AXA, including conflicts of interest, waiver of corporate opportunities and enforcement policies;
The Tax Cutscosts associated with separation and Jobs Act, enacted on December 22, 2017 (the “Tax Reform Act”)rebranding; and (x) risks related to our common stock and future changes in U.S. tax lawsofferings, including the market price for our common stock being volatile and regulations or interpretations thereof;
Adverse outcomes of legal or regulatory actions;
Conflicts of interest that arise because our controlling stockholder and its affiliates have continuing agreements and business relationships with us;
Our failurepotential stock price declines due to effectively remediate the material weaknesses in our internal control over financial reporting;
Costs associated with any rebranding that we expect to undertake after AXA S.A. (“AXA”) ceases to own at least a majority of our outstanding common stock;
Failure to replicate or replace functions, systems and infrastructure provided by AXA or certain of its affiliates and loss of benefits from AXA’s global contracts; and
Futurefuture sales of shares by existing stockholders could cause our stock price to decline.stockholders.
Forward-looking statements should be read in conjunction with the other cautionary statements, risks, uncertainties and other factors identified in Holdings’ prospectus dated May 9,Annual Report on Form 10-K for the year ended December 31, 2018 filed on May 11, 2018 with the U.S. Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, including in the section entitled “Risk Factors,” and elsewhere in this Quarterly Report on Form 10-Q. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to 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.
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
AXA EQUITABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
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| June 30, 2018 | | December 31, 2017 |
| (Unaudited) | | |
| (in millions, except share amounts) |
ASSETS | | | |
Investments: | |
Fixed maturities available for sale, at fair value (amortized cost of $44,171 and $45,068) | $ | 43,905 |
| | $ | 46,941 |
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Mortgage loans on real estate (net of valuation allowance of $7 and $8) | 11,808 |
| | 10,952 |
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Real estate held for production of income(1) | 53 |
| | 390 |
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Policy loans | 3,739 |
| | 3,819 |
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Other equity investments(1) | 1,385 |
| | 1,392 |
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Trading securities, at fair value | 14,146 |
| | 14,170 |
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Other invested assets(1) | 1,792 |
| | 4,118 |
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Total investments | 76,828 |
| | 81,782 |
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Cash and cash equivalents(1) | 6,833 |
| | 4,814 |
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Cash and securities segregated, at fair value | 1,289 |
| | 825 |
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Broker-dealer related receivables | 2,276 |
| | 2,158 |
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Deferred policy acquisition costs | 6,346 |
| | 5,969 |
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Goodwill and other intangible assets, net | 4,802 |
| | 4,824 |
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Amounts due from reinsurers | 4,963 |
| | 5,023 |
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Loans to affiliates | — |
| | 1,230 |
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GMIB reinsurance contract asset, at fair value | 1,636 |
| | 1,894 |
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Current and deferred tax assets | 47 |
| | 67 |
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Other assets(1) | 3,025 |
| | 2,510 |
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Separate Accounts assets | 122,967 |
| | 124,552 |
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Total assets | $ | 231,012 |
| | $ | 235,648 |
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LIABILITIES | | | |
Policyholders’ account balances | $ | 48,849 |
| | $ | 47,171 |
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Future policy benefits and other policyholders’ liabilities | 29,351 |
| | 30,299 |
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Broker-dealer related payables | 603 |
| | 783 |
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Securities sold under agreements to repurchase | 1,850 |
| | 1,887 |
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Customers related payables | 2,713 |
| | 2,229 |
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Amounts due to reinsurers | 1,398 |
| | 1,436 |
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Short-term and Long-term debt(1) | 4,922 |
| | 2,408 |
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Loans from affiliates | — |
| | 3,622 |
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Other liabilities(1) | 3,350 |
| | 4,053 |
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(UNAUDITED)
AXA EQUITABLE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS - CONTINUED
| | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (Unaudited) | | | (in millions, except share data) |
| (in millions, except share amounts) | |
ASSETS | | | | |
Investments: | | | | |
Fixed maturities available-for-sale, at fair value (amortized cost of $49,117 and $46,801) | | $ | 50,305 |
| | $ | 46,279 |
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Mortgage loans on real estate (net of valuation allowance of $0 and $7) | | 12,117 |
| | 11,835 |
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Real estate held for production of income (1) | | 68 |
| | 52 |
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Policy loans | | 3,766 |
| | 3,779 |
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Other equity investments (1) | | 1,321 |
| | 1,334 |
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Trading securities, at fair value | | 13,127 |
| | 16,017 |
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Other invested assets (1) | | 2,244 |
| | 2,037 |
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Total investments | | 82,948 |
| | 81,333 |
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Cash and cash equivalents (1) | | 5,129 |
| | 4,469 |
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Cash and securities segregated, at fair value | | 1,262 |
| | 1,170 |
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Broker-dealer related receivables | | 2,122 |
| | 2,209 |
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Deferred policy acquisition costs | | 6,018 |
| | 6,745 |
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Goodwill and other intangible assets, net | | 4,769 |
| | 4,780 |
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Amounts due from reinsurers | | 4,850 |
| | 4,895 |
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GMIB reinsurance contract asset, at fair value | | 1,740 |
| | 1,732 |
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Other assets | | 3,787 |
| | 3,127 |
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Separate Accounts assets | | 120,194 |
| | 110,337 |
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Total Assets | | $ | 232,819 |
| | $ | 220,797 |
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LIABILITIES | | | | |
Policyholders’ account balances | | $ | 52,197 |
| | $ | 49,923 |
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Future policy benefits and other policyholders' liabilities | | 31,462 |
| | 30,998 |
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Broker-dealer related payables | | 494 |
| | 431 |
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Securities sold under agreements to repurchase | | — |
| | 573 |
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Customer related payables | | 2,999 |
| | 3,095 |
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Amounts due to reinsurers | | 1,372 |
| | 1,438 |
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Short-term and long-term debt | | 4,949 |
| | 4,955 |
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Current and deferred income taxes | | 482 |
| | 68 |
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Other liabilities (1) | | 3,781 |
| | 3,360 |
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Separate Accounts liabilities | 122,967 |
| | 124,552 |
| 120,194 |
| | 110,337 |
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Total liabilities | $ | 216,003 |
| | $ | 218,440 |
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Total Liabilities | | $ | 217,930 |
| | $ | 205,178 |
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Redeemable noncontrolling interest(1) | $ | 146 |
| | $ | 626 |
| $ | 207 |
| | $ | 187 |
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Commitments and contingent liabilities |
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EQUITY | | | | | | |
Equity attributable to Holdings: | | | | | | |
Common stock, $0.01 par value, 2,000,000,000 shares authorized and 561,000,000 issued and outstanding | $ | 6 |
| | $ | 6 |
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Capital in excess of par value | 2,067 |
| | 1,298 |
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Common stock, $0.01 par value, 2,000,000,000 shares authorized, 552,896,328 and 561,000,000 shares issued, 491,015,901 and 528,861,758 shares outstanding, respectively | | $ | 5 |
| | $ | 5 |
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Additional paid-in capital | | 1,881 |
| | 1,908 |
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Treasury stock, at cost, 61,880,427 and 32,138,242 shares, respectively | | (1,234 | ) | | (640 | ) |
Retained earnings | 12,613 |
| | 12,289 |
| 13,004 |
| | 13,989 |
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Accumulated other comprehensive income (loss) | (1,310 | ) | | (108 | ) | (513 | ) | | (1,396 | ) |
Total equity attributable to Holdings | 13,376 |
| | 13,485 |
| 13,143 |
| | 13,866 |
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Noncontrolling interest | 1,487 |
| | 3,097 |
| 1,539 |
| | 1,566 |
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Total equity | 14,863 |
| | 16,582 |
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Total Equity | | 14,682 |
| | 15,432 |
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Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 231,012 |
| | $ | 235,648 |
| $ | 232,819 |
| | $ | 220,797 |
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(1) See Note 2 for details of balances with variable interest entities.
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(1) | See Note 2 for details of balances with variable interest entities. |
See Notes to Consolidated Financial Statements (Unaudited).
AXA EQUITABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 (as restated) | 2019 | | 2018 |
| (in millions, except earnings per share amounts) | (in millions, except per share data) |
REVENUES | | | | | | | | | | |
Policy charges and fee income | $ | 987 |
| | $ | 935 |
| | $ | 1,959 |
| | $ | 1,891 |
| $ | 931 |
| | $ | 966 |
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Premiums | 275 |
| | 277 |
| | 554 |
| | 558 |
| 283 |
| | 279 |
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Net derivative gains (losses) | (73 | ) | | 729 |
| | (354 | ) | | 494 |
| (1,630 | ) | | (236 | ) |
Net investment income (loss) | 596 |
| | 803 |
| | 1,187 |
| | 1,583 |
| 1,015 |
| | 591 |
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Investment gains (losses), net: | | | | | | | | |
Total other-than-temporary impairment losses | — |
| | (13 | ) | | — |
| | (14 | ) | |
Other investment gains (losses), net | (22 | ) | | 17 |
| | 80 |
| | (6 | ) | |
Total investment gains (losses), net | (22 | ) | | 4 |
| | 80 |
| | (20 | ) | |
Investment gains (losses), net | | (11 | ) | | 102 |
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Investment management and service fees | 1,075 |
| | 998 |
| | 2,130 |
| | 1,952 |
| 999 |
| | 1,055 |
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Other income | 124 |
| | 136 |
| | 241 |
| | 254 |
| 127 |
| | 117 |
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Total revenues | 2,962 |
| | 3,882 |
| | 5,797 |
| | 6,712 |
| 1,714 |
| | 2,874 |
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BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | |
Policyholders’ benefits | 920 |
| | 1,741 |
| | 1,528 |
| | 2,834 |
| 880 |
| | 594 |
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Interest credited to policyholders’ account balances | 268 |
| | 242 |
| | 539 |
| | 488 |
| 304 |
| | 271 |
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Compensation and benefits (includes $41, $41, $81 and $82 of deferred policy acquisition costs, respectively) | 558 |
| | 546 |
| | 1,178 |
| | 1,085 |
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Commissions and distribution related payments (includes $132, $138, $251 and $270 of deferred policy acquisition costs, respectively) | 418 |
| | 400 |
| | 829 |
| | 795 |
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Compensation and benefits | | 509 |
| | 579 |
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Commissions and distribution-related payments | | 281 |
| | 291 |
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Interest expense | 60 |
| | 38 |
| | 106 |
| | 73 |
| 56 |
| | 46 |
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Amortization of deferred policy acquisition costs (net of capitalization of $173, $179, $332 and $352 of deferred policy acquisition costs, respectively) | (1 | ) | | (113 | ) | | 14 |
| | (168 | ) | |
Amortization of deferred policy acquisition costs | | 198 |
| | 172 |
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Other operating costs and expenses | 425 |
| | 414 |
| | 919 |
| | 1,158 |
| 410 |
| | 493 |
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Total benefits and other deductions | 2,648 |
| | 3,268 |
| | 5,113 |
| | 6,265 |
| 2,638 |
| | 2,446 |
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Income (loss) from continuing operations, before income taxes | 314 |
| | 614 |
| | 684 |
| | 447 |
| (924 | ) | | 428 |
|
Income tax (expense) benefit | (59 | ) | | 84 |
| | (138 | ) | | 54 |
| 215 |
| | (91 | ) |
Net income (loss) | 255 |
| | 698 |
| | 546 |
| | 501 |
| (709 | ) | | 337 |
|
Less: net (income) loss attributable to the noncontrolling interest | (97 | ) | | (90 | ) | | (220 | ) | | (183 | ) | |
Less: Net (income) loss attributable to the noncontrolling interest | | (66 | ) | | (123 | ) |
Net income (loss) attributable to Holdings | $ | 158 |
| | $ | 608 |
| | $ | 326 |
| | $ | 318 |
| $ | (775 | ) | | $ | 214 |
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EARNINGS PER SHARE | | | | | | | | | | |
Earnings per share - Common stock | | | | | | | | |
Earnings per share - Common stock: | | | | |
Basic | $ | 0.28 |
| | $ | 1.08 |
| | $ | 0.58 |
| | $ | 0.57 |
| $ | (1.50 | ) | | $ | 0.38 |
|
Diluted | $ | 0.28 |
| | $ | 1.08 |
| | $ | 0.58 |
| | $ | 0.57 |
| $ | (1.50 | ) | | $ | 0.38 |
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Weighted average common shares outstanding - basic | 561.0 |
| | 561.0 |
| | 561.0 |
| | 561.0 |
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Weighted average common shares outstanding - diluted | 561.1 |
| | 561.0 |
| | 561.1 |
| | 561.0 |
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Weighted average common shares outstanding: | | | | |
Basic | | 518.0 |
| | 561.0 |
|
Diluted | | 518.0 |
| | 561.0 |
|
See Notes to Consolidated Financial Statements (Unaudited).
AXA EQUITABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
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| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
COMPREHENSIVE INCOME (LOSS) | | | |
Net income (loss) | $ | (709 | ) | | $ | 337 |
|
Other comprehensive income (loss) net of income taxes: |
| |
|
Change in unrealized gains (losses), net of reclassification adjustment (1) | 834 |
| | (962 | ) |
Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment | 49 |
| | 133 |
|
Foreign currency translation adjustment (1) | (1 | ) | | (3 | ) |
Total other comprehensive income (loss), net of income taxes | 882 |
| | (832 | ) |
Comprehensive income (loss) | 173 |
| | (495 | ) |
Less: Comprehensive (income) loss attributable to the noncontrolling interest | (65 | ) | | (129 | ) |
Comprehensive income (loss) attributable to Holdings | $ | 108 |
| | $ | (624 | ) |
______________ |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 (as restated) |
| (in millions) |
COMPREHENSIVE INCOME (LOSS) | | | | | | | |
Net income (loss) | $ | 255 |
| | $ | 698 |
| | $ | 546 |
| | $ | 501 |
|
Other comprehensive income (loss) net of income taxes: | | | | | | | |
Foreign currency translation adjustment | (8 | ) | | 17 |
| | (14 | ) | | 25 |
|
Change in unrealized gains (losses), net of reclassification adjustment | (349 | ) | | 431 |
| | (1,308 | ) | | 535 |
|
Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment | 1 |
| | 18 |
| | 134 |
| | 43 |
|
Total other comprehensive income (loss), net of income taxes | (356 | ) | | 466 |
| | (1,188 | ) | | 603 |
|
Comprehensive income (loss) | (101 | ) | | 1,164 |
| | (642 | ) | | 1,104 |
|
Less: Comprehensive (income) loss attributable to noncontrolling interest | (105 | ) | | (98 | ) | | (234 | ) | | (198 | ) |
Comprehensive income (loss) attributable to Holdings | $ | (206 | ) | | $ | 1,066 |
| | $ | (876 | ) | | $ | 906 |
|
| |
(1) | A reclassification of $2 million has been made to the previously reported amounts for the three months ended March 31, 2018 to conform to the current period’s presentation. |
See Notes to Consolidated Financial Statements (Unaudited).
AXA EQUITABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 (as restated) |
| (in millions) |
Equity attributable to Holdings: | | |
Common stock, at par value, beginning of year and end of period | $ | 6 |
| | $ | 6 |
|
| | | |
Capital in excess of par value, beginning of year | $ | 1,298 |
| | $ | 931 |
|
Capital contribution from parent | 695 |
| | — |
|
Purchase of AllianceBernstein Units from noncontrolling interest | 17 |
| | — |
|
Changes in capital in excess of par value | 57 |
| | 24 |
|
Capital in excess of par value, end of period | $ | 2,067 |
| | $ | 955 |
|
| | | |
Retained earnings, beginning of year | $ | 12,289 |
| | $ | 11,439 |
|
Impact of adoption of revenue recognition standard ASC 606 | 13 |
| | — |
|
Net income (loss) | 326 |
| | 318 |
|
Stockholder dividends | (15 | ) | |
|
|
Retained earnings, end of period | $ | 12,613 |
| | $ | 11,757 |
|
| | | |
Accumulated other comprehensive income (loss), beginning of year | $ | (108 | ) | | $ | (921 | ) |
Other comprehensive income (loss) | (1,202 | ) | | 588 |
|
Accumulated other comprehensive income (loss), end of period | (1,310 | ) | | (333 | ) |
Total Holdings’ equity, end of period | $ | 13,376 |
| | $ | 12,385 |
|
| | | |
Noncontrolling interest, beginning of year | $ | 3,097 |
| | $ | 3,142 |
|
Impact of adoption of revenue recognition standard ASC 606 | 19 |
| |
|
|
Repurchase of AB Holding units | (12 | ) | | (69 | ) |
Net income (loss) attributable to noncontrolling interest | 186 |
| | 159 |
|
Dividends paid to noncontrolling interest | (216 | ) | | (186 | ) |
Purchase of AB Units by Holdings | (1,521 | ) | | — |
|
Other comprehensive income (loss) attributable to noncontrolling interest | 14 |
| | 15 |
|
Other changes in noncontrolling interest | (80 | ) | | (8 | ) |
Noncontrolling interest, end of period | 1,487 |
| | 3,053 |
|
Total Equity, End of Period | $ | 14,863 |
| | $ | 15,438 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| Equity Attributable to Holdings | | | | |
| Common Stock |
| Additional Paid-in Capital |
| Treasury Stock |
| Retained Earnings |
| Accumulated Other Comprehensive Income (Loss) |
| Total Holdings Equity |
| Noncontrolling Interest |
| Total Equity |
| (in millions) |
January 1, 2019 | $ | 5 |
|
| $ | 1,908 |
|
| $ | (640 | ) |
| $ | 13,989 |
|
| $ | (1,396 | ) |
| $ | 13,866 |
|
| $ | 1,566 |
|
| $ | 15,432 |
|
Stock compensation and other | — |
|
| (19 | ) |
| — |
|
| — |
|
| — |
|
| (19 | ) |
| 9 |
|
| (10 | ) |
Purchase of treasury stock | — |
|
| — |
|
| (594 | ) |
| — |
|
| — |
|
| (594 | ) |
| — |
|
| (594 | ) |
Retirement of common stock | — |
|
| — |
|
| — |
|
| (142 | ) |
| — |
|
| (142 | ) |
| — |
|
| (142 | ) |
Repurchase of AB Holding units | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (21 | ) |
| (21 | ) |
Dividends paid to noncontrolling interest | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (68 | ) |
| (68 | ) |
Stockholder dividends (cash dividends declared per common share of $0.13 in 2019) | — |
|
| — |
|
| — |
|
| (68 | ) |
| — |
|
| (68 | ) |
| — |
|
| (68 | ) |
Net income (loss) | — |
|
| — |
|
| — |
|
| (775 | ) |
| — |
|
| (775 | ) |
| 54 |
|
| (721 | ) |
Other comprehensive income (loss) | — |
|
| — |
|
| — |
|
| — |
|
| 883 |
|
| 883 |
|
| (1 | ) |
| 882 |
|
Other | — |
|
| (8 | ) |
| — |
|
| — |
|
| — |
|
| (8 | ) |
| — |
|
| (8 | ) |
March 31, 2019 | $ | 5 |
|
| $ | 1,881 |
|
| $ | (1,234 | ) |
| $ | 13,004 |
|
| $ | (513 | ) |
| $ | 13,143 |
|
| $ | 1,539 |
|
| $ | 14,682 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
January 1, 2018 | $ | 5 |
| | $ | 1,299 |
| | $ | — |
| | $ | 12,225 |
| | $ | (108 | ) | | $ | 13,421 |
| | $ | 3,097 |
| | $ | 16,518 |
|
Cumulative effect of adoption of revenue recognition standard ASC 606 | — |
| | — |
| | — |
| | 13 |
| | — |
| | 13 |
| | 19 |
| | 32 |
|
Capital contribution from parent | — |
| | 695 |
| | — |
| | — |
| | — |
| | 695 |
| | — |
| | 695 |
|
Stock compensation and other | — |
| | 57 |
| | — |
| | — |
| | — |
| | 57 |
| | — |
| | 57 |
|
Repurchase of AB Holding units | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Dividends paid to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (135 | ) | | (135 | ) |
Stockholder dividends | — |
| | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) | | — |
| | (15 | ) |
Net income (loss) | — |
| | — |
| | — |
| | 214 |
| | — |
| | 214 |
| | 103 |
| | 317 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | (838 | ) | | (838 | ) | | 6 |
| | (832 | ) |
Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (54 | ) | | (54 | ) |
March 31, 2018 | $ | 5 |
| | $ | 2,051 |
| | $ | — |
| | $ | 12,437 |
| | $ | (946 | ) | | $ | 13,547 |
| | $ | 3,035 |
| | $ | 16,582 |
|
See Notes to Consolidated Financial Statements (Unaudited).
AXA EQUITABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 (as restated) | 2019 | | 2018 |
| (in millions) | (in millions) |
Cash flows from operating activities: | | | | |
Net income (loss) | $ | 546 |
| | $ | 501 |
| $ | (709 | ) | | $ | 337 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | |
Adjustments to reconcile Net income (loss) to Net cash provided by (used in) operating activities: | | | | |
Interest credited to policyholders’ account balances | 539 |
| | 488 |
| 304 |
| | 271 |
|
Policy charges and fee income | (1,959 | ) | | (1,891 | ) | (931 | ) | | (966 | ) |
(Income) loss related to derivative instruments | 354 |
| | (494 | ) | |
Net derivative (gains) losses | | 1,630 |
| | 236 |
|
Investment (gains) losses, net | (80 | ) | | 20 |
| 11 |
| | (102 | ) |
Realized and unrealized gains (losses) on trading securities | 237 |
| | (216 | ) | |
Non-cash Pension restructuring | 101 |
| | — |
| |
Amortization of deferred cost of reinsurance asset | 10 |
| | 7 |
| |
Amortization of deferred sales commission | 13 |
| | 17 |
| |
Other depreciation and amortization | (32 | ) | | (60 | ) | |
Changes in goodwill | — |
| | 369 |
| |
Distribution from joint ventures and limited partnerships | 44 |
| | 53 |
| |
Realized and unrealized (gains) losses on trading securities | | (294 | ) | | 120 |
|
Non-cash long term incentive compensation expense (1) | | 42 |
| | 12 |
|
Non-cash pension plan restructuring | | — |
| | 102 |
|
Amortization and depreciation (1) | | 239 |
| | 164 |
|
Equity (income) loss from limited partnerships | | (13 | ) | | (38 | ) |
Changes in: | | | | | |
|
|
Net broker-dealer and customer related receivables/payables | 479 |
| | 160 |
| (221 | ) | | 283 |
|
Reinsurance recoverable | 20 |
| | 40 |
| |
Reinsurance recoverable (1) | | (18 | ) | | 29 |
|
Segregated cash and securities, net | (473 | ) | | (132 | ) | (93 | ) | | (208 | ) |
Deferred policy acquisition costs | 14 |
| | (168 | ) | |
Capitalization of deferred policy acquisition costs (1) | | (173 | ) | | (162 | ) |
Future policy benefits | (171 | ) | | 1,516 |
| 22 |
| | (248 | ) |
Current and deferred income taxes | 224 |
| | 123 |
| 183 |
| | 115 |
|
Other, net | (180 | ) | | 333 |
| |
Other, net (1) | | (88 | ) | | (192 | ) |
Net cash provided by (used in) operating activities | $ | (314 | ) | | $ | 666 |
| $ | (109 | ) | | $ | (247 | ) |
| | | | | | |
Cash flows from investing activities: | | | | | | |
Proceeds from the sale/maturity/prepayment of: | | | | | | |
Fixed maturities, available for sale | $ | 6,307 |
| | $ | 2,275 |
| |
Fixed maturities, available-for-sale | | $ | 2,900 |
| | $ | 4,288 |
|
Mortgage loans on real estate | 153 |
| | 399 |
| 216 |
| | 68 |
|
Trading account securities | 4,866 |
| | 5,663 |
| 3,843 |
| | 1,629 |
|
Real estate joint ventures | | 1 |
| | 140 |
|
Short-term investments (1) | | 794 |
| | 1,684 |
|
Other | 261 |
| | 164 |
| 48 |
| | 54 |
|
Payment for the purchase/origination of: | | | | | | |
Fixed maturities, available for sale | (6,031 | ) | | (2,696 | ) | |
Fixed maturities, available-for-sale | | (5,187 | ) | | (3,245 | ) |
Mortgage loans on real estate | (1,004 | ) | | (1,041 | ) | (517 | ) | | (447 | ) |
Trading account securities | (5,075 | ) | | (7,236 | ) | (536 | ) | | (2,613 | ) |
Short-term investments (1) | | (685 | ) | | (731 | ) |
Other | (110 | ) | | (149 | ) | (74 | ) | | (48 | ) |
Cash settlements related to derivative instruments | (333 | ) | | (1,537 | ) | (1,005 | ) | | (674 | ) |
Decrease in loans to affiliates | 1,230 |
| | — |
| |
Change in short-term investments | 1,170 |
| | (1,045 | ) | |
Repayments of loans to affiliates | | — |
| | 346 |
|
Investment in capitalized software, leasehold improvements and EDP equipment | | (16 | ) | | (24 | ) |
Other, net (1) | | 148 |
| | (311 | ) |
Net cash provided by (used in) investing activities | | $ | (70 | ) | | $ | 116 |
|
| | | | |
Cash flows from financing activities: | | | | |
Policyholders’ account balances: | | | | |
Deposits | | $ | 2,430 |
| | $ | 2,041 |
|
Withdrawals | | (1,067 | ) | | (1,100 | ) |
Transfers (to) from Separate Accounts | | 424 |
| | 431 |
|
Change in short-term financings | | (6 | ) | | 167 |
|
Repayment of loans from affiliates | | — |
| | (470 | ) |
Change in collateralized pledged assets | | (6 | ) | | 17 |
|
Change in collateralized pledged liabilities | | 631 |
| | 56 |
|
Increase (decrease) in overdrafts payable | | (65 | ) | | 7 |
|
AXA EQUITABLE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—CONTINUED
(UNAUDITED)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 (as restated) |
Investment in capitalized software, leasehold improvements and EDP equipment | (46 | ) | | (43 | ) |
Other, net | 419 |
| | 179 |
|
Net cash provided by (used in) investing activities | $ | 1,807 |
| | $ | (5,067 | ) |
| | | |
Cash flows from financing activities: | | | |
Policyholders’ account balances: | | | |
Deposits | $ | 5,567 |
| | $ | 4,401 |
|
Withdrawals | (2,750 | ) | | (1,724 | ) |
Transfer (to) from Separate Accounts | (307 | ) | | 826 |
|
Change in short-term financings | (1,341 | ) | | 79 |
|
Issuance of long-term debt | 4,058 |
| | — |
|
Repayment of loans from affiliates | (3,000 | ) | | (56 | ) |
Proceeds from loans from affiliates | — |
| | 109 |
|
Change in collateralized pledged assets | 31 |
| | 1,821 |
|
Change in collateralized pledged liabilities | 455 |
| | 133 |
|
Increase (decrease) in overdrafts payable | (29 | ) | | 69 |
|
Cash contribution from parent | 8 |
| | — |
|
Shareholder dividend paid | (15 | ) | | — |
|
Purchase of AB Units by Holdings | (1,330 | ) | | — |
|
Repurchase of AB Holding units from noncontrolling interest | (19 | ) | | (128 | ) |
Redemption of noncontrolling interests of consolidated VIEs, net | (516 | ) | | (75 | ) |
Distribution to noncontrolling interests in consolidated subsidiaries | (216 | ) | | (186 | ) |
Increase (decrease) in securities sold under agreement to repurchase | (37 | ) | | (346 | ) |
Other, net | (27 | ) | | — |
|
Net cash provided by (used in) financing activities | $ | 532 |
| | $ | 4,923 |
|
Effect of exchange rate changes on cash and cash equivalents | (6 | ) | | 11 |
|
Change in cash and cash equivalents | 2,019 |
| | 533 |
|
Cash and cash equivalents, beginning of year | 4,814 |
| | 5,654 |
|
Cash and cash equivalents, end of period | $ | 6,833 |
| | $ | 6,187 |
|
| | | |
Non-cash transactions during the Period | | | |
Capital contribution from Parent | $ | 630 |
| | $ | — |
|
Repayment of long-term debt | $ | 202 |
| | $ | — |
|
Transfer of assets to reinsurer | $ | (604 | ) | | $ | — |
|
Contribution of 0.5% minority interest in AXA Financial | $ | 65 |
| | $ | — |
|
Repayment of loans from affiliates | $ | (622 | ) | | $ | — |
|
|
| | | | | | | |
| Three Months Ended March 31, |
2019 | | 2018 |
| (in millions) |
Cash contribution from parent company | — |
| | 8 |
|
Shareholder dividend paid | (68 | ) | | (15 | ) |
Cash paid to repurchase common stock | (744 | ) | | — |
|
Repurchase of AB Holding units from noncontrolling interest | — |
| | (1 | ) |
Purchases (redemptions) of noncontrolling interests of consolidated company-sponsored investment funds | — |
| | 373 |
|
Distribution to noncontrolling interest of consolidated subsidiaries | (68 | ) | | (135 | ) |
Increase (decrease) in securities sold under agreement to repurchase | (573 | ) | | 17 |
|
Other, net | (50 | ) | | 4 |
|
Net cash provided by (used in) financing activities | $ | 838 |
| | $ | 1,400 |
|
| | | |
Effect of exchange rate changes on cash and cash equivalents | 1 |
| | 8 |
|
Change in cash and cash equivalents | 660 |
| | 1,277 |
|
Cash and cash equivalents, beginning of year | 4,469 |
| | 4,814 |
|
Cash and cash equivalents, end of period | $ | 5,129 |
| | $ | 6,091 |
|
| | | |
Non-cash transactions during the period: | | | |
Capital contribution from parent company | $ | — |
| | $ | 622 |
|
(Settlement) issuance of long-term debt | $ | — |
| | $ | (202 | ) |
Transfer of assets to reinsurer | $ | — |
| | $ | (604 | ) |
Contribution of 0.5% minority interest in AXA Financial | $ | — |
| | $ | 65 |
|
Repayment of loans from affiliates | $ | — |
| | $ | (622 | ) |
_______________
(1) Prior period amounts have been reclassified to conform to current period’s presentation. See Note 16 for further information.
See Notes to Consolidated Financial Statements (Unaudited).
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) ORGANIZATION
Business
AXA Equitable Holdings, Inc. (“Holdings” and, collectively with its consolidated subsidiaries, the “Company”) is the holding company for a diversified financial services organization. In May 2017,As of March 31, 2019 and December 31, 2018, AXA S.A. (“AXA”), a French holding company for the AXA Group, a worldwide leader in life, propertyowned approximately 48% and casualty and health insurance and asset management, announced its intention to pursue the sale of a minority stake in Holdings through an initial public offering (the “IPO”). On May 14, 2018, Holdings completed the IPO in which AXA sold 157,837,500 shares of Holdings common stock to the public. As of June 30, 2018, AXA owns approximately 71.9%59%, respectively, of the outstanding common stock of Holdings.
The Company conducts operations in four segments: Individual Retirement, Group Retirement, Investment Management and Research, and Protection Solutions. The Company’s management evaluates the performance of each of these segments independently.
The Individual Retirement segment offers a diverse suite of variable annuity products which are primarily sold to affluent and high net worth individuals saving for retirement or seeking retirement income.
The Group Retirement segment offers 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.
The Investment Management and Research segment provides diversified investment management, research and related solutions globally to a broad range of clients through three main client channels—Institutional, Retail and Private Wealth Management—and distributes its institutional research products and solutions through Bernstein Research Services. The Investment Management and Research segment reflects the business of AllianceBernstein Holding L.P. (“AB Holding”), AllianceBernstein L.P. (“ABLP”) and their subsidiaries (collectively, “AB”).
The Protection Solutions segment includes the Company’s life insurance and group employee benefits businesses. The life insurance business offers a variety of variable universal life, indexed universal life and term life products to help affluent and high net worth individuals, as well as small and medium-sized business owners, with their wealth protection, wealth transfer and corporate needs. Our group employee benefits business offers a suite of life, short- and long-term disability, dental and vision insurance products to small and medium-size businesses across the United States.
The Company reports certain activities and items that are not included in our segments in Corporate and Other. Corporate and Other includes certain of our financing and investment expenses. It also includes: the AXA Advisors broker-dealer business, closed block of life insurance (the “Closed Block”), run-off variable annuity reinsurance business, run-off group pension business, run-off health business, benefit plans for our employees, certain strategic investments and certain unallocated items, including capital and related investments, interest expense and corporate expense. AB’s results of operations are reflected in the Investment Management and Research segment. Accordingly, Corporate and Other does not include any items applicable to AB.
On April 23, 2018, Holdings purchased 8,160,000 units of limited partnership in ABLP (“AB Units”) from Coliseum Reinsurance Company (“Coliseum”), an affiliate. In addition, Holdings acquired AXA-IM Holding US Inc., which owns 41,934,582 AB Units. As a result of these two transactions, the Company’s economic interest increased to approximately 65%. AtMarch 31, 2019 and December 31, 2017,2018, the Company’s economic interest in AB was approximately 47%.66% and 65%, respectively.
The general partner of AB, AllianceBernstein Corporation (the “General Partner”), is a wholly-owned subsidiary of the Company. Because the General Partner has the authority to manage and control the business of AB, AB is consolidated in the Company’s financial statements for all periods.
AXA EQUITABLE HOLDINGS, INC.2) SIGNIFICANT ACCOUNTING POLICIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In March 2018, AXA contributed the 0.5% minority interest in AXA Financial, Inc. (“AXA Financial”) to Holdings so that Holdings now owns 100% of AXA Financial.
Basis of Presentation
The Unaudited Interim Consolidated Financial Statementsunaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Consolidated Financial Statements included in Holdings’ prospectus dated May 9, 2018 filed withAnnual Report on Form 10-K for the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on May 11, 2018 (the “Prospectus”).year ended December 31, 2018.
The terms “second“first quarter 2019” or “first three months of 2019” and “first quarter 2018” and “second quarter 2017”or “first three months of 2018” refer to the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. The terms “first six months of 2018” and “first six months of 2017” refer to the six months ended June 30, 2018 and 2017, respectively.
2) SIGNIFICANT ACCOUNTING POLICIES
Adoption of New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new guidance that revises the recognition criteria for revenue arising from contracts with customers to provide goods or services, except when those revenue streams are from insurance and investment contracts, 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, for which existing revenue recognition requirements are not superseded by this guidance. On January 1, 2018, the Company adopted the new revenue recognition guidance on a modified retrospective basis and is reporting the additional disclosures required by the new standard in first quarter 2018. |
| |
Description | Effect on the Financial Statement or Other Significant Matters |
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. | On January 1, 2019, the Company adopted the new hedging guidance. Adoption of this guidance did not 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. | On January 1, 2019, the Company adopted the new guidance on accounting for certain premiums on callable debt securities. As the Company’s existing accounting practices aligned with the guidance in the ASU, adoption of the new standard did not have a material impact on the Company’s consolidated financial statements. |
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. | On January 1, 2019, the Company adopted the new leases standard using the simplified modified retrospective transition method, as of the adoption date. Prior comparable periods will not be adjusted or presented under this method. We applied several practical expedients offered by ACS 842 upon adoption of this standard. These included continuing to account for existing leases based on judgment made under legacy U.S. GAAP as it relates to determining classification of leases, unamortized initial direct costs and whether contracts are leases or contain leases. We also used the practical expedient to use hindsight in determining lease terms (using knowledge and expectations as of the standard’s adoption date instead of the previous assumptions under legacy U.S. GAAP) and evaluated impairment of our right-of-use (“RoU”) assets in the transition period (using most up-to-date information.) Adoption of this standard resulted in the recognition, as of January 1, 2019, of additional RoU operating lease assets of $799 million reported in Other assets and operating lease liabilities of $1,024 million reported in Other liabilities in accompanying consolidated balance sheets. The operating RoU assets recognized as of January 1, 2019 are net of deferred rent of $105 million and liabilities associated with previously recognized impairments of $120 million. See Note 8 for additional information. |
Future Adoption of this new guidance did not change the amounts or timing of the Company’s revenue recognition for base investment management and advisory fees, distribution revenues, shareholder servicing revenues, and broker-dealer revenues. However, some performance-based fees and carried-interest distributions that prior to adoption were recognized when no risk of reversal remained, in certain instances under the new standard may be recognized earlier if it is probable that significant reversal will not occur. As a result, on January 1, 2018, the Company recognized a cumulative effect adjustment, net of tax, to increase opening equity attributable to Holdings and the noncontrolling interest by approximately $13 million and $19 million, respectively, reflecting the impact of carried-interest distributions previously received by AB of approximately $78 million, net of revenue sharing payments to investment team members of approximately $43 million, for which it is probable that significant reversal will not occur and for which incremental tax is provided at Holdings.New Accounting Pronouncements
In January 2016, the FASB issued new |
| | |
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 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. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale (“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 are reported in Accumulated Other Comprehensive Income (Loss) (“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 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. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
earnings for the net unrealized gains, net of tax, related |
| | |
Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-13:Fair Value Measurement (Topic 820) |
This ASU improves the effectiveness of fair value disclosures in the notes to approximately $46 million common stock securities and eliminated their designation as AFS equity securities. The new guidance does not apply to FHLB common stock and prohibits such investments from being classified as equity securities subject to the new guidance. Accordingly, the Company has classified its investment in the FHLB common stock as other invested assets at June 30, 2018. The Company’s investment assets held in the form of equity interests in unconsolidated entities, such as limited partnerships and limited liability companies, including hedge funds, private equity funds, and real estate-related funds, generally are accounted for under the equity method and were not impacted by this new guidance. The Company does not currently report any of its financial liabilities under the fair value option. In March 2017, the FASB issued 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. The service cost component is required to be presented with other employee compensation costs in “income from operations,” and the remaining components are to be reported separately outside of income from operations. While this standard did not change how net periodic pension and post-retirement benefit costs are measured, it limits the amount eligible for capitalization on a prospective basis to the service cost component. 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.
In May 2017, the FASB issued guidance on share-based payments. The amendment provides clarity intended to reduce diversity in practice and the cost and complexity of accounting for changes to the terms or conditions of share-based payment awards. The new guidance is effective for interim and annual periods beginning after December 15, 2017 and requires prospective application to awards modified on or after the date of adoption. Adoption of this amendment on January 1, 2018 did not 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 requires application of a retrospective transition method. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.
Future Adoption of New Accounting Pronouncements
In June 2018, the FASB issued new guidance that largely aligns the accounting for share-based payment awards issued to employees and non-employees. The amendments in the new guidance are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods, with early adoption permitted. Changes to the accounting for non-employee awards should be applied to all new awards as well as outstanding awards using transition provisions intended to simplify adoption by eliminating the need to retrospectively determine fair values at historical grant dates. The Company has granted share-based payment awards only to employees as defined by accounting guidance and does not expect this guidance will have material impact on its consolidated financial statements.
In February 2018, the FASB issued new guidance that will permit, but not require, 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. An entity that elects this option must reclassify these stranded tax effects for all items in AOCI, including, but not limited to, AFS securities and employee benefits. Tax effects stranded in AOCI for other reasons, such as prior changes in tax law, may not be reclassified. While the new guidance provides entities the option to reclassify these amounts, new disclosures are required regardless of whether entities elect to do so. The new guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. Election can be made either to apply the new guidance retrospectively to each period in which the effect of the Tax Reform Act is recognized or in the period of adoption. Management currently is evaluating the options provided for adopting this guidance and the potential impacts on the Company’s consolidated financial statements. Amendments in this ASU modify disclosure requirements in Topic 820, including the removal of certain disclosure requirements, modification of certain disclosures, and the addition of new 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 requirements delayed until their 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. |
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. | Effective for 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 policy acquisition costs.
For MRBs, the ASU should be applied retrospectively as of 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, however the adoption of the ASU is expected to have a significant impact on our consolidated financial condition, results of operations, cash flows and required disclosures, as well as processes and controls. |
Amortization of deferred policy acquisition costs. The ASU simplifies the amortization of deferred policy 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. | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In August 2017, the FASB issued new guidance on accounting for hedging activities, intended to more closely align the financial statement reporting of hedging relationships to the economic results of an entity’s risk management activities. In addition, the new guidance makes certain targeted modifications to simplify the application of current hedge accounting guidance. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early application permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date). All transition requirements and elections should be applied to derivatives positions and hedging relationships existing on the date of adoption. |
| | |
Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-12:Financial Services—Insurance (Topic 944), Continued |
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 Accounts liabilities and deferred policy acquisition costs. Companies will also be required to disclose information about significant inputs, judgements, assumptions and methods used in measurement. | For deferred policy 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. |
|
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 as of the 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. |
Accounting and Consolidation of Variable Interest Entities (“VIEs”)
At March 31, 2019, the Company held approximately $1.2 billion of investment assets in the form of equity interests issued by non-corporate legal entities determined under the 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 Company 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 or other financial arrangements, if any, the Company 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 sheets as Other equity investments and to apply the equity method of accounting for these positions. The net assets of these non-consolidated VIEs are approximately $168.6 billion at March 31, 2019. The Company’s maximum exposure to loss from its direct involvement with these VIEs is the carrying value of its investment of $1.2 billion and approximately $945 million of unfunded commitments at March 31, 2019. The Company has no further economic interest in these VIEs in the form of guarantees, derivatives, credit enhancements or similar instruments and obligations.
At March 31, 2019, the Company consolidated one real estate joint venture for which it was identified as primary beneficiary under the VIE model. The consolidated entity is jointly owned by AXA Equitable Life Insurance Company (“AXA Equitable Life”) and AXA France and holds an investment in a real estate venture. Included in the Company’s consolidated financial statements.balance sheet at March 31, 2019 related to this VIE is $35 million of Real estate held for production of income. In addition, Real estate held for production of income reflects $16 million as related to two non-consolidated joint ventures at March 31, 2019.
In March 2017, the FASB issued guidance that 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 mannerIncluded in which market participants price these instruments. The new guidance is 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 currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements.
In June 2016,balance sheet at March 31, 2019 are assets of $249 million, liabilities of $14 million and redeemable noncontrolling interest of $116 million associated with the FASB issued new guidance related toconsolidation of AB-sponsored investment funds under 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 currently is evaluating the impact that adoption of this guidance will have onVIE model. Also included in the Company’s consolidated financial statements.
In February 2016, the FASB issued revised guidance to lease accounting that will require lessees to recognize on the balance sheet a “right-of-use” assetat March 31, 2019 are assets of $170 million, liabilities of $16 million and a lease liability for virtually all lease arrangements, including those embeddedredeemable noncontrolling interest of $40 million from consolidation of AB-sponsored investment funds under the Voting Interest Entity (“VOE”) model. Of the assets of these consolidated funds, $168 million are presented within Other invested assets and $2 million are presented in other contracts. The new lease accounting model will continue to distinguish between capital Cash
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and operating leases. The current straight-line pattern forcash equivalents and $16 million liabilities of these consolidated funds are presented with Other liabilities in the recognition of rent expense on an operating lease is expected to remain substantially unchangedCompany’s consolidated balance sheet at March 31, 2019. Ownership interests not held by the new guidance but instead will be comprisedCompany relating to consolidated VIEs and VOEs are presented either as redeemable or non-redeemable noncontrolling interest, as appropriate. The Company is not required to provide financial support to these company-sponsored investment funds, and only the assets of amortizationsuch funds are available to settle each fund’s own liabilities.
As of March 31, 2019, the right-of-use assetnet assets of investment products sponsored by AB that are non-consolidated VIEs are approximately $53.5 billion, and interest cost on the related lease obligation, thereby resulting in an income statement presentation similarCompany’s maximum exposure to a financing arrangement or capital lease. Lessor accounting will remain substantially unchangedloss from the current model but has been updated to alignits direct involvement with certain changes made to the lessee model. Although early adoptionthese VIEs is permitted, the Company expects to adopt ASU 2016-02, as well as other related clarifications and interpretive guidance issued by the FASB, when it becomes effective on January 1,its investment of $6 million at March 31, 2019. The Company planshas no further commitments to elector economic interest in these VIEs.
Assumption Updates and Model Changes
In 2018, the optional modified retrospective transition method to apply the provisionsCompany began conducting its annual review of the new standard atCompany’s assumptions and models during the adoption date, which will result in recognitionthird quarter, consistent with industry practice. The annual review encompasses assumptions underlying the valuation of unearned revenue liabilities, embedded derivatives for the Company’s insurance business, liabilities for future policyholder benefits, deferred policy acquisition cost (“DAC”) and measurement of leases as a cumulative-effect adjustment to opening retained earningsdeferred sales inducement (“DSI”) assets. Accordingly, there were no material assumption changes in the periodfirst quarters of adoption. Under this transition method,2019 or 2018.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company would not recastchanged the presentation of the capitalization of DAC in the consolidated statements of income for all prior financial statements presented. Extensive quantitativeperiods presented herein by netting the capitalized amounts within the applicable expense line items, such as Compensation and qualitative disclosures, including significant judgments made by management, will be requiredbenefits, Commissions and distribution-related payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of DAC. There was no impact on Net income (loss) or Comprehensive income (loss) from this reclassification.
The reclassification adjustments for the three months ended March 31, 2018 are presented in the table below. Capitalization of DAC reclassified to provide greater insight intoCompensation and benefits, Commissions and distribution-related payments, and Other operating costs and expenses reduced the extentamounts previously reported in those expense line items, while the capitalization of revenue andDAC reclassified from the Amortization of deferred policy acquisition costs line item increases that expense recognized and expected to be recognized from existing lease contracts and arrangements. Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements.line item.
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| Individual Retirement | | Group Retirement | | Protection Solutions | | Consolidated |
| (in millions) |
Reductions to expense line items: | | | | | | | |
Compensation and benefits | $ | 19 |
| | $ | 7 |
| | $ | 15 |
| | $ | 41 |
|
Commissions and distribution-related payments | 72 |
| | 14 |
| | 34 |
| | 120 |
|
Other operating costs and expenses | — |
| | — |
| | 1 |
| | 1 |
|
Total reductions | $ | 91 |
| | $ | 21 |
| | $ | 50 |
| | $ | 162 |
|
| | | | | | | |
Increase to expense line item: | | | | | | | |
Amortization of deferred policy acquisition costs | $ | 91 |
| | $ | 21 |
| | $ | 50 |
| | $ | 162 |
|
Revenue RecognitionAssumption Updates and Model Changes
Investment Management and Service Fees and Related Expenses
Reported as Investment management and service fees in the Company’s consolidated statements of income (loss) are investment advisory and service fees, distribution revenues, and institutional research services revenues principally emerging from the Investment Management and Research segment. Also included are investment management and administrative service fees earned by AXA Equitable Funds Management Group, LLC (“AXA Equitable FMG”) and reported in the Individual Retirement, Group Retirement and Protection Solutions segments as well as certain asset-based fees associated with insurance contracts.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Investment management, advisory, and service fees
AB provides asset management services by managing customer assets and seeking to deliver returns to investors. Similarly, 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 contracts 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 services that are substantially the same and have the same pattern of transfer to the customer. Accordingly, these investment management, advisory, and administrative service base fees are recorded over time as services are performed and entitle the Company to variable consideration. Base fees, generally calculated as a percentage of 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 claw back and there is minimal probability that a significant reversal of the revenue recorded will occur.
Certain investment advisory contracts of AB, including those associated with hedge funds or other alternative investments, provide for a performance-based fee (including carried interest), in addition to a base advisory fee, calculated either as a percentage of absolute investment results or a percentage of investment results in excess of a stated benchmark over a specified period of time. These performance-based fees are forms of variable consideration and, therefore, are excluded from the transaction price until it becomes probable there will not be significant reversal of the cumulative revenue recognized. At each reporting date, the Company evaluates constraining factors surrounding the variable consideration to determine the extent to which, if any, revenues associated with the performance-based fee can be recognized. Constraining factors impacting the amount of variable consideration included in the transaction price include contractual claw-back provisions, the length of time of the uncertainty, the number and range of possible amounts, the probability of significant fluctuations in fund’s market value, and the level in which the fund’s value exceeds the contractual threshold required to earn such a fee and the materiality of the amount being evaluated. Prior to adoption of the new revenue recognition guidance on January 1,In 2018, the Company recognized performance-based fees at the endbegan conducting its annual review of the applicable measurement period whenCompany’s 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 the Company’s insurance business, liabilities for future policyholder benefits, deferred policy acquisition cost (“DAC”) and deferred sales inducement (“DSI”) assets. Accordingly, there were no riskmaterial assumption changes in the first quarters of reversal remained, and carried-interest distributions received as deferred revenues until no risk2019 or 2018.
Reclassification of reversal remained.DAC Capitalization
Sub-advisory and sub-administrative expenses associated with these services are calculated and recorded asDuring the related services are performed in Other operating costs and expensefourth quarter of 2018, the Company changed the presentation of the capitalization of DAC in the consolidated statements of income (loss)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-related payments and Other operating costs and expenses. Previously, the Company is actinghad netted the capitalized amounts within the Amortization of DAC. There was no impact on Net income (loss) or Comprehensive income (loss) from this reclassification.
The reclassification adjustments for the three months ended March 31, 2018 are presented in a principal capacity in these transactionsthe table below. Capitalization of DAC reclassified to Compensation and as such, reflects these revenuesbenefits, Commissions and distribution-related payments, and Other operating costs and expenses on a gross basis.
Research services
Research services revenue principally consistsreduced the amounts previously reported in those expense line items, while the capitalization of brokerage transaction charges received by Sanford C. Bernstein & Co. LLC (“SCB LLC”) and Sanford C. Bernstein Limited (“SCBL”) for providing equity research services to institutional clients. Brokerage commissions for trade execution services and related expenses are recorded on a trade-date basis when the performance obligations are satisfied. Generally, the transaction price is agreed upon at the point of each trade and based upon the number of shares traded or the value of the consideration traded. Research revenues are recognized when the transaction price is quantified, collectability is assured, and significant reversal of such revenue is not probable.
Distribution services
Revenues from distribution services include fees received as partial reimbursement of expenses incurred in connection with the sale of certain AB sponsored mutual funds and 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.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Most open-end management investment companies, such as U.S. funds and 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 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 terminated by either 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 no longer constrained as the NAV can be calculated and the 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 acting in a principal capacity in these transactions; as such, these revenues and expenses are recorded on a gross basis in the consolidated statements of income (loss).
AB sponsored mutual funds offer back-end load shares in limited instances and charge the investor a contingent deferred sales charge (“CDSC”) if the investment is redeemed within a certain period. The variable consideration for these contracts is contingent upon the timing of the redemption by the investor and the value of the sales proceeds. Due to these constraining factors, the Company excludes the CDSC feeDAC reclassified from the transaction price until the investor redeems the investment. Upon redemption, the cash consideration received for these contractual arrangements is recorded as a reductionAmortization of unamortized deferred sales commissions.
AB’s Luxembourg subsidiary, the management company for most of its non-U.S. funds, earns a management fee which is accrued daily and paid monthly, at an annual rate, based on the average daily net assets of the fund. With respect to certain share classes, the management fee also may contain a component paid to distributors and other financial intermediaries and service providers to cover shareholder servicing and other administrative expenses (also referred to as an “All-in-Fee”). Based on the conclusionpolicy acquisition costs line item increases that asset management is distinct from distribution, the Company allocates a portion of the investment and advisory fee to distribution revenues for the servicing component based on standalone selling prices.
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 shareholder servicing fees, mutual fund reimbursements, and other brokerage income.
Shareholder services, including transfer agency, administration, and record-keeping are provided by AB to company-sponsored mutual funds. The consideration for these services is based on a percentage of the NAV of the fund or a fixed-fee based on the number of shareholder accounts being serviced. The revenues are recorded at month-end when the constraining factors involved with determining NAV or the numbers of shareholders’ accounts are resolved.
Other income
Revenues from contracts with customers reported as Other income in the Company’s consolidated statements of income (loss) primarily consist of advisory account fees and brokerage commissions from the Company’s subsidiary broker-dealer operations and sales commissions from the Company’s general agent for the distribution of non-affiliate insurers’ life insurance and annuity products. These revenues are recognized 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 value of consideration can be determined.
Contract assets and liabilities
The Company applies the practical expedient for contracts that have an original duration of one year or less. Accordingly, the Company accrues the incremental costs of obtaining a contract when incurred and does not consider the time value
expense line item.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of money. At June 30, 2018, there are no material balances of contract assets and contract liabilities; as such, no further disclosures are necessary.
Accounting and Consolidation of Variable Interest Entities (“VIEs”)
A VIE must be consolidated by its primary beneficiary, which generally is defined as the party that has a controlling financial interest in the VIE. The Company is deemed to have a controlling financial interest 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, 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 provider 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 updated on a continuous 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 June 30, 2018, the Company held approximately $1,158 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 Company 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 or other financial arrangements, if any, the Company 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 sheet as Other equity investments and to apply the equity method of accounting for these positions. The net assets of these non-consolidated VIEs are approximately $166,107 million, and the Company’s maximum exposure to loss from its direct involvement with these VIEs is the carrying value of its investment of $1,158 million at June 30, 2018. Except for approximately $806 million of unfunded commitments at June 30, 2018, the Company has no further economic interest in these VIEs in the form of guarantees, derivatives, credit enhancements or similar instruments and obligations.
At June 30, 2018, the Company consolidated one real estate joint venture for which it was identified as primary beneficiary under the VIE model. The consolidated entity is jointly owned by AXA Equitable Life Insurance Company (“AXA Equitable Life”) and AXA France and holds an investment in a real estate venture. Included in the Company’s consolidated balance sheet at June 30, 2018, are total assets of $37 million related to this VIE, primarily resulting from the consolidated presentation of $37 million of real estate held for production of income. In addition, real estate held for production of income reflects $16 million as related to two non-consolidated joint ventures at June 30, 2018.
Included in the Company’s consolidated balance sheet at June 30, 2018 are assets of $225 million, liabilities of $5 million and redeemable non-controlling interest of $93 million associated with the consolidation of AB-sponsored investment funds under the VIE model. Also included in the Company’s consolidated balance sheets are assets of $108
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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million, liabilities of $2 million and redeemable non-controlling interest of $10 million from consolidation of AB-sponsored investment funds under the VOE model. The assets of these consolidated funds are presented within Other invested assets and cash and cash equivalents, and liabilities of these consolidated funds are presented with other liabilities on the face of the Company’s consolidated balance sheet at June 30, 2018; ownership interests not held by the Company relating to consolidated VIEs and VOEs are presented either as redeemable or non-redeemable noncontrolling interest, as appropriate. The Company is not required to provide financial support to these company-sponsored investment funds, and only the assets of such funds are available to settle each fund’s own liabilities.
As of June 30, 2018, the net assets of AB-sponsored investment products that are non-consolidated VIEs are approximately $47.6 billion, and the Company’s maximum risk of loss is its investment of $6 million in these VIEs and its advisory fee receivables from these VIEs, which are not material.
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 changes long-standing provisions governing the taxation of U.S. corporations, including life insurance companies.
The Tax Reform Act reduces the federal corporate income tax rate to 21% beginning in 2018 and repeals the corporate alternative minimum tax (“AMT”) while keeping existing AMT credits. It also includes changes to the dividends received deduction (“DRD”), insurance reserves and tax DAC, and measures affecting our international operations, such as a one-time transitional tax on some of the accumulated earnings of our foreign subsidiaries (within our Investment Management and Research segment).
We expect the Tax Reform Act to have both positive and negative impacts on our consolidated balance sheet. On the one hand, as a one-time effect, the lower tax rate resulted in a reduction to the value of our deferred tax assets. On the other hand, the Tax Reform Act repeals the corporate AMT and, subject to certain limitations, allows us to use our AMT credits going forward, which will result in a reduction of our tax liability.
We expect the tax liability on the earnings of our foreign subsidiaries will decrease going forward. In 2017, we recorded a one-time estimated decrease to net income of $23 million due to the estimated transitional tax on some of the accumulated earnings of these subsidiaries.
Overall, we expect the Tax Reform Act to have a net positive economic impact on us. At December 31, 2017, we recorded a provisional estimate of the income tax effects related to the Tax Reform Act. During the period ended June 30, 2018, we have not recorded any changes to this estimate. We continue to evaluate this new and complicated piece of legislation, assess the magnitude of the various impacts and monitor potential regulatory changes related to this reform. |
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| Individual Retirement | | Group Retirement | | Protection Solutions | | Consolidated |
| (in millions) |
Reductions to expense line items: | | | | | | | |
Compensation and benefits | $ | 19 |
| | $ | 7 |
| | $ | 15 |
| | $ | 41 |
|
Commissions and distribution-related payments | 72 |
| | 14 |
| | 34 |
| | 120 |
|
Other operating costs and expenses | — |
| | — |
| | 1 |
| | 1 |
|
Total reductions | $ | 91 |
| | $ | 21 |
| | $ | 50 |
| | $ | 162 |
|
| | | | | | | |
Increase to expense line item: | | | | | | | |
Amortization of deferred policy acquisition costs | $ | 91 |
| | $ | 21 |
| | $ | 50 |
| | $ | 162 |
|
Assumption Updates and Model Changes
ThereIn 2018, the Company began conducting its annual review of the Company’s 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 the Company’s insurance business, liabilities for future policyholder benefits, deferred policy acquisition cost (“DAC”) and deferred sales inducement (“DSI”) assets. Accordingly, there were no significantmaterial assumption or model changes in the first or second quarters of 20182019 or in the first quarter of 2017.
During second quarter 2017, the Company updated its expectations of long-term lapse and partial withdrawal behavior for variable annuities with GMxB features based on emerging experience. These updates increased policyholders’ benefits expected by $827 million, increased the fair value of the GMIB reinsurance contract asset by $504 million, decreased the GMIBNLG liability by $447 million and decreased the amortization of DAC by $75 million. The after tax impacts of these assumption updates increased Net income by approximately $129 million in the three and six months ended June 30, 2017.2018.
Restatement and RevisionReclassification of Prior Period Financial StatementsDAC Capitalization
As describedDuring the fourth quarter of 2018, the Company changed the presentation of the capitalization of DAC in the Prospectus, management identified errors in its previously issued financial statements. These errors primarily relate to errorsconsolidated 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-related payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of DAC. There was no impact on Net income (loss) or Comprehensive income (loss) from this reclassification.
The reclassification adjustments for the three months ended March 31, 2018 are presented in the calculationtable below. Capitalization of policyholders’ benefit reserves forDAC reclassified to Compensation and benefits, Commissions and distribution-related payments, and Other operating costs and expenses reduced the Company’s life productsamounts 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.
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| Individual Retirement | | Group Retirement | | Protection Solutions | | Consolidated |
| (in millions) |
Reductions to expense line items: | | | | | | | |
Compensation and benefits | $ | 19 |
| | $ | 7 |
| | $ | 15 |
| | $ | 41 |
|
Commissions and distribution-related payments | 72 |
| | 14 |
| | 34 |
| | 120 |
|
Other operating costs and expenses | — |
| | — |
| | 1 |
| | 1 |
|
Total reductions | $ | 91 |
| | $ | 21 |
| | $ | 50 |
| | $ | 162 |
|
| | | | | | | |
Increase to expense line item: | | | | | | | |
Amortization of deferred policy acquisition costs | $ | 91 |
| | $ | 21 |
| | $ | 50 |
| | $ | 162 |
|
Revenue Recognition
The table below presents the revenues recognized during the three months ended March 31, 2019 and the2018, disaggregated by category:
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Investment management, advisory and service fees: | | | |
Base fees | $ | 705 |
| | $ | 724 |
|
Performance-based fees | 4 |
| | 6 |
|
Research services | 90 |
| | 114 |
|
Distribution services | 172 |
| | 180 |
|
Shareholder services | 18 |
| | 20 |
|
Other | 4 |
| | 6 |
|
Total investment management and service fees | $ | 993 |
| | $ | 1,050 |
|
| | | |
Other income | $ | 120 |
| | $ | 112 |
|
Revision of DAC amortization for certain variable and interest sensitive life products. Based upon quantitative and qualitative factors, management determined thatPrior Period Financial Statements
During the impactthird quarter of 2018, the errors was material to the consolidatedCompany revised its financial statements asto reflect the correction of and forerrors identified by the nine months ended September 30, 2017 and as of and for the six months ended June 30, 2017. Management includedCompany in the Prospectus summarizedits previously issued financial information for the restated consolidated balance sheets as of September 30, 2017 and June 30, 2017 and the related consolidated statements of income (loss), statements of comprehensive income (loss), statements of equity and statements of cash flow for the nine months ended September 30, 2017 and for the six months ended June 30, 2017 that reflect restatements related to these errors.
In addition, during the preparation of the first quarter 2018 financial statements, management identified a misclassification error between interest credited and net derivative gains/losses.statements. The impact of this error to the consolidated financial statements for the years ended December 31, 2017 and 2016these errors was not considered to be material. InHowever, in order to improve the consistency and comparability of the financial statements, management will reviserevised the Company’s consolidated financial statements as of and for the three and six months ended March 31, 2018 and June 30, 2018, respectively.
In addition, during the fourth quarter of 2018, the Company identified certain cash flows that were incorrectly classified in the Company’s consolidated statements of income (loss)cash flows. The Company has determined that these misclassifications were not material to the financial statements of any period.
The impact of the misclassifications detailed in the revision tables included in Note 16 on the consolidated statement of cash flows for the three months ended March 31, 2018 were corrected in the comparative consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 contained elsewhere in the financial statements. The misclassifications for the six and nine months ended June 30, 2018 and September 30, 2018 will be corrected in the Company’s comparative consolidated statements of cash flows to includebe included in the revisionsForm 10-Q filings as of and for the classification error the next time these financial statements are presented. Additionally, this misclassification error also impacts thethree and six months ended June 30, 20172019 and as of and for the three and nine months ended September 30, 2017. The restated financial statements also correct this item.
2019, respectively. See Note 1816 for details of the restatements and revisions.further information.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3) INVESTMENTS
Fixed Maturities
The following table providestables provide information relating to fixed maturities securities classified as AFS:available-for-sale (“AFS”).
Available-for-Sale Securities by Classification
|
| | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI (3) |
| (in millions) |
June 30, 2018: | | | | | | | | | |
Fixed Maturity Securities: | | | | | | | | | |
Public corporate | $ | 20,046 |
| | $ | 377 |
| | $ | 511 |
| | $ | 19,912 |
| | $ | — |
|
Private corporate | 7,343 |
| | 89 |
| | 158 |
| | 7,274 |
| | — |
|
U.S. Treasury, government and agency | 14,557 |
| | 360 |
| | 516 |
| | 14,401 |
| | — |
|
States and political subdivisions | 421 |
| | 50 |
| | 1 |
| | 470 |
| | — |
|
Foreign governments | 449 |
| | 19 |
| | 11 |
| | 457 |
| | — |
|
Residential mortgage-backed(1) | 246 |
| | 11 |
| | 1 |
| | 256 |
| | — |
|
Asset-backed(2) | 632 |
| | 2 |
| | 5 |
| | 629 |
| | 2 |
|
Redeemable preferred stock | 477 |
| | 32 |
| | 3 |
| | 506 |
| | — |
|
Total at June 30, 2018 | $ | 44,171 |
| | $ | 940 |
| | $ | 1,206 |
| | $ | 43,905 |
| | $ | 2 |
|
As a result of the adoption of the Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) standard on January 1, 2018 (see Note 2), equity securities are no longer classified and accounted for as available-for-sale securities.
|
| | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI (3) |
| (in millions) |
December 31, 2017: | | | | | | | | | |
Fixed Maturity Securities: | | | | | | | | | |
Public corporate | $ | 17,181 |
| | $ | 806 |
| | $ | 33 |
| | $ | 17,954 |
| | $ | — |
|
Private corporate | 7,299 |
| | 225 |
| | 32 |
| | 7,492 |
| | — |
|
U.S. Treasury, government and agency | 17,759 |
| | 1,000 |
| | 251 |
| | 18,508 |
| | — |
|
States and political subdivisions | 422 |
| | 67 |
| | — |
| | 489 |
| | — |
|
Foreign governments | 395 |
| | 29 |
| | 5 |
| | 419 |
| | — |
|
Residential mortgage-backed(1) | 797 |
| | 22 |
| | 1 |
| | 818 |
| | — |
|
Asset-backed(2) | 745 |
| | 5 |
| | 1 |
| | 749 |
| | 2 |
|
Redeemable preferred stock | 470 |
| | 43 |
| | 1 |
| | 512 |
| | — |
|
Total Fixed Maturities | 45,068 |
| | 2,197 |
| | 324 |
| | 46,941 |
| | 2 |
|
Equity securities | 188 |
| | 2 |
| | — |
| | 190 |
| | — |
|
Total at December 31, 2017 | $ | 45,256 |
| | $ | 2,199 |
| | $ | 324 |
| | $ | 47,131 |
| | $ | 2 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI (4) |
| (in millions) |
March 31, 2019: | | | | | | | | | |
Fixed Maturities: | | | | | | | | | |
Corporate (1) | $ | 33,984 |
| | $ | 936 |
| | $ | 233 |
| | $ | 34,687 |
| | $ | — |
|
U.S. Treasury, government and agency | 12,969 |
| | 602 |
| | 214 |
| | 13,357 |
| | — |
|
States and political subdivisions | 414 |
| | 56 |
| | — |
| | 470 |
| | — |
|
Foreign governments | 485 |
| | 28 |
| | 7 |
| | 506 |
| | — |
|
Residential mortgage-backed (2) | 217 |
| | 11 |
| | — |
| | 228 |
| | — |
|
Asset-backed (3) | 620 |
| | 1 |
| | 4 |
| | 617 |
| | 2 |
|
Redeemable preferred stock | 428 |
| | 16 |
| | 4 |
| | 440 |
| | — |
|
Total at March 31, 2019 | $ | 49,117 |
| | $ | 1,650 |
| | $ | 462 |
| | $ | 50,305 |
| | $ | 2 |
|
| |
(1) | Includes publicly traded agency pass-through securities and collateralized obligations. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | OTTI in AOCI (4) |
| (in millions) |
| | | | | | | | | |
December 31, 2018: | | | | | | | | | |
Fixed Maturities: | | | | | | | | | |
Corporate (1) | $ | 30,572 |
| | $ | 406 |
| | $ | 800 |
| | $ | 30,178 |
| | $ | — |
|
U.S. Treasury, government and agency | 14,004 |
| | 295 |
| | 470 |
| | 13,829 |
| | — |
|
States and political subdivisions | 415 |
| | 47 |
| | 1 |
| | 461 |
| | — |
|
Foreign governments | 524 |
| | 19 |
| | 13 |
| | 530 |
| | — |
|
Residential mortgage-backed (2) | 225 |
| | 10 |
| | 1 |
| | 234 |
| | — |
|
Asset-backed (3) | 612 |
| | 1 |
| | 12 |
| | 601 |
| | 2 |
|
Redeemable preferred stock | 449 |
| | 15 |
| | 18 |
| | 446 |
| | — |
|
Total at December 31, 2018 | $ | 46,801 |
| | $ | 793 |
| | $ | 1,315 |
| | $ | 46,279 |
| | $ | 2 |
|
______________
| |
(1) | Corporate fixed maturities include both public and private issues. |
| |
(2) | Includes publicly traded agency pass-through securities and collateralized obligations. |
| |
(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 Net income (loss) in accordance with current accounting guidance.. |
The contractual maturities of AFS fixed maturities at June 30, 2018March 31, 2019 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
Contractual Maturities at June 30, 2018
| | | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value |
| (in millions) | (in millions) |
March 31, 2019: | | | | |
Due in one year or less | $ | 1,868 |
| | $ | 1,878 |
| $ | 2,234 |
| | $ | 2,246 |
|
Due in years two through five | 8,579 |
| | 8,655 |
| 11,686 |
| | 11,900 |
|
Due in years six through ten | 14,779 |
| | 14,467 |
| 17,060 |
| | 17,505 |
|
Due after ten years | 17,590 |
| | 17,514 |
| 16,872 |
| | 17,369 |
|
Subtotal | 42,816 |
| | 42,514 |
| 47,852 |
| | 49,020 |
|
Residential mortgage-backed securities | 246 |
| | 256 |
| |
Asset-backed securities | 632 |
| | 629 |
| |
Residential mortgage-backed | | 217 |
| | 228 |
|
Asset-backed | | 620 |
| | 617 |
|
Redeemable preferred stock | 477 |
| | 506 |
| 428 |
| | 440 |
|
Total | $ | 44,171 |
| | $ | 43,905 |
| |
Total at March 31, 2019 | | $ | 49,117 |
| | $ | 50,305 |
|
The following table shows proceeds from sales, gross gains (losses) from sales and OTTI for AFS fixed maturities during the three and six months ended June 30, 2018March 31, 2019 and 2017:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Proceeds from sales | $ | 1,145 |
| | $ | 145 |
| | $ | 5,025 |
| | $ | 585 |
|
Gross gains on sales | $ | 17 |
| | $ | 11 |
| | $ | 172 |
| | $ | 36 |
|
Gross losses on sales | $ | (36 | ) | | $ | (8 | ) | | $ | (88 | ) | | $ | (31 | ) |
Total OTTI | $ | — |
| | $ | (14 | ) | | $ | — |
| | $ | (14 | ) |
Non-credit losses recognized in OCI | — |
| | — |
| | — |
| | — |
|
Credit losses recognized in net income (loss) | $ | — |
| | $ | (14 | ) | | $ | — |
| | $ | (14 | ) |
2018:
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Proceeds from sales | $ | 1,450 |
| | $ | 3,880 |
|
Gross gains on sales | $ | 8 |
| | $ | 155 |
|
Gross losses on sales | $ | (18 | ) | | $ | (52 | ) |
| | | |
Total OTTI | $ | — |
| | $ | — |
|
Non-credit losses recognized in OCI | — |
| | — |
|
Credit losses recognized in Net income (loss) | $ | — |
| | $ | — |
|
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.
Fixed Maturities - Credit Loss Impairments
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | (in millions) |
Balances, beginning of period | $ | (18 | ) | | $ | (184 | ) | | $ | (18 | ) | | $ | (239 | ) | |
Balances at January 1, | | $ | (58 | ) | | $ | (18 | ) |
Previously recognized impairments on securities that matured, paid, prepaid or sold | 1 |
| | 54 |
| | 1 |
| | 109 |
| 32 |
| | — |
|
Recognized impairments on securities impaired to fair value this period(1) | — |
| | — |
| | — |
| | — |
| — |
| | — |
|
Impairments recognized this period on securities not previously impaired | — |
| | (14 | ) | | — |
| | (14 | ) | — |
| | — |
|
Additional impairments this period on securities previously impaired | — |
| | — |
| | — |
| | — |
| — |
| | — |
|
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 June 30 | $ | (17 | ) | | $ | (144 | ) | | $ | (17 | ) | | $ | (144 | ) | |
Balances at March 31, | | $ | (26 | ) | | $ | (18 | ) |
______________
| |
(1) | Represents circumstances where the Company determined in the current period that it intends to sell the security, or it is more than likely than not that it will be required to sell the security before the 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:
Net Unrealized Gains (Losses) on Fixed Maturities Classified as AFS
| | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (in millions) | (in millions) |
AFS Securities: | | | | |
Fixed maturities: | | | | |
Fixed maturities available-for-sale: | | | | |
With OTTI loss | $ | 2 |
| | $ | 2 |
| $ | 1 |
| | $ | — |
|
All other | (268 | ) | | 1,871 |
| 1,187 |
| | (522 | ) |
Equity securities | — |
| | 2 |
| |
Net Unrealized Gains (Losses) | $ | (266 | ) | | $ | 1,875 |
| $ | 1,188 |
| | $ | (522 | ) |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As a result of the adoption of the Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) standard on January 1, 2018 (see Note 2), equity securities are no longer classified and accounted for as available-for-sale securities.
Changes in net unrealized investment gains (losses) recognized in AOCI include reclassification adjustments to reflect amounts realized in Net income (loss) for the current period that had been part of OCI in earlier periods. The tables that follow below present a roll-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 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, April 1, 2018 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net investment gains (losses) arising during the period | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Reclassification adjustment: | | | | | | | | | |
Included in Net income (loss) | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Excluded from Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
|
Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
DAC | — |
| | — |
| | — |
| | — |
| | — |
|
Deferred income taxes | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Policyholders’ liabilities | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Balance, June 30, 2018 | $ | 2 |
| | $ | — |
| | $ | 1 |
|
| $ | (1 | ) |
| $ | 2 |
|
Balance, April 1, 2017 | $ | 17 |
| | $ | (3 | ) | | $ | (4 | ) | | $ | (4 | ) | | $ | 6 |
|
Net investment gains (losses) arising during the period | (65 | ) | | — |
| | — |
| | — |
| | (65 | ) |
Reclassification adjustment: | | | | | | | | | |
Included in Net income (loss) | 31 |
| | — |
| | — |
| | — |
| | 31 |
|
Excluded from Net income (loss) | — |
| | — |
| | — |
| | — |
| | — |
|
Impact of net unrealized investment gains (losses) on: | | | | | | | | | |
DAC | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
Deferred income taxes | — |
| | — |
| | — |
| | 8 |
| | 8 |
|
Policyholders’ liabilities | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
Balance, June 30, 2017 | $ | (17 | ) | | $ | 2 |
| | $ | 1 |
| | $ | 4 |
| | $ | (10 | ) |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Net Unrealized Gains (Losses) on Fixed Maturities with OTTI Losses
| | | Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) | 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) | (in millions) |
Balance, January 1, 2018 | $ | 2 |
| | $ | — |
| | $ | (1 | ) | | $ | (7 | ) | | $ | (6 | ) | |
Balances at January 1, 2019 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net investment gains (losses) arising during the period | 1 |
| | — |
| | — |
| | — |
| | 1 |
| (11 | ) | | — |
| | — |
| | — |
| | (11 | ) |
Reclassification adjustment: | | | | | | | | | | | | | | | | | | |
Included in Net income (loss) | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) | 12 |
| | — |
| | — |
| | — |
| | 12 |
|
Excluded from Net income (loss)(1) | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
Impact of net unrealized investment gains (losses) on: | | | | | | | | | | | | | | | | | | |
DAC | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
Deferred income taxes | — |
| | — |
| | — |
| | 6 |
| | 6 |
| — |
| | — |
| | — |
| | — |
| | — |
|
Policyholders’ liabilities | — |
| | — |
| | 2 |
| | — |
| | 2 |
| — |
| | — |
| | — |
| | — |
| | — |
|
Balance, June 30, 2018 | $ | 2 |
| | $ | — |
| | $ | 1 |
| | $ | (1 | ) | | $ | 2 |
| |
Balance, January 1, 2017 | $ | 19 |
| | $ | 1 |
| | $ | (10 | ) | | $ | (4 | ) | | $ | 6 |
| |
Balances at March 31, 2019 | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| | | | | | | | | | |
Balances at January 1, 2018 | | $ | 2 |
| | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | 1 |
|
Net investment gains (losses) arising during the period | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) | — |
| | — |
| | — |
| | — |
| | — |
|
Reclassification adjustment: | | | | | | | | | | | | | | | | | | |
Included in Net income (loss) | (34 | ) | | — |
| | — |
| | — |
| | (34 | ) | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) |
Excluded from Net income (loss)(1) | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
Impact of net unrealized investment gains (losses) on: | | | | | | | | | | | | | | | | | | |
DAC | — |
| | 1 |
| | — |
| | — |
| | 1 |
| — |
| | — |
| | — |
| | — |
| | — |
|
Deferred income taxes | — |
| | — |
| | — |
| | 8 |
| | 8 |
| — |
| | — |
| | — |
| | — |
| | — |
|
Policyholders’ liabilities | — |
| | — |
| | 11 |
| | — |
| | 11 |
| — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Balance, June 30, 2017 | $ | (17 | ) | | $ | 2 |
| | $ | 1 |
| | $ | 4 |
| | $ | (10 | ) | |
Balances at March 31, 2018 | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
______________
| |
(1) | Represents “transfers in” related to the portion of OTTI losses recognized during the period that were not recognized in Net income (loss) for securities with no prior OTTI loss. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
All Other Net Unrealized Investment Gains (Losses) Inin 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) | 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) | (in millions) |
Balance, April 1, 2018 | $ | 216 |
| | $ | (17 | ) | | $ | (128 | ) | | $ | (144 | ) | | $ | (73 | ) | |
Balances at January 1, 2019 | | $ | (522 | ) | | $ | 100 |
| | $ | (73 | ) | | $ | 104 |
| | $ | (391 | ) |
Net investment gains (losses) arising during the period | (503 | ) | | — |
| | — |
| | — |
| | (503 | ) | 1,710 |
| | — |
| | — |
| | — |
| | 1,710 |
|
Reclassification adjustment: | | | | | | | | | | | | | | | | | | |
Included in Net income (loss) | 19 |
| | — |
| | — |
| | — |
| | 19 |
| (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
Excluded from Net income (loss)(1) |
|
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
Impact of net unrealized investment gains (losses) on: | | | | | | | | | | | | | | | | | | |
DAC | — |
| | 104 |
| | — |
| | — |
| | 104 |
| — |
| | (701 | ) | | — |
| | — |
| | (701 | ) |
Deferred income taxes | — |
| | — |
| | — |
| | 78 |
| | 78 |
| — |
| | — |
| | — |
| | (230 | ) | | (230 | ) |
Policyholders’ liabilities | — |
| | — |
| | 8 |
| | — |
| | 8 |
| — |
| | — |
| | 85 |
| | — |
| | 85 |
|
Balance, June 30, 2018 | $ | (268 | ) | | $ | 87 |
| | $ | (120 | ) | | $ | (66 | ) | | $ | (367 | ) | |
Balance, April 1, 2017 | $ | 734 |
| | $ | (113 | ) | | $ | (178 | ) | | $ | (155 | ) | | $ | 288 |
| |
Net investment gains (losses) arising during the period | 674 |
| | — |
| | — |
| | — |
| | 674 |
| |
Reclassification adjustment: | | | | | | | | | | |
Included in Net income (loss) | 24 |
| | — |
| | — |
| | — |
| | 24 |
| |
Excluded from Net income (loss)(1) | — |
| | — |
| | — |
| | — |
| | — |
| |
Impact of net unrealized investment gains (losses) on: | | | | | | | | | | |
DAC | — |
| | (27 | ) | | — |
| | — |
| | (27 | ) | |
Deferred income taxes | — |
| | — |
| | — |
| | (226 | ) | | (226 | ) | |
Policyholders’ liabilities | — |
| | — |
| | (26 | ) | | — |
| | (26 | ) | |
Balance, June 30, 2017 | $ | 1,432 |
| | $ | (140 | ) | | $ | (204 | ) | | $ | (381 | ) | | $ | 707 |
| |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) | 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) | (in millions) |
Balance, January 1, 2018 | $ | 1,871 |
| | $ | (358 | ) | | $ | (238 | ) | | $ | (383 | ) | | $ | 892 |
| |
Balances at March 31, 2019 | | $ | 1,187 |
|
| $ | (601 | ) |
| $ | 12 |
|
| $ | (126 | ) |
| $ | 472 |
|
Balances at January 1, 2018 | | $ | 1,871 |
| | $ | (358 | ) | | $ | (238 | ) | | $ | (397 | ) | | $ | 878 |
|
Net investment gains (losses) arising during the period | (2,049 | ) | | — |
| | — |
| | — |
| | (2,049 | ) | (1,546 | ) | | — |
| | — |
| | — |
| | (1,546 | ) |
Reclassification adjustment: |
| |
| |
| |
| | | | | | | | | | | |
Included in Net income (loss) | (90 | ) | | — |
| | — |
| | — |
| | (90 | ) | (109 | ) | | — |
| | — |
| | — |
| | (109 | ) |
Excluded from Net income (loss)(1) | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
|
Impact of net unrealized investment gains (losses) on: |
| |
| |
| |
| | | | | | | | | | | |
DAC | — |
| | 445 |
| | — |
| | — |
| | 445 |
| — |
| | 341 |
| | — |
| | — |
| | 341 |
|
Deferred income taxes | — |
| | — |
| | — |
| | 317 |
| | 317 |
| — |
| | — |
| | — |
| | 253 |
| | 253 |
|
Policyholders’ liabilities | — |
| | — |
| | 118 |
| | — |
| | 118 |
| — |
| | — |
| | 110 |
| | — |
| | 110 |
|
Balance, June 30, 2018 | $ | (268 | ) |
| $ | 87 |
|
| $ | (120 | ) |
| $ | (66 | ) |
| $ | (367 | ) | |
Balance, January 1, 2017 | $ | 529 |
| | $ | (45 | ) | | $ | (192 | ) | | $ | (95 | ) | | $ | 197 |
| |
Net investment gains (losses) arising during the period | 850 |
| | — |
| | — |
| | — |
| | 850 |
| |
Reclassification adjustment: |
| |
| |
| |
| | | |
Included in Net income (loss) | 53 |
| | — |
| | — |
| | — |
| | 53 |
| |
Excluded from Net income (loss)(1) |
|
| | — |
| | — |
| | — |
| | — |
| |
Impact of net unrealized investment gains (losses) on: |
| |
| |
| |
| | | |
DAC | — |
| | (95 | ) | | — |
| | — |
| | (95 | ) | |
Deferred income taxes | — |
| | — |
| | — |
| | (286 | ) | | (286 | ) | |
Policyholders’ liabilities | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) | |
Balance, June 30, 2017 | $ | 1,432 |
| | $ | (140 | ) | | $ | (204 | ) | | $ | (381 | ) | | $ | 707 |
| |
Balances at March 31, 2018 | | $ | 216 |
| | $ | (17 | ) | | $ | (128 | ) | | $ | (144 | ) | | $ | (73 | ) |
______________
| |
(1) | Represents “transfers out” related to the portion of OTTI losses during the period that were not recognized in Net income (loss) for securities with no prior OTTI loss.losses. |
The following tables disclose the fair values and gross unrealized losses of the 1,592770 issues at June 30, 2018March 31, 2019 and the 7521,700 issues at December 31, 20172018 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 |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (in millions) |
March 31, 2019: | | | | | | | | | | | |
Fixed Maturities: | | | | | | | | | | | |
Corporate | $ | 658 |
| | $ | 6 |
| | $ | 6,529 |
| | $ | 227 |
| | $ | 7,187 |
| | $ | 233 |
|
U.S. Treasury, government and agency | — |
| | — |
| | 3,392 |
| | 214 |
| | 3,392 |
| | 214 |
|
Foreign governments | 6 |
| | — |
| | 67 |
| | 7 |
| | 73 |
| | 7 |
|
Asset-backed | 344 |
| | 2 |
| | 112 |
| | 2 |
| | 456 |
| | 4 |
|
Redeemable preferred stock | 48 |
| | 2 |
| | 37 |
| | 2 |
| | 85 |
| | 4 |
|
Total at March 31, 2019 | $ | 1,056 |
| | $ | 10 |
| | $ | 10,137 |
| | $ | 452 |
| | $ | 11,193 |
| | $ | 462 |
|
| | | | | | | | | | | |
December 31, 2018: | | | | | | | | | | | |
Fixed Maturities: | | | | | | | | | | | |
Corporate | $ | 8,964 |
| | $ | 313 |
| | $ | 8,244 |
| | $ | 487 |
| | $ | 17,208 |
| | $ | 800 |
|
U.S. Treasury, government and agency | 1,077 |
| | 53 |
| | 4,306 |
| | 417 |
| | 5,383 |
| | 470 |
|
States and political subdivisions | — |
| | — |
| | 19 |
| | 1 |
| | 19 |
| | 1 |
|
Foreign governments | 109 |
| | 3 |
| | 76 |
| | 10 |
| | 185 |
| | 13 |
|
Residential mortgage-backed | — |
| | — |
| | 29 |
| | 1 |
| | 29 |
| | 1 |
|
Asset-backed | 563 |
| | 11 |
| | 13 |
| | 1 |
| | 576 |
| | 12 |
|
Redeemable preferred stock | 165 |
| | 13 |
| | 33 |
| | 5 |
| | 198 |
| | 18 |
|
Total at December 31, 2018 | $ | 10,878 |
| | $ | 393 |
| | $ | 12,720 |
| | $ | 922 |
| | $ | 23,598 |
| | $ | 1,315 |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or Longer | | Total |
| Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
| (in millions) |
June 30, 2018: | | | | | | | | | | | |
Fixed Maturity Securities: | | | | | | | | | | | |
Public corporate | $ | 10,761 |
| | $ | 471 |
| | $ | 685 |
| | $ | 40 |
| | $ | 11,446 |
| | $ | 511 |
|
Private corporate | 3,221 |
| | 106 |
| | 746 |
| | 52 |
| | 3,967 |
| | 158 |
|
U.S. Treasury, government and agency | 3,126 |
| | 97 |
| | 4,057 |
| | 419 |
| | 7,183 |
| | 516 |
|
States and political subdivisions | 19 |
| | 1 |
| | — |
| | — |
| | 19 |
| | 1 |
|
Foreign governments | 128 |
| | 3 |
| | 73 |
| | 8 |
| | 201 |
| | 11 |
|
Residential mortgage-backed | 32 |
| | 1 |
| | — |
| | — |
| | 32 |
| | 1 |
|
Asset-backed | 110 |
| | 5 |
| | 1 |
| | — |
| | 111 |
| | 5 |
|
Redeemable preferred stock | 109 |
| | 2 |
| | 12 |
| | 1 |
| | 121 |
| | 3 |
|
Total | $ | 17,506 |
| | $ | 686 |
|
| $ | 5,574 |
|
| $ | 520 |
|
| $ | 23,080 |
|
| $ | 1,206 |
|
December 31, 2017: | | | | | | | | | | | |
Fixed Maturity Securities: | | | | | | | | | | | |
Public corporate | $ | 2,123 |
| | $ | 15 |
| | $ | 690 |
| | $ | 18 |
| | $ | 2,813 |
| | $ | 33 |
|
Private corporate | 780 |
| | 8 |
| | 641 |
| | 24 |
| | 1,421 |
| | 32 |
|
U.S. Treasury, government and agency | 2,718 |
| | 6 |
| | 4,506 |
| | 245 |
| | 7,224 |
| | 251 |
|
States and political subdivisions | 20 |
| | — |
| | — |
| | — |
| | 20 |
| | — |
|
Foreign governments | 11 |
| | — |
| | 73 |
| | 5 |
| | 84 |
| | 5 |
|
Residential mortgage-backed | 62 |
| | — |
| | 76 |
| | 1 |
| | 138 |
| | 1 |
|
Asset-backed | 15 |
| | 1 |
| | 12 |
| | — |
| | 27 |
| | 1 |
|
Redeemable preferred stock | 10 |
| | — |
| | 13 |
| | 1 |
| | 23 |
| | 1 |
|
Total | $ | 5,739 |
| | $ | 30 |
| | $ | 6,011 |
| | $ | 294 |
| | $ | 11,750 |
| | $ | 324 |
|
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 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 0.5%0.7% of total investments. The largest exposures to a single issuer of corporate securities held at June 30, 2018March 31, 2019 and December 31, 20172018 were $203$237 million and $207$226 million, respectively. respectively, representing 1.6% and 1.5% of the consolidated equity of the Company.
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 June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, approximately $1,284$1,288 million and $1,372$1,268 million, or 2.9%2.6% and 3.0%2.7%, of the $44,171$49,117 million and $45,068$46,801 million aggregate amortized cost of fixed maturities held by the Company were considered to be other than investment grade. These securities had net unrealized gains and (losses)losses of $(14)$4 million and $5$31 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively.
At June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, the $520$452 million and $294$922 million of gross unrealized losses of twelve months or more were concentrated in corporate and U.S. Treasury, government and agency securities. In accordance with the policy described in Note 2, the Company concluded that an adjustment to income for OTTI for the three months ended March 31, 2019 or 2018 for these securities was not warranted at either June 30, 2018 or 2017.warranted. At June 30, 2018March 31, 2019 and December 31,
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2017, 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. At June 30, 2018, the carrying value of fixed maturities that were non-income producing for the twelve months preceding that date was $3 million.
For the three and six months ended June 30, 2018 and 2017, investment income is shown net of investment expenses of $19 million, $38 million, $9 million and $29 million, respectively.
At June 30, 2018March 31, 2019 and December 31, 2017,2018, the fair valuesvalue of the Company’s trading account securities were $14,146was $13,127 million and $14,170$16,017 million, respectively. Also at June 30, 2018At March 31, 2019 and December 31, 2017,2018, trading account securities included the General Account’s investment in Separate Accounts which had carrying values of $50$51 million and $50$49 million, respectively.
Net unrealized and realized gains (losses) on trading account equity securities are included in Net investment income (loss) in the Consolidated Statements of Income (Loss). The table below shows a breakdown of Net investment income (loss) from trading account securities during the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:
Net Investment Income (Loss) from Trading Account Securities
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | (in millions) |
Net investment gains (losses) recognized during the period on securities held at the end of the period | $ | (99 | ) | | $ | 102 |
| | $ | (220 | ) | | $ | 189 |
| $ | 318 |
| | $ | (121 | ) |
Net investment gains (losses) recognized on securities sold during the period | (18 | ) | | 23 |
| | (17 | ) | | 27 |
| (24 | ) | | 1 |
|
Unrealized and realized gains (losses) on trading securities arising during the period | (117 | ) | | 125 |
| | (237 | ) | | 216 |
| |
Net investment gains (losses) on trading securities arising during the period | | 294 |
| | (120 | ) |
Interest and dividend income from trading securities | 83 |
| | 54 |
| | 159 |
| | 117 |
| 92 |
| | 76 |
|
Net investment income (loss) from trading securities | $ | (34 | ) | | $ | 179 |
| | $ | (78 | ) | | $ | 333 |
| $ | 386 |
| | $ | (44 | ) |
Mortgage Loans
The payment terms of mortgage loans may from time to time be restructured or modified.
Mortgage loans on real estate are placed on nonaccrual status once management determines the collection of accrued interest is doubtful. Once mortgage loans on real estate are classified as nonaccrual 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. At June 30, 2018March 31, 2019 and December 31, 2017,2018, the carrying values of problem commercial mortgage loans on real estate that had been classified as nonaccrualnon-accrual loans were $19 million$0 and $19 million, respectively.
Valuation Allowances for Mortgage Loans:
AllowanceThe change in the valuation allowance for credit losses for commercial mortgage loans forduring the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 are as follows:
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | (in millions) |
Allowance for credit losses: | | | | |
Beginning balance, January 1, | $ | 8 |
| | $ | 8 |
| $ | 7 |
| | $ | 8 |
|
Charge-offs | — |
| | — |
| (7 | ) | | — |
|
Recoveries | (1 | ) | | — |
| — |
| | (1 | ) |
Provision | — |
| | — |
| — |
| | — |
|
Ending balance, June 30, | $ | 7 |
| | $ | 8 |
| |
Ending balance, March 31, | | $ | — |
| | $ | 7 |
|
| | | | | | |
June 30, Individually Evaluated for Impairment | $ | 7 |
| | $ | 8 |
| |
March 31, Individually Evaluated for Impairment | | $ | — |
| | $ | 7 |
|
There were no allowances for credit losses for agricultural mortgage loans for the sixthree months ended June 30, 2018March 31, 2019 and 2017.2018.
The following tables provide information relating to the loan to valueloan-to-value and debt service coverage ratios for commercial and agricultural mortgage loans at June 30, 2018March 31, 2019 and December 31, 2017.2018. The values used in these ratiosratio 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) | | Total Mortgage Loans |
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 | |
| (in millions) |
March 31, 2019: | | | | | | | | | | | | | |
Commercial Mortgage Loans | | | | | | | | | | | | | |
0% - 50% | $ | 781 |
| | $ | 21 |
| | $ | 215 |
| | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 1,041 |
|
50% - 70% | 4,933 |
| | 806 |
| | 1,284 |
| | 474 |
| | — |
| | — |
| | 7,497 |
|
70% - 90% | 266 |
| | — |
| | 117 |
| | 334 |
| | 132 |
| | — |
| | 849 |
|
90% plus | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Commercial Mortgage Loans | $ | 5,980 |
| | $ | 827 |
| | $ | 1,616 |
| | $ | 832 |
| | $ | 132 |
| | $ | — |
| | $ | 9,387 |
|
| | | | | | | | | | | | | |
Agricultural Mortgage Loans | | | | | | | | | | | | | |
0% - 50% | $ | 278 |
| | $ | 130 |
| | $ | 276 |
| | $ | 563 |
| | $ | 350 |
| | $ | 49 |
| | $ | 1,646 |
|
50% - 70% | 119 |
| | 70 |
| | 248 |
| | 357 |
| | 237 |
| | 34 |
| | 1,065 |
|
70% - 90% | — |
| | — |
| | — |
| | 19 |
| | — |
| | — |
| | 19 |
|
90% plus | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Agricultural Mortgage Loans | $ | 397 |
| | $ | 200 |
| | $ | 524 |
| | $ | 939 |
| | $ | 587 |
| | $ | 83 |
| | $ | 2,730 |
|
| | | | | | | | | | | | | |
Total Mortgage Loans | | | | | | | | | | | | | |
0% - 50% | $ | 1,059 |
| | $ | 151 |
| | $ | 491 |
| | $ | 587 |
| | $ | 350 |
| | $ | 49 |
| | $ | 2,687 |
|
50% - 70% | 5,052 |
| | 876 |
| | 1,532 |
| | 831 |
| | 237 |
| | 34 |
| | 8,562 |
|
70% - 90% | 266 |
| | — |
| | 117 |
| | 353 |
| | 132 |
| | — |
| | 868 |
|
90% plus | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Mortgage Loans | $ | 6,377 |
| | $ | 1,027 |
| | $ | 2,140 |
| | $ | 1,771 |
| | $ | 719 |
| | $ | 83 |
| | $ | 12,117 |
|
| | | | | | | | | | | | | |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios
June 30, 2018
| | | Debt Service Coverage Ratio(1) | | | Debt Service Coverage Ratio (1) | | Total Mortgage Loans |
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 | |
| (in millions) | (in millions) |
Commercial Mortgage Loans(1) | | | | | | | | | | | | | | |
December 31, 2018: | | | | | | | | | | | | | | |
Commercial Mortgage Loans | | | | | | | | | | | | | | |
0% - 50% | $ | 786 |
| | $ | 21 |
| | $ | 330 |
| | $ | 73 |
| | $ | — |
| | $ | — |
| | $ | 1,210 |
| $ | 797 |
| | $ | 21 |
| | $ | 247 |
| | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 1,089 |
|
50% - 70% | 4,709 |
| | 588 |
| | 1,280 |
| | 411 |
| | 152 |
| | — |
| | 7,140 |
| 4,908 |
| | 656 |
| | 1,146 |
| | 325 |
| | 151 |
| | — |
| | 7,186 |
|
70% - 90% | 217 |
| | 110 |
| | 144 |
| | 309 |
| | 27 |
| | — |
| | 807 |
| 260 |
| | — |
| | 117 |
| | 370 |
| | 98 |
| | — |
| | 845 |
|
90% plus | — |
| | — |
| | 27 |
| | — |
| | — |
| | — |
| | 27 |
| — |
| | — |
| | — |
| | 27 |
| | — |
| | — |
| | 27 |
|
Total Commercial Mortgage Loans | $ | 5,712 |
| | $ | 719 |
| | $ | 1,781 |
| | $ | 793 |
| | $ | 179 |
| | $ | — |
| | $ | 9,184 |
| $ | 5,965 |
| | $ | 677 |
| | $ | 1,510 |
| | $ | 746 |
| | $ | 249 |
| | $ | — |
| | $ | 9,147 |
|
Agricultural Mortgage Loans(1) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Agricultural Mortgage Loans | | | | | | | | | | | | | | |
0% - 50% | $ | 280 |
| | $ | 141 |
| | $ | 266 |
| | $ | 528 |
| | $ | 316 |
| | $ | 31 |
| | $ | 1,562 |
| $ | 282 |
| | $ | 147 |
| | $ | 267 |
| | $ | 543 |
| | $ | 321 |
| | $ | 51 |
| | $ | 1,611 |
|
50% - 70% | 114 |
| | 55 |
| | 227 |
| | 366 |
| | 234 |
| | 50 |
| | 1,046 |
| 112 |
| | 46 |
| | 246 |
| | 379 |
| | 224 |
| | 31 |
| | 1,038 |
|
70% - 90% | — |
| | — |
| | — |
| | 23 |
| | — |
| | — |
| | 23 |
| — |
| | — |
| | — |
| | 19 |
| | 27 |
| | — |
| | 46 |
|
90% plus | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total Agricultural Mortgage Loans | $ | 394 |
| | $ | 196 |
| | $ | 493 |
| | $ | 917 |
| | $ | 550 |
| | $ | 81 |
| | $ | 2,631 |
| $ | 394 |
| | $ | 193 |
| | $ | 513 |
| | $ | 941 |
| | $ | 572 |
| | $ | 82 |
| | $ | 2,695 |
|
Total Mortgage Loans(1) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total Mortgage Loans | | | | | | | | | | | | | | |
0% - 50% | $ | 1,066 |
| | $ | 162 |
| | $ | 596 |
| | $ | 601 |
| | $ | 316 |
| | $ | 31 |
| | $ | 2,772 |
| $ | 1,079 |
| | $ | 168 |
| | $ | 514 |
| | $ | 567 |
| | $ | 321 |
| | $ | 51 |
| | $ | 2,700 |
|
50% - 70% | 4,823 |
| | 643 |
| | 1,507 |
| | 777 |
| | 386 |
| | 50 |
| | 8,186 |
| 5,020 |
| | 702 |
| | 1,392 |
| | 704 |
| | 375 |
| | 31 |
| | 8,224 |
|
70% - 90% | 217 |
| | 110 |
| | 144 |
| | 332 |
| | 27 |
| | — |
| | 830 |
| 260 |
| | — |
| | 117 |
| | 389 |
| | 125 |
| | — |
| | 891 |
|
90% plus | — |
| | — |
| | 27 |
| | — |
| | — |
| | — |
| | 27 |
| — |
| | — |
| | — |
| | 27 |
| | — |
| | — |
| | 27 |
|
Total Mortgage Loans | $ | 6,106 |
| | $ | 915 |
| | $ | 2,274 |
| | $ | 1,710 |
| | $ | 729 |
| | $ | 81 |
| | $ | 11,815 |
| $ | 6,359 |
| | $ | 870 |
| | $ | 2,023 |
| | $ | 1,687 |
| | $ | 821 |
| | $ | 82 |
| | $ | 11,842 |
|
______________
| |
(1) | The debt service coverage ratio is calculated using the most recently reported 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 March 31, 2019 and December 31, 2018.
Age Analysis of Past Due Mortgage Loans
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | | | | |
March 31, 2019 | | | | | | | | | | | | | |
Commercial | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 9,387 |
| | $ | 9,387 |
| | $ | — |
|
Agricultural | 9 |
| | 26 |
| | 55 |
| | 90 |
| | 2,640 |
| | 2,730 |
| | 54 |
|
Total Mortgage Loans | $ | 9 |
| | $ | 26 |
| | $ | 55 |
| | $ | 90 |
| | $ | 12,027 |
| | $ | 12,117 |
| | $ | 54 |
|
| | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
Commercial | $ | — |
| | $ | — |
| | $ | 27 |
| | $ | 27 |
| | $ | 9,120 |
| | $ | 9,147 |
| | $ | — |
|
Agricultural | 18 |
| | 8 |
| | 42 |
| | 68 |
| | 2,627 |
| | 2,695 |
| | 40 |
|
Total Mortgage Loans | $ | 18 |
| | $ | 8 |
| | $ | 69 |
| | $ | 95 |
| | $ | 11,747 |
| | $ | 11,842 |
| | $ | 40 |
|
The following table provides information relating to impaired mortgage loans at March 31, 2019 and December 31, 2018.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Impaired Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios
December 31, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 to1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total Mortgage Loans |
| (in millions) |
Commercial Mortgage Loans(1) | | | | | | | | | | | | | |
0% - 50% | $ | 759 |
| | $ | — |
| | $ | 320 |
| | $ | 74 |
| | $ | — |
| | $ | — |
| | $ | 1,153 |
|
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 | $ | 5,016 |
| | $ | 792 |
| | $ | 1,609 |
| | $ | 774 |
| | $ | 195 |
| | $ | — |
| | $ | 8,386 |
|
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% | $ | 1,031 |
| | $ | 149 |
| | $ | 595 |
| | $ | 589 |
| | $ | 316 |
| | $ | 30 |
| | $ | 2,710 |
|
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 | $ | 5,399 |
| | $ | 987 |
| | $ | 2,111 |
| | $ | 1,652 |
| | $ | 732 |
| | $ | 79 |
| | $ | 10,960 |
|
| |
(1) | The debt service coverage ratio is calculated using the most recently reported 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. |
|
| | | | | | | | | | | | | | | | | | | |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment (1) | | Interest Income Recognized |
| (in millions) |
March 31, 2019: | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | |
Agricultural mortgage loans | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | — |
|
Total | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | — |
|
With related allowance recorded: | | | | | | | | | |
Commercial mortgage loans - other | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13 |
| | $ | — |
|
Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | 13 |
| | $ | — |
|
| | | | | | | | | |
December 31, 2018: | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | |
Agricultural mortgage loans | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total | $ | 2 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
|
With related allowance recorded: | | | | | | | | | |
Commercial mortgage loans - other | $ | 27 |
| | $ | 31 |
| | $ | (7 | ) | | $ | 27 |
| | $ | — |
|
Total | $ | 27 |
| | $ | 31 |
| | $ | (7 | ) | | $ | 27 |
| | $ | — |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table provides information relating to the aging analysis of past due mortgage loans at June 30, 2018 and December 31, 2017, respectively.
Age Analysis of Past Due Mortgage Loan |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 30-59 Days | | 60-89 Days | | 90 Days or > | | Total | | Current | | Total Financing Receivables | | Recorded Investment 90 Days or > and Accruing |
| | | | | | | (in millions) | | | | |
June 30, 2018 | | | | | | | | | | | | | |
Commercial | $ | — |
| | $ | — |
| | $ | 27 |
| | $ | 27 |
| | $ | 9,157 |
| | $ | 9,184 |
| | $ | — |
|
Agricultural | 46 |
| | 12 |
| | 21 |
| | 79 |
| | 2,552 |
| | 2,631 |
| | 21 |
|
Total Mortgage Loans | $ | 46 |
| | $ | 12 |
| | $ | 48 |
| | $ | 106 |
| | $ | 11,709 |
| | $ | 11,815 |
| | $ | 21 |
|
December 31, 2017 | | | | | | | | | | | | | |
Commercial | $ | 27 |
| | $ | — |
| | $ | — |
| | $ | 27 |
| | $ | 8,359 |
| | $ | 8,386 |
| | $ | — |
|
Agricultural | 49 |
| | 3 |
| | 22 |
| | 74 |
| | 2,500 |
| | 2,574 |
| | 22 |
|
Total Mortgage Loans | $ | 76 |
| | $ | 3 |
| | $ | 22 |
| | $ | 101 |
| | $ | 10,859 |
| | $ | 10,960 |
| | $ | 22 |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table provides information relating to impaired mortgage loans at June 30, 2018 and December 31, 2017, respectively.
|
| | | | | | | | | | | | | | | | | | | |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment(1) | | Interest Income Recognized |
| (in millions) |
June 30, 2018: | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | |
Commercial mortgage loans - other | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Agricultural mortgage loans | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
With related allowance recorded: | | | | | | | | | |
Commercial mortgage loans - other | $ | 27 |
| | $ | 27 |
| | $ | (7 | ) | | $ | 27 |
| | $ | — |
|
Agricultural mortgage loans | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 27 |
| | $ | 27 |
| | $ | (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 |
| | $ | 27 |
| | $ | (8 | ) | | $ | 27 |
| | $ | 2 |
|
Agricultural mortgage loans | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 27 |
| | $ | 27 |
| | $ | (8 | ) | | $ | 27 |
| | $ | 2 |
|
______________ | |
(1) | Represents a two-quarter and five-quarter average of recorded amortized cost.cost at March 31, 2019 and December 31, 2018, respectively. |
Real Estate:
In March 2018, the Company sold its interest in two consolidated real estate joint ventures to AXA France for a total purchase price of approximately $143 million, which resulted in a pre-tax loss of $0.2 million and the reduction of $203 million of long-term debt on the Company’s balance sheet for the first quarter of 2018.
Derivatives and Offsetting Assets and Liabilities4) DERIVATIVES
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 Plan (“DUP”)Plan” approved by applicable states’ insurance law. Derivatives are generally not accounted for using hedge accounting, with the 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
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 ourits hedging strategy, the Company holds static hedge positions to maintain a targettargets 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. CTE 98CTE98 denotes the financial resources a company would need to cover the average of the worst 2% of scenarios).scenarios.)
Derivatives utilized to hedge exposure to Variable Annuities with Guarantee Features
The Company has issued and continues to offer variable annuity products with variable annuity guaranteed benefits (“GMxB”), including guaranteed minimum living benefits (“GMLBs”) (such as guaranteed minimum income benefits (“GMIBs”), guaranteed minimum withdrawal benefits (“GMWBs”) and guaranteed minimum accumulation benefits (“GMABs”)), and guaranteed minimum death benefits (“GMDBs”) (inclusive of return of premium death benefit guarantees).GMxB 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, 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 products that have a GMxB derivative features liability is that under-performance of the financial
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
markets could result in the GMxB derivative features’ benefits being higher than what accumulated policyholders’ account balances would support.
For 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 policyholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMxB 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 implemented static hedge positions to maintain a target asset level for all variable annuities at a CTE98 level under most scenarios, and at a CTE95 level in extreme scenarios. This program was implemented beginning in December 2017.
Derivatives usedutilized to hedge crediting rate exposure on SCS, SIO, MSO and IUL products/investment options
The Company hedges crediting rates in the Structured Capital Strategies (“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. 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 to caps and buffers, without any basis risk due to market exposures, thereby substantially reducing any exposure to market-related earnings volatility.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Derivatives used for General Account Investment Portfolio
The Company maintains 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 basedderivatives-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 generally transacts the sale of CDSs 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 U.S. dollar or euro-equivalent of the derivativederivative’s 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.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company purchased 30-year 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 June 30, 2018 and December 31, 2017, the Company’s unrealized gains (losses) related to this program were $95 million and $86 million, respectively, 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 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 derivative gains (losses).
In 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. Under this program, the Company derecognized approximately $3,905 million of U.S. Treasury securities for which the Company received proceeds of approximately $3,906$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 June 30, 2018,March 31, 2019, the aggregate fair value of U.S. Treasury securities derecognized under this program was approximately $3,655$3,788 million. Reported in Other invested assets in the Company’s balance sheet at June 30, 2018March 31, 2019 is approximately $34$87 million, representing the fair value of the total return swap contracts.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Derivatives used to hedge currency fluctuations
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.
Derivative Instruments by Category
| | | At June 30, 2018 | | Gains (Losses) Reported In Net Earnings (Loss) Six Months Ended June 30, 2018 | At March 31, 2019 | | Gains (Losses) Reported in Net Income (Loss) Three Months Ended March 31, 2019 |
| | | Fair Value | | | | Fair Value | |
| Notional Amount | | Asset Derivatives | | Liability Derivatives | | Notional Amount | | Asset Derivatives | | Liability Derivatives | |
| (in millions) | (in millions) |
Freestanding derivatives: | | | | | | | | |
Freestanding Derivatives (1) (2): | | | | | | | | |
Equity contracts:(1) | | | | | | | | | | | | | | |
Futures | $ | 7,776 |
| | $ | 2 |
| | $ | 1 |
| | $ | (294 | ) | $ | 7,514 |
| | $ | — |
| | $ | 2 |
| | $ | (762 | ) |
Swaps | 8,330 |
| | 119 |
| | 79 |
| | (17 | ) | 8,158 |
| | 6 |
| | 371 |
| | (985 | ) |
Options | 22,954 |
| | 3,676 |
| | 1,540 |
| | 240 |
| 37,544 |
| | 3,494 |
| | 1,311 |
| | 1,111 |
|
Interest rate contracts:(1) | | | | | | | | | | | | | | |
Swaps | 28,010 |
| | 570 |
| | 252 |
| | (716 | ) | 28,253 |
| | 912 |
| | 211 |
| | 648 |
|
Futures | 21,315 |
| | — |
| | — |
| | 104 |
| 16,758 |
| | — |
| | — |
| | 56 |
|
Credit contracts:(1) | | | | | | | | | | | | | | |
Credit default swaps | 1,954 |
| | 26 |
| | 3 |
| | (2 | ) | 1,338 |
| | 23 |
| | 3 |
| | 7 |
|
Other freestanding contracts:(1) | | | | | | | | | | | | | | |
Foreign currency contracts | 1,953 |
| | 34 |
| | 13 |
| | 14 |
| 1,853 |
| | 31 |
| | 8 |
| | 10 |
|
Margin | — |
| | 22 |
| | — |
| | — |
| — |
| | 38 |
| | — |
| | — |
|
Collateral | — |
| | 3 |
| | 2,607 |
| | — |
| — |
| | 9 |
| | 2,575 |
| | — |
|
Embedded derivatives: | | | | | | | | |
GMIB reinsurance contracts(6) | — |
| | 1,636 |
| | — |
| | (251 | ) | |
GMxB derivative features liability(3,6) | — |
| | — |
| | 3,657 |
| | 882 |
| |
SCS, SIO, MSO and IUL indexed features(5,6) | — |
| | — |
| | 1,968 |
| | (314 | ) | |
Net derivative investment gains (loss) | | | | | | | (354 | ) | |
Cross currency swaps (2,4) | — |
| | — |
| | — |
| | 9 |
| |
| | | | | | | | |
Embedded Derivatives (2): | | | | | | | | |
GMIB reinsurance contracts | | — |
| | 1,740 |
| | — |
| | 18 |
|
GMxB derivative features liability (3) | | — |
| | — |
| | 6,126 |
| | (408 | ) |
SCS, SIO, MSO and IUL indexed features (4) | | — |
| | — |
| | 2,067 |
| | (1,325 | ) |
Total | $ | 92,292 |
| | $ | 6,088 |
| | $ | 10,120 |
| | $ | (345 | ) | $ | 101,418 |
| | $ | 6,253 |
| | $ | 12,674 |
| | $ | (1,630 | ) |
______________
| |
(1) | Reported in Other invested assets in the consolidated balance sheets. |
| |
(2) | Reported in Other assets or Other liabilitiesNet derivative gains (losses) in the consolidated balance sheets.statements of income (loss). |
| |
(3) | Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets. |
| |
(4) | Reported in Other income in the consolidated statements of income (loss). |
| |
(5) | SCS, and SIO, indexed features are reported in Policyholders’ account balances; MSO and IUL indexed features are reported in the Future policyholders’ benefits and other policyholders’ liabilitiesPolicyholders’ account balances in the consolidated balance sheets. |
| |
(6) | Reported in Net derivative gains (losses) in the consolidated statements of income (loss). |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | At December 31, 2017 | | Gains (Losses) Reported In Net Earnings (Loss) Six Months Ended June 30, 2017 | At December 31, 2018 | | Gains (Losses) Reported in Net Income (Loss) Three Months Ended March 31, 2018 |
| | | Fair Value | | | | Fair Value | |
| Notional Amount | | Asset Derivatives | | Liability Derivatives | | Notional Amount | | Asset Derivatives | | Liability Derivatives | |
| (in millions) | (in millions) |
Freestanding derivatives: | | | | | | | | |
Freestanding Derivatives (1) (2): | | | | | | | | |
Equity contracts:(1) | | | | | | | | | | | | | | |
Futures | $ | 6,716 |
| | $ | 1 |
| | $ | 2 |
| | $ | (616 | ) | $ | 11,143 |
| | $ | 2 |
| | $ | 3 |
| | $ | (23 | ) |
Swaps | 7,623 |
| | 4 |
| | 201 |
| | (674 | ) | 7,796 |
| | 143 |
| | 168 |
| | 114 |
|
Options | 22,223 |
| | 3,456 |
| | 1,457 |
| | 504 |
| 21,821 |
| | 2,133 |
| | 1,164 |
| | (18 | ) |
Interest rate contracts:(1) | | | | | | | | | | | | | | |
Swaps | 26,769 |
| | 604 |
| | 193 |
| | 585 |
| 27,116 |
| | 634 |
| | 196 |
| | (671 | ) |
Futures | 20,675 |
| | — |
| | — |
| | 83 |
| 11,792 |
| | — |
| | — |
| | 40 |
|
Credit contracts:(1) | | | | | | | | | | | | | | |
Credit default swaps | 2,131 |
| | 35 |
| | 3 |
| | 8 |
| 1,376 |
| | 20 |
| | 3 |
| | — |
|
Other freestanding contracts:(1) | | | | | | | | | | | | | | |
Foreign currency contracts | 1,423 |
| | 19 |
| | 10 |
| | (1 | ) | 2,184 |
| | 35 |
| | 22 |
| | (51 | ) |
Margin | — |
| | 24 |
| | 4 |
| | — |
| — |
| | 18 |
| | 5 |
| | — |
|
Collateral | — |
| | 4 |
| | 2,123 |
| | — |
| — |
| | 8 |
| | 1,581 |
| | — |
|
Embedded derivatives: | | | | | | | | |
GMIB reinsurance contracts(6) | — |
| | 1,894 |
| | — |
| | 367 |
| |
GMxB derivative features liability(3,6) | — |
| | — |
| | 4,358 |
| | 743 |
| |
SCS, SIO, MSO and IUL indexed features(5,6) | — |
| | — |
| | 1,786 |
| | (505 | ) | |
Net derivative investment gains (loss) | | | | | | | 494 |
| |
Cross currency swaps(2,4) | 354 |
| | 5 |
| | — |
| | (7 | ) | |
| | | | | | | | |
Embedded Derivatives: | | | | | | | | |
GMIB reinsurance contracts (2) | | — |
| | 1,732 |
| | — |
| | (159 | ) |
GMxB derivative features liability (2) (3) | | — |
| | — |
| | 5,614 |
| | 505 |
|
SCS, SIO, MSO and IUL indexed features (2) (4) | | — |
| | — |
| | 715 |
| | 27 |
|
Net derivative gains (loss) | | | | | | | | (236 | ) |
Cross currency swaps (5) (6) | | — |
| | — |
| | — |
| | 9 |
|
Total | $ | 87,914 |
| | $ | 6,046 |
| | $ | 10,137 |
| | $ | 487 |
| $ | 83,228 |
| | $ | 4,725 |
| | $ | 9,471 |
| | $ | (227 | ) |
______________
| |
(1) | Reported in Other invested assets in the consolidated balance sheets. |
| |
(2) | Reported in Other assets or Other liabilitiesNet derivative gains (losses) in the consolidated balance sheets.statements of income (loss). |
| |
(3) | Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets. |
| |
(4) | Reported in Other income in the consolidated statements of income (loss). |
| |
(5) | SCS, and SIO, indexed features are reported in Policyholders’ account balances; MSO and IUL indexed features are reported in Policyholders’ account balances in the Future policyholders’ benefits and other policyholders’consolidated balance sheets. |
| |
(5) | Reported in Other assets or Other liabilities in the consolidated balance sheets. |
| |
(6) | Reported in Net derivative gains (losses)Other income in the consolidated statements of income (loss). |
Equity-Based and Treasury Futures Contracts Margin
All outstanding equity-based and treasury futures contracts at June 30, 2018March 31, 2019 are exchange-traded and net settled daily in cash. At June 30, 2018,March 31, 2019, 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 $230$295 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 $56$35 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 $22$25 million.
Collateral Arrangements
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Credit Risk
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 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 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 June 30, 2018March 31, 2019 and December 31, 2017, 2018,
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
respectively, the Company held $2,607$2,575 million and $2,123$1,581 million in cash and securities collateral delivered by trade counterparties, representing the fair value of the related derivative agreements. The unrestricted cash collateral is reported in Other invested assets. The Company posted collateral of $3$9 million and $4$8 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, 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.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company obtains or posts collateral generally in the form of cash and U.S. Treasury, corporate and government agency securities. The fair value of the securities to be repurchased or resold is 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 June 30, 2018March 31, 2019 and December 31, 2017,2018, the balance outstanding under securities repurchase transactions was $1,850 million$0 and $1,887$573 million, respectively. The Company utilized these repurchase and reverse repurchase agreements for asset liability and cash management purposes. For other instruments used for asset and liability management purposes, see “Obligation under funding agreements” included in Note 15.13.
The following table presents information about the Company’s offsetting of financial assets and liabilities and derivative instruments at June 30, 2018.March 31, 2019.
Offsetting of Financial Assets and Liabilities and Derivative Instruments
At June 30, 2018March 31, 2019
|
| | | | | | | | | | | |
| 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 | $ | 3,797 |
| | $ | 1,621 |
| | $ | 2,176 |
|
Interest rate contracts | 570 |
| | 252 |
| | 318 |
|
Credit contracts | 26 |
| | 3 |
| | 23 |
|
Currency | 34 |
| | 13 |
| | 21 |
|
Margin | 22 |
| | — |
| | 22 |
|
Collateral | 3 |
| | 2,607 |
| | (2,604 | ) |
Total Derivatives, subject to an ISDA Master Agreement | 4,452 |
| | 4,496 |
| | (44 | ) |
Other financial instruments | 1,836 |
| | — |
| | 1,836 |
|
Other invested assets | $ | 6,288 |
| | $ | 4,496 |
| | $ | 1,792 |
|
LIABILITIES(2) | | | | | |
Description | | | | | |
Derivatives: | | | | | |
Equity contracts | $ | 1,621 |
| | $ | 1,621 |
| | $ | — |
|
Interest rate contracts | 252 |
| | 252 |
| | — |
|
Credit contracts | 3 |
| | 3 |
| | — |
|
Currency | 13 |
| | 13 |
| | — |
|
Margin | — |
| | — |
| | — |
|
Collateral | 2,607 |
| | 2,607 |
| | — |
|
Total Derivatives, subject to an ISDA Master Agreement | 4,496 |
| | 4,496 |
| | — |
|
Other financial liabilities | 3,350 |
| | — |
| | 3,350 |
|
Other liabilities | $ | 7,846 |
| | $ | 4,496 |
| | $ | 3,350 |
|
Securities sold under agreement to repurchase(3) | $ | 1,842 |
| | $ | — |
| | $ | 1,842 |
|
|
| | | | | | | | | | | |
| Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets |
| (in millions) |
Assets (1) | | | | | |
Total derivatives | $ | 4,514 |
| | $ | 4,434 |
| | $ | 80 |
|
Other financial instruments | 2,164 |
| | — |
| | 2,164 |
|
Other invested assets | $ | 6,678 |
| | $ | 4,434 |
| | $ | 2,244 |
|
| | | | | |
Liabilities (2) | | | | | |
Total derivatives | $ | 4,434 |
| | $ | 4,387 |
| | $ | 47 |
|
Other financial liabilities | 3,734 |
| | — |
| | 3,734 |
|
Other liabilities | $ | 8,168 |
| | $ | 4,387 |
| | $ | 3,781 |
|
______________
| |
(1) | Excludes Investment Management and Research segment’s derivative assets of consolidated VIEs/VOEs. |
| |
(2) | Excludes Investment Management and Research segment’s derivative liabilities of consolidated VIEs/VOEs. |
The following table presents information about the Company’s gross collateral amounts that are not offset in the consolidated balance sheets at March 31, 2019.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Collateral Amounts Not Offset in the Consolidated Balance Sheets
At March 31, 2019
|
| | | | | | | | | | | | | | | |
| Net Amount Presented in the Balance Sheets | | Collateral (Received)/Held | | |
| Financial Instruments | | Cash | | Net Amount |
| (in millions) |
Assets (1) | | | | | | |
Total derivatives | $ | 2,561 |
| | $ | 367 |
| | $ | 2,114 |
| | $ | 80 |
|
Other financial instruments | 2,164 |
| | — |
| | — |
| | 2,164 |
|
Other invested assets | $ | 4,725 |
| | $ | 367 |
| | $ | 2,114 |
| | $ | 2,244 |
|
| | | | | | | |
Liabilities (2) | | | | | | |
|
Total derivatives | $ | 47 |
| | $ | — |
| | $ | — |
| | $ | 47 |
|
Other financial liabilities | 3,734 |
| | — |
| | — |
| | 3,734 |
|
Other liabilities | $ | 3,781 |
| | $ | — |
| | $ | — |
| | $ | 3,781 |
|
______________
| |
(1) | Excludes Investment Management and Research segment’s derivative assets of consolidated VIEs/VOEs. |
| |
(2) | Excludes Investment Management and Research segment’s derivative liabilities of consolidated VIEs/VOEs. |
The Company had no securities sold under agreements to repurchase at March 31, 2019.
The following table presents information about the Company’s offsetting financial assets and liabilities and derivative instruments at December 31, 2018.
Offsetting of Financial Assets and Liabilities and Derivative Instruments
At December 31, 2018
|
| | | | | | | | | | | |
| Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets |
| (in millions) |
Assets (1) | | | | | |
Total derivatives | $ | 2,993 |
| | $ | 2,945 |
| | $ | 48 |
|
Other financial instruments | 1,989 |
| | — |
| | 1,989 |
|
Other invested assets | $ | 4,982 |
| | $ | 2,945 |
| | $ | 2,037 |
|
| | | | | |
Liabilities (2) | | | | | |
Total derivatives | $ | 3,142 |
| | $ | 2,945 |
| | $ | 197 |
|
Other financial liabilities | 3,163 |
| | — |
| | 3,163 |
|
Other liabilities | $ | 6,305 |
| | $ | 2,945 |
| | $ | 3,360 |
|
| | | | | |
Securities sold under agreement to repurchase (3) | $ | 571 |
| | $ | — |
| | $ | 571 |
|
______________
| |
(1) | Excludes Investment Management and Research segment’s derivative assets of consolidated VIEs/VOEs. |
| |
(2) | Excludes Investment Management and Research segment’s derivative liabilities of consolidated VIEs/VOEs. |
| |
(3) | Excludes expense of $8$2 million in securitiesSecurities sold under agreement to repurchase.repurchase on the consolidated balance sheets. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents information about the Company’s gross collateral amounts that are not offset in the consolidated balance sheets at June 30,December 31, 2018.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Collateral Amounts Not Offset in the Consolidated Balance Sheets
At June 30,December 31, 2018
| | | Net Amounts Presented in the Balance Sheets | | Collateral (Received)/Held | | | Net Amount Presented in the Balance Sheets | | Collateral (Received)/Held | | |
| Financial Instruments | | Cash | | Net Amounts | Financial Instruments | | Cash | | Net Amount |
| (in millions) | (in millions) |
Assets(1) | Assets(1) | | | | | | | | | | | | | |
Total derivatives | $ | 2,538 |
| | $ | — |
| | $ | (2,582 | ) | | $ | (44 | ) | $ | 1,411 |
| | $ | — |
| | $ | (1,363 | ) | | $ | 48 |
|
Other financial instruments | 1,836 |
| | — |
| | — |
| | 1,836 |
| 1,989 |
| | — |
| | — |
| | 1,989 |
|
Other invested assets | $ | 4,374 |
| | $ | — |
| | $ | (2,582 | ) | | $ | 1,792 |
| $ | 3,400 |
| | $ | — |
| | $ | (1,363 | ) | | $ | 2,037 |
|
Liabilities:(2) | | | | | | |
| |
Securities sold under agreement to repurchase(3)(4)(5) | $ | 1,842 |
| | $ | (1,889 | ) | | $ | (13 | ) | | $ | (60 | ) | |
| | | | | | | | |
Liabilities (2) | | | | | | | | |
Total derivatives | | $ | 197 |
| | $ | — |
| | $ | — |
| | $ | 197 |
|
Other financial liabilities | | 3,163 |
| | — |
| | — |
| | 3,163 |
|
Other liabilities | | $ | 3,360 |
| | $ | — |
| | $ | — |
| | $ | 3,360 |
|
| | | | | | | | |
Securities sold under agreement to repurchase (3) (4) (5) | | $ | 571 |
| | $ | (588 | ) | | $ | — |
| | $ | (17 | ) |
______________
| |
(1) | Excludes Investment Management and Research segment’s derivative assets of consolidated VIEs/VOEs. |
| |
(2) | Excludes Investment Management and Research segment’s derivative liabilities of consolidated VIEs/VOEs. |
| |
(3) | Excludes expense of $8 million included in Securities sold under agreements to repurchase on the consolidated balance sheet. |
| |
(4) | US Treasury and agency securities are included in Fixed maturities available for sale on the consolidated balance sheet. |
| |
(5) | Cash is reported in Cash and cash equivalents on the consolidated balance sheet. |
The following table presents information about repurchase agreements accounted for as secured borrowings in the consolidated balance sheets at June 30, 2018.
Repurchase Agreement Accounted for as Secured Borrowings
|
| | | | | | | | | | | | | | | | | | | |
| At June 30, 2018 |
| Remaining Contractual Maturity of the Agreements |
| Overnight and Continuous | | Up to 30 days | | 30–90 days | | Greater Than 90 days | | Total |
| (in millions) |
Securities sold under agreement to repurchase(1) | | | | | | | | | |
U.S. Treasury and agency securities | $ | — |
| | $ | 1,842 |
| | $ | — |
| | $ | — |
| | $ | 1,842 |
|
Total | $ | — |
| | $ | 1,842 |
| | $ | — |
| | $ | — |
| | $ | 1,842 |
|
| |
(1) | Excludes expense accrual of $8 million included in Securities sold under agreements to repurchase on the consolidated balance sheet. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents information about the Company’s offsetting financial assets and liabilities and derivative instruments at December 31, 2017.
Offsetting of Financial Assets and Liabilities and Derivative Instruments
At December 31, 2017
|
| | | | | | | | | | | |
| 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 | $ | 3,461 |
| | $ | 1,660 |
| | $ | 1,801 |
|
Interest rate contracts | 604 |
| | 193 |
| | 411 |
|
Credit contracts | 35 |
| | 3 |
| | 32 |
|
Currency | 19 |
| | 10 |
| | 9 |
|
Collateral | 4 |
| | 2,123 |
| | (2,119 | ) |
Margin | 24 |
| | 4 |
| | 20 |
|
Total Derivatives, subject to an ISDA Master Agreement | 4,147 |
| | 3,993 |
| | 154 |
|
Other financial instruments | 3,964 |
| | — |
| | 3,964 |
|
Other invested assets | $ | 8,111 |
| | $ | 3,993 |
| | $ | 4,118 |
|
Total Derivatives, not subject to an ISDA Master Agreement(4) | $ | 5 |
| | $ | — |
| | $ | 5 |
|
LIABILITIES(2) | | | | | |
Description | | | | | |
Derivatives: | | | | | |
Equity contracts | $ | 1,660 |
| | $ | 1,660 |
| | $ | — |
|
Interest rate contracts | 193 |
| | 193 |
| | — |
|
Credit contracts | 3 |
| | 3 |
| | — |
|
Currency | 10 |
| | 10 |
| | — |
|
Collateral | 2,123 |
| | 2,123 |
| | — |
|
Margin | 4 |
| | 4 |
| | — |
|
Total Derivatives, subject to an ISDA Master Agreement | 3,993 |
| | 3,993 |
| | — |
|
Other financial liabilities | 4,053 |
| | — |
| | 4,053 |
|
Other liabilities | $ | 8,046 |
| | $ | 3,993 |
| | $ | 4,053 |
|
Securities sold under agreement to repurchase(3) | $ | 1,882 |
| | $ | — |
| | $ | 1,882 |
|
| |
(1) | Excludes Investment Management and Research segment’s derivative assets of consolidated VIEs/VOEs. |
| |
(2) | Excludes Investment Management and Research segment’s derivative liabilities of consolidated VIEs/VOEs. |
| |
(3) | Excludes expense of $5 million included in Securities sold under agreements to repurchase on the consolidated balance sheets. |
| |
(4) | This amount is reflected in Other assets. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents information about the Company’s gross collateral amounts that are not offset in the consolidated balance sheet at December 31, 2017.
Collateral Amounts Offset in the Consolidated Balance Sheets
At December 31, 2017
|
| | | | | | | | | | | | | | | |
| Net Amounts Presented in the Balance Sheets | | Collateral (Received)/Held | | |
| Financial Instruments | | Cash | | Net Amounts |
| (in millions) |
Assets(1) | | | | | | | |
Total Derivatives | $ | 2,253 |
| | $ | — |
| | $ | (2,099 | ) | | $ | 154 |
|
Other financial assets | 3,964 |
| | — |
| | — |
| | 3,964 |
|
Other invested assets | $ | 6,217 |
| | $ | — |
| | $ | (2,099 | ) | | $ | 4,118 |
|
Liabilities:(2) | | | | | | | |
Other financial liabilities | $ | 4,053 |
| | $ | — |
| | $ | — |
| | $ | 4,053 |
|
Other liabilities | $ | 4,053 |
| | $ | — |
| | $ | — |
| | $ | 4,053 |
|
Securities sold under agreement to repurchase(3)(4)(5) | $ | 1,882 |
| | $ | (1,988 | ) | | $ | (21 | ) | | $ | (127 | ) |
| |
(1) | Excludes Investment Management and Research segment’s derivative assets of consolidated VIEs/VOEs. |
| |
(2) | Excludes Investment Management and Research segment’s derivative liabilities of consolidated VIEs/VOEs. |
| |
(3) | Excludes expense of $5$2 million in securitiesSecurities sold under agreement to repurchase. |
| |
(4) | USU.S. Treasury and agency securities are in fixedFixed maturities available for saleavailable-for-sale on the consolidated balance sheet.sheets. |
| |
(5) | Cash is included in cashCash and cash equivalents on consolidated balance sheet.sheets. |
The following table presents information about repurchase agreements accounted for as secured borrowings in the consolidated balance sheets at December 31, 2017.2018.
Repurchase Agreement Accounted for as Secured Borrowings
At December 31, 2018
| | | At December 31, 2017 | | | | | | | | | | | |
| 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(1) | | | | | | | | | | | | | | | | | | |
U.S. Treasury and agency securities | $ | — |
| | $ | 1,882 |
| | $ | — |
| | $ | — |
| | $ | 1,882 |
| $ | — |
| | $ | 571 |
| | $ | — |
| | $ | — |
| | $ | 571 |
|
Total | $ | — |
| | $ | 1,882 |
| | $ | — |
| | $ | — |
| | $ | 1,882 |
| $ | — |
| | $ | 571 |
| | $ | — |
| | $ | — |
| | $ | 571 |
|
______________
| |
(1) | Excludes expense of $5$2 million in securitiesSecurities sold under agreement to repurchase.repurchase on the consolidated balance sheets. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4)5) CLOSED BLOCK
Summarized financial information for the Company’s Closed Block is as follows:
| | | June 30, 2018 | | December 31, 2017 | March 31, 2019 | | December 31, 2018 |
| (in millions) | (in millions) |
CLOSED BLOCK LIABILITIES: | | | | |
Closed Block Liabilities: | | | | |
Future policy benefits, policyholders’ account balances and other | $ | 6,829 |
| | $ | 6,958 |
| $ | 6,670 |
| | $ | 6,709 |
|
Policyholder dividend obligation | — |
| | 19 |
| |
Other liabilities | 272 |
| | 271 |
| 70 |
| | 47 |
|
Total Closed Block liabilities | 7,101 |
| | 7,248 |
| 6,740 |
| | 6,756 |
|
ASSETS DESIGNATED TO THE CLOSED BLOCK: | | | | |
Fixed maturities, available for sale, at fair value (amortized cost of $3,768 and $3,923) | 3,772 |
| | 4,070 |
| |
Mortgage loans on real estate | 1,908 |
| | 1,720 |
| |
| | | | |
Assets Designated to the Closed Block: | | | | |
Fixed maturities, available-for-sale, at fair value (amortized cost of $3,606 and $3,680) | | 3,697 |
| | 3,672 |
|
Mortgage loans on real estate, net of valuation allowance of $0 and $0 | | 1,822 |
| | 1,824 |
|
Policy loans | 752 |
| | 781 |
| 727 |
| | 736 |
|
Cash and other invested assets | 216 |
| | 351 |
| 142 |
| | 76 |
|
Other assets | 182 |
| | 182 |
| 171 |
| | 179 |
|
Total assets designated to the Closed Block | 6,830 |
| | 7,104 |
| 6,559 |
| | 6,487 |
|
| | | | |
Excess of Closed Block liabilities over assets designated to the Closed Block | 271 |
| | 144 |
| 181 |
| | 269 |
|
Amounts included in accumulated other comprehensive income (loss): | | | | | | |
Net unrealized investment gains (losses), net of policyholder dividend obligation of $0 and $19 | 14 |
| | 138 |
| |
Maximum Future Earnings To Be Recognized From Closed Block Assets and Liabilities | $ | 285 |
| | $ | 282 |
| |
Net unrealized investment gains (losses), net of policyholders' dividend obligation of $0 and $0 | | 105 |
| | 8 |
|
Maximum future earnings to be recognized from Closed Block assets and liabilities | | $ | 286 |
| | $ | 277 |
|
The Company’s Closed Block revenues and expenses are as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | (in millions) |
REVENUES: | | | | | | | | |
Revenues: | | | | |
Premiums and other income | $ | 49 |
| | $ | 61 |
| | $ | 100 |
| | $ | 115 |
| $ | 48 |
| | $ | 51 |
|
Net investment income (loss) | 73 |
| | 79 |
| | 146 |
| | 162 |
| 67 |
| | 73 |
|
Net investment gains (losses) | — |
| | (1 | ) | | 1 |
| | (16 | ) | |
Investment gains (losses), net | | (1 | ) | | 1 |
|
Total revenues | 122 |
| | 139 |
| | 247 |
| | 261 |
| 114 |
| | 125 |
|
BENEFITS AND OTHER DEDUCTIONS: | | | | | | | | |
| | | | |
Benefits and Other Deductions: | | | | |
Policyholders’ benefits and dividends | 123 |
| | 133 |
| | 249 |
| | 284 |
| 121 |
| | 126 |
|
Other operating costs and expenses | — |
| | 1 |
| | 2 |
| | 1 |
| 1 |
| | 1 |
|
Total benefits and other deductions | 123 |
| | 134 |
| | 251 |
| | 285 |
| 122 |
| | 127 |
|
Net revenues (loss) before income taxes | (1 | ) | | 5 |
| | (4 | ) | | (24 | ) | |
Net income (loss) before income taxes | | (8 | ) | | (2 | ) |
Income tax (expense) benefit | — |
| | (2 | ) | | 1 |
| | 8 |
| (1 | ) | | — |
|
Net Revenues (Losses) | $ | (1 | ) | | $ | 3 |
| | $ | (3 | ) | | $ | (16 | ) | |
Net income (loss) | | $ | (9 | ) | | $ | (2 | ) |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A reconciliation of the Company’s policyholder dividend obligation follows:
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | (in millions) |
Balances, beginning of year | $ | 19 |
| | $ | 52 |
| $ | — |
| | $ | 19 |
|
Unrealized investment gains (losses), net of DAC | (19 | ) | | (5 | ) | — |
| | (19 | ) |
Balances, End of Period | $ | — |
| | $ | 47 |
| |
Balances, end of period | | $ | — |
| | $ | — |
|
5)6) INSURANCE LIABILITIES
A) 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 the directLiabilities for Variable Annuity Contracts with GMDB and GMIB Features without a no-lapse guarantee riderNo-Lapse Guarantee Rider (“NLG”) Feature
The change in the liabilities for variable annuity contracts with GMDB and GMIB features and no NLG feature liabilities, beforeare summarized in the tables below. The amounts for the direct contracts (before reinsurance ceded,ceded) and assumed contracts are reflected in the consolidated balance sheets in Future 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 Three Months Ended March 31, 2019 and 2018
| | | GMDB | | GMIB | | Total | GMDB | | GMIB |
| (in millions) | Direct | | Assumed | | Ceded | | Direct | | Assumed | | Ceded |
| | (in millions) |
Balance at January 1, 2019 | | $ | 4,659 |
| | $ | 82 |
| | $ | (113 | ) | | $ | 3,743 |
| | $ | 184 |
| | $ | (1,732 | ) |
Paid guarantee benefits | | (118 | ) | | (6 | ) | | 4 |
| | (56 | ) | | (1 | ) | | 21 |
|
Other changes in reserve | | 129 |
| | 1 |
| | — |
| | 55 |
| | (1 | ) | | (29 | ) |
Balance at March 31, 2019 | | $ | 4,670 |
| | $ | 77 |
| | $ | (109 | ) | | $ | 3,742 |
| | $ | 182 |
| | $ | (1,740 | ) |
| | | | | | | | | | | | |
Balance at January 1, 2018 | $ | 4,085 |
| | $ | 4,800 |
| | $ | 8,885 |
| $ | 4,059 |
| | $ | 95 |
| | $ | (108 | ) | | $ | 4,752 |
| | $ | 195 |
| | $ | (1,894 | ) |
Paid guarantee benefits | (200 | ) | | (65 | ) | | (265 | ) | (101 | ) | | (6 | ) | | 4 |
| | (33 | ) | | (21 | ) | | 11 |
|
Other changes in reserve | 244 |
| | (33 | ) | | 211 |
| 123 |
| | (7 | ) | | (2 | ) | | (87 | ) | | (1 | ) | | 148 |
|
Balance at June 30, 2018 | $ | 4,129 |
| | $ | 4,702 |
| | $ | 8,831 |
| |
Balance at January 1, 2017 | $ | 3,170 |
| | $ | 3,868 |
| | $ | 7,038 |
| |
Paid guarantee benefits | (189 | ) | | (79 | ) | | (268 | ) | |
Other changes in reserve | 653 |
| | 788 |
| | 1,441 |
| |
Balance at June 30, 2017 | $ | 3,634 |
| | $ | 4,577 |
| | $ | 8,211 |
| |
Balance at March 31, 2018 | | $ | 4,081 |
| | $ | 82 |
| | $ | (106 | ) | | $ | 4,632 |
| | $ | 173 |
| | $ | (1,735 | ) |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizes the ceded GMDB liabilities, reflected in the consolidated balance sheets in Amounts due from reinsurers:Liabilities for Embedded and Freestanding Insurance Related Derivatives
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
| (in millions) |
Balance, beginning of year | $ | 108 |
| | $ | 90 |
|
Paid guarantee benefits | (10 | ) | | (9 | ) |
Other changes in reserve | 4 |
| | 18 |
|
Balance, End of Period | $ | 102 |
| | $ | 99 |
|
The following table summarizes the assumed GMDB liabilities, reflected in the consolidated balance sheets in Future policy benefits and other policyholders’ liabilities:
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
| (in millions) |
Balance, beginning of year | $ | 95 |
| | $ | 121 |
|
Paid guarantee benefits | (12 | ) | | (11 | ) |
Other changes in reserve | (1 | ) | | (6 | ) |
Balance, End of Period | $ | 82 |
| | $ | 104 |
|
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 contract assetcontracts are considered embedded or freestanding insurance derivatives and are reported at fair value. Summarized in the table below is a summary ofFor the fair value of the assets and liabilities associated with these liabilitiesembedded or freestanding insurance derivatives, seeNote 7.
Account Values and Net Amount at June 30, 2018Risk
Account Values and December 31, 2017:
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| (in millions) |
GMIBNLG(1) | $ | 3,418 |
| | $ | 4,056 |
|
SCS, SIO, MSO, IUL indexed features(2) | 1,968 |
| | 1,786 |
|
Assumed GMIB reinsurance Contracts(1) | 158 |
| | 194 |
|
GWBL/GMWB(1) | 119 |
| | 130 |
|
GIB(1) | (41 | ) | | (27 | ) |
GMAB(1) | 3 |
| | 5 |
|
Total embedded and freestanding derivative liabilities | $ | 5,625 |
| | $ | 6,144 |
|
| | | |
GMIB reinsurance contract asset(3) | $ | 1,636 |
| | $ | 1,894 |
|
| |
(1) | Reported in Future policyholders’ benefits and other policyholders’ liabilities in the consolidated balance sheets. |
| |
(2) | Reported in Policyholders’ account balances in the consolidated balance sheets. |
| |
(3) | Reported in GMIB reinsurance contract asset, at fair value in the consolidated balance sheets. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The June 30, 2018 valuesNet Amount at Risk (“NAR”) for direct and assumed variable annuity contracts in-force on such date with GMDB and GMIB features as of March 31, 2019 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 exceedfeature exceeds the related account values.Account Values. For contracts with the GMIB feature, the net amount at riskNAR in the event of annuitization is 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 Contract Values
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2018 |
| Return of Premium | | Ratchet | | Roll-Up | | Combo | | Total |
| (Dollars in millions) |
GMDB: | | | | | | | | | |
Account values invested in: | | | | | | | | | |
General Account | $ | 13,947 |
| | $ | 106 |
| | $ | 63 |
| | $ | 190 |
| | $ | 14,306 |
|
Separate Accounts | $ | 45,892 |
| | $ | 9,348 |
| | $ | 3,363 |
| | $ | 34,610 |
| | $ | 93,213 |
|
Net amount at risk, gross | $ | 176 |
| | $ | 88 |
| | $ | 1,980 |
| | $ | 16,493 |
| | $ | 18,737 |
|
Net amount at risk, net of amounts reinsured | $ | 176 |
| | $ | 84 |
| | $ | 1,367 |
| | $ | 16,493 |
| | $ | 18,120 |
|
Average attained age of policyholders | 51.3 |
| | 66.7 |
| | 73.3 |
| | 68.6 |
| | 55.2 |
|
Percentage of policyholders over age 70 | 9.8 | % | | 41.6 | % | | 64.3 | % | | 48.3 | % | | 18.4 | % |
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 |
| | $ | 23 |
| | $ | 280 |
| | $ | 303 |
|
Separate Accounts | N/A |
| | N/A |
| | $ | 20,928 |
| | $ | 39,350 |
| | $ | 60,278 |
|
Net amount at risk, gross | N/A |
| | N/A |
| | $ | 843 |
| | $ | 6,275 |
| | $ | 7,118 |
|
Net amount at risk, net of amounts reinsured | N/A |
| | N/A |
| | $ | 264 |
| | $ | 5,700 |
| | $ | 5,964 |
|
Average attained age of policyholders | N/A |
| | N/A |
| | 70.3 |
| | 68.8 |
| | 69.0 |
|
Weighted average years remaining until annuitization | N/A |
| | N/A |
| | 1.6 |
| | 0.6 |
| | 0.7 |
|
Range of contractually specified interest rates | N/A |
| | N/A |
| | 3%-6% |
| | 3%-6.5% |
| | 3%-6.5% |
|
The June 30, 2018 values for assumed variable annuity contracts in force on such dateContracts with GMDB and GMIB features are presented in the following table:Features
At March 31, 2019
|
| | | | | | | | | | | | | | | | | | | |
| 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 | $ | 14,178 |
| | $ | 98 |
| | $ | 60 |
| | $ | 181 |
| | $ | 14,517 |
|
Separate Accounts | 45,599 |
| | 9,001 |
| | 3,134 |
| | 32,609 |
| | 90,343 |
|
Total Account Values | $ | 59,777 |
| | $ | 9,099 |
| | $ | 3,194 |
| | $ | 32,790 |
| | $ | 104,860 |
|
| | | | | | | | | |
Net amount at risk, gross | $ | 143 |
| | $ | 143 |
| | $ | 2,025 |
| | $ | 18,389 |
| | $ | 20,700 |
|
Net amount at risk, net of amounts reinsured | $ | 143 |
| | $ | 138 |
| | $ | 1,414 |
| | $ | 18,389 |
| | $ | 20,084 |
|
| | | | | | | | | |
Average attained age of policyholders (in years) | 51.4 |
| | 67.1 |
| | 73.8 |
| | 69.2 |
| | 55.3 |
|
Percentage of policyholders over age 70 | 10.2 | % | | 43.5 | % | | 66.1 | % | | 50.7 | % | | 19.0 | % |
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 |
| | $ | 245 |
| | $ | 264 |
|
Separate Accounts | — |
| | — |
| | 21,923 |
| | 35,745 |
| | 57,668 |
|
Total Account Values | $ | — |
| | $ | — |
| | $ | 21,942 |
| | $ | 35,990 |
| | $ | 57,932 |
|
| | | | | | | | | |
Net amount at risk, gross | $ | — |
| | $ | — |
| | $ | 898 |
| | $ | 8,287 |
| | $ | 9,185 |
|
Net amount at risk, net of amounts reinsured | $ | — |
| | $ | — |
| | $ | 281 |
| | $ | 7,515 |
| | $ | 7,796 |
|
| | | | | | | | | |
Average attained age of policyholders (in years) | N/A | | N/A | | 69.0 |
| | 69.0 |
| | 69.0 |
|
Weighted average years remaining until annuitization | N/A | | N/A | | 1.7 |
| | 0.5 |
| | 0.5 |
|
Range of contractually specified interest rates | N/A | | N/A | | 3% - 6% |
| | 3% - 6.5% |
| | 3% - 6.5% |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Assumed Variable Annuity Contract ValuesContracts with GMDB and GMIB Features
At March 31, 2019
|
| | | | | | | | | | | | | | | | | | | |
| Guarantee Type |
| Return of Premium | | Ratchet | | Roll-Up | | Combo | | Total |
| (in millions, except age and interest rates) |
Variable annuity contracts with GMDB features | | | | | | | | | |
Reinsured account values | $ | 932 |
| | $ | 5,327 |
| | $ | 271 |
| | $ | 1,700 |
| | $ | 8,230 |
|
Net amount at risk assumed | $ | 6 |
| | $ | 286 |
| | $ | 20 |
| | $ | 273 |
| | $ | 585 |
|
| | | | | | | | | |
Average attained age of policyholders (in years) | 67 |
| | 72 |
| | 77 |
| | 75 |
| | 73 |
|
Percentage of policyholders over age 70 | 43.9 | % | | 62.6 | % | | 78.9 | % | | 75.5 | % | | 63.7 | % |
Range of contractually specified interest rates (1) | N/A | | N/A | | 3%-10% |
| | 5%-10% |
| | 3%-10% |
|
| | | | | | | | | |
Variable annuity contracts with GMIB features | | | | | | | | | |
Reinsured account values | $ | 898 |
| | $ | 45 |
| | $ | 244 |
| | $ | 1,205 |
| | $ | 2,392 |
|
Net amount at risk assumed | $ | 1 |
| | $ | — |
| | $ | 36 |
| | $ | 267 |
| | $ | 304 |
|
| | | | | | | | | |
Average attained age of policyholders (in years) | 71 |
| | 74 |
| | 72 |
| | 69 |
| | 70 |
|
Percentage of policyholders over age 70 | 63.1 | % | | 64.1 | % | | 59.3 | % | | 50.7 | % | | 56.5 | % |
Range of contractually specified interest rates | N/A | | N/A | | 3.3%-6.5% |
| | 6%-6% |
| | 3.3%-6.5% |
|
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2018 |
| Return of Premium | | Ratchet | | Roll-Up | | Combo | | Total |
| (Dollars in millions) |
GMDB: | | | | | | | | | |
Reinsured account values | $ | 1,012 |
| | $ | 5,758 |
| | $ | 295 |
| | $ | 1,847 |
| | $ | 8,912 |
|
Net amount at risk assumed | $ | 7 |
| | $ | 286 |
| | $ | 22 |
| | $ | 295 |
| | $ | 610 |
|
Average attained age of policyholders | 67.1 |
| | 71.9 |
| | 76.8 |
| | 75.1 |
| | 72.2 |
|
Percentage of policyholders over age 70 | 42.1 | % | | 61.3 | % | | 77.5 | % | | 74.6 | % | | 62.4 | % |
Range of contractually specified interest rates | N/A |
| | N/A |
| | 3%-10% |
| | 5%-10% |
| | 3%-10% |
|
GMIB: | | | | | | | | | |
Reinsured account values | $ | 961 |
| | $ | 51 |
| | $ | 266 |
| | $ | 1,316 |
| | $ | 2,594 |
|
Net amount at risk assumed | $ | 1 |
| | $ | — |
| | $ | 36 |
| | $ | 210 |
| | $ | 247 |
|
Average attained age of policyholders | 71.3 |
| | 73.8 |
| | 71.4 |
| | 68.5 |
| | 70.0 |
|
Percentage of policyholders over age 70 | 62.2 | % | | 64.6 | % | | 57.4 | % | | 48.8 | % | | 55.0 | % |
Range of contractually specified interest rates(1) | N/A |
| | N/A |
| | 3.3%-6.5% |
| | 6%-6% |
| | 3.3%-6.5% |
|
______________ | |
(1) | In general, for policies with the highest contractual interest rate shown (10%), the rate applied only for the first 10 years after issue, which havehas now elapsed. |
B) For more information about the reinsurance programs of the Company’s GMDB and GMIB exposure, see “Reinsurance Agreements” in Note 10 of the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.
Separate AccountAccounts Investments by Investment Category Underlying Variable Annuity Contracts with GMDB and GMIB Features
The total account values of variable annuity contracts with GMDB and GMIB features include amounts allocated to the guaranteed interest option, which is backed by the assets inpart 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 guarantees.features. The investment performance of the assets impacts the related account values and, consequently, the net amount of riskNAR associated with the GMDB and GMIB benefits and guarantees. Because the Company’s variable annuity contracts offer both GMDB and GMIB features, GMDB and GMIB amounts are not mutually exclusive.
Investment in Variable Insurance Trust Mutual Funds |
| | | | | | | | | | | | | | | |
| As of March 31, 2019 | | As of December 31, 2018 |
| GMDB | | GMIB | | GMDB | | GMIB |
| (in millions) |
Equity | $ | 39,856 |
| | $ | 17,692 |
| | $ | 35,541 |
| | $ | 15,759 |
|
Fixed income | 5,206 |
| | 2,825 |
| | 5,173 |
| | 2,812 |
|
Balanced | 44,433 |
| | 36,855 |
| | 41,588 |
| | 33,974 |
|
Other | 848 |
| | 296 |
| | 852 |
| | 290 |
|
Total | $ | 90,343 |
| | $ | 57,668 |
| | $ | 83,154 |
| | $ | 52,835 |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Investment in Separate Account Investment Options
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017(1) |
| (in millions) |
GMDB: | | | |
Equity | $ | 41,308 |
| | $ | 41,658 |
|
Fixed income | 5,316 |
| | 5,469 |
|
Balanced | 45,736 |
| | 46,577 |
|
Other | 853 |
| | 968 |
|
Total | $ | 93,213 |
| | $ | 94,672 |
|
GMIB: | | | |
Equity | $ | 19,107 |
| | $ | 19,928 |
|
Fixed income | 2,977 |
| | 3,150 |
|
Balanced | 37,894 |
| | 38,890 |
|
Other | 301 |
| | 318 |
|
Total | $ | 60,279 |
| | $ | 62,286 |
|
| |
(1) | Amounts previously reported were as follows in millions: (a) GMDB: Equity $78,069, Fixed Income $2,234, Balanced $14,084, and Other $283; (b) GMIB: Equity $50,429, Fixed Income $1,568, Balanced $10,165, and Other $124. |
C) Hedging Programs for GMDB, GMIB, GIB and Other Features
Beginning in 2003, theThe Company establishedhas a program intended to hedge certain risks associated first with the GMDB feature and beginning in 2004, with the GMIB feature of the 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 June 30, 2018, the total account value and net amount at risk of the hedged variable annuity contracts were $68,823 million and $17,169 million, respectively, with the GMDB feature and $57,987 million and $7,226 million, respectively, with the GMIB and GIB feature. A hedge program is also used to manage certain capital markets risks associated with the products the Company has assumed that have GMDB and GMIB features. At June 30, 2018, the total account value and net amount at risk of the hedged assumed variable annuity contracts were $8,912 million and $610 million, respectively, with the GMDB feature and $2,594 million and $247 million, respectively, with the GMIB 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 Net derivative gains (losses) in the period in which they occur, and may contribute to income (loss) volatility.
D) Variable and Interest-Sensitive Life Insurance Policies - NLG
The NLG 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 NLG remains in effect so long as the policy meets a contractually specified premium funding test and certain other requirements.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table summarizeschange in the NLG liabilitiesfeature reflected in the General Account in Future policy benefits and other policyholders’ liabilities:liabilities in the consolidated balance sheets, is summarized in the table below.
|
| | | |
| Direct Liability(1) |
| (in millions) |
Balance at January 1, 2018 | $ | 686 |
|
Paid Guaranteed Benefits | (9 | ) |
Other changes in reserves | 52 |
|
Balance at June 30, 2018 | $ | 729 |
|
Balance at January 1, 2017 | $ | 1,307 |
|
Other changes in reserves | 49 |
|
Balance at June 30, 2017 | $ | 1,356 |
|
|
| | | | | | | |
| Direct Liability (1) |
| 2019 | | 2018 |
| (in millions) |
Balance at January 1, | $ | 812 |
| | $ | 709 |
|
Paid guaranteed benefits | (7 | ) | | (8 | ) |
Other changes in reserves | 20 |
| | 3 |
|
Balance at March 31, | $ | 825 |
| | $ | 704 |
|
(1) ______________
| |
(1) | There were no amounts of reinsurance ceded in any period presented. |
6) REINSURANCE AGREEMENTS
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 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.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt outstanding as of June 30, 2018 and December 31, 2017 included:
|
| | | | | | | |
| |
| June 30, 2018 | | December 31, 2017 |
| (in millions) |
Short-term debt: | | | |
AB commercial paper (with interest rates of 2.0% and 1.6%) | $ | 515 |
| | 491 |
|
AB revolving credit facility (with interest rate of 2.4%) | — |
| | 75 |
|
AXA Financial commercial paper (with interest rates of 0% and 1.6%) | — |
| | 1,290 |
|
Total short-term debt | $ | 515 |
| | $ | 1,856 |
|
Long-term debt: | | | |
Senior Notes (5.00%, due 2048) | 1,480 |
| | — |
|
Senior Notes (4.35%, due 2028) | 1,485 |
| | — |
|
Senior Notes (3.90%, due 2023) | 793 |
| | — |
|
Delayed Draw Term Loan (3 month LIBOR + 1.125%, due 2021) | 300 |
| | — |
|
AXA Financial Senior Debentures, 7.0%, due 2028 | 349 |
| | 349 |
|
AXA Equitable non-recourse mortgage debt (with interest rates of 4.1%) | — |
| | 82 |
|
AXA Equitable non-recourse mortgage debt (with interest rates of 3.9%) | — |
| | 121 |
|
Total long-term debt | $ | 4,407 |
| | $ | 552 |
|
Total Short-term and Long-term debt | $ | 4,922 |
| | $ | 2,408 |
|
Short-term Debt
AB Commercial Paper
As of June 30, 2018 and December 31, 2017, AB had $515 million and $491 million, respectively, in commercial paper outstanding with weighted average interest rates of approximately 2.0% and 1.6%, respectively. The commercial paper is short term in nature, and as such, recorded value is estimated to approximate fair value (and considered a Level 2 security in the fair value hierarchy). Average daily borrowings of commercial paper during the six months ended June 30, 2018 and the year ended December 31, 2017 were $429 million and $482 million, respectively, with weighted average interest rates of approximately 1.9% and 1.2%, respectively.
AXA Financial Commercial Paper
In June 2009, AXA Financial and AXA initiated a commercial paper program on a private placement basis under which AXA Financial or AXA may issue short-term unsecured notes in an aggregate amount not to exceed $2 billion outstanding at any time. At December 31, 2017, $1.3 billion was outstanding with an interest rate of 1.6%. Prior to June 12, 2018, the obligations of AXA Financial were guaranteed by AXA. Subsequent to June 12, 2018, there were no amounts outstanding under this commercial paper program and AXA Financial does not intend to incur any additional borrowings under the program.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Long-term Debt
Holdings Senior Notes
On April 20, 2018, Holdings issued $800 million aggregate principal amount of 3.9% Senior Notes due 2023, $1.5 billion aggregate principal amount of 4.35% Senior Notes due 2028 and $1.5 billion aggregate principal amount of 5.0% Senior Notes due 2048 (together, the “Notes”). These amounts are recorded net of original issue discount and issuance costs.
Holdings Three-Year Delayed Draw Term Loan
On May 4, 2018, Holdings borrowed $300 million under a $500 million three-year senior unsecured delayed draw term loan agreement and terminated the remaining $200 million capacity at the date of the IPO.
AXA Financial Senior Debentures
As of June 30, 2018 and December 31, 2017, AXA Financial had outstanding $349 million aggregate principal amount of 7.0% Senior Debentures due 2028 (the “Senior Debentures”). The Senior Debentures are the unsecured, senior indebtedness of AXA Financial.
Credit Facilities
Holdings Two-Year Delayed Draw Term Loan
In February 2018, Holdings entered into a $3.9 billion two year senior unsecured delayed draw term loan agreement which was terminated in April 2018.
Holdings Revolving Credit Facility
In February 2018, Holdings entered into a $2.5 billion five-year senior unsecured revolving credit facility with a syndicate of banks. The revolving credit facility has a sub-limit of $1.5 billion for the issuance of letters of credit to support our life insurance business reinsured to EQ AZ Life Re following the GMxB Unwind and the third-party GMxB variable annuity business reinsured by CS Life RE. In April 2018, the Company had $125 million and $800 million of undrawn letters of credit issued out of the $1.5 billion sub-limit for ACS Life and AXA Equitable Life, respectively, as beneficiaries.
Bilateral Letter of Credit Facilities
In February 2018, the Company entered into bilateral letter of credit facilities, each guaranteed by Holdings, with an aggregate principal amount of approximately $1.9 billion, with the following counterparties:
JP Morgan ($150 million)
Citi ($175 million)
Barclays ($150 million)
HSBC ($150 million)
CACIB ($400 million)
Helaba ($300 million)
Commerzbank ($325 million)
Natixis ($250 million)
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
These facilities support our life insurance business reinsured to EQ AZ Life Re following the GMxB Unwind. As of June 30, 2018, $1.9 billion of letters of credit were issued under these facilities, each of which matures on February 16, 2023.
AB Revolving Credit Facility
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 October 22, 2019. The credit facility provides for possible increases in the principal amount by up to an aggregate incremental amount of $250 million. Any such increase is subject to the consent of the affected lenders. The AB Credit Facility is available for AB and SCB LLC, for 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 June 30, 2018, 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 June 30, 2018 and December 31, 2017, AB and SCB LLC had no amounts outstanding under the AB Credit Facility. During the first six months of 2018 and the full year 2017, AB and SCB LLC did not draw upon the AB Credit Facility.
AB has a $200 million, unsecured 364-day senior revolving credit facility (the “Revolver”) with a leading international bank and the other lending institutions that may be party thereto, which matures on November 28, 2018. The 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 Revolver and management expects to draw on the Revolver from time to time. AB has agreed to guarantee the obligations of SCB LLC under the Revolver. The Revolver contains affirmative, negative and financial covenants that are identical to those of AB’s $1.0 billion committed, unsecured senior revolving credit facility. As of June 30, 2018, AB had no amounts outstanding under the Revolver. As of December 31, 2017, AB had $75 million outstanding under the Revolver with an interest rate of 2.4%. Average daily borrowing under the Revolver during the six months ended June 30, 2018 and year ended December 31, 2017 were $18 million and $21 million, respectively, with weighted average interest rates of approximately 2.6% and 2.0%, respectively.
Termination of AXA Financial’s Participation in AXA Facilities
On the date of the IPO, AXA Financial terminated its participation in the following credit facilities guaranteed by AXA: (i) J.P. Morgan Chase Bank $250 million multi-currency revolving credit facility; (ii) Citibank $300 million multi-currency credit facility; (iii) Bank of America Merrill Lynch $300 million multi-currency revolving credit facility; (iv) club deal unsecured revolving credit facility with a number of lending institutions for $1.3 billion.
Also, AXA Financial, AXA RE Arizona and CS Life terminated their participation in an unsecured revolving credit facility guaranteed by AXA totaling €1.6 billion (or its equivalent in optional currencies) with a number of major European lending institutions.
On April 25, 2018, AXA Equitable Life (as successor to AXA RE Arizona) canceled its $1.5 billion revolving credit facility with AXA.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In second quarter 2018, AXA RE Arizona terminated its participation in the following credit facilities guaranteed by AXA: (i) $700 million letter of credit facility agreement with Commerzbank, (ii) $2.45 billion letter of credit facility agreement with Citibank Europe Plc and (iii) $200 million letter of credit facility agreement with JP Morgan Europe Limits.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8) FAIR VALUE DISCLOSURES
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 establishedestablishes 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:
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.
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.
| |
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. |
| |
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 the fair value offor 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
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 2018March 31, 2019 and December 31, 2017,2018, 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 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.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Fair Value Measurements at June 30, 2018March 31, 2019
| | | Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) | (in millions) |
Assets | | | | | | | | | | | | | | |
Investments | | | | | | | | | | | | | | |
Fixed maturities, available-for-sale: | | | | | | | | | | | | | | |
Public Corporate | $ | — |
| | $ | 19,837 |
| | $ | 75 |
| | $ | 19,912 |
| |
Private Corporate | — |
| | 6,189 |
| | 1,085 |
| | 7,274 |
| |
Corporate (1) | | $ | — |
| | $ | 33,507 |
| | $ | 1,180 |
| | $ | 34,687 |
|
U.S. Treasury, government and agency | — |
| | 14,401 |
| | — |
| | 14,401 |
| — |
| | 13,357 |
| | — |
| | 13,357 |
|
States and political subdivisions | — |
| | 432 |
| | 38 |
| | 470 |
| — |
| | 430 |
| | 40 |
| | 470 |
|
Foreign governments | — |
| | 457 |
| | — |
| | 457 |
| — |
| | 506 |
| | — |
| | 506 |
|
Residential mortgage-backed(1) | — |
| | 256 |
| | — |
| | 256 |
| |
Asset-backed(2) | — |
| | 91 |
| | 538 |
| | 629 |
| |
Residential mortgage-backed (2) | | — |
| | 228 |
| | — |
| | 228 |
|
Asset-backed (3) | | — |
| | 83 |
| | 534 |
| | 617 |
|
Redeemable preferred stock | 181 |
| | 325 |
| | — |
| | 506 |
| 159 |
| | 281 |
| | — |
| | 440 |
|
Subtotal | 181 |
| | 41,988 |
| | 1,736 |
| | 43,905 |
| |
Total fixed maturities, available-for-sale | | 159 |
| | 48,392 |
| | 1,754 |
| | 50,305 |
|
Other equity investments | 12 |
| | — |
| | 44 |
| | 56 |
| 12 |
| | — |
| | 74 |
| | 86 |
|
Trading securities | 501 |
| | 13,607 |
| | 38 |
| | 14,146 |
| 484 |
| | 12,608 |
| | 35 |
| | 13,127 |
|
Other invested assets: | | | | | | | | | | | | | | |
Short-term investments | — |
| | 483 |
| | — |
| | 483 |
| — |
| | 258 |
| | — |
| | 258 |
|
Assets of consolidated VIEs/VOEs | 73 |
| | 226 |
| | 29 |
| | 328 |
| 112 |
| | 270 |
| | 28 |
| | 410 |
|
Swaps | — |
| | 380 |
| | — |
| | 380 |
| — |
| | 359 |
| | — |
| | 359 |
|
Credit Default Swaps | — |
| | 23 |
| | — |
| | 23 |
| |
Credit default swaps | | — |
| | 20 |
| | — |
| | 20 |
|
Futures | 1 |
| | — |
| | — |
| | 1 |
| (1 | ) | | — |
| | — |
| | (1 | ) |
Options | — |
| | 2,135 |
| | — |
| | 2,135 |
| — |
| | 2,183 |
| | — |
| | 2,183 |
|
Subtotal | 74 |
| | 3,247 |
| | 29 |
| | 3,350 |
| |
Total other invested assets | | 111 |
| | 3,090 |
| | 28 |
| | 3,229 |
|
Cash equivalents | 6,833 |
| | — |
| | — |
| | 6,833 |
| 4,021 |
| | — |
| | — |
| | 4,021 |
|
Segregated securities | — |
| | 1,289 |
| | — |
| | 1,289 |
| — |
| | 1,262 |
| | — |
| | 1,262 |
|
GMIB reinsurance contract asset | — |
| | — |
| | 1,636 |
| | 1,636 |
| — |
| | — |
| | 1,740 |
| | 1,740 |
|
Separate Accounts’ assets | 119,592 |
| | 2,778 |
| | 361 |
| | 122,731 |
| |
Separate Accounts assets | | 116,829 |
| | 2,764 |
| | 383 |
| | 119,976 |
|
Total Assets | $ | 127,193 |
| | $ | 62,909 |
| | $ | 3,844 |
| | $ | 193,946 |
| $ | 121,616 |
| | $ | 68,116 |
| | $ | 4,014 |
| | $ | 193,746 |
|
| | | | | | | | |
Liabilities | | | | | | | | | | | | | | |
Other invested liabilities | | | | | | | | |
GMxB derivative features’ liability | $ | — |
| | $ | — |
| | $ | 3,657 |
| | $ | 3,657 |
| $ | — |
| | $ | — |
| | $ | 6,126 |
| | $ | 6,126 |
|
SCS, SIO, MSO and IUL indexed features’ liability | — |
| | 1,968 |
| | — |
| | 1,968 |
| — |
| | 2,067 |
| | — |
| | 2,067 |
|
Liabilities of consolidated VIEs/VOEs | — |
| | 3 |
| | — |
| | 3 |
| — |
| | 6 |
| | — |
| | 6 |
|
Contingent payment arrangements | — |
| | — |
| | 13 |
| | 13 |
| — |
| | — |
| | 7 |
| | 7 |
|
Total Liabilities | $ | — |
| | $ | 1,971 |
| | $ | 3,670 |
| | $ | 5,641 |
| $ | — |
| | $ | 2,073 |
| | $ | 6,133 |
| | $ | 8,206 |
|
______________
| |
(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 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Fair Value Measurements at December 31, 20172018
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
Assets | | | | | | | |
Investments | | | | | | | |
Fixed maturities, available-for-sale: | | | | | | | |
Corporate (1) | $ | — |
| | $ | 28,992 |
| | $ | 1,186 |
| | $ | 30,178 |
|
U.S. Treasury, government and agency | — |
| | 13,829 |
| | — |
| | 13,829 |
|
States and political subdivisions | — |
| | 422 |
| | 39 |
| | 461 |
|
Foreign governments | — |
| | 530 |
| | — |
| | 530 |
|
Residential mortgage-backed (2) | — |
| | 234 |
| | — |
| | 234 |
|
Asset-backed (3) | — |
| | 82 |
| | 519 |
| | 601 |
|
Redeemable preferred stock | 167 |
| | 279 |
| | — |
| | 446 |
|
Total fixed maturities, available-for-sale | 167 |
| | 44,368 |
| | 1,744 |
| | 46,279 |
|
Other equity investments | 11 |
| | — |
| | 74 |
| | 85 |
|
Trading securities | 446 |
| | 15,507 |
| | 64 |
| | 16,017 |
|
Other invested assets: | | | | | | | |
Short-term investments | — |
| | 515 |
| | — |
| | 515 |
|
Assets of consolidated VIEs/VOEs | 92 |
| | 259 |
| | 27 |
| | 378 |
|
Swaps | — |
| | 426 |
| | — |
| | 426 |
|
Credit default swaps | — |
| | 17 |
| | — |
| | 17 |
|
Futures | (1 | ) | | — |
| | — |
| | (1 | ) |
Options | — |
| | 968 |
| | — |
| | 968 |
|
Total other invested assets | 91 |
| | 2,185 |
| | 27 |
| | 2,303 |
|
Cash equivalents | 3,482 |
| | — |
| | — |
| | 3,482 |
|
Segregated securities | — |
| | 1,170 |
| | — |
| | 1,170 |
|
GMIB reinsurance contracts asset | — |
| | — |
| | 1,732 |
| | 1,732 |
|
Separate Accounts assets | 106,994 |
| | 2,747 |
| | 374 |
| | 110,115 |
|
Total Assets | $ | 111,191 |
| | $ | 65,977 |
| | $ | 4,015 |
| | $ | 181,183 |
|
| | | | | | | |
Liabilities | | | | | | | |
GMxB derivative features’ liability | $ | — |
| | $ | — |
| | $ | 5,614 |
| | $ | 5,614 |
|
SCS, SIO, MSO and IUL indexed features’ liability | — |
| | 715 |
| | — |
| | 715 |
|
Liabilities of consolidated VIEs/VOEs | — |
| | 7 |
| | — |
| | 7 |
|
Contingent payment arrangements | — |
| | — |
| | 7 |
| | 7 |
|
Total Liabilities | $ | — |
| | $ | 722 |
| | $ | 5,621 |
| | $ | 6,343 |
|
|
| | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
Assets | | | | | | | |
Investments | | | | | | | |
Fixed maturities, available-for-sale: | | | | | | | |
Public Corporate | $ | — |
| | $ | 17,906 |
| | $ | 48 |
| | $ | 17,954 |
|
Private Corporate | — |
| | 6,390 |
| | 1,102 |
| | 7,492 |
|
U.S. Treasury, government and agency | — |
| | 18,508 |
| | — |
| | 18,508 |
|
States and political subdivisions | — |
| | 449 |
| | 40 |
| | 489 |
|
Foreign governments | — |
| | 419 |
| | — |
| | 419 |
|
Residential mortgage-backed(1) | — |
| | 818 |
| | — |
| | 818 |
|
Asset-backed(2) | — |
| | 208 |
| | 541 |
| | 749 |
|
Redeemable preferred stock | 184 |
| | 327 |
| | 1 |
| | 512 |
|
Subtotal | 184 |
| | 45,025 |
| | 1,732 |
| | 46,941 |
|
Other equity investments | 13 |
| | — |
| | 34 |
| | 47 |
|
Trading securities | 485 |
| | 13,647 |
| | 38 |
| | 14,170 |
|
Other invested assets: | | | | | | | |
Short-term investments | — |
| | 1,730 |
| | — |
| | 1,730 |
|
Assets of consolidated VIEs/VOEs | 1,060 |
| | 215 |
| | 27 |
| | 1,302 |
|
Swaps | — |
| | 222 |
| | — |
| | 222 |
|
Credit Default Swaps | — |
| | 33 |
| | — |
| | 33 |
|
Futures | (2 | ) | | — |
| | — |
| | (2 | ) |
Foreign currency contract(3) | — |
| | 5 |
| | — |
| | 5 |
|
Options | — |
| | 1,999 |
| | — |
| | 1,999 |
|
Subtotal | 1,058 |
| | 4,204 |
| | 27 |
| | 5,289 |
|
Cash equivalents | 3,608 |
| | — |
| | — |
| | 3,608 |
|
Segregated securities | — |
| | 825 |
| | — |
| | 825 |
|
GMIB reinsurance contract asset | — |
| | — |
| | 1,894 |
| | 1,894 |
|
Separate Accounts’ assets | 121,000 |
| | 2,997 |
| | 349 |
| | 124,346 |
|
Total Assets | $ | 126,348 |
| | $ | 66,698 |
| | $ | 4,074 |
| | $ | 197,120 |
|
Liabilities | | | | | | | |
Other invested liabilities | | | | | | | |
GMxB derivative features’ liability | $ | — |
| | $ | — |
| | $ | 4,358 |
| | $ | 4,358 |
|
SCS, SIO, MSO and IUL indexed features’ liability | — |
| | 1,786 |
| | — |
| | 1,786 |
|
Liabilities of consolidated VIEs/VOEs | 670 |
| | 22 |
| | — |
| | 692 |
|
Contingent payment arrangements | — |
| | — |
| | 15 |
| | 15 |
|
Total Liabilities | $ | 670 |
| | $ | 1,808 |
| | $ | 4,373 |
| | $ | 6,851 |
|
______________ | |
(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. |
| |
(3) | Reported in Other assets in the consolidated balance sheets. |
At June 30, 2018 and December 31, 2017, respectively, the fair value of public fixed maturities is approximately $35,682 million and $38,762 million or approximately 18.7% and 20.0% 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
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 June 30, 2018 and December 31, 2017, respectively, the fair value of private fixed maturities is approximately $8,223 million and $8,179 million or approximately 4.3% and 4.2% of the Company’s total assets measured at fair value on a recurring basis. The fair values 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.
As disclosed in Note 3, at June 30, 2018 and December 31, 2017, respectively, theThe net fair value of the Company’s freestanding derivative positions is approximately 66.1% and 42.9% of Other invested assets measured at fair value on a recurring basis, with a value of $2,539 million and $2,258 million. The fair values of the Company’s derivative positionsas disclosed in Note 4 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 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 June 30, 2018 and December 31, 2017, respectively, investmentsInvestments classified as Level 1 comprise approximately 66.6% and 64.9% of assets measured at fair value on a recurring basis and primarily include redeemable preferred stock, trading securities, cash equivalents and Separate AccountAccounts assets. Fair value measurements classified as Level 1
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 2018 and December 31, 2017, respectively, investmentsInvestments classified as Level 2 comprise approximately 32.3% and 34.0% 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 bills 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 June 30, 2018 and December 31, 2017, respectively, approximately $262 million and $875 millionThe
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Certain Company products such as the SCS and EQUI-VEST variable annuity product,products, 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 6 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 data obtained from independent valuation service providers.
At June 30, 2018 and December 31, 2017, respectively,The Company’s investments classified as Level 3 comprise approximately 1.2% and 1.1% of assets measured at fair value on a recurring basis and primarily include 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 June 30, 2018 and December 31, 2017, respectively, were approximately $94 million and $97 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 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 $538 million and $598 million of mortgage- and asset-backed securities are classified as Level 3 at June 30, 2018 and December 31, 2017, respectively.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
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 assets, which are accounted for as derivative contracts. The GMIB reinsurance contract asset 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 GMxB derivative features liability reflects the present value of expected future payments (benefits) less fees, adjusted for risk margins and nonperformance risk, attributable to GMxB derivative features’ liability over a range of market-consistent economic scenarios.
The valuations of the GMIB reinsurance contract asset and GMxB derivative features liability incorporate significant non-observable assumptions related to policyholder behavior, risk margins and projections of equity separate accountSeparate Accounts 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 GMxB derivative features liability positions, respectively, after taking into account the effects of collateral arrangements. Incremental adjustment to the swap curve for non-performance risk is made to the fair values of the GMIB reinsurance contract asset and liabilities and GMIBNLG feature to reflect the claims-paying ratings of counterparties and the Company. Equity and fixed income volatilities were modeled to reflect current market volatilities. Due to the 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 $12$84 million and $8$112 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, to recognize incremental counterparty non-performance risk and reduced the fair value of its GMIB reinsurance contract liabilities by $22$31 million and $24$41 million at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, to recognize its own incremental non-performance risk.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values and the current policyholder account value, which include other factors 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 to lapse. For valuing the embedded derivative, lapse rates vary throughout the period over which cash flows are projected.
The Company’s Level 3 liabilities include contingent payment arrangements associated with acquisitions in 2010, 2014 and 2016 by AB. At each reporting date, AB estimates the fair values of the contingent consideration expected to be paid based upon revenue and discount rate projections, using unobservable market data inputs, which are included in Level 3 of the valuation hierarchy. The Company’s Level 3 liabilities also include contingent payment arrangements associated with a Renewal Rights Agreement (the “Renewal Rights Agreement”) that transitions certain group employee benefits policies beginning January 1, 2017 from an insurer exiting such business to MONY Life Insurance Company of America (“MLOA”). The fair value of the contingent payments liability associated with this transaction is measured and adjusted each reporting period through final settlement using projected premiums from these policies, net of potential surrenders and terminations, and applying a risk-adjusted discount factor (6.4% at June 30, 2018) to the resulting cash flows.
As of June 30, 2018 and December 31, 2017, the Company’s consolidated VIEs/VOEs hold $29 million and $27 million, respectively, of investments that are classified as Level 3, primarily consist of corporate bonds that are vendor priced with no ratings available, bank loans, non-agency collateralized mortgage obligations and asset-backed securities.
During the sixthree months ended June 30, 2018,March 31, 2019, AFS fixed maturities with fair values of $28$69 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 $65$17 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 0.6% of total equity at June 30,March 31, 2019.
During the three months ended March 31, 2018, AFS fixed maturities with fair values of $16 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 $67 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 0.5% of total equity at March 31, 2018.
The tables below present reconciliations for all Level 3 assets and liabilities for the three months ended March 31, 2019 and 2018.
Level 3 Instruments - Fair Value Measurements
|
| | | | | | | | | | | |
| Corporate | | State and Political Subdivisions | | Asset-backed |
| (in millions) |
Balance, January 1, 2019 | $ | 1,186 |
| | $ | 39 |
| | $ | 519 |
|
Total gains (losses), realized and unrealized, included in: | | | | | |
Income (loss) as: | | | | | |
Net investment income (loss) | 1 |
| | — |
| | — |
|
Other comprehensive income (loss) | 9 |
| | 1 |
| | 4 |
|
Purchases | 70 |
| | — |
| | 11 |
|
Sales | (34 | ) | | — |
| | — |
|
Transfers into Level 3 (1) | 17 |
| | — |
| | — |
|
Transfers out of Level 3 (1) | (69 | ) | | — |
| | — |
|
Balance, March 31, 2019 | $ | 1,180 |
| | $ | 40 |
| | $ | 534 |
|
| | | | | |
Balance, January 1, 2018 | $ | 1,150 |
| | $ | 40 |
| | $ | 541 |
|
Total gains (losses), realized and unrealized, included in: | | | | | |
Income (loss) as: | | | | | |
Net investment income (loss) | 1 |
| | — |
| | — |
|
Other comprehensive income (loss) | (21 | ) | | (1 | ) | | — |
|
Purchases | 189 |
| | — |
| | — |
|
Sales | (117 | ) | | — |
| | (1 | ) |
Transfers into Level 3 (1) | 67 |
| | — |
| | — |
|
Transfers out of Level 3 (1) | (16 | ) | | — |
| | — |
|
Balance, March 31, 2018 | $ | 1,253 |
| | $ | 39 |
| | $ | 540 |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During______________
| |
(1) | Transfers into/out of Level 3 classification are reflected at beginning-of-period fair values. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Preferred Stock | | Other Equity Investments (2) | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB Derivative Features Liability | | Contingent Payment Arrangement |
| (in millions) |
Balance, January 1, 2019 | $ | — |
| | $ | 165 |
| | $ | 1,732 |
| | $ | 374 |
| | $ | (5,614 | ) | | $ | (7 | ) |
Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | |
Income (loss) as: | | | | | | | | | | | |
Investment gains (losses), net | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
|
Net derivative gains (losses), excluding non-performance risk | — |
| | — |
| | (11 | ) | | — |
| | 63 |
| | — |
|
Non-performance risk (1) | — |
| | — |
| | 29 |
| | — |
| | (470 | ) | | — |
|
Subtotal | — |
| | — |
| | 18 |
| | 7 |
| | (407 | ) | | — |
|
Purchases (2) | — |
| | 2 |
| | 11 |
| | 4 |
| | (111 | ) | | — |
|
Sales (3) | — |
| | — |
| | (21 | ) | | — |
| | 6 |
| | — |
|
Settlements (4) | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
|
Activity related to consolidated VIEs/VOEs | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3 (5) | — |
| | (29 | ) | | — |
| | (1 | ) | | — |
| | — |
|
Balance, March 31, 2019 | $ | — |
| | $ | 137 |
| | $ | 1,740 |
| | $ | 383 |
| | $ | (6,126 | ) | | $ | (7 | ) |
| | | | | | | | | | | |
Balance, January 1, 2018 | $ | 1 |
| | $ | 99 |
| | $ | 1,894 |
| | $ | 349 |
| | (4,451 | ) | | $ | (15 | ) |
Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | |
Income (loss) as: | | | | | | | | | | | |
Investment gains (losses), net | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
|
Net derivative gains (losses), excluding non-performance risk | — |
| | — |
| | (155 | ) | | — |
| | 457 |
| | — |
|
Non-performance risk (1) | — |
| | — |
| | (4 | ) | | — |
| | 48 |
| | — |
|
Subtotal | — |
| | — |
| | (159 | ) | | 7 |
| | 505 |
| | — |
|
Other comprehensive income (loss) | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Purchases (2) | — |
| | 4 |
| | 10 |
| | 3 |
| | (96 | ) | | — |
|
Sales (3) | (1 | ) | | — |
| | (11 | ) | | (1 | ) | | 5 |
| | — |
|
Settlements (4) | — |
| | — |
| | — |
| | (1 | ) | | — |
| | 1 |
|
Activity related to consolidated VIEs/VOEs | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3 (5) | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
|
Balance, March 31, 2018 | $ | — |
| | $ | 110 |
| | $ | 1,734 |
| | $ | 357 |
| | (4,037 | ) | | $ | (14 | ) |
______________
| |
(1) | The Company’s non-performance risk is recorded through Net derivative gains (losses). |
| |
(2) | For the GMIB reinsurance contract asset and GMxB derivative features liability, represents attributed fee. |
| |
(3) | For the GMIB reinsurance contract asset, represents recoveries from reinsurers and for the GMxB derivative features liability, represents benefits paid. |
| |
(4) | For contingent payment arrangements, represents payments under the arrangement. |
| |
(5) | Transfers into/out of Level 3 classification are reflected at beginning-of-period fair values. |
The table below details changes in unrealized gains (losses) for the sixthree months ended June 30, 2017, $6 million of AFS fixed maturities were transferred out of Level 3March 31, 2019 and into Level 2 principally due to the availability of trading activity or market observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $13 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 0.2% of total equity at June 30, 2017.
The tables below presents a reconciliation2018 by category for all Level 3 assets and liabilities for the threestill held at March 31, 2019 and six months ended June 30, 2018 and 2017, respectively:2018.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Level 3 Instruments
Fair Value Measurements
|
| | | | | | | | | | | | | | | |
| Corporate | | State and Political Sub- divisions | | Commercial Mortgage- backed | | Asset- backed |
| (in millions) |
Balance, April 1, 2018 | $ | 1,253 |
| | $ | 39 |
| | $ | — |
| | $ | 540 |
|
Total gains (losses), realized and unrealized, included in: | | | | | | | |
Income (loss) as: | | | | | | | |
Net investment income (loss) | 3 |
| | — |
| | — |
| | — |
|
Investment gains (losses), net | 1 |
| | — |
| | — |
| | — |
|
Subtotal | 4 |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) | 7 |
| | — |
| | — |
| | (1 | ) |
Purchases | 11 |
| | — |
| | — |
| | — |
|
Sales | (101 | ) | | (1 | ) | | — |
| | (1 | ) |
Settlements | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3(1) | (2 | ) | | — |
| | — |
| | — |
|
Transfers out of Level 3(1) | (12 | ) | | — |
| | — |
| | — |
|
Balance, June 30, 2018 | $ | 1,160 |
| | $ | 38 |
| | $ | — |
| | $ | 538 |
|
Balance, April 1, 2017 | $ | 1,025 |
| | $ | 42 |
| | $ | 340 |
| | $ | 323 |
|
Total gains (losses), realized and unrealized, included in: | | | | | | | |
Income (loss) as: | | | | | | | |
Net investment income (loss) | 3 |
| | — |
| | 1 |
| | — |
|
Investment gains (losses), net | (1 | ) | | — |
| | 4 |
| | 15 |
|
Subtotal | 2 |
| | — |
| | 5 |
| | 15 |
|
Other comprehensive income (loss) | (52 | ) | | — |
| | (6 | ) | | (12 | ) |
Purchases | 162 |
| | — |
| | 196 |
| | 210 |
|
Sales | (38 | ) | | — |
| | (34 | ) | | (16 | ) |
Transfers into Level 3(1) | (5 | ) | | — |
| | — |
| | (6 | ) |
Transfers out of Level 3(1) | (5 | ) | | — |
| | — |
| | (1 | ) |
Balance, June 30, 2017 | $ | 1,089 |
| | $ | 42 |
| | $ | 501 |
| | $ | 513 |
|
|
| | | | | | | | | | | |
| Income (Loss) | |
| Investment Gains (Losses), Net | | Net Derivative Gains (Losses) | | OCI |
| (in millions) |
Held at March 31, 2019: | | | | | |
Change in unrealized gains (losses): | | | | | |
Fixed maturities, available-for-sale: | | | | | |
Corporate | $ | — |
| | $ | — |
| | $ | 9 |
|
State and political subdivisions | — |
| | — |
| | 1 |
|
Asset-backed | — |
| | — |
| | 4 |
|
Subtotal | — |
| | — |
| | 14 |
|
GMIB reinsurance contracts | — |
| | 18 |
| | — |
|
Separate Accounts assets (1) | 7 |
| | — |
| | — |
|
GMxB derivative features liability | — |
| | (408 | ) | | — |
|
Total | $ | 7 |
| | $ | (390 | ) | | $ | 14 |
|
| | | | | |
Held at March 31, 2018: | | | | | |
Change in unrealized gains (losses): | | | | | |
Fixed maturities, available-for-sale: | | | | | |
Corporate | $ | — |
| | $ | — |
| | $ | (19 | ) |
Commercial mortgage-backed | — |
| | — |
| | (1 | ) |
Subtotal | — |
| | — |
| | (20 | ) |
GMIB reinsurance contracts | — |
| | (159 | ) | | — |
|
Separate Accounts assets (1) | 7 |
| | — |
| | — |
|
GMxB derivative features liability | — |
| | 505 |
| | — |
|
Total | $ | 7 |
| | $ | 346 |
| | $ | (20 | ) |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Corporate | | State and Political Sub- divisions | | Commercial Mortgage- backed | | Asset- backed |
| (in millions) |
Balance, January 1, 2018 | $ | 1,150 |
| | $ | 40 |
| | $ | — |
| | $ | 541 |
|
Total gains (losses), realized and unrealized, included in: | | | | | | | |
Income (loss) as: | | | | | | | |
Net investment income (loss) | 4 |
| | — |
| | — |
| | — |
|
Investment gains (losses), net | 1 |
| | — |
| | — |
| | — |
|
Subtotal | 5 |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) | (14 | ) | | (1 | ) | | — |
| | (1 | ) |
Purchases | 200 |
| | — |
| | — |
| | — |
|
Sales | (218 | ) | | (1 | ) | | — |
| | (2 | ) |
Settlements | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3(1) | 65 |
| | — |
| | — |
| | — |
|
Transfers out of Level 3(1) | (28 | ) | | — |
| | — |
| | — |
|
Balance, June 30, 2018 | $ | 1,160 |
| | $ | 38 |
| | $ | — |
| | $ | 538 |
|
Balance, January 1, 2017 | $ | 857 |
| | $ | 42 |
| | $ | 373 |
| | $ | 120 |
|
Total gains (losses), realized and unrealized, included in: | | | | | | | |
Income (loss) as: | | | | | | | |
Net investment income (loss) | 4 |
| | — |
| | 1 |
| | — |
|
Investment gains (losses), net | (1 | ) | | — |
| | (19 | ) | | 15 |
|
Subtotal | 3 |
| | — |
| | (18 | ) | | 15 |
|
Other comprehensive income (loss) | (7 | ) | | — |
| | 19 |
| | (7 | ) |
Purchases | 333 |
| | — |
| | 196 |
| | 405 |
|
Sales | (105 | ) | | — |
| | (69 | ) | | (19 | ) |
Transfers into Level 3(1) | 13 |
| | — |
| | — |
| | — |
|
Transfers out of Level 3(1) | (5 | ) | | — |
| | — |
| | (1 | ) |
Balance, June 30, 2017 | $ | 1,089 |
| | $ | 42 |
| | $ | 501 |
| | $ | 513 |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Preferred Stock | | Other Equity Investments(2) | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB derivative features liability | | Contingent Payment Arrangement |
| (in millions) |
Balance, April 1, 2018 | $ | — |
| | $ | 110 |
| | $ | 1,734 |
| | $ | 357 |
| | $ | (3,977 | ) | | $ | (14 | ) |
Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | |
Income (loss) as: | | | | | | | | | | | |
Net investment income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Investment gains (losses), net | — |
| | (1 | ) | | — |
| | 6 |
| | — |
| | — |
|
Net derivative gains (losses) | — |
| | — |
| | (92 | ) | | — |
| | 422 |
| | — |
|
Subtotal | — |
| | (1 | ) | | (92 | ) | | 6 |
| | 422 |
| | — |
|
Other comprehensive income (loss) | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
|
Purchases(2) | — |
| | 6 |
| | 13 |
| | (1 | ) | | (106 | ) | | — |
|
Sales(3) | — |
| | (2 | ) | | (19 | ) | | — |
| | 4 |
| | — |
|
Settlements(4) | — |
| | — |
| | — |
| | (1 | ) | | — |
| | 1 |
|
Activity related to consolidated VIEs | — |
| | (3 | ) | | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3(1) | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3(1) | — |
| | (5 | ) | | — |
| | — |
| | — |
| | — |
|
Balance, June 30, 2018 | $ | — |
| | $ | 111 |
| | $ | 1,636 |
| | $ | 361 |
| | $ | (3,657 | ) | | $ | (13 | ) |
Balance, April 1, 2017 | $ | 1 |
| | $ | 74 |
| | $ | 1,659 |
| | $ | 325 |
| | $ | (5,146 | ) | | $ | (24 | ) |
Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | |
Income (loss) as: | | | | | | | | | | | |
Net investment income (loss) | — |
| | — |
| | — |
| | 18 |
| | — |
| | — |
|
Investment gains (losses), net | — |
| | 9 |
| | — |
| | (10 | ) | | — |
| | — |
|
Net derivative gains (losses) | — |
| | — |
| | 438 |
| | — |
| | 236 |
| | — |
|
Subtotal | — |
| | 9 |
| | 438 |
| | 8 |
| | 236 |
| | — |
|
Other comprehensive income (loss) | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
|
Purchases(2) | — |
| | 14 |
| | 15 |
| | 3 |
| | (83 | ) | | — |
|
Sales(3) | — |
| | — |
| | (21 | ) | | (1 | ) | | 2 |
| | — |
|
Settlements(4) | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
|
Activity related to consolidated VIEs | — |
| | (6 | ) | | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3(1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3(1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balance, June 30, 2017 | $ | 1 |
| | $ | 93 |
| | $ | 2,091 |
| | $ | 334 |
| | $ | (4,991 | ) | | $ | (24 | ) |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Redeemable Preferred Stock | | Other Equity Investments(2) | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB derivative features liability | | Contingent Payment Arrangement |
| (in millions) |
Balance, January 1, 2018 | $ | 1 |
| | $ | 99 |
| | $ | 1,894 |
| | $ | 349 |
| | $ | (4,358 | ) | | $ | (15 | ) |
Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | |
Income (loss) as: | | | | | | | | | | | |
Net investment income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Investment gains (losses), net | — |
| | (1 | ) | | — |
| | 13 |
| | — |
| | — |
|
Net derivative gains (losses) | — |
| | — |
| | (251 | ) | | — |
| | 882 |
| | — |
|
Subtotal | — |
| | (1 | ) | | (251 | ) | | 13 |
| | 882 |
| | — |
|
Other comprehensive income (loss) | — |
| | 6 |
| | — |
| | — |
| | — |
| | — |
|
Purchases(2) | — |
| | 10 |
| | 23 |
| | 2 |
| | (190 | ) | | — |
|
Sales(3) | (1 | ) | | (2 | ) | | (30 | ) | | (1 | ) | | 9 |
| | — |
|
Settlements(4) | — |
| | — |
| | — |
| | (2 | ) | | — |
| | 2 |
|
Activity related to consolidated VIEs | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3(1) | — |
| | 6 |
| | — |
| | — |
| | — |
| | — |
|
Transfers out of Level 3(1) | — |
| | (5 | ) | | — |
| | — |
| | — |
| | — |
|
Balance, June 30, 2018 | $ | — |
| | $ | 111 |
| | $ | 1,636 |
| | $ | 361 |
| | $ | (3,657 | ) | | $ | (13 | ) |
Balance, January 1, 2017 | $ | 1 |
| | $ | 88 |
| | $ | 1,735 |
| | $ | 313 |
| | $ | (5,580 | ) | | $ | (25 | ) |
Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | |
Income (loss) as: | | | | | | | | | | | |
Net investment income (loss) | — |
| | — |
| | — |
| | 18 |
| | — |
| | — |
|
Investment gains (losses), net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net derivative gains (losses) | — |
| | — |
| | 367 |
| | — |
| | 743 |
| | — |
|
Subtotal | — |
| | — |
| | 367 |
| | 18 |
| | 743 |
| | — |
|
Other comprehensive income (loss) | — |
| | 2 |
| | — |
| | — |
| | — |
| | — |
|
Purchases(2) | — |
| | 18 |
| | 24 |
| | 6 |
| | (164 | ) | | — |
|
Sales(3) | — |
| | (1 | ) | | (35 | ) | | (2 | ) | | 10 |
| | — |
|
Settlements(4) | — |
| | — |
| | — |
| | (2 | ) | | — |
| | 1 |
|
Activity related to consolidated VIEs | — |
| | (15 | ) | | — |
| | — |
| | — |
| | — |
|
Transfers into Level 3(1) | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
Transfers out of Level 3(1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Balance, June 30, 2017 | $ | 1 |
| | $ | 93 |
| | $ | 2,091 |
| | $ | 334 |
| | $ | (4,991 | ) | | $ | (24 | ) |
| |
(1) | Transfers into/out of Level 3 classification are reflected at beginning-of-period fair values. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
(2) | For the GMIB reinsurance contract asset, and GMxB derivative features liability, represents attributed fee. |
| |
(3) | For the GMIB reinsurance contract asset, represents recoveries from reinsurers and for GMxB derivative features liability represents benefits paid. |
| |
(4) | For contingent payment arrangements, it represents payments under the arrangement. |
The table below details changes in unrealized gains (losses) for the six months ended June 30, 2018 and 2017 by category for Level 3 assets and liabilities still held at June 30, 2018 and 2017, respectively:
|
| | | | | | | | | | | |
| Income (Loss) | |
| Investment Gains (Losses), Net | | Net Derivative Gains (losses) | | OCI |
| (in millions) |
Level 3 Instruments | | | | | |
Six Months Ended June 30, 2018 | | | | | |
Held at June 30, 2018: | | | | | |
Change in unrealized gains (losses): | | | | | |
Fixed maturities, available-for-sale: | | | | | |
Corporate | $ | — |
| | $ | — |
| | $ | (15 | ) |
State and political subdivisions | — |
| | — |
| | (1 | ) |
Asset-backed | — |
| | — |
| | 1 |
|
Subtotal | $ | — |
| | $ | — |
| | $ | (15 | ) |
GMIB reinsurance contracts | — |
| | (251 | ) | | — |
|
Separate Accounts’ assets(1) | 13 |
| | — |
| | — |
|
GMxB derivative features' liability | — |
| | 882 |
| | — |
|
Total | $ | 13 |
| | $ | 631 |
| | $ | (15 | ) |
Level 3 Instruments | | | | | |
Six Months Ended June 30, 2017 | | | | | |
Held at June 30, 2017: | | | | | |
Change in unrealized gains (losses): | | | | | |
Fixed maturities, available-for-sale: | | | | | |
Corporate | $ | — |
| | $ | — |
| | $ | (6 | ) |
Commercial mortgage-backed | — |
| | — |
| | 18 |
|
Asset-backed | — |
| | — |
| | (7 | ) |
Subtotal | $ | — |
| | $ | — |
| | $ | 5 |
|
GMIB reinsurance contracts | — |
| | 367 |
| | — |
|
Separate Accounts’ assets(1) | 18 |
| | — |
| | — |
|
GMxB derivative features' liability | — |
| | 743 |
| | — |
|
Total | $ | 18 |
| | $ | 1,110 |
| | $ | 5 |
|
______________
| |
(1) | There is an investment expense that offsets this investment gain (loss). |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following tables disclose quantitative information about Level 3 fair value measurements by category for assets and liabilities as of June 30, 2018at March 31, 2019 and December 31, 2017, respectively.
Quantitative Information about Level 3 Fair Value Measurements
|
| | | | | | | | | | | |
| Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average |
| (in millions) | | |
Assets: | | | | | | | | | |
Investments: | | | | | | | | | |
Fixed maturities, available-for-sale: | | | | | | | | | |
Corporate | $ | 31 |
| | Matrix pricing model | | Spread over the industry-Specific benchmark yield curve | | 75 - 565 bps | | 188 bps |
| 757 |
| | Market comparable companies | | EBITDA multiples Discount rate Cash flow multiples | | 4.8x - 33.0x 7.2% - 16.5% 9.0x - 17.7x | | 13.0x 11.1% 13.1x |
Other equity investments | 38 |
| | Discounted cash flow | | Earnings Multiple Discounts factor Discount years | | 10.8x 10.0% 12 | | |
Separate Accounts’ assets | 339 |
| | Third party appraisal | | Capitalization Rate Exit capitalization Rate Discount Rate | | 4.5% 5.6% 6.5% | | |
| 1 |
| | Discounted cash flow | | Spread over U.S. Treasury curve Discount factor | | 228 bps 4.8% | | |
GMIB reinsurance contract asset | 1,636 |
| | Discounted cash flow | | Lapse Rates Withdrawal Rates Utilization Rates Non-performance risk Volatility rates - Equity | | 1.0% - 6.3% 0.0% - 8.0% 0.0% - 16.0% 5bps - 10bps 8.82% - 31.51% | | |
Liabilities: | | | | | | | | | |
GMIBNLG | 3,418 |
| | Discounted cash flow | | Non-performance risk Lapse Rates Withdrawal Rates Annuitization NLG Forfeiture Rates Long-term equity Volatility | | 1.1% 0.8% - 26.2% 0.0% - 12.4% 0.0% - 16.0% 0.55% - 2.1% 20.0% | | |
Assumed GMIB Reinsurance Contracts | 158 |
| | Discounted cash flow | | Lapse Rates Withdrawal Rates (Age 0-85) Withdrawal Rates (Age 86+) Utilization Rates Non-performance risk Volatility rates - Equity | | 1.1% - 13.3% 0.7% - 22.2% 1.3% - 100% 0% - 30% 1.4% 8.82% - 31.51% | | |
GWBL/GMWB | 119 |
| | Discounted cash flow | | Lapse Rates Withdrawal Rates Utilization Rates Volatility rates - Equity | | 0.5%-5.7% 0.0%-7.0% 100% after delay 8.82% - 31.51% | | |
GIB | (41 | ) | | Discounted cash flow | | Lapse Rates Withdrawal Rates Utilization Rates Volatility rates - Equity | | 0.5%-5.7% 0%-8% 0% - 16% 8.82% - 31.51% | | |
GMAB | 3 |
| | Discounted cash flow | | Lapse Rates Volatility rates - Equity | | 0.5%-11.0% 8.82% - 31.51% | | |
2018.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Quantitative Information about Level 3 Fair Value Measurements
December at March 31, 20172019
| | | | Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average | Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average |
| | (in millions) | | (in millions) | |
Assets: | | | | | |
Investments: | | | | | |
Fixed maturities, available-for-sale: | | | | | |
Corporate | | $ | 53 |
| | Matrix pricing model | | Spread over the industry-specific benchmark yield curve | | 0 bps-565 bps | | 125 bps | $ | 102 |
| | Matrix pricing model | | Spread over benchmark | | 15 - 580 bps | | 115 bps |
| | 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 | 891 |
| | Market comparable companies | | EBITDA multiples Discount rate Cash flow multiples | | 3.9x - 25.5x 6.1% - 16.5% 1.6x - 18.0x | | 12.7x 10.6% 11.4x |
Other equity investments | | 38 |
| | Discounted cash flow | | Earnings Multiple Discounts factor Discount years | | 10.8x 10.0% 12 | | 35 |
| | Discounted cash flow | | Earnings multiple Discount factor Discount years | | 9.4x 10.0% 12 | |
|
Separate Accounts’ assets | | 326 |
| | Third party appraisal | | Capitalization Rate Exit capitalization Rate Discount Rate | | 4.6% 5.6% 6.6% | | |
Separate Accounts assets | | 359 |
| | Third party appraisal | | Capitalization rate Exit capitalization rate Discount rate | | 4.4% 5.5% 6.4% | |
| | 1 |
| | Discounted cash flow | | Spread over U.S. Treasury curve Discount factor | | 243 bps 4.409% | | 1 |
| | Discounted cash flow | | Spread over U.S. Treasury curve Discount factor | | 248 bps 4.8% | |
GMIB reinsurance contract asset | | 1,894 |
| | Discounted Cash flow | | Lapse Rates Withdrawal Rates Utilization Rates Non-performance risk Volatility rates - Equity | | 1.0% - 6.3% 0.0% - 8.0% 0.0% - 16.0% 5bps - 10bps 9.9% - 30.9% | | 1,740 |
| | 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% - 6.27% 0% - 8% 0% - 16% 52 - 129 bps 7% - 32%
0.01% - 0.18% 0.07% - 0.54% 0.42% - 42.0% | |
Liabilities: | | | | | |
GMIBNLG | | 4,056 |
| | Discounted cash flow | | Non-performance risk Lapse Rates Withdrawal Rates Utilization Rates NLG Forfeiture Rates Long -term Equity Volatility | | 1.0% 0.8% - 26.2% 0.0% - 12.4% 0.0% - 16.0% 0.55% - 2.1% 20.0% | | 5,847 |
| | Discounted cash flow | | Non-performance risk Lapse rates Withdrawal rates Annuitization Mortality rates (1): Ages 0 - 40 Ages 41 - 60 Ages 60 - 115 | | 149 bps 0.8% - 26.2% 0.0% - 12.144% 0.0% - 100.0%
0.01% - 0.19% 0.06% - 0.53% 0.41% - 41.2% | |
Assumed GMIB Reinsurance Contracts | | 194 |
| | Discounted cash flow | | Lapse Rates Withdrawal Rates (Age 0-85) Withdrawal Rates (Age 86+) Utilization Rates Non-performance risk Volatility rates - Equity | | 1.1% - 13.3% 0.7% - 22.2% 1.3% - 100% 0 - 30% 1.3% 9.9% - 30.9% | | 182 |
| | Discounted cash flow | | Lapse rates Withdrawal rates (Age 0 - 85) Withdrawal rates (Age 86+) Utilization rates Non-performance risk Volatility rates - Equity | | 1.1% - 11.2% 0.7% - 22.2% 1.3% - 100.0% 0.0% - 30.0% 0.75% to 1.99% 10.0% - 34.0% | |
GWBL/GMWB | | 130 |
| | Discounted cash flow | | Lapse Rates Withdrawal Rates Utilization Rates Volatility rates - Equity | | 0.9% - 5.7% 0.0% - 7.0% 100% after delay 9.9% - 30.9% | | 137 |
| | Discounted cash flow | | Lapse rates Withdrawal rates Utilization rates Volatility rates - Equity | | 0.5% - 5.7% 0.0% - 7.0% 100% after delay 7.0% - 32.0% | |
GIB | | (27 | ) | | 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% | | (44 | ) | | Discounted cash flow | | Lapse rates Withdrawal rates Utilization rates Volatility rates - Equity | | 0.5% - 5.7% 0.0% - 8.0% 0.0% - 16.0% 7.0% - 32.0% | |
GMAB | | 5 |
| | Discounted cash flow | | Lapse Rates Volatility rates - Equity | | 0.5% - 11.0% 9.9% - 30.9% | | 4 |
| | Discounted cash flow | | Lapse rates Volatility rates - Equity | | 0.5% - 11.0% 7.0% - 32.0% | |
______________
| |
(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 HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2018
|
| | | | | | | | | | | |
| Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average |
| (in millions) | | |
Assets: | | | | | | | | | |
Investments: | | | | | | | | | |
Fixed maturities, available-for-sale: | | | | | | | | | |
Corporate | $ | 99 |
| | Matrix pricing model | | Spread over benchmark | | 15 - 580 bps | | 109 bps |
| 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 |
Other equity investments | 35 |
| | Discounted cash flow | | Earnings multiple Discount factor Discount years | | 9.4x 10.0% 12 | |
|
Separate Accounts assets | 352 |
| | Third party appraisal | | Capitalization rate Exit capitalization rate Discount rate | | 4.4% 5.6% 6.5% | | |
| 1 |
| | Discounted cash flow | | Spread over U.S. Treasury curve Discount factor | | 248bps 5.1% | | |
GMIB reinsurance contract asset | 1,732 |
| | 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% - 6.27% 0% - 8% 0% - 16% 74 - 159 bps 10% - 34%
0.01% - 0.18% 0.07% - 0.54% 0.42% - 42.0% | | |
Liabilities: | | | | | | | | | |
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% | | |
Assumed GMIB Reinsurance Contracts | 183 |
| | Discounted cash flow | | Lapse rates Withdrawal rates (Age 0 - 85) Withdrawal rates (Age 86+) Utilization rates Non-performance risk Volatility rates - Equity | | 1.1% - 11.2% 0.7% - 22.2% 1.3% - 100.0% 0.0% - 30.0% 1.1% - 2.4% 10.0% - 34.0% | | |
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 | | 0.5% - 11.0% 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. |
Excluded from the tables above at June 30, 2018March 31, 2019 and December 31, 2017,2018, respectively, are approximately $1,042$887 million and $948$915 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 47.2% and 44.0% of total assets classified as Level 3 and represent only 0.5% and 0.5% of total assets measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017, respectively. These investments primarily consist of certain
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
privately placed debt securities with limited trading activity, including 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 June 30, 2018 and December 31, 2017, respectively, are approximately $788 million and $842 million fair value of loans classified as Level 3. 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 67.9% and 73.2% 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 June 30, 2018March 31, 2019 and December 31, 2017,2018, there were no Level 3 securities that were determined by application of a matrix 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 would lead to directionally inverse movement in 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 June 30, 2018March 31, 2019 and December 31, 2017,2018, there were no securities that were determined by the application of matrix-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 AccountAccounts assets classified as Level 3 in the table at June 30, 2018March 31, 2019 and December 31, 2017,2018, primarily consist of a private real estate fund with a fair value of approximately $339 million and $326 millionand mortgage loans with fair value of approximately $1 million and $1 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. 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. Treasury 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 Account investments classified as Level
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3 excluded from the table consist of mortgage- and asset-backed securities with fair values of approximately $13 million and $8 million at June 30, 2018 and $14 million and $8 million at December 31, 2017, 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.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 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 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.
During 2017, AB made the final contingent consideration payment relating to its 2014 acquisition and recorded a change in estimate and wrote off the remaining contingent consideration payable relating to its 2010 acquisition. As of June 30, 2018At March 31, 2019 and December 31, 2017, one2018, a remaining acquisition-related contingent consideration liability of $11$7 million remainsand $7 million relating to AB’s 2016 acquisition, which was valued at March 31, 2019 using a revenue growth rate of 31.0%18.0% and a discount rate ranging from 1.4%3.2% to 2.3%.
The MLOA contingent payment arrangements associated with the Renewal Rights Agreement (with a fair value of $2 million as of June 30, 2018 is measured using projected premiums from these policies, net of potential surrenders3.7% and terminations, and applying a risk-adjusted discount factor (6.4% at June 30, 2018) to the resulting cash flows.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The carrying values and fair values at June 30, 2018 and December 31, 2017 for financial instruments not otherwise disclosed in Note 3 are presented in the table below. 2018 using a revenue growth rate of 17.6% and a discount rate ranging from 3.2% to 3.7%.
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 March 31, 2019 and December 31, 2018 for financial instruments not otherwise disclosed in Notes 3 and 4 are presented in the table below.
|
| | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
June 30, 2018: | | | | | | | | |
Mortgage loans on real estate | $ | 11,808 |
| | $ | — |
| | $ | — |
| | $ | 11,552 |
| | $ | 11,552 |
|
Loans to affiliates | — |
| | — |
| | — |
| | — |
| | — |
|
Policyholders’ liabilities: Investment contracts | 2,202 |
| | — |
| | — |
| | 2,245 |
| | 2,245 |
|
FHLBNY Funding Agreements | 3,013 |
| | — |
| | 2,937 |
| | — |
| | 2,937 |
|
Short term and long-term debt | 4,922 |
| | — |
| | 4,786 |
| | — |
| | 4,786 |
|
Loans from affiliates | — |
| | — |
| | — |
| | — |
| | — |
|
Policy loans | 3,739 |
| | — |
| | — |
| | 4,264 |
| | 4,264 |
|
Separate Account Liabilities | 7,968 |
| | — |
| | — |
| | 7,968 |
| | 7,968 |
|
December 31, 2017: | | | | | | | | | |
Mortgage loans on real estate | $ | 10,952 |
| | $ | — |
| | $ | — |
| | $ | 10,912 |
| | $ | 10,912 |
|
Loans to affiliates | 1,230 |
| | — |
| | 1,230 |
| | — |
| | 1,230 |
|
Policyholders’ liabilities: Investment contracts | 2,224 |
| | — |
| | — |
| | 2,329 |
| | 2,329 |
|
FHLBNY Funding Agreements | 3,014 |
| | — |
| | 3,020 |
| | — |
| | 3,020 |
|
Short term and long-term debt | 2,408 |
| | — |
| | 2,500 |
| | — |
| | 2,500 |
|
Loans from affiliates | 3,622 |
| | — |
| | 3,622 |
| | — |
| | 3,622 |
|
Policy loans | 3,819 |
| | — |
| | — |
| | 4,754 |
| | 4,754 |
|
Separate Account Liabilities | 7,537 |
| | — |
| | — |
| | 7,537 |
| | 7,537 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Carrying Value | | Fair Value |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| (in millions) |
March 31, 2019: | | | | | | | | |
Mortgage loans on real estate | $ | 12,117 |
| | $ | — |
| | $ | — |
| | $ | 12,019 |
| | $ | 12,019 |
|
FHLBNY Funding Agreements | $ | 4,001 |
| | $ | — |
| | $ | 4,011 |
| | $ | — |
| | $ | 4,011 |
|
Policy loans | $ | 3,766 |
| | $ | — |
| | $ | — |
| | $ | 4,611 |
| | $ | 4,611 |
|
Policyholders’ liabilities: Investment contracts | $ | 2,132 |
| | $ | — |
| | $ | — |
| | $ | 2,248 |
| | $ | 2,248 |
|
Short-term and long-term debt | $ | 4,949 |
| | $ | — |
| | $ | 5,023 |
| | $ | — |
| | $ | 5,023 |
|
Separate Accounts liabilities | $ | 8,173 |
| | $ | — |
| | $ | — |
| | $ | 8,173 |
| | $ | 8,173 |
|
| | | | | | | | | |
December 31, 2018: | | | | | | | | | |
Mortgage loans on real estate | $ | 11,835 |
| | $ | — |
| | $ | — |
| | $ | 11,494 |
| | $ | 11,494 |
|
FHLBNY Funding Agreements | $ | 4,002 |
| | $ | — |
| | $ | 3,956 |
| | $ | — |
| | $ | 3,956 |
|
Policy loans | $ | 3,779 |
| | $ | — |
| | $ | — |
| | $ | 4,183 |
| | $ | 4,183 |
|
Policyholders’ liabilities: Investment contracts | $ | 2,127 |
| | $ | — |
| | $ | — |
| | $ | 2,174 |
| | $ | 2,174 |
|
Short-term and long-term debt | $ | 4,955 |
| | $ | — |
| | $ | 4,749 |
| | $ | — |
| | $ | 4,749 |
|
Separate Accounts liabilities | $ | 7,406 |
| | $ | — |
| | $ | — |
| | $ | 7,406 |
| | $ | 7,406 |
|
As our COLI policies are recorded at their cash surrender value, they are not required to be included in the table above.
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
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 partythird-party appraisal and assessed for reasonableness. The Company’s short-term debt primarily includes commercial paper with short termshort-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 in the same manner as for such transactions with third parties, including matrix pricing models for debt securities and discounted cash flow analysis for mortgage loans.
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.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The fair values of the Company's funding agreements are determined by discounted cash flow analysis based on the indicative funding agreement rates published by the 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 Policyholders’ 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.
9) REVENUE RECOGNITION8) LEASES
See “Revenue Recognition” in Note 2Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for descriptionsthese leases on a straight-line basis over the lease term. For those leases with a term greater than one year, the Company recognizes on the balance sheet at the time of revenues presentedlease commencement or modification a right of use (“RoU”) operating lease asset and a lease liability, initially measured at the present value of the lease payments. Lease costs are recognized in the table belowincome statement over the lease term on a straight-line basis. RoU assets represent our right to use an underlying asset for the lease term and subjectlease liabilities represent our obligation to contractsmake lease payments arising from the lease.
The Company's lease population primarily consists of real estate leases for office space. The Company also has operating leases for various types of furniture and office equipment. For certain equipment leases, the Company applies a portfolio approach to effectively account for the operating lease RoU assets and liabilities. For certain lease agreements entered into or reassessed after the adoption of ASC 842, the Company elected to combine the lease and related non-lease components for its operating leases; however, the non-lease components associated with customers determinedthe Company’s operating leases are primarily variable in nature and as such are not included in the determination of the RoU asset and lease liability but are recognized in the period in which the obligation for those payments is incurred.
The Company’s operating leases may include options to extend or terminate the lease, which are not included in the determination of the RoU asset or lease liability unless they are reasonably certain to be in-scopeexercised. The Company's operating leases have remaining lease terms of one year to 12 years, some of which include options to extend the leases. The Company typically does not include its renewal options in its lease terms for calculating its RoU operating lease asset and lease liability as the renewal options allow the Company to maintain operational flexibility and the Company is not reasonably certain it will exercise these renewal options until close to the initial end date of the new guidance.lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the Company's leases do not provide an implicit rate, we used an incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments.
The Company primarily subleases floor space within our New Jersey and New York lease properties to various third parties. The lease term for the subleases typically corresponds to the head lease term.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Balance Sheet Classification of Operating Lease Assets and Liabilities
|
| | | | | | |
| | Balance Sheet Line Item | | March 31, 2019 |
| | | | (in millions) |
Assets | | | | |
Operating lease asset | | Other Assets | | $ | 760 |
|
Liabilities | | | | |
Operating lease liability | | Other Liabilities | | $ | 974 |
|
The table below presentssummarizes the revenues recognized duringcomponents of lease costs for the three and six months ended June 30, 2018 and 2017, disaggregated by category:March 31, 2019.
Lease Costs
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Investment management, advisory and service fees: | | | | | | | |
Base fees | $ | 720 |
| | $ | 670 |
| | $ | 1,444 |
| | $ | 1,313 |
|
Performance-based fees | 35 |
| | 15 |
| | 41 |
| | 21 |
|
Research services | 107 |
| | 109 |
| | 221 |
| | 222 |
|
Distribution services | 183 |
| | 171 |
| | 363 |
| | 337 |
|
Other revenues: | | | | | | | |
Shareholder services | 18 |
| | 19 |
| | 38 |
| | 37 |
|
Other | 5 |
| | 4 |
| | 11 |
| | 8 |
|
Total investment management and service fees | $ | 1,068 |
| | $ | 988 |
| | $ | 2,118 |
| | $ | 1,938 |
|
| | | | | | | |
Other income | $ | 122 |
| | $ | 103 |
| | $ | 234 |
| | $ | 204 |
|
|
| | | | |
| | Three Months Ended March 31, 2019 |
| | (in millions) |
Operating lease cost | | $ | 81 |
|
Variable operating lease cost | | $ | 13 |
|
Sublease income | | $ | (19 | ) |
Short-term lease expense | | $ | 1 |
|
Maturities of lease liabilities as of March 31, 2019 are as follows:
Maturities of Lease Liabilities
|
| | | | |
| | March 31, 2019 |
| | (in millions) |
Operating Leases: | | |
2019 | | $ | 183 |
|
2020 | | 203 |
|
2021 | | 190 |
|
2022 | | 172 |
|
2023 | | 158 |
|
Thereafter | | 204 |
|
Total lease payments | | 1,110 |
|
Less: Interest | | (136 | ) |
Present value of lease liabilities | | $ | 974 |
|
As of March 31, 2019, AXA Equitable Life entered into additional operating real estate leases that have not yet commenced with an estimated total base rent of approximately $10 million. These operating leases will commence in August 2019 with lease terms of 5 to 10 years. During October 2018, AB signed a lease, which commences in mid-2020, relating to 205,000 square feet of space at AB’s new Nashville headquarters. The estimated total base rent obligation (excluding taxes, operating expenses and utilities) over the 15-year initial lease term is $126 million. During April 2019, AB signed a lease, which commences in 2024, relating to approximately 190,000 square feet of space in New York City. The estimated total base rent obligation (excluding taxes, operating expenses and utilities) over the 20-year lease term is approximately $448 million.
The below table shows the weighted-average operating lease term and discount rate for the Company and its subsidiaries. The averages presented are blended rates derived by weighting the calculated values from internal lease systems of our subsidiaries with the proportional value of their lease liabilities.
Weighted Average of Lease Term and Discount Rate
|
| | | |
| | March 31, 2019 |
Weighted-average remaining operating lease term (years) | | 5.8 |
|
Weighted-average discount rate for operating leases | | 3.32 | % |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Supplemental cash flow information related to leases was as follows:
Lease Liabilities Information
|
| | | | |
| | Three Months Ended March 31, 2019 |
| | (in millions) |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | | $ | 58 |
|
Non-cash transactions: | | |
Leased assets obtained in exchange for new operating lease liabilities | | $ | 3 |
|
The following table presents the Company’s future minimum lease obligation under ASC 840 as of December 31, 2018:
|
| | | | |
| | December 31, 2018 |
Calendar Year | | (in millions) |
2019 | | $ | 212 |
|
2020 | | $ | 186 |
|
2021 | | $ | 181 |
|
2022 | | $ | 166 |
|
2023 | | $ | 155 |
|
Thereafter | | $ | 293 |
|
10)9) EMPLOYEE BENEFIT PLANS
AXA Financial and AXA Equitable Life Plans
AXA Equitable Life 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 $6 million, $15 million, $6 million and $13 million in the three and six months ended June 30, 2018 and 2017, respectively.
AXA FinancialHoldings sponsors the MONY Life Retirement Income Security Plan for Employees and AXA Equitable Life sponsors the AXA Equitable Retirement Plan (the “AXA Equitable Life QP”), both of which are frozen qualified defined benefit plans covering eligible employees and financial professionals. These pension plans are non-contributory and their benefits are generally based on a cash balance formula and/or,Holdings is primarily liable for certain participants, years of service and average earnings over a specified period in theboth plans. AXA Financial and AXA Equitable Life also sponsor certain nonqualified defined benefit plans.
On March 13, 2018, the Company signed a binding agreement with a third party insurer to purchase two single premium, non-participating group annuity contracts with the intent of settling certain retiree liabilitiesis secondarily liable for obligations under the MONY Life Retirement Income Security Plan for Employees and the AXA Equitable Life QP. Payment of the preliminary contribution amounts for the group annuity contracts was funded from plan assets on March 20, 2018, securing the third party insurer’s irrevocable assumption of certain benefits obligations and commitment to issue the group annuity contracts. The annuity purchase transaction and consequent transfer of approximately $254 million of the plans’ obligations to retirees or 10% of the aggregate pension benefit obligations resulted in a partial settlement of the plans. Following remeasurement of the plans’ assets and obligations on March 20, 2018, as required in the event of an accounting settlement, the Company recognized a pre-tax settlement loss of approximately $100 million, largely attributable to recognition of a pro-rata portion of the plans’ unamortized net actuarial losses accumulated in other comprehensive income.
In the second quarter of 2018, routine lump-sum distributions totaling $6 million made from the AXA Equitable Life QP and the MONY Life Retirement Income Security Plan for Employees resulted in the Company’s recognition of a pre-tax settlement loss of $2 million following remeasurement of the plans’ assets and obligations at June 30, 2018.
AB
AB maintains the Profit Sharing Plan for Employees of AB, a tax-qualified profit sharing 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,noncontributory, defined benefit retirement plan covering current and former employees who were employed by AB in the United States prior to October 2, 2000 (the “AB Plan”).2000. Benefits under the AB Plan are based on years of credited service, average final base salary and primary Social Security benefits. Service and compensation after December 31, 2008 are not taken into account in determining participants’ retirement benefits.
In the six months ended June 30, 2018, a $5 million cash contribution was made by AB to the AB Plan. Based on the funded status of the AB plan at June 30, 2018, no minimum contribution is required to be made in 2018 under ERISA, as amended by the Pension Act.
Funding Policy
The Company’s funding policy for its qualified pension plans is to satisfy its funding obligations each year in an amount not less than the minimum required by the ERISA, as amended by the Pension Act, and not greater than the maximum it can deduct for Federal income tax purposes.
Components of certain benefit costs for the Company were as follows:
| |
| Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | (in millions) |
Net Periodic Pension Expense: | | | | | | | | |
(Qualified and Non-qualified Plans) | | | | | | | | |
Net Periodic Pension Expense (Qualified Plans): | | | | |
Service cost | $ | 2 |
| | $ | 2 |
| | $ | 4 |
| | $ | 5 |
| $ | 2 |
| | $ | 2 |
|
Interest cost | 25 |
| | 27 |
| | 50 |
| | 53 |
| 22 |
| | 21 |
|
Expected return on assets | (39 | ) | | (44 | ) | | (84 | ) | | (87 | ) | (38 | ) | | (43 | ) |
Actuarial (gain) loss | | — |
| | — |
|
Net amortization | 23 |
| | 32 |
| | 52 |
| | 64 |
| 20 |
| | 26 |
|
Partial settlement | 1 |
| | — |
| | 101 |
| | — |
| — |
| | 99 |
|
Total | $ | 12 |
| | $ | 17 |
| | $ | 123 |
| | $ | 35 |
| $ | 6 |
| | $ | 105 |
|
Net Postretirement Benefits Costs: | | | | | | | | |
Service cost | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| |
Interest cost | 4 |
| | 4 |
| | 8 |
| | 8 |
| |
Net amortization | (2 | ) | | 1 |
| | — |
| | 3 |
| |
Total | $ | 3 |
| | $ | 6 |
| | $ | 9 |
| | $ | 12 |
| |
Net Postemployment Benefits Costs: | | | | | | | | |
Service cost | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
| |
Interest cost | — |
| | — |
| | — |
| | — |
| |
Net amortization | — |
| | — |
| | — |
| | — |
| |
Total | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 1 |
| |
11) SHARE-BASED COMPENSATION PROGRAMS
AXA and the Company sponsor various share-based compensation plans for eligible employees, financial professionals and non-officer directors of Holdings and its subsidiaries. AB also sponsors its own equity compensation plan for certain of its employees.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Compensation costs for the three and six months ended June 30, 2018 and 2017 for share-based payment arrangements as further described herein are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Performance Shares(1) | $ | 4.3 |
| | $ | 28.3 |
| | $ | 4.4 |
| | $ | 34.0 |
|
Stock Options | 0.4 |
| | 0.8 |
| | 0.5 |
| | 0.8 |
|
Restricted Unit Awards(2) | (2.3 | ) | | 13.6 |
| | 10.1 |
| | 21.3 |
|
Other Compensation Plans(3) | 2.4 |
| | 0.2 |
| | 1.5 |
| | 0.4 |
|
Total Compensation Expenses | $ | 4.8 |
| | $ | 42.9 |
| | $ | 16.5 |
| | $ | 56.5 |
|
| |
(1) | Reflects 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 $10.9 million adjustment for awards with graded vesting, service-only conditions from the graded to the straight-line attribution method. |
| |
(3) | Includes Stock Appreciation Rights and Employee Stock Purchase Plans. |
Awards Linked to Holdings’ Common Stock
As described below, Holdings made various grants of equity awards linked to the value of Holdings’ common stock in the second quarter of 2018. For awards with graded vesting schedules and service-only vesting conditions, including Holdings restricted stock units (“Holdings RSUs”) and other forms of share-based payment awards, the Company applies a straight-line expense attribution policy for the recognition of compensation cost. Estimated and/or actual forfeitures with respect to the 2018 grants were considered immaterial in the recognition of compensation cost for the second quarter of 2018.
Holdings adopted the AXA Equitable Holdings, Inc. 2018 Omnibus Incentive Plan (the “Omnibus Plan”) on April 25, 2018. All grants discussed in this section were made under this Omnibus Plan with the exception of the Holdings RSUs granted to financial professionals. Also, all grants discussed in the section will be settled in shares of Holdings’ common stock except for the RSUs granted to financial professionals which will be settled in cash. As of June 30, 2018, the common stock reserved and available for issuance under the Omnibus Plan was 5.9 million shares.
Restricted Stock Units
In May 2018, Holdings made several grants of Holdings RSUs. The market price of a Holdings’ share is used as the basis for the fair value measure of a Holdings RSU. For purposes of determining compensation cost for stock-settled Holdings RSUs, fair value is fixed at the grant date until settlement, absent modification to the terms of the award. For liability-classified cash-settled Holdings RSUs, fair value is remeasured at the end of each reporting period. If Holdings pays any ordinary dividend in cash, all outstanding Holdings RSUs will accrue dividend equivalents in the form of additional Holdings RSUs to be settled or forfeited consistent with the terms of the related award.
Transaction Incentive Awards10) INCOME TAXES
On May 9, 2018, coincident with the IPO, Holdings granted one-time “Transaction Incentive Awards” to executive officers and certain other employees in the form of 0.7 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%
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of the Performance Units may still vest based on five years of continued service and the remaining Performance Units will be forfeited. The $7.2 million aggregate grant-date fair value of the 0.4 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 $3.6 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 $3.0 million compensation expense will be recognized. In the second quarter of 2018, the Company recognized compensation expense associated with the Transaction Incentive Awards of approximately $0.9 million.
Employee Awards
Also on May 9, 2018, Holdings made an employee grant of 0.4 million Holdings RSUs, or 50 restricted stock units to each eligible individual, that cliff vest 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 $7.1 million will be recognized as compensation expense over the six-month service period. In the second quarter of 2018, the Company recognized expense associated with the employee award of approximately $2.1 million.
2018 Annual Awards
On May 17, 2018, Holdings granted 1.3 million Holdings RSUs to 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 $21.68 closing price of the Holdings’ share on the grant date, and the resulting $27.4 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. Similarly, on May 17, 2018, the Company granted an award of 0.5 million cash-settled Holdings RSUs to certain eligible financial professionals that vest ratably in equal installments over a three-year period on each of the first three anniversaries of March 1, 2018. The cash payment for each RSU will equal the average closing price for a Holdings’ share on the NYSE over the 20 trading days immediately preceding the vesting date. These awards are liability-classified and require fair value remeasurement based upon the price of a Holdings’ share at the close of each reporting period. In the second quarter of 2018, the Company recognized expense associated with the annual awards of approximately $3.1 million.
Performance Shares
Also on May 17, 2018, Holdings approved a grant of 0.4 million unearned Performance Shares to employees, subject to performance conditions and a cliff-vesting term ending March 1, 2021. If Holdings pays any ordinary dividend, outstanding Performance Shares will accrue dividend equivalents in the form of additional Performance Shares to be settled or forfeited consistent with the terms of the related award. The Performance Shares consist of two distinct tranches; one based on the Holdings’ return-on-equity targets (the “ROE Performance Shares”) and the other based on the Company’s 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 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 $4.8 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 the second quarter of 2018, the Company recognized expense associated with the TSR Performance Share awards of approximately $0.1 million.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Stock Options
On June 11, 2018, Holdings awarded 1.0 million stock options to 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-free interest rate of 2.83%. The total fair value of these options of approximately $4.8 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 the second quarter of 2018, the Company recognized expense associated with the June 11, 2018 option grant of approximately $0.2 million.
Director Awards
On May 17, 2018, Holdings awarded 0.03 million unrestricted Holdings’ shares to non-officer directors of Holdings, AXA Equitable Life, and MLOA under the Omnibus Plan. The fair value of these awards was measured using the $21.68 closing price of Holdings’ shares on the grant date. As these awards were immediately vested, their aggregate fair value of $0.6 million was recognized as compensation expense in the second quarter of 2018.
Funding of Awards
The Company expects to purchase Holdings’ shares on the open market once the blackout period ends to fund the delivery of the 0.03 million unrestricted shares granted to the non-officer directors in the second quarter of 2018. Holdings may issue new shares or buy existing ones on the market for the other outstanding awards linked to Holdings’ common stock.
Equity Awards Linked to AXA Ordinary Shares
Grants
On February 15, 2018, AXA Financial granted restricted AXA ordinary shares to non-officer directors of AXA Financial, AXA Equitable Life, and MLOA with a three-year vesting period under the Equity Plan for Directors.
Settlement/Payouts
On March 26, 2018, share distributions totaling approximately $21 million were made to active and former employees in settlement of 0.8 million Performance Shares earned under the terms of the AXA Performance Share Plan 2014. On April 6, 2018, cash distributions of approximately $6 million were made to active and former financial professionals in settlement of 0.2 million Performance Units earned under the terms of the AXA Advisor Performance Unit Plan 2014.
AB Long-term Incentive Compensation Plans
During the three and six months ended June 30, 2018, respectively, AB purchased 1.2 million and 1.2 million units, representing assignments of beneficial ownership of limited partnership interests in AB Holding (“AB Holding Units”), for $33 million and $35 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 1.2 million AB Holding Units for $33 million during the three months ended June 30, 2018 with the remainder relating to purchases of AB Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of delivery of long-term incentive compensation awards. During the three and six months ended June 30, 2017, AB purchased 4.3 million and 5.7 million AB Holding Units for $97 million and $128 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 3.7 million and 4.9 million AB Holding Units for $82 million and $110 million, respectively, with the remainder relating to purchases of AB Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of delivery of long-term incentive compensation awards.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the six months ended June 30, 2018 and 2017, AB granted to employees and eligible Directors 2.4 million and 2.0 million restricted AB Holding Unit awards, respectively. AB used AB Holding Units repurchased during the periods and newly issued AB Holding Units to fund these awards.
During the six months ended June 30, 2018 and 2017, AB Holding issued 0.5 million and 0.5 million AB Holding Units, respectively, upon exercise of options to buy AB Holding Units. AB Holding used the proceeds of $8 million and $9 million, respectively, received as payment in cash for the exercise price to purchase the equivalent number of newly-issued AB Units.
12) INCOME TAXES
Income tax expense for the sixthree months ended June 30,March 31, 2019 and 2018 and 2017 was computed using an estimated annual effective tax rate (“ETR”), with discrete items recognized in the period in which they occur. The estimated ETR is revised, as necessary, at the end of successive interim reporting periods.
The Company adopted revised goodwill impairment guidance in the first quarter of 2017. Income tax expense for the six months ended June 30, 2017 includes an expense of $129 million related to the impairment of non-deductible goodwill.
In the second quarter of 2017, the Company recognized a tax benefit of $218 million related to the conclusion of an Internal Revenue Service (“IRS”) audit for tax years 2008 and 2009.
13)11) RELATED PARTY TRANSACTIONS
The Company’s significant transactions during the sixthree months ended June 30, 2018March 31, 2019 with related parties are summarized below.
Cost Sharing and General Service AgreementsTermination of Trademark License Agreement
In light ofOn March 28, 2019, AXA terminated the IPO,Trademark License Agreement, dated May 4, 2018, between Holdings and AXA (the “Trademark License Agreement”). Accordingly, 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).
AXA Secondary Offering of Holdings Common Stock and Holdings Share Buyback
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 of common stock of Holdings. 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 majority owned subsidiary of AXA.
12) EQUITY
Dividends to Shareholders
On February 27, 2019, Holdings’ Board of Directors declared a cash dividend on Holdings’ common stock of $0.13 per share, payable on March 15, 2019 to shareholders of record as of March 5, 2019. The payment of any future dividends will be at the discretion of Holdings’ Board of Directors and will depend on various factors.
Share Repurchase
In January 2019, Holdings entered into a Transitional Services Agreement, dated as of May 4, 2018an Accelerated Share Repurchase agreement (the “TSA”“ASR”), regarding the continued provision of services between the Company and AXA and its subsidiaries on a transitional basis. The TSA replaced existing cost-sharing and general service agreements with various AXA subsidiaries and governs the following types of services:
services AXA or its subsidiaries (other than the Company) receive pursuant to a contract with a third-party service provider, which AXA or its subsidiaries then providefinancial institution to repurchase an aggregate of $150 million of Holdings’ common stock. Pursuant to the Company onASR, Holdings made a pass-through basis;
servicesprepayment of $150 million and received initial delivery of seven million shares. The ASR terminated during the Company receives pursuant to a contract with a third-party service provider,first quarter of 2019, at which the Company then provides to AXA or its subsidiaries (excluding the Company) on a pass-through basis;
certain services the Company receives directly from AXA or its subsidiaries (excluding the Company); and
certain services the Company provides directly to AXA or its subsidiaries (excluding the Company).
The fees for each service vary and may betime an additional one million shares were delivered, at an average purchase price of $18.51 per share based on costs, usage, previously established ratesthe volume-weighted average price of Holding’s common stock traded during the pricing period, less an agreed discount. Shares repurchased under the ASR were retired upon receipt resulting in a reduction of Holding’s total issued shares as of March 31, 2019.
On February 27, 2019, Holdings’ Board of Directors authorized a $800 million share repurchase program. Under this authorization, Holdings, may, from time to time through December 31, 2019, purchase shares of its common stock through various means. Holdings may choose to suspend or other factors. Generally, all services other than specified long-term services will be provided untildiscontinue the third anniversaryrepurchase program at any time. The repurchase program does not obligate Holdings to purchase any particular number of shares.
On March 25, 2019, AXA completed a secondary offering of 46 million shares of common stock of Holdings and the sale to Holdings of 30 million shares of common stock of Holdings. Following the completion of this secondary offering and the share buyback by Holdings, AXA owns 48.3% of the dateshares of common stock of Holdings. As a change in controlresult, Holdings is no longer a majority owned subsidiary of AXA. Following the completion of the share buyback by Holdings, unless the service recipient elects to terminate the service earlier upon 180 days written notice. The specified long-term services will be provided until specific end dates listed in the TSA.Holdings had approximately $200 million remaining under its share repurchase program authorization.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Trademark License Agreement
On May 4, 2018, AXA and Holdings entered into a Trademark License Agreement (the “TLA”) that replaced the existing sub-licensing agreement between AXA Financial and AXA (the “Former TLA”). Under the TLA, AXA grants the Company a limited license to use certain trademarks (the “Licensed Marks”), including the name “AXA” and domain names, in the United States and Canada (the “Territory”). Under the TLA, the Company is obligated to pay AXA consideration for the grant of the license based on the same formula that applied under the Former TLA which takes into account the Company’s revenue (excluding certain items) and a notoriety index for the Licensed Marks in the Territory.
AXA may terminate the TLA upon a change in control of Holdings. After the termination of the TLA, the Company will be able to continue to use the Licensed Marks for a transition period but the Company will be required to use reasonable best efforts to transition to other trademarks.
Tax-Sharing Agreement
Holdings entered into a tax sharing agreement with AXA and AXA Investment Managers S.A. (“AXA IM SA”) on March 28, 2018 related to the sale of AXA-IM Holding U.S. Inc. and AXA America Corporate Solutions (“AXA CS”), described below. The agreement generally allocates responsibility for the taxes of AXA-IM Holding U.S. Inc. and AXA CS to the seller of the applicable entity for taxable periods predating the sale and to the buyer of such entity for taxable periods postdating the sale, except that any taxes arising in connection with the sale transactions as a result of an adjustment by a taxing authority will instead be borne 90% by the seller and 10% by the buyer (or, if that taxes are attributable to any action or inaction of the seller or the buyer, 100% by the responsible party).
Disposition of AXA CS
Holdings formerly held 78.99% of the shares of AXA CS, which holds certain AXA U.S. P&C business. AXA CS and its subsidiaries have been excluded from the historical Consolidated Financial Statements since they were operated independently from the other Holdings subsidiaries.
In March 2018, Holdings sold its AXA CS shares to AXA for $630 million. In anticipation of this sale, in the fourth quarter of 2017, AXA made a short-term loan of $622 million to Holdings with interest calculated at 3-month LIBOR plus 0.439% margin. Holdings’ repayment obligation to AXA in respect of this loan was set off against the purchase price for the AXA CS shares, and AXA paid Holdings the $8 million balance in cash. The net result of the sale was a decrease in Loans from affiliates of $622 million, an increase in cash of $8 million, and an increase in capital in excess of par of $630 million.
Settlement of Borrowings
In September 2007, AXA issued a $700 million 5.4% Senior Unsecured Note to AXA Equitable. The note paid 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 January 2018, AXA pre-paid $50 million of the $700 million note. In April 2018, AXA pre-paid the remainder of this note.
In December 2008, AXA received a $500 million term loan from AXA Financial. In December 2014, AXA repaid $300 million of this loan. This loan had an interest rate of 5.4% payable semi-annually with a maturity date of December 15, 2020. In January 2018, AXA pre-paid an additional $150 million of the loan. In April 2018, AXA pre-paid the remainder of this loan.
In March 2010, AXA Financial issued subordinated notes to AXA Life Japan in the amount of $770 million. The subordinated notes had a maturity date of March 30, 2020 and a floating interest rate of LIBOR plus 120 basis points, which reset semiannually. The notes were repaid on April 20, 2018.
In 2013, Holdings received a $242 million loan and a $145 million loan from Coliseum Re. The loans each had an interest rate of 4.75% and a maturity date in December 2028. The loans were repaid on April 20, 2018.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In October 2012, AXA Financial issued a note denominated in Euros in the amount of €300 million or $391 million to AXA Belgium S.A. (“AXA Belgium”). This note had an interest rate of Europe Interbank Offered Rate (“EURIBOR”) plus 1.15% and a maturity date of October 23, 2017. Concurrently, AXA Financial entered into a swap with AXA covering the exchange rate on both the interest and principal payments related to this note. The interest rate on the swap was 6-month LIBOR plus 1.475%. In October 2017, the note was extended to March 30, 2018. The extended note had a floating interest rate of 1-month EURIBOR plus 0.06% with a minimum rate of 0%. Concurrently, AXA Financial entered into a swap with AXA covering the exchange rate on both the interest and principal payments related to the extended note until March 30, 2018. Both the loan and the swap were repaid on March 29, 2018.
In December 2014, AXA Financial received a $2,727 million, 3-month LIBOR plus 1.06% margin term loan from AXA. The loan had a maturity date of December 18, 2024. AXA Financial repaid $520 million of this loan in June 2015 and repaid an additional $1,200 million of this loan in 2016. On April 20, 2018, the remainder of this loan was repaid.
In 2015, Holdings received a $366 million 3-month LIBOR plus 1.44% loan from AXA. The loan had a maturity date of October 8, 2022. This loan was repaid on April 20, 2018.In December 2013, Colisée Re issued a $145 million 4.75% Senior Unsecured Note to Holdings. The loan was scheduled to mature on December 19, 2028. This loan was repaid on March 26, 2018.
In 2017, Holdings received a $100 million and $10 million loan from AXA CS. The loans had interest rates of 1.86% and 1.76%, respectively, and were repaid on their maturity date of February 5, 2018.
Disposition of Real Estate Joint Ventures
In March 2018, AXA Equitable Life sold its interest in two consolidated real estate joint ventures to AXA France for a total purchase price of approximately $143 million.
Acquisition of Noncontrolling Interest of AXA Financial
In March 2018, AXA contributed the 0.5% noncontrolling interest in AXA Financial to Holdings, resulting in AXA Financial becoming a wholly-owned subsidiary of Holdings. The contribution is reflected as a $66 million capital contribution.
Acquisition of Additional AB Units
On April 23, 2018, Holdings purchased: (i) 100% of the shares of AXA-IM Holding U.S. Inc., which owns 41,934,582 AB Units, for a purchase price of $1,113 million and (ii) 8,160,000 AB Units held by Coliseum Re for $217 million. As a result of these two transactions, Holdings ownership of AB increased to approximately 64.7%, Noncontrolling interest decreased by $1,521 million, Capital in excess of par increased by $17 million and taxes payable increased by$174 million.
Acquisition of 30.3% of AXA Venture Partners SAS
On May 7, 2018, Holdings made a capital contribution of approximately $2.6 million to AXA Venture Partners SAS in exchange for approximately 30.3% of the shares of AXA Venture Partners SAS and certain rights and protections as a shareholder of the company, including the right to appoint two members of the management committee as well as consent rights over significant transactions.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revolving Credit Facility with AXA
On April 25, 2018, AXA Equitable Life (as successor to AXA RE Arizona) canceled its $1.5 billion revolving credit facility with AXA.
AXA Guarantees
As of May 14, 2018, AXA no longer guaranteed any of the Company’s borrowing other than amounts borrowed under AXA Financial’s commercial paper program. As of June 12, 2018, there are no longer any amounts outstanding under AXA Financial’s commercial paper program and AXA no longer provides any related guarantees.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)Accumulated Other Comprehensive Income (Loss)
AOCI represents cumulative gains (losses) on items that are not reflected in Net income (loss). The balances as of June 30,March 31, 2019 and 2018 and 2017 follow:
| | | June 30, | March 31, |
| 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | (in millions) |
Unrealized gains (losses) on investments(1) | $ | (478 | ) | | $ | 675 |
| $ | 430 |
| | $ | (137 | ) |
Foreign currency translation adjustments | (49 | ) | | (52 | ) | |
Defined benefit pension plans | (821 | ) | | (1,012 | ) | (919 | ) | | (822 | ) |
Foreign currency translation adjustments (1) | | (63 | ) | | (33 | ) |
Total accumulated other comprehensive income (loss) | (1,348 | ) | | (389 | ) | (552 | ) | | (992 | ) |
Less: Accumulated other comprehensive (income) loss attributable to noncontrolling interest | 38 |
| | 56 |
| 39 |
| | 46 |
|
Accumulated other comprehensive income (loss) attributable to Holdings | $ | (1,310 | ) | | $ | (333 | ) | $ | (513 | ) | | $ | (946 | ) |
______________
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
(1) | A reclassification of $7 million has been made to the March 31, 2018 previously reported balances to conform to the current period’s presentation. |
The components of OCI, net of taxes for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 follow:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Change in net unrealized gains (losses) on investments: | | | |
Net unrealized gains (losses) arising during the period | $ | 1,342 |
| | $ | (1,221 | ) |
(Gains) losses reclassified to Net income (loss) during the period (1) | 9 |
| | (88 | ) |
Net unrealized gains (losses) on investments | 1,351 |
| | (1,309 | ) |
Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other (2) | (517 | ) | | 347 |
|
Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of $218, and $(255)) | 834 |
| | (962 | ) |
Change in defined benefit plans: | | | |
Less: Reclassification to Net income (loss) of amortization of net prior service credit included in net periodic cost (3) | 49 |
| | 133 |
|
Change in defined benefit plans (net of deferred income tax expense (benefit) of $12 and $35) | 49 |
| | 133 |
|
Foreign currency translation adjustments: | | | |
Foreign currency translation gains (losses) arising during the period (2) | (1 | ) | | (3 | ) |
Foreign currency translation adjustment | (1 | ) | | (3 | ) |
Total other comprehensive income (loss), net of income taxes | 882 |
| | (832 | ) |
Less: Other comprehensive (income) loss attributable to noncontrolling interest | 1 |
| | (6 | ) |
Other comprehensive income (loss) attributable to Holdings | $ | 883 |
| | $ | (838 | ) |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Foreign currency translation adjustments: | | | | | | | |
Foreign currency translation gains (losses) arising during the period | $ | (8 | ) | | $ | 17 |
| | $ | (14 | ) | | $ | 25 |
|
(Gains) losses reclassified into net income (loss) during the period | — |
| | — |
| | — |
| | — |
|
Foreign currency translation adjustment | (8 | ) | | 17 |
| | (14 | ) | | 25 |
|
Net unrealized gains (losses) on investments: | | | | | | | |
Net unrealized gains (losses) arising during the period | (397 | ) | | 395 |
| | (1,620 | ) | | 550 |
|
(Gains) losses reclassified into net income (loss) during the period(1) | 16 |
| | 35 |
| | (70 | ) | | 12 |
|
Net unrealized gains (losses) on investments | (381 | ) | | 430 |
| | (1,690 | ) | | 562 |
|
Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other | 32 |
| | 1 |
| | 382 |
| | (27 | ) |
Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of $(94), $233, $(349), and $288) | (349 | ) | | 431 |
| | (1,308 | ) | | 535 |
|
Change in defined benefit plans: | | | | | | | |
Less: reclassification adjustments to net income (loss) for: | | | | | | | |
Amortization of net actuarial (gains) losses included in: | | | | | | | |
Amortization of net prior service cost included in net periodic cost | 1 |
| | 18 |
| | 134 |
| | 43 |
|
Change in defined benefit plans (net of deferred income tax expense (benefit) of $(1), $11, $34, and $23). | 1 |
| | 18 |
| | 134 |
| | 43 |
|
Total other comprehensive income (loss), net of income taxes | (356 | ) | | 466 |
| | (1,188 | ) | | 603 |
|
Less: Other comprehensive (income) loss attributable to noncontrolling interest | (8 | ) | | (8 | ) | | (14 | ) | | (15 | ) |
Other comprehensive income (loss) attributable to Holdings | $ | (364 | ) | | $ | 458 |
| | $ | (1,202 | ) | | $ | 588 |
|
______________ | |
(1) | See “Reclassification adjustments” in Note 3. Reclassification amounts presented net of income tax expense (benefit) of $4 million, $19 million, $(19)$2 million, and $6$(23) million for the three and six months ended June 30,March 31, 2019 and 2018, and 2017, respectively. |
| |
(2) | A reclassification of $2 million has been made to the previously reported amounts for the three months ended March 31, 2018 to conform to the current period’s presentation. |
| |
(3) | These AOCI components are included in the computation of net periodic pension expenses. See Note 9 for further information. |
Investment gains and losses reclassified from AOCI to netNet income (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 income (loss). Amounts reclassified from AOCI to netNet 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
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
net periodic cost and reported in Compensation and benefit expenses in the consolidated statements of income (loss). Amounts presented in the table above are net of tax.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
15)13) 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 June 30, 2018,March 31, 2019, 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 $90 million.$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 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 July 2011, a derivative action was filed in the United States District Court for the District of New Jersey entitled Mary Ann Sivolella v. AXA Equitable Life Insurance Company and AXA Equitable Funds Management Group, LLC
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(“Sivolella Litigation”) and a substantially similar action was filed in January 2013 entitled Sanford et al. v. AXA 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 to AXA Equitable Life and AXA Equitable FMG for investment management services and administrative services and (ii) a variety of other theories including unjust enrichment. The Sivolella Litigation and the Sanford Litigation were consolidated and a 25-day trial commenced in January 2016 and concluded in February 2016. In August 2016, the District Court issued its decision in favor of AXA Equitable Life and AXA Equitable FMG, finding that the plaintiffs had failed to meet their burden to demonstrate that AXA Equitable Life 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 District 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 July 2018, the U.S. Court of Appeals for the Third Circuit affirmed the District Court’s decision.
In April 2014, a lawsuit was filed in the United States District Court for the Southern District of New York, now entitled Ross v. 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 Life (the “Policies”). The complaint alleges that AXA Equitable Life 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 Life 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 Life’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 Life, and that decision is now final because the plaintiffs failed to file a further appeal.
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 Life variable life insurance policyholders who allocated funds from their policy accounts to investments in AXA Equitable Life’s Separate Accounts, which were subsequently subjected to the volatility management strategy and who suffered injury as a result thereof. The action asserts that AXA Equitable Life 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 April 2018, the Superior Court of New Jersey Appellate Division affirmed the trial court’s decision. 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 others similarly situated v. AXA Equitable Life Insurance Company. This
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
lawsuit is a putative class action on behalf of all persons who purchased variable annuities from AXA Equitable Life, 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 JuneSeptember 2018, the Second Circuit grantedissued its mandate, following AXA Equitable Life’s motionnotification to stay issuance of
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
the mandate pending the filing and disposition of itscourt 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 these matters.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. In March 2018, plaintiffA second putative class action was filed in Arizona in 2017 and consolidated with the Brach matter. The current consolidated amended its complaint to add two new plaintiffs, including the individual Malcolm Currie. The currentclass 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 seekseek: (a) compensatory damages, costs, and, pre- and post-judgment interest,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,class; and (c) injunctive relief and attorneys’ fees in connection with their statutory claims. Seven individualFive other federal actions challenging the COI rate increase are also pending against AXA Equitable Life in federal or state courts.and have been coordinated with the Brach action for the purposes of pre-trial activities. They contain allegations similar allegations asto those in the Brach action as well as additional allegations for violations of various states’ consumer protection statutes and common law fraud. Pursuant to an October 2017 order, the putative class action and the four individual federalTwo actions are consolidated for the purposes of coordinating pre-trial activities. We arealso pending against AXA Equitable Life in various stages of motion practice, and areNew York state court. AXA Equitable Life is vigorously defending each of these matters.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Restructuring
The restructuring costs and liabilities associated with the Company’s initiatives were as follows:
|
| | | | | | | |
| Six Months Ended June 30, | | Year Ended December 31, |
| 2018 | | 2017 |
| (in millions) |
Severance | | | |
Balance, beginning of year | $ | 23 |
| | $ | 22 |
|
Additions | 6 |
| | 17 |
|
Cash payments | (4 | ) | | (14 | ) |
Other reductions | — |
| | (2 | ) |
Balance, end of Year | $ | 25 |
| | $ | 23 |
|
|
| | | | | | | |
| Six Months Ended June 30, | | Year Ended December 31, |
| 2018 | | 2017 |
| (in millions) |
Leases | | | |
Balance, beginning of year | $ | 165 |
| | $ | 170 |
|
Expense incurred | — |
| | 29 |
|
Deferred rent | 13 |
| | 10 |
|
Payments made | (32 | ) | | (48 | ) |
Interest accretion | 7 |
| | 4 |
|
Balance, end of year | $ | 153 |
| | $ | 165 |
|
Obligation under funding agreements
As a member of the FHLBNY, AXA Equitable Life has access to collateralized borrowings. It also may issue funding agreements to the FHLBNY. Both the collateralized borrowings and funding agreements would require AXA Equitable Life to pledge qualified mortgage-backed assets and/or government securities as collateral. AXA Equitable Life issues short-term funding agreements to the FHLBNY and uses the funds for asset, liability and cash management purposes. AXA Equitable Life issues long-term funding agreements to the FHLBNY and uses the funds for spread lending purposes. For other instruments used for asset liability management purposes see “Derivative and offsetting assets and liabilities” included in Note 3.4. Funding agreements are reported in Policyholders’ account balances in the consolidated balance sheets.
Change in FHLBNY Funding Agreements during the Three Months Ended March 31, 2019
|
| | | | | | | | | | | | | | | |
| Outstanding Balance at December 31, 2018 | | Issued During the Period | | Repaid During the Period | | Outstanding Balance at March 31, 2019 |
| (in millions) |
Short-term funding agreements: | | | | | | | |
Due in one year or less | $ | 1,640 |
| | $ | 4,470 |
| | $ | 4,470 |
| | $ | 1,640 |
|
Long-term funding agreements: | | | | | | | |
Due in years two through five | 1,569 |
| | — |
| | — |
| | 1,569 |
|
Due in more than five years | 781 |
| | — |
| | — |
| | 781 |
|
Total long-term funding agreements | 2,350 |
| | — |
| | — |
| | 2,350 |
|
Total funding agreements (1) | $ | 3,990 |
| | $ | 4,470 |
| | $ | 4,470 |
| | $ | 3,990 |
|
______________
| |
(1) | The $11 million and $12 million difference between the funding agreements carrying value shown in fair value table at March 31, 2019 and December 31, 2018, respectively, reflects the remaining amortization of a hedge implemented and closed, which locked in the funding agreements’ borrowing rates. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | |
| Outstanding balance at end of period | | Maturity of Outstanding balance | | Issued during the period | | Repaid during the period |
June 30, 2018 | (in millions) |
Short-term FHLBNY funding agreements | $ | 500 |
| | less than one month | | $ | 3,000 |
| | $ | 3,000 |
|
Long-term FHLBNY funding agreements | 1,526 |
| | less than 4 years | | — |
| | — |
|
| 193 |
| | Less than 5 years | | — |
| | — |
|
| 781 |
| | greater than five years | | — |
| | — |
|
Total long-term funding agreements | 2,500 |
| | | | — |
| | — |
|
Total FHLBNY funding agreements at June 30, 2018 | $ | 3,000 |
| | | | $ | 3,000 |
| | $ | 3,000 |
|
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 4 years | | 324 |
| | — |
|
| 377 |
| | Less than 5 years | | 303 |
| | — |
|
| 879 |
| | Greater than five years | | 135 |
| | — |
|
Total long-term funding agreements | 2,500 |
| | | | 762 |
| | — |
|
Total FHLBNY funding agreements at December 31, 2017 | $ | 3,000 |
| | | | $ | 6,762 |
| | $ | 6,000 |
|
Credit Facilities and Notes
In February 2018, Holdings entered into the following credit facilities: (i)has a $3.9$2.5 billion two-year senior unsecured delayed draw term loan agreement; (ii) a $500 million three-year senior unsecured delayed draw term loan agreement; and (iii) a $2.5 billion five-year senior unsecured revolving credit facility with a syndicate of banks. The revolving credit facility has a sub-limit of $1.5 billion for letters of credit issued to support ourthe Company’s life insurance business reinsured toby EQ AZ Life Re following the GMxB Unwind and to support the third-party GMxB variable annuity business reinsured byretroceded to CS Life RE.
In April 2018, the Company terminated the $3.9 billion two-year term loan agreement, As of March 31, 2019,$125 millionand in May 2018, the Company borrowed $300$600 million under the three-year term loan agreement and the remaining $200 million capacity was terminated at IPO. In April, the Company had $125 million and $800 million of of undrawn letters of credit have been issued out of the $1.5 billion sub-limit for ACS Life and AXA Equitable Life, respectively, as beneficiaries.
Letters of Credit
In addition to the letters of credit issued under the $2.5 billion revolving credit facility, $1,929 million as of March 31, 2019,$1.9 billionof undrawn letters of credit werehave been issued including $1,900 million atrelated to reinsurance assumed by EQ AZ Life Re related to reinsurance assumed from AXA Equitable Life, USFL and MLOA at June 30, 2018.MLOA.
Other Commitments
The Company had $820$955 million (including $280$336 million with affiliates) and $599$325 million of commitments under equity financing arrangements to certain limited partnership and existing mortgage loan agreements, respectively, at June 30, 2018.March 31, 2019.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
16)14) BUSINESS SEGMENT INFORMATION
The Company has four reportable segments: Individual Retirement, Group Retirement, Investment Management and Research and Protection Solutions.
The Company changed its segment presentation in the fourth quarter 2017. The segment disclosures are based on the intention to provide the users of the financial statements with a view of the business from the Company’s perspective. As a result, the Company determined that it is more useful for a user of the financial statements to assess the historical performance on the basis which management currently evaluates the business. The reportable segments are based on the nature of the business activities.
These segments reflect the manner by which the Company’s chief operating decision maker views and manages the business. A brief description of these segments follows:
The Individual Retirement segment offers a diverse suite of variable annuity products which are primarily sold to affluent and high net worth individuals saving for retirement or seeking retirement income.
The Group Retirement segment offers tax-deferred investment and retirement plansservices or products to beplans sponsored by educational entities, municipalities and not-for-profit entities as well as small and medium-sized businesses.
The Investment Management and Research segment provides diversified investment management, research and related solutions globally to a broad range of clients through three main client channels-channels - Institutional, Retail and Private Wealth Management-andManagement and distributes its institutional research products and solutions through Bernstein Research Services.
The Protection Solutions segment includes our life insurance and group employee benefits businesses. Our life insurance business offers a variety of variable universal life, universal life and term life products to help affluent and high net worth individuals, as well as small and medium-sized business owners, with their wealth protection, wealth transfer and corporate needs. Our group employee benefits business offers a suite of dental, vision, life, and short- and long-term disability and other insurance products to small and medium-size businesses across the United States.
Measurement
Operating earnings (loss) is the financial measure which primarily focuses on the Company’s segments’ results of operations as well as the underlying profitability of the Company’s core business. By excluding items that can be distortive and unpredictable such as investment gains (losses) and investment income (loss) from derivative instruments, the Company believes operatingOperating earnings (loss) by segment enhances the understanding of the Company’s underlying drivers of profitability and trends in the Company’s segments.
In the first quarter of 2019, the Company updated its Operating earnings measure to exclude market value adjustments impacting the DAC amortization for its SCS variable annuity product in order to be consistent with the treatment of the market value adjustments on the SCS liability and with industry practice. The presentation of Operating earnings in prior periods was not revised to reflect this modification, however, the Company estimated that had the treatment in the Company’s Operating earnings measure of the Amortization of DAC for SCS been modified in the first quarter of 2018, the Company revised itspre-tax impact on Operating earnings definition as it relates toof excluding the treatmentSCS-related DAC amortization from Operating
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
earnings would have been a decrease of $52 million, $17 million and $4 million during the profitabilityfirst, second and third quarters of its variable annuity products with indexed-linked features to align to2018, respectively, and an increase of $17 million during the treatmentfourth quarter of its variable annuity products with GMxB features. In addition, adjustments for variable annuity products with index-linked features previously included within Other adjustments in the calculation of Non-GAAP Operating Earnings are now included with the adjustments for variable annuity products with GMxB features in the broader adjustment category, Variable annuity product features. In order to improve the consistency and comparability of the financial statements, management revised the Notes to the Consolidated Financial Statements for the six months ended June 30, 2017, nine months ended September 30, 2017 and the year ended December 31, 2017 to include the revisions discussed herein.2018.
Operating earnings is calculated by adjusting each segment’s Net income (loss) attributable to Holdings for the following items:
Items related to Variablevariable annuity product features, which include certain changes in the fair value of the derivatives and other securities we use to hedge these features, the effect of benefit ratio unlock adjustments
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
and changes in the fair value of the embedded derivatives reflected within Variablevariable annuity products’ net derivative results;results and the impact of these items on DAC amortization;
Investment (gains) losses, which includes other-than-temporary impairments of securities, sales or disposals of securities/investments, realized capital gains/losses and valuation allowances;
Goodwill impairment, which includes a write-down of goodwill in first quarter of 2017.
Net actuarial (gains) losses, which includes actuarial gains and losses as a result of differences between actual and expected experience on pension plan assets or projected benefit obligation during a given period related to pension, other postretirement benefit obligations, and the one-time impact of the settlement of the defined benefit obligation;
Other adjustments, which includes restructuring costs related to severance, lease write-offs related to non-recurring restructuring activities, and separation costs; and
Income tax expense (benefit) related to the above items and non-recurring tax items, which includes the effect of uncertain tax positions for a given audit period permanent differences due to goodwill impairment, and the impact of the Tax Reform Act.
Revenues derived from any customer did not exceed 10% of revenues for the three and six months ended June 30, 2018March 31, 2019 and 2017.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2018.
The table below presents operatingOperating earnings (loss) by segment and Corporate and Other and a reconciliation to Net income (loss) attributable to Holdings for the three and six months ended June 30,March 31, 2019 and 2018, and 2017, respectively:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Net income (loss) attributable to Holdings | $ | (775 | ) | | $ | 214 |
|
Adjustments related to: | | | |
Variable annuity product features (1) | 1,540 |
| | 176 |
|
Investment (gains) losses | 11 |
| | (102 | ) |
Net actuarial (gains) losses related to pension and other postretirement benefit obligations | 24 |
| | 131 |
|
Other adjustments (2) | 40 |
| | 91 |
|
Income tax expense (benefit) related to above adjustments (3) | (337 | ) | | (55 | ) |
Non-recurring tax items | 6 |
| | 28 |
|
Non-GAAP Operating Earnings (4) | $ | 509 |
| | $ | 483 |
|
| | | |
Operating earnings (loss) by segment: | | | |
Individual Retirement (5) | $ | 370 |
| | $ | 368 |
|
Group Retirement | $ | 81 |
| | $ | 76 |
|
Investment Management and Research | $ | 77 |
| | $ | 81 |
|
Protection Solutions | $ | 49 |
| | $ | 35 |
|
Corporate and Other (6) | $ | (68 | ) | | $ | (77 | ) |
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | 2018 | | 2017 |
| (in millions) |
Net income (loss) attributable to Holdings | $ | 158 |
| | $ | 608 |
| $ | 326 |
| | $ | 318 |
|
Adjustments related to: | | | | | | |
Variable annuity product features | 280 |
| | (40 | ) | 492 |
| | 251 |
|
Investment (gains) losses | 22 |
| | (4 | ) | (80 | ) | | 20 |
|
Goodwill impairment | — |
| | — |
| — |
| | 369 |
|
Net actuarial (gains) losses related to pension and other postretirement benefit obligations | 27 |
| | 33 |
| 158 |
| | 67 |
|
Other adjustments | 89 |
| | 26 |
| 179 |
| | 5 |
|
Income tax expense (benefit) related to above adjustments | (81 | ) | | (7 | ) | (144 | ) | | (242 | ) |
Non-recurring tax items | 11 |
| | (217 | ) | 39 |
| | (85 | ) |
Non-GAAP Operating Earnings | $ | 506 |
| | $ | 399 |
| $ | 970 |
| | $ | 703 |
|
Operating earnings (loss) by segment: | | | | | | |
Individual Retirement | $ | 399 |
| | $ | 308 |
| $ | 759 |
| | $ | 510 |
|
Group Retirement | 78 |
| | 48 |
| 154 |
| | 107 |
|
Investment Management and Research | 97 |
| | 61 |
| 178 |
| | 93 |
|
Protection Solutions | 24 |
| | 16 |
| 47 |
| | 55 |
|
Corporate and Other(1) | (92 | ) | | (34 | ) | (168 | ) | | (62 | ) |
______________ | |
(1) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, the adjustment related to Variable annuity product features for the three months ended March 31, 2018 would have been $124 million. |
| |
(2) | Other adjustments include separation costs of $24 million and $61 million for the three months ended March 31, 2019 and 2018, respectively. |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| |
(3) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, the adjustment related to Income tax expense (benefit) related to above adjustments for the three months ended March 31, 2018 would have been $(44) million. |
| |
(4) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Non-GAAP Operating Earnings for the three months ended March 31, 2018 would have been $442 million. |
| |
(5) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Operating earnings for the three months ended March 31, 2018 for the Individual Retirement segment would have been $327 million. |
| |
(6) | Includes interest expense of $58$52 million $32 million, $102 million and $63$44 million for the three and six months ended June 30,March 31, 2019 and 2018, and 2017, respectively. |
Segment revenues areis a measure of the Company’s revenue by segment as adjusted to exclude certain items. The following table reconciles segment revenues to Total revenues by excluding the following items:
Items related to variable annuity product features, which include certain changes in the fair value of the derivatives and other securities we use to hedge these features and changes in the fair value of the embedded derivatives reflected within the net derivative results of variable annuity product features;
Investment gains (losses), net, which include other-than-temporary impairments of securities, sales or disposals of securities/investments, realized capital gains/losses, and valuation allowances; and
Other adjustments, which includes the impact of adoption of revenue recognition standard ASC 606.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
investment income (loss) from certain derivative instruments, excluding derivative instruments used to hedge risks associated with interest margins on interest sensitive life and annuity contracts and freestanding and embedded derivatives associated with products with GMxB features.
The table below presents segment revenues for the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:
|
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | Six Months Ended June 30, |
| 2018 | | 2017 | 2018 | | 2017 |
| (in millions) |
Segment revenues: | | | | | | |
Individual Retirement(1) | $ | 1,082 |
| | $ | 1,041 |
| $ | 1,811 |
| | $ | 2,060 |
|
Group Retirement(1) | 245 |
| | 210 |
| 483 |
| | 437 |
|
Investment Management and Research(2) | 842 |
| | 772 |
| 1,751 |
| | 1,515 |
|
Protection Solutions(1) | 800 |
| | 743 |
| 1,609 |
| | 1,532 |
|
Corporate and Other(1) | 293 |
| | 339 |
| 581 |
| | 677 |
|
Adjustments related to: | | | | | | |
Variable annuity product features | (249 | ) | | 757 |
| (446 | ) | | 470 |
|
Investment gains (losses) | (22 | ) | | 4 |
| 80 |
|
| (20 | ) |
Other adjustments to segment revenues | (29 | ) | | 16 |
| (72 | ) | | 41 |
|
Total revenues | $ | 2,962 |
| | $ | 3,882 |
| $ | 5,797 |
| | $ | 6,712 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Segment revenues: | | | |
Individual Retirement (1) | $ | 1,007 |
| | $ | 729 |
|
Group Retirement (1) | 251 |
| | 238 |
|
Investment Management and Research (2) | 780 |
| | 909 |
|
Protection Solutions (1) | 831 |
| | 814 |
|
Corporate and Other (1) | 312 |
| | 288 |
|
Adjustments related to: | | | |
Variable annuity product features | (1,478 | ) | | (161 | ) |
Investment gains (losses), net | (11 | ) |
| 102 |
|
Other adjustments to segment revenues | 22 |
| | (45 | ) |
Total revenues | $ | 1,714 |
| | $ | 2,874 |
|
______________
| |
(1) | Includes investment expenses charged by AB of approximately $18 million $14 million, $36 million, and $31 million, for both of the three and six months ended June 30,March 31, 2019 and 2018 and 2017, respectively, for services provided to the Company. |
| |
(2) | Inter-segment investment management and other fees of approximately $25 million $21 million, $50 million, and $45 million for both of the three and six months ended June 30,March 31, 2019 and 2018 and 2017, respectively, are included in total revenues of the Investment Management and Research segment. |
The table below presents Total assets by segment as of June 30, 2018March 31, 2019 and December 31, 2017:2018:
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| (in millions) |
Total assets by segment: | | | |
Individual Retirement | $ | 109,376 |
| | $ | 121,723 |
|
Group Retirement | 43,057 |
| | 38,578 |
|
Investment Management and Research(1) | 9,946 |
| | 10,057 |
|
Protection Solutions | 46,836 |
| | 43,169 |
|
Corporate and Other(1) | 21,797 |
| | 22,121 |
|
Total assets | $ | 231,012 |
| | $ | 235,648 |
|
(1) Amounts previously reported were: Investment Management and Research of $8,297 million and Corporate and Other of $23,881 million. |
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| (in millions) |
Total assets by segment: | | | |
Individual Retirement | $ | 116,833 |
| | $ | 105,532 |
|
Group Retirement | 38,965 |
| | 38,874 |
|
Investment Management and Research | 10,348 |
| | 10,294 |
|
Protection Solutions | 42,122 |
| | 44,633 |
|
Corporate and Other | 24,551 |
| | 21,464 |
|
Total assets | $ | 232,819 |
| | $ | 220,797 |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
17)15) EARNINGS PER SHARE
Basic earnings per share (“EPS”) is calculated by dividing netNet income (loss) attributable to Holdings common shareholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is calculated by dividing the netNet income (loss) attributable to Holdings common shareholders, adjusted for the incremental dilution from AB, by the weighted-average number of common shares outstanding for the period plus the shares representing the dilutive effect of share-based awards.
On April 24, 2018, a 459.4752645-for-1 stock split of the common stock of Holdings was effected. All applicable share data, per share amounts and related information in the consolidated financial statements and notes thereto have been adjusted retroactively to give effect to the stock split.
The following table presents the reconciliation of the numerator for the basic and diluted net income per share calculations:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Net income (loss) attributable to Holdings common shareholders: | | | | | | | |
Net income (loss) attributable to Holdings common shareholders (basic): | $ | 158 |
| | $ | 608 |
| | $ | 326 |
| | $ | 318 |
|
Less: Incremental dilution from AB(1) | — |
| | — |
| | — |
| | — |
|
Income (loss) attributable to Holdings common shareholders (diluted): | $ | 158 |
| | $ | 608 |
| | $ | 326 |
| | $ | 318 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Net income (loss) attributable to Holdings common shareholders: | | | |
Net income (loss) attributable to Holdings common shareholders (basic) | $ | (775 | ) | | $ | 214 |
|
Net income (loss) attributable to Holdings common shareholders (diluted) | $ | (775 | ) | | $ | 214 |
|
| |
(1) | The incremental dilution from AB represents the impact of AB’s dilutive units on the Company’s diluted earnings per share and is calculated based on the Company’s proportionate ownership interest in AB. |
The following table presents the number of weighted average shares used in calculating basic and diluted earnings per common share:share
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Weighted Average Shares | | | | | | | |
Weighted average common stock outstanding for basic earnings per common share | 561.0 |
| | 561.0 |
| | 561.0 |
| | 561.0 |
|
Effect of dilutive securities: | | | | | | | |
Employee stock awards | 0.1 |
| | — |
| | 0.1 |
| | — |
|
Weighted average common stock outstanding for diluted earnings per common share | 561.1 |
| | 561.0 |
| | 561.1 |
| | 561.0 |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (number of shares, in millions) |
Weighted Average Shares: | | | |
Weighted average common stock outstanding for basic earnings per common share | 518.0 |
| | 561.0 |
|
Weighted average common stock outstanding for diluted earnings per common share | 518.0 |
| | 561.0 |
|
For the three and six months ended June 30, 2018,March 31, 2019, approximately 3.7 million and 3.85.3 million shares of outstanding stock awards were not included in the computation of diluted earnings per share because their effect was anti-dilutive.
The following table presents both basic and diluted income (loss) per share for each period presented:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (dollars per share) | (dollars per share) |
Net income (loss) attributable to Holdings per common share: | | | | | | | | | | |
Basic | $ | 0.28 |
| | $ | 1.08 |
| | $ | 0.58 |
| | $ | 0.57 |
| $ | (1.50 | ) | | $ | 0.38 |
|
Diluted | $ | 0.28 |
| | $ | 1.08 |
| | $ | 0.58 |
| | $ | 0.57 |
| $ | (1.50 | ) | | $ | 0.38 |
|
18) RESTATEMENT AND 16)REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS
As describedReclassification of DAC Capitalization
During the fourth quarter of 2018, the Company changed the presentation of the capitalization of DAC in the Prospectus, managementconsolidated 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-related payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of DAC. There was no impact on Net income (loss) or Comprehensive income (loss) from this reclassification. See Note 2 for further details of this reclassification.
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revisions of Prior Period Financial Statements
During the third quarter of 2018, the Company revised its financial statements to reflect the correction of errors identified errorsby the Company in its previously issued financial statements. These errors primarily relate to errors in the calculation of policyholders’ benefit reserves for the Company’s life products and the calculation of DAC amortization for certain variable and interest sensitive life products. Based upon quantitative and qualitative factors, management determined that the impact of the errors was material to the consolidated financial statements as of and for the nine months ended September 30, 2017 and as of and for the six months ended June 30, 2017. Management included in the Prospectus summarized financial information for the restated consolidated balance sheets as of September 30, 2017 and June 30, 2017 and the related consolidated statements of income (loss), statements of comprehensive income (loss), statements of equity and statements of cash flow for the six months ended June 30, 2017 and for the nine months ended September 30, 2017 that reflect restatements related to these errors.
In addition, during the preparation of the first quarter 2018 financial statements, management identified a misclassification error between interest credited and net derivative gains/losses. The impact of this error to the consolidated financial statements for the years ended December 31, 2017 and 2016these errors was not considered to be material. InHowever, in order to improve the consistency and comparability of the financial statements, management will reviserevised the Company’s consolidated financial statements as of and for the three and six months ended March 31, 2018 and June 30, 2018, respectively.
In addition, during the fourth quarter of 2018, the Company identified certain cash flows that were incorrectly classified in the Company’s consolidated statements of income (loss)cash flows. The Company has determined that these misclassifications were not material to the financial statements of any period.
The impact of the misclassifications detailed in the revision tables included on the consolidated statement of cash flows for the three months ended March 31, 2018 were corrected in the comparative consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 contained elsewhere in the financial statements. The misclassifications for the six and nine months ended June 30, 2018 and September 30, 2018 will be corrected in the Company’s comparative consolidated statements of cash flows to includebe included in the revisionsForm 10-Q filings as of and for the classification error the next time these financial statements are presented. Additionally, this misclassification error also impacts thethree and six months ended June 30, 20172019 and as of and for the three and nine months ended September 30, 2017. 2019, respectively.
Revision of Consolidated Financial Statements as of and for the Three Months Ended March 31, 2018
The restatedfollowing tables present line items of the consolidated financial statements also correct this item.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, 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.
|
| | | | | | | | | | | | | | | | | | | |
| March 31, 2018 |
| As Pre-viously Reported | | Presentation Reclassifi-cations | | As Adjusted | | Impact of Revisions | | As Revised |
| (in millions) |
Consolidated Balance Sheet: | | | | | | | | | |
Assets: | | | | | | | | | |
Deferred policy acquisition costs | $ | 6,288 |
| | $ | — |
| | $ | 6,288 |
| | $ | (45 | ) | | $ | 6,243 |
|
Current and deferred income taxes | 225 |
| | — |
| | 225 |
| | 7 |
| | 232 |
|
Total Assets | $ | 232,294 |
| | $ | — |
| | $ | 232,294 |
| | $ | (38 | ) | | $ | 232,256 |
|
Liabilities: | | | | | | | | | |
Future policy benefits and other policyholders’ liabilities | 29,586 |
| | — |
| | 29,586 |
| | (20 | ) | | 29,566 |
|
Total Liabilities | $ | 214,670 |
| | $ | — |
| | $ | 214,670 |
| | $ | (20 | ) | | $ | 214,650 |
|
Equity: | | | | | | | | | |
Retained earnings | 12,455 |
| | — |
| | 12,455 |
| | (18 | ) | | 12,437 |
|
Total equity attributable to Holdings | 13,565 |
| | — |
| | 13,565 |
| | (18 | ) | | 13,547 |
|
Total Equity | 16,600 |
| | — |
| | 16,600 |
| | (18 | ) | | 16,582 |
|
Total Liabilities, Redeemable Noncontrolling Interest and Equity | $ | 232,294 |
| | $ | — |
| | $ | 232,294 |
| | $ | (38 | ) | | $ | 232,256 |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Restated Unaudited Interim Financial Information as of and for the Nine Months ended September 30, 2017 and the Six Months ended June 30, 2017 |
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 | Six Months Ended June 30, 2017 |
| As Previously Reported | Impact of Adjustments | As Restated | As Previously Reported | Impact of Adjustments | As Restated |
| (in millions) |
Assets: | |
| |
| |
| |
| |
| |
|
Deferred policy acquisition costs | $ | 5,933 |
| $ | 181 |
| $ | 6,114 |
| $ | 5,906 |
| $ | 195 |
| $ | 6,101 |
|
Loans to affiliates | 1,245 |
| (11 | ) | 1,234 |
| 1,257 |
| (22 | ) | 1,235 |
|
GMIB reinsurance contract asset, at fair value | 2,011 |
| — |
| 2,011 |
| 2,091 |
| 2 |
| 2,093 |
|
Current and deferred income taxes | 339 |
| (73 | ) | 266 |
| 362 |
| (64 | ) | 298 |
|
Other assets | 2,610 |
| 18 |
| 2,628 |
| 2,606 |
| 14 |
| 2,620 |
|
Total Assets | 230,825 |
| 115 |
| 230,940 |
| 226,564 |
| 125 |
| 226,689 |
|
| | | | | | |
Liabilities: | | | | | | |
Future policy benefits and other policyholders’ liabilities | 31,179 |
| (99 | ) | 31,080 |
| 31,113 |
| (84 | ) | 31,029 |
|
Total Liabilities | 215,164 |
| (99 | ) | 215,065 |
| 210,974 |
| (84 | ) | 210,890 |
|
| | | | | | |
Equity: | | | | | | |
Capital in excess of par value(1) | 1,007 |
| (9 | ) | 998 |
| 964 |
| (9 | ) | 955 |
|
Retained earnings | 11,548 |
| 203 |
| 11,751 |
| 11,558 |
| 199 |
| 11,757 |
|
Accumulated other comprehensive income (loss) | (350 | ) | 20 |
| (330 | ) | (350 | ) | 17 |
| (333 | ) |
Total equity attributable to Holdings | 12,211 |
| 214 |
| 12,425 |
| 12,178 |
| 207 |
| 12,385 |
|
Noncontrolling interest | 3,010 |
| — |
| 3,010 |
| 3,051 |
| 2 |
| 3,053 |
|
Total Equity | $ | 15,221 |
| $ | 214 |
| $ | 15,435 |
| $ | 15,229 |
| $ | 209 |
| $ | 15,438 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| As Pre-viously Reported | | Presentation Reclassifi-cations | | As Adjusted | | Impact of Revisions | | As Revised |
| (in millions) |
Consolidated Statement of Income (Loss): | | | | | | | | | |
Revenues: | | | | | | | | | |
Policy charges and fee income | $ | 972 |
| | $ | — |
| | $ | 972 |
| | $ | (6 | ) | | $ | 966 |
|
Net derivative gains (losses) | (281 | ) | | — |
| | (281 | ) | | 45 |
| | (236 | ) |
Total revenues | 2,835 |
| | — |
|
| 2,835 |
|
| 39 |
|
| 2,874 |
|
Benefits and other deductions: | | | | | | | | | |
Policyholders’ benefits | 608 |
| | — |
| | 608 |
| | (14 | ) | | 594 |
|
Amortization of deferred policy acquisition costs | 15 |
| | 162 |
| | 177 |
| | (5 | ) | | 172 |
|
Total benefits and other deductions | 2,465 |
| | — |
| | 2,465 |
| | (19 | ) | | 2,446 |
|
Income (loss) from continuing operations, before income taxes | 370 |
| | — |
| | 370 |
| | 58 |
| | 428 |
|
Income tax (expense) benefit | (79 | ) | | — |
| | (79 | ) | | (12 | ) | | (91 | ) |
Net income (loss) | 291 |
| | — |
| | 291 |
| | 46 |
| | 337 |
|
Net income (loss) attributable to Holdings | $ | 168 |
| | $ | — |
| | $ | 168 |
| | $ | 46 |
| | $ | 214 |
|
(1) Previously reported amounts have been adjusted to give retrospective effect to the 459.4752645-for-1 stock split effected on April 24, 2018. |
| | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 | Six Months Ended June 30, 2017 |
| As Previously Reported | Impact of Adjustments | As Restated | As Previously Reported | Impact of Adjustments | As Restated |
| (in millions) |
Statements of Income (Loss): | |
| |
| |
| |
| |
| |
|
Revenues: | |
| |
| |
| |
| |
| |
|
Policy charges and fee income | $ | 2,853 |
| $ | 8 |
| $ | 2,861 |
| $ | 1,888 |
| $ | 3 |
| $ | 1,891 |
|
Premiums | 805 |
| 20 |
| 825 |
| 542 |
| 16 |
| 558 |
|
Net derivative gains (losses)(2) | 166 |
| (38 | ) | 128 |
| 524 |
| (30 | ) | 494 |
|
Total revenues | 9,495 |
| (10 | ) | 9,485 |
| 6,723 |
| (11 | ) | 6,712 |
|
| |
| |
| |
| |
| |
| |
|
Benefits and other deductions: | |
| |
| |
| |
| |
| |
|
Policyholders’ benefits | 3,909 |
| 15 |
| 3,924 |
| 2,821 |
| 13 |
| 2,834 |
|
Interest credited to policyholders’ account balances(2) | 794 |
| (51 | ) | 743 |
| 526 |
| (38 | ) | 488 |
|
Amortization of deferred policy acquisition costs, net | (31 | ) | (125 | ) | (156 | ) | (43 | ) | (125 | ) | (168 | ) |
Total benefits and other deductions | 9,187 |
| (161 | ) | 9,026 |
| 6,415 |
| (150 | ) | 6,265 |
|
| |
| |
| |
| |
| |
| |
|
Income (loss) from operations, before income taxes | 308 |
| 151 |
| 459 |
| 308 |
| 139 |
| 447 |
|
Income tax (expense) benefit | 163 |
| (31 | ) | 132 |
| 77 |
| (23 | ) | 54 |
|
Net income (loss) | 471 |
| 120 |
| 591 |
| 385 |
| 116 |
| 501 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| As Pre-viously Reported | | Presentation Reclassifi-cations | | As Adjusted | | Impact of Revisions | | As Revised |
| (in millions) |
Statement of Comprehensive Income (Loss) | | | | | | | | | |
Net income (loss) | $ | 291 |
| | $ | — |
| | $ | 291 |
| | $ | 46 |
| | $ | 337 |
|
Comprehensive income (loss) | (541 | ) | | — |
| | (541 | ) | | 46 |
| | (495 | ) |
Comprehensive income (loss) attributable to Holdings | $ | (670 | ) | | $ | — |
| | $ | (670 | ) | | $ | 46 |
| | $ | (624 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| As Pre-viously Reported | | Presentation Reclassifi-cations | | As Adjusted | | Impact of Revisions | | As Revised |
| (in millions) |
Consolidated Statement of Equity: | | | | | | | | | |
Retained earnings, beginning of year | $ | 12,289 |
| | $ | — |
| | $ | 12,289 |
| | $ | (64 | ) | | $ | 12,225 |
|
Net income (loss) attributable to Holdings | 168 |
| | — |
| | 168 |
| | 46 |
| | 214 |
|
Retained earnings, end of period | $ | 12,455 |
| | $ | — |
| | $ | 12,455 |
| | $ | (18 | ) | | $ | 12,437 |
|
Total Holdings’ equity, end of period | $ | 13,565 |
| | $ | — |
| | $ | 13,565 |
| | $ | (18 | ) | | $ | 13,547 |
|
Total Equity, End of Period | $ | 16,600 |
| | $ | — |
| | $ | 16,600 |
| | $ | (18 | ) | | $ | 16,582 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| As Pre-viously Reported | | Presentation Reclassifi-cations | | As Adjusted | | Impact of Revisions | | As Revised |
| (in millions) |
Consolidated Statement of Cash Flows: | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | |
Net income (loss) | $ | 291 |
| | $ | — |
| | $ | 291 |
| | $ | 46 |
| | $ | 337 |
|
Adjustments to reconcile Net income (loss) to Net cash provided by (used in) operating activities: | | | | | | | | | |
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | |
Less: net (income) loss attributable to the noncontrolling interest | (279 | ) | — |
| (279 | ) | (183 | ) | — |
| (183 | ) |
Net income (loss) attributable to Holdings | $ | 192 |
| $ | 120 |
| $ | 312 |
| $ | 202 |
| $ | 116 |
| $ | 318 |
|
| | | | | | |
| Nine Months Ended September 30, 2017 | Six Months Ended June 30, 2017 |
| As Previously Reported | Impact of Adjustments | As Restated | As Previously Reported | Impact of Adjustments | As Restated |
| (in millions) |
Statements of Comprehensive Income (Loss): | | | | | | |
Net income (loss) | $ | 471 |
| $ | 120 |
| $ | 591 |
| $ | 385 |
| $ | 116 |
| $ | 501 |
|
Change in unrealized gains (losses), net of reclassification | 519 |
| 20 |
| 539 |
| 540 |
| (5 | ) | 535 |
|
Total other comprehensive income (loss), net of income taxes | 611 |
| 20 |
| 631 |
| 608 |
| (5 | ) | 603 |
|
Comprehensive income (loss) | 1,082 |
| 140 |
| 1,222 |
| 993 |
| 111 |
| 1,104 |
|
Less: comprehensive (income) loss attributable to the noncontrolling interest | (297 | ) | — |
| (297 | ) | (198 | ) | — |
| (198 | ) |
Comprehensive income (loss) attributable to Holdings | $ | 785 |
| $ | 140 |
| $ | 925 |
| $ | 795 |
| $ | 111 |
| $ | 906 |
|
| | | | | | |
| Nine Months Ended September 30, 2017 | Six Months Ended June 30, 2017 |
| As Previously Reported | Impact of Adjustments | As Restated | As Previously Reported | Impact of Adjustments | As Restated |
| (in millions) |
Statements of Equity: | | | | | | |
Capital in excess of par value, beginning of year(1) | $ | 942 |
| $ | (11 | ) | $ | 931 |
| $ | 942 |
| $ | (11 | ) | $ | 931 |
|
Changes in capital in excess of par value | 65 |
| 2 |
| 67 |
| 22 |
| 2 |
| 24 |
|
Capital in excess of par value, end of period(1) | 1,007 |
| (9 | ) | 998 |
| 964 |
| (9 | ) | 955 |
|
Retained earnings, beginning of year | 11,356 |
| 83 |
| 11,439 |
| 11,356 |
| 83 |
| 11,439 |
|
Net income (loss) attributable to Holdings | 192 |
| 120 |
| 312 |
| 202 |
| 116 |
| 318 |
|
Retained earnings, end of period | 11,548 |
| 203 |
| 11,751 |
| 11,558 |
| 199 |
| 11,757 |
|
Accumulated other comprehensive income (loss), beginning of year | (943 | ) | 22 |
| (921 | ) | (943 | ) | 22 |
| (921 | ) |
Other comprehensive income (loss) | 593 |
| (2 | ) | 591 |
| 593 |
| (5 | ) | 588 |
|
Accumulated other comprehensive income (loss), end of year | (350 | ) | 20 |
| (330 | ) | (350 | ) | 17 |
| (333 | ) |
Total Holdings’ equity, end of period | 12,211 |
| 214 |
| 12,425 |
| 12,178 |
| 207 |
| 12,385 |
|
Noncontrolling interest, end of period | 3,010 |
| — |
| 3,010 |
| 3,051 |
| 2 |
| 3,053 |
|
Total equity, end of period | $ | 15,221 |
| $ | 214 |
| $ | 15,435 |
| $ | 15,229 |
| $ | 209 |
| $ | 15,438 |
|
| | | | | | |
Statements of Cash Flows: | | | | | | |
Cash flow from operating activities: | | | | | | |
Net income (loss) | $ | 471 |
| $ | 120 |
| $ | 591 |
| $ | 385 |
| $ | 116 |
| $ | 501 |
|
Policy charges and fee income | (2,853 | ) | (8 | ) | (2,861 | ) | (1,888 | ) | (3 | ) | (1,891 | ) |
Interest credited to policyholders’ account balances(2) | 794 |
| (51 | ) | 743 |
| 526 |
| (38 | ) | 488 |
|
Net derivative (gains) loss(2) | (166 | ) | 38 |
| (128 | ) | (524 | ) | 30 |
| (494 | ) |
Changes in: | | | | | | |
Deferred Policy Acquisition costs | (31 | ) | (125 | ) | (156 | ) | (43 | ) | (125 | ) | (168 | ) |
Future policy benefits | 1,616 |
| (5 | ) | 1,611 |
| 1,519 |
| (3 | ) | 1,516 |
|
Current and deferred income taxes | 435 |
| 31 |
| 466 |
| 100 |
| 23 |
| 123 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| As Pre-viously Reported | | Presentation Reclassifi-cations | | As Adjusted | | Impact of Revisions | | As Revised |
| (in millions) |
Policy charges and fee income | (972 | ) | | — |
| | (972 | ) | | 6 |
| | (966 | ) |
Net derivative (gains) losses | 281 |
| | — |
| | 281 |
| | (45 | ) | | 236 |
|
Amortization of deferred sales commission | 7 |
| | (7 | ) | | — |
| | — |
| | — |
|
Amortization and depreciation | (20 | ) | | 189 |
| | 169 |
| | (5 | ) | | 164 |
|
Amortization of deferred cost of reinsurance asset | 5 |
| | (5 | ) | | — |
| | — |
| | — |
|
Distributions from joint ventures and limited partnerships | 25 |
| | (25 | ) | | — |
| | — |
| | — |
|
Equity (income) loss from limited partnerships | — |
| | (38 | ) | | (38 | ) | | — |
| | (38 | ) |
Changes in: | | |
|
| | | | | | |
Reinsurance recoverable | 32 |
| | — |
| | 32 |
| | (3 | ) | | 29 |
|
Capitalization of deferred policy acquisition costs | 15 |
| | (177 | ) | | (162 | ) | | — |
| | (162 | ) |
Future policy benefits | (254 | ) | | — |
| | (254 | ) | | 6 |
| | (248 | ) |
Current and deferred income taxes | 103 |
| | — |
| | 103 |
| | 12 |
| | 115 |
|
Other, net | (255 | ) | | 63 |
| | (192 | ) | | — |
| | (192 | ) |
Net cash provided by (used in) operating activities | $ | (264 | ) | | $ | — |
| | $ | (264 | ) | | $ | 17 |
| | $ | (247 | ) |
| | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | |
Proceeds from the sale/maturity/prepayment of: | | | | | | | | | |
Real estate joint ventures | $ | — |
| | $ | — |
| | $ | — |
| | $ | 140 |
| | $ | 140 |
|
Short-term investments | — |
| | 1,607 |
| | 1,607 |
| | 77 |
| | 1,684 |
|
Payment for the purchase/origination of: | | | | | | |
| | |
Short-term investments | — |
| | (731 | ) | | (731 | ) | | — |
| | (731 | ) |
Cash settlements related to derivative instruments | (54 | ) | | — |
| | (54 | ) | | (620 | ) | | (674 | ) |
Change in short-term investments | 876 |
| | (876 | ) | | — |
| | — |
| | — |
|
Other, net | (371 | ) | | — |
| | (371 | ) | | 60 |
| | (311 | ) |
Net cash provided by (used in) investing activities | $ | 459 |
| | $ | — |
| | $ | 459 |
| | $ | (343 | ) | | $ | 116 |
|
| | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | |
Policyholders’ account balances: | | | | | | | | | |
Deposits | $ | 2,532 |
| | $ | — |
| | $ | 2,532 |
| | $ | (491 | ) | | $ | 2,041 |
|
Withdrawals | (1,384 | ) | | — |
| | (1,384 | ) | | 284 |
| | (1,100 | ) |
Transfers (to) from Separate Accounts | (102 | ) | | — |
| | (102 | ) | | 533 |
| | 431 |
|
Net cash provided by (used in) financing activities | $ | 1,074 |
| | $ | — |
| | $ | 1,074 |
| | $ | 326 |
| | $ | 1,400 |
|
| | | | | | | | | |
Non-cash transactions during the period: | | | | | | | | | |
Capital contribution from parent | $ | 630 |
| | $ | — |
| | $ | 630 |
| | $ | (8 | ) | | $ | 622 |
|
(Settlement) issuance of long-term debt | $ | 202 |
| | $ | — |
| | $ | 202 |
| | $ | (404 | ) | | $ | (202 | ) |
Transfer of assets to reinsurer | $ | — |
| | $ | — |
| | $ | — |
| | $ | (604 | ) | | $ | (604 | ) |
(2) Adjustments include revision for misclassification error17) SUBSEQUENT EVENTS
Contingent Funding Arrangements
In April 2019, pursuant to separate Purchase Agreements among us, Credit Suisse Securities (USA) LLC, as representative of $34 million for six months ended June 30, 2017,the several initial purchasers, and $44 million for the nine months ended September 30, 2017 identified in first quarter 2018.Trusts (as defined below), Pine Street Trust I, a Delaware statutory trust (the “2029 Trust”), completed the issuance and sale of 600,000 of its Pre-Capitalized Trust Securities
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Effects of the revision for the misclassification error to the Company’s previously reported Consolidated Statements of Income (Loss), and Cash Flows for the year ended December 31, 2017
|
| | | | | | | | | | | |
| December 31, 2017 |
| As Previously Reported | | Impact of Revisions | | As Revised |
| (in millions) |
Consolidated Statement of Income (Loss): | | |
Revenues: | | | | | |
Net derivative gains (losses) | $ | 228 |
| | $ | (113 | ) | | $ | 115 |
|
Total revenues | 12,514 |
| | $ | (113 | ) | | 12,401 |
|
Benefits and other deductions: | | | | | |
Interest credited to Policyholder’s account balances | 1,108 |
| | $ | (113 | ) | | 995 |
|
Total benefits and other deductions | 11,200 |
| | $ | (113 | ) | | 11,087 |
|
|
| | | | | | | | | | | |
| December 31, 2017 |
| As Previously Reported | | Impact of Revisions | | As Revised |
| (in millions) |
Consolidated Statement of Cash Flows: | | | | | |
Cash flow from operating activities: | | | | | |
Interest credited to policyholders’ account balances | $ | 1,108 |
| | $ | (113 | ) | | $ | 995 |
|
Net derivative (gains) loss | (228 | ) | | 113 |
| | (115 | ) |
Net cash provided by (used in) operating activities | 1,021 |
| | $ | — |
| | 1,021 |
|
Effects of the revision for the misclassification error to the Company’s previously reported Consolidated Statements of Income (Loss), and Cash Flows for the year ended December 31, 2016
|
| | | | | | | | | | | | |
| December 31, 2016 |
| As Previously Reported | | Impact of Revisions | | As Revised |
| (in millions) |
Consolidated Statement of Income (Loss): | | |
Revenues: | | | | | |
Net derivative gains (losses) | $ | (1,722 | ) | | $ | (121 | ) | — |
| $ | (1,843 | ) |
Total revenues | 11,922 |
| | $ | (121 | ) | | 11,801 |
|
Benefits and other deductions: | | | | | |
Interest credited to Policyholder’s account balances | 1,091 |
| | $ | (121 | ) | | 970 |
|
Total benefits and other deductions | 9,868 |
| | $ | (121 | ) | | 9,747 |
|
AXA EQUITABLE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | |
| December 31, 2016 |
| As Previously Reported | | Impact of Revisions | | As Revised |
| (in millions) |
Consolidated Statement of Cash Flows: | | | | | |
Cash flow from operating activities: | | | | | |
Interest credited to policyholders’ account balances | $ | 1,091 |
| | $ | (121 | ) | | $ | 970 |
|
Net derivative (gains) loss | 1,722 |
| | 121 |
| | 1,843 |
|
Net cash provided by (used in) operating activities | (236 | ) | | $ | — |
| | (236 | ) |
19) SUBSEQUENT EVENTS
Cash Dividend Declared
On August 10, 2018, Holdings declaredredeemable February 15, 2029 (the “2029 P-Caps”) for an aggregate purchase price of $600 million and Pine Street Trust II, a cash dividendDelaware statutory trust (the “2049 Trust” and, together with the 2029 Trust, the “Trusts”), completed the issuance and sale of $0.13 per common share, payable400,000 of its Pre-Capitalized Trust Securities redeemable February 15, 2049 (the “2049 P-Caps” and, together with the 2029 P-Caps, the “P-Caps”) for an aggregate purchase price of $400 million, in each case to qualified institutional buyers in reliance on August 30, 2018 to all stockholdersRule 144A that are also “qualified purchasers” for purposes of record asSection 3(c)(7) of the closeInvestment Company Act of business on August 23, 2018.
Share Repurchase Program
On August 10, 2018, Holdings’ Board1940, as amended. The P-Caps are a contingent funding arrangement that, upon our election, gives us the right over a ten-year period (in the case of Directors authorizedthe 2029 Trust) or over a share repurchase program. Underthirty-year period (in the program, Holdings may purchase upcase of the 2049 Trust) to $500 millionissue senior notes to the Trusts. The Trusts each invested the proceeds from the sale of its common stock beginning August 16, 2018 and expiring on March 31, 2019. Holdings may choose to suspend their P-Caps in separate portfolios of principal and/or discontinue the repurchase program at any time. The repurchase program does not obligate Holdings to purchase any particular numberinterest strips of shares.
U.S. Treasury securities.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
AXA Equitable Holdings, Inc. (“Holdings” and, collectively with its consolidated subsidiaries, the “Company”) is a diversified financial services company. Through May 13, 2018, 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 used herein, “AXA Equitable Life” refers to AXA Equitable Life Insurance Company, a New York stock life insurance corporation, “AXA Financial” refers to AXA Financial, Inc., an intermediate holding company incorporated in Delaware, “MLOA” refers to MONY Life Insurance Company of America, an Arizona life insurance corporation, “AXA Advisors” refers to AXA Advisors, LLC, a Delaware limited liability company, “AXA RE Arizona” refers to AXA RE Arizona Company, an Arizona corporation, and “EQ AZ Life Re” refers to EQ AZ Life Re Company, a newly formed captive insurance company organized under the laws of Arizona.
In May 2017, AXA announced its intention to pursue the sale of a minority stake in Holdings through an initial public offering (the “IPO”). On May 14, 2018, Holdings completed the IPO in which AXA sold 157,837,500 shares of Holdings common stock to the public. Following the IPO, AXA owns approximately 71.9% of the outstanding common stock of Holdings.
Management’sThe following discussion and analysis of our financial condition and results of operations for the Company that follows should be read in its entirety and in conjunction with the consolidated financial statements and the related Notes to Consolidated Financial Statements included elsewhere herein, with the information provided under “Forward-looking Statements” included elsewhere herein and thenotes contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section contained in our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”).In addition to historical data, this discussion contains forward-looking statements about our business, operations and “Risk Factors” sections includedfinancial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in Holdings’ prospectus dated May 9, 2018,the forward-looking statements as a result of various factors. See the Note Regarding Forward-Looking Statements and Information. Investors are directed to consider the risks and uncertainties discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as in other documents we have filed with the U.S. Securities and Exchange Commission pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, on May 11, 2018 (the “Prospectus”(“SEC”).
Executive Summary
Overview
We are one of America’s leading financial services companies, providing (i) advice and solutions for helping Americans set and meet their retirement goals and protect and transfer their wealth across generations and (ii) a wide range of investment management insights, expertise and innovations to drive better investment decisions and outcomes for clients worldwide.
We manage our business through four segments: Individual Retirement, Group Retirement, Investment Management and Research, and Protection Solutions. We report certain activities and items that are not included in these segments in Corporate and Other. See Note 1614 of the Notes to the Consolidated Financial Statements for further information on the Company’sour segments.
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.
Revenues
Our revenues come from three principal sources:
fee income derived from our retirement and protection products and our investment management and research services;
premiums from our traditional life insurance and annuity products; and
investment income from our General Account investment assets (“GAIA”).portfolio.
Our fee income varies directly in relation to the amount of the underlying account valueAV or benefit base of our retirement and protection products and the amount of AUM of our Investment Management and Research business. AV and AUM, each as defined in “—Key Operating Measures,” are influenced by changes in economic conditions, primarily equity market returns, as well as net flows. Our premium income is driven by the growth in new policies written and the persistency of 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 of GAIA 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 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.
Due to the impacts on our net income of equity market and interest rate movements and other items that are not part of the underlying profitability drivers of our business, we evaluate and manage our business performance using Non-GAAP Operating Earnings, a non-GAAP financial measure that is intended to remove these impacts from our results. See “—Key Operating Measures—Non-GAAP Operating Earnings.”
Significant Factors Impacting Our Results
The following 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 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 implementedhave 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 newThis program in addition to our dynamic hedge program is expected to increasehas increased the size of our derivative positions, resulting in an increase in net income volatility. The impacts are most pronounced for variable annuity products in our Individual Retirement segment.
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 AccountAccounts 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.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 when appropriate induring 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 Notes to Consolidated Financial Statements.
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 Conditions and Consumer ConfidenceEnvironment
A wide variety of factors continue to impact global financial and economic conditions and consumer confidence.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.
Capital Market Conditions
Although extraordinary monetary accommodation has mitigatedStressed conditions, volatility and disruptions in interest ratethe 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 creditour insurance liabilities and domestic equity markets for an extended period, global central banks may now be past peak accommodation as the U.S. Federal Reserve continues its gradual pace of policy normalization. As global monetary policy becomes less accommodating, anderivatives 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 AUM, AV or AUA. 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 AV and AUM 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:
Our GAIA portfolio consists predominantly of fixed income investments. In the near term, and absent further material change in yields available on investments, we expect the yield we earn on new investments will be lower than the yields we earn on maturing investments, which were generally purchased in environments where interest rates were higher than current levels. If interest rates were to rise, we expect the yield on our new money investments would also rise and gradually converge toward the yield of those maturing assets.
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, primarily for our Protection Solutions segment.
Regulatory Developments
Our life insurance subsidiaries are regulated primarily at the state level, with some policies and products also subject to federal regulation. On an ongoing basis, regulators refine capital requirements and introduce new reserving standards. See “Business—Regulation” and “Risk Factors—Legal and Regulatory Risks” in the 2018 Form 10-K. Regulations recently adopted or currently under review can potentially impact our statutory reserve and capital requirements.
National Association of Insurance Commissioners (“NAIC”). The. In 2015, the NAIC Financial Condition (E) Committee has 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 risk-based capital (“RBC”)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.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. However, we cannot predict whether the NYDFS or other state insurance regulators will adopt standards different from the NAIC framework.
Fiduciary RulesRules/ “Best Interest” Standards of Conduct. In April 2016, the Departmentwake of Labor (the “DOL”) issued a final rule (the “Rule”), which significantly expanded the range of activities considered to be fiduciary investment advice under the Employee Retirement Income Security Act of 1974 (“ERISA”) when our advisors and our employees provide investment-related information and support to retirement plan sponsors, participants and individual retirement account (“IRA”) holders. On March 15, 2018 a federal appeals court issued a decision vacating the Rule and subsequently denied motions by the Attorneys General of three states to intervene in the case. A final mandate implementing the March 2018 decision was issued by the court on June 21, 2018, and the time for appeal to the Supreme Court has lapsed.
In addition tovacate 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 assessingdeveloping our compliance framework for Regulation 187 to determineand assessing 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 what appliesthose 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.
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 annuity 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, 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.
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 changeschanged long-standing provisions governing the taxation of U.S. corporations, including life insurance companies.
The Tax Reform Act reducesreduced the federal corporate income tax rate to 21% beginning in 2018 and repealsrepealed the corporate alternative minimum taxAlternative Minimum Tax (“AMT”) while keeping existing AMT credits. It also containscontained measures affecting our insurance companies, including changes to the dividends received deduction (“DRD”),DRD, insurance reserves and tax DAC, and measures affecting our international operations, such as a one-time transitional tax on some of the accumulated earnings of our foreign subsidiaries (within our Investment Management and Research segment).
We expect the Tax Reform Act to have both positive and negative impacts on our balance sheet. On the one hand, as a one-time effect, the lower tax rate resulted in a reduction to the value of our deferred tax assets. On the other hand, the Tax Reform Act repeals the corporate AMT and, subject to certain limitations, allows us to use our AMT credits going forward, which we expect will result in a reduction of our tax liability.
In 2017, on a statutory basis, we recorded a moderate increase to our Combined RBC ratio asoperations. As a result of the Tax Reform Act. Specifically, this was driven mainly byAct, our Net Income and Non-GAAP Operating Earnings has improved and the benefittax liability on the earnings of the corporate AMT repeal, but partially offset by a lower statutory deferred tax asset valuation. our foreign subsidiaries has decreased.
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, reported at year-end 2018. Aswhich resulted in a result of these changes, we expectreduction to our Combined RBC Ratio to decrease by approximately 100 RBC percentage points.
We expect the tax liability on the earnings of our foreign subsidiaries will decrease going forward. In 2017, we recorded a one-time decrease to net income of $23 million due to the estimated transitional tax on some of the accumulated earnings of these subsidiaries.Ratio.
Overall, we expect the Tax Reform Act to havehad a net positive economic impact on us. Weus and we continue to evaluate this new and complicated piece of legislation, assess the magnitude of the various impacts and monitor potential regulatory changesregulations related to this reform.
Separation Costs
In connection with the IPO and transitioning to operating as a stand-alone public company, we have incurred and expect to continue to incur one-time and recurring expenses. These expenses primarily relate to information technology, compliance, internal audit, finance, risk management, procurement, client service, human resources and other support services. The process of replicating and replacing functions, systems and infrastructure provided by AXA or certain of its affiliates in order to operate on a stand-alone basis is currently underway.
We estimate that the aggregate amount Furthermore, as a result of the one-time expenses described above will be between approximately $300 million and $350 million, of which $93 million was incurred in 2017 and approximately $150 million is expected to be incurred in 2018. Of this amount, $94 million has been incurred in the first six months of 2018, with $61 million in the first quarter of 2018 and $33 million in the second quarter of 2018. Furthermore, additional one-time expenses will be incurred when AXA ceasesceasing to own at least a majority of our outstanding common stock.stock, we incurred, and continue to incur, additional expenses. These expenses, any recurring expenses, including under the Transitional Services Agreement, and any additional one-time expenses, including as a result of rebranding, we may incur may be material. See “Risk Factors” in the Prospectus2018 Form 10-K for additional information.
We estimate that the aggregate amount of the total separation expenses described above will be between approximately $650 million and $700 million. Through March 31, 2019, a total of $334 million has been incurred, of which $24 million and $61 million was incurred in the three months ended March 31, 2019 and 2018, respectively.
Productivity Strategies
Retirement and Protection Businesses.
We continue to build upon our recent productivity improvements through which we have delivered more than $350 million in efficiency improvements over the last five years.from 2012 through 2017. Our productivity strategy includes several initiatives, including reallocatingrelocating some of our real estate footprint away from the New York metropolitan area, replacing or updating less efficient legacy technology infrastructure and expanding existing outsourcing arrangements, which we believe will reduce costs and improve productivity.
We anticipate that the savings from these initiatives will offset any incremental ongoing expenses that we incur as a standalone company, and we expect these initiatives to improve our operating leverage, increasing our Non-GAAP Operating Earnings by approximately $75 million pre-tax per annum by 2020.
Investment Management and Research Business.
AB has announced that it will establish its corporate headquarters in, and relocate approximately 1,050 jobs currently located in the New York metro area to, Nashville, TN.Tennessee. For more detail on the costs and expense savings AB expects to incur as a result of this relocation, see AB’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018.March 31, 2019.
Key Operating Measures
In addition to our results presented in accordance with U.S. GAAP, we report Non-GAAP Operating Earnings, Non-GAAP Operating ROC by segment for our Individual Retirement, Group Retirement and Protection Solutions segments, and Non-GAAP Operating Earnings per share, each of which is a measure that is not determined in accordance with U.S. GAAP. Management believes that the use of these non-GAAP financial measures, together with relevant U.S. GAAP measures, provides a better understanding of our results of operations and the underlying profitability drivers and trends of our business. These non-GAAP financial measures are intended to remove from our results of operations the impact of market changes (where there is mismatch in the valuation of assets and liabilities) as well as certain other expenses which are not part of our underlying profitability drivers or likely to re-occur in the foreseeable future, as such items fluctuate from period-to-period in a manner inconsistent with these drivers. These measures should be considered supplementary to our results that are presented in accordance with U.S. GAAP and should not be viewed as a substitute for the U.S. GAAP measures. Other companies may use similarly titled non-GAAP financial measures that are calculated differently from the way we calculate such measures. Consequently, our non-GAAP financial measures may not be comparable to similar measures used by other companies.
We also discuss certain operating measures, including AUM, AUA, AV, Protection Solutions Reserves and certain other operating measures, which management believes provide useful information about our businesses and the operational factors underlying our financial performance.
Non-GAAP Operating Earnings
Non-GAAP Operating Earnings is an after-tax non-GAAP financial measure used to evaluate our financial performance on a consolidated basis that is determined by making certain adjustments to our consolidated after-tax net income attributable to Holdings. The most significant of such adjustments relates to our derivative positions, which protect economic value and statutory capital, and are more sensitive to changes in market conditions than the variable annuity product liabilities as valued under U.S. GAAP. This is a large source of volatility in net income.
In the first quarter of 2018, the Company revised its2019, we modified our Non-GAAP Operating Earnings definition as it relates to themeasure’s treatment of certain elementsthe impact of timing differences on the profitabilityamortization of itsDAC resulting from market value adjustments for our SCS variable annuity products with indexed-linked features to align toproduct. As a result of this modification, the treatmentamortization of its variable annuity products with GMxB features. In addition, adjustmentsDAC for variable annuity products with index-linked features previouslyour SCS product included within Other adjustments in the calculation of Non-GAAP Operating Earnings was changed to be determined based on our SCS product's gross profits included in Non-GAAP Operating Earnings, consistent with both our exclusion from Non-GAAP Operating Earnings of other items that are now includeddistortive to the underlying drivers of our financial performance on a consolidated basis and with the adjustments for variable annuity products with GMxB features in the broader adjustment category, Variable annuity product features. Theindustry practice. Our presentation of Non-GAAP Operating Earnings in prior periods was not revised to reflect this changemodification, however, had we modified the treatment of the amortization of DAC for SCS starting in definition.the first quarter of 2018, SCS-related DAC amortization excluded from Non-GAAP Operating Earnings would have been $52 million, $17 million and $4 million lower during the first, second and third quarters of 2018, respectively, and $17 million higher during the fourth quarter of 2018.
Non-GAAP Operating Earnings equals our consolidated after-tax net income attributable to Holdings adjusted to eliminate the impact of the following items:
Items related to Variablevariable annuity product features, which include certain changes in the fair value of the derivatives and other securities we use to hedge these features, the effect of benefit ratio unlock adjustments and changes in the fair value of the embedded derivatives reflected within Variablevariable annuity products’ net derivative results;results and the impact of these items on DAC amortization;
Investment (gains) losses, which includes other-than-temporary impairments of securities, sales or disposals of securities/investments, realized capital gains/losses and valuation allowances;
Goodwill impairment, which includes a write-down of goodwill in first quarter of 2017.
Net actuarial (gains) losses, which includes actuarial gains and losses as a result of differences between actual and expected experience on pension plan assets or projected benefit obligation during a given period related to pension, other postretirement benefit obligations, and the one-time impact of the settlement of the defined benefit obligation;
Other adjustments, which includes restructuring costs related to severance, lease write-offs related to non-recurring restructuring activities, and separation costs; and
Income tax expense (benefit) related to the above items and non-recurring tax items, which includes the effect of uncertain tax positions for a given audit period permanent differences due to goodwill impairment, and the impact of the Tax Reform Act.
Because Non-GAAP Operating Earnings excludes the foregoing items that can be distortive or unpredictable, management believes that this measure enhances the understanding of the Company’s underlying drivers of profitability and trends in our business, thereby allowing management to make decisions that will positively impact our business.
We use our prevailing corporate federal income tax rate of 21% in 20182019 and 35% in 2017,2018, while taking into account any non-recurring differences for events recognized differently in our financial statements and federal income tax returns as well as partnership income taxed at lower rates when reconciling Net income (loss) attributable to Holdings to Non-GAAP Operating Earnings.
The table below presents a reconciliation of Net income (loss) attributable to Holdings to Non-GAAP Operating Earnings for the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | | (in millions) | (in millions) |
Net income (loss) attributable to Holdings | $ | 158 |
| | $ | 608 |
| | $ | 326 |
| | $ | 318 |
| $ | (775 | ) | | $ | 214 |
|
Adjustments related to: | | | | | | | | | | |
Variable annuity product features (1) | 280 |
| | (40 | ) | | 492 |
| | 251 |
| 1,540 |
| | 176 |
|
Investment (gains) losses | 22 |
| | (4 | ) | | (80 | ) | | 20 |
| 11 |
| | (102 | ) |
Goodwill impairment | — |
| | — |
| | — |
| | 369 |
| |
Net actuarial (gains) losses related to pension and other postretirement benefit obligations | 27 |
| | 33 |
| | 158 |
| | 67 |
| 24 |
| | 131 |
|
Other adjustments | 89 |
| | 26 |
| | 179 |
| | 5 |
| |
Income tax expense (benefit) related to above adjustments | (81 | ) | | (7 | ) | | (144 | ) | | (242 | ) | |
Other adjustments (2) | | 40 |
| | 91 |
|
Income tax expense (benefit) related to above adjustments (3) | | (337 | ) | | (55 | ) |
Non-recurring tax items | 11 |
| | (217 | ) | | 39 |
| | (85 | ) | 6 |
| | 28 |
|
Non-GAAP Operating Earnings | $ | 506 |
| | $ | 399 |
| | $ | 970 |
| | $ | 703 |
| |
Non-GAAP Operating Earnings (4) | | $ | 509 |
| | $ | 483 |
|
______________
| |
(1) | This reconciling item was previously referred to as “GMxB product features”, but is now referred to more broadly as “Variable annuity product features.” See Note 16 toHad we modified the Notes to Consolidated Financial Statementstreatment of the amortization of DAC for detailsSCS starting in the first quarter of adjustments2018, the adjustment related to Variable annuity product features.features for the three months ended March 31, 2018 would have been $124 million. |
| |
(2) | “Other adjustments” includes separation costs of $24 million and $61 million, for the three months ended March 31, 2019 and 2018, respectively. |
| |
(3) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, the adjustment related to Income tax expense (benefit) related to above adjustments for the three months ended March 31, 2018 would have been $(44) million. |
| |
(4) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Non-GAAP Operating Earnings for the three months ended March 31, 2018 would have been $442 million. |
Non-GAAP Operating ROE and Non-GAAP Operating ROC by Segment
We plan to report Non-GAAP Operating ROE beginning in the second quarter 2019, and we currently report Non-GAAP Operating ROC by segment for our Individual Retirement, Group Retirement and Protection Solutions segments, each of which is a non-GAAPNon-GAAP financial measure used to evaluate our recurrent profitability on a consolidated basis and by segment, respectively.
We calculate Non-GAAP Operating ROE by dividing Non-GAAP Operating Earnings by consolidated average equity attributable to Holdings, excluding Accumulated Other Comprehensive Income (“AOCI”) and Noncontrolling interest (“NCI”). We calculate Non-GAAP Operating ROC by segment by dividing operatingOperating earnings (loss) on a segment basis by average capital on a segment basis, excluding AOCI and NCI, as described below. AOCI fluctuates period-to-period in a manner inconsistent with our underlying profitability drivers as the majority of such fluctuation is related to the market volatility of the unrealized gains and losses associated with our available for saleavailable-for-sale (“AFS”) securities. Therefore, we believe
excluding AOCI is more effective for analyzing the trends of our operations. We do not calculate Non-GAAP Operating ROC by segment for our Investment Management & Research segment because we do not manage that segment from a return of capital perspective. Instead, we use metrics more directly applicable to an asset management business, such as AUM, to evaluate and manage that segment.
For Non-GAAP Operating ROC by segment, capital components pertaining directly to specific segments such as DAC along with targeted capital are directly attributed to these segments. Targeted capital for each segment is established using assumptions supporting statutory capital adequacy levels necessary to be considered a going concern.(including CTE98). To enhance the ability to analyze these measures across periods, interim periods are annualized. Non-GAAP Operating ROE and Non-GAAP Operating ROC by segment should not be used as a substitutesubstitutes for ROE.
The following table sets forth Non-GAAP Operating ROC by segment for our Individual Retirement, Group Retirement and Protection Solutions segments for the trailing twelve months ended June 30, 2018.March 31, 2019.
| | | Trailing Twelve Months Ended June 30, 2018 | Trailing Twelve Months Ended March 31, 2019 |
| Individual Retirement | | Group Retirement | | Protection Solutions | Individual Retirement | | Group Retirement | | Protection Solutions |
| (in millions) | (in millions) |
Operating earnings(1) | $ | 1,610 |
| | $ | 323 |
| | $ | 529 |
| $ | 1,558 |
| | $ | 394 |
| | $ | 211 |
|
Average capital(1)(2) | 7,188 |
| | 1,270 |
| | 2,574 |
| $ | 6,881 |
| | $ | 1,256 |
| | $ | 2,762 |
|
Non-GAAP Operating ROC(3) | 22.4 | % | | 25.4 | % | | 20.5 | % | 22.6 | % | | 31.3 | % | | 7.6 | % |
______________
| |
(1) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Operating earnings for the trailing twelve months ended March 31, 2019 for the Individual Retirement segment would have been $1,555 million. |
| |
(2) | For average capital amounts by segment, capital components pertaining directly to specific segments such as DAC along with targeted capital are directly attributed to these segments. Targeted capital for each segment is established using assumptions supporting statutory capital adequacy levels necessary to be considered a going concern.(including CTE98). |
| |
(3) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Non-GAAP Operating ROC for the trailing twelve months ended March 31, 2019 for the Individual Retirement segment would have been 22.6%. |
Non-GAAP Operating Earnings perPer Share
Non-GAAP Operating EPSEarnings Per Share (“Non-GAAP EPS”) is calculated by dividing Non-GAAP Operating Earnings by endingdiluted common shares outstanding - diluted.outstanding. The following table sets forth Non-GAAP Operating EPS for the three and six months ended June 30, 2018March 31, 2019 and 2017.2018.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (per share amounts) | (per share amounts) |
Net income (loss) attributable to Holdings | $ | 0.28 |
| | $ | 1.08 |
| | $ | 0.58 |
| | $ | 0.57 |
| $ | (1.50 | ) | | $ | 0.38 |
|
Adjustments related to: | | | | | | | | | | |
Variable annuity product features (1) | 0.50 |
| | (0.07 | ) | | 0.88 |
| | 0.45 |
| 2.97 |
| | 0.31 |
|
Investment (gains) losses | 0.04 |
| | (0.01 | ) | | (0.14 | ) | | 0.04 |
| 0.02 |
| | (0.18 | ) |
Goodwill impairment | — |
| | — |
| | — |
| | 0.66 |
| |
Net actuarial (gains) losses related to pension and other postretirement benefit obligations | 0.05 |
| | 0.06 |
| | 0.28 |
| | 0.12 |
| 0.05 |
| | 0.23 |
|
Other adjustments | 0.15 |
| | 0.05 |
| | 0.32 |
| | (0.01 | ) | |
Income tax expense (benefit) related to above adjustments | (0.14 | ) | | (0.01 | ) | | (0.26 | ) | | (0.43 | ) | |
Other adjustments (2) | | 0.08 |
| | 0.17 |
|
Income tax expense (benefit) related to above adjustments (3) | | (0.65 | ) | | (0.10 | ) |
Non-recurring tax items | 0.02 |
| | (0.39 | ) | | 0.07 |
| | (0.15 | ) | 0.01 |
| | 0.05 |
|
Non-GAAP Operating Earnings per share | $ | 0.90 |
| | $ | 0.71 |
| | $ | 1.73 |
| | $ | 1.25 |
| |
Non-GAAP Operating Earnings (4) | | $ | 0.98 |
| | $ | 0.86 |
|
______________
| |
(1) | This reconciling item was previously referred to as “GMxB product features”, but is now referred to more broadly as “Variable annuity product features.” See Note 16 toHad we modified the Notes to Consolidated Financial Statementstreatment of the amortization of DAC for detailsSCS starting in the first quarter of adjustments2018, the adjustment related to Variable annuity product features.features for the three months ended March 31, 2018 would have been $0.22. |
| |
(2) | “Other adjustments” includes separation costs of $0.05 and $0.11, for the three months ended March 31, 2019 and 2018, respectively. |
| |
(3) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, the adjustment related to Income tax expense (benefit) related to above adjustments for the three months ended March 31, 2018 would have been $(0.08). |
| |
(4) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Non-GAAP Operating Earnings for the three months ended March 31, 2018 would have been $0.79. |
Assets Under Management (“AUM”)
AUM means investment assets that are managed by one of our subsidiaries and includes: (i) assets managed by AB,AB; (ii) the assets in our GAIA portfolioGeneral Account investment portfolio; and (iii) the Separate AccountAccounts assets of our Individual Retirement, Group Retirement and Protection Solutions businesses. Total AUM reflects exclusions between segments to avoid double counting.
Assets Under Administration (“AUA”)
AUA includes non-insurance client assets that are invested in our savings and investment products or serviced by our AXA Advisors platform. We provide administrative services for these assets and generally record the revenues received as distribution fees.
Account Value (“AV”)
AV generally equals the aggregate policy account value of our retirement products. General Account AV refers to account balances in investment options that are backed by the General Account while Separate AccountAccounts AV refers to Separate AccountAccounts investment assets.
Protection Solutions Reserves
Protection Solutions Reserves equals the aggregate value of Policyholders’ account balances and Future policy benefits for policies in our Protection Solutions segment.
Consolidated Results of Operations
Our consolidated results of operations are significantly affected by conditions in the capital markets and the economy because we offer variable annuity products with GMxB features.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 and interest rates, we 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. The volatility in Net income attributable to Holdings for the periods presented below results from the mismatch betweenbetween: (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 fluctuationsfluctuations; 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.
AsReclassification of June 30,DAC Capitalization
During the fourth quarter of 2018, and June 30, 2017,we changed our economic interest in AB was approximately 64.7% and 46.7%, respectively. On April 23, 2018, Holdings purchased (i) 8,160,000 AB Units from Coliseum Reinsurance Company and (ii) allpresentation of the issuedcapitalization of 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 outstanding sharesbenefits, Commissions and distribution-related payments, and Other operating costs and expenses. Previously, the capitalized amounts were netted within the Amortization of common stockDAC. There was no impact on Net income (loss) or Non-GAAP Operating Earnings of AXA-IM Holding U.S., Inc., which owns 41,934,582 AB Units (collectively, this reclassification.
The reclassification adjustments for the “AB Reorganization Transactions”).three months ended March 31, 2018 are presented in the table below. Capitalization of DAC reclassified to Compensation and benefits, Commissions and distribution-related payments, and Other operating costs and expenses reduced the amounts previously reported in those expense line items, whereas the capitalization of DAC reclassified from the Amortization of DAC line item increases that expense line item.
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 |
| Individual Retirement | | Group Retirement | | Protection Solutions | | Consolidated |
| (in millions) |
Reductions to expense line items: | | | | | | | |
Commissions and distribution-related payments | $ | 72 |
| | $ | 14 |
| | $ | 34 |
| | $ | 120 |
|
Compensation and benefits, interest expense, and other operating costs and expenses | 19 |
| | 7 |
| | 16 |
| | 42 |
|
Total reductions | $ | 91 |
| | $ | 21 |
| | $ | 50 |
|
| $ | 162 |
|
| | | | | | | |
Increase to expense line item: | | | | | | | |
Amortization of deferred policy acquisition costs | $ | 91 |
| | $ | 21 |
| | $ | 50 |
| | $ | 162 |
|
Ownership and Consolidation of AllianceBernstein
Our indirect, wholly owned subsidiary, AllianceBernstein Corporation, is the General Partner of AB. Accordingly, AB is consolidated in our financial statements, and its results are fully reflected in our consolidated financial statements. As of March 31, 2019 and 2018, our economic interest in AB was approximately 66% and 47%, respectively.
Effective Tax Rates
For interim reporting periods, we calculate income tax expense using an estimated annual effective tax rate (“ETR”), with discrete items recognized in the period in which they occur.
Consolidated Results of Operations
The following table summarizes our consolidated statements of income (loss) for the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (in millions, except earnings per share amounts) | (in millions, except earnings per share amounts) |
REVENUES | | | | | | | | | | |
Policy charges and fee income | $ | 987 |
| | $ | 935 |
| | $ | 1,959 |
| | $ | 1,891 |
| $ | 931 |
| | $ | 966 |
|
Premiums | 275 |
| | 277 |
| | 554 |
| | 558 |
| 283 |
| | 279 |
|
Net derivative gains (losses) | (73 | ) | | 729 |
| | (354 | ) | | 494 |
| (1,630 | ) | | (236 | ) |
Net investment income (loss) | 596 |
| | 803 |
| | 1,187 |
| | 1,583 |
| 1,015 |
| | 591 |
|
Investment gains (losses), net: | | | | | | | | |
Total other-than-temporary impairment losses | — |
| | (13 | ) | | — |
| | (14 | ) | |
Other investment gains (losses), net | (22 | ) | | 17 |
| | 80 |
| | (6 | ) | |
Total investment gains (losses), net | (22 | ) | | 4 |
| | 80 |
| | (20 | ) | |
Investment gains (losses), net | | (11 | ) | | 102 |
|
Investment management and service fees | 1,075 |
| | 998 |
| | 2,130 |
| | 1,952 |
| 999 |
| | 1,055 |
|
Other income | 124 |
| | 136 |
| | 241 |
| | 254 |
| 127 |
| | 117 |
|
Total revenues | 2,962 |
| | 3,882 |
| | 5,797 |
| | 6,712 |
| 1,714 |
| | 2,874 |
|
| | | | |
BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | |
Policyholders’ benefits | 920 |
| | 1,741 |
| | 1,528 |
| | 2,834 |
| 880 |
| | 594 |
|
Interest credited to policyholders’ account balances | 268 |
| | 242 |
| | 539 |
| | 488 |
| 304 |
| | 271 |
|
Compensation and benefits (includes $41, $41, $81 and $82 of deferred policy acquisition costs, respectively) | 558 |
| | 546 |
| | 1,178 |
| | 1,085 |
| |
Commissions and distribution related payments (includes $132, $138, $251 and $270 of deferred policy acquisition costs, respectively) | 418 |
| | 400 |
| | 829 |
| | 795 |
| |
Compensation and benefits | | 509 |
| | 579 |
|
Commissions and distribution-related payments | | 281 |
| | 291 |
|
Interest expense | 60 |
| | 38 |
| | 106 |
| | 73 |
| 56 |
| | 46 |
|
Amortization of deferred policy acquisition costs (net of capitalization of $173, $179, $332 and $352 of deferred policy acquisition costs, respectively) | (1 | ) | | (113 | ) | | 14 |
| | (168 | ) | |
Amortization of deferred policy acquisition costs | | 198 |
| | 172 |
|
Other operating costs and expenses | 425 |
| | 414 |
| | 919 |
| | 1,158 |
| 410 |
| | 493 |
|
Total benefits and other deductions | 2,648 |
| | 3,268 |
| | 5,113 |
| | 6,265 |
| 2,638 |
| | 2,446 |
|
Income (loss) from continuing operations, before income taxes | 314 |
| | 614 |
| | 684 |
| | 447 |
| (924 | ) | | 428 |
|
Income tax (expense) benefit | (59 | ) | | 84 |
| | (138 | ) | | 54 |
| 215 |
| | (91 | ) |
Net income (loss) | 255 |
| | 698 |
| | 546 |
| | 501 |
| (709 | ) | | 337 |
|
Less: net (income) loss attributable to the noncontrolling interest | (97 | ) | | (90 | ) | | (220 | ) | | (183 | ) | |
Less: Net (income) loss attributable to the noncontrolling interest | | (66 | ) | | (123 | ) |
Net income (loss) attributable to Holdings | $ | 158 |
| | $ | 608 |
| | $ | 326 |
| | $ | 318 |
| $ | (775 | ) | | $ | 214 |
|
| | | | | | | | | | |
EARNINGS PER SHARE | | | | | | | | | | |
Earnings per share - Common stock | | | | | | | | |
Earnings per share - Common stock: | | | | |
Basic | $ | 0.28 |
| | $ | 1.08 |
| | $ | 0.58 |
| | $ | 0.57 |
| $ | (1.50 | ) | | $ | 0.38 |
|
Diluted | $ | 0.28 |
| | $ | 1.08 |
| | $ | 0.58 |
| | $ | 0.57 |
| $ | (1.50 | ) | | $ | 0.38 |
|
Weighted average common shares outstanding - basic | 561.0 |
| | 561.0 |
| | 561.0 |
| | 561.0 |
| |
Weighted average common shares outstanding - diluted | 561.1 |
| | 561.0 |
| | 561.1 |
| | 561.0 |
| |
Weighted average common shares outstanding: (in millions) | | | | |
Basic | | 518.0 |
| | 561.0 |
|
Diluted | | 518.0 |
| | 561.0 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Non-GAAP Operating Earnings (1) | $ | 509 |
| | $ | 483 |
|
_______________
| |
(1) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Non-GAAP Operating Earnings for the three months ended March 31, 2018 would have been $442 million. |
The following table summarizes our non-GAAP operating earnings per shareNon-GAAP Operating EPS for the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (earnings per share amounts) |
Non-GAAP Operating EPS - common stock: | | | |
Basic (1) | $ | 0.98 |
| | $ | 0.86 |
|
Diluted (2) | $ | 0.98 |
| | $ | 0.86 |
|
_______________ |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions, except earnings per share amounts) |
Non-GAAP Operating Earnings | $ | 506 |
| | $ | 399 |
| | $ | 970 |
| | $ | 703 |
|
Non-GAAP Operating Earnings per share, Basic | $ | 0.90 |
| | $ | 0.71 |
| | $ | 1.73 |
| | $ | 1.25 |
|
Non-GAAP Operating Earnings per share, Diluted | $ | 0.90 |
| | $ | 0.71 |
| | $ | 1.73 |
| | $ | 1.25 |
|
| |
(1) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Non-GAAP Operating EPS - common stock, basic for the three months ended March 31, 2018 would have been $0.79. |
| |
(2) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Non-GAAP Operating EPS - common stock, diluted for the three months ended March 31, 2018 would have been $0.79. |
The following discussion compares the results for the three and six months ended June 30, 2018 comparedMarch 31, 2019 to the comparable 2017 period’s results.results for the three months ended March 31, 2018.
Three Months Ended June 30, 2018March 31, 2019 Compared to the Three Months Ended June 30, 2017
Net Income Attributable to Holdings
Net income (loss) attributable to Holdings decreased $450by $989 million, to $158a net loss of $775 million for the three months ended June 30, 2018March 31, 2019 from $608net income of $214 million for the three months ended June 30, 2017,March 31, 2018, primarily driven by the following notable items:
Net derivative gains (losses) decreased by $1,394 million mainly due to the higher freestanding derivative losses and increases in the fair value of the GMIBNLG liability.
Policyholders’ benefits increased by $286 million mainly due to our Individual Retirement and Protection Solutions segments. The increase in our Individual Retirement segment was primarily due to the favorable impact of higher interest rates in the first quarter of 2018. The assumption updates in the third quarter of 2018 reduced the impact of interest rates on GMxB policyholders’ benefits in the first quarter of 2019. The increase in the Protection Solutions segment mainly reflected higher mortality experience.
Investment gains (losses), net decreased by $113 million primarily due to realized losses on the sale of fixed maturities in the first three months of 2019 compared to realized gains on the sale of fixed maturities in first three months of 2018.
Revenue from fees and related items ("Fee-type revenue"), including Policy charges and fee income, Premiums, Investment Management service fees and Other income, decreased by $77 million mainly driven by our Investment Management and Research and Individual Retirement segments. The decrease in our Investment Management segment was primarily due to lower performance-based fees and lower Bernstein Research Services revenues. The decrease in the Individual Retirement segment was mainly due to lower average Separate Accounts AV in 2019 compared to 2018 as a result of a decline in equity markets in the fourth quarter of 2018.
Interest credited to policyholders’ account balances increased by $33 million mainly driven by our Individual Retirement segment, reflecting an increase in SCS AV and by our Protection Solutions segment, mainly reflecting an increase in Indexed Universal Life products AV due to new business growth, partially offset by higher Net derivative gains (losses).
Amortization of DAC increased by $26 million mainly due to higher amortization in our Individual Retirement segment, primarily due to the impact of non-repeating favorable DAC amortization in our SCS product in the first three months of 2018, partially offset by lower amortization in our Protection Solutions segment resulting from no longer being in loss recognition.
Interest expense increased by $10 million due to the incurrence of $3.8 billion of indebtedness in April 2018, partially offset by lower repurchase agreement costs.
Partially offsetting this decrease were the following notable items:
Net investment income decreased(loss) increased by $207$424 million, mainly due to a change in the market value of trading securities supporting our variable annuity products due to higherlower interest rates.
Amortization of DAC, net increasedCompensation, benefits and other operating expenses decreased by $112$153 million mainly due to our Protection Solutionsthe partial settlement of the employee pension plan in the first three months of 2018 and Individual Retirement segments. The Protection Solutions segment increase waslower separation costs.
Earnings attributable to noncontrolling interest decreased by $57 million due to a $51 millionlower AB net income and from the increase in amortizationour ownership percentage of DAC before capitalization as we have remained in a loss recognition position inAB that reduced the second quarternoncontrolling interest's share of 2018 (loss recognition position started in the fourth quarter of 2017), which results in higher amortization of DAC. The Individual Retirement segment increase was due to a $37 million increase in amortization of DAC before capitalization due to a non-recurring positive impact in amortization of DAC resulting from the 2017 reserve strengthening.AB's net income.
Total investment gains, netCommissions and distribution-related payments decreased by $26$10 million primarily due to the salemainly driven by higher capitalization of fixed maturity securities.
commissions.Income tax expense decreased by $306 million driven primarily by a pre-tax loss in the first three months of 2019 compared to pre-tax income in the first three months of 2018.
Non-GAAP Operating Earnings
Non-GAAP Operating Earnings increased by $143$26 million driven by a settlement of an IRS auditto $509 million during the three months ended March 31, 2019 from $483 million in the second quarter of 2017, partially offsetthree months ended March 31, 2018, primarily driven by a decrease in pre-tax earnings and a lower effective tax rate due to the Tax Reform Act.
Partially offsetting this decrease were the following notable items:items. Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Non-GAAP Operating Earnings for the three months ended March 31, 2019 would have increased $67 million from $442 million in the three months ended March 31, 2018. See Note 14, “Business Segment Information” in the Notes to the Consolidated Financial Statements for further details of this prospective change in our Non-GAAP Operating Earnings measure.
Policyholders’ benefits decreasedNet derivative gains (losses) increased by $821$265 million primarilymainly due to a $761$279 million decreaseincrease in our Individual Retirement segment. Within policyholder benefits, a decreasesegment due to decreasing interest rates in GMxB reserves was driven2019 compared to 2018.
Net investment income increased by a reserve strengthening in 2017, that was$91 million mainly due to the positive impacts of higher asset balances and yields on our trading securities and seed money and from our General Account investment portfolio optimization, partially offset by Net derivative losses of $802 million reflecting the change in market value of derivatives, duelower income from alternative investments.
Earnings attributable to the aforementioned reserve strengtheningnoncontrolling interest decreased by $71 million in 2017 and higher interest rates in 2018.
Investment management and service fees increased by $77 million mainly driven by our Investment Management and Research segment due to lower AB Operating earnings and from the increase in our ownership percentage of AB that reduced the noncontrolling interest’s share of AB’s Operating earnings.
Compensation, benefits and other operating costs and expenses decreased by $56 million mainly due to higher base fees reflecting an increasea decrease in average AUMour Investment Management and Research segment driven by the non-recurrence of 6.8%a $43 million expense related to the impact of adopting revenue recognition standard ASC 606 in 2018 and an increase in performance fees.lower incentive compensation expenses. Excluding our Investment Management and Research segment, these expenses decreased by $3 million driven by our productivity initiatives.
Policy charges and fee income increasedAmortization of DAC decreased by $52$25 million due to higher average AV from net flows and higher equity markets and an increase in cost of insurance charges inmainly driven by our Protection Solutions segment.
Non-GAAP Operating Earnings
Non-GAAP Operating Earnings increasedsegment as this segment is no longer in loss recognition, partially offset by $107 million to $506 million during the three months ended June 30, 2018 from $399 million in the three months ended June 30, 2017, primarily driven by the following notable items:
Policyholders’ benefits decreased by $106 million primarily due to a $46 million decreasean increase in our Individual Retirement segment, and a $59 million decrease in Corporate and Other. The decrease in Individual Retirement reflected an improvement in GMxB margins, mainly driven by reserve strengthening in 2017 (the decrease in Policyholders’ benefits was partially offset by derivative losses).
Investment management and service fees increased by $77 million reflecting higher base fees resulting from an increase in average AUM of 6.8% and an increase in performance fees.
Policy charges, fee income and premiums increased by $49 million, due to higher average AV from net flows and higher equity markets and an increase in cost of insurance charges in our Protection Solutions segment.
Net investment income increased by $35 million mainly due to the General Account portfolio optimization and higher asset balances.impact of interest rate movements on our SCS block. During the first quarter of 2019, we prospectively modified our Non-GAAP Operating Earnings measure to exclude the impact of timing differences on the Amortization of DAC resulting from SCS market value adjustments. Had the treatment in our Non-GAAP Operating Earnings measure of the Amortization of DAC for SCS been modified in the first quarter of 2018, the SCS-related DAC amortization excluded from Non-GAAP Operating Earnings would have been $52 million lower, decreasing Non-GAAP Operating Earnings. See Note 14, “Business Segment Information” in the Notes to the Consolidated Financial Statements for further details of this prospective change in our Non-GAAP Operating Earnings measure.
Income tax expense decreased by $10$5 million mainly driven by the impact of a lower effective tax rate duerate. Had the treatment in our Non-GAAP Operating Earnings measure of the Amortization of DAC for SCS been modified in the first quarter of 2018, income tax benefit excluded from Non-GAAP Operating Earnings would have been $11 million lower. See Note 14, “Business Segment Information” in the Notes to the Tax Reform Act, partially offset by higher pre-tax earnings.Consolidated Financial Statements for further details of this prospective change in our Non-GAAP Operating Earnings measure.
Partially offsetting this increase were the following notable items:
Amortization of DAC, net increased by $108 million, mainly due to our Protection Solutions and Individual Retirement segments. The Protection Solutions segment increase was due to a $50 million increase in amortization of DAC before capitalization as we have remained in a loss recognition position in the second quarter of 2018 (loss recognition position started in the fourth quarter of 2017), which results in higher amortization of DAC. The Individual Retirement segment increase was due to a $35 million increase in amortization of DAC before capitalization due to a non-recurring positive impact in amortization of DAC resulting from the 2017 reserve strengthening.
Interest expense increased by $19 million, primarily driven by the issuance of $3.8 billion of senior notes in the second quarter of 2018, partially offset by the settlement of affiliated debt of approximately $2.5 billion.
Interest credited to policyholders’ account balances increased by $27 million mainly driven by higher SCS AV in the Individual Retirement segment and higher interest credited for funding agreements.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Net Income Attributable to Holdings
Net income attributable to Holdings increased $8 million, to $326 millionfor the first six months of 2018 from $318 million for the first six months of 2017, primarily driven by the following notable items:
Policyholders’ benefits decreased $1.3 billion primarilyincreased by $302 million mainly due to a $1.2 billion decreaseour Individual Retirement and Protection Solutions segment. The increase in our Individual Retirement segment. Within policyholder benefits, a decrease in GMxB reservessegment, which was driven by a reserve strengthening in 2017, that was partially offset by an increase in Net derivative losses of $848 million reflecting the change in market value of derivatives gains (losses), was primarily due to the aforementioned reserve strengthening in 2017 andfavorable impact of higher interest rates in the first three months of 2018.
Other operating costs and expenses decreased by $239 million mainly due to a $369 million non-recurring goodwill impairment charge The assumption updates in the third quarter of 2018 reduced the impact of interest rates on GMxB policyholders’ benefits in the first six monthsquarter of 2017 resulting from2019. The increase in the Company’s adoption of new accounting guidance for goodwill on January 1, 2017, partially offsetProtection Solutions segment mainly reflected higher mortality experience.
Fee-type revenue decreased by higher IPO related separation costs.
Investment management and service fees increased by $178$153 million mainly driven by our Investment Management and Research segment, primarily due to higher base fees reflecting an increase in average AUM of 10% and an increase in performance fees.
Total investment gains (losses), net increased by $100 million, primarily due to the sale of fixed maturity securities, mainly U.S. Treasury securities.
Partially offsetting this increase were the following notable items:
Decrease in Net investment income of $396 million, mainly due to a change in market value of trading securities due to higher interest rates.
Amortization of DAC, net increased by $182 million mainly due to our Protection Solutions and Individual Retirement segments. The Protection Solutionsdecrease in our Investment Management and Research segment increase was primarily due to lower performance-based fees, lower Bernstein Research Services revenues and the non-recurrence of a $91$78 million increase in amortization of DAC before capitalization as we have remained in a loss recognition positionrevenues in the second quarterfirst three months of 2018 (lossfrom the impact of adopting revenue recognition position startedstandard ASC 606 in the fourth quarter of 2017), which results2018. The decrease in higher amortization of DAC. Thethe Individual Retirement segment increase was due to a $35 million increase in amortization of DAC before capitalization due to (i) higher amortization in 2018 from higher interest rates in the six months ended June 30, 2018 compared to the six months ended June 30, 2017 and (ii) a non-recurring positive impact in amortization of DAC resulting from the 2017 reserve strengthening.
Compensation and benefits increased by $93 million mainly due to our pension settlementlower average Separate Accounts AV in 2019 compared to 2018 as a result of the decline in equity markets in the firstfourth quarter of 2018.
Interest credited to policyholders’ account balances increased by $51 million, mainly driven by higher SCS AV.
Income tax expense increased by $192 million driven by an increase in pre-tax earnings and the tax benefit related to the conclusion of an IRS audit for tax years 2008 and 2009 in the first six months of 2017, partially offset by a lower effective tax rate due to the Tax Reform Act as well as the permanent differences of a one-time goodwill impairment in the first six months of 2017.
Non-GAAP Operating Earnings
Non-GAAP Operating Earnings increased by $267 million to $970 million during the first six months of 2018 from $703 million in the first six months of 2017, primarily driven by the following notable items:
Policyholders’ benefits decreased by $606 million primarily due to a $502 million decrease in our Individual Retirement segment and a $100 million decrease in Corporate and Other. The decrease in Individual Retirement reflected an improvement in GMxB margins mainly due to reserve strengthening in 2017 (the decrease in Policyholders’ benefits was partially offset by derivative losses).
Investment management and service fees increased by $256$32 million mainly driven by our Investment Management and ResearchIndividual Retirement segment, primarily due to higher base fees reflecting an increase in average AUM of 10%SCS AV due to higher sales, and an increaseby our Protection Solutions segment, mainly due to our Indexed Universal Life products (partially offset by higher Net derivative gains (losses)).
Interest expense in performance fees.
Policy charges, fee incomeCorporate and premiumsOther increased by $64$10 million due to higher average AV from net flows and higher equity markets and an increase in cost of insurance charges in our Protection Solutions segment.
Net investment income increased by $48 million mainly due to the General Account portfolio optimization and higher asset balances.
Income tax expense decreased by $30 million driven by a lower effective tax rate due to the Tax Reform Act, partially offset by tax expense on higher pre-tax earnings.
Partially offsetting this increase were the following notable items:
Interest expense increased by $33 million, primarily driven by the issuanceincurrence of $3.8 billion of senior notesindebtedness in the first six months ofApril 2018, partially offset by the settlement of affiliated debt of approximately $2.5 billion.
Amortization of DAC, net increased by $160 million, mainly due to our Protection Solutions and Individual Retirement segments. The Protection Solutions segment increase was due to a $94 million increase in amortization of DAC before capitalization as we have remained in a loss recognition position in the second quarter of 2018 (loss recognition position started in the fourth quarter of 2017), which results in higher amortization of DAC. The Individual Retirement segment increase in amortization of DAC was due to (i) higher amortization in 2018 from higher interest rates in the six months ended June 30, 2018 compared to the six months ended June 30, 2017 and (ii) a non-recurring positive impact in amortization of DAC resulting from the 2017 reserve strengthening.
Compensation, benefits, and other operating costs increased $59 million, mainly due to an increase of $69 million in the Investment Management and Research segment, including $43 million related to the impact of adopting the new revenue recognition standard (ASC 606) in 2018. Excluding Investment Management and Research, expenses were lower by $10 million reflecting company efficiency plans.
Interest credited to policyholders’ account balances increased by $51 million mainly from higher SCS AV in Individual Retirement and higher interest credited for funding agreements.
repurchase agreement costs.
Results of Operations by Segment
We manage our business through the following four segments: Individual Retirement, Group Retirement, Investment Management and Research, and Protection Solutions. We report certain activities and items that are not included in our four segments in Corporate and Other. The following section presents our discussion of Operating earnings (loss) by segment and AUM, AV and Protection Solutions Reserves by segment, as applicable. Consistent with U.S. GAAP guidance for segment reporting, operatingOperating earnings (loss) is our U.S. GAAP measure of segment performance. See Note 1614 of the Notes to the Consolidated Financial Statements for further information on our segments.
The following table summarizes Operating earnings (loss) by segment and Corporate and Other for the Company’s segments.periods presented:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Operating earnings (loss): | | | |
Individual Retirement (1) | $ | 370 |
| | $ | 368 |
|
Group Retirement | 81 |
| | 76 |
|
Investment Management and Research | 77 |
| | 81 |
|
Protection Solutions | 49 |
| | 35 |
|
Corporate and Other | (68 | ) | | (77 | ) |
Non-GAAP Operating Earnings (2) | $ | 509 |
| | $ | 483 |
|
______________ | |
(1) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Operating earnings for the three months ended March 31, 2018 for the Individual Retirement segment would have been $327 million. |
| |
(2) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Non-GAAP Operating Earnings for the three months ended March 31, 2018 would have been $442 million. |
Effective Tax Rates by Segment
For interim reporting periods, the Company calculateswe calculate income tax expense using an estimated annual effective tax rate (“ETR”), with discrete items recognized in the period in which they occur. Income tax expense is calculated using the ETR and then allocated to the Company'sour business segments using a 18%16% ETR for our retirement and protection businesses (Individual Retirement, Group Retirement, and Protection Solutions) and a 27%28% ETR for Investment Management and Research.
The following table summarizes Operating earnings (loss) by segment and Corporate and Other for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Operating earnings (loss): | | | | | | | |
Individual Retirement | $ | 399 |
| | $ | 308 |
| | $ | 759 |
| | $ | 510 |
|
Group Retirement | 78 |
| | 48 |
| | 154 |
| | 107 |
|
Investment Management and Research | 97 |
| | 61 |
| | 178 |
| | 93 |
|
Protection Solutions | 24 |
| | 16 |
| | 47 |
| | 55 |
|
Total segment operating earnings | 598 |
| | 433 |
|
| 1,138 |
|
| 765 |
|
Corporate and Other | (92 | ) | | (34 | ) | | (168 | ) | | (62 | ) |
Non-GAAP Operating Earnings | $ | 506 |
| | $ | 399 |
| | $ | 970 |
| | $ | 703 |
|
Individual Retirement
The Individual Retirement segment includes our variable annuity products which primarily meet the needs of individuals saving for retirement or seeking retirement income.
The following table summarizes Operating earnings of our Individual Retirement segment for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Operating earnings | $ | 399 |
| | $ | 308 |
| | $ | 759 |
| | $ | 510 |
|
| | | | | | | |
Key components of Operating earnings are: | | | | | | | |
| | | | | | | |
REVENUES | | | | | | | |
Policy charges, fee income and premiums | $ | 543 |
| | $ | 544 |
| | $ | 1,083 |
| | $ | 1,063 |
|
Net investment income | 258 |
| | 221 |
| | 486 |
| | 398 |
|
Investment gains (losses), net including derivative gains (losses) | 91 |
| | 93 |
| | (136 | ) | | 233 |
|
Investment management, service fees and other income | 190 |
| | 183 |
| | 378 |
| | 366 |
|
Segment revenues | 1,082 |
| | 1,041 |
| | 1,811 |
| | 2,060 |
|
BENEFITS AND OTHER DEDUCTIONS | | | | | | | |
Policyholders’ benefits | 314 |
| | 360 |
| | 319 |
| | 821 |
|
Interest credited to policyholders’ account balances | 54 |
| | 30 |
| | 113 |
| | 77 |
|
Commissions and distribution related payments(1) | 152 |
| | 156 |
| | 296 |
| | 314 |
|
Amortization of deferred policy acquisition costs, net(2) | (45 | ) | | (89 | ) | | (92 | ) | | (143 | ) |
Compensation and benefits and other operating costs and expenses(3)
| 124 |
| | 146 |
| | 245 |
| | 274 |
|
Interest expense | — |
| | 7 |
| | — |
| | 7 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Operating earnings (1) | $ | 370 |
| | $ | 368 |
|
_______________
| |
(1) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Operating earnings for the three months ended March 31, 2018 for the Individual Retirement segment would have been $327 million. |
Key components of Operating earnings are:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
REVENUES | | | |
Policy charges, fee income and premiums | $ | 498 |
| | $ | 529 |
|
Net investment income | 268 |
| | 228 |
|
Net derivative gains (losses) | 63 |
| | (216 | ) |
Investment management, service fees and other income | 178 |
| | 188 |
|
Segment revenues | $ | 1,007 |
| | $ | 729 |
|
| | | |
BENEFITS AND OTHER DEDUCTIONS | | | |
Policyholders’ benefits | $ | 244 |
| | $ | (9 | ) |
Interest credited to policyholders’ account balances | 62 |
| | 59 |
|
Commissions and distribution-related payments | 66 |
| | 72 |
|
Amortization of deferred policy acquisition costs (1) | 83 |
| | 44 |
|
Compensation, benefits and other operating costs and expenses | 111 |
| | 106 |
|
Interest expense | — |
| | — |
|
Segment benefits and other deductions (2) | $ | 566 |
| | $ | 272 |
|
_______________ | |
(1) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Amortization of deferred policy acquisition costs for the three months ended March 31, 2018 for the Individual Retirement segment would have been $96 million. |
| |
(2) | Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Segment benefits and other deductions for the three months ended March 31, 2018 for the Individual Retirement segment would have been $324 million. |
The following table summarizes AV for our Individual Retirement segment as of the dates indicated:
|
| | | | | | | |
| As of |
| March 31, 2019 | | December 31, 2018 |
| (in millions) |
AV | | | |
General Account | $ | 22,677 |
| | $ | 20,631 |
|
Separate Accounts | 79,821 |
| | 73,958 |
|
Total AV | $ | 102,498 |
| | $ | 94,589 |
|
The following table summarizes a roll-forward of AV for our Individual Retirement segment for the periods indicated:
|
| | | | | | | | | | | | | | | |
Segment benefits and other deductions | $ | 599 |
| | $ | 610 |
| | $ | 881 |
| | $ | 1,350 |
|
(1) Includes $81 million, $92 million, $153 million and $177 million of deferred policy acquisition costs.
(2) Net of capitalization of $101 million, $110 million, $188 million, and $213 million.
(3) Includes $20 million, $18 million, $35 million, and $36 million of deferred policy acquisition costs.
The following table summarizes a roll forward of AV for our Individual Retirement segment for the periods presented:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | (in millions) |
Balance as of beginning of period | $ | 101,790 |
| | $ | 96,679 |
| | $ | 103,423 |
| | $ | 93,604 |
| $ | 94,589 |
| | $ | 103,423 |
|
Gross premiums | 2,056 |
| | 2,092 |
| | 3,843 |
| | 4,102 |
| 2,038 |
| | 1,786 |
|
Surrenders, withdrawals and benefits | (2,205 | ) | | (1,914 | ) | | (4,454 | ) | | (3,711 | ) | (2,126 | ) | | (2,248 | ) |
Net flows | (149 | ) | | 178 |
| | (611 | ) | | 391 |
| (88 | ) | | (462 | ) |
Investment performance, interest credited and policy charges | 1,473 |
| | 1,713 |
| | 302 |
| | 4,575 |
| 7,997 |
| | (1,172 | ) |
Balance as of end of period | $ | 103,114 |
| | $ | 98,570 |
| | $ | 103,114 |
| | $ | 98,570 |
| $ | 102,498 |
| | $ | 101,789 |
|
General Account | 20,471 |
| | 17,429 |
| | 20,471 |
| | 17,429 |
| |
Separate Accounts | 82,643 |
| | 81,141 |
| | 82,643 |
| | 81,141 |
| |
Total AV | $ | 103,114 |
| | $ | 98,570 |
| | $ | 103,114 |
| | $ | 98,570 |
| |
Three Months Ended June 30, 2018March 31, 2019 Compared to the Three Months Ended June 30, 2017March 31, 2018 for the Individual Retirement Segment
Operating earnings
Operating earnings increased $91by $2 million to $399$370 million in the three months ended June 30, 2018March 31, 2019 from $308$368 million in the three months ended June 30, 2017March 31, 2018 primarily attributable to the following:following. Had we modified the treatment of the amortization of DAC for SCS starting in the first quarter of 2018, Operating earnings for the three months ended March 31, 2019 would have increased $43 million from $327 million in the three months ended March 31, 2018. See Note 14, “Business Segment Information” in the Notes to the Consolidated Financial Statements for further details of this prospective change in our Operating earnings measure.
Increase in Net investment income of $37$40 million resulting from the positive impact on SCS AV of higher asset balances mainly driven by SCS sales and yields and from our General Account investment portfolio optimization.
Net increase of $31 millionImprovement in operating earnings due to higher GMxB results consisting of a $50$9 million decrease in Policyholder benefits’ primarily due to a reserve strengtheningassumption updates in 2017, which was partially offset by a decreasethe third quarter of $19 million of2018. GMxB results include Policy charges and fee income, Net derivative losses.
Decrease in operating expenses of $22 million due to company efficiency plansgains (losses) and lower acquisition expenses from lower sales in 2018 compared to the three months ended June 30, 2017 where sales were higher in advance of the proposed implementation of the DOL Rule.Policyholders’ benefits.
Decrease in Income tax expense of $36$16 million driven by a lower effective tax rate duerate. Had the treatment in our Non-GAAP Operating Earnings measure of the Amortization of DAC for SCS been modified in the first quarter of 2018, income tax benefit excluded from Operating earnings would have been $11 million lower. See Note 14, “Business Segment Information” in the Notes to the Tax Reform Act partially offset by higher pre-tax operating earnings.Consolidated Financial Statements for further details of this prospective change in our Non-GAAP Operating Earnings measure.
The increase was partially offset by:
Increase in Amortization of DAC net of $44$39 million, primarily due to a non-recurring positivethe impact in amortizationof interest rate movements on our SCS block. During the first quarter of 2019, we prospectively modified our Operating earnings measure to exclude the impact of timing differences on the Amortization of DAC resulting from SCS market value adjustments. Had the 2017 reserve strengthening.treatment in our Operating earnings measure of the Amortization of DAC for SCS been modified in the first quarter of 2018, the SCS-related DAC amortization excluded from Operating earnings would have been $52 million lower. See Note 14, “Business Segment Information” in the Notes to the Consolidated Financial Statements for further details of this prospective change in our Operating earnings measure.
Increase of Interest credited to policyholders’ account balancesFee-type revenue decreased by $24$30 million primarilymainly due to higher SCSlower average Separate Accounts AV balances partially offsetting investment income gains.in 2019 compared to 2018 as a result of the sharp decline in equity markets in the fourth quarter of 2018.
Net Flows and AV
The increase in AV of $4.5$7.9 billion was mainly due to the positive impact of higher equity markets offsetting net outflows in our older fixed ratefixed-rate GMxB block.
Net outflows were $149of $88 million primarily improved by $374 million compared to 2018, driven by $1.0 billion outflows onhigher deposits in our older fixed GMxB block, which were partially offset by $867 million inflows on our newer less capital intensive products.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017 for the Individual Retirement Segment
Operating earnings
Operating earnings increased $249 million to $759 million in the first six months of 2018 from $510 million in the first six months of 2017 primarily attributable to the following:
Net increase in Operating earnings of $108 million due to higher GMxB results from reserve strengthening in 2017. Higher interest rates were the primary driver of a $512 million decrease in Policyholders’ benefits which was partially offset by Net derivative losses of $403 million.
Increase in Net investment income of $88 million, resulting from higher asset balances mainly driven by SCS sales and General Account portfolio optimization.
Increase in fee type revenue of $32 million due to higher average Separate Account AV, primarily due to positive market performance in 2017 and higher premium income from payout annuities.
Decrease in operating expenses of $29 million due to company efficiency planscurrent product offerings and lower acquisition expenses from lower sales in 2018 compared to the six months ended June 30, 2017 where sales were higher in advance of the implementation of the proposed DOL Rule.
Decrease in Income tax expense of $27 million due to a lower effective tax rate due to the Tax Reform Act.
The increase was partially offset by:
Increase in Amortization of DAC, net of $51 million to (i) higher amortization in 2018 from higher interest rates in the six months ended June 30, 2018 compared to the six months ended June 30, 2017 and (ii) a non-recurring positive impact in amortization of DAC resulting from the 2017 reserve strengthening.
Increase in Interest credited to policyholders’ account balances of $36 million primarily due to higher SCS AV balances.
Net Flows and AV
The increase in AV of $4.5 billion was due to higher equity markets offset by net outflowssurrenders in our older fixed ratefixed-rate GMxB block.
Net outflows were $611 million, primarily driven by $2.1 billion of outflows on our older fixed GMxB block, which were partially offset by $1.4 billion of inflows on our newer less capital intensive products.
Group Retirement
The Group Retirement segment offers 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.
The following table summarizes Operating earnings of our Group Retirement segment for the periods presented: |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Operating earnings | $ | 81 |
| | $ | 76 |
|
Key components of Operating earnings are:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Operating earnings | $ | 78 |
| | $ | 48 |
| | $ | 154 |
| | $ | 107 |
|
| | | | | | | |
Key components of Operating earnings are: | | | | | | | |
| | | | | | | |
REVENUES | | | | | | | |
Policy charges, fee income and premiums | $ | 69 |
| | $ | 61 |
| | $ | 133 |
| | $ | 120 |
|
Net investment income | 124 |
| | 111 |
| | 255 |
| | 241 |
|
Investment gains (losses), net including derivative gains (losses) | 2 |
| | (3 | ) | | 1 |
| | (8 | ) |
Investment management, service fees and other income | 50 |
| | 41 |
| | 94 |
| | 84 |
|
Segment Revenues | 245 |
| | 210 |
| | 483 |
| | 437 |
|
BENEFITS AND OTHER DEDUCTIONS | | | | | | | |
Policyholders’ benefits | — |
| | — |
| | — |
| | — |
|
Interest credited to policyholders’ account balances | 73 |
| | 69 |
| | 143 |
| | 140 |
|
Commissions and distribution related payments(1) | 26 |
| | 24 |
| | 50 |
| | 47 |
|
Amortization of deferred policy acquisition costs, net(2) | (15 | ) | | (19 | ) | | (26 | ) | | (30 | ) |
Compensation and benefits and other operating costs and expenses(3)
| 66 |
| | 69 |
| | 128 |
| | 131 |
|
Interest expense | — |
| | — |
| | — |
| | — |
|
Segment benefits and other deductions | $ | 150 |
| | $ | 143 |
| | $ | 295 |
| | $ | 288 |
|
(1) Includes $15 million, $11 million, $29 million and $24 million of deferred policy acquisition costs.
(2) Net of capitalization of $22 million, $3 million, $44 million and $41 million.
(3) Includes $7 million, $8 million, $15 million and $17 million of deferred policy acquisition costs. |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
REVENUES | | | |
Policy charges, fee income and premiums | $ | 65 |
| | $ | 64 |
|
Net investment income | 134 |
| | 131 |
|
Net derivative gains (losses) | 4 |
| | (1 | ) |
Investment management, service fees and other income | 48 |
| | 44 |
|
Segment revenues | $ | 251 |
| | $ | 238 |
|
| | | |
BENEFITS AND OTHER DEDUCTIONS | | | |
Policyholders’ benefits | $ | — |
| | $ | — |
|
Interest credited to policyholders’ account balances | 73 |
| | 70 |
|
Commissions and distribution-related payments | 10 |
| | 10 |
|
Amortization of deferred policy acquisition costs | 12 |
| | 11 |
|
Compensation, benefits and other operating costs and expenses | 60 |
| | 54 |
|
Interest expense | — |
| | — |
|
Segment benefits and other deductions | $ | 155 |
| | $ | 145 |
|
The following table summarizes AV for our Group Retirement segment as of the dates indicated:
116
|
| | | | | | | |
| As of |
| March 31, 2019 | | December 31, 2018 |
| (in millions) |
AV | | | |
General Account | $ | 11,752 |
| | $ | 11,619 |
|
Separate Accounts | 23,325 |
| | 20,782 |
|
Total AV | $ | 35,077 |
| | $ | 32,401 |
|
The following table summarizes a roll-forward of AV for our Group Retirement segment for the periods presented:indicated:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Balance as of beginning of period | $ | 33,918 |
| | $ | 31,168 |
| | $ | 33,906 |
| | $ | 30,138 |
|
Gross premiums | 885 |
| | 848 |
| | 1,722 |
| | 1,672 |
|
Surrenders, withdrawals and benefits | (735 | ) | | (652 | ) | | (1,471 | ) | | (1,421 | ) |
Net flows | 150 |
| | 196 |
| | 251 |
| | 251 |
|
Investment performance, interest credited and policy charges | 581 |
| | 619 |
| | 492 |
| | 1,594 |
|
Balance as of end of period | $ | 34,649 |
| | $ | 31,983 |
| | $ | 34,649 |
| | $ | 31,983 |
|
General Account | 11,502 |
| | 11,210 |
| | 11,502 |
| | 11,210 |
|
Separate Accounts | 23,147 |
| | 20,773 |
| | 23,147 |
| | 20,773 |
|
Total AV | $ | 34,649 |
| | $ | 31,983 |
| | $ | 34,649 |
| | $ | 31,983 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Balance as of beginning of period | $ | 32,401 |
| | $ | 33,906 |
|
Gross premiums | 840 |
| | 837 |
|
Surrenders, withdrawals and benefits | (733 | ) | | (736 | ) |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Net flows | 107 |
| | 101 |
|
Investment performance, interest credited and policy charges | 2,569 |
| | (89 | ) |
Balance as of end of period | $ | 35,077 |
| | $ | 33,918 |
|
Three Months Ended June 30, 2018March 31, 2019 Compared to the Three Months Ended June 30, 2017March 31, 2018 for the Group Retirement Segment
Operating earnings
Operating earnings increased $30by $5 million to $78 million for the three months ended June 30, 2018 from $48$81 million in the three months ended June 30, 2017.
The increase isMarch 31, 2019 from $76 million in the three months ended March 31, 2018 primarily attributable to the following:
Increase in fee typefee-type revenue of $17$5 million due to positive net flows anda 1% increase in the average Separate Accounts AV reflecting higher equity market performance.markets.
Increase in Netnet investment income of $13$3 million due to our General Account investment portfolio optimizationoptimization.
The increase was partially offset by the following:
Increase in Compensation and higher asset balances.benefits and other operating costs and expenses of $6 million to support new business.
Increase in Interest credited to policyholders’ account balances of $3 million due to AV growth.
Net Flows and AV
The increase in the AV of $2.7 billion was primarily due to higher equity markets and positive net flows.
Net flows were $150inflows of $107 million improved by $6 million compared to 2018, driven by strong client renewalinflows and client retention.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017 for the Group Retirement Segment
Operating earnings
Operating earnings increased $47 million to $154 million for the first six months of 2018 from $107 million in the first six months of 2017.
The increase is primarily attributable to the following:improved surrenders.
Increase in fee type revenue of $23 million due to positive net flows and equity market performance.
Increase in Net investment income of $14 million due to General Account portfolio optimization and higher asset balances.
Decrease in Income tax expense of $7 million due to a lower effective tax rate as a result of the Tax Reform Act.
Net Flows and AV
The increase in AV of $2.7 billion was primarily due to higher equity markets and positive net flows.
Net flows were $251 million, driven by strong client renewal and client retention.
Investment Management and Research
The Investment Management and Research segment provides diversified investment management, research and related services to a broad range of clients around the world. Operating earnings (loss), net of tax, presented here represents our economic interest in AB of approximately 65% after66% during the purchasefirst three months of units in2019 compared to approximately 47% during the second quarterfirst three months of 2018 (See Note 1 of Notes to Consolidated Financial Statements for further information). At June 30, 2017, the Company’s economic interest in AB was approximately 46%.2018.
The following table summarizes Operating earnings of our Investment Management and Research segment for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Operating earnings | $ | 97 |
| | $ | 61 |
| | $ | 178 |
| | $ | 93 |
|
| | | | | | | |
Key components of Operating earnings are: | | | | | | | |
| | | | | | | |
REVENUES | | | | | | | |
Policy charges, fee income and premiums | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Net investment income | 4 |
| | 4 |
| | 7 |
| | 23 |
|
Investment gains (losses), net including derivative gains (losses) | — |
| | (5 | ) | | 2 |
| | (15 | ) |
Investment management, service fees and other income | 838 |
| | 773 |
| | 1,742 |
| | 1,507 |
|
Segment Revenues | 842 |
| | 772 |
| | 1,751 |
| | 1,515 |
|
BENEFITS AND OTHER DEDUCTIONS | | | | | | | |
Policyholders’ benefits | — |
| | — |
| | — |
| | — |
|
Interest credited to policyholders’ account balances | — |
| | — |
| | — |
| | — |
|
Commissions and distribution related payments | 106 |
| | 103 |
| | 216 |
| | 199 |
|
Amortization of deferred policy acquisition costs, net | — |
| | — |
| | — |
| | — |
|
Compensation and benefits and other operating costs and expenses(3)
| 513 |
| | 510 |
| | 1,075 |
| | 1,006 |
|
Interest expense | 2 |
| | 2 |
| | 4 |
| | 3 |
|
Segment benefits and other deductions | $ | 621 |
| | $ | 615 |
| | $ | 1,295 |
| | $ | 1,208 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Operating earnings | $ | 77 |
| | $ | 81 |
|
Key components of Operating earnings are: |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
REVENUES | | | |
Policy charges, fee income and premiums | $ | — |
| | $ | — |
|
Net investment income | 24 |
| | 3 |
|
Net derivative gains (losses) | (20 | ) | | 2 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Investment management, service fees and other income | 776 |
| | 904 |
|
Segment revenues | $ | 780 |
| | $ | 909 |
|
| | | |
BENEFITS AND OTHER DEDUCTIONS | | | |
Policyholders’ benefits | $ | — |
| | $ | — |
|
Interest credited to policyholders’ account balances | — |
| | — |
|
Commissions and distribution-related payments | 106 |
| | 110 |
|
Amortization of deferred policy acquisition costs | — |
| | — |
|
Compensation, benefits and other operating costs and expenses | 509 |
| | 562 |
|
Interest expense | 4 |
| | 2 |
|
Segment benefits and other deductions | $ | 619 |
| | $ | 674 |
|
Changes in AUM in the Investment Management and Research segment for the periods presented were as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 |
| (in billions) | (in billions) |
Balance as of beginning of period | $ | 549.5 |
| | $ | 497.9 |
| | $ | 554.5 |
| | $ | 480.2 |
| $ | 516.4 |
| | $ | 554.5 |
|
Long-term flows: | | | | | | | | | | |
Sales/new accounts | 19.0 |
| | 20.4 |
| | 53.2 |
| | 39.4 |
| 23.1 |
| | 34.1 |
|
Redemptions/terminations | (23.3 | ) | | (14.4 | ) | | (54.5 | ) | | (32.8 | ) | (18.2 | ) | | (31.2 | ) |
Cash flow/unreinvested dividends | (3.4 | ) | | (1.3 | ) | | (8.8 | ) | | (2.1 | ) | (3.8 | ) | | (5.3 | ) |
Net long-term (outflows) inflows | (7.7 | ) | | 4.7 |
| | (10.1 | ) | | 4.5 |
| 1.1 |
| | (2.4 | ) |
Market appreciation (depreciation) | (2.0 | ) | | 14.0 |
| | (4.6 | ) | | 31.9 |
| 37.2 |
| | (2.6 | ) |
Net change | (9.7 | ) | | 18.7 |
| | (14.7 | ) | | 36.4 |
| 38.3 |
| | (5.0 | ) |
Balance as of end of period | $ | 539.8 |
| | $ | 516.6 |
| | $ | 539.8 |
| | $ | 516.6 |
| $ | 554.7 |
| | $ | 549.5 |
|
Average AUM in the Investment Management and Research segment for the periods presented by distribution channel and investment services were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in billions) |
Distribution Channel: | | | | | | | |
Institutions | $ | 256.7 |
| | $ | 248.9 |
| | $ | 262.7 |
| | $ | 246.5 |
|
Retail | 191.0 |
| | 173.4 |
| | 192.7 |
| | 169.2 |
|
Private Wealth Management | 94.5 |
| | 85.4 |
| | 94.2 |
| | 83.9 |
|
Total | $ | 542.2 |
| | $ | 507.7 |
| | $ | 549.6 |
| | $ | 499.6 |
|
Investment Service: | | | | | | | |
Equity Actively Managed | $ | 145.4 |
| | $ | 121.8 |
| | $ | 144.4 |
| | $ | 118.8 |
|
Equity Passively Managed(1) | 52.7 |
| | 49.7 |
| | 53.7 |
| | 49.2 |
|
Fixed Income Actively Managed – Taxable | 230.6 |
| | 232.9 |
| | 236.9 |
| | 229.6 |
|
Fixed Income Actively Managed – Tax-exempt | 41.1 |
| | 38.5 |
| | 40.8 |
| | 37.9 |
|
Fixed Income Passively Managed(1) | 10.0 |
| | 10.2 |
| | 10.0 |
| | 10.6 |
|
Other(2) | 62.4 |
| | 54.6 |
| | 63.8 |
| | 53.5 |
|
Total | $ | 542.2 |
| | $ | 507.7 |
| | $ | 549.6 |
| | $ | 499.6 |
|
(1) Includes index and enhanced index services.
(2) Includes multi-asset solutions and services, and certain alternative investments.
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in billions) |
Distribution Channel: | | | |
Institutions | $ | 252.2 |
| | $ | 269.3 |
|
Retail | 193.4 |
| | 194.0 |
|
Private Wealth Management | 93.6 |
| | 93.8 |
|
Total | $ | 539.2 |
| | $ | 557.1 |
|
| | | |
Investment Service: | | | |
Equity Actively Managed | $ | 148.5 |
| | $ | 142.9 |
|
Equity Passively Managed (1) | 53.9 |
| | 54.3 |
|
Fixed Income Actively Managed – Taxable | 223.4 |
| | 243.3 |
|
Fixed Income Actively Managed – Tax-exempt | 42.6 |
| | 40.6 |
|
Fixed Income Passively Managed (1) | 9.4 |
| | 10.0 |
|
Other (2) | 61.4 |
| | 66.0 |
|
Total | $ | 539.2 |
| | $ | 557.1 |
|
______________
| |
(1) | Includes index and enhanced index services. |
| |
(2) | Includes multi-asset solutions and services, and certain alternative investments. |
Three Months Ended June 30, 2018March 31, 2019 Compared to the Three Months Ended June 30, 2017March 31, 2018 for the Investment Management and Research Segment
Operating earnings
Operating earnings increased $36decreased by $4 million in the three months ended June 30, 2018March 31, 2019 to $97$77 million from $61$81 million in the three months ended June 30, 2017March 31, 2018 primarily attributable to the following:
IncreaseDecrease in ownershipFee-type revenue of AB from a blended rate of approximately 62% for the three months ended June 30, 2018 compared to approximately 52% during the three months ended June 30, 2017.
Increase in Investment management, service fees, and other income of $65$128 million primarily due to higher baselower performance-based fees, lower Bernstein Research Services revenues and the non-recurrence of $45a $78 million resulting from a 6.8% increase in average AUM and anrevenues in the first three months of 2018 from the impact of adopting revenue recognition standard ASC 606 in 2018.
Net derivative gains (losses) decreased $22 million primarily due to derivative losses mainly offsetting the increase in performance fees of $21 million.Net investment income.
This increasedecrease was partially offset by the following:
Higher Segment benefits and other deductions of $6Earnings attributable to the noncontrolling interest decreased by $72 million due to higher compensationlower AB Operating earnings and from the increase in our ownership percentage of AB that reduced the noncontrolling interest’s share of AB’s Operating earnings.
Decrease in Compensation, benefits, offset by lower generalinterest expense and administrative expenses.
Income tax expense increased $20other operating costs of $51 million driven by higher pre-tax earnings offset by a lower effective tax rateprimarily due to the Tax Reform Act.non-recurrence of a $43 million expense related to the impact of adopting revenue recognition standard ASC 606 in 2018 and lower incentive compensation expenses.
Increase in Net investment income of $21 million mainly offsetting the decrease in Net derivative gains (losses).
Long-Term Net Flows and AUM
Total AUM as of June 30, 2018March 31, 2019 was $539.8$554.7 billion, down $9.7up $38.3 billion, or 1.8%7.4%, compared to MarchDecember 31, 2018,2018. The increase was driven by market appreciation of $37.2 billion and up $23.2net inflows of $1.1 billion or 4.5%, compared to June 30, 2017. During the second quarter(net inflows of 2018, AUM decreased as a result$5.3 billion and $0.5 billion for Retail and Private Wealth Management, respectively, offset by Institutional net outflows of $7.7 billion (Institutional net outflows of $8.0 billion and $0.6 billion for Retail, offset by net inflows of $0.9 billion for Private Wealth Management) and market depreciation of $2.0 billion.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017 for the Investment Management and Research Segment
Operating earnings
Operating earnings increased $85 million in the first six months of 2018 to $178 million from $93 million in the first six months of 2017 primarily attributable to the following:
Increase in ownership of AB from a blended rate of approximately 54% for the first six months of 2018 compared to approximately 49% during the first six months of 2017.
Increase in Investment management, service fees, and other income of $235 million primarily due to higher base fees of $120 million resulting from a 10.0% increase in average AUM and additionally an increase in performance fees of $21 million. Operating earnings includes an increase in revenues of $78 million from the impact of adopting the new revenue recognition standard (ASC 606) in 2018.
This increase was partially offset by the following:
Higher Compensation, benefits, interest expense and other operating costs of $69 million, including $43 million related to the impact of adoption of revenue recognition standard (ASC 606) in 2018.
Higher commissions and distribution related payments of $17 million.
Income tax expense increased $12 million driven by higher pre-tax earnings offset by a lower effective tax rate due to the Tax Reform Act.
Long-Term Net Flows and AUM
Total AUM as of June 30, 2018 was $539.8 billion, up $23.2 billion, or 4.5%, compared to the first six months of 2017. During the twelve months ended June 30, 2018, AUM increased as a result of market appreciation of $24.6 billion, offset by net outflows of $1.4 billion (Institutional net outflows of $6.4 billion, offset by net inflows of $2.9 billion for Private Wealth Management and $2.1 billion for Retail)$4.7 billion).
Protection Solutions
The Protection Solutions segment includes our life insurance and employee benefits businesses. We provide a targeted range of products aimed at serving the financial needs of our clients throughout their lives, including Variable Universal Life (“VUL”),VUL, IUL and term life products. In 2015, we entered the employee benefits market and currently offer a suite of dental, vision, life, as well as short- and long-term disability insurance products to small and medium-size businesses.
In recent years, we have refocused our product offering and distribution towards less capital intensive, higher return accumulation and protection products. We plan to improve our operatingOperating earnings over time through earnings generated from sales of our repositioned product portfolio and by proactively managing and optimizing our in-force book.
The following table summarizes Operating earnings (loss) of our Protection Solutions segment for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Operating earnings | $ | 24 |
| | $ | 16 |
| | $ | 47 |
| | $ | 55 |
|
| | | | | | | |
Key components of Operating earnings are: | | | | | | | |
| | | | | | | |
REVENUES | | | | | | | |
Policy charges, fee income and premiums | $ | 547 |
| | $ | 512 |
| | $ | 1,082 |
| | $ | 1,041 |
|
Net investment income | 194 |
| | 173 |
| | 414 |
| | 381 |
|
Investment gains (losses), net including derivative gains (losses) | 3 |
| | 1 |
| | 2 |
| | 1 |
|
Investment management, service fees and other income | 56 |
| | 57 |
| | 111 |
| | 109 |
|
Segment Revenues | 800 |
| | 743 |
| | 1,609 |
| | 1,532 |
|
BENEFITS AND OTHER DEDUCTIONS | | | | | | | |
Policyholders’ benefits | 420 |
| | 421 |
| | 829 |
| | 833 |
|
Interest credited to policyholders’ account balances | 120 |
| | 120 |
| | 242 |
| | 236 |
|
Commissions and distribution related payments(1) | 75 |
| | 68 |
| | 141 |
| | 136 |
|
Amortization of deferred policy acquisition costs, net(2) | 47 |
| | (3 | ) | | 118 |
| | 26 |
|
Compensation and benefits and other operating costs and expenses(3)
| 107 |
| | 118 |
| | 221 |
| | 227 |
|
Interest expense | — |
| | — |
| | — |
| | — |
|
Segment benefits and other deductions | $ | 769 |
| | $ | 724 |
| | $ | 1,551 |
| | $ | 1,458 |
|
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Operating earnings | $ | 49 |
| | $ | 35 |
|
(1) Includes $36 million, $34 million, $70 million and $70 million
Key components of deferred policy acquisition costs.
(2) Net of capitalization of $49 million, $49 million, $101 million and $99 million.Operating earnings are:
(3) Includes $13 million, $15 million, $31 million and $30 million of deferred policy acquisition costs. |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
REVENUES | | | |
Policy charges, fee income and premiums | $ | 542 |
| | $ | 540 |
|
Net investment income | 224 |
| | 220 |
|
Net derivative gains (losses) | 10 |
| | (1 | ) |
Investment management, service fees and other income | 55 |
| | 55 |
|
Segment revenues | $ | 831 |
| | $ | 814 |
|
| | | |
BENEFITS AND OTHER DEDUCTIONS | | | |
Policyholders’ benefits | $ | 452 |
| | $ | 409 |
|
Interest credited to policyholders’ account balances | 138 |
| | 122 |
|
Commissions and distribution-related payments | 38 |
| | 32 |
|
Amortization of deferred policy acquisition costs | 50 |
| | 113 |
|
Compensation, benefits and other operating costs and expenses | 95 |
| | 96 |
|
Interest expense | — |
| | — |
|
Segment benefits and other deductions | $ | 773 |
| | $ | 772 |
|
The following table summarizes Protection Solutions Reserves for our Protection Solutions segment as of the dates presented:
|
| | | | | | | |
| As of |
| March 31, 2019 | | December 31, 2018 |
| (in millions) |
Protection Solutions Reserves (1) | | | |
General Account | $ | 17,731 |
| | $ | 17,562 |
|
Separate Accounts | 12,572 |
| | 11,393 |
|
Total Protection Solutions Reserves | $ | 30,303 |
| | $ | 28,955 |
|
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| (in millions) |
Protection Solutions Reserves(1) | | | |
General Account | $ | 16,202 |
| | $ | 16,007 |
|
Separate Accounts | 12,597 |
| | 12,643 |
|
Total Protection Solutions Reserves | $ | 28,799 |
| | $ | 28,650 |
|
______________ | |
(1) | Does not include Protection Solutions Reserves for our employee benefitsEmployee Benefits business as it is a start-up business and therefore has immaterial in-force policies. |
The following table presents our in-force face amounts for the periods indicated, respectively, for our individual life insurance products:
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| (in billions) |
In-force Face Amounts for Protection Solutions(1) | | | |
Universal life(2) | $ | 57.5 |
| | $ | 59.0 |
|
Indexed universal life | 21.7 |
| | 20.5 |
|
Variable universal life(3) | 128.1 |
| | 128.9 |
|
Term | 234.4 |
| | 235.9 |
|
Whole life | 1.5 |
| | 1.6 |
|
Total in-force face amount | $ | 443.2 |
| | $ | 445.9 |
|
|
| | | | | | | |
| As of |
| March 31, 2019 | | December 31, 2018 |
| (in billions) |
In-force face amount by product: (1) | | | |
Universal Life (2) | $ | 55.1 |
| | $ | 55.9 |
|
Indexed Universal Life | 23.6 |
| | 22.9 |
|
Variable Universal Life (3) | 127.4 |
| | 127.3 |
|
Term | 235.1 |
| | 234.9 |
|
Whole Life | 1.5 |
| | 1.4 |
|
Total in-force face amount | $ | 442.7 |
| | $ | 442.4 |
|
______________
| |
(1) | Includes individual life insurance and does not include employee benefitsEmployee Benefits as it is a start-up business and therefore has immaterial in-force policies. |
| |
(2) | Universal Life includes Guaranteed Universal Life. |
| |
(3) | Variable Universal Life includes VL and COLI. |
Three Months Ended June 30, 2018March 31, 2019 Compared to the Three Months Ended June 30, 2017March 31, 2018 for the Protection Solutions Segment
Operating earnings
Operating earnings increased $8by $14 million to $24$49 million in the three months ended June 30, 2018 from $16March 31, 2019 compared to $35 million in the three months ended June 30, 2017March 31, 2018 primarily attributable to the following:
IncreaseDecrease in Amortization of $35DAC of $63 million as the Protection Solutions segment is no longer in Policy charges, fee income and premiums, mainly dueloss recognition.
Net derivative gains (losses) increased $11 million primarily attributable to anour Indexed Universal Life hedging program, partially offset by the increase in cost of insurance charges and employee benefits sales.Interest credited to policyholders’ account balances.
Increase in Net investment income of $21$4 million primarily due to the positive impact of our General Account investment portfolio optimization, and higher asset balances.partially offset by lower income from alternative investments.
This increase was partially offset by the following:
Amortization of DAC, net increased by $50$43 million due to a $50 million increase in DAC amortization before capitalization, as we have remained in a loss recognition position in the three months ended June 30, 2018 (loss recognition position started in the fourth quarter of 2017) which results in higher amortization.
Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017 for the Protection Solutions Segment
Operating earnings
Operating earnings decreased $8 million to $47 million in the first six months of 2018 from $55 million in the first six months of 2017 primarily attributable to the following:
Amortization of DAC, net increased by $92 million due to a $94 million increase in DAC amortization before capitalization, as we have remained in a loss recognition position in the first six months of 2018 (loss recognition position started in the fourth quarter of 2017) which results in higher amortization.
An increase of $6 million in Interest credited to policyholders' account balances mainly due to higher AV inmortality experience.
Interest credited to policyholders’ account balances increased $16 million primarily due to our Indexed Universal Life products.
This decrease was partiallyproducts (partially offset by the following:
Increase of $41 million in Policy charges, fee income and premiums, mainly due to an increase in cost of insurance charges and employee benefit sales.higher Net derivative gains (losses)).
Increase in Net investment income of $33 million due to the General Account portfolio optimizationCommissions and higher asset balances.
Decrease in operating expensesdistribution-related payments of $6 million due to company efficiency plans.
Decreasehigher sales in income tax expense of $8 million due to a lower effective tax rate as a result of the Tax Reform Actour Individual Life and lower pre-tax operating earnings.Employee Benefits businesses.
Corporate and Other
Corporate and Other includes certain of our financing and investment expenses. It also includes: AXA Advisors broker-dealer business, the Closed Block, run-off variable annuity reinsurance business, run-off group pension business, run-off health business, benefit plans for our employees, certain strategic investments and certain unallocated items, including capital and related investments, interest expense and corporate expense. AB’s results of operations are reflected in the Investment Management and Research segment. Accordingly, Corporate and Other does not include any items applicable to AB.
The following table summarizes Operating earnings (loss) of Corporate and Other for the periods presented:
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Operating earnings (loss) | (92 | ) | | (34 | ) | | (168 | ) | | (62 | ) |
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
| (in millions) |
Operating earnings (loss) | $ | (68 | ) | | $ | (77 | ) |
General Account Investment Assets Portfolio
The GAIAGeneral Account investment portfolio and investment results supportsupports the insurance and annuity liabilities of our Individual Retirement, Group Retirement and Protection Solutions businesses. Our GAIAGeneral Account investment portfolio investment strategy seeks to achieve sustainable risk-
adjustedrisk-adjusted returns by focusing on principal preservation, investment return, duration and liquidity requirements by product class and the diversification of risks. Investment activities are undertaken according to investment policy statements that contain internally established guidelines and are required to comply with applicable laws and insurance regulations. Risk tolerances are established for credit risk, market risk, liquidity risk and concentration risk across types of issuers and asset classes and that seek to mitigate the impact of cash flow variability arising from these risks.
The GAIAGeneral Account investment portfolio consists largely of investment grade fixed maturities, and short-term investments, commercial and agricultural mortgage loans, below investment grade fixed maturities, alternative investments and other financial instruments. Fixed maturities include publicly issued corporate bonds, government bonds, privately placed notes and bonds, bonds issued by states and municipalities, mortgage-backed securities and asset-backed securities.
As part of our asset and liability management strategies, we maintain a weighted average duration for our GAIAThe General Account investment portfolio that is within an acceptable range of the estimated duration of our liabilities given our risk appetite and hedging programs. The GAIA portfolioalso includes credit derivatives to replicate exposure to individual securities or pools of securities as a means of achieving credit exposure similar to bonds of the underlying issuer(s) more efficiently. In
addition, from time to time we use derivatives for hedging purposes to reduce our exposure to equity markets, interest rates and credit spreads.
As part of our asset and liability management strategies, we maintain a weighted average duration for our General Account investment portfolio that is within an acceptable range of the estimated duration of our liabilities given our risk appetite and hedging programs. Our asset and liability management strategies are applied to portfolio duration groups within the General Account investment portfolio. For example, we maintain a “short duration” group comprised primarily of investment grade fixed maturity securities that are aligned with the duration of product liabilities with an average duration of less than six years (e.g., our SCS product). As of March 31, 2019 and December 31, 2018, 67% and 69% of the fixed maturities in the short duration group were rated NAIC 1, and 33% and 31% were rated NAIC 2, respectively. During the first quarter of 2019, new purchases from both new money flows and portfolio rebalancing activity were designated as available-for-sale (“AFS”) included in fixed maturities. The remaining trading securities in the Short Duration VA portfolio will be opportunistically rebalanced to AFS and shown with fixed maturities, which is consistent with other portfolios in our General Account. We expect this rebalancing to largely occur over the next several quarters. New AFS assets included in fixed maturities was $3.7 billion as of March 31, 2019.
Investment portfolios are primarily managed by legal entity with dedicated portfolios for certain blocks of business. For portfolios that back multiple product groups, investment results are allocated to business segments.
The following tables reconcileInvestment Results of the consolidated balance sheet asset and liability amounts to GAIA.
General Account Investment AssetsPortfolio
|
| | | | | | | | | | | |
| GAIA | | Other(1) | | Balance Sheet Total |
| (in millions) |
Balance Sheet Captions: | | | | | |
Fixed maturities, available for sale, at fair value | $ | 44,154 |
| | $ | (249 | ) | | $ | 43,905 |
|
Mortgage loans on real estate | 11,808 |
| | — |
| | 11,808 |
|
Policy Loans | 3,739 |
| | — |
| | 3,739 |
|
Real Estate held for production of income | 53 |
| | — |
| | 53 |
|
Other equity investments | 1,141 |
| | 244 |
| | 1,385 |
|
Other invested assets | 170 |
| | 1,622 |
| | 1,792 |
|
Sub-total investments | 61,065 |
| | 1,617 |
| | 62,682 |
|
Trading Securities | 13,352 |
| (2) | 794 |
| | 14,146 |
|
Total investments | 74,417 |
| | 2,411 |
| | 76,828 |
|
Cash and cash equivalents | 5,763 |
| | 1,070 |
| | 6,833 |
|
Repurchase and funding agreements(3) | (4,343 | ) | | — |
| | (4,343 | ) |
Total | $ | 75,837 |
| | $ | 3,481 |
| | $ | 79,318 |
|
| |
(1) | Assets listed in the “Other” category principally consist of our 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 and which are not managed as part of GAIA, including: (i) related accrued income or expense, (ii) certain reclassifications and intercompany adjustments, (iii) certain trading securities that are associated with hedging programs for variable annuity products with guarantee features, (iv) assets and income of AB and (v) for fixed maturities, the reversal of net unrealized gains (losses). The “Other” category is deducted in arriving at GAIA. |
| |
(2) | Primarily related to SCS and consists of corporate bonds (82%), U.S. Treasury securities (6%), other government securities (11%) and other trading securities (1%). |
| |
(3) | Includes Securities purchased under agreements to resell, Securities sold under agreements to repurchase and Federal Home Loan Bank funding agreements which are reported in policyholders’ account balances. |
General Account Investment Assets
December 31, 2017
|
| | | | | | | | | | | |
Balance Sheet Captions: | GAIA | | Other(1) | | Balance Sheet Total |
| (in millions) |
Fixed maturities, available for sale, at fair value | $ | 45,751 |
| | $ | 1,190 |
| | $ | 46,941 |
|
Mortgage loans on real estate | 10,952 |
| | — |
| | 10,952 |
|
Policy loans | 3,819 |
| | — |
| | 3,819 |
|
Real estate held for the production of Income | 390 |
| | — |
| | 390 |
|
Other equity investments | 1,264 |
| | 128 |
| | 1,392 |
|
Other invested assets | 25 |
| | 4,093 |
| | 4,118 |
|
Subtotal investment assets | $ | 62,201 |
| | $ | 5,411 |
| | $ | 67,612 |
|
Trading securities | 12,050 |
| (2) | 2,120 |
| | 14,170 |
|
Total investments | $ | 74,251 |
| | $ | 7,531 |
| | $ | 81,782 |
|
Cash and cash equivalent | 4,539 |
| | 275 |
| | 4,814 |
|
Repurchase and funding agreements(3) | (4,382 | ) | | — |
| | (4,382 | ) |
Total | $ | 74,408 |
| | $ | 7,806 |
| | $ | 82,214 |
|
| |
(1) | Assets listed in the “Other” category principally consist of our 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 and which are not managed as part of GAIA, including: (i) related accrued income or expense, (ii) certain reclassifications and intercompany adjustments, (iii) certain trading securities that are associated with hedging programs for variable annuity products with guarantee features, (iv) assets and income of AB and (v) for fixed maturities, the reversal of net unrealized gains (losses). The “Other” category is deducted in arriving at GAIA. |
| |
(2) | Primarily related to SCS and consists of corporate bonds (83%), U.S. Treasury securities (8%), other government securities (8%) and other trading securities (1%).
|
| |
(3) | Includes Securities purchased under agreements to resell, Securities sold under agreements to repurchase and Federal Home Loan Bank funding agreements which are reported in policyholders’ account balances. |
Investment Results of General Account Investment Assets
The following table summarizes the General Account investment portfolio results with Non-GAAP Operating Earnings adjustments by asset category for the periods indicated. |
| | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2018 | | 2017 |
| Yield | | Amount | | Yield | | Amount |
| (Dollars in millions) |
Fixed Maturities: | | | | | | | |
Investment grade | | | | | | | |
Income (loss) | 3.83 | % | | $ | 414 |
| | 4.22 | % | | $ | 429 |
|
Ending assets | | | 42,866 |
| | | | 41,322 |
|
Below investment grade | | | | | | | |
Income | 6.02 | % | | 20 |
| | 6.46 | % | | 26 |
|
Ending assets | | | 1,288 |
| | | | 1,562 |
|
Mortgages: | | | | | | | |
Income (loss) | 4.29 | % | | 122 |
| | 4.51 | % | | 113 |
|
Ending assets | | | 11,808 |
| | | | 10,408 |
|
Real Estate Held for Production of Income | | | | | | | |
Interest expense and other | (0.61 | )% | | (1 | ) | | — | % | | — |
|
Ending liabilities | | | 53 |
| | | | 56 |
|
Other Equity Investments: | | | | | | | |
Income (loss) | 6.46 | % | | 21 |
| | 12.18 | % | | 38 |
|
Ending assets | | | 1,311 |
| | | | 1,281 |
|
Policy Loans: | | | | | | | |
Income | 5.72 | % | | 54 |
| | 5.85 | % | | 56 |
|
Ending assets | | | 3,739 |
| | | | 3,919 |
|
Cash and Short-term Investments: | | | | | | | |
Income | 0.66 | % | | 8 |
| | 0.23 | % | | 3 |
|
Ending assets | | | 5,763 |
| | | | 6,522 |
|
Repurchase and Funding agreements: | | | | | | | |
Interest expense and other | | | (8 | ) | | | | (3 | ) |
Ending assets (liabilities) | | | (4,343 | ) | | | | (4,416 | ) |
Total Invested Assets: | | | | | | | |
Income | 4.09 | % | | 630 |
| | 4.56 | % | | 662 |
|
Ending assets | | | 62,485 |
| | | | 60,654 |
|
Trading Securities: | | | | | | | |
Income | (0.88 | )% | | (28 | ) | | 0.42 | % | | 10 |
|
Ending assets | | | 13,352 |
| | | | 10,702 |
|
Total: | | | | | | | |
Investment Income | 3.24 | % | | 602 |
| | 3.97 | % | | 672 |
|
Less: investment fees | (0.09 | )% | | (16 | ) | | (0.09 | )% | | (18 | ) |
Investment Income, Net | 3.15 | % | | $ | 586 |
| | 3.88 | % | | $ | 654 |
|
Ending Net Assets | | | $ | 75,837 |
| | | | $ | 71,356 |
|
This presentation is consistent with how we measure investment performance for management purposes.
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | Year Ended December 31, 2018 (2) |
| 2019 | | 2018 | |
| Yield | | Amount (2) | | Yield | | Amount (2) | |
| (Dollars in millions) |
Fixed Maturities: | | | | | | | | | |
Income (loss) | 3.65 | % | | $ | 435 |
| | 3.72 | % | | $ | 417 |
| | $ | 1,732 |
|
Ending assets | | | 48,767 |
| | | | 43,953 |
| | 46,447 |
|
Mortgages: | | | | | | | | | |
Income (loss) | 4.41 | % | | 132 |
| | 4.18 | % | | 116 |
| | 494 |
|
Ending assets | | | 12,117 |
| | | | 11,333 |
| | 11,835 |
|
Real Estate Held for the Production of Income: | | | | | | | | | |
Interest expense and other | (1.67 | )% | | (1 | ) | | (1.91 | )% | | (4 | ) | | (6 | ) |
Ending assets | | | 68 |
| | | | 52 |
| | 52 |
|
Other Equity Investments (1): | | | | | | | | | |
Income (loss) | 4.76 | % | | 16 |
| | 12.59 | % | | 41 |
| | 133 |
|
Ending assets | | | 1,336 |
| | | | 1,298 |
| | 1,354 |
|
Policy Loans: | | | | | | | | | |
Income (loss) | 5.62 | % | | 53 |
| | 5.71 | % | | 54 |
| | 215 |
|
Ending assets | | | 3,766 |
| | | | 3,776 |
| | 3,779 |
|
Cash and Short-Term Investments: | | | | | | | | | |
Income (loss) | — | % | | — |
| | 0.38 | % | | 4 |
| | 21 |
|
Ending assets | | | 3,243 |
| | | | 4,220 |
| | 3,332 |
|
Repurchase and Funding Agreements: | | | | | | | | | |
Interest expense and other | | | (25 | ) | | | | (24 | ) | | (104 | ) |
Ending assets (liabilities) | | | (4,001 | ) | | | | (4,897 | ) | | (4,561 | ) |
Total Invested Assets: | | | | | | | | | |
Income (loss) | 3.83 | % | | 610 |
| | 3.98 | % | | 604 |
| | 2,485 |
|
Ending assets | | | 65,296 |
| | | | 59,735 |
| | 62,238 |
|
Short Duration Fixed Maturities: | | | | | | | | | |
Income (loss) | 2.98 | % | | 101 |
| | 2.16 | % | | 67 |
| | 333 |
|
Ending assets | | | 12,262 |
| | | | 12,802 |
| | 14,818 |
|
Total: | | | | | | | | | |
Investment income (loss) | 3.68 | % | | 711 |
| | 3.67 | % | | 671 |
| | 2,818 |
|
Less: investment fees | (0.08 | )% | | (16 | ) | | (0.08 | )% | | (15 | ) | | (62 | ) |
Investment income, net | 3.60 | % | | $ | 695 |
| | 3.59 | % | | $ | 656 |
| | $ | 2,756 |
|
Ending Net Assets | | | $ | 77,558 |
| | | | $ | 72,537 |
| | $ | 77,056 |
|
|
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Year Ended December 31, 2017 |
| 2018 | | 2017 | |
| Yield | | Amount | | Yield | | Amount | |
| (Dollars in millions) |
Fixed Maturities(1): | | | | | | | | | |
Investment grade | | | | | | | | | |
Income (loss) | 3.74 | % | | $ | 810 |
| | 3.95 | % | | $ | 803 |
| | $ | 1,515 |
|
Ending assets | | | 42,866 |
| | | | 41,322 |
| | 44,384 |
|
Below investment grade | | | | | | | | | |
Income (loss) | 6.32 | % | | 42 |
| | 6.90 | % | | 56 |
| | 113 |
|
Ending assets | | | 1,288 |
| | | | 1,562 |
| | 1,367 |
|
Mortgages: | | | | | | | | | |
Income (loss) | 4.18 | % | | 238 |
| | 4.54 | % | | 229 |
| | 454 |
|
Ending assets | | | 11,808 |
| | | | 10,408 |
| | 10,952 |
|
Real Estate Held for Production of Income: | | | | | | | | | |
Interest expense and other | (3.00 | )% | | (5 | ) | | (5.56 | )% | | (1 | ) | | 2 |
|
Ending assets (liabilities) | | | 53 |
| | | | 56 |
| | 390 |
|
Other Equity Investments(2): | | | | | | | | | |
Income (loss) | 9.56 | % | | 62 |
| | 12.68 | % | | 79 |
| | 169 |
|
Ending assets | | | 1,311 |
| | | | 1,281 |
| | 1,289 |
|
Policy Loans: | | | | | | | | | |
Income (loss) | 5.70 | % | | 108 |
| | 5.79 | % | | 111 |
| | 221 |
|
Ending assets | | | 3,739 |
| | | | 3,919 |
| | 3,819 |
|
Cash and Short-term Investments: | | | | | | | | | |
Income (loss) | 0.68 | % | | 16 |
| | 0.36 | % | | 9 |
| | 32 |
|
Ending assets | | | 5,763 |
| | | | 6,522 |
| | 4,539 |
|
Repurchase and Funding agreements: | | | | | | | | | |
Interest expense and other | | | (17 | ) | | | | (8 | ) | | (21 | ) |
Ending (liabilities) | | | (4,343 | ) | | | | (4,416 | ) | | (4,382 | ) |
Total Invested Assets: | | | | | | | | | |
Income (loss) | 4.06 | % | | 1,254 |
| | 4.40 | % | | 1,278 |
| | 2,485 |
|
Ending assets | | | 62,485 |
| | | | 60,654 |
| | 62,358 |
|
Trading Securities: | | | | | | | | | |
Income (loss) | (0.89 | )% | | (57 | ) | | 2.66 | % | | 129 |
| | 231 |
|
Ending assets | | | 13,352 |
| | | | 10,702 |
| | 12,050 |
|
Total: | | | | | | | | | |
Investment Income (loss) | 3.21 | % | | 1,197 |
| | 4.15 | % | | 1,407 |
| | 2,716 |
|
Less: investment fees | (0.09 | )% | | (34 | ) | | (0.11 | )% | | (36 | ) | | (68 | ) |
Investment Income, Net | 3.12 | % | | $ | 1,163 |
| | 4.04 | % | | $ | 1,371 |
| | $ | 2,648 |
|
Ending Net Assets | | | $ | 75,837 |
| | | | $ | 71,356 |
| | $ | 74,408 |
|
______________
| |
(1) | Fixed Maturities Investment GradeIncludes Other invested assets of $209 million, $170 million and Below Investment Grade are based on Moody’s Equivalent ratings.$211 million as of March 31, 2019, March 31, 2018 and December 31, 2018 respectively, |
| |
(2) | Includes, asAmount for fixed maturities and mortgages represents original cost, reduced by repayments, write-downs, adjusted amortization of June 30, 2018premiums, accretion of discount and December 31, 2017, respectively, $170 million,valuation allowances. Cost for equity securities represents original cost reduced by write-downs. Cost for other limited partnership interests represents original cost adjusted for equity in earnings and $25 million of other invested assets.reduced by distributions. |
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. The limited below investment grade securities in the GAIAGeneral Account investment portfolio consist of “fallen angels”angels,” originally purchased as investment grade, as well as short duration public high yield securities and loans to middle market companies. At June 30, 2018 and December 31, 2017, respectively, 81.2% and 81.1%
Fixed Maturities by Industry
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 | | Percentage of Total (%) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Percentage of Total (%) |
| (in millions) | | | (in millions) |
At June 30, 2018: | | | | | | | | | | |
As of March 31, 2019: | | | | | | | | | | |
Corporate Securities: | | | | | | | | | | |
Finance | | $ | 7,452 |
| | $ | 180 |
| | $ | 31 |
| | $ | 7,601 |
| | 15 | % |
Manufacturing | | 10,244 |
| | 251 |
| | 83 |
| | 10,412 |
| | 21 | % |
Utilities | | 4,440 |
| | 148 |
| | 39 |
| | 4,549 |
| | 9 | % |
Services | | 4,927 |
| | 145 |
| | 34 |
| | 5,038 |
| | 10 | % |
Energy | | 2,499 |
| | 91 |
| | 14 |
| | 2,576 |
| | 5 | % |
Retail and wholesale | | 2,476 |
| | 64 |
| | 13 |
| | 2,527 |
| | 5 | % |
Transportation | | 1,447 |
| | 51 |
| | 20 |
| | 1,478 |
| | 3 | % |
Other | | 164 |
| | 5 |
| | — |
| | 169 |
| | — | % |
Total corporate securities | | 33,649 |
| | 935 |
| | 234 |
| | 34,350 |
| | 68 | % |
U.S. government | | 12,954 |
| | 602 |
| | 214 |
| | 13,342 |
| | 27 | % |
Residential mortgage-backed (2) | | 217 |
| | 11 |
| | — |
| | 228 |
| | 1 | % |
Preferred stock | | 428 |
| | 16 |
| | 4 |
| | 440 |
| | 1 | % |
State & municipal | | 414 |
| | 56 |
| | — |
| | 470 |
| | 1 | % |
Foreign governments | | 485 |
| | 28 |
| | 7 |
| | 506 |
| | 1 | % |
Asset-backed securities | | 620 |
| | 1 |
| | 4 |
| | 617 |
| | 1 | % |
Total | | $ | 48,767 |
| | $ | 1,649 |
| | $ | 463 |
| | $ | 49,953 |
| | 100 | % |
| | | | | | | | | | |
As of December 31, 2018 | | | | | | | | | | |
Corporate Securities: | | | | | | | | | | | | | | | | | | |
Finance | $ | 5,837 |
| | $ | 90 |
| | $ | 112 |
| | $ | 5,815 |
| | 13 | % | $ | 6,343 |
| | $ | 77 |
| | $ | 124 |
| | $ | 6,296 |
| | 14 | % |
Manufacturing | 8,621 |
| | 123 |
| | 218 |
| | 8,526 |
| | 19 | % | 9,123 |
| | 105 |
| | 273 |
| | 8,955 |
| | 20 | % |
Utilities | 4,180 |
| | 94 |
| | 118 |
| | 4,156 |
| | 9 | % | 4,413 |
| | 80 |
| | 121 |
| | 4,372 |
| | 9 | % |
Services | 3,774 |
| | 60 |
| | 93 |
| | 3,741 |
| | 9 | % | 4,317 |
| | 52 |
| | 102 |
| | 4,267 |
| | 9 | % |
Energy | 2,078 |
| | 50 |
| | 47 |
| | 2,081 |
| | 5 | % | 2,347 |
| | 40 |
| | 75 |
| | 2,312 |
| | 5 | % |
Retail and wholesale | 1,607 |
| | 14 |
| | 36 |
| | 1,585 |
| | 4 | % | 2,163 |
| | 19 |
| | 49 |
| | 2,133 |
| | 5 | % |
Transportation | 1,154 |
| | 31 |
| | 44 |
| | 1,141 |
| | 3 | % | 1,357 |
| | 29 |
| | 54 |
| | 1,332 |
| | 3 | % |
Other | 136 |
| | 4 |
| | 1 |
| | 139 |
| | — | % | 171 |
| | 4 |
| | 2 |
| | 173 |
| | — | % |
Total corporate securities | 27,387 |
| | 466 |
| | 669 |
| | 27,184 |
| | 62 | % | 30,234 |
| | 406 |
| | 800 |
| | 29,840 |
| | 65 | % |
U.S. government and agency | 14,542 |
| | 360 |
| | 516 |
| | 14,386 |
| | 33 | % | 13,989 |
| | 295 |
| | 470 |
| | 13,814 |
| | 30 | % |
Residential mortgage-backed(2) | 246 |
| | 11 |
| | 1 |
| | 256 |
| | 1 | % | 225 |
| | 9 |
| | — |
| | 234 |
| | 1 | % |
Preferred stock | 477 |
| | 32 |
| | 3 |
| | 506 |
| | 1 | % | 448 |
| | 15 |
| | 18 |
| | 445 |
| | 1 | % |
State & municipal | 421 |
| | 50 |
| | 1 |
| | 470 |
| | 1 | % | 415 |
| | 48 |
| | 1 |
| | 462 |
| | 1 | % |
Foreign governments | 449 |
| | 20 |
| | 12 |
| | 457 |
| | 1 | % | 524 |
| | 19 |
| | 13 |
| | 530 |
| | 1 | % |
Asset-backed securities | 632 |
| | 2 |
| | 5 |
| | 629 |
| | 1 | % | 612 |
| | 1 |
| | 12 |
| | 601 |
| | 1 | % |
Total | $ | 44,154 |
| | $ | 941 |
| | $ | 1,207 |
| | $ | 43,888 |
| | 100 | % | $ | 46,447 |
| | $ | 793 |
| | $ | 1,314 |
| | $ | 45,926 |
| | 100 | % |
At December 31, 2017 | | | | | | | | | | |
Corporate Securities: | | | | | | | | | | |
Finance | $ | 5,824 |
| | $ | 200 |
| | $ | 7 |
| | $ | 6,017 |
| | 13 | % | |
Manufacturing | 7,546 |
| | 289 |
| | 15 |
| | 7,820 |
| | 17 | % | |
Utilities | 4,032 |
| | 210 |
| | 13 |
| | 4,229 |
| | 9 | % | |
Services | 3,307 |
| | 130 |
| | 15 |
| | 3,422 |
| | 7 | % | |
Energy | 1,980 |
| | 101 |
| | 9 |
| | 2,072 |
| | 4 | % | |
Retail and wholesale | 1,404 |
| | 36 |
| | 3 |
| | 1,437 |
| | 3 | % | |
Transportation | 957 |
| | 58 |
| | 3 |
| | 1,012 |
| | 2 | % | |
Other | 128 |
| | 7 |
| | — |
| | 135 |
| | — | % | |
Total corporate securities | 25,178 |
| | 1,031 |
| | 65 |
| | 26,144 |
| | 55 | % | |
U.S. government and agency | 17,744 |
| | 1,000 |
| | 251 |
| | 18,493 |
| | 39 | % | |
Residential mortgage-backed(2) | 797 |
| | 22 |
| | 1 |
| | 818 |
| | 2 | % | |
Preferred stock | 470 |
| | 43 |
| | 1 |
| | 512 |
| | 1 | % | |
State & municipal | 422 |
| | 67 |
| | — |
| | 489 |
| | 1 | % | |
Foreign governments | 395 |
| | 29 |
| | 5 |
| | 419 |
| | 1 | % | |
Asset-backed securities | 745 |
| | 5 |
| | 1 |
| | 749 |
| | 1 | % | |
Total | $ | 45,751 |
| | $ | 2,197 |
| | $ | 324 |
| | $ | 47,624 |
| | 100 | % | |
______________
| |
(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 obligations. |
Fixed Maturities Credit Quality
The Securities Valuation Office (“SVO”) of the NAICNational Association of Insurance Commissioners (“NAIC”) evaluates the investments of insurers for regulatory reporting purposes and assigns fixed maturity securitiesmaturities 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 typically 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 Designationdesignation is based on the expected ratings indicated by internal analysis.
The amortized cost of the General Accounts’ public and private below investment grade fixed maturities totaled $1.0 billion, or 2.3% of the total fixed maturities at June 30, 2018 and $1.1 billion, or 2.5%, of the total fixed maturities at December 31, 2017. Gross unrealized losses on public and private fixed maturities increased from $324 million in 2017 to $1.2 billion in the first six months of 2018. Below investment grade fixed maturities represented 1.8% and 5.6% of the gross unrealized losses at June 30, 2018 and December 31, 2017, respectively.
Public Fixed Maturities Credit Quality.
The following table sets forth the General Account’s public fixed maturities portfolio by NAIC rating at the dates indicated.
|
| | | | | | | | | | | | | | | | | | |
| NAIC Designation(1) | Rating Agency Equivalent | | Amortized Costs | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
|
| | | | (in millions) |
| At June 30, 2018: | | | | | | | | | |
| 1 | Aaa, Aa, A | | $ | 26,389 |
| | $ | 608 |
| | $ | 810 |
| | $ | 26,187 |
|
| 2 | Baa | | 9,140 |
| | 226 |
| | 225 |
| | 9,141 |
|
| | Investment grade | | 35,529 |
| | 834 |
| | 1,035 |
| | 35,328 |
|
| | | | | | | | | |
|
|
| 3 | Ba | | 216 |
| | 1 |
| | 2 |
| | 215 |
|
| 4 | B | | 121 |
| | — |
| | 5 |
| | 116 |
|
| 5 | C and lower | | 5 |
| | — |
| | — |
| | 5 |
|
| 6 | In or near default | | 3 |
| | 1 |
| | 1 |
| | 3 |
|
| | Below investment grade | | 345 |
| | 2 |
| | 8 |
| | 339 |
|
| Total Public Fixed Maturities | | $ | 35,874 |
| | $ | 836 |
| | $ | 1,043 |
| | $ | 35,667 |
|
| | | | | | | | | | |
| At December 31, 2017 | | | | | | | | | |
| 1 | Aaa, Aa, A | | $ | 29,137 |
| | $ | 1,506 |
| | $ | 274 |
| | $ | 30,369 |
|
| 2 | Baa | | 7,521 |
| | 434 |
| | 10 |
| | 7,945 |
|
| | Investment grade | | 36,658 |
| | 1,940 |
| | 284 |
| | 38,314 |
|
| 3 | Ba | | 304 |
| | 5 |
| | 6 |
| | 303 |
|
| 4 | B | | 119 |
| | — |
| | 1 |
| | 118 |
|
| 5 | C and lower | | 3 |
| | — |
| | — |
| | 3 |
|
| 6 | In or near default | | 9 |
| | — |
| | — |
| | 9 |
|
| | Below investment grade | | 435 |
| | 5 |
| | 7 |
| | 433 |
|
| Total Public Fixed Maturities | | $ | 37,093 |
| | $ | 1,945 |
| | $ | 291 |
| | $ | 38,747 |
|
| |
(1) | Includes, as of June 30, 2018 and December 31, 2017, respectively, one security with amortized cost of $1 million (fair value of $1 million) and two securities with amortized cost of $14 million (fair value of $14 million) that have 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.
Private Fixed Maturities
|
| | | | | | | | | | | | | | | | | |
NAIC Designation(1) | Rating Agency Equivalent | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | (in millions) |
At June 30, 2018: | | | | | | | | | |
1 | Aaa, Aa, A | | $ | 4,004 |
| | $ | 55 |
| | $ | 61 |
| | $ | 3,998 |
|
2 | Baa | | 3,603 |
| | 47 |
| | 89 |
| | 3,561 |
|
| Investment grade | | 7,607 |
| | 102 |
| | 150 |
| | 7,559 |
|
3 | Ba | | 289 |
| | — |
| | 5 |
| | 284 |
|
4 | B | | 363 |
| | 1 |
| | 9 |
| | 355 |
|
5 | C and lower | | 20 |
| | — |
| | — |
| | 20 |
|
6 | In or near default | | 1 |
| | 2 |
| | — |
| | 3 |
|
| Below investment grade | | 673 |
| | 3 |
| | 14 |
| | 662 |
|
Total Private Fixed Maturities | | $ | 8,280 |
| | $ | 105 |
| | $ | 164 |
| | $ | 8,221 |
|
| | | | | | | | | |
At December 31, 2017: | | | | | | | | | |
1 | Aaa, Aa, A | | $ | 4,356 |
| | $ | 122 |
| | $ | 12 |
| | $ | 4,466 |
|
2 | Baa | | 3,610 |
| | 123 |
| | 10 |
| | 3,723 |
|
| Investment grade | | 7,966 |
| | 245 |
| | 22 |
| | 8,189 |
|
3 | Ba | | 358 |
| | 2 |
| | 4 |
| | 356 |
|
4 | B | | 315 |
| | 2 |
| | 7 |
| | 310 |
|
5 | C and lower | | 17 |
| | 1 |
| | — |
| | 18 |
|
6 | In or near default | | 2 |
| | 2 |
| | — |
| | 4 |
|
| Below investment grade | | 692 |
| | 7 |
| | 11 |
| | 688 |
|
Total Private Fixed Maturities | | | $ | 8,658 |
| | $ | 252 |
| | $ | 33 |
| | $ | 8,877 |
|
| |
(1) | Includes, as of June 30, 2018 and December 31, 2017, respectively, 21 securities with amortized cost of $248 million (fair value, $244 million) and 24 securities with amortized cost of $541 million (fair value, $543 million) that have been categorized based on expected NAIC designation pending receipt of SVO ratings. |
|
| | | | | | | | | | | | | | | | | | | |
| NAIC Designation | | Rating Agency Equivalent | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
|
| | | | | (in millions) |
| As of March 31, 2019: | | | | | | | | | | |
| 1 | | Aaa, Aa, A | | $ | 32,436 |
| | $ | 1,189 |
| | $ | 299 |
| | $ | 33,326 |
|
| 2 | | Baa | | 15,169 |
| | 452 |
| | 143 |
| | 15,478 |
|
| | | Investment grade | | 47,605 |
| | 1,641 |
| | 442 |
| | 48,804 |
|
| 3 | | Ba | | 657 |
| | 4 |
| | 8 |
| | 653 |
|
| 4 | | B | | 485 |
| | 2 |
| | 11 |
| | 476 |
|
| 5 | | Caa | | 16 |
| | 1 |
| | 1 |
| | 16 |
|
| 6 | | Ca, C | | 4 |
| | 1 |
| | 1 |
| | 4 |
|
| | | Below investment grade | | 1,162 |
| | 8 |
| | 21 |
| | 1,149 |
|
| Total Fixed Maturities | | $ | 48,767 |
| | $ | 1,649 |
| | $ | 463 |
| | $ | 49,953 |
|
| | | | | | | | | | | |
| As of December 31, 2018: | | | | | | | | | | |
| 1 | | Aaa, Aa, A | | $ | 30,805 |
| | $ | 587 |
| | $ | 835 |
| | $ | 30,557 |
|
| 2 | | Baa | | 14,541 |
| | 202 |
| | 437 |
| | 14,306 |
|
| | | Investment grade | | 45,346 |
| | 789 |
| | 1,272 |
| | 44,863 |
|
| 3 | | Ba | | 589 |
| | 1 |
| | 18 |
| | 572 |
|
| 4 | | B | | 489 |
| | 1 |
| | 22 |
| | 468 |
|
| 5 | | Caa | | 18 |
| | 1 |
| | 1 |
| | 18 |
|
| 6 | | Ca, C | | 5 |
| | 1 |
| | 1 |
| | 5 |
|
| | | Below investment grade | | 1,101 |
| | 4 |
| | 42 |
| | 1,063 |
|
| Total Fixed Maturities | | $ | 46,447 |
| | $ | 793 |
| | $ | 1,314 |
| | $ | 45,926 |
|
Corporate Fixed Maturities Credit Quality.Mortgage Loans
The following table sets forth the General Account’s public and private holdingsmortgage portfolio primarily consists of corporate fixed maturities by NAIC rating at the dates indicated.
Corporate Fixed Maturities
|
| | | | | | | | | | | | | | | | | |
NAIC Designation(1) | Rating Agency Equivalent | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
| | | (in millions) |
At June 30, 2018: | | | | | | | | | |
1 | Aaa, Aa, A | | $ | 14,267 |
| | $ | 222 |
| | $ | 342 |
| | $ | 14,147 |
|
2 | Baa | | 12,111 |
| | 239 |
| | 306 |
| | 12,044 |
|
| Investment grade | | 26,378 |
| | 461 |
| | 648 |
| | 26,191 |
|
| | | | | | | | |
|
|
3 | Ba | | 503 |
| | 2 |
| | 8 |
| | 497 |
|
4 | B | | 482 |
| | 1 |
| | 13 |
| | 470 |
|
5 | C and lower | | 22 |
| | — |
| | — |
| | 22 |
|
6 | In or near default | | 2 |
| | 2 |
| | — |
| | 4 |
|
| Below investment grade | | 1,009 |
| | 5 |
| | 21 |
| | 993 |
|
Total Corporate Fixed Maturities | | $ | 27,387 |
| | $ | 466 |
| | $ | 669 |
| | $ | 27,184 |
|
| | | | | | | | | |
At December 31, 2017: | | | | | | | | | |
1 | Aaa, Aa, A | | $ | 13,517 |
| | $ | 508 |
| | $ | 29 |
| | $ | 13,996 |
|
2 | Baa | | 10,543 |
| | 510 |
| | 19 |
| | 11,034 |
|
| Investment grade | | 24,060 |
| | 1,018 |
| | 48 |
| | 25,030 |
|
3 | Ba | | 660 |
| | 7 |
| | 9 |
| | 658 |
|
4 | B | | 432 |
| | 3 |
| | 8 |
| | 427 |
|
5 | C and lower | | 19 |
| | — |
| | — |
| | 19 |
|
6 | In or near default | | 7 |
| | 3 |
| | — |
| | 10 |
|
| Below investment grade | | 1,118 |
| | 13 |
| | 17 |
| | 1,114 |
|
Total Corporate Fixed Maturities | | $ | 25,178 |
| | $ | 1,031 |
| | $ | 65 |
| | $ | 26,144 |
|
| |
(1) | Includes, as of June 30, 2018 and December 31, 2017, respectively, 21 securities with amortized cost of $179 million (fair value, $179 million) and 25 securities with amortized cost of $484 million (fair value, $484 million) that have been categorized based on expected NAIC designation pending receipt of SVO ratings. |
Asset-backed Securities
As of June 30, 2018, the amortized cost and fair value of asset backed securities held were $632 million and $629 million, respectively. As of December 31, 2017, the amortized cost and fair value of asset-backed securities held were $745 million and $749 million, respectively.
Commercial Mortgage-backed Securities
At June 30, 2018 and December 31, 2017 there were no General Account commercial mortgage-backed securities outstanding.
Mortgages
Investment Mix
As of June 30, 2018 and December 31, 2017, respectively, approximately 15.6% and 12.7%, respectively, of invested assets 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.
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| (in millions) |
Commercial mortgage loans | $ | 9,184 |
| | $ | 8,386 |
|
Agricultural mortgage loans | 2,631 |
| | 2,574 |
|
Total mortgage loans | $ | 11,815 |
| | $ | 10,960 |
|
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
|
| | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Amortized Cost | | % of Total | | Amortized Cost | | % of Total |
| (Dollars in millions) |
By Region: | | | | | | | |
U.S. Regions: | | | | | | | |
Pacific | $ | 3,333 |
| | 28.1 | % | | $ | 3,264 |
| | 29.8 | % |
Middle Atlantic | 3,182 |
| | 26.9 |
| | 2,958 |
| | 27.0 |
|
South Atlantic | 1,264 |
| | 10.7 |
| | 1,096 |
| | 10.0 |
|
East North Central | 928 |
| | 7.9 |
| | 917 |
| | 8.4 |
|
Mountain | 999 |
| | 8.5 |
| | 800 |
| | 7.3 |
|
West North Central | 795 |
| | 6.7 |
| | 778 |
| | 7.1 |
|
West South Central | 516 |
| | 4.4 |
| | 499 |
| | 4.5 |
|
New England | 624 |
| | 5.3 |
| | 460 |
| | 4.2 |
|
East South Central | 174 |
| | 1.5 |
| | 188 |
| | 1.7 |
|
Total Mortgage Loans | $ | 11,815 |
| | 100.0 | % | | $ | 10,960 |
| | 100.0 | % |
By Property Type: | | | | | | | |
Office Buildings | $ | 4,183 |
| | 35.4 | % | | $ | 3,639 |
| | 33.2 | % |
Apartment Complexes | 3,254 |
| | 27.5 |
| | 3,014 |
| | 27.5 |
|
Agricultural properties | 2,631 |
| | 22.3 |
| | 2,574 |
| | 23.5 |
|
Retail stores | 694 |
| | 5.9 |
| | 647 |
| | 5.9 |
|
Hospitality | 387 |
| | 3.3 |
| | 417 |
| | 3.8 |
|
Industrial | 324 |
| | 2.7 |
| | 326 |
| | 3.0 |
|
Other | 342 |
| | 2.9 |
| | 343 |
| | 3.1 |
|
Total mortgage loans | $ | 11,815 |
| | 100.0 | % | | $ | 10,960 |
| | 100.0 | % |
As of June 30, 2018 and December 31, 2017, respectively, the General Account investments in commercial mortgage loans had a weighted average loan-to-value ratio of 59% and 59%, respectively, while the agricultural mortgage loans weighted average loan-to-value ratio was 46% and 46%, respectively. |
| | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 |
| Amortized Cost | | % of Total | | Amortized Cost | | % of Total |
| (in millions) |
By Region: | | | | | | | |
U.S. Regions: | | | | | | | |
Pacific | $ | 3,385 |
| | 27.8 | % | | $ | 3,288 |
| | 27.7 | % |
Middle Atlantic | 3,201 |
| | 26.4 |
| | 3,183 |
| | 26.9 |
|
South Atlantic | 1,366 |
| | 11.3 |
| | 1,207 |
| | 10.2 |
|
East North Central | 979 |
| | 8.1 |
| | 963 |
| | 8.1 |
|
Mountain | 1,017 |
| | 8.4 |
| | 1,014 |
| | 8.6 |
|
West North Central | 904 |
| | 7.5 |
| | 910 |
| | 7.7 |
|
West South Central | 567 |
| | 4.7 |
| | 578 |
| | 4.9 |
|
New England | 555 |
| | 4.6 |
| | 556 |
| | 4.7 |
|
East South Central | 143 |
| | 1.2 |
| | 143 |
| | 1.2 |
|
Total Mortgage Loans | $ | 12,117 |
| | 100.0 | % | | $ | 11,842 |
| | 100.0 | % |
| | | | | | | |
By Property Type: | | | | | | | |
Office | $ | 3,971 |
| | 32.8 | % | | $ | 3,977 |
| | 33.6 | % |
Multifamily | 3,608 |
| | 29.8 |
| | 3,440 |
| | 29.0 |
|
Agricultural loans | 2,730 |
| | 22.5 |
| | 2,695 |
| | 22.8 |
|
Retail | 667 |
| | 5.5 |
| | 667 |
| | 5.6 |
|
Industrial | 413 |
| | 3.4 |
| | 333 |
| | 2.8 |
|
Hospitality | 383 |
| | 3.2 |
| | 384 |
| | 3.3 |
|
Other | 345 |
| | 2.8 |
| | 346 |
| | 2.9 |
|
Total Mortgage Loans | $ | 12,117 |
| | 100.0 | % | | $ | 11,842 |
| | 100.0 | % |
The following tables provide information relating to the loan-to-value and debt service coverage ratios for commercial and agricultural mortgage loans as of June 30, 2018 and December 31, 2017, respectively. 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
June 30, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| (in millions) |
0% - 50% | $ | 1,066 |
| | $ | 162 |
| | $ | 596 |
| | $ | 601 |
| | $ | 316 |
| | $ | 31 |
| | $ | 2,772 |
|
50% - 70% | 4,823 |
| | 643 |
| | 1,507 |
| | 777 |
| | 386 |
| | 50 |
| | 8,186 |
|
70% - 90% | 217 |
| | 110 |
| | 144 |
| | 332 |
| | 27 |
| | — |
| | 830 |
|
90% plus | — |
| | — |
| | 27 |
| | — |
| | — |
| | — |
| | 27 |
|
Total commercial and agricultural mortgage loans | $ | 6,106 |
| | $ | 915 |
| | $ | 2,274 |
| | $ | 1,710 |
| | $ | 729 |
| | $ | 81 |
| | $ | 11,815 |
|
| |
(1) | The debt service coverage ratio is calculated using actual results from property operations. |
| |
(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. |
December 31, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| (in millions) |
0% - 50% | $ | 1,031 |
| | $ | 149 |
| | $ | 595 |
| | $ | 589 |
| | $ | 316 |
| | $ | 30 |
| | $ | 2,710 |
|
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 commercial and agricultural mortgage loans | $ | 5,399 |
| | $ | 987 |
| | $ | 2,111 |
| | $ | 1,652 |
| | $ | 732 |
| | $ | 79 |
| | $ | 10,960 |
|
| |
(1) | The debt service coverage ratio is calculated using actual results from property operations. |
| |
(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 tables below show the breakdown of the commercial and agricultural mortgage loans by year of origination at June 30, 2018 and December 31, 2017, respectively.
Mortgage Loans by Year of Origination
|
| | | | | | |
| June 30, 2018 |
Year of Origination | Amortized Cost | | % of Total |
| (in millions) |
2018 | $ | 922 |
| | 7.8 | % |
2017 | 2,059 |
| | 17.4 |
|
2016 | 3,309 |
| | 28.0 |
|
2015 | 1,538 |
| | 13.0 |
|
2014 | 1,165 |
| | 9.9 |
|
2013 and prior | 2,822 |
| | 23.9 |
|
Total mortgage loans | $ | 11,815 |
| | 100.0 | % |
|
| | | | | | |
| December 31, 2017 |
Year of Origination | Amortized Cost | | % of Total |
| (in millions) |
2017 | $ | 2,026 |
| | 18.5 | % |
2016 | 3,298 |
| | 30.1 |
|
2015 | 1,551 |
| | 14.2 |
|
2014 | 1,170 |
| | 10.7 |
|
2013 | 1,485 |
| | 13.5 |
|
2012 and prior | 1,430 |
| | 13.0 |
|
Total mortgage loans | $ | 10,960 |
| | 100.0 | % |
At June 30, 2018 and December 31, 2017, respectively, $47 million and $49 million of mortgage loans were classified as problem loans while $0 million and $0 million were classified as potential problem loans.
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 June 30, 2018 and June 30, 2017.
Commercial Mortgage Loans
|
| | | | | | | |
| 2018 | | 2017 |
Allowance for credit losses: | (in millions) |
Beginning Balance, January 1 | $ | 8 |
| | $ | 8 |
|
Charge-offs | — |
| | — |
|
Recoveries | (1 | ) | | — |
|
Provision | — |
| | — |
|
Ending Balance, June 30 | $ | 7 |
| | $ | 8 |
|
Ending Balance, June 30: | | | |
Individually Evaluated for Impairment | $ | 7 |
| | $ | 8 |
|
Other Equity Investments
At June 30, 2018 and December 31, 2017, private equity partnerships, hedge funds and real-estate related partnerships were 98.9% and 87.5%, respectively of total other equity investments. These interests, which represent 1.5% and 1.5%, respectively 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.
Other Equity Investments - Classifications
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| (in millions) |
Common stock | $ | 12 |
| | $ | 158 |
|
Joint ventures and limited partnerships: | | | |
Private equity | 977 |
| | 927 |
|
Hedge funds | 152 |
| | 179 |
|
Total Other Equity Investments | $ | 1,141 |
| | $ | 1,264 |
|
As a result of the adoption of the Recognition and Measurement of Financial Assets and Financial Liabilities standard on January 1, 2018 (Financial Instruments Recognition and Measurement Standard), equity securities are no longer classified and accounted for as available for sale securities.
Derivatives
We use derivatives as part of our 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 Use Plan (“DUP”) approved by applicable states’ insurance law. Derivatives are generally not accounted for using hedge accounting. 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 swaps on equity, bond and Treasury indices, total return swaps on single U.S. Treasury Securities, interest rate swaps bond and bond-index total return swaps, swaptions, variance swaps, equity options, credit and foreign exchange derivatives, as well as bond and repo transactions to support the hedging.
Derivatives used to hedge exposure to variable annuity products with GMxB features
We have issued and continue to offer certain variable annuity products with GMxB 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 GMLB features is that under-performance of the financial markets could result in the GMLB features’ benefits being higher than what accumulated policyholders’ account balances would support.
For GMxB features, we retain 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, policyholder election rates and other behaviors. The derivative contracts are managed to correlate with changes in the value of the GMxB 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, we are 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, we derecognize these securities with consequent gain or loss from the sale. We have 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 us.
Derivatives used to hedge crediting rate exposure on SCS, SIO, MSO and IUL products/investment options
We hedge crediting rates in SCS, SIO in the EQUI-VEST variable annuity product series, MSO in the variable life insurance products and 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 we 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, we enter 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.
Other derivatives based hedges
From time to time and depending on market and other conditions we hedge additional risks not otherwise covered by our variable annuity product hedge programs. Such hedge programs include:
the net duration of our General Account economic liability and assets;
expected income from fees on Separate Account AUM against declines in equity markets;
the economic impact of lower interest-rates on expected variable annuity product sales;
the equity exposure of General Account assets; and
the credit exposure of General Account assets.
Derivatives utilized for General Account investment portfolio
We maintain a strategy in our General Account investment portfolio reflects certain differences from the presentation of the U.S. GAAP Consolidated Financial Statements. This presentation is consistent with how we manage the General Account investment portfolio. For further investment information, please refer to replicate the exposure of fixed maturity securities otherwise permissible for investment under our investment guidelines. Examples include corporate bond exposure replicated through the sale of credit default swaps together with the purchase of a Treasury bondNote 3 and Treasury bond exposure replicated through the sale of an asset swap and the purchase the bond referencedNote 4 in the asset swap.
These asset swaps, when considered in combination with the bonds, result a yield higher than a term-equivalent U.S. Treasury bond.
The tables below present quantitative disclosures about our derivative instruments, including those embedded in other contracts required to be accounted for as derivative instruments.
Derivative Instruments by Category
|
| | | | | | | | | | | | | | | |
| At June 30, 2018 | | Gains (Losses) Reported in Net Earnings (Loss) Six Months Ended June 30, 2018 |
| | | Fair Value | |
| Notional Amount | | Asset Derivatives | | Liability Derivatives | |
| (In Millions) |
Freestanding derivatives | | | | | | | |
Equity contracts:(1) | | | | | | | |
Futures | $ | 7,621 |
| | $ | — |
| | $ | — |
| | $ | (296 | ) |
Swaps | 8,203 |
| | 119 |
| | 78 |
| | (16 | ) |
Options | 22,954 |
| | 3,676 |
| | 1,540 |
| | 240 |
|
Interest rate contracts:(1) | | | | | | | |
Floors | — |
| | — |
| | — |
| | — |
|
Swaps | 27,938 |
| | 569 |
| | 251 |
| | (716 | ) |
Futures | 21,315 |
| | — |
| | — |
| | 104 |
|
Swaptions | — |
| | — |
| | — |
| | — |
|
Credit contracts:(1) | | | | | | | |
Credit default swaps | 1,872 |
| | 24 |
| | 1 |
| | (2 | ) |
Other freestanding contracts:(1) | | | | | | | |
Foreign currency contracts | 1,848 |
| | 25 |
| | 4 |
| | 13 |
|
Margin |
| | 19 |
| | — |
| |
|
|
Collateral |
| | — |
| | 2,607 |
| |
|
Embedded derivatives: | | | | | | | |
GMIB reinsurance contracts(4) | — |
| | 1,636 |
| | — |
| | — |
|
GMxB derivative features liability(2,4) | — |
| | — |
| | 3,657 |
| | — |
|
SCS, SIO, MSO and IUL indexed features(3,4) | — |
| | — |
| | 1,968 |
| | — |
|
Total | $ | 91,751 |
| | $ | 6,068 |
| | $ | 10,106 |
| | $ | (673 | ) |
| |
(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 the Future policyholders’ benefits and other policyholders’ liabilities in the consolidated balance sheets. |
| |
(4) | Reported in Net derivative gains (losses) in the consolidated statements of income (loss). |
Derivative Instruments by Category
|
| | | | | | | | | | | | | | | |
| At December 31, 2017 | | Gains (Losses) Reported in Net Earnings (Loss) Six Months Ended June 30, 2017 |
| | | Fair Value | |
| Notional Amount | | Asset Derivatives | | Liability Derivatives | |
| (In Millions) |
Freestanding derivatives | | | | | | | |
Equity contracts:(1) | | | | | | | |
Futures | $ | 6,552 |
| | $ | — |
| | $ | — |
| | $ | (607 | ) |
Swaps | 7,555 |
| | 3 |
| | 200 |
| | (671 | ) |
Options | 22,223 |
| | 3,456 |
| | 1,457 |
| | 504 |
|
Interest rate contracts:(1) | | | | | | | |
Floors | — |
| | — |
| | — |
| | — |
|
Swaps | 26,725 |
| | 603 |
| | 192 |
| | 586 |
|
Futures | 20,675 |
| | — |
| | — |
| | 83 |
|
Credit contracts:(1) | | | | | | | |
Credit default swaps | 2,057 |
| | 34 |
| | 2 |
| | 9 |
|
Other freestanding contracts:(1) | | | | | | | |
Foreign currency contracts | 1,297 |
| | 11 |
| | 2 |
| | — |
|
Margin | — |
| | 18 |
| | 4 |
| | — |
|
Collateral | — |
| | 4 |
| | 2,123 |
| | — |
|
Embedded derivatives: | | | | | | | |
GMIB reinsurance contracts(4) | — |
| | 1,894 |
| | — |
| | 367 |
|
GMxB derivative features liability(2,4) | — |
| | — |
| | 4,358 |
| | 862 |
|
SCS, SIO, MSO and IUL indexed features(3,4) | — |
| | — |
| | 1,786 |
| | (299 | ) |
Total | $ | 87,084 |
| | $ | 6,023 |
| | $ | 10,124 |
| | $ | 834 |
|
| |
(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 the Future policyholders’ benefits and other policyholders’ liabilities in the consolidated balance sheets. |
| |
(4) | Reported in Net derivative gains (losses) in the consolidated statements of income (loss). |
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 adjustmentsNotes 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.Consolidated Financial Statements.
The following table sets forth “Realized investment gains (losses), net,” for the periods indicated:
Realized Investment Gains (Losses), Net
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Fixed maturities | $ | (19 | ) | | $ | (18 | ) | | $ | 90 |
| | $ | (24 | ) |
Other equity investments | — |
| | (1 | ) | | — |
| | 3 |
|
Other | — |
| | 1 |
| | — |
| | 1 |
|
Total | $ | (19 | ) | | $ | (18 | ) | | $ | 90 |
| | $ | (20 | ) |
The following table further describes realized gains (losses), net for Fixed maturities for the periods indicated:
Fixed Maturities
Realized Investment Gains (Losses)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in millions) |
Gross realized investment gains: | | | | | | | |
Gross gains on sales and maturities | $ | 17 |
| | $ | 33 |
| | $ | 178 |
| | $ | 53 |
|
Other | — |
| | — |
| | — |
| | — |
|
Total gross realized investment gains | 17 |
| | 33 |
| | 178 |
| | 53 |
|
Gross realized investment losses: | | | | | | | |
Other-than-temporary impairments recognized in income (loss) | — |
| | (14 | ) | | — |
| | (14 | ) |
Gross losses on sales and maturities | (36 | ) | | (37 | ) | | (88 | ) | | (63 | ) |
Total gross realized investment losses | (36 | ) | | (51 | ) | | (88 | ) | | (77 | ) |
Total | $ | (19 | ) | | $ | (18 | ) | | $ | 90 |
| | $ | (24 | ) |
Other-Than-Temporary Impairments Recorded in Earnings (Losses)
At June 30, 2018 and 2017, there were no General Account other-than-temporary impairments recorded in Income (Loss).
LIQUIDITY AND CAPITAL RESOURCESLiquidity and Capital Resources
Liquidity refers to our ability to generate adequate amounts of cash from our operating, investment and financing activities to meet our cash requirements with a prudent margin of safety. Capital refers to our long-term financial resources available to support business operations and future growth. Our ability to generate and maintain sufficient liquidity and capital is dependent on the profitability of our businesses, timing of cash flows related to our investments and products, our ability to access the capital markets, general economic conditions and the alternative sources of liquidity and capital described herein. When considering our liquidity and cash flows, it is important to distinguish between the needs of Holdings and the needs of our insurance and non-insurance subsidiaries. We also distinguish and separately manage the liquidity and capital resources of our retirement and protection businesses, including our Individual Retirement, Group Retirement and Protection Solutions segments, and our Investment Management and Research segment.
Sources and Uses of Liquidity and Capital Position of Holdings
As a holding company with no business operations of its own, Holdings primarily derives cash flows from dividends from its subsidiaries and distributions related to its economic interest in AB, more than halfnearly all of which is currently held outside our insurance company subsidiaries. These principal sources of liquidity are augmented by cash and short-term investments held by Holdings and access to bank lines of credit and the capital markets. The main uses of liquidity for Holdings are interest payments and debt repayment, payment of dividends and other distributions to stockholders, which may include stock
repurchases, and capital contributions, if needed, to our insurance subsidiaries. Our principal sources of liquidity and our capital position are described in the following paragraphs.
Cash Distributions from Our Subsidiaries
In 2019, Holdings received net cash distributions from AB of $124 million. Also, it received $576 million from AXA Equitable Life as repayment of principal $572 million and interest of $4 million related to a $572 million surplus note. In 2018, Holdings received net cash distributions from subsidiaries of $1.4 billion. These net cash distributions comprised $1.1 billion in dividends from our insurance subsidiaries, $255 million in distributions from AB and $45 million in distributions from AXA Advisors.
Distributions from Insurance Subsidiaries
Our insurance companies are subject to limitations on the payment of dividends and other transfers of funds to Holdings and other affiliates under applicable insurance law and regulation. Also, more generally, the ability of our insurance subsidiaries to pay dividends can be affected by market conditions and other factors beyond our control.
Under New York insurance law applicable to AXA Equitable Life, 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 ofeither the insurer’s earned surplus (as reported onEarned Surplus Standard or 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”).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.
Applying the formulas under these standards, AXA Equitable Life could pay ordinary dividends of up to approximately $1.2 billion during 2018, and on July 26, 2018, made a cash dividend payment of $1.1 billion. However, Also, in 2016, the NYDFS issued a circular letter to its regulated insurance companies stating that ordinary dividends which exceed an insurer’s positive unassigned funds (as reported on the insurer’s most recent annual statement) may fail one of the qualitative tests imposed by the Earned Surplus Standard. Given the circular letter, it is possible that the NYDFS could limit the amount of ordinary dividends declared by AXA Equitable Life under the Earned Surplus Standard to the amount of AXA Equitable Life’s positive unassigned funds. As
In December 2018, AXA Equitable Life transferred its interests in ABLP, AB Holding and the General Partner to a newly formed subsidiary and distributed the shares of December 31, 2017,that subsidiary to its direct parent which subsequently distributed such shares to Holdings (the “AB Ownership Transfer”). In connection with the AB Ownership Transfer, AXA Equitable Life paid an extraordinary cash dividend of $572 million and issued a surplus note to Holdings in the same amount. AXA Equitable Life repaid the outstanding principal balance of the surplus note in March 2019.
Applying the formulas under the dividend standards above, AXA Equitable Life could pay ordinary dividends in 2019 of up to $2.1 billion under the Earned Surplus Standard, assuming the amount was limited to the amount of AXA Equitable Life’s positive unassigned funds reported on its statutory financial statements was approximately $1.9 billion.
Inas described above. However, in connection with the second quarter of 2017,AB Ownership Transfer, AXA Equitable Life agreed with the NYDFS that until it (i) filed a plan with respect to the management of our variable annuity business ceded to AXA RE Arizona with the NYDFS and (ii) fully implement that plan (the “DFS Conditions”), it would pay ordinary dividends onlynot seek a dividend of greater than $1.0 billion under the Earned Surplus Standard. Standard during 2019.
The completionrepayment of the unwind$572 million surplus note in March 2019 and the full utilization of the reinsurance provided to$1.0 billion dividend capacity as agreed with the NYDFS would result in a total cash payout from AXA Equitable Life by AXA RE Arizona for certain variable annuitiesof $1,572 million in 2019. Accordingly, we believe that our agreement with GMxB features (the “GMxB Unwind”), which occurred on April 12, 2018, satisfied the DFS Conditions, and, going forward, satisfaction of either the Earned Surplus Standard or Alternative StandardNYDFS will determine AXA Equitable Life’snot impact Holdings’ ability to pay ordinary dividends. Our other insurance subsidiaries that reside outsidemeet its liquidity needs, dividend and share repurchases capacity or target payout range of New York are subject to legal restrictions on dividends similar to those described above under New York law, though the specifics of such rules vary from state to state. In 2018, we do not expect any significant dividends from other insurance subsidiaries.
Non-GAAP Operating Earnings for 2019.
Distributions from AllianceBernstein
ABLP is required to distribute all of its Available Cash Flow, as defined in the Amended and Restated Partnership Agreement of ABLP, to the holders of AB Units and to the General Partner. Available Cash Flow can be summarizedis defined as the cash flow received by ABLP from operations minus such amounts as the General Partner determines, in its sole discretion, should be retained by ABLP for use in its business, or plus such amounts as the General Partner determines, in its sole discretion, should be released from previously retained cash flow. Distributions by ABLP are made 1% to the General Partner and 99% among the limited partners.
Typically, Available Cash Flow has been the adjusted diluted net income per unit for the quarter multiplied by the number of general and limited partnership interests at the end of the quarter. In future periods, management of AB anticipates that Available Cash Flow will be based on adjusted diluted net income per unit, unless management of AB determines, with the
concurrence of the Board of Directors of AB, that one or more adjustments that are made for adjusted net income should not be made with respect to the Available Cash Flow calculation.
AB Holding is required to distribute all of its Available Cash Flow, as defined in the Amended and Restated Agreement of Limited Partnership of AB Holding, to holders of units representing assignments of beneficial ownership of limited partnership interests in AB Holding (“AB Holding Units”)Units pro rata in accordance with their percentage interestsinterest in AB Holding. Available Cash Flow is defined as the cash distributions AB Holding receives from ABLP minus such amounts as the General Partner determines, in its sole discretion, should be retained by AB Holding for use in its business (such as the payment of taxes) or plus such amounts as the General Partner determines, in its sole discretion, should be released from previously retained cash flow. AB Holding is dependent on the quarterly cash distributions it receives from ABLP, which is subject to the performance of capital markets and other factors beyond our control. Distributions from AB Holding are made pro rata based on the holder’s percentage ownership interest in AB Holding.
Following the AB Reorganization Transactions, Holdings and its non-insurance company subsidiaries now hold 93.1approximately 167.5 million AB Units, and 2.34.0 million AB Holding Units, while 77.0 million AB Units, 1.4 million AB Holding Units and the 1% General Partnership interest in AB are now held by AXA Equitable LifeABLP and MLOA two of our insurance company subsidiaries.holds 2.6 million AB Units. Because AXA Equitable Life and MLOA areis subject to regulatory restrictions on the amount of dividends it may pay, distributions they receiveit receives from AB may not be distributable to Holdings.
As of June 30, 2018,March 31, 2019, the ownership structure of ABLP, including AB Units outstanding as well as the general partner’s 1% interest, was as follows:
|
| | | |
Owner | | Percentage Ownership |
Holdings and its non-insurance subsidiaries | 63.3 | 63.0 | % |
MLOA | | 1.0 | % |
AB Holding | 35.9 | 35.2 | % |
Unaffiliated holders | | 0.8 | % |
Total | | 100.0 | % |
Including both the general partnership and limited partnership interests in AB Holding and ABLP, Holdings and its subsidiaries had an approximate 64.7%66% economic interest in AB as of June 30,March 31, 2019.
Holdings Credit Facilities
We have a $2.5 billion five-year senior unsecured revolving credit facility (the “Revolver”), which may provide significant support to our liquidity position when alternative sources of credit are limited. In addition to the Revolver, we entered into letter of credit facilities with an aggregate principal amount of approximately $1.9 billion (the “LOC Facilities”), primarily to be used to support our life insurance business reinsured to EQ AZ Life Re in April 2018.
In May 2018, we borrowed $300 million under a $500 million three-year senior unsecured delayed draw term loan agreement (the “DDTL”) and terminated the remaining $200 million capacity. The Revolver and DDTL contain certain administrative, reporting, legal and financial covenants, including requirements to maintain a specified minimum consolidated net worth and to maintain a ratio of indebtedness to total capitalization not in excess of a specified percentage, and limitations on the dollar amount of indebtedness that may be incurred by our subsidiaries and the dollar amount of secured indebtedness that may be incurred by us, which could restrict our operations and use of funds. The right to borrow funds under the Revolver, DDTL and LOC Facilities is subject to the fulfillment of certain conditions, including compliance with all covenants, and the ability to borrow thereunder is also subject to the continued ability of the lenders that are or will be parties to the facilities to provide funds. As of March 31, 2019, we were in compliance with these covenants. For additional information regarding the covenants in the facilities and the conditions to borrowing thereunder, see “Part I Item 1A-Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2018.
Contingent Funding Arrangements
In April 2019, pursuant to separate Purchase Agreements among us, Credit Suisse Securities (USA) LLC, as representative of the several initial purchasers, and the Trusts (as defined below), Pine Street Trust I, a Delaware statutory trust (the “2029 Trust”), completed the issuance and sale of 600,000 of its Pre-Capitalized Trust Securities redeemable February 15, 2029 (the “2029 P-Caps”) for an aggregate purchase price of $600 million and Pine Street Trust II, a Delaware statutory trust (the “2049
Trust” and, together with the 2029 Trust, the “Trusts”), completed the issuance and sale of 400,000 of its Pre-Capitalized Trust Securities redeemable February 15, 2049 (the “2049 P-Caps” and, together with the 2029 P-Caps, the “P-Caps”) for an aggregate purchase price of $400 million, in each case to qualified institutional buyers in reliance on Rule 144A that are also “qualified purchasers” for purposes of Section 3(c)(7) of the Investment Company Act of 1940, as amended. The P-Caps are a contingent funding arrangement that, upon our election, gives us the right over a ten-year period (in the case of the 2029 Trust) or over a thirty-year period (in the case of the 2049 Trust) to issue senior notes to the Trusts. The Trusts each invested the proceeds from the sale of their P-Caps in separate portfolios of principal and/or interest strips of U.S. Treasury securities.
Capital Position
We manage our capital position to maintain financial strength and credit ratings that facilitate the distribution of our products and provide our desired level of access to the bank and public financing markets. Our capital position is supported by the ability of our subsidiaries to generate cash flows and distribute cash to us and our ability to effectively manage the risk of our businesses and to borrow funds and raise capital to meet our operating and growth needs.
We have historically operated with a capital structure that reflected our status as a wholly owned subsidiary of AXA, including relying on financing provided or guaranteed by AXA and its affiliates. To meet our target capitalization following the IPO, we have taken certain significant actions that have impacted our liquidity and capital position and that align our capital structure more closely with other U.S. public companies. These actions include:
issued debt securities to third party investors: (i) $800 million aggregate principal amount of 3.900% Senior Notes due 2023, (ii) $1.5 billion aggregate principal amount of 4.350% Senior Notes due 2028 and (iii) $1.5 billion aggregate principal amount of 5.000% Senior Notes due 2048, to replace intercompany financing that was provided or guaranteed by AXA and its affiliates, among other things;
arranged additional contingent financing facilities, including (i) letter of credit facilities with an aggregate principal amount of $1.9 billion, primarily to be used to support our life insurance business reinsured to EQ AZ Life Re following the GMxB Unwind, (ii) a five-year senior unsecured revolving credit facility for an amount of approximately $2.5 billion, and (iii) a three-year senior unsecured term loan facility of up to $500 million;
borrowed $300 million under the three-year term loan agreement, and the remaining $200 million capacity was terminated;
terminated outstanding balance issued under AXA Financial’s commercial paper program;
(i) received a capital contribution of $318 million and (ii) a $622 million loan from AXA, which was set off against AXA’s payment obligation to Holdings with respect to the sale of AXA CS shares;
increased the statutory capital and reserves of our retirement and protection businesses by approximately $2.3 billion in 2017;
sold AXA Equitable Life’s interest in two real estate joint ventures to AXA France for a total purchase price of $143 million, which resulted in the elimination of $203 million of long-term debt on Holdings’ consolidated balance sheet for the first quarter of 2018 and a corresponding reduction of our debt-to-capital ratio; and
implemented the Reorganization Transactions (as defined in the Prospectus) which included the direct or indirect acquisition of an additional 19.2% economic interest in AB and the GMxB Unwind.
Waiver Letter Agreements
In April 2018, we entered into waiver letter agreements with the lenders under each of our credit facilities and the letter of credit facilities, pursuant to which the lenders waived certain defaults or events of default under such facilities resulting from the restatement of our annual financial statements for the year ended December 31, 2016, the restatement of our interim financial statements for the nine months ended September 30, 2017 and for the six months ended June 30, 2017, the failure to furnish audited financial statements for the year ended December 31, 2017 on a timely basis as required by such facilities and related matters. There can be no assurance that our lenders will provide such waivers in the future. For a discussion of the restatement to our 2016 annual financial statements, see Note 1 to the Notes to Consolidated Financial Statements included in the Prospectus.
Capital Management
Our board of directors (the “Board”)Board and senior management are directly involved in the development of our capital management policies. Accordingly, capital actions, including proposed changes to the annual capital plan, capital targets and capital policies, are approved by the Board.
Dividend Declared and Paid
On February 14, 2019, Holdings’ Board of Directors declared a quarterly cash dividend of $0.13 per share of common stock, payable on March 15, 2019 to all stockholders of record as of the close of business on March 5, 2019.
The declaration and payment of future dividends is subject to the discretion of our Board of Directors and depends on our financial condition, results of operations, cash requirements, future prospects, regulatory restrictions on the payment of dividends by Holdings’ insurance subsidiaries and other factors deemed relevant by the Board.
Share Repurchase Program
On August 10, 2018, ourFebruary 27, 2019, Holdings’ Board of Directors authorized a $800 millionshare repurchase program. Under the program, we may purchase up to $500 million of our common stock beginning August 16, 2018 and expiring on March 31, 2019 (unless extended). The repurchase program does not obligate us to purchase any shares. Subject to market conditions,this authorization, Holdings, may, from time to time through December 31, 2019, purchase shares of its common stock through various means, including open market transactions, privately negotiated transactions (including share repurchases from AXA), forward, derivative, accelerated repurchase,means. Holdings may choose to suspend or automatic repurchase transactions, or tender offers. The Board of Directors may terminate, increase or decreasediscontinue the share repurchase program at any time. The repurchase program does not obligate Holdings to purchase any particular number of shares.
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 of common stock of Holdings. 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 majority owned subsidiary of AXA. Following the completion of the share buyback by Holdings, Holdings had $200 million remaining under its share repurchase program authorization.
Accelerated Share Repurchase Agreement
In January 2019, Holdings entered into an Accelerated Share Repurchase agreement (the “ASR”) with a third-party financial institution to repurchase an aggregate of $150 million of Holdings’ common stock. Holdings received 7 million shares upon entering the ASR in January and one million shares upon settlement of the ASR, which terminated on March 1, 2019. For additional information on the ASR, see “Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds”.
Sources and Uses of Liquidity of Our Insurance Subsidiaries
The principal sources of liquidity for our insurance subsidiaries are premiums, investment and fee income, deposits associated with our insurance and annuity operations, cash and invested assets, as well as internal borrowings. The principal uses of that liquidity include benefits, claims and dividends paid to policyholders and payments to policyholders in connection with surrenders and withdrawals. Other uses of liquidity include commissions, general and administrative expenses, purchases of investments, the payment of dividends to Holdings and hedging activity. Certain of our insurance subsidiaries’ principal sources and uses of liquidity are described in the paragraphs that follow.
We manage the liquidity of our insurance subsidiaries with the objective of ensuring that they are able to meet payment obligations linked to our Individual Retirement, Group Retirement and Protection Solutions businesses and to their outstanding debt and derivative positions, including in our hedging programs, without support from Holdings. We employ an asset/liability management approach specific to the requirements of each of our insurance businesses. We measure liquidity against internally-developed benchmarks that consider the characteristics of our asset portfolio and the liabilities that it supports. We consider attributes of the various categories of our liquid assets (for example, type of asset and credit quality) in calculating internal liquidity indicators for our insurance and reinsurance operations. Our liquidity benchmarks are established for various stress scenarios and durations, including company-specific and market-wide events. The scenarios we use to evaluate the liquidity of our subsidiaries are defined to allow operating entities to operate without support from Holdings.
Liquid Assets
The investment portfolios of our insurance subsidiaries are a significant component of our overall liquidity. Liquid assets include cash and cash equivalents, short-term investments, U.S. Treasury fixed maturities, fixed maturities that are not designated as held-to-maturity and public equity securities. We believe that our business operations and the liquidity profile of our assets provide sufficient liquidity under reasonably foreseeable stress scenarios for each of our insurance subsidiaries.
See “—General Account Investment Assets Portfolio” and Notes 3 and 4 for a description of our retirement and protection businesses’ portfolio of liquid assets.
Hedging Activities
Because the future claims exposure on our insurance products, and in particular our variable annuity products with GMxB features, is sensitive to movements in the equity markets and interest rates, we 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. We use derivatives as part of our overall asset/liability risk management program primarily to reduce exposures to equity market and interest rate risks. In addition, we use credit derivatives to replicate exposure to individual securities or pools of securities as a means of achieving credit exposure similar to bonds of the underlying issuer(s) more efficiently. The derivative contracts are an integral part of our risk management program, especially for the management of our variable annuities program, and are collectively managed to reduce the economic impact of unfavorable movements in capital markets. These derivative transactions require liquidity to meet payment obligations such as payments for periodic settlements, purchases, maturities and terminations as well as liquid assets pledged as collateral related to any decline in the net estimated fair value. Collateral calls represent one of our biggest drivers for liquidity needs for our insurance subsidiaries. Historically, we have managed our liquidity needs related to our derivative portfolio at AXA FinancialHoldings and AXA RE Arizona on a combined basis. Due to the limited size of the AXA RE Arizona investment portfolio, we have historically supported its collateral funding needs through AXA Financial’s commercial paper program. Following the GMxB Unwind, which was effected on April 12, 2018, our derivatives contracts reside primarily within AXA Equitable Life. As AXA Equitable Life has a significantly larger investment portfolio than AXA RE Arizona had, we anticipate ahave reduced the need for overall liquidity going forward.
FHLB Membership
AXA Equitable Life is a member of the Federal Home Loan Bank of New York (“FHLBNY”), which provides AXA Equitable Life with access to collateralized borrowings and other FHLBNY products. At June 30, 2018, weMarch 31, 2019, Holdings had $500 million$1.6 billion of outstanding short-term funding agreements and $3.0$2.4 billion of long-term outstanding funding agreements issued to the FHLBNY and had posted $4.5$6.0 billion securities as collateral for funding agreements. In addition, AXA Equitable Life implemented a hedge to lock in the funding agreements borrowing rate, and $13$11 million of hedge impact was reported as funding agreement carrying value. MLOA also becameis a member of the Federal Home Loan Bank of San Francisco in February 2018.Francisco.
Sources and Uses of Liquidity of our Investment Management and Research Segment
The principal sources of liquidity for our Investment Management and Research business include investment management fees and borrowings under its revolving credit facility and commercial paper program. The principal uses of liquidity include general and administrative expenses, business financing and distributions to holders of AB Units and AB Holding Units plus interest and debt service. The primary liquidity risk for our fee-based Investment Management and Research business is its profitability, which is impacted by market conditions and our investment management performance.
As of March 31, 2019 and December 31, 2018, AB had $540 million and $521 million, respectively, in commercial paper outstanding with weighted average interest rates of approximately 2.7% for both periods. The commercial paper is short term in nature, and as such, recorded value is estimated to approximate fair value (and considered a Level 2 security in the fair value hierarchy). Average daily borrowings of commercial paper during the first three months of 2019 and the full year 2018 were $519 million and $350 million, respectively, with weighted average interest rates of approximately 2.7% and 2.0%, respectively.
AB has a $1.0 billion$800 million committed, unsecured senior revolving credit facility (the “AB Credit Facility”) with a group of commercial banks and other lenders, whichthat matures on October 22, 2019.September 27, 2023. The credit facility provides for possible increases in the principal amount by up to an aggregate incremental amount of $250$200 million. Any such increase is subject to the consent of the affected lenders. The AB Credit Facility is available for AB and SCB LLC, for 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 June 30, 2018,March 31, 2019, 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 June 30, 2018March 31, 2019 and December 31, 2017,2018, AB and SCB LLC had no amounts outstanding under the AB Credit Facility. During the first sixthree months of 20182019 and the full year 2017,2018, AB and SCB LLC did not draw upon the AB Credit Facility.
AB has a $200 million committed, 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, which matures on November 28, 2018.16, 2021. 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 that are identical to those of the AB Credit Facility. As of June 30, 2018,March 31, 2019, AB had no amounts outstanding under the AB Revolver. As of December 31, 2017,2018, AB had $75$25 million outstanding under the AB Revolver.Revolver with an interest rate of 3.4%. Average daily borrowing of the AB Revolver during the first sixthree months of 20182019 and full year 20172018 were $18$26 million and $21$19 million, respectively, with weighted average interest rates of approximately 2.6%3.4% and 2.0%2.8%, respectively.
In addition, SCB LLC also has three uncommitted lines of credit with three financial institutions. Two of these lines of credit permit usSCB LLC to borrow up to an aggregate of $175 million, with AB named as an additional borrower, while the other line has no stated limit. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, SCB LLC had no bank loans outstanding. Average daily borrowings of bank loans during first sixthree months of 20182019 and full year 20172018 were $3$2 million and $5$3 million, respectively, with weighted average interest rates of approximately 1.5% and 1.4%1.6%, respectively.
Consolidated Cash FlowsFlow Analysis
We believe that cash flows from our operations on a consolidated basis are adequate to satisfy current liquidity requirements. The continued adequacy of our liquidity will depend upon factors such as future market conditions, changes in interest rate levels, policyholder perceptions of our financial strength, policyholder behavior, the effectiveness of our hedging programs, catastrophic events and the relative safety and attractiveness of competing products. Changes in any of these factors may result in reduced or increased cash outflows. Our insurance subsidiaries’ cash flows from investment activities result from repayments of principal, proceeds from maturities and sales of invested assets and investment income, net of amounts reinvested. The primary liquidity risks with respect to these cash flows are the risk of default by debtors or bond insurers, our counterparties’ willingness to extend repurchase agreements, commitments to invest and market volatility. We closely manage these risks through our asset/liability management process and regular monitoring of our liquidity position. Our primary sources and uses of liquidity and capital are summarized below.
| | | Six Months Ended June 30, | Three Months Ended March 31, |
| 2018 | | 2017 | 2019 | | 2018 |
| (in millions) | (in millions) |
Cash and Cash Equivalents, beginning of period | $ | 4,814 |
| | $ | 5,654 |
| $ | 4,469 |
| | $ | 4,814 |
|
Net cash provided by (used in) operating activities | (314 | ) | | 666 |
| (109 | ) | | (247 | ) |
Net cash provided by (used in) investing activities | 1,807 |
| | (5,067 | ) | (70 | ) | | 116 |
|
Net cash provided by financing activities | 532 |
| | 4,923 |
| |
Effect of exchange rates | (6 | ) | | 11 |
| |
Net cash provided by (used in) financing activities | | 838 |
| | 1,400 |
|
Net increase (decrease) | | 659 |
| | 1,269 |
|
Effect of exchange rate changes on cash and cash equivalents | | 1 |
| | 8 |
|
Cash and Cash Equivalents, end of period | $ | 6,833 |
| | $ | 6,187 |
| $ | 5,129 |
| | $ | 6,091 |
|
SixThree Months Ended June 30, 2018March 31, 2019 Compared to SixThree Months Ended June 30, 2017March 31, 2018
Cash and cash equivalents at March 31, 2019 were $5.1 billion, a decrease of $6.8$1.0 billion from $6.1 billion at June 30, 2018 increased $0.6 billion from $6.2 billion at June 30, 2017.March 31, 2018.
Net cash used in operating activities was $0.3 billion$(109) million in the first sixthree months of 2018, $1.0 billion more usage than2019; a decrease of $138 million from the $0.7 billion$(247) million net cash provided byused in operating activities in the first sixthree months of 2017.2018. 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 $(70) million in the first three months of 2019; $186 million less than the $116 million net cash provided by investing activities was $1.8 billion in the first sixthree months of 2018; $6.9 billion less than the $5.1 billion net cash used in investing activities in the first six months of 2017.2018. The decrease was primarily related to $2.0 billion$331 million higher net sale of investments, $2.2 billion changecash outflows from cash settlements related to derivatives, a $346 million decrease in short-term investments, $1.2 billion higher prepaymentrepayment of loans to affiliates and $1.2 billion$844 million lower cash outflows from cash settlement related to derivativesnet change in short-term investments. These were offset by $900 million higher net sales of investments and $515 million lower payables for investments as compared to the first sixthree months of 2017.2018.
Cash flows provided by financing activities were $0.5 billion$838 million in the first sixthree months of 2018; $4.3 billion2019; $562 million lower than the $4.9 billion$1,400 million net cash provided by financing activities in the first sixthree months of 2017.2018. The decrease was primarily driven by $1 billion$744 million cash paid to repurchase common stock, $590 million net decrease in securities sold under repurchase agreements, $373 million lower cash inflows for purchases of noncontrolling interest of consolidated company-sponsored investment funds, $173 million lower cash inflows from short-term financings and $53 million higher dividends paid to shareholders. These were offset by $552 million higher cash inflows due to net pledges of collateral, a $470 million decrease in repayments of loans to affiliates, $415 million higher net deposits to policyholders’policyholders' account balances $1.5 billion higherand $67 million lower cash outflows duefrom the distribution to net pledged collateral, and $1.3 billion higher cash outflow to purchase AB units. The $1.4 billion outflownoncontrolling interest of repayment of commercial paper and $2.9 billion outflow of repayment of loans from affiliates were largely funded by the $4.1 billion inflow from long-term debt issuance and $0.3 billion inflow from repurchase agreement increase.consolidated subsidiaries.
Statutory Capital of Our Insurance Subsidiaries
Our capital management framework is primarily based on statutory RBC standards and the CTE asset standard for our variable annuity business.
RBC requirements are used as minimum capital requirements by the NAIC and the state insurance departments to evaluate the capital condition of regulated insurance companies. RBC is based on a formula calculated by applying factors to various asset, premium, claim, expense and statutory reserve items. The formula takes into account the risk characteristics of the insurer, including asset risk, insurance risk, interest rate risk, market risk and business risk and is calculated on a quarterly basis and made public on an annual basis. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. These rules apply to our insurance company subsidiaries and not to Holdings. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose total adjusted capital does not meet or exceed certain RBC levels. At the date of the most recent annual statutory financial statements filed with insurance regulators, the total adjusted capital of each of these insurance company subsidiaries subject to these requirements was in excess of each of those RBC levels.
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. In the case of our analysis of variable annuity guarantees, CTE98 denotes the financial resources a company would need to cover the average of the worst 2% of scenarios.
We target to maintain an asset level for all variable annuity products at or above a CTE98 level under most economic scenarios.level. For our non-variable annuity insurance liabilities, we target to maintain an RBC ratio of 350%-400%–400%.
Captive Reinsurance Companies
We use captive reinsurance companies to more effectively manage our reserves and capital on an economic basis and to enable the aggregation and transfer of risks. Our captive reinsurance companies assume business from affiliates only and are closed to new business. All of our captive reinsurance companies are wholly owned subsidiaries and are located in the United States. In addition to state insurance regulation, our captives are subject to internal policies governing their activities. We continue to analyze the use of our existing captive reinsurance structures, as well as additional third-party reinsurance arrangements. On April 12, 2018, we effected an unwind of one of our existing captive reinsurance structures as described below.
Unwind of Reinsurance of GMxB Business with a Captive Reinsurer
On April 12, 2018, we effected an unwind of our existing captive reinsurance structure between AXA Equitable Life , AXA RE Arizona, an indirectly wholly owned subsidiary of Holdings. Prior to the unwind AXA RE Arizona reinsured a 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”) 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. AXA RE Arizona also reinsured a 90% quota share of level premium term insurance issued by AXA Equitable Life 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 Life on or after June 1, 2003 through June 30, 2007.
In connection with the GMxB Unwind, all of the business previously reinsured to AXA RE Arizona, with the exception of the GMxB Business, was novated on April 12, 2018 to EQ AZ Life Re, a newly formed captive insurance company organized under the laws of Arizona, an indirectly and wholly owned by Holdings. Following the novation of business to EQ AZ Life Re, AXA RE Arizona, holding only the GMxB Business, was merged with and into AXA Equitable Life. As a result of the merger, the reinsurance by AXA RE Arizona of the GMxB Business no longer in place. Following AXA RE Arizona’s merger with and into AXA Equitable Life, the GMxB Business is not subject to any new internal or third-party reinsurance arrangements, though in the future AXA Equitable Life may reinsure the GMxB Business with third parties.Description of Certain Indebtedness
Historically, our insurance companies have relied on AXA for most of our financing, either through internal loans or guarantees. In connection with the IPO, we have put in place a stand-alone financing strategy at Holdings targeting an overall indebtedness level in line with our U.S. public company peers. AB historically has been self-reliant for its financing, and we expect AB will remain so in its financing activities going forward. As of June 30, 2018, our total short-term and long-term external debt on a consolidated basis was $4.9 billion.
The following table sets forth our total consolidated borrowings as of the dates indicated. Our financial strategy going forward will remain subject to market conditions and other factors. For example, we may from time to time enter into additional bank or other financing arrangements, including public or private debt, structured facilities and contingent capital arrangements, under which we could incur additional indebtedness.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Holdings and AXA Financial | | AXA Equitable Life | | AB | | Consolidated | | Holdings and AXA Financial | | AXA Equitable Life(1) | | AB | | Consolidated |
| (in millions) |
Short-term and long-term debt | | | | | | | | | | | | |
Commercial paper | $ | — |
| | $ | — |
| | $ | 515 |
| | $ | 515 |
| | $ | 1,290 |
| | $ | — |
| | $ | 491 |
| | $ | 1,781 |
|
AB Revolver | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 75 |
| | 75 |
|
Long-term debt | 4,407 |
| | — |
| | — |
| | 4,407 |
| | 349 |
| | 203 |
| | — |
| | 552 |
|
Total short-term and long-term debt | 4,407 |
| | — |
| | 515 |
| | 4,922 |
| | 1,639 |
| | 203 |
| | 566 |
| | 2,408 |
|
Loans from affiliates | | | | | | | | | | | | |
Loans from affiliates | — |
| | — |
| | — |
| | — |
| | 3,622 |
| | — |
| | — |
| | 3,622 |
|
Total borrowings | $ | 4,407 |
| | $ | — |
| | $ | 515 |
| | $ | 4,922 |
| | $ | 5,261 |
| | $ | 203 |
| | $ | 566 |
| | $ | 6,030 |
|
|
| | | | | | | | | | | |
| March 31, 2019 |
| Holdings | | AB | | Consolidated |
| (in millions) |
Short-term debt: | | | | | |
AB commercial paper (with interest rate of 2.7%) | $ | — |
| | $ | 540 |
| | $ | 540 |
|
Total short-term debt | — |
| | 540 |
| | 540 |
|
| | | | | |
Long-term debt: | | | | | |
Senior Notes (5.00%, due 2048) | 1,480 |
| | — |
| | 1,480 |
|
Senior Notes (4.35%, due 2028) | 1,486 |
| | — |
| | 1,486 |
|
Senior Notes (3.90%, due 2023) | 794 |
| | — |
| | 794 |
|
Delayed Draw Term Loan (3-month LIBOR + 1.125%, due 2021) | 300 |
| | — |
| | 300 |
|
Senior Debentures, 7.0%, due 2028 | 349 |
| | — |
| | 349 |
|
Total long-term debt | 4,409 |
| | — |
| | 4,409 |
|
Total borrowings | $ | 4,409 |
| | $ | 540 |
| | $ | 4,949 |
|
| |
(1) | In March 2018, AXA Equitable Life sold its interest in two real estate joint ventures to AXA France for a total purchase price of approximately $143 million, which resulted in the elimination of the $203 million long-term debt shown in this column. |
|
| | | | | | | | | | | |
| December 31, 2018 |
| Holdings | | AB | | Consolidated |
| (in millions) |
Short-term debt: | | | | | |
AB commercial paper (with interest rate of 2.7%) | $ | — |
| | $ | 521 |
| | $ | 521 |
|
AB revolving credit facility (with interest rate of 3.4%) | — |
| | 25 |
| | 25 |
|
Total short-term debt | — |
| | 546 |
| | 546 |
|
In February 2018, we entered into a $3.9 billion two-year senior unsecured delayed draw term loan agreement, a $500 million three-year senior unsecured delayed draw term loan agreement
93
|
| | | | | | | | | | | |
| December 31, 2018 |
| Holdings | | AB | | Consolidated |
| (in millions) |
Long-term debt: | | | | | |
Senior Notes (5.00%, due 2048) | 1,480 |
| | — |
| | 1,480 |
|
Senior Notes (4.35%, due 2028) | 1,486 |
| | — |
| | 1,486 |
|
Senior Notes (3.90%, due 2023) | 794 |
| | — |
| | 794 |
|
Delayed Draw Term Loan (3-month LIBOR + 1.125%, due 2021) | 300 |
| | — |
| | 300 |
|
Senior Debentures, 7.0%, due 2028 | 349 |
| | — |
| | 349 |
|
Total long-term debt | 4,409 |
| | — |
| | 4,409 |
|
Total borrowings | $ | 4,409 |
| | $ | 546 |
| | $ | 4,955 |
|
Notes and a $2.5 billion five-year senior unsecured revolving credit facility (collectively, the “Credit Facilities”), which may provide significant support to our liquidity position when alternative sources of credit are limited. The Credit Facilities contain certain administrative, reporting, legal and financial covenants, including requirements to maintain a specified minimum consolidated net worth and to maintain a ratio of indebtedness to total capitalization not in excess of a specified percentage, and limitations on the dollar amount of indebtedness that may be incurred by our subsidiaries and the dollar amount of secured indebtedness that may be incurred by the Company, which could restrict our operations and use of funds. Borrowings under the term loan agreements would be made only prior to the IPO. Debentures
In April 2018, we terminated the two-year term loan agreement, and, in May 2018, we borrowed $300 million under the three-year term loan agreement and terminated the remaining $200 million capacity. In addition to the Credit Facilities, we entered into letter of credit facilities with an aggregate principal amount of approximately $1.9 billion, primarily to be used to support our life insurance business reinsured to EQ AZ Life Re following the GMxB Unwind. In April 2018, we also issued $3.8 billion in aggregate principal amount of notes (consisting of $800 million aggregate principal amount of 3.900%3.9% Senior Notes due 2023, $1.5 billion aggregate principal amount of 4.350%4.35% Senior Notes due 2028 and $1.5 billion aggregate principal amount of 5.000%5.0% Senior Notes due 2048) to third party investors. As of March 31, 2019, we had outstanding $349 million aggregate principal amount of 7.0% Senior Debentures due 2028 (the “Senior Debentures”).
The rightSenior Notes and Senior Debentures contain customary affirmative and negative covenants, including a limitation on certain liens and a limit on the Company’s ability to borrow fundsconsolidate, merge or sell or otherwise dispose of all or substantially all of its assets. The Senior Notes and Senior Debentures also include customary events of default (with customary grace periods, as applicable), including provisions under which, upon the Credit Facilities is subject to the fulfillmentoccurrence of certain conditions, includingan event of default, all outstanding Senior Notes and Senior Debentures may be accelerated. As of March 31, 2019, we were in compliance with all covenants, and the ability to borrow thereunder is also subject to the continued ability of the lenders that are or will be parties to the Credit Facilities to provide funds. For additional information regarding the covenants in our Credit Facilities and the conditions to borrowing thereunder, see “Risk Factors” in the Prospectus.
covenants.
Ratings
Financial strength ratings (which are sometimes referred to as “claims-paying” ratings) and credit ratings are important factors affecting public confidence in an insurer and its competitive position in marketing products. Our credit ratings are also important for our ability to raise capital through the issuance of debt and for the cost of such financing.
A downgrade of our debt ratings could affect our ability to raise additional debt with terms and conditions similar to our current debt, and accordingly, likely increase our cost of capital. In addition, a downgrade of these ratings could make it more difficult to raise capital to refinance any maturing debt obligations, to support business growth at our insurance subsidiaries and to maintain or improve the current financial strength ratings of our principal insurance subsidiaries. Upon announcement of AXA’s plan to pursue the IPO and the filing of the initial Form S-1 on November 13, 2017, AXA Equitable Life’s and AXA Financial’s ratings were downgraded by AM Best, S&P and Moody’s. The downgrades reflected the removal of the uplift associated with assumed financial support from AXA.
Financial strength ratings represent the opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under an insurance policy. Credit ratings represent the opinions of rating agencies regarding an entity’s ability to repay its indebtedness. The following table summarizes the ratings for Holdings and certain of its subsidiaries. S&P and Moody’s financial strength and credit ratings have a stable outlook while AM Best ratings are currently under review with developing implications.
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| | | | | |
| AM Best | | S&P | | Moody’s |
Last review date | 3/7/12/17/2018 | | 3/6/12/11/2018 | | 4/11/9/18/2018 |
Financial Strength Ratings: | | | | | |
AXA Equitable Life | A | | A+ | | A2 |
MLOA | A | | A+ | | A2 |
| | | | | |
Credit Ratings: | | | | | |
Holdings | —bbb+ | | BBB+ | | Baa2 |
AXA Financial | bbb+ | | BBB+ | | Baa2 | |
Last Review Date | | | 11/29/20179/2018 | | 5/17/201710/05/2018 |
AB | — | | AA/Stable/A-1 | | A2 |
SUPPLEMENTARY INFORMATION
We are involved in a number of ventures and transactions with AXA and certain of its affiliates. See Note 1311 of the Notes to the Consolidated Financial Statements included herein and Note 12 in the Notes to Consolidated Financial Statements included herein.
in the Annual Report on Form 10-K for the year ended December 31, 2018.
Contractual Obligations
Our consolidated contractual agreements include policyholder obligations, long-term debt, commercial paper, employee benefits, operating leases and various funding commitments. See “Supplementary Information – Contractual Obligations” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the ProspectusAnnual Report on Form 10-K for the year ended December 31, 2018 for additional information.
Off-Balance Sheet Arrangements
At June 30, 2018, the Company wasMarch 31, 2019, we were not a party to any off-balance sheet transactions other than those guarantees and commitments described in Note 1513 of the Notes to the Consolidated Financial Statements included herein.
Summary of Critical Accounting PoliciesEstimates
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.Statements included in our 2018 Form 10-K. The most critical estimates include those used in determining:
liabilities for future policy benefits;
accounting for reinsurance;
capitalization and amortization of DAC;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;
goodwill and related impairment;
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.
As previously reported, we identified two material weaknesses in the design and operation of our internal control over financial reporting. Our management has 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, timely reviews of assumptions and data have occurred; 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 or segments. We are currently in the process of remediating these material weaknesses by taking steps to (i) validate all existing actuarial models and valuation systems as well as to improve controls and processes around our assumption and data process and (ii) strengthen the control function related to the financial closing process. Although we plan to complete these remediation processes as quickly as possible, we cannot at this time estimate when the remediations will be completed. See Item 4, Controls and Procedures.
A discussion of each of the critical accounting estimates may be found in the Prospectus2018 Form 10-K in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — ApplicationSummary of Critical Accounting Estimates.”
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the quantitative and qualitative disclosures about market risk described in the ProspectusAnnual Report on Form 10-K for the year ended December 31, 2018 in “Quantitative and Qualitative Disclosures About Market Risk”.
Item 4. Controls and Procedures
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The management of the Company, with the participation of the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934)1934, as amended) as of June 30, 2018.March 31, 2019. This evaluation is performed to determine if our disclosure controls and procedures are 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 March 31, 2019.
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 (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 were completely and accurately recorded to the appropriate accounts or segments and, as a result, errors were identified in the consolidated financial statements, including in the presentation and disclosure between the operating and financing sections of the statements of cash flows. not:
| |
(i) | maintain effective controls to timely validate that actuarial models are properly configured to capture all relevant product features and 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 |
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(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 or segments 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 in:
(i) the revision of the interim financial statements for the nine, six, months ended June 30, 2017, nineand three months ended September 30, June 30, and March 31, 2018 and 2017, respectively, and the annual financial statements for the years ended December 31, 2017 and 2016,(ii) the restatement of the annual financial statements for the year ended December 31, 2016,2017;
(ii) the restatementsamended restatement of the interim financial statements for the nine months ended September 30, 2017 and for the six months ended June 30, 2017, and the year ended December 31, 2016 and revisions for the six and three months ended June 30, 2018 and March 31, 2018, respectively, and the three months ended March 31, 2017 and the years ended December 31, 2017, 2015, 2014, and 2013, respectively;
(iii) the revision of the annual financial statements for the year ended December 31, 20152017 and amended the revision ofrestated annual financial statements for the year ended December 31, 2016, and amended the restated interim financial statements for the nine and six months ended September 30, 20162017, and for the six months ended June 30, 2016, and (iii) the restatement of the interim financial statements for the six months ended June 30, 2017, respectively;
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(iv) | the restatements of the interim financial statements for the nine and six months ended September 30, 2017 and June 30, 2017, respectively, the restatement of the annual financial statements for the year ended December 31, 2016, the revision of the interim financial statements for the nine and six months ended September 30, 2016 and June 30, 2016, respectively, and the revision of the annual financial statements for the year ended December 31, 2015; and |
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(v) | the restatement of the interim financial statements for the six months ended June 30, 2017 and the revision of the annual financial statements for the years ended December 31, 2016, 2015 and 2014, respectively, and the interim financial statements for the six months ended June 30, 2016. |
These revisions and restatements were directly related to the revisionmaterial weaknesses described above and not indicative of the annual financial statements for the years ended December 31, 2016, 2015 and 2014 and the interim financial statements for the six months ended June 30, 2016.any new material weaknesses. Until remedied,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 result in a material misstatement to the Company’s annual or interim financial statements that would not be prevented or detected.
DueRemediation Status of Material Weaknesses
Management continues to theseexecute its plan moving towards remediation of the material weaknesses, the Company’s management, including the Company’s CEO and CFO, concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2018.
weaknesses. Since identifying the material weakness relatedweaknesses, management has performed the following activities:
Material Weakness Related to ourActuarial Models, Assumptions and Data
We have designed and implemented an enhanced model validation control framework, including a rotational schedule to periodically re-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 weand assumptions. We have been,initiated a validation review and a control design assessment of these data flows.
We are currently in the process of remediatingcompleting 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 taking stepsadding approximately 25 employees to validate allthe 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 actuarial models and valuation systems as well as tostaff.
To improve controls over journal entries, a less controlled secondary process that was used for consolidating certain entities, reflecting adjustments to prior periods, and processes around our assumptiongenerating the business segment disclosures has been eliminated. Beginning with third quarter 2018, all journal entries are recorded in the Company’s general ledger and data process. These steps include verifying inputs and unique algorithms, ensuring alignment with documented accountingthe secondary process is no longer necessary.
We have enhanced the controls over journal entries through the implementation of new standards and verifying assumptions used in our models are consistent with documented assumptions and data is reliable. The remediation efforts are being performed by our internal model risk team (which is separate from our modeling and valuation teams), as supported by third party firms. We will continue to enhance controlsdesigned to ensure our models, including assumptionseffective review and data,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 March 31, 2019, we are revalidated on a fixed calendar schedule and that new model changes and product features are tested through our internal model risk team prior to adoption within our models and systems. Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate when the remediation will be completed.
Since identifying the material weakness related to our journal entry process, we have been, and are currentlystill 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 by taking steps to strengthen the control function related to our financial closing process. These steps include recruiting additional personnel, retaining external expert resources, further automating entries where possible, enhancing the design of certain management review controlsmaterial weaknesses, and providing training regarding internal control processes. We willwe continue to enhancedevote 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 to ensureare effective. Accordingly, the financial closing process is effectively implemented. Although we plan to complete this remediation processmaterial weaknesses are not remediated as quickly as possible, we cannot at this time estimate when the remediation will be completed.of March 31, 2019.
Changes in Internal Control Over Financial Reporting
As described above, the Company continues to design and implement additional controls in connection with its remediation plan. There were noThese remediation efforts related to the material weaknesses described above represent changes in the Company’sour internal control over financial reporting (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 for the quarter ended June 30, 2018March 31, 2019 that hashave materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See Note 1513 of Notes to Consolidated Financial Statements contained herein. Except as disclosed in Note 1513 of Notes to Consolidated Financial Statements, there have been no new material legal proceedings and no new material developments in legal proceedings previously reported in the Prospectus.
Annual Report on Form 10-K for the year ended December 31, 2018.
Item 1A. Risk Factors
YouThe following risks should carefully considerbe read in conjunction with, and supplement and amend, the risks described in the “Risk Factors” section included in the Prospectus. These risks could materiallythat may affect our business, consolidated results of operations or financial condition.condition described in the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, 2018. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” above and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q.
AXA is our principal shareholder and has significant rights with respect to our governance and certain corporate actions pursuant to the Shareholder Agreement between AXA and Holdings (the “Shareholder Agreement”).
AXA owns approximately 48% of our outstanding common stock. From the time of our initial public offering (“IPO”) until the time of AXA’s secondary offering in March 2019, we were treated as a “controlled company” for purposes of the NYSE listed company rules. Accordingly, we were not subject to certain NYSE corporate governance requirements, including the requirements that our Board of Directors (the “Board”) consists of a majority of directors who are “independent,” as defined under the NYSE listed company rules, and that our Compensation Committee and our Nominating and Corporate Governance Committee each consist entirely of independent directors. Following the settlement of the March 2019 offering and concurrent stock buyback from AXA, our Board now consists of a majority of independent directors and our Compensation Committee and our Nominating and Corporate Governance Committee each consist entirely of independent directors. Three directors nominated by AXA remain on our Board.
AXA may no longer nominate a majority of our Board, and we are no longer subject to certain AXA Group standards. However, pursuant to the Shareholder Agreement, AXA continues to maintain significant influence over our governance. AXA continues to have consent rights with respect to certain corporate and business activities that we may undertake. Specifically, the Shareholder Agreement provides that, until the date on which AXA ceases to beneficially own at least 30% of our outstanding common stock, AXA’s prior written consent is required before we may take certain corporate and business actions, whether directly or indirectly through a subsidiary, including, among others, the following:
any merger, consolidation or similar transaction (or any amendment to or termination of an agreement to enter into such a transaction) involving us or any of our subsidiaries, on the one hand, and any other person, on the other hand, subject to certain specified exceptions;
any change in our authorized capital stock or the creation of any new class or series of our capital stock;
any issuance or acquisition of capital stock (including stock buy-backs, redemptions or other reductions of capital), or securities convertible into or exchangeable or exercisable for capital stock or equity-linked securities, subject to certain specified exceptions;
any issuance or acquisition of debt securities involving an aggregate principal amount exceeding $250 million;
any amendment (or approval or recommendation of any amendment) to our certificate of incorporation or by-laws; and
the election, appointment, hiring, dismissal or removal (other than for cause) of the Company’s CEO or CFO.
As a result of these consent rights, AXA maintains significant control over our corporate and business activities. For additional discussion of AXA’s consent rights under the Shareholder Agreement, see “Certain Relationships and Related Transactions, and Director Independence—Shareholder Agreement—Consent Rights” in our Annual Report on Form 10-K. Although AXA has announced that it intends to sell all of its interest in Holdings over time, AXA is under no obligation to do
so and retains the sole discretion to determine the timing of any future sales of shares of our common stock. Neither AXA nor any affiliate of AXA has any obligation to provide any capital or credit support to us.
Our amended and restated certificate of incorporation and our amended and restated by-laws also include a number of provisions that may discourage, delay or prevent a change in our management or control for so long as AXA owns specified percentages of our common stock. These provisions not only could have a negative impact on the trading price of our common stock, but could also allow AXA to delay or prevent a corporate transaction of which the public stockholders approve.
AXA’s continuing significant interest in us may result in conflicts of interest. Conflicts of interest may arise because AXA and its affiliates have continuing agreements and business relationships with us.
Conflicts of interest may arise between AXA and us. Affiliates of AXA engage in transactions with us. Further, AXA may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us, and they may either directly, or through affiliates, also maintain business relationships with companies that may directly compete with us. In general, AXA or its affiliates could pursue business interests or exercise their voting power as stockholders in ways that are detrimental to us but beneficial to themselves or to other companies in which they invest or with whom they have a material relationship. Conflicts of interest could also arise with respect to business opportunities that could be advantageous to AXA, and they may pursue acquisition opportunities that may be complementary to our business. As a result, those acquisition opportunities may not be available to us. Under the terms of our amended and restated certificate of incorporation, AXA has no obligation to offer us corporate opportunities. In addition, changes to IFRS 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. See “Risk Factors—Risks Relating to Our Operations–Changes in accounting standards could have a material adverse effect on our business, results of operations or financial condition” in our Annual Report on Form 10-K for the year ended December 31, 2018.
AXA and its affiliates other than us are among AB’s largest clients. AXA and its affiliates other than us represented 6% of AB’s total AUM as of December 31, 2018 and 2% of AB’s net revenues for the year ended December 31, 2018. AB’s investment management agreements with AXA and its affiliates are terminable at any time or on short notice by either party and AXA and its affiliates are under no obligation to maintain any level of AUM with AB. If AXA and its affiliates were to terminate their investment management agreements with AB, it could have a materially adverse effect on AB’s business, results of operations or financial condition.
As a result of these relationships, the interests of AXA may not coincide with our interests or the interests of the other holders of our common stock. So long as AXA continues to control a significant amount of the outstanding shares of our common stock, AXA will continue to be able to strongly influence or effectively control our decisions, including potential mergers or acquisitions, asset sales and other significant corporate transactions.
If AXA sells a significant interest in our company to a third party in a private transaction, you may become subject to the control of a presently unknown third party and may not realize any change of control premium on shares of our common stock.
AXA has the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction. The ability of AXA to privately sell such shares of our common stock could prevent you from realizing any change of control premium on your shares of our common stock that may otherwise accrue to AXA upon its private sale of our common stock. Additionally, if AXA privately sells a significant equity interest in us to a third party, we may become subject to the control or significant influence of a presently unknown third party. Such third party may have conflicts of interest with the interests of other stockholders.
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 the Transitional Services Agreement.
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 the Transitional
Services Agreement. Certain contracts and services between us and AXA are not covered by the Transitional Services Agreement and continue pursuant to the terms of such contracts. Under the Transitional Services Agreement, AXA agrees to continue to provide us with certain services currently provided to us by or through AXA, either directly or on a pass-through basis, and we agree to continue to provide, or arrange to provide, AXA with certain services currently provided to them, 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.
In connection with the IPO and transitioning to operating as a stand-alone public company, we have incurred and expect to continue to incur one-time and recurring expenses. These expenses primarily relate to information technology, compliance, internal audit, finance, risk management, procurement, client service, human resources and other support services. The process of replicating and replacing functions, systems and infrastructure provided by AXA or certain of its affiliates in order to operate on a stand-alone basis is currently underway. Furthermore, as a result of AXA ceasing to own at least a majority of our outstanding common stock, we incurred, and continue to incur, additional expenses.
These expenses, any recurring expenses, including under the Transitional Services Agreement, and any additional one-time expenses, including as a result of rebranding, we may incur may be material. We estimate that the aggregate amount of the total separation expenses described above will be between approximately $650 million and $700 million. Through March 31, 2019, a total of $334 million has been incurred, of which $24 million and $61 million was incurred in the three months ended March 31, 2019 and 2018, respectively.
Costs associated with rebranding could be significant.
Prior to the IPO, as a wholly-owned subsidiary of AXA, we marketed our products and services using the “AXA” brand name and logo together with the “Equitable” brand. On March 28, 2019, AXA terminated the Trademark License Agreement, dated May 4, 2018, between Holdings and AXA (the “Trademark License Agreement”). Accordingly, 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 employees. 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
NONE.The following table provides information about purchases by Holdings during the three months ended March 31, 2019, of its common stock:
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Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Programs | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (1) (2) |
1/1/19 through 1/31/19 | 6,956,522 |
| | $ | 18.51 |
| | 6,956,522 |
| | $ | 1,185,479 |
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2/1/19 through 2/28/19 | — |
| | $ | — |
| | — |
| | $ | 801,185,479 |
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3/1/19 through 3/31/19 | 31,147,150 |
| | $ | 19.93 |
| | 31,147,150 |
| | $ | 200,375,000 |
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Total | 38,103,672 |
| | $ | 19.67 |
| | 38,103,672 |
| | $ | 200,375,000 |
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(1) | In January 2019, Holdings entered into an Accelerated Share Repurchase agreement (the “ASR”) with a third-party financial institution to repurchase an aggregate of $150 million of Holdings’ common stock. As such, $150 million in cash was delivered at the time of the agreement along with the first tranche of shares. The ASR closed on March 1, 2019, with a second tranche of shares delivered on that date. |
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(2) | On February 27, 2019, Holdings’ Board of Directors authorized an $800 million share repurchase program replacing the previous authorization. |
Item 3. Defaults Upon Senior Securities
NONE.
None.
Item 4. Mine Safety Disclosures
NONE.
None.
Item 5. Other Information
Iran Threat Reduction and Syria Human Rights Act
Holdings and its 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 embassyEmbassy 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 $24,600. These policies were underwritten by a broker who specializes in providing insurance coverage for diplomats.$24,272.
AXA also has informed us that AXA Belgium, an AXA insurance subsidiary organized under the laws of Belgium, insures three carshas two policies providing for car insurance for Global Trading NV, who werewhich was designated on May 17, 2018 under (E.O.) 13224.13224 and subsequently changed its name to Energy Engineers & Construction on August 20, 2018. The total annual premium of these policies is approximately $15,553$6,559 before tax and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $1,866.$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 $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 third party 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 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 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.
Lastly, 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.
The aggregate annual premium for the above-referenced insurance policies is approximately $559,025,$572,960, representing approximately 0.0006%0.0007% of AXA’s 20172018 consolidated revenues, which exceed $100 billion. The related net profit, which is difficult to calculate with precision, is estimated to be $85,792,$88,070, representing approximately 0.001%0.002% of AXA’s 20172018 aggregate net profit.
Mark Pearson Employment Agreement Waiver
On May 8, 2019, Mr. Pearson irrevocably waived his right under his employment agreement dated March 9, 2011 to terminate his employment for “good reason” and receive certain severance benefits due to his replacement as Chair of the AXA Equitable Life Board of Directors by Mr. Ramon de Oliveira.
Item 6. Exhibits
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Number | Description and Method of Filing |
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| Indenture, dated as of April 20, 2018, among AXA Equitable Holdings, Inc., as issuer, Wilmington Saving Fund Society, FSB, as trustee, and Citibank, N.A., as security registrar and paying agent (incorporated by reference to Exhibit 4.4 to the Form S-1). |
| First Supplemental Indenture, dated as of April 20, 2018, among AXA Equitable Holdings, Inc., as issuer, Wilmington Saving Fund Society, FSB, as trustee, and Citibank, N.A., as security registrar and paying agent (incorporated by reference to Exhibit 4.5 to the Form S-1). |
| Second Supplemental Indenture, dated as of April 20, 2018, among AXA Equitable Holdings, Inc., as issuer, Wilmington Saving Fund Society, FSB, as trustee, and Citibank, N.A., as security registrar and paying agent (incorporated by reference to Exhibit 4.6 to the Form S-1). |
| Third Supplemental Indenture, dated as of April 20, 2018, among AXA Equitable Holdings, Inc., as issuer, Wilmington Saving Fund Society, FSB, as trustee, and Citibank, N.A., as security registrar and paying agent (incorporated by reference to Exhibit 4.7 to the Form S-1). |
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| Amendment to the AXA Equitable Post-2004 Variable Deferred Compensation Plan for Executives, effective as of January 1, 2019 (incorporated by reference to Exhibit 10.69 of the 2018 Form 10-K). |
| Form of Transaction IncentivePerformance Shares Award Agreement under the 2018 Omnibus Incentive Plan, effective as of February 14, 2019 (incorporated by reference to Exhibit 10.2110.70 of our Quarterly Report onthe 2018 Form 10-Q filed on June 20, 2018, File No. 001-38469)10-K). |
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| 2018 Form 10-K). |
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Number | Description and Method of Filing |
| Share Repurchase Agreement between AXA S.A. and AXA Equitable Holdings, Inc. (incorporated by reference to Exhibit 10.73 to the Registration Statement on Form S-1 of AXA Equitable Holdings, Inc., File No. 333-230367). |
| Certification of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certification of the Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| Certification of the Registrant’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101.INS | XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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# Filed herewith.
† Identifies each management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, AXA Equitable Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Date: August 13, 2018May 10, 2019 | AXA Equitable Holdings, Inc.EQUITABLE HOLDINGS, INC. |
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| | By: | /s/ Anders Malmström |
| | | Name: | Anders Malmström |
| | | Title: | Senior Executive Vice President |
| | | | and Chief Financial Officer |
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Date: August 13, 2018 | May 10, 2019 | | /s/ Andrea NitzanWilliam Eckert |
| | | Name: | Andrea NitzanWilliam Eckert |
| | | Title: | Senior Vice President, |
| | | | Chief Accounting Officer and Controller |