Business context and reporting period
AXA Equitable Holdings, Inc. (now Equitable Holdings) filed this Form 10-K for the fiscal year ended December 31, 2018. The company operates Individual Retirement, Group Retirement, Investment Management and Research (AllianceBernstein, or AB), and Protection Solutions, plus Corporate and Other. AXA owned approximately 59% of the company at year-end. The company completed its IPO in May 2018 and remained in transition to standalone public-company operations.
Financial results and position
Unless otherwise noted, figures are for the year ended December 31 and dollars are U.S. dollars.
| Metric | 2018 | 2017 | Change / context |
|---|---|---|---|
| Total revenue | $12.078 billion | $12.460 billion | Down 3.1% |
| Income before tax | $2.461 billion | $1.306 billion | Up 88.4% |
| Net income attributable to Holdings | $1.820 billion | $834 million | Up $986 million |
| Diluted GAAP EPS | $3.27 | $1.48 | Up from $1.48 |
| Non-GAAP Operating Earnings | $2.166 billion | $2.035 billion | Up 6.4%; non-GAAP measure |
| Non-GAAP Operating EPS | $3.89 | $3.63 | Up 7.2%; non-GAAP measure |
| Net cash from operating activities | $61 million | $(243) million | Improved by $304 million |
| Cash and cash equivalents at year-end | $4.469 billion | $4.814 billion | Down $345 million |
| Total assets / total equity | $220.797 billion / $15.432 billion | $235.615 billion / $16.518 billion | Both declined |
| Short- and long-term debt | $4.955 billion | $2.408 billion | Increased mainly following 2018 debt issuance |
Revenue fell despite higher policy charges and fee income ($3.824 billion, up from $3.693 billion) and investment management and service fees ($4.268 billion, up from $4.093 billion). Net investment income declined to $2.693 billion from $3.082 billion, and net derivative results shifted to a $231 million loss from a $214 million gain. Policyholders’ benefits fell to $2.915 billion from $4.366 billion, a major contributor to higher GAAP earnings. The filing cautions that derivative and guarantee accounting can make GAAP earnings volatile.
Segment operating earnings were: Individual Retirement $1.555 billion (2017: $1.252 billion); Group Retirement $389 million ($283 million); Investment Management and Research $381 million ($211 million); Protection Solutions $197 million ($502 million); and Corporate and Other loss of $356 million (loss of $213 million). Protection Solutions’ decline largely reflected the absence of favorable 2017 assumption updates and higher mortality experience. Corporate and Other’s loss widened, primarily due to higher interest expense and lower net investment income.
Liquidity and capital: year-end statutory total adjusted capital for the insurance subsidiaries was approximately $8.5 billion, with a Combined RBC Ratio of approximately 670%. The company targets CTE98 asset levels for variable annuities and 350–400% RBC for non-variable-annuity liabilities. Debt-to-capital excluding AOCI was approximately 25%, with management targeting the mid-20% range. Holdings received $1.4 billion in net distributions from subsidiaries during 2018; insurance-subsidiary dividends remain subject to regulatory limits. The company reported $81.3 billion in total investments; $46.3 billion was available-for-sale fixed maturities, 97.3% of which was investment grade.
Material changes versus the prior comparable period
- GAAP net income and EPS increased substantially, while total revenue declined. Non-GAAP Operating Earnings rose more moderately, emphasizing the effect of market-sensitive and other excluded items on GAAP results.
- 2018 actuarial assumption updates reduced GAAP net income by approximately $131 million, including a $366 million unfavorable impact from variable-annuity feature assumptions. On the company’s non-GAAP basis, assumption updates were favorable by $169 million after tax.
- AB assets under management fell 6.9% to $516.4 billion from $554.5 billion, including $30.0 billion of market depreciation and $8.1 billion of net long-term outflows. Fourth-quarter market declines reduced AUM by $34.0 billion.
- Individual Retirement account value fell to $94.6 billion from $103.4 billion, reflecting market declines and net outflows, particularly from older fixed-rate guaranteed-benefit products. Group Retirement account value fell to $32.4 billion from $33.9 billion; net flows remained positive at $96 million.
- The company issued $3.8 billion of senior notes and borrowed $300 million under a term loan. Year-end external debt increased, while affiliate loans fell to zero.
- Cash flows from operations improved to positive $61 million, but cash declined. The filing also revised prior-period cash-flow classifications and reported earlier revisions and restatements related to control weaknesses.
Outlook, management commentary, risks and unusual items
- Management’s goals include 5–7% compound annual growth in Non-GAAP Operating Earnings through 2020, subject to market conditions; returning 50–60% of Non-GAAP Operating Earnings to shareholders on an annualized basis starting in 2019; and achieving mid-teens Non-GAAP Operating ROE by 2020. These are forward-looking targets, not guarantees.
- Management estimated that General Account portfolio optimization could add approximately $160 million of annual Non-GAAP Operating Earnings by 2020, and productivity initiatives could add approximately $75 million pre-tax annually by 2020. These estimates depend on market, execution and other assumptions.
- AB no longer considered its target of a 30% adjusted operating margin by 2020 likely after market-driven AUM declines; it remained committed to the target in later years, subject to market and business conditions.
- The Tax Reform Act lowered the federal corporate tax rate and benefited earnings, but changes to the RBC calculation reflecting the 21% tax rate reduced the Combined RBC Ratio.
- Key risks include equity-market and interest-rate movements, variable-annuity guarantee costs and hedge effectiveness, policyholder behavior, reserve assumptions, reinsurance and counterparty performance, investment losses, competition and active-management outflows, regulatory changes, and restrictions on subsidiary dividends. NAIC variable-annuity reserve and capital reforms were expected to take effect from 2020, with implementation details still uncertain.
- The company reported two unremediated material weaknesses in internal control over financial reporting: actuarial-model, assumption and data controls; and staffing and financial-statement/journal-entry controls. Management concluded disclosure controls were ineffective at year-end. The auditor gave an unqualified opinion on the financial statements but was not engaged to opine on internal-control effectiveness.
- Earlier financial statements were restated or revised, and 2018 cash-flow misclassifications were revised; management said the latter were not material. A November 2018 incident at a third-party vendor involved unauthorized access to some customer information; the company said it notified affected parties and believed the incident was resolved, while noting remediation could not be assured fully.
- Litigation includes cost-of-insurance increase and other insurance-related cases. For certain matters, the company estimated reasonably possible losses in excess of accruals of up to approximately $95 million; it could not estimate losses for other matters.
- Shareholders received two 2018 dividends of $0.13 per share. The company repurchased approximately 32.5 million shares at a total cost of approximately $649 million. Future dividends and repurchases are discretionary and subject to regulatory, capital and other constraints.
Important facts for investors to verify
- Reconcile GAAP net income growth with the lower revenue, large decline in policyholders’ benefits, derivative volatility and actuarial assumption effects; compare it with the non-GAAP measure and its exclusions.
- Review remediation and independent testing of the two material weaknesses, and monitor any subsequent financial-statement revisions or cash-flow reclassifications.
- Track statutory capital and RBC results against the 670% year-end ratio, including effects of market conditions and the implementation of variable-annuity capital reforms.
- Assess liquidity at Holdings separately from insurance subsidiaries, including regulatory dividend capacity, collateral requirements, debt service and the $6.1 billion of securities pledged for FHLBNY funding.
- Monitor AB AUM, net flows, investment performance, fee rates and progress on its margin and expense plans amid the shift from active to passive investing.
- Evaluate whether the 2020 earnings, return-on-equity, portfolio optimization and productivity targets remain achievable under the stated market and execution assumptions.