Business context and reporting period
AXA Equitable Holdings, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2018. Its businesses are Individual Retirement, Group Retirement, Investment Management and Research (including AllianceBernstein, or AB), and Protection Solutions, plus Corporate and Other. AXA completed a partial public offering on May 14, 2018, after quarter-end, and retained approximately 71.9% of Holdings’ shares.
Financial performance and position
- Revenue: $2.835 billion, up slightly from $2.830 billion in Q1 2017.
- Earnings: GAAP net income attributable to Holdings was $168 million ($0.30 per share), versus a $290 million loss ($0.52 loss per share) a year earlier. Non-GAAP Operating Earnings were $464 million ($0.83 per share), compared with $304 million ($0.54 per share).
- Cash flow: Operating activities used $264 million, versus $72 million provided in Q1 2017. Investing activities provided $459 million, and financing activities provided $1.074 billion. Cash and equivalents were $6.091 billion at quarter-end.
- Assets and equity: Total assets were $232.294 billion, including $121.858 billion of Separate Accounts assets; total equity was $16.600 billion. Holdings-attributable equity was $13.565 billion.
- Debt and liquidity: Short- and long-term debt was $2.373 billion, down from $2.408 billion at year-end 2017. Loans from affiliates were $2.530 billion, versus $3.622 billion. The company reported no outstanding balances on its new Holdings credit facilities at March 31. It also had $3.0 billion of FHLBNY funding agreements outstanding and $4.489 billion of undrawn letters of credit.
- Investment and comprehensive results: Net investment income was $591 million, down from $780 million; net derivative losses were $281 million. Other investment gains were $102 million, versus a $24 million loss. Comprehensive loss attributable to Holdings was $670 million, largely reflecting a $960 million after-tax decline in unrealized gains on investments.
Changes versus the prior comparable period
- GAAP earnings improved by $458 million. Management attributed the change principally to lower policyholder benefits, including a $441 million decrease in Individual Retirement GMxB reserves, and higher investment gains and investment-management fees. A $369 million goodwill impairment in Q1 2017 also affected the comparison.
- Non-GAAP Operating Earnings rose $160 million. The Individual Retirement segment increased to $360 million from $202 million; Group Retirement to $76 million from $59 million; Investment Management and Research to $81 million from $32 million. Protection Solutions declined to $23 million from $39 million, while Corporate and Other worsened to a $76 million loss from a $28 million loss.
- Investment Management and Research fees benefited from average AUM growth of 13% and a 2% increase in the overall portfolio return rate. Segment operating results also reflected adoption of ASC 606, including a reported $78 million revenue increase and $43 million expense increase.
- Individual Retirement reported $462 million of net outflows, primarily from older fixed GMxB products, partly offset by inflows to newer products. Group Retirement recorded $101 million of net inflows. AB reported $2.4 billion of long-term net outflows for the quarter, while its AUM ended at $549.5 billion.
Outlook, commentary, risks and unusual items
- Management expects an effective tax rate of approximately 19% under the Tax Reform Act and expects the law to have an overall positive economic effect; the company was still evaluating its detailed impacts.
- Management estimated IPO and stand-alone separation costs of $300 million–$350 million in total, including approximately $150 million expected in 2018. $61.4 million was incurred in Q1 2018.
- On April 12, 2018, the company completed the GMxB captive reinsurance unwind. Management said the resulting placement of derivatives primarily within AXA Equitable Life was expected to reduce overall liquidity needs, while the hedge program may increase reported earnings volatility.
- After quarter-end, Holdings issued $3.8 billion of senior notes, made affiliate-loan settlements, and acquired additional AB interests. Its economic interest in AB was approximately 65% at April 30, 2018. These are subsequent events, not March 31 balances.
- The company disclosed two material weaknesses in internal controls: actuarial-model validation and financial-close/journal-entry controls. Management concluded disclosure controls were ineffective as of March 31; remediation was underway, with no completion date estimated. Prior-period financial statements had been restated or revised.
- Management cited market, interest-rate, equity, policyholder-behavior, hedging, reinsurance, regulatory-capital, ratings, operational, and litigation risks. It estimated reasonably possible litigation losses in excess of recorded accruals of up to approximately $90 million, while noting some matters could not be estimated.
- No specific consolidated earnings guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Reconcile GAAP and non-GAAP earnings, particularly the effects of GMxB reserve changes, derivatives, the prior-year goodwill impairment, and the 2018 pension settlement.
- Track remediation of the material weaknesses, subsequent reporting quality, and any additional restatements or revisions.
- Review post-IPO debt, affiliate transactions, credit-facility usage, and the effect of the GMxB unwind on statutory capital, collateral needs, and liquidity.
- Monitor retirement-product flows, AB AUM and net flows, and Protection Solutions’ elevated DAC amortization and loss-recognition position.
- Assess investment valuation and market exposure, including rising unrealized fixed-maturity losses and the assumptions underlying Level 3 insurance derivatives.
- Follow litigation developments and any changes to the estimated reasonably possible loss range.