Business context and reporting period
AXA Equitable Holdings, Inc. (now Equitable Holdings) filed this unaudited Form 10-Q for the quarter ended March 31, 2019. Its businesses are Individual Retirement, Group Retirement, Investment Management and Research (AllianceBernstein), and Protection Solutions, plus Corporate and Other. Results are compared with the three months ended March 31, 2018; the filing notes that certain 2018 figures were revised or reclassified.
Financial results and position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total revenue | $1.714 billion | $2.874 billion |
| Pre-tax income (loss) | $(924) million | $428 million |
| Net income (loss) | $(709) million | $337 million |
| Net income (loss) attributable to Holdings | $(775) million | $214 million |
| GAAP diluted EPS | $(1.50) | $0.38 |
| Non-GAAP operating earnings | $509 million | $483 million* |
| Non-GAAP operating EPS | $0.98 | $0.86* |
| Operating cash flow | $(109) million | $(247) million |
*Management’s prospective change to the treatment of SCS deferred acquisition cost amortization affects comparability: on the revised basis, Q1 2018 non-GAAP operating earnings would have been $442 million and operating EPS $0.79.
- Drivers and margins: GAAP results were heavily affected by net derivative losses of $1.630 billion, versus $236 million of losses a year earlier. Management attributed the deterioration mainly to higher freestanding derivative losses and an increase in the fair value of the GMIBNLG liability. Fee-type revenue declined, while net investment income rose. No operating margin figure is stated in the filing.
- Segment operating earnings: Individual Retirement $370 million (prior year $368 million); Group Retirement $81 million ($76 million); Investment Management and Research $77 million ($81 million); Protection Solutions $49 million ($35 million); Corporate and Other $(68) million ($(77) million).
- Balance sheet at March 31: assets $232.819 billion, liabilities $217.930 billion, total equity $14.682 billion, and cash and cash equivalents $5.129 billion. Separate Accounts assets and liabilities were each $120.194 billion.
- Debt and liquidity: consolidated borrowings were $4.949 billion, including $4.409 billion of long-term debt and $540 million of AllianceBernstein commercial paper. Holdings had a $2.5 billion revolving credit facility; the company reported covenant compliance. Operating and investing activities used $109 million and $70 million, respectively; financing activities provided $838 million. Cash increased by $660 million from year-end to $5.129 billion.
- Insurance and investment measures: Individual Retirement account value was $102.498 billion; Group Retirement account value was $35.077 billion. AllianceBernstein AUM was $554.7 billion at quarter-end, up 7.4% from year-end, reflecting $37.2 billion of market appreciation and $1.1 billion of net long-term inflows.
Material changes versus the prior comparable period
- Holdings’ attributable result swung from $214 million of income to a $775 million loss, chiefly reflecting a $1.394 billion year-over-year deterioration in net derivative results. Policyholder benefits rose $286 million, while investment gains fell by $113 million.
- Net investment income increased $424 million, partly offsetting the derivative impact. Management cited trading-security market value changes and lower interest rates. Compensation, benefits and other operating expenses declined $153 million, in part because the prior-year period included pension settlement costs.
- Non-GAAP operating earnings increased $26 million to $509 million as reported. The reported comparison is affected by a change in the SCS DAC methodology; on management’s adjusted comparison, the increase from $442 million would be $67 million.
- AXA’s ownership fell to 48.3% after its March secondary offering and concurrent sale of shares to Holdings; Holdings was no longer majority-owned by AXA. Holdings repurchased shares, including $150 million under an accelerated repurchase agreement, and paid a $0.13-per-share dividend.
- Adoption of the leases standard on January 1, 2019 added $799 million of operating lease assets and $1.024 billion of lease liabilities at adoption. The filing says other newly adopted accounting standards had no material financial-statement impact.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no specific quarterly or full-year earnings guidance. Management expects productivity initiatives to increase pre-tax operating earnings by approximately $75 million annually by 2020. Estimated total separation expenses are $650–$700 million; $334 million had been incurred through March 31, 2019.
- Market and insurance risks: Results and liquidity are sensitive to equity-market performance, interest rates, volatility, policyholder behavior, hedging effectiveness, investment yields and counterparty credit. Derivative gains and losses are recognized immediately while offsetting insurance liability movements may emerge over time, creating GAAP earnings volatility. Low rates may pressure investment spreads, increase hedging costs or statutory reserves, and affect subsidiary dividend capacity.
- Capital and funding: Management targets variable-annuity assets at or above CTE98 and RBC ratios of 350%–400% for non-variable-annuity liabilities. AXA Equitable Life agreed with the NYDFS not to seek more than $1.0 billion of ordinary dividends in 2019; management said this would not impair Holdings’ liquidity needs or 2019 capital-return plans. In April 2019, after quarter-end, $1.0 billion of P-Caps were issued as contingent funding arrangements that permit Holdings to elect to issue senior notes.
- Separation and rebranding: AXA terminated the trademark license in March 2019; the company expects to cease using the AXA brand within 18 months, subject to permitted extensions. Rebranding and replacing AXA-provided services may raise costs or disrupt operations. AXA retains significant consent rights while it owns at least 30% of Holdings.
- Accounting and controls: Management expects adoption of the long-duration insurance-contract standard (ASU 2018-12) to have a significant impact on financial condition, results, cash flows, disclosures, processes and controls. Disclosure controls were not effective at March 31, 2019 because two material weaknesses remained: actuarial model/data controls and insufficient experienced financial-reporting personnel and journal-entry controls. Remediation work was ongoing; management had not concluded the weaknesses were remediated.
- Contingencies: The company estimated reasonably possible litigation and regulatory losses in excess of accrued amounts of up to approximately $95 million; it could not estimate losses for some matters. Management said pending matters were not likely to materially affect financial position based on information then known, while acknowledging adverse outcomes could materially affect a particular period’s results or cash flows.
Important facts for investors to verify
- How much of the reported GAAP loss reflects timing and valuation mismatches in variable-annuity hedges and guarantees, and how effective are those hedges economically and for statutory capital?
- How comparable are the $509 million of Q1 2019 operating earnings and the prior-year measure after the SCS DAC methodology change?
- What are the current status, testing results and expected completion timing for remediation of the two material weaknesses and ineffective disclosure controls?
- How will AXA separation, service replacement and rebranding affect costs, customer retention, governance and subsidiary cash distributions?
- What are the updated implications of the insurance-contract accounting standard, statutory capital rules, litigation exposures and the April 2019 P-Caps?