Business context and reporting period
AXA Equitable Holdings, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2018. Its businesses span individual and group retirement, investment management and research (AllianceBernstein, or AB), and protection solutions. AXA completed a minority-share IPO on May 14, 2018 and held approximately 71.9% of Holdings at June 30.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $2.962 billion | $3.882 billion | $5.797 billion | $6.712 billion |
| Pre-tax income from continuing operations | $314 million | $614 million | $684 million | $447 million |
| Net income attributable to Holdings | $158 million | $608 million | $326 million | $318 million |
| GAAP diluted EPS | $0.28 | $1.08 | $0.58 | $0.57 |
| Non-GAAP operating earnings | $506 million | $399 million | $970 million | $703 million |
| Non-GAAP operating EPS | $0.90 | $0.71 | $1.73 | $1.25 |
Amounts are in U.S. dollars. The company’s non-GAAP operating measures exclude, among other items, variable-annuity feature impacts, investment gains and losses, pension actuarial items, and certain other adjustments; they are not substitutes for GAAP results.
- Q2 revenue fell $920 million year over year, chiefly reflecting the swing in net derivative results (a $73 million loss versus a $729 million gain) and lower net investment income ($596 million versus $803 million). Q2 policyholder benefits also declined substantially, partly reflecting prior-year reserve strengthening.
- For the first six months, revenue declined $915 million, while net income attributable to Holdings rose $8 million. Lower policyholder benefits and operating costs, including the prior-year $369 million goodwill impairment, were offset by lower investment income, higher DAC amortization and higher tax expense.
- Non-GAAP operating earnings increased in both comparisons. Management cited improved variable-annuity margins relative to 2017 reserve strengthening, higher investment-management fees and average AUM, and higher investment income in the retirement and protection businesses.
- At June 30, total assets were $231.0 billion, total liabilities $216.0 billion, and total equity $14.9 billion. Cash and cash equivalents were $6.8 billion, up from $4.8 billion at year-end 2017. Holdings-attributable equity was $13.4 billion; accumulated other comprehensive loss attributable to Holdings was $1.3 billion.
- Six-month operating cash flow was negative $314 million, compared with positive $666 million in the prior-year period. Investing cash flow was positive $1.807 billion, versus negative $5.067 billion; financing cash flow was positive $532 million, versus positive $4.923 billion.
- Short- and long-term debt totaled $4.922 billion, up from $2.408 billion at year-end. This reflects new public notes and a $300 million term loan issued as the company shifted away from affiliate financing; affiliate loans declined from $3.622 billion to zero. Q2 interest expense rose to $60 million from $38 million.
- Fixed maturities had $1.206 billion of gross unrealized losses at June 30, compared with $324 million at year-end; the filing says the company did not intend, and was not likely required, to sell the affected securities before recovery.
Material changes, outlook, and risks
- Holdings’ economic interest in AB increased to approximately 64.7% from approximately 47% at year-end 2017 following April transactions. The acquisition increased the share of AB earnings attributable to Holdings but also reduced noncontrolling interests.
- On April 12, the company unwound a captive reinsurance arrangement covering specified variable annuity guarantees. The associated GMxB business is no longer ceded under that arrangement. Management uses dynamic and static hedging and says static hedges are intended to support statutory capital, but hedging does not eliminate exposure and may add reported earnings volatility.
- The company expects $300 million to $350 million in aggregate one-time stand-alone transition expenses related to the IPO and separation from AXA; approximately $150 million was expected in 2018. It reported $94 million incurred in the first half of 2018. Management expects productivity initiatives to add approximately $75 million of pre-tax annual operating earnings by 2020.
- The Tax Reform Act is expected by management to have an overall positive economic impact, although the company noted effects on deferred tax assets and insurance-company capital. After the quarter, the NAIC adopted a framework scheduled to take effect in 2020; the company said revised RBC calculations were expected to reduce its Combined RBC Ratio by approximately 100 percentage points at year-end 2018.
- Management identifies market and interest-rate conditions, variable-annuity guarantees, hedging and reinsurance effectiveness, policyholder behavior, investment losses, regulatory changes and access to subsidiary dividends as significant risks. It also notes potential pressure from lower investment yields and increased market volatility.
- Litigation and regulatory matters arise in the ordinary course. The company estimated reasonably possible losses, in excess of recorded accruals, of up to approximately $90 million, while stating it could not estimate a range for some matters.
- Management reported two unremediated material weaknesses in internal control over financial reporting: actuarial model validation and controls over financial close and journal entries. It concluded disclosure controls were ineffective as of June 30. Prior-period statements were restated for material reserve and DAC errors; 2017 comparative figures in this filing are identified as restated.
- Subsequent events: the board declared a $0.13-per-share dividend on August 10, payable August 30, and authorized a share repurchase program of up to $500 million through March 31, 2019. The filing also reports a $1.1 billion dividend from AXA Equitable Life to Holdings on July 26.
Important facts for investors to verify
- Review the GAAP-to-non-GAAP reconciliation and assess how much operating-earnings growth depends on exclusions and prior-year reserve effects.
- Track remediation of the material weaknesses, subsequent reporting quality, and any further restatements or revisions.
- Assess variable-annuity guarantee exposure, hedge performance, remaining retained risks, and the effects of the reinsurance unwind and forthcoming NAIC capital framework.
- Monitor cash generation, new debt and interest costs, subsidiary dividend capacity, and the liquidity and collateral requirements of hedging and funding agreements.
- Evaluate AB’s net flows and AUM: Q2 AUM was $539.8 billion, down $9.7 billion from the prior quarter, including $7.7 billion of net long-term outflows.
- Check actual separation expenses against management’s estimates, and follow the stated efficiency targets, dividend and repurchase execution, and litigation developments.