10-K 1 ael201810-k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549  
 
FORM 10-K
 
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018 
OR
¨
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. 000-20501
 
AXA EQUITABLE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)

New York
 
13-5570651
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨    No  x
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 every Interactive Data File required to be submitted 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 such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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.
Large accelerated filer
¨

Accelerated filer
¨
Non-accelerated filer
x
Smaller reporting company
¨
Emerging growth company
¨
 
 
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
As of March 28, 2019, 2,000,000 shares of the registrant’s $1.25 par value Common Stock were outstanding, all of which were owned indirectly by AXA Equitable Holdings, Inc.
REDUCED DISCLOSURE FORMAT
AXA Equitable Life Insurance Company meets the conditions set forth in General Instruction (I)(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE
None.


TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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FORWARD-LOOKING STATEMENTS
Certain of the statements included or incorporated by reference in this Annual Report on Form 10-K 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 Life Insurance Company (“AXA Equitable”) and its consolidated subsidiaries. “We,” “us” and “our” refer to AXA Equitable and its consolidated subsidiaries, unless the context refers only to AXA Equitable as a corporate entity. There can be no assurance that future developments affecting AXA Equitable will be those anticipated by management. Forward-looking statements include, without limitation, all matters that are not historical facts.
These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (i) conditions in the financial markets and economy, including equity market declines and volatility, interest rate fluctuations and changes in liquidity and access to and cost of capital; (ii) operational factors, remediation of our material weaknesses, 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, complex regulation and administration of our products, variations in statutory capital requirements, financial strength and claims-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 pricing expectations or reserves, amortization of deferred acquisition costs and financial models; (vii) legal and regulatory risks, including federal and state legislation affecting financial institutions, insurance regulation and tax reform; and (viii) risks related to our separation and rebranding.
You should read this Annual Report on Form 10-K completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this Annual Report on Form 10-K are qualified by these cautionary statements. 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.
Other risks, uncertainties and factors, including those discussed under “Risk Factors,” could cause our actual results to differ materially from those projected in any forward-looking statements we make. Readers should read carefully the factors described in “Risk Factors” to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.
CERTAIN IMPORTANT TERMS
As used in this Form 10-K, the term “AXA Equitable” refers to AXA Equitable Life Insurance Company, a New York stock life insurance corporation established in 1859. “We,” “our,” “us” and the “Company” refer to AXA Equitable and its consolidated subsidiaries, unless the context refers only to AXA Equitable. The term “Holdings” refers to AXA Equitable Holdings, Inc., a Delaware corporation. The term “AXA Distributors” refers to our subsidiary, AXA Distributors, LLC, a Delaware limited liability company, “AXA Advisors” refers to our affiliate, AXA Advisors, LLC, a Delaware limited liability company, “AXA Network” refers to our affiliate, AXA Network, LLC, a Delaware limited liability company and its subsidiary, “AXA Equitable FMG” refers to our subsidiary, AXA Equitable Funds Management Group, LLC, a Delaware limited liability company, “AXA RE Arizona” refers to our affiliate, AXA RE Arizona Company, an Arizona corporation, and “EQ AZ Life Re” refers to our affiliate, EQ AZ Life Re Company, an Arizona corporation. The term “MONY America” refers to our affiliate, MONY Life Insurance Company of America, an Arizona life insurance corporation and wholly owned subsidiary of Holdings. The term “AXA” refers to AXA S.A., a société anonyme organized under the laws of France. The term “General Account” refers to the assets held in the general account of AXA Equitable and all of the investment assets held in certain of AXA Equitable’s separate accounts on which AXA Equitable bears the investment risk. The term “Separate Accounts” refers to the separate account investment assets of AXA Equitable excluding the assets held in those separate accounts on which AXA Equitable bears the investment risk.

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Part I, Item 1.
BUSINESS
GENERAL
We are one of America’s leading financial services companies, providing advice and solutions for helping Americans set and meet their retirement goals and protect and transfer their wealth across generations.
We are an indirect, wholly-owned subsidiary of Holdings. On May 14, 2018, Holdings completed the initial public offering (“Holdings IPO”) in which AXA sold shares of Holdings common stock to the public. 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 common stock. 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 “controlled company” within the meaning of the corporate governance standards of the NYSE and is no longer a majority owned subsidiary of AXA.
RECENT DEVELOPMENTS
AllianceBernstein Transfer
In December 2018, we entered into a series of transactions whereby we transferred our ownership interests in AllianceBernstein L.P. (“ABLP”), AllianceBernstein Holding L.P. (“AB Holding” and together with ABLP, “AB”) and AllianceBernstein Corporation to a wholly-owned subsidiary of Holdings. For additional information, see Note 19 of the Notes to the Consolidated Financial Statements.
As a result of these transactions, we now operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources.
GMxB Unwind
In April 2018, we completed an unwind of the reinsurance provided to the Company by AXA RE Arizona for certain variable annuities with GMxB features (the “GMxB Unwind”). Accordingly, all business previously reinsured to AXA RE Arizona, with the exception of variable annuities with GMxB riders issued on or after January 1, 2006 and in-force on September 30, 2008 (the “GMxB business”), was novated to EQ AZ Life Re, a newly formed captive insurance company organized under the laws of Arizona, which is an indirect wholly owned subsidiary of Holdings. Following the novation of this business to EQ AZ Life Re, AXA RE Arizona was merged with and into AXA Equitable. Following AXA RE Arizona’s merger with and into AXA Equitable, the GMxB business is not subject to any new internal or third-party reinsurance arrangements, though in the future AXA Equitable may reinsure the GMxB Business with third parties. See “Products — Individual Variable Annuities — Risk Management — Reinsurance — Captive Reinsurance” and Note 12 of the Notes to the Consolidated Financial Statements for further details of the GMxB Unwind.
PRODUCTS
We offer a variety of variable annuity products, term, variable and universal life insurance products, employee benefit products, and investment products including mutual funds, principally to individuals, small and medium-sized businesses and professional and trade associations. Our product approach is to ensure that design characteristics are attractive to both our customers and our company’s capital approach. We currently focus on products across our business that expose us to less market and customer behavior risk, are more easily hedged and, overall, are less capital intensive than many traditional products.
Individual Variable Annuities
We are a leading provider of individual variable annuity products, which are primarily sold to affluent and high net worth individuals saving for retirement or seeking guaranteed retirement income. We have a long history of innovation, as one of the

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first companies, in 1968, to enter the variable annuity market, as the first company, in 1996, to provide variable annuities with living benefits, and as the first company, in 2010, to bring to market an index-linked variable annuity product. We continue to innovate our offering, periodically updating our product benefits and introducing new variable annuity products to meet the evolving needs of our clients while managing the risk and return of these variable annuity products to our company. We sell our variable annuity products through AXA Advisors and a wide network of over 600 third-party firms, including banks, broker-dealers and insurance partners, reaching more than 100,000 advisors.
Variable Annuities Policy Feature Overview
Variable annuities allow the policyholder to make deposits into accounts offering variable investment options. For deposits allocated to Separate Accounts, the risks associated with the investment options are borne entirely by the policyholder, except where the policyholder elects guaranteed minimum death benefits (“GMDB”) and/or guaranteed minimum living benefits (“GMLB,” and together with GMDB, “GMxB features”) in certain variable annuities, for which additional fees are charged. Additionally, certain variable annuity products permit policyholders to allocate a portion of their account to investment options backed by the General Account and are credited with interest rates that we determine, subject to certain limitations.
Certain variable annuity products offer one or more GMxB features in addition to the standard return of premium death benefit guarantee. GMxB features (other than the return of premium death benefit guarantee) provide the policyholder a minimum return based on their initial deposit adjusted for withdrawals (i.e., the benefit base), thus guarding against a downturn in the markets. The rate of this return may increase the specified benefit base at a guaranteed minimum rate (i.e., a fixed roll-up rate) or may increase the benefit base at a rate tied to interest rates (i.e., a floating roll-up rate). GMxB riders must be chosen by the policyholder no later than at the issuance of the contract.
GMLBs principally include guaranteed minimum income benefits (“GMIB”) and guaranteed income benefits (“GIB”). Variable annuities may also offer a guaranteed minimum accumulation benefit (“GMAB”) or a guaranteed withdrawal benefit for life (“GWBL”) rider. A GMIB is an optional benefit where an annuitant is entitled to annuitize the policy and receive a minimum payment stream based on the benefit base, which could be greater than the underlying account value (“AV”). A GMDB is an optional benefit that guarantees an annuitant’s beneficiaries are entitled to a minimum payment based on the benefit base, which could be greater than the underlying AV, upon the death of the annuitant. A GIB is an optional benefit which provides the policyholder with a guaranteed lifetime annuity based on predetermined annuity purchase rates applied to a GIB benefit base, with annuitization automatically triggered if and when the contract AV falls to zero. A GWBL is an optional benefit where an annuitant is entitled to withdraw a maximum amount of their benefit base each year, for the duration of the policyholder’s life, regardless of account performance. “GMxB” is a general reference to all forms of variable annuity guaranteed benefits.
    Current Variable Annuities Offered
We primarily sell three variable annuity products, each providing policyholders with distinct features and return profiles. Our current primary product offering includes:
Structured Capital Strategies (“SCS”). Our index-linked variable annuity product allows the policyholder to invest in various investment options, whose performance is tied to one or more securities indices, commodities indices or exchange traded funds (“ETFs”), subject to a performance cap, over a set period of time. The risks associated with such investment options are borne entirely by the policyholder, except the portion of any negative performance that we absorb (a buffer) upon investment maturity. This variable annuity does not offer GMxB features, other than an optional return of premium death benefit that we have introduced on some versions.
Retirement Cornerstone. Our Retirement Cornerstone product offers two platforms: (i) RC Performance, which offers access to over 100 funds with annuitization benefits based solely on non-guaranteed account investment performance and (ii) RC Protection, which offers access to a focused selection of funds and an optional floating-rate GMxB feature providing guaranteed income for life, with a choice between two floating roll-up rate options.
Investment Edge. Our investment-only variable annuity is a wealth accumulation variable annuity that defers current taxes during accumulation and provides tax-efficient distributions on non-qualified assets through scheduled payments over a set period of time with a portion of each payment being a return of cost basis, thus excludable from taxes. Investment Edge does not offer any GMxB feature other than an optional return of premium death benefit.

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Other products. We offer other products which offer optional GMxB benefits. These other products do not contribute significantly to our sales.
We work with AXA Equitable FMG to identify and include appropriate underlying investment options in its products, as well as to control the costs of these options and increase profitability of the products. For a discussion of AXA Equitable FMG, see below “ —AXA Equitable FMG.”
Underwriting and Pricing
We generally do not underwrite our variable annuity products on an individual-by-individual basis. Instead, we price our products based upon our expected investment returns and assumptions regarding mortality, longevity and persistency for our policyholders collectively, while taking into account historical experience. We price annuities by analyzing longevity and persistency risk, volatility of expected earnings on our AV and the expected time to retirement. Our product pricing models also take into account capital requirements, hedging costs and operating expenses. Investment-oriented products are priced based on various factors, which may include investment return, expenses, persistency and optionality.
Our variable annuity products generally include penalties for early withdrawals. From time to time, we reevaluate the type and level of GMxB and other features we offer. We have previously changed the nature and pricing of the features we offer and will likely do so from time to time in the future as the needs of our clients, the economic environment and our risk appetite evolve.
Risk Management
To actively manage and protect against the economic risks associated with our in-force variable annuity products, our management team has taken a multi-pronged approach. Our in-force variable annuity risk management programs include:
Hedging
We use a dynamic hedging strategy supplemented by static hedges to offset changes in our economic liability from changes in equity markets and interest rates. In addition to our dynamic hedging strategy, in the fourth quarter of 2017 and first quarter of 2018, we implemented static hedge positions to maintain a target asset level for all variable annuities at a CTE98 level under most economic scenarios, and to maintain a CTE95 level even in extreme scenarios. The term “CTE” refers to “conditional tail expectation,” which is calculated as the average amount of total assets required to satisfy obligations over the life of the contract or policy in the worst x% of scenarios and is represented as CTE (100 less x). E.g., CTE95 represents the worst five percent of scenarios. We expect to adjust from time to time our static equity hedge positions to maintain our target level of CTE protection over time. A wide range of derivatives contracts are used in these hedging programs, such as futures and total return swaps (both equity and fixed income), options and variance swaps, as well as, to a lesser extent, bond investments and repurchase agreements. For GMxB features, we retain certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected assumptions for mortality, lapse and surrender, withdrawal and contract-holder election rates, among other things.
Reinsurance
We have used reinsurance to mitigate a portion of the risks that we face in certain of our variable annuity products with regard to a portion of the GMxB features. Under our reinsurance arrangements, other insurers assume a portion of the obligation to pay claims and related expenses to which we are subject. However, we remain liable as the direct insurer on all risks we reinsure and, therefore, are subject to the risk that our reinsurer is unable or unwilling to pay or reimburse claims at the time demand is made. We evaluate the financial condition of our reinsurers in an effort to minimize our exposure to significant losses from reinsurer insolvencies.
Non-affiliate Reinsurance. We have reinsured to non-affiliated reinsurers a portion of our exposure on variable annuity products that offer a GMxB feature issued through February 2005. At December 31, 2018, we had reinsured to non-affiliated reinsurers, subject to certain maximum amounts or caps in any one period, approximately 15.5% of our net amount at risk resulting from the GMIB feature and approximately 2.9% of our net amount at risk (“NAR”) to the GMDB obligation on variable annuity contracts in force as of December 31, 2018.
Captive Reinsurance. In addition to non-affiliated reinsurance, we ceded to AXA RE Arizona, a captive reinsurance company, a 100% quota share of all liabilities for variable annuities with GMxB riders other than return of premium death

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benefit issued on or after January 1, 2006 and in-force on September 30, 2008 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 (the “Excess Risks”). Upon completion of the GMxB Unwind, we have assumed all of the liabilities of the GMxB business that were previously ceded to AXA RE Arizona and the Excess Risks were novated to EQ AZ Life Re. For more detail on the GMxB Unwind and its associated risks, see “Risk Factors—Risks Relating to Our Business—Risks Relating to Our Reinsurance and Hedging Programs—Our reinsurance arrangements with affiliated captives may be adversely impacted by changes to policyholder behavior assumptions under the reinsured contracts, the performance of their hedging program, their liquidity needs, their overall financial results and changes in regulatory requirements regarding the use of captives.”
Other Programs
We have introduced several other programs that reduced gross reserves and reduced the risk in our in-force block and, in many cases, offered a benefit to our clients by offering liquidity or flexibility:
Investment Option Changes. We made several changes to our investment options within our variable annuity products over the years to manage risk, employ more passive strategies and offer our clients attractive risk-adjusted investment returns. To reduce the differential between hedging instruments performance and fund performance, we added many passive investment strategies and reduced the credit risk of some of the bond portfolios, which is designed to provide a better risk adjusted return to clients. We also introduced managed volatility funds in 2009. Our volatility management strategy seeks to reduce the portfolio’s equity exposure during periods when certain market indicators indicate that market volatility is above specific thresholds set for the portfolio. Historically when market volatility is high, equity markets generally are trending down, and therefore this strategy is intended to reduce the overall risk of investing in the portfolio for clients.
Optional Buyouts. Since 2012, we have implemented several successful buyout programs that benefited clients whose needs had changed since buying the initial contract and reduced our exposure to certain types of GMxB features. We have executed buyout programs since 2012, offering buyouts to contracts issued between 2002 and 2009.
Premium Suspension Programs. We have suspended the acceptance of subsequent premiums to certain GMxB contracts.
Lump Sum Option. Since 2015, we have provided certain policyholders with the optional benefit to receive a one-time lump sum payment rather than systematic lifetime payments if their AV falls to zero. This option provides the same advantages as a buyout. However, because the availability of this option is contingent on future events, their actual effectiveness will only be known over a long-term horizon.
Employer-Sponsored Products and Services
We also offer 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. We primarily operate in the 403(b), 401(k) and 457(b) markets where we sell variable annuity and mutual fund-based products. As of December 31, 2018, we had relationships with approximately 26,000 employers and served more than one million participants, of which approximately 758,000 were educators. A specialized division of AXA Advisors, the Retirement Benefits Group (“RBG”), is the primary distributor of our products and related solutions to the education market with more than 1,000 advisors dedicated to helping educators prepare for retirement as of December 31, 2018.
Our products offer teachers, municipal employees and corporate employees a savings opportunity that provides tax-deferred wealth accumulation coupled with industry award-winning customer service. Our innovative product offerings address all retirement phases with diverse investment options.

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Variable Annuities. Our variable annuities offer defined contribution plan record-keeping, as well as administrative and participant services combined with a variety of proprietary and non-proprietary investment options. Our variable annuity investment lineup mostly consists of proprietary variable investment options that are managed by AXA Equitable FMG. AXA Equitable FMG provides discretionary investment management services for these investment options that include developing and executing asset allocation strategies and providing rigorous oversight of sub-advisors for the investment options. This helps to ensure that we retain high quality managers and that we leverage our scale across our products. In addition, our variable annuity products offer the following features:
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Guaranteed Interest Option (“GIO”)—Provides a fixed interest rate and guaranteed AV.
•
Structured Investment Option (“SIO”)—Provides upside market participation that tracks either the S&P 500, Russell 2000 or the MSCI EAFE index subject to a performance cap, with a downside buffer that limits losses in the investment over a one, three or five year investment horizon. This option leverages our innovative SCS individual annuity offering, and we believe that we are the only provider that offers this type of guarantee in the defined contribution markets today.
•
Personal Income Benefit—An optional GMxB feature that enables participants to obtain a guaranteed withdrawal benefit for life for an additional fee.
Open Architecture Mutual Fund Platform. We recently launched a mutual fund-based product to complement our variable annuity products. This platform provides a similar service offering to our variable annuities from the same award-winning service team. The program allows plan sponsors to select from approximately 15,000 mutual funds. The platform also offers a group fixed annuity that operates very similarly to the GIO as an available investment option on this platform.
Services. Both our variable annuity and open architecture mutual fund products offer a suite of tools and services to enable plan participants to obtain education and guidance on their contributions and investment decisions and plan fiduciary services. Education and guidance is available on-line or in person from a team of plan relationship and enrollment specialists and/or the advisor that sold the product. Our clients’ retirement contributions come through payroll deductions, which contribute significantly to stable and recurring sources of renewals.
Underwriting and Pricing
We generally do not underwrite our annuity products on an individual-by-individual basis. Instead, we price our products based upon our expected investment returns and assumptions regarding mortality, longevity and persistency for our policyholders collectively, while taking into account historical experience. We price variable annuities by analyzing longevity and persistency risk, volatility of expected earnings on our AV and the expected time to retirement. Our product pricing models also take into account capital requirements, hedging costs and operating expenses. Investment-oriented products are priced based on various factors, which may include investment return, expenses, persistency and optionality.
Our variable annuity products generally include penalties for early withdrawals. From time to time, we reevaluate the type and level of guarantees and other features we offer. We have previously changed the nature and pricing of the features we offer and will likely do so from time to time in the future as the needs of our clients, the economic environment and our risk appetite evolve.
Risk Management
We design our employer-sponsored products with the goal of providing attractive features to clients that also minimize risks to us. To mitigate risks to our General Account from fluctuations in interest rates, we apply a variety of techniques that align well with a given product type. We designed our GIO to comply with the National Association of Insurance Commissioners (the “NAIC”) minimum rate (1.75% for new issues), and our 403(b) products that we currently sell include a contractual provision that enables us to limit transfers into the GIO. As most defined contribution plans allow participants to borrow against their accounts, we have made changes to our loan repayment processes to minimize participant loan defaults and to facilitate loan repayments to the participant’s current investment allocation as opposed to requiring repayments only to the GIO. In the 401(k) and 457(b) markets, we may charge a market value adjustment on the assets of the GIO when a plan sponsor terminates its agreement with us. We also prohibit direct transfers to fixed income products that compete with the GIO, which protects the principal in the General Account in a rising interest rate environment.

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In the Tax-Exempt market, the benefits include a minimum guaranteed interest rate on our GIO, return of premium death benefits and limited optional GMxB features. The utilization of GMxB features is low. In the Corporate market, the products that we sell today we do not offer death benefits in excess of the AV.
We use a committee of subject matter experts and business leaders that meet periodically to set crediting rates for our guaranteed interest options. The committee evaluates macroeconomic and business factors to determine prudent interest rates in excess of the contract minimum when appropriate.
We also monitor the behavior of our clients who have the ability to transfer assets between the GIO and various Separate Account investment options. We have not historically observed a material shift of assets moving into guarantees during times of higher market volatility.
Hedging
We hedge crediting rates to mitigate certain risks associated with the SIO. In order to support the returns associated with the SIO, we enter into derivatives contracts whose payouts, in combination with fixed income investments, emulate those of the S&P 500, Russell 2000 or MSCI EAFE index, subject to caps and buffers.
Life Insurance Products
We have a long history of providing life insurance products to affluent and high net worth individuals and small and medium-sized business markets. We are currently focused on the relatively less capital intensive asset accumulation segments of the market, with leading offerings in the VUL and IUL markets.
We offer a targeted range of life insurance products aimed at serving the financial needs of our clients throughout their lives. Specifically, our products are designed to help affluent and high net worth individuals as well as small and medium-sized business owners protect and transfer their wealth. Our product offerings include VUL, IUL and term life products. Our products are distributed through AXA Advisors and select third-party firms. We benefit from a long-term, stable distribution relationship with AXA Advisors.
Our life insurance products are primarily designed to help individuals and small and medium-sized businesses with protection, wealth accumulation and transfer, as well as corporate planning solutions. We target select segments of the life insurance market: permanent life insurance, including IUL and VUL products and term insurance. As part of a strategic shift over the past several years, we evolved our product design to be less capital-intensive and more accumulation-focused.
Permanent Life Insurance. Our permanent life insurance offerings are built on the premise that all clients expect to receive a benefit from the policy. The benefit may take the form of a life insurance death benefit paid at time of death no matter the age or duration of the policy or the form of access to cash that has accumulated in the policy on a tax-favored basis. In each case, the value to the client comes from access to a broad spectrum of investments that accumulate the policy value at attractive rates of return.
We have three permanent life insurance offerings built upon a universal life (“UL”) insurance framework: IUL, VUL and corporate-owned life insurance targeting the small and medium-sized business market, which is a subset of VUL products. Universal life policies offer flexible premiums, and generally offer the policyholder the ability to choose one of two death benefit options: a level benefit equal to the policy’s original face amount or a variable benefit equal to the original face amount plus any existing policy AV. Our universal life insurance products include single-life products and second-to-die (i.e., survivorship) products, which pay death benefits following the death of both insureds.
IUL. IUL uses an equity-linked approach for generating policy investment returns. The equity linked options provide upside return based on an external equity based index (e.g., S&P 500) subject to a cap. In exchange for this cap on investment returns, the policy provides downside protection in that annual investment returns are guaranteed to never be less than zero, even if the relevant index is down. In addition, there is an option to receive a higher cap on certain investment returns in exchange for a fee. As noted above, the performance of any universal life insurance policy also depends on the level of policy charges. For further discussion, see “—Pricing and Fees.”
VUL. VUL uses a series of investment options to generate the investment return allocated to the cash value. The sub-accounts are similar to retail mutual funds: a policyholder can invest premiums in one or more underlying investment options

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offering varying levels of risk and growth potential. These provide long-term growth opportunities, tax-deferred earnings and the ability to make tax-free transfers among the various sub-accounts. In addition, the policyholder can invest premiums in a guaranteed interest option, as well as an investment option we call the Market Stabilizer Option (“MSO”), which provides downside protection from losses in the index up to a specified percentage. We also offer corporate-owned life insurance, which is a VUL insurance product tailored specifically to support executive benefits in the small business market.
We work with AXA Equitable FMG to identify and include appropriate underlying investment options in our variable life products, as well as to control the costs of these options.
Term Life. Term life provides basic life insurance protection for a specified period of time, and is typically a client’s first life insurance purchase due to its relatively low cost. Life insurance benefits are paid if death occurs during the term period, as long as required premiums have been paid. The required premiums are guaranteed not to increase during the term period, otherwise known as a level pay or fixed premium. Our term products include competitive conversion features that allow the policyholder to convert their term life insurance policy to permanent life insurance within policy limits and the ability to add certain riders. Our term life portfolio includes 1, 10, 15 and 20-year term products.
Other Benefits. We offer a portfolio of riders to provide clients with additional flexibility to protect the value of their investments and overcome challenges. Our Long-Term Care Services Rider provides an acceleration of the policy death benefit in the event of a chronic illness. The MSO, referred to above and offered via a policy rider on our variable life products, provides policyholders with the opportunity to manage volatility. The return of premium rider provides a guarantee that the death benefit payable will be no less than the amount invested in the policy.
As part of Holdings’ ongoing efforts to efficiently manage capital amongst its subsidiaries, improve the quality of the product line-up of its insurance subsidiaries and enhance the overall profitability of Holdings, most sales of IUL insurance products to policyholders located outside of New York are being issued through MONY America, another life insurance subsidiary of Holdings, instead of AXA Equitable. We expect that Holdings will continue to issue newly developed life insurance products to policyholders located outside of New York through MONY America instead of AXA Equitable. Since future decisions regarding product development and availability depend on factors and considerations not yet known, management is unable to predict the extent to which additional products will be offered through MONY America or another subsidiary of Holdings instead of or in addition to AXA Equitable, or what the impact to AXA Equitable will be.
Underwriting
Our underwriting process, built around extensive underwriting guidelines, is designed to assign prospective insureds to risk classes in a manner that is consistent with our business and financial objectives, including our risk appetite and pricing expectations.
As part of making an underwriting decision, our underwriters evaluate information disclosed as part of the application process as well as information obtained from other sources after the application. This information includes, but is not limited to, the insured’s age and sex, results from medical exams and financial information.
We continue to research and develop guideline changes to increase the efficiency of our underwriting process (e.g., through the use of predictive models), both from an internal cost perspective and our customer experience perspective. We manage changes to our underwriting guidelines though a robust governance process that ensures that our underwriting decisions continue to align with our business and financial objectives, including risk appetite and pricing expectations. We continuously monitor our underwriting decisions through internal audits and other quality control processes, to ensure accurate and consistent application of our underwriting guidelines.
We use reinsurance to manage our mortality risk and volatility. Our reinsurer partners regularly review our underwriting practices and mortality and lapse experience through audits and experience studies, the outcome of which have consistently validated the high-quality underwriting process and decisions.
Pricing and Fees
Life insurance products are priced based upon assumptions including, but not limited to, expected future premium payments, surrender rates, mortality and morbidity rates, investment returns, hedging costs, equity returns, expenses and inflation and capital requirements. The primary source of revenue from our life insurance business is premiums, investment

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income, asset-based fees (including investment management and 12b-1 fees) and policy charges (expense loads, surrender charges, mortality charges and other policy charges).
Risk Management
Reinsurance
We use reinsurance to mitigate a portion of our risk and optimize the capital efficiency and operating returns of our life insurance portfolio. As part of our risk management function, we continuously monitor the financial condition of our reinsurers in an effort to minimize our exposure to significant losses from reinsurer insolvencies.
Non-affiliate Reinsurance. We generally obtain reinsurance for the portion of a life insurance policy that exceeds $10 million. We have set up reinsurance pools with highly rated unaffiliated reinsurers that obligate the pool participants to pay death claim amounts in excess of our retention limits for an agreed-upon premium.
Captive Reinsurance. EQ AZ Life Re Company reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and 90% of the risk of the lapse protection riders under UL insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007 (collectively, the “Life Business”).
Hedging
We hedge the exposure contained in our IUL products and the MSO rider we offer on our VUL products. These products and riders allow the policyholder to participate in the performance of an index price movement up to certain caps and/or protect the policyholder in a movement down to a certain buffer for a set period of time. In order to support our obligations under these investment options, we enter into derivatives contracts whose payouts, in combination with returns from the underlying fixed income investments, seek to replicate those of the index price, subject to prescribed caps and buffers.
Employee Benefits Products
Our employee benefits business focuses on serving small and medium-sized businesses located in New York, offering these businesses a differentiated technology platform and competitive suite of group insurance products. Though we only entered the market in 2015, we now offer coverage nationally. We believe our employee benefits business will further augment our solution for small and medium-sized businesses which we believe is differentiated by a high-quality technology platform. Leveraging our innovative technology platform, we have formed strategic partnerships with large insurance and health carriers as their primary group benefits provider. As a new entrant in the employee benefits market we were able to build a platform from the ground up, without reliance on legacy systems.
Our products are designed to provide valuable protection for employees as well as help employers attract employees and control costs. We currently offer a suite of life, short and long-term disability, dental and vision insurance products to small and medium-sized businesses located in New York. Sales of employee benefit products to businesses located outside of New York are being issued through MONY America.
Underwriting
We manage the underwriting process to facilitate quality sales and serve the needs of our customers, while supporting our financial strength and business objectives. The application of our underwriting guidelines is continuously monitored through internal underwriting audits to achieve high standards of underwriting and consistency.
Pricing and Fees
Employee benefits pricing reflects the claims experience and the risk characteristics of each group. We set appropriate plans for the group based on demographic information and, for larger groups, also evaluate the experience of the group. The claims experience is reviewed at the time of policy issuance and during the renewal timeframes, resulting in periodic pricing adjustments at the group level.

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Reinsurance
Group Reinsurance Plus provides reinsurance on our short and long-term disability products. Our current arrangement provides quota share reinsurance at 50% for disability products.
MARKETS
Variable Annuity Products. We target sales of our variable annuity products to affluent and high net worth individuals and families saving for retirement or seeking retirement income. Within our target customer base, customers prioritize certain features based on their life-stage and investment needs. In addition, our products offer features designed to serve different market conditions. SCS targets clients with investable assets who want exposure to equity markets, but also want to guard against a market correction. Retirement Cornerstone targets clients who want growth potential and guaranteed income with increases in a rising interest rate environment. Investment Edge targets clients concerned about rising taxes.
Employer-Sponsored Products and Services. We primarily operate in the tax-exempt 403(b)/457(b), corporate 401(k) and other markets. In the tax-exempt 403(b)/457(b) market, we primarily serve employees of public school systems. To a lesser extent, we also market to government entities that sponsor 457(b) plans. In the corporate 401(k) market, we target small and medium-sized businesses with 401(k) plans that generally have under $20 million in assets. Our product offerings accommodate start up plans and plans with accumulated assets.
Life Insurance Products. We are focused on targeted segments of the life insurance market, particularly affluent and high net worth individuals, as well as small and medium-sized businesses located in New York. We focus on creating value for our customers through the differentiated features and benefits we offer on our products. We distribute these products through retail advisors and third-party firms who demonstrate the value of life insurance in helping clients to accumulate wealth and protect their assets.
Employee Benefit Products. Our employee benefit product suite is targeted to small and medium-sized businesses located in New York seeking simple, technology-driven employee benefits management. We built the employee benefits business from the ground up based on feedback from brokers and employers, ensuring the business’ relevance to the market we address. We are committed to continuously evolving our product suite and technology platform to meet market demand.
DISTRIBUTION
We primarily distribute our products through AXA Advisors and through third party distribution channels.
Affiliated Distribution. We offer our products on a retail basis through our affiliated retail sales force of financial professionals, AXA Advisors. These financial professionals have access to and offer a broad array of variable annuity, life insurance, employee benefits and investment products and services from affiliated and unaffiliated insurers and other financial service providers. AXA Advisors, through RBG, is the primary distribution channel for our employer-sponsored products and services. RBG has a group of more than 1,000 advisors that specialize in the 403(b) and 457(b) markets.
Third-Party Distribution. For our annuity products, we have shifted the focus of our third-party distribution significantly over the last decade, growing our distribution in the bank, broker-dealer and insurance partner channels and providing us access to more than 100,000 financial professionals. We also distribute life insurance products through third-party firms provides efficient access to independent producers on a largely variable cost basis. Brokerage general agencies, producer groups, banks, warehouses, independent broker-dealers and registered investment advisers are all important partners who distribute our products today. We distribute our employee benefits products through a growing network of third-party firms, including private exchanges, health plans and professional employer organizations.
COMPETITION
There is strong competition among insurers, banks, brokerage firms and other financial institutions and providers seeking clients for the types of products and services we provide. Competition is intense among a broad range of financial institutions and other financial service providers for retirement and other savings dollars.
The principal competitive factors affecting our business are our financial strength as evidenced, in part, by our financial and claims-paying ratings; access to capital; access to diversified sources of distribution; size and scale; product quality, range, features/functionality and price; our ability to bring customized products to the market quickly; technological capabilities; our

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ability to explain complicated products and features to our distribution channels and customers; crediting rates on fixed products; visibility, recognition and understanding of our brand in the marketplace; reputation and quality of service; the tax-favored status certain of our products receive under the current federal and state laws and (with respect to variable insurance and annuity products, mutual funds and other investment products) investment options, flexibility and investment management performance.
We and our affiliated distributors must attract and retain productive sales representatives to sell our products. Strong competition continues among financial institutions for sales representatives with demonstrated ability. We and our affiliated distribution companies compete with other financial institutions for sales representatives primarily on the basis of financial position, product breadth and features, support services and compensation policies.
Legislative and other changes affecting the regulatory environment can affect our competitive position within the life insurance industry and within the broader financial services industry.
AXA EQUITABLE FMG
AXA Equitable FMG oversees our variable funds and supports our business. AXA Equitable FMG helps add value and marketing appeal to our products by bringing investment management expertise and specialized strategies to the underlying investment lineup of each product. In addition, by advising an attractive array of proprietary investment portfolios (each, a “Portfolio,” and together, the “Portfolios”), AXA Equitable FMG brings investment acumen, financial controls and economies of scale to the construction of high-quality, economical underlying investment options for our products. Finally, AXA Equitable FMG is able to negotiate favorable terms for investment services, operations, trading and administrative functions for the Portfolios.
AXA Equitable FMG provides investment management and administrative services to proprietary investment vehicles sponsored by the Company, including investment companies that are underlying investment options for our variable insurance and annuity products. AXA Equitable FMG is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”). AXA Equitable FMG serves as the investment adviser to three investment companies that are registered under the Investment Company Act of 1940, as amended—EQ Advisors Trust (“EQAT”), AXA Premier VIP Trust (“VIP Trust”) and 1290 Funds (each, a “Trust” and collectively, the “Trusts”)—and to two private investment trusts established in the Cayman Islands. Each of the investment companies and private investment trusts is a “series” type of trust with multiple Portfolios. AXA Equitable FMG provides discretionary investment management services to the Portfolios, including, among other things, (1) portfolio management services for the Portfolios; (2) selecting investment sub-advisers and (3) developing and executing asset allocation strategies for multi-advised Portfolios and Portfolios structured as funds-of-funds. AXA Equitable FMG also provides administrative services to the Portfolios. AXA Equitable FMG is further charged with ensuring that the other parts of the Company that interact with the Trusts, such as product management, the distribution system and the financial organization, have a specific point of contact.
AXA Equitable FMG has a variety of responsibilities for the general management and administration of its investment company clients. One of AXA Equitable FMG’s primary responsibilities is to provide clients with portfolio management and investment advisory evaluation services, principally by reviewing whether to appoint, dismiss or replace sub-advisers to each Portfolio, and thereafter monitoring and reviewing each sub-adviser’s performance through qualitative and quantitative analysis, as well as periodic in-person, telephonic and written consultations with the sub-advisers. Currently, AXA Equitable FMG has entered into sub-advisory agreements with more than 40 different sub-advisers, including AB and other AXA affiliates. Another primary responsibility of AXA Equitable FMG is to develop and monitor the investment program of each Portfolio, including Portfolio investment objectives, policies and asset allocations for the Portfolios, select investments for Portfolios (or portions thereof) for which it provides direct investment selection services, and ensure that investments and asset allocations are consistent with the guidelines that have been approved by clients. The administrative services that AXA Equitable FMG provides to the Portfolios include, among others, coordination of each Portfolio’s audit, financial statements and tax returns; expense management and budgeting; legal administrative services and compliance monitoring; portfolio accounting services, including daily net asset value accounting; risk management; and oversight of proxy voting procedures and anti-money laundering program.

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REGULATION
Insurance Regulation
We are licensed to transact insurance business, and are subject to extensive regulation and supervision by insurance regulators, in all 50 states of the United States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and nine of Canada’s thirteen provinces and territories. We are domiciled in New York and are primarily regulated by the New York State Department of Financial Services (the “NYDFS”). The extent of regulation by jurisdiction varies, but most jurisdictions have laws and regulations governing the financial aspects and business conduct of insurers. State laws in the U.S. grant insurance regulatory authorities broad administrative powers with respect to, among other things, licensing companies to transact business, sales practices, establishing statutory capital and reserve requirements and solvency standards, reinsurance and hedging, protecting privacy, regulating advertising, restricting the payment of dividends and other transactions between affiliates, permitted types and concentrations of investments and business conduct to be maintained by insurance companies as well as agent licensing, approval of policy forms and, for certain lines of insurance, approval or filing of rates. Insurance regulators have the discretionary authority to limit or prohibit new issuances of business to policyholders within their jurisdictions when, in their judgment, such regulators determine that the issuing company is not maintaining adequate statutory surplus or capital. Additionally, New York Insurance Law limits sales commissions and certain other marketing expenses that we may incur. For additional information on Insurance Supervision, see “Risk Factors.”
Supervisory agencies in each of the jurisdictions in which we do business may conduct regular or targeted examinations of our operations and accounts, and make requests for particular information from us. Periodic financial examinations of the books, records, accounts and business practices of insurers domiciled in their states are generally conducted by such supervisory agencies every three to five years. From time to time, regulators raise issues during examinations or audits of us that could, if determined adversely, have a material adverse effect on us. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact, particularly in areas such as accounting or statutory reserve requirements. In addition to oversight by state insurance regulators in recent years, the insurance industry has seen an increase in inquiries from state attorneys general and other state officials regarding compliance with certain state insurance, securities and other applicable laws. We have received and responded to such inquiries from time to time. For additional information on legal and regulatory risk, see “Risk Factors—Legal and Regulatory Risks.”
We are required to file detailed annual financial statements, prepared on a statutory accounting basis or in accordance with other accounting practices permitted by the applicable regulator, with supervisory agencies in each of the jurisdictions in which we do business. The NAIC has approved a series of uniform statutory accounting principles (“SAP”) that have been adopted, in some cases with minor modifications, by all state insurance regulators. As a basis of accounting, SAP was developed to monitor and regulate the solvency of insurance companies. In developing SAP, the insurance regulators were primarily concerned with assuring an insurer’s ability to pay all its current and future obligations to policyholders. As a result, statutory accounting focuses on conservatively valuing the assets and liabilities of insurers, generally in accordance with standards specified by the insurer’s domiciliary state. The values for assets, liabilities and equity reflected in financial statements prepared in accordance with U.S. GAAP are usually different from those reflected in financial statements prepared under SAP.
Holding Company and Shareholder Dividend Regulation
Most states, including New York, regulate transactions between an insurer and its affiliates under insurance holding company acts. The insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require that all transactions affecting insurers within a holding company system be fair and reasonable and, if material, typically require prior notice and approval or non-disapproval by the state’s insurance regulator.
The insurance holding company laws and regulations generally also require a controlled insurance company (insurers that are subsidiaries of insurance holding companies) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning its capital structure, ownership, financial condition, certain intercompany transactions and general business operations. States generally require the ultimate controlling person of a U.S. insurer to file an annual enterprise risk report with the lead state of the insurance holding company system identifying risks likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole.
State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, as well as on transactions between an insurer and its

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affiliates. Under New York insurance law, 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 of the insurer’s earned surplus (as reported on 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”). 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.
State insurance holding company regulations also regulate changes in control. State laws generally provide that no person, corporation or other entity may acquire control of an insurance company, or a controlling interest in any parent company of an insurance company, without the prior approval of such insurance company’s domiciliary state insurance regulator. Generally, any person acquiring, directly or indirectly, 10% or more of the voting securities of an insurance company is presumed to have acquired “control” of the company. This statutory presumption may be rebutted by a showing that control does not exist in fact. State insurance regulators, however, may find that “control” exists in circumstances in which a person owns or controls less than 10% of voting securities.
The laws and regulations regarding acquisition of control transactions may discourage potential acquisition proposals and may delay or prevent a change of control involving us, including through unsolicited transactions that some of our shareholders might consider desirable.
NAIC
The mandate of the NAIC is to benefit state insurance regulatory authorities and consumers by promulgating model insurance laws and regulations for adoption by the states. The NAIC provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and Procedures Manual (the “Manual”). However, statutory accounting principles have been, or may be, modified by individual state laws, regulations and permitted practices. Changes to the Manual or modifications by the various state insurance departments may impact our statutory capital and surplus.
In September 2012, the NAIC adopted the Risk Management and Own Risk and Solvency Assessment Model Act (“ORSA”), which has been enacted by New York. ORSA requires that insurers maintain a risk management framework and conduct an internal risk and solvency assessment of the insurer’s material risks in normal and stressed environments. The assessment is documented in a confidential annual summary report, a copy of which must be made available to regulators as required or upon request. We have been filing an ORSA summary report with the NYDFS since 2015.
In December 2012, the NAIC approved a new valuation manual containing a principles-based approach to life insurance company reserves. Principles-based reserving is designed to better address reserving for products, including the current generation of products for which the current formulaic basis for reserve determination does not work effectively. The principles-based reserving approach became effective for new business on January 1, 2017 in the states where it has been adopted with a three-year phase-in period. The New York Legislature enacted legislation adopting principles-based reserving in June 2018 which was signed into law by the Governor in December 2018. Also, in December 2018, the NYDFS promulgated an emergency regulation to begin implementation of principle-based reserving, to become effective on January 1, 2020.
Captive Reinsurer Regulation
As described above, we use captive reinsurers as part of our capital management strategy. During the last few years, the NAIC and certain state regulators, including the NYDFS, have been scrutinizing insurance companies’ use of affiliated captive reinsurers or offshore entities.
In 2014, the NAIC considered a proposal to require states to apply NAIC accreditation standards, applicable to traditional insurers, to captive reinsurers. In 2015, the NAIC adopted such a proposal, in the form of a revised preamble to the NAIC accreditation standards (the “Standard”), with an effective date of January 1, 2016 for application of the Standard to captives that assume level premium term life insurance (“XXX”) business and universal life with secondary guarantees (“AXXX”) business. During 2014, the NAIC approved a new regulatory framework, the XXX/AXXX Reinsurance Framework, applicable to XXX/AXXX transactions. The framework requires more disclosure of an insurer’s use of captives in its statutory financial statements, and narrows the types of assets permitted to back statutory reserves that are required to support the insurer’s future obligations. The NAIC implemented the framework through an actuarial guideline (“AG 48”), which requires the actuary of the

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ceding insurer that opines on the insurer’s reserves to issue a qualified opinion if the framework is not followed. AG 48 applies prospectively, so that XXX/AXXX captives will not be subject to AG 48 if reinsured policies were issued prior to January 1, 2015 and ceded so that they were part of a reinsurance arrangement as of December 31, 2014, as is the case for the XXX business and AXXX business reinsured by our Arizona captive. Regulation of XXX/AXXX captives is deemed to satisfy the Standard if the applicable reinsurance transaction satisfies the XXX/AXXX Reinsurance Framework requirements adopted by the NAIC. The NAIC also adopted a revised Credit for Reinsurance Model Law in January 2016 and the Term and Universal Life Insurance Reserving Financing Model Regulation in December 2016 to replace AG 48. The model regulation will generally replace AG 48 in a state upon the state’s adoption of the model regulation. The NAIC left for future action the application of the Standard to captives that assume variable annuity business.
During 2015, the NAIC Financial Condition Committee (the “NAIC E Committee”) established the Variable Annuities Issues E Working Group (“VAIWG”) to oversee the NAIC’s efforts to study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions. In November 2015, upon the recommendation of the VAIWG, the NAIC E Committee adopted the Framework for Change which recommends charges for NAIC working groups to adjust the variable annuity statutory framework applicable to all insurers that have written or are writing variable annuity business. The Framework for Change contemplates a holistic set of reforms that would improve the current reserve and capital framework and address root cause issues that result in the use of captive arrangements but would not necessarily mandate recapture by insurers of VA cessions to captives. In November 2015, VAIWG engaged Oliver Wyman (“OW”) to conduct a quantitative impact study (the “QIS”) involving industry participants including the Company, of various reforms outlined in the Framework for Change. OW completed the QIS in July of 2016 and reported its initial findings to the VAIWG in late August 2016. The OW report proposed certain revisions to the current VA reserve and capital framework, which focused on (i) mitigating the asset-liability accounting mismatch between hedge instruments and statutory instruments and statutory liabilities, (ii) removing the non-economic volatility in statutory capital charges and the resulting solvency ratios and (iii) facilitating greater harmonization across insurers and products for greater compatibility, and recommended a second quantitative impact study to be conducted so that testing can inform the proper calibration for certain conceptual and/or preliminary parameters set out in the OW proposal. Following a fourth quarter 2016 public comment period and several meetings on the OW proposal, the VAIWG determined that a second quantitative impact study (the “QIS2”) involving industry participants, including us, will be conducted by OW. The QIS2 began in February 2017 and OW issued its recommendations in December 2017. In 2018, the VAIWG held multiple public conference calls to discuss and refine the proposed recommendations. By the end of July 2018, both the VAIWG and the NAIC E Committee adopted the proposed recommendations with modifications reflecting input from all stakeholders. After adopting the Framework for Change, other NAIC working groups and task forces will consider specific revisions to the capital requirements for variable annuities to implement the recommendations in the framework. The changes to the variable annuity reserve and capital framework are expected to become effective January 1, 2020 with a suggested three-year phase-in period, but exact timing for implementation of changes remains subject to change.
We cannot predict what revisions, if any, will be made to the model laws and regulations relating to XXX/AXXX transactions, or to the Standard, if adopted for variable annuity captives, as states consider their adoption or undertake their implementation, or how the Framework for Change proposal may be implemented as a result of ongoing NAIC work. It is also unclear whether the Standard or other proposals will be adopted by the NAIC or how the NYDFS will implement the Framework for Change, or what additional actions and regulatory changes will result from the continued captives scrutiny and reform efforts by the NAIC and other regulatory bodies. Any regulatory action that limits our ability to achieve desired benefits from the use of or materially increases our cost of using captive reinsurance and applies retroactively, including, if the Standard is adopted as proposed, without grandfathering provisions for existing captive variable annuity reinsurance entities, could have a material adverse effect on our financial condition or results of operations. For additional information on our use of a captive reinsurance company, see “Risk Factors.”
Surplus and Capital; Risk Based Capital
Insurers are required to maintain their capital and surplus at or above minimum levels. Regulators have discretionary authority, in connection with the continued licensing of insurance companies, to limit or prohibit an insurer’s sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders. We report our RBC based on a formula calculated by applying factors to various asset, premium and statutory reserve items, as well as taking into account the risk characteristics of the insurer. The major categories of risk involved are asset risk, insurance risk, interest rate risk, market risk and business risk. The formula is used as a regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose RBC ratio does not meet or exceed

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certain RBC levels. As of the date of the most recent annual statutory financial statements filed with insurance regulators, our RBC was in excess of each of those RBC levels. For additional information on RBC, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Guaranty Associations and Similar Arrangements
Each of the states in which we are admitted to transact business require life insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay certain contractual insurance benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. The laws are designed to protect policyholders from losses under insurance policies issued by insurance companies that become impaired or insolvent. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.
During each of the past five years, the assessments levied against us have not been material.
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 and a similar rule recently enacted in California that takes effect on July 1, 2019, 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.
Broker-Dealer and Securities Regulation
We and certain policies and contracts offered by us are subject to regulation under the Federal securities laws administered by the U.S. Securities and Exchange Commission (the “SEC”), self-regulatory organizations and under certain state securities laws. These regulators may conduct examinations of our operations, and from time to time make requests for particular information from us.
Certain of our subsidiaries and affiliates, including AXA Advisors, AXA Distributors, AllianceBernstein Investments, Inc. and Sanford C. Bernstein & Co., LLC (“SCB LLC”), are registered as broker-dealers (collectively, the “Broker-Dealers”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Broker-Dealers are subject to extensive regulation by the SEC and are members of, and subject to regulation by, the Financial Industry Regulatory Authority, Inc. (“FINRA”), a self-regulatory organization subject to SEC oversight. The Broker-Dealers are subject to the capital requirements of the SEC and/or FINRA, which specify minimum levels of capital (“net capital”) that the Broker-Dealers are required to maintain and also limit the amount of leverage that the Broker-Dealers are able to employ in their businesses. The SEC and FINRA also regulate the sales practices of the Broker-Dealers. In recent years, the SEC and FINRA have intensified their scrutiny of sales practices relating to variable annuities, variable life insurance and alternative investments, among other products. In addition, the Broker-Dealers are also subject to regulation by state securities administrators in those states in which they conduct business, who may also conduct examinations and direct inquiries to the Broker-Dealers.
Certain of our Separate Accounts are registered as investment companies under the Investment Company Act. Separate Account interests under certain annuity contracts and insurance policies issued by us are also registered under the Securities Act. EQAT, AXA Premier VIP Trust and 1290 Funds are registered as investment companies under the Investment Company Act and shares offered by these investment companies are also registered under the Securities Act.
Certain subsidiaries and affiliates including AXA Equitable FMG and AXA Advisors are registered as investment advisers under the Investment Advisers Act. The investment advisory activities of such registered investment advisers are subject to various federal and state laws and regulations and to the laws in those foreign countries in which they conduct business. These

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laws and regulations generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations.
AXA Equitable FMG is registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator with respect to certain portfolios and is also a member of the National Futures Association (“NFA”). The CFTC is a federal independent agency that is responsible for, among other things, the regulation of commodity interests and enforcement of the Commodity Exchange Act (“CEA”). The NFA is a self-regulatory organization to which the CFTC has delegated, among other things, the administration and enforcement of commodity regulatory registration requirements and the regulation of its members. As such, AXA Equitable FMG is subject to regulation by the NFA and CFTC and is subject to certain legal requirements and restrictions in the CEA and in the rules and regulations of the CFTC and the rules and by-laws of the NFA on behalf of itself and any commodity pools that it operates, including investor protection requirements and anti-fraud prohibitions, and is subject to periodic inspections and audits by the CFTC and NFA. AXA Equitable FMG is also subject to certain CFTC-mandated disclosure, reporting and record-keeping obligations.
Regulators, including the SEC, FINRA, the CFTC, NFA and state attorneys general, continue to focus attention on various practices in or affecting the investment management and/or mutual fund industries, including portfolio management, valuation and the use of fund assets for distribution.
We and certain of our subsidiaries and affiliates have provided, and in certain cases continue to provide, information and documents to the SEC, FINRA, the CFTC, NFA, state attorneys general, the NYDFS and other state insurance regulators, and other regulators regarding our compliance with insurance, securities and other laws and regulations regarding the conduct of our business. For example, we have responded to inquiries from the SEC requesting information with regard to contract language and accompanying disclosure for certain variable annuity contracts. For additional information on regulatory matters, see Note 17 of the Notes to the Consolidated Financial Statements.
The SEC, FINRA, the CFTC and other governmental regulatory authorities may institute administrative or judicial proceedings that may result in censure, fines, the issuance of cease-and-desist orders, trading prohibitions, the suspension or expulsion of a broker-dealer or member, its officers, registered representatives or employees or other similar sanctions.
Dodd-Frank Wall Street Reform and Consumer Protection Act
Currently, the U.S. federal government does not directly regulate the business of insurance. While the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) does not remove primary responsibility for the supervision and regulation of insurance from the states, Title V of the Dodd-Frank Act establishes the Federal Insurance Office (“FIO”) within the U.S. Treasury Department and reforms the regulation of the non-admitted property and casualty insurance market and the reinsurance market. The Dodd-Frank Act also established the Financial Stability Oversight Council (“FSOC”), which is authorized to subject non-bank financial companies, including insurers, to supervision by the Federal Reserve and enhanced prudential standards if the FSOC determines that a non-bank financial institution could pose a threat to U.S. financial stability.
The FIO has authority that extends to all lines of insurance except health insurance, crop insurance and (unless included with life or annuity components) long-term care insurance. Under the Dodd-Frank Act, the FIO is charged with monitoring all aspects of the insurance industry (including identifying gaps in regulation that could contribute to a systemic crisis), recommending to the FSOC the designation of any insurer and its affiliates (potentially including AXA and its affiliates) as a non-bank financial company subject to oversight by the Board of Governors of the Federal Reserve System (including the administration of stress testing on capital), assisting the Treasury Secretary in negotiating “covered agreements” with non-U.S. governments or regulatory authorities, and, with respect to state insurance laws and regulation, determining whether state insurance measures are pre-empted by such covered agreements.
In addition, the FIO is empowered to request and collect data (including financial data) on and from the insurance industry and insurers (including reinsurers) and their affiliates. In such capacity, the FIO may require an insurer or an affiliate of an insurer to submit such data or information as the FIO may reasonably require. In addition, the FIO’s approval will be required to subject a financial company whose largest U.S. subsidiary is an insurer to the special orderly liquidation process outside the federal bankruptcy code, administered by the Federal Deposit Insurance Corporation (the “FDIC”) pursuant to the Dodd-Frank Act. U.S. insurance subsidiaries of any such financial company, however, would be subject to rehabilitation and liquidation proceedings under state insurance law. The Dodd-Frank Act also reforms the regulation of the non-admitted property/casualty insurance market (commonly referred to as excess and surplus lines) and the reinsurance markets, including prohibiting the

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ability of non-domiciliary state insurance regulators to deny credit for reinsurance when recognized by the ceding insurer’s domiciliary state regulator.
Other aspects of our operations could also be affected by the Dodd-Frank Act. These include:
Heightened Standards and Safeguards
The FSOC may recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices we and other insurers or other financial services companies engage in if the FSOC determines that those activities or practices could create or increase the risk that significant liquidity, credit or other problems spread among financial companies. We cannot predict whether any such recommendations will be made or their effect on our business, consolidated results of operations or financial condition.
Over-The-Counter Derivatives Regulation
The Dodd-Frank Act includes a framework of regulation of the over-the-counter (“OTC”) derivatives markets. Regulations approved to date require clearing of previously uncleared transactions and will require clearing of additional OTC transactions in the future. In addition, regulations approved pursuant to the Dodd-Frank Act impose margin requirements on OTC transactions not required to be cleared. As a result of these regulations, our costs of risk mitigation have and may continue to increase under the Dodd-Frank Act. For example, margin requirements, including the requirement to pledge initial margin for OTC cleared transactions entered into after June 10, 2013 and for OTC uncleared transactions entered into after the phase-in period, which would be applicable to us in 2020, have increased. In addition, restrictions on securities that will qualify as eligible collateral, will require increased holdings of cash and highly liquid securities with lower yields causing a reduction in income. Centralized clearing of certain OTC derivatives exposes us to the risk of a default by a clearing member or clearinghouse with respect to our cleared derivatives transactions. We use derivatives to mitigate a wide range of risks in connection with our business, including the impact of increased benefit exposures from certain variable annuity products that offer GMxB features. We have always been subject to the risk that our hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, could produce economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might result from the enactment and implementation of the Dodd-Frank Act.
Broker-Dealer Regulation
The Dodd-Frank Act provides that the SEC may promulgate rules to provide that the standard of conduct for all broker-dealers, when providing personalized investment advice about securities to retail customers (and any other customers as the SEC may by rule provide) will be the same as the standard of conduct applicable to an investment adviser under the Investment Advisers Act. On April 18, 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 applies to investment advisers under existing law. We are currently assessing these proposed rules to determine the impact they may have on our business. In addition, FINRA is also currently focusing on how broker-dealers identify and manage conflicts of interest.
Although many of the regulations implementing portions of the Dodd-Frank Act have been promulgated, we are still unable to predict how this legislation may be interpreted and enforced or the full extent to which implementing regulations and policies may affect us. Also, the Trump administration and Congress have indicated that the Dodd-Frank Act will be under further scrutiny and some of the provisions of the Dodd-Frank Act may be revised, repealed or amended. For example, President Trump has issued an executive order that calls for a comprehensive review of the Dodd-Frank Act and requires the Secretary of the Treasury to consult with the heads of the member agencies of FSOC to identify any laws, regulations or requirements that inhibit federal regulation of the financial system in a manner consistent with the core principles identified in the executive order. In addition, on June 8, 2017, the U.S. House of Representatives passed the Financial CHOICE Act of 2017, which proposes to amend or repeal various sections of the Dodd-Frank Act. There is considerable uncertainty with respect to the impact the Trump administration and Congress may have, if any, on the Dodd-Frank Act and any changes likely will take

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time to unfold. We cannot predict the ultimate content, timing or effect of any reform legislation or the impact of potential legislation on us.
ERISA Considerations
We provide certain products and services to employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) and certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”). As such, our activities are subject to the restrictions imposed by ERISA and the Code, including the requirement that fiduciaries must perform their duties solely in the interests of plan participants and beneficiaries, and fiduciaries may not cause or permit a covered plan to engage in certain prohibited transactions with persons (parties-in-interest) who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Code are subject to enforcement by the U.S. Department of Labor (the “DOL”), the Internal Revenue Service (the “IRS”) and the Pension Benefit Guaranty Corporation.
In April 2016, the DOL issued a rule (the “DOL Rule”) which significantly expanded the range of activities considered to be fiduciary investment advice under ERISA when our advisors and our employees provide investment-related information and support to retirement plan sponsors, participants and IRA holders. In the wake of the March 2018 federal appeals court decision to vacate 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. We are currently assessing Regulation 187 to determine the impact it may have on our business. In November 2018, the three 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. Beyond the New York regulation, the likelihood of enactment of any such federal or 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.
International Regulation
Regulators and lawmakers in non-U.S. jurisdictions are engaged in addressing the causes of the financial crisis and means of avoiding such crises in the future. On July 18, 2013, the International Association of Insurance Supervisors (“IAIS”) published an initial assessment methodology for designating global systemically important insurers (“GSIIs”), as part of the global initiative launched by the G20 with the assistance of the Financial Stability Board (the “FSB”) to identify those insurers whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity.
On July 18, 2013, the FSB published its initial list of nine GSIIs, which included AXA. The GSII list was originally intended to be updated annually following consultation with the IAIS and respective national supervisory authorities. AXA remained on the list as updated in November 2014, 2015 and 2016. However, the FSB announced in November 2017 that it, in consultation with the IAIS and national authorities, has decided not to publish a new list of GSIIs for 2017. On November 14, 2018, the FSB announced that, in light of IAIS progress in developing a proposed holistic framework for the assessment and mitigation of potential systemic risk in the insurance sector, the FSB has decided not to engage in an identification of G-SIIs in 2018. In its public consultation on the holistic framework, issued on November 14, 2018, the IAIS recommended that the implementation of its proposed holistic framework should obviate the need for the FSB’s annual G-SII identification process. The FSB subsequently stated that it will assess the IAIS’s recommendation to suspend G-SII identification from 2020, once the holistic framework is finalized in November 2019, and, in November 2022, based on the initial implementation of the holistic framework, review the need to either discontinue or reestablish an annual identification of G-SIIs.
The policy measures for GSIIs, published by the IAIS in July 2013, include (i) the introduction of new capital requirements; a “basic” capital requirement (“BCR”) applicable to all GSII activities which is intended to serve as a basis for an additional level of capital, called “Higher Loss Absorbency” (“HLA”) required from GSIIs in relation to their systemic activities, (ii) greater regulatory oversight over holding companies, (iii) various measures to promote the structural and financial “self-sufficiency” of group companies and reduce group interdependencies including restrictions on intra-group financing and other arrangements, and (iv) in general, a greater level of regulatory scrutiny for GSIIs (including a requirement to establish a Systemic Risk Management Plan (“SRMP”), a Liquidity Risk Management Plan (“LRMP”) and a Recovery and Resolution Plan (“RRP”) which have entailed significant new processes, reporting and compliance burdens and costs for AXA. The

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contemplated policy measures include the constitution of a Crisis Management Group by the group-wide supervisor, the preparation of the above-mentioned documents (SRMP, LRMP and RRP) and the development and implementation of the BCR in 2014, while other measures are to be phased in more gradually, such as the HLA (the first version of which was endorsed by the FSB in October 2015 but which is expected to be revised before its implementation in at least 2019).
On June 16, 2016, the IAIS published an updated assessment methodology, applicable to the 2016 designation process, which is yet to be endorsed by the FSB. To support some adjustments proposed by the revised assessment methodology, the IAIS also published a paper on June 16, 2016, describing the “Systemic Features Framework” that the IAIS intends to employ in assessing whether certain contractual features and other factors are likely to expose an insurer to a greater degree of systemic risk, focusing specifically on two sets of risks: macroeconomic exposure and substantial liquidity risk. Also, the IAIS stated that the 2016 assessment methodology, along with the Systemic Features Framework, will lead to a change in HLA design and calibration. In addition, the IAIS is in the process of developing an activities-based approach to systemic risk in the insurance sector and published a consultation paper on this approach in December 2017. The development of this activities-based approach may have significant implications for the identification of GSIIs and the policy measures to which they are expected to be subject.
As part of its efforts to create a common framework for the supervision of internationally active insurance groups (“IAIGs”), the IAIS has also been developing a comprehensive, group-wide international insurance capital standard (the “ICS”) to be applied to both GSIIs and IAIGs, although it is not expected to be finalized until 2019 at the earliest, and is not expected to be fully implemented, if at all, until at least five years thereafter. AXA currently meets the parameters set forth to define an IAIG. Although the BCR and HLA are more developed than the ICS at present, the IAIS has stated that it intends to revisit both standards following development and refinement of the ICS, and that the BCR will eventually be replaced by the ICS. The NAIC plans to develop an “aggregation method” for group capital. Although the aggregation method will not be part of ICS, the IAIS aims to make a determination whether the aggregated approach provides substantially the same outcome as the ICS, in which case it could be incorporated into the ICS as an outcome-equivalent approach.
Although the standards issued by the FSB and/or the IAIS are not binding on the United States or other jurisdictions around the world unless and until the appropriate local governmental bodies or regulators adopt appropriate laws and regulations, these measures could have far reaching regulatory and competitive implications for AXA in the event they are implemented by its group supervisors, which in turn, to the extent we are deemed to be controlled by or an affiliate of AXA at the time the measures are implemented, or we independently meet the criteria for being an IAIG and the measures are adopted by U.S. group supervisors, could materially affect our competitive position, consolidated results of operations, financial condition, liquidity and how we operate our business.
Federal Tax Legislation, Regulation, and Administration
Although we cannot predict what legislative, regulatory, or administrative changes may or may not occur with respect to the federal tax law, we nevertheless endeavor to consider the possible ramifications of such changes on the profitability of our business and the attractiveness of our products to consumers. In this regard, we analyze multiple streams of information, including those described below.
Enacted Legislation
At present, the federal tax laws generally permit certain holders of life insurance and annuity products to defer taxation on the build-up of value within such products (commonly referred to as “inside build-up”) until payments are made to the policyholders or other beneficiaries. From time to time, Congress considers legislation that could enhance or reduce (or eliminate) the benefit of tax deferral on some life insurance and annuity products. As an example, the American Taxpayer’s Relief Act increased individual tax rates for higher-income taxpayers. Higher tax rates increase the benefits of tax deferral on inside build-up and, correspondingly, tend to enhance the attractiveness of life insurance and annuity products to consumers that are subject to those higher tax rates. The Tax Reform Act reduced individual tax rates, which could reduce demand for our products. The modification or elimination of this tax-favored status could also reduce demand for our products. In addition, if the treatment of earnings accrued inside an annuity contract was changed prospectively, and the tax-favored status of existing contracts was grandfathered, holders of existing contracts would be less likely to surrender or rollover their contracts. These changes could reduce our earnings and negatively impact our business.

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The Tax Reform Act
The Tax Reform Act overhauled the U.S. Internal Revenue Code and changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies. While the Tax Reform Act had a net positive economic impact on us, it contained measures which could have adverse or uncertain impacts on some aspects of our business, results of operations or financial condition. We continue to monitor regulations and interpretations of the Tax Reform Act that could impact our business, results of operations and financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Macroeconomic and Industry Trends—Impact of the Tax Reform Act.”
Future Changes in U.S. Tax Laws
We anticipate that, following the Tax Reform Act, we will continue deriving tax benefits from certain items, including but not limited to the dividend received deduction (“DRD”), tax credits, insurance reserve deductions and interest expense deductions. However, there is a risk that interpretations of the Tax Reform Act, regulations promulgated thereunder, or future changes to federal, state or other tax laws could reduce or eliminate the tax benefits from these or other items and result in our incurring materially higher taxes.
Regulatory and Other Administrative Guidance from the Treasury Department and the IRS
Regulatory and other administrative guidance from the Treasury Department and the IRS also could impact the amount of federal tax that we pay. For example, the adoption of “principles based” approaches for calculating statutory reserves may lead the Treasury Department and the IRS to issue guidance that changes the way that deductible insurance reserves are determined, potentially reducing future tax deductions for us.
Privacy and Security of Customer Information and Cybersecurity Regulation
We are subject to federal and state laws and regulations that require financial institutions to protect the security and confidentiality of customer information, and to notify customers about their policies and practices relating to their collection and disclosure of customer information and their practices relating to protecting the security and confidentiality of that information. We have adopted a privacy policy outlining procedures and practices to be followed by members of Holdings and its subsidiaries relating to the collection, disclosure and protection of customer information. As required by law, a copy of the privacy policy is mailed to customers on an annual basis. Federal and state laws generally require that we provide notice to affected individuals, law enforcement, regulators and/or potentially others if there is a situation in which customer information is intentionally or accidentally disclosed to and/or acquired by unauthorized third parties. Federal regulations require financial institutions to implement programs to detect, prevent, and mitigate identity theft. Federal and state laws and regulations regulate the ability of financial institutions to make telemarketing calls and to send unsolicited e-mail or fax messages to both consumers and customers, and also regulate the permissible uses of certain categories of customer information. Violation of these laws and regulations may result in significant fines and remediation costs. It may be expected that legislation considered by either the U.S. Congress and/or state legislatures could create additional and/or more detailed obligations relating to the use and protection of customer information.
On February 16, 2017, the NYDFS announced the adoption of a new cybersecurity regulation for financial services institutions, including banking and insurance entities, under its jurisdiction. The new regulation became effective on March 1, 2017 and is being implemented in stages that commenced on August 28, 2017 and will be fully implemented by March 1, 2019. This new regulation requires these entities to, among other things, establish and maintain a cybersecurity policy designed to protect consumers’ private data. We have adopted a cybersecurity policy outlining our policies and procedures for the protection of our information systems and information stored on those systems that comports with the regulation. In addition to New York’s cybersecurity regulation, the NAIC adopted the Insurance Data Security Model Law in October 2017. Under the model law, companies that are compliant with the NYDFS cybersecurity regulation are deemed also to be in compliance with the model law. The purpose of the model law is to establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. Certain states have adopted the model law, and we expect that additional states will also adopt the model law, although it cannot be predicted whether or not, or in what form or when, they will do so.
Environmental Considerations
Federal, state and local environmental laws and regulations apply to our ownership and operation of real property. Inherent in owning and operating real property are the risk of environmental liabilities and the costs of any required clean-up. Under the

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laws of certain states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of clean-up, which could adversely affect our mortgage lending business. In some states, this lien may have priority over the lien of an existing mortgage against such property. In addition, in some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, we may be liable, in certain circumstances, as an “owner” or “operator,” for costs of cleaning-up releases or threatened releases of hazardous substances at a property mortgaged to us. We also risk environmental liability when we foreclose on a property mortgaged to us. However, federal legislation provides for a safe harbor from CERCLA liability for secured lenders, provided that certain requirements are met. Application of various other federal and state environmental laws could also result in the imposition of liability on us for costs associated with environmental hazards.
We routinely conduct environmental assessments prior to making a mortgage loan or taking title to real estate, whether through acquisition for investment or through foreclosure on real estate collateralizing mortgages. We cannot provide assurance that unexpected environmental liabilities will not arise. However, based on information currently available to us, we believe that any costs associated with compliance with environmental laws and regulations or any clean-up of properties would not have a material adverse effect on our consolidated results of operations.
Intellectual Property
We rely on a combination of copyright, trademark, patent and trade secret laws to establish and protect our intellectual property rights. Holdings has entered into a licensing arrangement (the “Trademark License Agreement”) with AXA concerning the use by Holdings of the “AXA” name. We also have an extensive portfolio of trademarks and service marks that we consider important in the marketing of our products and services. We regard our intellectual property as valuable assets and protect them against infringement.
Iran Threat Reduction and Syria Human Rights Act
Holdings, AXA Equitable and their global 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 Embassy 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 $24,272.
AXA also has informed us that AXA Belgium, an AXA insurance subsidiary organized under the laws of Belgium, has two policies providing for car insurance for Global Trading NV, which was designated on May 17, 2018 under (E.O.) 13224, and subsequently changed its name to Energy Engineers & Construction on August 20, 2018. The total annual premium of these policies is approximately $6,559 before tax and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $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 Embassy 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 liability insurance coverage is compulsory in Turkey and cannot be canceled unilaterally. The total annual premium in

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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 in Switzerland. The total annual premium of these policies is approximately $396,597 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $59,489.
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.
Furthermore, 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.
Lastly, a non-U.S. subsidiary of AXA XL provided accident & health insurance coverage to the diplomatic personnel of the Embassy of Iran in Brussels, Belgium during the third quarter of 2018. AXA XL’s non-U.S. subsidiary received aggregate payments for this insurance from inception through December 31, 2018 of approximately $73,451. Benefits of approximately $2,994 were paid to beneficiaries during 2018. These activities are permitted pursuant to applicable law. The policy has been canceled and is no longer in force.
The aggregate annual premium for the above-referenced insurance policies is approximately $646,411, representing approximately 0.0006% of AXA’s 2018 consolidated revenues, which exceed $100 billion. The related net profit, which is difficult to calculate with precision, is estimated to be $88,070, representing approximately 0.001% of AXA’s 2018 aggregate net profit.
EMPLOYEES
As of December 31, 2018, the Company had approximately 4,200 full time employees.

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Part I, Item 1A.
RISK FACTORS
You should consider and read carefully all of the risks and uncertainties described below, as well as other information set forth in this Annual Report on Form 10-K. The risks described below are not the only ones facing us. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial position, results of operations or cash flows. This Annual Report on Form 10-K also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below.
Risks Relating to Our Business
Risks Relating to Conditions in the Financial Markets and Economy
Conditions in the global capital markets and the economy could materially and adversely affect our business, results of operations or financial condition.
Our business, results of operations or financial condition are materially affected by conditions in the global capital markets and the economy generally. A wide variety of factors continue to impact economic conditions and consumer confidence. These factors include, among others, concerns over the pace of economic growth in the United States, equity market performance, continued low interest rates, uncertainty regarding the U.S. Federal Reserve’s plans to further raise short-term interest rates, the strength of the U.S. dollar, uncertainty created by actions the Trump administration and Congress may pursue, global trade wars, global economic factors including quantitative easing or similar programs by major central banks or the unwinding of quantitative easing or similar programs, the United Kingdom’s vote to exit (“Brexit”) from the European Union (the “EU”), and other geopolitical issues. Given our interest rate and equity market exposure in our investment and derivatives portfolios and many of our products, these factors could have a material adverse effect on us. Our revenues may decline, our profit margins could erode and we could incur significant losses. The value of our investments and derivatives portfolios may also be impacted by reductions in price transparency, changes in the assumptions or methodology we use to estimate fair value and changes in investor confidence or preferences, which could potentially result in higher realized or unrealized losses and have a material adverse effect on our business, results of operations or financial condition. Market volatility may also make it difficult to transact in or to value certain of our securities if trading becomes less frequent.
Factors such as consumer spending, business investment, government debt and spending, the volatility and strength of the equity markets, interest rates, deflation and inflation all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our retirement, protection or investment products and our investment returns could be materially and adversely affected. The profitability of many of our retirement, protection and investment products depends in part on the value of the General Account and Separate Accounts supporting them, which may fluctuate substantially depending on any of the foregoing conditions. In addition, a change in market conditions could cause a change in consumer sentiment and adversely affect sales and could cause the actual persistency of these products to vary from their anticipated persistency (the probability that a product will remain in force from one period to the next) and adversely affect profitability. Changing economic conditions or adverse public perception of financial institutions can influence customer behavior, which can result in, among other things, an increase or decrease in the levels of claims, lapses, deposits, surrenders and withdrawals in certain products, any of which could adversely affect profitability. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. In addition, market conditions may affect the availability and cost of reinsurance protections and the availability and performance of hedging instruments in ways that could materially and adversely affect our profitability.
Accordingly, both market and economic factors may affect our business results by adversely affecting our business volumes, profitability, cash flow, capitalization and overall financial condition. Disruptions in one market or asset class can also spread to other markets or asset classes. Upheavals and stagnation in the financial markets could also materially affect our financial condition (including our liquidity and capital levels) as a result of the impact of such events on our assets and liabilities.

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Equity market declines and volatility may materially and adversely affect our business, results of operations or financial condition.
Declines or volatility in the equity markets, such as that which we experienced during the fourth quarter of 2018, can negatively impact our investment returns as well as our business, results of operations or financial condition. For example, equity market declines or volatility could, among other things, decrease the AV of our annuity and variable life contracts which, in turn, would reduce the amount of revenue we derive from fees charged on those account and asset values. Our variable annuity business in particular is highly sensitive to equity markets, and a sustained weakness or stagnation in equity markets could decrease our revenues and earnings with respect to those products. At the same time, for variable annuity contracts that include GMxB features, equity market declines increase the amount of our potential obligations related to such GMxB features and could increase the cost of executing GMxB-related hedges beyond what was anticipated in the pricing of the products being hedged. This could result in an increase in claims and reserves related to those contracts, net of any reinsurance reimbursements or proceeds from our hedging programs. We may not be able to effectively mitigate, including through our hedging strategies, and we may sometimes choose based on economic considerations and other factors not to fully mitigate the equity market volatility of our portfolio. Equity market declines and volatility may also influence policyholder behavior, which may adversely impact the levels of surrenders, withdrawals and amounts of withdrawals of our annuity and variable life contracts or cause policyholders to reallocate a portion of their account balances to more conservative investment options (which may have lower fees), which could negatively impact our future profitability or increase our benefit obligations particularly if they were to remain in such options during an equity market increase. Market volatility can negatively impact the value of equity securities we hold for investment which could in turn reduce our statutory capital. In addition, equity market volatility could reduce demand for variable products relative to fixed products, lead to changes in estimates underlying our calculations of DAC that, in turn, could accelerate our DAC amortization and reduce our current earnings and result in changes to the fair value of our GMIB reinsurance contracts and GMxB liabilities, which could increase the volatility of our earnings. Lastly, periods of high market volatility or adverse conditions could decrease the availability or increase the cost of derivatives.
Interest rate fluctuations or prolonged periods of low interest rates may materially and adversely impact our business, consolidated results of operations or financial condition.
We are affected by the monetary policies of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) and the Federal Reserve Bank of New York (collectively, with the Federal Reserve Board, the “Federal Reserve”) and other major central banks, including the unwinding of quantitative easing programs, as such policies may adversely impact the level of interest rates and, as discussed below, the income we earn on our investments or the level of product sales.
Some of our retirement and protection products and certain of our investment products, and our investment returns, are sensitive to interest rate fluctuations, and changes in interest rates may adversely affect our investment returns and results of operations, including in the following respects:
•
changes in interest rates may reduce the spread on some of our products between the amounts that we are required to pay under the contracts and the rate of return we are able to earn on our General Account investments supporting the contracts. When interest rates decline, we have to reinvest the cash income from our investments in lower yielding instruments, potentially reducing net investment income. Since many of our policies and contracts have guaranteed minimum interest or crediting rates or limit the resetting of interest rates, the spreads could decrease and potentially become negative. When interest rates rise, we may not be able to quickly replace the assets in our General Account with higher yielding assets needed to fund the higher crediting rates necessary to keep these products and contracts competitive, which may result in higher lapse rates;
•
when interest rates rise rapidly, policy loans and surrenders and withdrawals of annuity contracts and life insurance policies may increase as policyholders seek to buy products with perceived higher returns, requiring us to sell investment assets potentially resulting in realized investment losses, or requiring us to accelerate the amortization of DAC, which could reduce our net income;
•
a decline in interest rates accompanied by unexpected prepayments of certain investments may result in reduced investment income and a decline in our profitability. An increase in interest rates accompanied by unexpected extensions of certain lower yielding investments may result in a decline in our profitability;
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changes in the relationship between long-term and short-term interest rates may adversely affect the profitability of some of our products;
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changes in interest rates could result in changes to the fair value of our GMIB reinsurance contracts asset, which could increase the volatility of our earnings. Higher interest rates reduce the value of the GMIB reinsurance contract asset

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which reduces our earnings, while lower interest rates increase the value of the GMIB reinsurance contract asset which increases our earnings;
•
changes in interest rates could result in changes to the fair value liability of our variable annuity GMxB business. Higher interest rates decrease the fair value liability of our GMxB variable annuity business, which increases our earnings; while lower interest rates increase the fair value liability of our GMxB variable annuity business, which decreases our earnings;
•
changes in interest rates may adversely impact our liquidity and increase our costs of financing and the cost of some of our hedges;
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our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a weighted average duration that is within an acceptable range of the duration of our estimated liability cash flow profile given our risk appetite. However, our estimate of the liability cash flow profile may turn out to be inaccurate. In addition, there are practical and capital market limitations on our ability to accomplish this objective. Due to these and other factors we may need to liquidate investments prior to maturity at a loss in order to satisfy liabilities or be forced to reinvest funds in a lower rate environment;
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we may not be able to effectively mitigate, including through our hedging strategies, and we may sometimes choose based on economic considerations and other factors not to fully mitigate or to increase, the interest rate risk of our assets relative to our liabilities; and
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for certain of our products, a delay between the time we make changes in interest rate and other assumptions used for product pricing and the time we are able to reflect these assumptions in products available for sale may negatively impact the long-term profitability of products sold during the intervening period.
Recent periods have been characterized by low interest rates relative to historical levels. A prolonged period during which interest rates remain low may result in greater costs associated with our variable annuity products with GMxB features; higher costs for some derivative instruments used to hedge certain of our product risks; or shortfalls in investment income on assets supporting policy obligations as our portfolio earnings decline over time, each of which may require us to record charges to increase reserves. In addition, an extended period of declining interest rates or a prolonged period of low interest rates may also cause us to change our long-term view of the interest rates that we can earn on our investments. Such a change in our view would cause us to change the long-term interest rate that we assume in our calculation of insurance assets and liabilities under U.S. GAAP. Any future revision would result in increased reserves, accelerated amortization of DAC and other unfavorable consequences. In addition, certain statutory capital and reserve requirements are based on formulas or models that consider interest rates, and an extended period of low interest rates may increase the statutory capital we are required to hold and the amount of assets we must maintain to support statutory reserves. In addition to compressing spreads and reducing net investment income, such an environment may cause certain policies to remain in force for longer periods than we anticipated in our pricing, potentially resulting in greater claims costs than we expected and resulting in lower overall returns on business in force.
We manage interest rate risk as part of our asset and liability management strategies, which include (i) maintaining an investment portfolio with diversified maturities that has a weighted average duration that is within an acceptable range of the duration of our estimated liability cash flow profile given our risk appetite and (ii) our hedging programs. For certain of our liability portfolios, it is not possible to invest assets to the full liability duration, thereby creating some asset/liability mismatch. Where a liability cash flow may exceed the maturity of available assets, as is the case with certain retirement products, we may support such liabilities with equity investments, derivatives or interest rate mismatch strategies. We take measures to manage the economic risks of investing in a changing interest rate environment, but we may not be able to mitigate the interest rate risk of our fixed income investments relative to our interest sensitive liabilities. Widening credit spreads, if not offset by equal or greater declines in the risk-free interest rate, would also cause the total interest rate payable on newly issued securities to increase, and thus would have the same effect as an increase in underlying interest rates.
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, our access to capital and our cost of capital.
The capital and credit markets may experience, and have experienced, varying degrees of volatility and disruption. In some cases, the markets have exerted downward pressure on availability of liquidity and credit capacity for certain issuers. We need liquidity to pay our operating expenses (including potential hedging losses), interest expenses and any dividends. Without sufficient liquidity, we could be required to curtail our operations and our business would suffer.

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While we expect that our future liquidity needs will be satisfied primarily through cash generated by our operations, borrowings from third parties and dividends and distributions from our subsidiaries, it is possible that the level of cash and securities we maintain when combined with expected cash inflows from investments and operations will not be adequate to meet our anticipated short-term and long-term benefit and expense payment obligations. If current resources are insufficient to satisfy our needs, we may access financing sources such as bank debt or the capital markets. The availability of additional financing would depend on a variety of factors, such as market conditions, the general availability of credit, the volume of trading activities, the overall availability of credit to the financial services industry, interest rates, credit spreads, our credit ratings and credit capacity, as well as the possibility that our customers or lenders could develop a negative perception of our long- or short-term financial prospects if we incur large investment losses or if the level of our business activity decreases due to a market downturn. Similarly, our access to funds may be rendered more costly or impaired if rating agencies downgrade our ratings or if regulatory authorities take certain actions against us. If we are unable to access capital markets to issue new debt or refinance existing debt as needed, or if we are unable to obtain such financing on acceptable terms, our business could be adversely impacted.
Volatility in the capital markets may also consume liquidity as we pay hedge losses and meet collateral requirements related to market movements. We maintain hedging programs to reduce our net economic exposure under long-term liabilities to risks such as interest rates and equity market levels. We expect these hedging programs to incur losses in certain market scenarios, creating a need to pay cash settlements or post collateral to counterparties. Although our liabilities will also be reduced in these scenarios, this reduction is not immediate, and so in the short-term hedging losses will reduce available liquidity. Liquidity may also be consumed by increased required contributions to captive reinsurance trusts. For more details, see “—Risks Relating to Our Business—Risks Relating to Our Reinsurance and Hedging Programs—Our reinsurance arrangements with affiliated captives may be adversely impacted by changes to policyholder behavior assumptions under the reinsured contracts, the performance of their hedging program, their liquidity needs, their overall financial results and changes in regulatory requirements regarding the use of captives.”
Disruptions, uncertainty or volatility in the capital and credit markets may also limit our access to capital. Such market conditions may in the future limit our ability to raise additional capital to support business growth, or to counter-balance the consequences of losses or increased regulatory reserves and rating agency capital requirements. Our business, results of operations, financial condition, liquidity, statutory capital or rating agency capital position could be materially and adversely affected by disruptions in the financial markets.
Future changes in our credit ratings are possible, and any downgrade to our ratings is likely to increase our borrowing costs and limit our access to the capital markets and could be detrimental to our business relationships with distribution partners. If this occurs, we may be forced to incur unanticipated costs or revise our strategic plans, which could materially and adversely affect our business, results of operations or financial condition.
Risks Relating to Our Operations
During the course of preparing our U.S. GAAP financial statements, our management identified two material weaknesses in our internal control over financial reporting. If our remediation of these material weaknesses is not effective, we may not be able to report our financial condition or results of operations accurately or on a timely basis.
During the course of preparing our U.S. GAAP financial statements, our management identified two material weaknesses in the design and operation of our 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.
Our management consequently 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 that 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 (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 and, as a result, errors were identified in the Company’s consolidated financial statements, including in the presentation and disclosure between sections of the statement of cash flows.
These material weaknesses resulted in misstatements in the Company’s previously issued annual and interim financial statements and resulted in the restatement of the annual financial statements for the year ended December 31, 2016, the revision

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to each of the quarterly interim periods for 2017 and 2016, and the revision of the annual financial statements for the year ended December 31, 2015.
In addition, during the preparation of our quarterly report on Form 10-Q for the six months ended June 30, 2018, management identified a misclassification error between interest credited and net derivative gains/losses, which resulted in misstatements in the consolidated statements of income (loss) and statements of cash flows that were not considered material. Accordingly, we: (i) revised the annual financial statements for the year ended December 31, 2017; (ii) revised the annual financial statements for the year ended December 31, 2016; and (iii) revised the interim financial statements for the nine months ended September 30, 2017 and for the six months ended June 30, 2017.
Further, in connection with preparing our quarterly report on Form 10-Q for the nine months ended September 30, 2018, management identified errors primarily related to the calculation of policyholders’ benefit reserves for our life and annuity products and the calculation of net derivative gains (losses) and DAC amortization for certain variable and interest sensitive life products. Accordingly, we: (i) revised the interim financial statements for the nine months ended September 30, 2017 and the six months ended June 30, 2017 from the previously reported interim financial statements; (ii) revised the interim financial statements for the six months ended June 30, 2018 and the three months ended March 31, 2018 and 2017 from the previously reported interim financial statements; (iii) revised the annual financial statements for the years ended December 31, 2017 from the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018; (iv) and revised the annual financial statements for the year ended December 31, 2016 from the Company’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018.
Lastly, in connection with preparing our annual report on Form 10-K for the year ended December 31, 2018, management identified certain cash flows that were incorrectly classified in the Company’s historical consolidated statements of cash flows. The impact of these misclassifications was not considered material. Accordingly, the Company revised the interim financial statements for the three, six, and nine months ended March 31, June 30 and September 30, 2018 and 2017 and the annual financial statements for the year ended December 31, 2017.
The changes necessary to correct the identified misstatements in our previously reported historical results have been appropriately reflected in our consolidated annual financial statements included elsewhere in this Annual Report on Form 10-K. Until remedied, these material weaknesses could result in a misstatement of our consolidated financial statements or disclosures that would result in a material misstatement to our annual or interim financial statements that would not be prevented or detected.
Since identifying the two material weaknesses, we have been, and are currently in the process of, remediating each material weakness. Although we plan to complete the remediation process as quickly as possible for each material weakness, we cannot at this time estimate when the remediation will be completed. For additional information, see “Controls and Procedures-Remediation Status of Material Weaknesses.”
If we fail to remediate effectively these material weaknesses or if we identify additional material weaknesses in our internal control over financial reporting, we may be unable to report our financial condition or financial results accurately or to report them within the timeframes required by the SEC. If this were the case, we could become subject to sanctions or investigations by the SEC or other regulatory authorities. Furthermore, failure to report our financial condition or financial results accurately or report them within the timeframes required by the SEC could cause us to curtail or cease sales of certain variable insurance products. In addition, if we are unable to determine that our internal control over financial reporting or our disclosure controls and procedures are effective, users of our financial statements may lose confidence in the accuracy and completeness of our financial reports, we may face reduced ability to obtain financing and restricted access to the capital markets, and we may be required to curtail or cease sales of our products. See “Controls and Procedures” in Part II, Item 9A.
Failure to protect the confidentiality of customer information or proprietary business information could adversely affect our reputation and have a material adverse effect on our business, results of operations or financial condition.
Our business and relationships with customers are dependent upon our ability to maintain the confidentiality of our customers’ proprietary business and confidential information (including customer transactional data and personal data about our employees, our customers and the employees and customers of our customers). Pursuant to federal laws, various federal regulatory and law enforcement agencies have established rules protecting the privacy and security of personal information. In addition, most states, including New York, have enacted laws, which vary significantly from jurisdiction to jurisdiction, to safeguard the privacy and security of personal information.

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We and certain of our vendors retain confidential information in our information systems and in cloud-based systems (including customer transactional data and personal information about our customers, the employees and customers of our customers, and our own employees). We rely on commercial technologies and third parties to maintain the security of those systems. Anyone who is able to circumvent our security measures and penetrate our information systems, those of our vendors, or the cloud-based systems we use, could access, view, misappropriate, alter or delete any information in the systems, including personally identifiable customer information and proprietary business information. It is possible that an employee, contractor or representative could, intentionally or unintentionally, disclose or misappropriate personal information or other confidential information. Our employees, distribution partners and other vendors may use portable computers or mobile devices which may contain similar information to that in our information systems, and these devices have been and can be lost, stolen or damaged. In addition, an increasing number of states require that customers be notified if a security breach results in the inappropriate disclosure of personally identifiable customer information. Any compromise of the security of our information systems, or those of our vendors, or the cloud-based systems we use, through cyber-attacks or for any other reason that results in inappropriate disclosure of personally identifiable customer information could damage our reputation in the marketplace, deter people from purchasing our products, subject us to significant civil and criminal liability and require us to incur significant technical, legal and other expenses any of which could have a material adverse effect on our reputation, business, results of operations or financial condition.
For example, in November 2018, we were notified by one of our third-party vendors of an incident involving unauthorized access to confidential information of certain of our customers, as well as customer information of a number of other institutions. In accordance with applicable law and regulations, we have notified the appropriate regulators and our affected customers. We have also conducted a thorough investigation of this security breach and believe it has been resolved. However, we cannot provide assurances that all potential causes of the incident have been identified and remediated or that a similar incident will not occur again.
Our own operational failures or those of service providers on which we rely, including failures arising out of human error, could disrupt our business, damage our reputation and have a material adverse effect on our business, results of operations or financial condition.
Weaknesses or failures in our internal processes or systems could lead to disruption of our operations, liability to clients, exposure to disciplinary action or harm to our reputation. Our business is highly dependent on our ability to process, on a daily basis, large numbers of transactions, many of which are highly complex, across numerous and diverse markets. These transactions generally must comply with client investment guidelines, as well as stringent legal and regulatory standards.
Weaknesses or failures within a vendor’s internal processes or systems, or inadequate business continuity plans, can materially disrupt our business operations. In addition, vendors may lack the necessary infrastructure or resources to effectively safeguard our confidential data. If we are unable to effectively manage the risks associated with such third-party relationships, we may suffer fines, disciplinary action and reputational damage.
Our obligations to clients require us to exercise skill, care and prudence in performing our services. The large number of transactions we process makes it highly likely that errors will occasionally occur. If we make a mistake in performing our services that causes financial harm to a client, we have a duty to act promptly to put the client in the position the client would have been in had we not made the error. The occurrence of mistakes, particularly significant ones, can have a material adverse effect on our reputation, business, results of operations or financial condition.
Our information systems may fail or their security may be compromised, which could materially and adversely impact our business, results of operations or financial condition.
Our business is highly dependent upon the effective operation of our information systems. We also have arrangements in place with outside vendors and other service providers through which we share and receive information. We rely on these systems throughout our business for a variety of functions, including processing claims and applications, providing information to customers and third-party distribution firms, performing actuarial analyses and modeling, hedging, performing operational tasks (e.g., processing transactions and calculating net asset value) and maintaining financial records. Our information systems and those of our outside vendors and service providers may be vulnerable to physical or cyber-attacks, computer viruses or other computer related attacks, programming errors and similar disruptive problems. In some cases, such physical and electronic break-ins, cyber-attacks or other security breaches may not be immediately detected. In addition, we could experience a failure of one or these systems, our employees or agents could fail to monitor and implement enhancements or other modifications to a system in a timely and effective manner, or our employees or agents could fail to complete all

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necessary data reconciliation or other conversion controls when implementing a new software system or implementing modifications to an existing system. The failure of these systems for any reason could cause significant interruptions to our operations, which could result in a material adverse effect on our business, results of operations or financial condition. In addition, a failure of these systems could lead to the possibility of litigation or regulatory investigations or actions, including regulatory actions by state and federal governmental authorities. While we take preventative measures to avoid cyber-attacks and other security breaches, we cannot guarantee that such measures will successfully prevent an attack or breach.
Many of the software applications that we use in our business are licensed from, and supported, upgraded and maintained by, vendors. A suspension or termination of certain of these licenses or the related support, upgrades and maintenance could cause temporary system delays or interruptions. Additionally, technology rapidly evolves and we cannot guarantee that our competitors may not implement more advanced technology platforms for their products and services, which may place us at a competitive disadvantage and materially and adversely affect our results of operations and business prospects.
Our service providers, including service providers to whom we outsource certain of our functions, are also subject to the risks outlined above, any one of which could result in our incurring substantial costs and other negative consequences, including a material adverse effect on our business, results of operations or financial condition.
On February 16, 2017, the NYDFS issued final Cybersecurity Requirements for Financial Services Companies that require banks, insurance companies and other financial services institutions regulated by the NYDFS, including us, to, among other things, establish and maintain a cybersecurity policy “designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry.” The regulation went into effect on March 1, 2017 and has transition periods ranging from 180 days to two years. We have a cybersecurity policy in place outlining our policies and procedures for the protection of our information systems and information stored on those systems that comports with the regulation. In accordance with the regulation, our Chief Information Security Officer reports to the Board. In addition to New York’s cybersecurity regulation, the NAIC adopted the Insurance Data Security Model Law in October 2017. Under the model law, companies that are compliant with the NYDFS cybersecurity regulation are deemed also to be in compliance with the model law. The purpose of the model law is to establish standards for data security and for the investigation and notification of insurance commissioners of cybersecurity events involving unauthorized access to, or the misuse of, certain nonpublic information. Certain states have adopted the model law, and we expect that additional states will begin adopting the model law, although it cannot be predicted whether or not, or in what form or when, they will do so. We are currently evaluating these regulations and their potential impact on our operations, and, with respect to the NYDFS regulations, have begun implementing compliance procedures for those portions of the regulation that are in effect. Depending on our assessment of these and other potential implementation requirements, we and other financial services companies may be required to incur significant expense in order to comply with these regulatory mandates.
Central banks in Europe and Japan have in recent years begun to pursue negative interest rate policies, and the Federal Open Market Committee has not ruled out the possibility that the Federal Reserve would adopt a negative interest rate policy for the United States, at some point in the future, if circumstances so warranted. Because negative interest rates are largely unprecedented, there is uncertainty as to whether the technology used by financial institutions, including us, could operate correctly in such a scenario. Should negative interest rates emerge, our hardware or software, or the hardware or software used by our contractual counterparties and financial services providers, may not function as expected or at all. In such a case, our business, results of operations or financial condition could be materially and adversely affected.
We face competition from other insurance companies, banks, asset managers and other financial institutions, which may adversely impact our market share and consolidated results of operations.
There is strong competition among insurers, banks, asset managers, brokerage firms and other financial institutions and financial services providers seeking clients for the types of products and services we provide. Competition is intense among a broad range of financial institutions and other financial service providers for retirement and other savings dollars. As a result, this competition makes it especially difficult to provide unique products because, once such products are made available to the public, they often are reproduced and offered by our competitors. As with any highly competitive market, competitive pricing structures are important. If competitors charge lower fees for similar products or strategies, we may decide to reduce the fees on our own products or strategies (either directly on a gross basis or on a net basis through fee waivers) in order to retain or attract customers. Such fee reductions, or other effects of competition, could have a material adverse effect on our business, results of operations or financial condition.

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Competition may adversely impact our market share and profitability. Many of our competitors are large and well-established and some have greater market share or breadth of distribution, offer a broader range of products, services or features, assume a greater level of risk, have greater financial resources, have higher claims-paying or credit ratings, have better brand recognition or have more established relationships with clients than we do. We may also face competition from new market entrants or non-traditional or online competitors, which may have a material adverse effect on our business.
Our ability to compete is dependent on numerous factors including, among others, the successful implementation of our strategy; our financial strength as evidenced, in part, by our financial and claims-paying ratings; new regulations or different interpretations of existing regulations; our access to diversified sources of distribution; our size and scale; our product quality, range, features/functionality and price; our ability to bring customized products to the market quickly; our technological capabilities; our ability to explain complicated products and features to our distribution channels and customers; crediting rates on our fixed products; the visibility, recognition and understanding of our brands in the marketplace; our reputation and quality of service; the tax-favored status certain of our products receive under current federal and state laws; and, with respect to variable annuity and insurance products, mutual funds and other investment products, investment options, flexibility and investment management performance.
Many of our competitors also have been able to increase their distribution systems through mergers, acquisitions, partnerships or other contractual arrangements. Furthermore, larger competitors may have lower operating costs and have an ability to absorb greater risk, while maintaining financial strength ratings, allowing them to price products more competitively. These competitive pressures could result in increased pressure on the pricing of certain of our products and services, and could harm our ability to maintain or increase profitability. In addition, if our financial strength and credit ratings are lower than our competitors, we may experience increased surrenders or a significant decline in sales. The competitive landscape in which we operate may be further affected by government sponsored programs or regulatory changes in the United States and similar governmental actions outside of the United States. Competitors that receive governmental financing, guarantees or other assistance, or that are not subject to the same regulatory constraints, may have or obtain pricing or other competitive advantages. Due to the competitive nature of the financial services industry, there can be no assurance that we will continue to effectively compete within the industry or that competition will not materially and adversely impact our business, results of operations or financial condition.
We may also face competition from new entrants into our markets, many of whom are leveraging digital technology that may challenge the position of traditional financial service companies, including us, by providing new services or creating new distribution channels.
The inability of AXA Advisors and AXA Network to recruit, motivate and retain experienced and productive financial professionals and our inability to recruit, motivate and retain key employees may have a material adverse effect on our business, results of operations or financial condition.
Financial professionals associated with AXA Advisors and AXA Network and our key employees are key factors driving our sales. Intense competition exists among insurers and other financial services companies for financial professionals and key employees. Companies compete for financial professionals principally with respect to compensation policies, products and sales support. Competition is particularly intense in the hiring and retention of experienced financial professionals. Our ability to incentivize our employees and financial professionals may be adversely affected by tax reform. We cannot provide assurances that we, AXA Advisors or AXA Network will be successful in our respective efforts to recruit, motivate and retain key employees and top financial professionals, and the loss of such employees and professionals could have a material adverse effect on our business, results of operations or financial condition.
We also rely upon the knowledge and experience of employees involved in functions that require technical expertise in order to provide for sound operational controls for our overall enterprise, including the accurate and timely preparation of required regulatory filings and U.S. GAAP and statutory financial statements and operation of internal controls. A loss of such employees, including as a result of shifting our real estate footprint away from the New York metropolitan area, could adversely impact our ability to execute key operational functions and could adversely affect our operational controls, including internal control over financial reporting.

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Misconduct by our employees or financial professionals associated with us could expose us to significant legal liability and reputational harm.
Past or future misconduct by our employees, financial professionals associated with us, agents, intermediaries, representatives of our broker-dealer subsidiaries or employees of our vendors could result in violations of law by us or our subsidiaries, regulatory sanctions or serious reputational or financial harm and the precautions we take to prevent and detect this activity may not be effective in all cases. We employ controls and procedures designed to monitor employees’ and financial professionals’ business decisions and to prevent us from taking excessive or inappropriate risks, including with respect to information security, but employees may take such risks regardless of such controls and procedures. Our compensation policies and practices are reviewed by us as part of our overall risk management program, but it is possible that such compensation policies and practices could inadvertently incentivize excessive or inappropriate risk taking. If our employees or financial professionals take excessive or inappropriate risks, those risks could harm our reputation, subject us to significant civil or criminal liability and require us to incur significant technical, legal and other expenses.
We may engage in strategic transactions that could pose risks and present financial, managerial and operational challenges.
We may, from time to time, consider potential strategic transactions, including acquisitions, dispositions, mergers, consolidations, joint ventures and similar transactions, some of which may be material. These transactions may not be effective and could result in decreased earnings and harm to our competitive position. In addition, these transactions, if undertaken, may involve a number of risks and present financial, managerial and operational challenges, including:
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adverse effects on our earnings;
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additional demand on our existing employees;
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unanticipated difficulties integrating operating facilities technologies and new technologies;
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higher than anticipated costs related to integration;
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existence of unknown liabilities or contingencies that arise after closing; and
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potential disputes with counterparties.
Acquisitions also pose the risk that any business we acquire may lose customers or employees or could underperform relative to expectations. Additionally, the loss of investment personnel poses the risk that we may lose the AUM we expected to manage, which could materially and adversely affect our business, results of operations or financial condition. Furthermore, strategic transactions may require us to increase our leverage or, if we issue shares to fund an acquisition, would dilute the holdings of the existing stockholders. Any of the above could cause us to fail to realize the benefits anticipated from any such transaction.
Our business could be materially and adversely affected by the occurrence of a catastrophe, including natural or man-made disasters.
Any catastrophic event, such as pandemic diseases, terrorist attacks, floods, severe storms or hurricanes or computer cyber-terrorism, could have a material and adverse effect on our business in several respects:
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we could experience long-term interruptions in our service and the services provided by our significant vendors due to the effects of catastrophic events. Some of our operational systems are not fully redundant, and our disaster recovery and business continuity planning cannot account for all eventualities. Additionally, unanticipated problems with our disaster recovery systems could further impede our ability to conduct business, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data;
•
 the occurrence of a pandemic disease could have a material adverse effect on our liquidity and the operating results of our insurance business due to increased mortality and, in certain cases, morbidity rates;
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the occurrence of any pandemic disease, natural disaster, terrorist attack or any other catastrophic event that results in our workforce being unable to be physically located at one of our facilities could result in lengthy interruptions in our service;
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a localized catastrophic event that affects the location of one or more of our corporate-owned or employer-sponsored life insurance customers could cause a significant loss due to the corresponding mortality claims; and

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•
a terrorist attack in the United States could have long-term economic impacts that may have severe negative effects on our investment portfolio, including loss of AUM and losses due to significant volatility, and disrupt our business operations. Any continuous and heightened threat of terrorist attacks could also result in increased costs of reinsurance.
In the event of a disaster, such as a natural catastrophe, epidemic, industrial accident, blackout, computer virus, terrorist attack, cyber-attack or war, unanticipated problems with our disaster recovery systems could have a material adverse impact on our ability to conduct business and on our results of operations and financial position, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. Our ability to conduct business may be adversely affected by a disruption in the infrastructure that supports our operations and the communities in which they are located. This may include a disruption involving electrical, communications, transportation or other services we may use or third parties with which we conduct business. If a disruption occurs in one location and our employees in that location are unable to occupy our offices or communicate with or travel to other locations, our ability to conduct business with and on behalf of our clients may suffer, and we may not be able to successfully implement contingency plans that depend on communication or travel. Furthermore, unauthorized access to our systems as a result of a security breach, the failure of our systems, or the loss of data could give rise to legal proceedings or regulatory penalties under laws protecting the privacy of personal information, disrupt operations and damage our reputation.
Our operations require experienced, professional staff. Loss of a substantial number of such persons or an inability to provide properly equipped places for them to work may, by disrupting our operations, adversely affect our business, results of operations or financial condition. In addition, our property and business interruption insurance may not be adequate to compensate us for all losses, failures or breaches that may occur.
We may not be able to protect our intellectual property and may be subject to infringement claims by a third party.
We rely on a combination of contractual rights, copyright, trademark and trade secret laws to establish and protect our intellectual property. Third parties may infringe or misappropriate our intellectual property. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business and our ability to compete. Third parties may have, or may eventually be issued, patents or other protections that could be infringed by our products, methods, processes or services or could limit our ability to offer certain product features. In recent years, there has been increasing intellectual property litigation in the financial services industry challenging, among other things, product designs and business processes. If we were found to have infringed or misappropriated a third-party patent or other intellectual property right, we could in some circumstances be enjoined from providing certain products or services to our customers or from using and benefiting from certain patents, copyrights, trademarks, trade secrets or licenses. Alternatively, we could be required to enter into costly licensing arrangements with third parties or implement a costly alternative. Any of these scenarios could harm our reputation and have a material adverse effect on our business, results of operations or financial condition.
The insurance that we maintain may not fully cover all potential exposures.
We maintain property, business interruption, cyber, casualty and other types of insurance, but such insurance may not cover all risks associated with the operation of our business. Our coverage is subject to exclusions and limitations, including higher self-insured retentions or deductibles and maximum limits and liabilities covered. In addition, from time to time, various types of insurance may not be available on commercially acceptable terms or, in some cases, at all. We are potentially at additional risk if one or more of our insurance carriers fail. Additionally, severe disruptions in the domestic and global financial markets could adversely impact the ratings and survival of some insurers. Future downgrades in the ratings of enough insurers could adversely impact both the availability of appropriate insurance coverage and its cost. In the future, we may not be able to obtain coverage at current levels, if at all, and our premiums may increase significantly on coverage that we maintain. We can make no assurance that a claim or claims will be covered by our insurance policies or, if covered, will not exceed the limits of available insurance coverage, or that our insurers will remain solvent and meet their obligations.
Changes in accounting standards could have a material adverse effect on our business, results of operations or financial condition.
Our consolidated financial statements are prepared in accordance with U.S. GAAP, the principles of which are revised from time to time. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board (“FASB”). In the future, new accounting

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pronouncements, as well as new interpretations of existing accounting pronouncements, may have material adverse effects on our business, results of operations or financial condition.
FASB has issued several accounting standards updates which have resulted in significant changes in U.S. GAAP, including how we account for our insurance contracts and financial instruments and how our financial statements are presented. The changes to U.S. GAAP could affect the way we account for and report significant areas of our business, could impose special demands on us in the areas of governance, employee training, internal controls and disclosure and will likely affect how we manage our business. In August 2018, the FASB issued ASU 2018-12, Financial Services-Insurance (Topic 944), which applies to all insurance entities that issue long-duration contracts and revises elements of the measurement models for traditional nonparticipating long-duration and limited payment insurance liabilities and recognition and amortization model for DAC for most long-duration contracts. The new accounting standard also requires product features that have other-than-nominal credit risk, or market risk benefits (“MRBs”), to be measured at fair value. ASU 2018-12 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. We are currently evaluating the impact that the adoption of this guidance will have on our consolidated financial statements.
In addition, AXA, prepares consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”). From time to time, AXA may be required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the International Accounting Standards Board. In the future, new accounting pronouncements, as well as new interpretations of existing accounting pronouncements, may have material adverse effects on AXA’s business, results of operations or financial condition which 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.
Certain of our administrative operations and offices are located internationally, subjecting us to various international risks and increased compliance and regulatory risks and costs.
We have various offices in other countries and certain of our administrative operations are located in India. In the future, we may seek to expand operations in India or other countries. As a result of these operations, we may be exposed to economic, operating, regulatory and political risks in those countries, such as foreign investment restrictions, substantial fluctuations in economic growth, high levels of inflation, volatile currency exchange rates and instability, including civil unrest, terrorist acts or acts of war, which could have an adverse effect on our business, financial condition or results of operations. The political or regulatory climate in the United States could also change such that it would no longer be lawful or practical for us to use international operations in the manner in which they are currently conducted. If we had to curtail or cease operations in India and transfer some or all of these operations to another geographic area, we would incur significant transition costs as well as higher future overhead costs that could adversely affect us.
In many foreign countries, particularly in those with developing economies, it may be common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”) and similar anti-bribery laws. Any violations of the FCPA or other anti-bribery laws by us, our employees, subsidiaries or local agents, could have a material adverse effect on our business and reputation and result in substantial financial penalties or other sanctions.
Our investment advisory agreements with clients, and our selling and distribution agreements with various financial intermediaries, are subject to termination or non-renewal on short notice.
As part of our variable annuity products, AXA Equitable FMG enters into written investment management agreements (or other arrangements) with mutual funds. Generally, these investment management agreements are terminable without penalty at any time or upon relatively short notice by either party. For example, an investment management contract with an SEC-registered investment company (a “RIC”) may be terminated at any time, without payment of any penalty, by the RIC’s board of directors or by vote of a majority of the outstanding voting securities of the RIC on not more than 60 days’ notice. The investment management agreements pursuant to which AXA Equitable FMG manage RICs must be renewed and approved by the RIC’s boards of directors (including a majority of the independent directors) annually. A significant majority of the directors are independent. Consequently, there can be no assurance that the board of directors of each RIC will approve the investment management agreement each year or will not condition its approval on revised terms that may be adverse to us.
Also, as required by the Investment Company Act, each investment advisory agreement with a RIC automatically terminates upon its assignment, although new investment advisory agreements may be approved by the RIC’s board of directors or trustees and stockholders. An “assignment” includes a sale of a control block of the voting stock of the investment adviser or

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its parent company. If future sales of Holdings’ common stock were deemed to be an actual or constructive assignment, these termination provisions could be triggered, which may adversely affect AXA Equitable FMG’s ability to realize the value of its investment advisory agreements.
The Investment Advisers Act may also require approval or consent of advisory contracts by clients in the event of an “assignment” of the contract (including a sale of a control block of the voting stock of the investment adviser or its parent company) or a change in control of the investment adviser. Were future sales of Holdings’ common stock or another transaction to result in an assignment or change in control, the inability to obtain consent or approval from clients or stockholders of RICs or other clients could result in a significant reduction in advisory fees.
Similarly, we enter into selling and distribution agreements with securities firms, brokers, banks and other financial intermediaries that are terminable by either party upon notice (generally 60 days) and do not obligate the financial intermediary to sell any specific amount of our products. These intermediaries generally offer their clients investment products that compete with our products.
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 a transitional services agreement with Holdings.
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 a transitional services agreement with Holdings (the “Transitional Services Agreement”). Under the Transitional Services Agreement, AXA will continue to provide certain services, either directly or on a pass-through basis, and we will continue to provide AXA with certain services, 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.
Costs associated with any rebranding could be significant.
Prior to the Holdings IPO, as an indirect, wholly-owned subsidiary of AXA, we marketed our products and services using the “AXA” brand name and logo together with the “Equitable” brand. Following the settlement of AXA’s sell-down in March 2019, 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

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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.
Changes in the method for determining the London Inter-Bank Offered Rate (“LIBOR”) and the potential replacement of LIBOR may affect our cost of capital and net investment income.
As a result of concerns about the accuracy of the calculation of LIBOR, a number of British Bankers’ Association (BBA) member banks entered into settlements with certain regulators and law enforcement agencies with respect to the alleged manipulation of LIBOR.  As a consequence of such events, it is anticipated that LIBOR will be discontinued by the end of 2021 and an alternative rate will be used for derivatives contracts, debt investments, intercompany and third party loans and other types of commercial contracts. We anticipate a valuation risk around the potential discontinuation event. It is not possible to predict what rate or rates may become accepted alternatives to LIBOR or the effect of any such alternatives on the value of LIBOR-linked securities. Any changes to LIBOR or any alternative rate, or any further uncertainty in relation to the timing and manner of implementation of such changes, could have an adverse effect on the value of investments in our investment portfolio, derivatives we use for hedging, or other indebtedness, securities or commercial contracts.
Risks Relating to Credit, Counterparties and Investments
Our counterparties’ requirements to pledge collateral or make payments related to declines in estimated fair value of derivative contracts exposes us to counterparty credit risk and may adversely affect our liquidity.
We use derivatives and other instruments to help us mitigate various business risks. Our transactions with financial and other institutions generally specify the circumstances under which the parties are required to pledge collateral related to any decline in the market value of the derivatives contracts. If our counterparties fail or refuse to honor their obligations under these contracts, we could face significant losses to the extent collateral agreements do not fully offset our exposures and our hedges of the related risk will be ineffective. Such failure could have a material adverse effect on our business, results of operations or financial condition. Additionally, the implementation of the Dodd-Frank Act and other regulations may increase the need for liquidity and for the amount of collateral assets in excess of current levels.
We may be materially and adversely affected by changes in the actual or perceived soundness or condition of other financial institutions and market participants.
A default by any financial institution or by a sovereign could lead to additional defaults by other market participants. The failure of any financial institution could disrupt securities markets or clearance and settlement systems and lead to a chain of defaults, because the commercial and financial soundness of many financial institutions may be closely related as a result of credit, trading, clearing or other relationships. Even the perceived lack of creditworthiness of a financial institution may lead to market-wide liquidity problems and losses or defaults by us or by other institutions. This risk is sometimes referred to as “systemic risk” and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which we interact on a daily basis. Systemic risk could have a material adverse effect on our ability to raise new funding and on our business, results of operations or financial condition. In addition, such a failure could impact future product sales as a potential result of reduced confidence in the financial services industry. Regulatory changes implemented to address systemic risk could also cause market participants to curtail their participation in certain market activities, which could decrease market liquidity and increase trading and other costs.
Losses due to defaults, errors or omissions by third parties and affiliates, including outsourcing relationships, could materially and adversely impact our business, results of operations or financial condition.
We depend on third parties and affiliates that owe us money, securities or other assets to pay or perform under their obligations. These parties include the issuers whose securities we hold in our investment portfolios, borrowers under the mortgage loans we make, customers, trading counterparties, counterparties under swap and other derivatives contracts, reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries. Defaults by one or more of these parties on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other factors, or even rumors about potential defaults by one or more of these parties, could have a material adverse effect on our business, results of operations or financial condition.

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We also depend on third parties and affiliates in other contexts, including as distribution partners. For example, in establishing the amount of the liabilities and reserves associated with the risks assumed in connection with reinsurance pools and arrangements, we rely on the accuracy and timely delivery of data and other information from ceding companies. In addition, as investment manager and administrator of several mutual funds, we rely on various affiliated and unaffiliated sub-advisers to provide day-to-day portfolio management services for each investment portfolio.
 We rely on various counterparties and other vendors to augment our existing investment, operational, financial and technological capabilities, but the use of a vendor does not diminish our responsibility to ensure that client and regulatory obligations are met. Default rates, credit downgrades and disputes with counterparties as to the valuation of collateral increase significantly in times of market stress. Disruptions in the financial markets and other economic challenges may cause our counterparties and other vendors to experience significant cash flow problems or even render them insolvent, which may expose us to significant costs and impair our ability to conduct business.
Losses associated with defaults or other failures by these third parties and outsourcing partners upon whom we rely could materially adversely impact our business, results of operations or financial condition.
We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. The deterioration or perceived deterioration in the credit quality of third parties whose securities or obligations we hold could result in losses or adversely affect our ability to use those securities or obligations for liquidity purposes. While in many cases we are permitted to require additional collateral from counterparties that experience financial difficulty, disputes may arise as to the amount of collateral we are entitled to receive and the value of pledged assets. Our credit risk may also be exacerbated when the collateral we hold cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivatives exposure that is due to us, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those experienced during the financial crisis. The termination of contracts and the foreclosure on collateral may subject us to claims for the improper exercise of rights under the contracts. Bankruptcies, downgrades and disputes with counterparties as to the valuation of collateral tend to increase in times of market stress and illiquidity.
Gross unrealized losses on fixed maturity and equity securities may be realized or result in future impairments, resulting in a reduction in our net earnings.
Fixed maturity securities classified as available-for-sale are reported at fair value. Unrealized gains or losses on available-for-sale securities are recognized as a component of other comprehensive income (loss) and are, therefore, excluded from net earnings. The accumulated change in estimated fair value of these available-for-sale securities is recognized in net earnings when the gain or loss is realized upon the sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary and an impairment charge to earnings is taken. Realized losses or impairments may have a material adverse effect on our net earnings in a particular quarterly or annual period.
The occurrence of a major economic downturn, acts of corporate malfeasance, widening credit risk spreads, or other events that adversely affect the issuers or guarantors of securities we own or the underlying collateral of structured securities we own could cause the estimated fair value of our fixed maturity securities portfolio and corresponding earnings to decline and cause the default rate of the fixed maturity securities in our investment portfolio to increase. A ratings downgrade affecting issuers or guarantors of particular securities we hold, or similar trends that could worsen the credit quality of issuers, such as the corporate issuers of securities in our investment portfolio, could also have a similar effect. With economic uncertainty, credit quality of issuers or guarantors could be adversely affected. Similarly, a ratings downgrade affecting a security we hold could indicate the credit quality of that security has deteriorated and could increase the capital we must hold to support that security to maintain our RBC level. Levels of write-downs or impairments are impacted by intent to sell, or our assessment of the likelihood that we will be required to sell, fixed maturity securities, as well as our intent and ability to hold equity securities which have declined in value until recovery. Realized losses or impairments on these securities may have a material adverse effect on our business, results of operations, liquidity or financial condition in, or at the end of, any quarterly or annual period.
Some of our investments are relatively illiquid and may be difficult to sell, or to sell in significant amounts at acceptable prices, to generate cash to meet our needs.
We hold certain investments that may lack liquidity, such as privately placed fixed maturity securities, mortgage loans, commercial mortgage backed securities and alternative investments. In the past, even some of our very high-quality investments experienced reduced liquidity during periods of market volatility or disruption. Although we seek to adjust our cash and short-term investment positions to minimize the likelihood that we would need to sell illiquid investments, if we were

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required to liquidate these investments on short notice or were required to post or return collateral, we may have difficulty doing so and be forced to sell them for less than we otherwise would have been able to realize.
The reported values of our relatively illiquid types of investments do not necessarily reflect the current market price for the asset. If we were forced to sell certain of our assets in the current market, there can be no assurance that we would be able to sell them for the prices at which we have recorded them and we might be forced to sell them at significantly lower prices, which could have a material adverse effect on our business, results of operations, liquidity or financial condition.
Defaults on our mortgage loans and volatility in performance may adversely affect our profitability.
A portion of our investment portfolio consists of mortgage loans on commercial and agricultural real estate. Our exposure to this risk stems from various factors, including the supply and demand of leasable commercial space, creditworthiness of tenants and partners, capital markets volatility, interest rate fluctuations, agricultural prices and farm incomes, which have recently been declining. Although we manage credit risk and market valuation risk for our commercial and agricultural real estate assets through geographic, property type and product type diversification and asset allocation, general economic conditions in the commercial and agricultural real estate sectors will continue to influence the performance of these investments. These factors, which are beyond our control, could have a material adverse effect on our business, results of operations, liquidity or financial condition.
Our mortgage loans face default risk and are principally collateralized by commercial and agricultural properties. We establish valuation allowances for estimated impairments, which are based on loan risk characteristics, historical default rates and loss severities, real estate market fundamentals, such as property prices and unemployment, and economic outlooks, as well as other relevant factors (for example, local economic conditions). In addition, substantially all of our commercial and agricultural mortgage loans held-for-investment have balloon payment maturities. An increase in the default rate of our mortgage loan investments or fluctuations in their performance could have a material adverse effect on our business, results of operations, liquidity or financial condition.
Further, any geographic or property type concentration of our mortgage loans may have adverse effects on our investment portfolio and consequently on our business, results of operations, liquidity or financial condition. While we seek to mitigate this risk by having a broadly diversified portfolio, events or developments that have a negative effect on any particular geographic region or sector may have a greater adverse effect on our investment portfolio to the extent that the portfolio is concentrated. Moreover, our ability to sell assets relating to a group of related assets may be limited if other market participants are seeking to sell at the same time.
Risks Relating to Our Reinsurance and Hedging Programs
Our reinsurance and hedging programs may be inadequate to protect us against the full extent of the exposure or losses we seek to mitigate.
Certain of our products contain GMxB features or minimum crediting rates. Downturns in equity markets or reduced interest rates could result in an increase in the valuation of liabilities associated with such products, resulting in increases in reserves and reductions in net income. In the normal course of business, we seek to mitigate some of these risks to which our business is subject through our hedging and reinsurance programs. However, these programs cannot eliminate all of the risks, and no assurance can be given as to the extent to which such programs will be completely effective in reducing such risks. For example, in the event that reinsurers, derivatives or other counterparties or central clearinghouses do not pay balances due or do not post the required amount of collateral as required under our agreements, we still remain liable for the guaranteed benefits.
 Reinsurance. We use reinsurance to mitigate a portion of the risks that we face, principally in certain of our in-force annuity and life insurance products with regard to mortality, and in certain of our annuity products with regard to a portion of the GMxB features. Under our reinsurance arrangements, other insurers assume a portion of the obligation to pay claims and related expenses to which we are subject. However, we remain liable as the direct insurer on all risks we reinsure and, therefore, are subject to the risk that our reinsurer is unable or unwilling to pay or reimburse claims at the time demand is made. The inability or unwillingness of a reinsurer to meet its obligations to us, or the inability to collect under our reinsurance treaties for any other reason, could have a material adverse impact on our business, results of operations or financial condition.
We are continuing to use reinsurance to mitigate a portion of our risk on certain new life insurance sales. Prolonged or severe adverse mortality or morbidity experience could result in increased reinsurance costs, and ultimately may reduce the

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availability of reinsurance for future life insurance sales. If, for new sales, we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient, we would either have to be willing to accept an increase in our net exposures, revise our pricing to reflect higher reinsurance premiums or limit the amount of new business written on any individual life. If this were to occur, we may be exposed to reduced profitability and cash flow strain or we may not be able to price new business at competitive rates.
The premium rates and other fees that we charge are based, in part, on the assumption that reinsurance will be available at a certain cost. Some of our reinsurance contracts contain provisions that limit the reinsurer’s ability to increase rates on in-force business; however, some do not. If a reinsurer raises the rates that it charges on a block of in-force business, in some instances, we will not be able to pass the increased costs onto our customers and our profitability will be negatively impacted. Additionally, such a rate increase could result in our recapturing of the business, which may result in a need to maintain additional reserves, reduce reinsurance receivables and expose us to greater risks. While in recent years, we have faced a number of rate increase actions on in-force business, to date they have not had a material effect on our business, results of operations or financial condition. However, there can be no assurance that the outcome of future rate increase actions would have no material effect. In addition, market conditions beyond our control determine the availability and cost of reinsurance for new business. If reinsurers raise the rates that they charge on new business, we may be forced to raise our premiums, which could have a negative impact on our competitive position.
Hedging Programs. We use a hedging program to mitigate a portion of the unreinsured risks we face in, among other areas, the GMxB features of our variable annuity products and minimum crediting rates on our variable annuity and life products from unfavorable changes in benefit exposures due to movements in the capital markets. In certain cases, however, we may not be able to apply these techniques to effectively hedge these risks because the derivatives markets in question may not be of sufficient size or liquidity or there could be an operational error in the application of our hedging strategy or for other reasons. The operation of our hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates and amounts of withdrawals, election rates, fund performance, equity market returns and volatility, interest rate levels and correlation among various market movements. There can be no assurance that ultimate actual experience will not differ materially from our assumptions, particularly, but not only, during periods of high market volatility, which could adversely impact our business, results of operations or financial condition. For example, in the past, due to, among other things, levels of volatility in the equity and interest rate markets above our assumptions as well as deviations between actual and assumed surrender and withdrawal rates, gains from our hedging programs did not fully offset the economic effect of the increase in the potential net benefits payable under the GMxB features offered in certain of our products. If these circumstances were to re-occur in the future or if, for other reasons, results from our hedging programs in the future do not correlate with the economic effect of changes in benefit exposures to customers, we could experience economic losses which could have a material adverse impact on our business, results of operations or financial condition. Additionally, our strategies may result in under or over-hedging our liability exposure, which could result in an increase in our hedging losses and greater volatility in our earnings and have a material adverse effect on our business, results of operations or financial condition.
For further discussion, see below “—Risks Relating to Estimates, Assumptions and Valuations—Our risk management policies and procedures may not be adequate to identify, monitor and manage risks, which may leave us exposed to unidentified or unanticipated risks, which could negatively affect our business, results of operations or financial condition.”
Risks Relating to the Products We Offer, Our Structure and Product Distribution
GMxB features within certain of our products may decrease our earnings, decrease our capitalization, increase the volatility of our results, result in higher risk management costs and expose us to increased counterparty risk.
Certain of the variable annuity products we offer and certain in-force variable annuity products we offered historically, and certain variable annuity risks we assumed historically through reinsurance, include GMxB features. We also offer index-linked variable annuities with guarantees against a defined floor on losses. GMxB features are designed to offer protection to policyholders against changes in equity markets and interest rates. Any such periods of significant and sustained negative or low Separate Account returns, increased equity volatility or reduced interest rates will result in an increase in the valuation of our liabilities associated with those products. In addition, if the Separate Account assets consisting of fixed income securities, which support the guaranteed index-linked return feature, are insufficient to reflect a period of sustained growth in the equity-index on which the product is based, we may be required to support such Separate Accounts with assets from our General Account and increase our liabilities. An increase in these liabilities would result in a decrease in our net income and depending

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on the magnitude of any such increase, could materially and adversely affect our financial condition, including our capitalization, as well as the financial strength ratings which are necessary to support our product sales.
Additionally, we make assumptions regarding policyholder behavior at the time of pricing and in selecting and using the GMxB features inherent within our products (e.g., use of option to annuitize within a GMIB product). An increase in the valuation of the liability could result to the extent emerging and actual experience deviates from these policyholder option use assumptions. We review our actuarial assumptions at least annually, including those assumptions relating to policyholder behavior, and update assumptions when appropriate. If we update our assumptions based on our actuarial assumption review in future years, we could be required to increase the liabilities we record for future policy benefits and claims to a level that may materially and adversely affect our business, results of operations or financial condition which, in certain circumstances, could impair our solvency. In addition, we have in the past updated our assumptions on policyholder behavior, which has negatively impacted our net income, and there can be no assurance that similar updates will not be required in the future.
In addition, capital markets hedging instruments may not effectively offset the costs of GMxB features or may otherwise be insufficient in relation to our obligations. Furthermore, we are subject to the risk that changes in policyholder behavior or mortality, combined with adverse market events, could produce economic losses not addressed by the risk management techniques employed. These factors, individually or collectively, may have a material adverse effect on our business, results of operations, capitalization, financial condition or liquidity including our ability to pay dividends.
Our products contain numerous features and are subject to extensive regulation and failure to administer or meet any of the complex product requirements may adversely impact our business, results of operations or financial condition.
Our products are subject to a complex and extensive array of state and federal tax, securities, insurance and employee benefit plan laws and regulations, which are administered and enforced by a number of different governmental and self-regulatory authorities, including, among others, state insurance regulators, state securities administrators, state banking authorities, the SEC, FINRA, the DOL and the IRS.
For example, U.S. federal income tax law imposes requirements relating to annuity and insurance product design, administration and investments that are conditions for beneficial tax treatment of such products under the Code. Additionally, state and federal securities and insurance laws impose requirements relating to annuity and insurance product design, offering and distribution, and administration. Failure to administer product features in accordance with contract provisions or applicable law, or to meet any of these complex tax, securities or insurance requirements could subject us to administrative penalties imposed by a particular governmental or self-regulatory authority, unanticipated costs associated with remedying such failure or other claims, litigation, harm to our reputation or interruption of our operations. If this were to occur, it could adversely impact our business, results of operations or financial condition.
We are required to file periodic and other reports within certain time periods imposed by U.S. federal securities laws, rules and regulations. Failure to file such reports within the designated time period failure to accurately report our financial condition or results of operations, or restatements of historical financial statements could require us to curtail or cease sales of certain of our variable annuity products and other variable insurance products or delay the launch of new products or new features, which could cause a significant disruption in our business. If our affiliated and third party distribution platforms are required to curtail or cease sales of our products, we may lose shelf space for our products indefinitely, even once we are able to resume sales. For example, we failed to timely file our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 and required an extension of the due date under Rule 12b-25 for this Form 10-K. If we fail to file any future periodic or other report with the SEC on a timely basis, we would be required to cease sales of SEC-registered variable annuity products until such time that new registration statements could be filed with the SEC and declared effective. Any curtailment or cessation of sales of our variable insurance products could have a material adverse effect on our business, results of operations or financial condition.
Many of our products and services are complex and are frequently sold through intermediaries. In particular, we rely on intermediaries to describe and explain our products to potential customers. The intentional or unintentional misrepresentation of our products and services in advertising materials or other external communications, or inappropriate activities by our personnel or an intermediary, could adversely affect our reputation and business, as well as lead to potential regulatory actions or litigation.

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The amount of statutory capital that we have and the amount of statutory capital we must hold to meet our statutory capital requirements and our financial strength and credit ratings can vary significantly from time to time.
Statutory accounting standards and capital and reserve requirements for AXA Equitable are prescribed by the applicable state insurance regulators and the NAIC. State insurance regulators have established regulations that govern reserving requirements and provide minimum capitalization requirements based on RBC ratios for life insurance companies. This RBC formula establishes capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities and group annuities that contain death benefits or certain living benefits.
In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors, including but not limited to the amount of statutory income or losses we generate (which itself is sensitive to equity market and credit market conditions), changes in interest rates, changes to existing RBC formulas, changes in reserves, the amount of additional capital we must hold to support business growth, changes in equity market levels and the value and credit rating of certain fixed income and equity securities in our investment portfolio, which could in turn reduce our statutory capital. Additionally, state insurance regulators have significant leeway in how to interpret existing regulations, which could further impact the amount of statutory capital or reserves that we must maintain. We are primarily regulated by the NYDFS, which from time to time has taken more stringent positions than other state insurance regulators on matters affecting, among other things, statutory capital or reserves. In certain circumstances, particularly those involving significant market declines, the effect of these more stringent positions may be that our financial condition appears to be worse than competitors who are not subject to the same stringent standards, which could have a material adverse impact on our business, results of operations or financial condition. Moreover, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of capital we must hold in order to maintain their current ratings. To the extent that our statutory capital resources are deemed to be insufficient to maintain a particular rating by one or more rating agencies, our financial strength and credit ratings might be downgraded by one or more rating agencies. There can be no assurance that we will be able to maintain our current RBC ratio in the future or that our RBC ratio will not fall to a level that could have a material adverse effect on our business, results of operations or financial condition.
Our failure to meet our RBC requirements or minimum capital and surplus requirements could subject us to further examination or corrective action imposed by insurance regulators, including limitations on our ability to write additional business, supervision by regulators, rehabilitation, or seizure or liquidation. Any corrective action imposed could have a material adverse effect on our business, results of operations or financial condition. A decline in our RBC ratio, whether or not it results in a failure to meet applicable RBC requirements could result in a loss of customers or new business, and could be a factor in causing ratings agencies to downgrade our financial strength ratings, each of which could have a material adverse effect on our business, results of operations or financial condition.
Changes in statutory reserve or other requirements or the impact of adverse market conditions could result in changes to our product offerings that could materially and adversely impact our business, results of operations or financial condition.
Changes in statutory reserve or other requirements, increased costs of hedging, other risk mitigation techniques and financing and other adverse market conditions could result in certain products becoming less profitable or unprofitable. These circumstances may cause us to modify or eliminate certain features of various products or cause the suspension or cessation of sales of certain products in the future. Any modifications to products that we may make could result in certain of our products being less attractive or competitive. This could adversely impact sales, which could negatively impact AXA Advisors’ ability to retain its sales personnel and our ability to maintain our distribution relationships. This, in turn, may materially and adversely impact our business, results of operations or financial condition.
A downgrade in our financial strength and claims-paying ratings could adversely affect our business, results of operations or financial condition.
Claims-paying and financial strength ratings are important factors in establishing the competitive position of insurance companies. They indicate the rating agencies’ opinions regarding an insurance company’s ability to meet policyholder obligations and are important to maintaining public confidence in our products and our competitive position. A downgrade of our ratings or those of Holdings could adversely affect our business, results of operations or financial condition by, among other things, reducing new sales of our products, increasing surrenders and withdrawals from our existing contracts, possibly requiring us to reduce prices or take other actions for many of our products and services to remain competitive, or adversely

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affecting our ability to obtain reinsurance or obtain reasonable pricing on reinsurance. A downgrade in our ratings may also adversely affect our cost of raising capital or limit our access to sources of capital. Upon announcement of AXA’s plan to pursue the Holdings IPO, Holdings’ and AXA Equitable’s ratings were downgraded by AM Best, S&P and Moody’s. We may face additional downgrades as a result of future sales of Holdings’ common stock by AXA.
As rating agencies continue to evaluate the financial services industry, it is possible that rating agencies will heighten the level of scrutiny that they apply to financial institutions, increase the frequency and scope of their credit reviews, request additional information from the companies that they rate and potentially adjust upward the capital and other requirements employed in the rating agency models for maintenance of certain ratings levels. It is possible that the outcome of any such review of us would have additional adverse ratings consequences, which could have a material adverse effect on our business, results of operations or financial condition. We may need to take actions in response to changing standards or capital requirements set by any of the rating agencies which could cause our business and operations to suffer. We cannot predict what additional actions rating agencies may take, or what actions we may take in response to the actions of rating agencies.
Holdings could sell insurance, annuity or investment products through another one of its subsidiaries which would result in reduced sales of our products and total revenues.
We are a direct, wholly owned subsidiary of Holdings, a diversified financial services organization offering a broad spectrum of financial advisory, insurance and investment management products and services. As part of Holdings’ ongoing efforts to efficiently manage capital amongst its subsidiaries, improve the quality of the product line-up of its insurance subsidiaries and enhance the overall profitability of its group of companies, Holdings could sell insurance, annuity, investment and/or employee benefit products through another one of its subsidiaries. For example, most sales of indexed universal life insurance to policyholders located outside of New York and sales of employee benefit products to businesses located outside of New York are issued through MONY America, another life insurance subsidiary of Holdings, instead of AXA Equitable. It is expected that Holdings will continue to issue newly-developed life insurance products to policyholders located outside of New York through MONY America instead of AXA Equitable. This has impacted sales and may continue to reduce sales of our insurance products outside of New York, which will continue to reduce our total revenues. Since future decisions regarding product development and availability depend on factors and considerations not yet known, management is unable to predict the extent to which additional products will be offered through MONY America or another subsidiary instead of or in addition to AXA Equitable, or the impact to AXA Equitable.
The ability of financial professionals associated with AXA Advisors and AXA Network to sell our competitors’ products could result in reduced sales of our products and revenues.
Most of the financial professionals associated with AXA Advisors and AXA Network are permitted to sell products from competing unaffiliated insurance companies. If our competitors offer products that are more attractive than ours, or pay higher commission rates to the sales representatives than we do, these representatives may concentrate their efforts in selling our competitor’s products instead of ours. To the extent the financial professionals sell our competitors’ products rather than our products, we may experience reduced sales and revenues.
A loss of, or significant change in, key product distribution relationships could materially and adversely affect sales.
We distribute certain products under agreements with third-party distributors and other members of the financial services industry that are not affiliated with us. We compete with other financial institutions to attract and retain commercial relationships in each of these channels, and our success in competing for sales through these distribution intermediaries depends upon factors such as the amount of sales commissions and fees we pay, the breadth of our product offerings, the strength of our brand, our perceived stability and financial strength ratings, and the marketing and services we provide to, and the strength of the relationships we maintain with, individual third-party distributors. An interruption or significant change in certain key relationships could materially and adversely affect our ability to market our products and could have a material adverse effect on our business, results of operation or financial condition. Distributors may elect to alter, reduce or terminate their distribution relationships with us, including for such reasons as changes in our distribution strategy, adverse developments in our business, adverse rating agency actions or concerns about market-related risks. Alternatively, we may terminate one or more distribution agreements due to, for example, a loss of confidence in, or a change in control of, one of the third-party distributors, which could reduce sales.
 Furthermore, an interruption in certain key relationships could materially and adversely affect our ability to market our products and could have a material adverse effect on our business, results of operations or financial condition. The future sale of

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Holdings shares by AXA could prompt some third parties to re-price, modify or terminate their distribution or vendor relationships with us due to a perceived uncertainty related to such offering or our business. An interruption or significant change in certain key relationships could materially and adversely affect our ability to market our products and could have a material adverse effect on our business, results of operations or financial condition. Distributors may elect to suspend, alter, reduce or terminate their distribution relationships with us for various reasons, including uncertainty related to offerings of Holdings’ common stock, changes in our distribution strategy, adverse developments in our business, adverse rating agency actions or concerns about market-related risks.
We are also at risk that key distribution partners may merge or change their business models in ways that affect how our products are sold, either in response to changing business priorities or as a result of shifts in regulatory supervision or potential changes in state and federal laws and regulations regarding standards of conduct applicable to third-party distributors when providing investment advice to retail and other customers.
Because our products are distributed through unaffiliated firms, we may not be able to monitor or control the manner of their distribution despite our training and compliance programs. If our products are distributed by such firms in an inappropriate manner, or to customers for whom they are unsuitable, we may suffer reputational and other harm to our business.
Consolidation of third-party distributors of insurance products may adversely affect the insurance industry and the profitability of our business.
The insurance industry distributes many of its products through other financial institutions such as banks and broker-dealers. An increase in the consolidation activity of bank and other financial services companies may create firms with even stronger competitive positions, negatively impact the industry’s sales, increase competition for access to third-party distributors, result in greater distribution expenses and impair our ability to market products to our current customer base or expand our customer base. We may also face competition from new market entrants or non-traditional or online competitors, which may have a material adverse effect on our business. Consolidation of third-party distributors or other industry changes may also increase the likelihood that third-party distributors will try to renegotiate the terms of any existing selling agreements to terms less favorable to us.
Risks Relating to Estimates, Assumptions and Valuations
Our risk management policies and procedures may not be adequate to identify, monitor and manage risks, which may leave us exposed to unidentified or unanticipated risks, which could negatively affect our business, results of operations or financial condition.
Our policies and procedures, including hedging programs, to identify, monitor and manage risks may not be adequate or fully effective. Many of our methods of managing risk and exposures are based upon our use of historical market behavior or statistics based on historical models. As a result, these methods will not predict future exposures, which could be significantly greater than the historical measures indicate, such as the risk of terrorism or pandemics causing a large number of deaths. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated. Management of operational, legal and regulatory risks requires, among other things, policies and procedures to record and verify large numbers of transactions and events. These policies and procedures may not be fully effective.
We employ various strategies, including hedging and reinsurance, with the objective of mitigating risks inherent in our business and operations. These risks include current or future changes in the fair value of our assets and liabilities, current or future changes in cash flows, the effect of interest rates, equity markets and credit spread changes, the occurrence of credit defaults and changes in mortality and longevity. We seek to control these risks by, among other things, entering into reinsurance contracts and through our various hedging programs. Developing an effective strategy for dealing with these risks is complex, and no strategy can completely insulate us from such risks. Our hedging strategies also rely on assumptions and projections regarding our assets, liabilities, general market factors and the creditworthiness of our counterparties that may prove to be incorrect or prove to be inadequate. Accordingly, our hedging activities may not have the desired beneficial impact on our business, results of operations or financial condition. As U.S. GAAP accounting differs from the methods used to determine regulatory reserves and rating agency capital requirements, our hedging program tends to create earnings volatility in our U.S. GAAP financial statements. Further, the nature, timing, design or execution of our hedging transactions could actually increase our risks and losses. Our hedging strategies and the derivatives that we use, or may use in the future, may not adequately mitigate or offset the hedged risk and our hedging transactions may result in losses.

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Our reserves could be inadequate due to differences between our actual experience and management’s estimates and assumptions.
We establish and carry reserves to pay future policyholder benefits and claims. Our reserve requirements for our direct and reinsurance assumed business are calculated based on a number of estimates and assumptions, including estimates and assumptions related to future mortality, morbidity, longevity, interest rates, future equity performance, reinvestment rates, persistency, claims experience and policyholder elections (i.e., the exercise or non-exercise of rights by policyholders under the contracts). Examples of policyholder elections include, but are not limited to, lapses and surrenders, withdrawals and amounts of withdrawals, and contributions and the allocation thereof. The assumptions and estimates used in connection with the reserve estimation process are inherently uncertain and involve the exercise of significant judgment. We review the appropriateness of reserves and the underlying assumptions and update assumptions during the third quarter of each year and, if necessary, update our assumptions as additional information becomes available. For example, in 2018 we updated certain assumptions, resulting in increases and decreases in the carrying values of these product liabilities and assets. We cannot, however, determine with precision the amounts that we will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level assumed prior to payment of benefits or claims. Our claim costs could increase significantly and our reserves could be inadequate if actual results differ significantly from our estimates and assumptions. If so, we will be required to increase reserves or reduce DAC, which could materially and adversely impact our business, results of operations or financial condition.
Future reserve increases in connection with experience updates could be material and adverse to our results of operations or financial condition.
Our profitability may decline if mortality, longevity or persistency or other experience differ significantly from our pricing expectations or reserve assumptions.
We set prices for many of our retirement and protection products based upon expected claims and payment patterns, using assumptions for mortality rates of our policyholders. In addition to the potential effect of natural or man-made disasters, significant changes in mortality, longevity and morbidity could emerge gradually over time due to changes in the natural environment, the health habits of the insured population, technologies and treatments for disease or disability, the economic environment or other factors. The long-term profitability of our retirement and protection products depends upon how our actual mortality rates, and to a lesser extent actual morbidity rates, compare to our pricing assumptions. In addition, prolonged or severe adverse mortality or morbidity experience could result in increased reinsurance costs, and ultimately, reinsurers might not offer coverage at all. If we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient, we would have to accept an increase in our net risk exposures, revise our pricing to reflect higher reinsurance premiums, or otherwise modify our product offering.
Pricing of our retirement and protection products is also based in part upon expected persistency of these products, which is the probability that a policy or contract will remain in force from one period to the next. Persistency within our variable annuity products may be significantly and adversely impacted by the value of GMxB features contained in many of our variable annuity products being higher than current AV in light of poor equity market performance or extended periods of low interest rates as well as other factors. Results may also vary based on differences between actual and expected premium deposits and withdrawals for these products. Persistency within our life insurance products may be significantly impacted by, among other things, conditions in the capital markets, the changing needs of our policyholders, the manner in which a product is marketed or illustrated and competition, including the availability of new products and policyholder perception of us, which may be negatively impacted by adverse publicity.
Significant deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our products. For example, if policyholder elections differ from the assumptions we use in our pricing, our profitability may decline. Actual persistency that is lower than our persistency assumptions could have an adverse effect on profitability, especially in the early years of a policy, primarily because we would be required to accelerate the amortization of expenses we defer in connection with the acquisition of the policy. Actual persistency that is higher than our persistency assumptions could have an adverse effect on profitability in the later years of a block of business because the anticipated claims experience is higher in these later years. If actual persistency is significantly different from that assumed in our current reserving assumptions, our reserves for future policy benefits may prove to be inadequate. Although some of our variable annuity and life insurance products permit us to increase premiums or adjust other charges and credits during the life of the policy or contract, the adjustments permitted under the terms of the policies or contracts may not be sufficient to maintain profitability. Many of our variable annuity and life insurance products do not permit us to increase premiums or adjust other charges and credits or

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limit those adjustments during the life of the policy or contract. Even if we are permitted under the contract to increase premiums or adjust other charges and credits, we may not be able to do so due to litigation, point of sale disclosures, regulatory reputation and market risk or due to actions by our competitors. In addition, the development of a secondary market for life insurance, including life settlements or “viaticals” and investor owned life insurance, and to a lesser extent third-party investor strategies in the variable annuity market, could adversely affect the profitability of existing business and our pricing assumptions for new business.
We may be required to accelerate the amortization of DAC, which could adversely affect our business, results of operations or financial condition.
DAC represents policy acquisition costs that have been capitalized. Capitalized costs associated with DAC are amortized in proportion to actual and estimated gross profits, gross premiums or gross revenues depending on the type of contract. On an ongoing basis, we test the DAC recorded on our balance sheets to determine if the amount is recoverable under current assumptions. In addition, we regularly review the estimates and assumptions underlying DAC. The projection of estimated gross profits, gross premiums or gross revenues requires the use of certain assumptions, principally related to Separate Account fund returns in excess of amounts credited to policyholders, policyholder behavior such as surrender, lapse and annuitization rates, interest margin, expense margin, mortality, future impairments and hedging costs. Estimating future gross profits, gross premiums or gross revenues is a complex process requiring considerable judgment and the forecasting of events well into the future. If these assumptions prove to be inaccurate, if an estimation technique used to estimate future gross profits, gross premiums or gross revenues is changed, or if significant or sustained equity market declines occur or persist, we could be required to accelerate the amortization of DAC, which would result in a charge to earnings. Such adjustments could have a material adverse effect on our business, results of operations or financial condition.
We use financial models that rely on a number of estimates, assumptions and projections that are inherently uncertain and which may contain errors.
We use models in our hedging programs and many other aspects of our operations, including but not limited to, product development and pricing, capital management, the estimation of actuarial reserves, the amortization of DAC, the fair value of the GMIB reinsurance contracts and the valuation of certain other assets and liabilities. These models rely on estimates, assumptions and projections that are inherently uncertain and involve the exercise of significant judgment. Due to the complexity of such models, it is possible that errors in the models could exist and our controls could fail to detect such errors. Failure to detect such errors could materially and adversely impact our business, results of operations or financial condition.
The determination of the amount of allowances and impairments taken on our investments is subjective and could materially impact our business, results of operations or financial condition.
The determination of the amount of allowances and impairments vary by investment type and is based upon our evaluation and assessment of known and inherent risks associated with the respective asset class. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. There can be no assurance that management’s judgments, as reflected in our financial statements, will ultimately prove to be an accurate estimate of the actual and eventual diminution in realized value. Historical trends may not be indicative of future impairments or allowances. Furthermore, additional impairments may need to be taken or allowances provided for in the future that could have a material adverse effect on our business, results of operations or financial condition.
We define fair value generally as the price that would be received to sell an asset or paid to transfer a liability. When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable; these generally are the most liquid holdings and their valuation does not involve management judgment. When quoted prices in active markets are not available, we estimate fair value based on market standard valuation methodologies, including discounted cash flow methodologies, matrix pricing, or other similar techniques. For securities with reasonable price transparency, the significant inputs to these valuation methodologies either are observable in the market or can be derived principally from or corroborated by observable market data. When the volume or level of activity results in little or no price transparency, significant inputs no longer can be supported by reference to market observable data but instead must be based on management’s estimation and judgment. Valuations may result in estimated fair values which vary significantly from the amount at which the investments may ultimately be sold. Further, rapidly changing and unprecedented credit and equity market conditions could materially impact the valuation of securities as reported within our financial statements and the period-to-period changes in estimated fair value could vary significantly. Decreases in the estimated fair value of securities we hold may have a material adverse effect on our business, results of operations or financial condition.

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Legal and Regulatory Risks
We may be materially and adversely impacted by U.S. federal and state legislative and regulatory action affecting financial institutions.
Regulatory changes, and other reforms globally, could lead to business disruptions, could adversely impact the value of assets we have invested on behalf of clients and policyholders and could make it more difficult for us to conduct certain business activities or distinguish ourselves from competitors. Any of these factors could materially and adversely affect our business, results of operations or financial condition.
Dodd-Frank Act—The Dodd-Frank Act established the FSOC, which has the authority to designate non-bank systemically important financial institutions (“SIFIs”), thereby subjecting them to enhanced prudential standards and supervision by the Federal Reserve Board, including enhanced risk-based capital requirements, leverage limits, liquidity requirements, single counterparty exposure limits, governance requirements for risk management, capital planning and stress test requirements, special debt-to-equity limits for certain companies, early remediation procedures and recovery and resolution planning. If the FSOC were to determine that Holdings is a non-bank SIFI, we, as a subsidiary of Holdings, would become subject to certain of these enhanced prudential standards. Other regulators, such as state insurance regulators, may also determine to adopt new or heightened regulatory safeguards as a result of actions taken by the Federal Reserve Board in connection with its supervision of non-bank SIFIs. There can be no assurance that Holdings will not be designated as a non-bank SIFI, that such new or enhanced regulation will not apply to Holdings in the future, or, to the extent such regulation is adopted, that it would not have a material impact on our operations.
In addition, if Holdings were designated a SIFI, it could potentially be subject to capital charges or other restrictions with respect to activities it engages in that are limited by Section 619 of the Dodd-Frank Act, commonly referred to as the “Volcker Rule,” which places limitations on the ability of banks and their affiliates to engage in proprietary trading and limits the sponsorship of, and investment in, covered funds by banking entities and their affiliates.
Title II of the Dodd-Frank Act provides that certain financial companies, including Holdings, may be subject to a special resolution regime outside the federal bankruptcy code, which is administered by the Federal Deposit Insurance Corporation as receiver, and is applied to a covered financial company upon a determination that the company presents a risk to U.S. financial stability. U.S. insurance subsidiaries of any such covered financial company, however, would be subject to rehabilitation and liquidation proceedings under state insurance law. We cannot predict how rating agencies, or our creditors, will evaluate this potential or whether it will impact our financing or hedging costs.
The Dodd-Frank Act also established the FIO within the U.S. Department of the Treasury, which has the authority, on behalf of the United States, to participate in the negotiation of “covered agreements” with foreign governments or regulators, as well as to collect information and monitor about the insurance industry. While not having a general supervisory or regulatory authority over the business of insurance, the director of the FIO will perform various functions with respect to insurance, including serving as a non-voting member of the FSOC and making recommendations to the FSOC regarding insurers to be designated for more stringent regulation.
While the Trump administration has indicated its intent to modify various aspects of the Dodd-Frank Act, it is unclear whether or how such modifications will be implemented or the impact any such modifications would have on our business.
Title VII of the Dodd-Frank Act creates a new framework for regulation of the OTC derivatives markets. As a result of the adoption of final rules by federal banking regulators and the CFTC in 2015 establishing margin requirements for non-centrally cleared derivatives, the amount of collateral we may be required to pledge in support of such transactions may increase under certain circumstances and will increase as a result of the requirement to pledge initial margin on non-centrally cleared derivatives commencing in 2020. Notwithstanding the broad categories of non-cash collateral permitted under the rules, higher capital charges on non-cash collateral applicable to our bank counterparties may significantly increase pricing of derivatives and restrict or eliminate certain types of eligible collateral that we have available to pledge, which could significantly increase our hedging costs, adversely affect the liquidity and yield of our investments, affect the profitability of our products or their attractiveness to our customers, or cause us to alter our hedging strategy or change the composition of the risks we do not hedge.
 Regulation of Broker-Dealers—The Dodd-Frank Act provides that the SEC may promulgate rules to provide that the standard of conduct for all broker-dealers, when providing personalized investment advice about securities to retail customers

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(and any other customers as the SEC may by rule provide), will be the same as the standard of conduct applicable to an investment adviser under the Investment Advisers Act. For a discussion of the SEC’s recent set of proposed rules, see “Business—Regulation—Broker-Dealer and Securities Regulation—Broker-Dealer Regulation.”
General—From time to time, regulators raise issues during examinations or audits of us and regulated subsidiaries that could, if determined adversely, have a material impact on us. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact, particularly in areas such as accounting or statutory reserve requirements. We are also subject to other regulations and may in the future become subject to additional regulations. Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on our business, results of operations or financial condition.
Our business is heavily regulated, and changes in regulation and in supervisory and enforcement policies may limit our growth and have a material adverse effect on our business, results of operations or financial condition.
We are subject to a wide variety of insurance and other laws and regulations. State insurance laws regulate most aspects of our business, and we are regulated by the NYDFS and the states in which we are licensed. We are domiciled in New York and are primarily regulated by the NYDFS. The primary purpose of state regulation is to protect policyholders, and not necessarily to protect creditors and investors.
 State insurance guaranty associations have the right to assess insurance companies doing business in their state in order to help pay the obligations of insolvent insurance companies to policyholders and claimants. Because the amount and timing of an assessment is beyond our control, liabilities we have currently established for these potential assessments may not be adequate.
State insurance regulators, the NAIC and other regulatory bodies regularly reexamine existing laws and regulations applicable to insurance companies and their products. In the wake of the March 2018 federal appeals court decision to vacate 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 three 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 assessing Regulation 187 to determine the impact it may have on our business. Beyond the New York regulation, the likelihood 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. Generally, changes in laws and regulations, or in interpretations thereof, including potentially rescinding prior product approvals, are often made for the benefit of the consumer at the expense of the insurer and could materially and adversely affect our business, results of operations or financial condition.
We currently use captive reinsurance subsidiaries primarily to reinsure (i) term life insurance and universal life insurance with secondary guarantees, (ii) excess claims relating to variable annuities with GMIB riders which are subject to reinsurance treaties with unaffiliated third parties and (iii) to retrocede reinsurance of variable annuity guaranteed minimum benefits assumed from unaffiliated third parties. Uncertainties associated with continued use of captive reinsurance are primarily related to potential regulatory changes. See “—Risks Relating to Our Business—Risks Relating to Our Reinsurance and Hedging Programs.”
Insurance regulators have implemented, or begun to implement significant changes in the way in which insurers must determine statutory reserves and capital, particularly for products with contractual guarantees, such as variable annuities and universal life policies, and are considering further potentially significant changes in these requirements. The NAIC’s principle-based reserves (“PBR”) approach for life insurance policies became effective on January 1, 2017, and has a three-year phase-in period. Additionally, the New York legislature enacted legislation adopting principles based reserving in June 2018, which was signed into law by the Governor in December 2018. Also, in December 2018, the NYDFS promulgated emergency regulation to begin implementation of principles based reserving, to become effective on January 1, 2020. We are currently assessing the impact of, and appropriate implementation plan for, the PBR approach for life policies. The timing and extent of further changes to statutory reserves and reporting requirements are uncertain.

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During 2015, the NAIC E Committee established the VAIWG to oversee the NAIC’s efforts to study and address, as appropriate, regulatory issues resulting in variable annuity captive reinsurance transactions. In November 2015, upon the recommendation of the VAIWG, the NAIC E Committee adopted the Framework for Change which recommends charges for NAIC working groups to adjust the variable annuity statutory framework applicable to all insurers that have written or are writing variable annuity business and therefore has broader implications beyond captive reinsurance transactions. The Framework for Change contemplates a holistic set of reforms that would improve the current reserve and capital framework for insurers that write variable annuity business. In November 2015, VAIWG engaged Oliver Wyman (“OW”) to conduct a QIS involving industry participants, including the Company, of various reforms outlined in the Framework for Change. OW completed the QIS in July of 2016 and reported its initial findings to the VAIWG in late August. The OW report proposed certain revisions to the current variable annuity reserve and capital framework and recommended a second quantitative impact study be conducted so that testing can inform the proper calibration for certain conceptual and/or preliminary parameters set out in the OW proposal. Following a fourth quarter 2016 public comment period and several meetings on the OW proposal, the VAIWG determined that a QIS2 involving industry participants including us, will be conducted by OW. The QIS2 was initiated in February 2017 and OW issued its recommendation in December 2017. In 2018, the VAIWG held multiple public conference calls to discuss and refine the proposed recommendations. By the end of July 2018, both the VAIWG and the NAIC E Committee adopted the proposed recommendations with modifications reflecting input from all stakeholders. After adopting the Framework for Change, other NAIC working groups and task forces will consider specific revisions to the capital requirements for variable annuities to implement the recommendations in the framework. The changes to the variable annuity reserve and capital framework are expected to become effective January 1, 2020 with a suggested three-year phase-in period, but exact timing for implementation of changes remains subject to change.
We are currently assessing the impact on the Company of the implementation of the NAIC proposed changes to the reserve and capital framework requirements currently applicable to our variable annuity business and we cannot predict how the Framework for Change proposal may be implemented as a result of ongoing NAIC deliberations. Additionally, we cannot predict how the NYDFS will implement the final Framework for Change. As a result, the timing and extent of any necessary changes to reserves and capital requirements for our variable annuity business resulting from the work of the NAIC VAIWG are uncertain.
In addition, 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 and a similar rule recently enacted in California that takes effect on July 1, 2019, 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.
Future changes in U.S. tax laws and regulations or interpretations of the Tax Reform Act could reduce our earnings and negatively impact our business, results of operations or financial condition, including by making our products less attractive to consumers.
On December 22, 2017, President Trump signed into law the Tax Reform Act, a broad overhaul of the U.S. Internal Revenue Code that changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies. While the Tax Reform Act had a net positive economic impact on us, it contained measures which could have adverse or uncertain impacts on some aspects of our business, results of operations or financial condition.
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, which resulted in a reduction to our Combined RBC Ratio. These revisions could also have a negative impact on the CTE calculations of our insurance company subsidiaries, which could cause us to revise our target RBC and CTE levels, as appropriate.
Future changes in U.S. tax laws could have a material adverse effect on our business, results of operations or financial condition. We anticipate that, following the Tax Reform Act, we will continue deriving tax benefits from certain items, including but not limited to the DRD, tax credits, insurance reserve deductions and interest expense deductions. However, there is a risk that interpretations of the Tax Reform Act, regulations promulgated thereunder, or future changes to federal, state or

46



other tax laws could reduce or eliminate the tax benefits from these or other items and result in our incurring materially higher taxes.
Many of the products that we sell benefit from one or more forms of tax-favored status under current federal and state income tax regimes. For example, life insurance and annuity contracts currently allow policyholders to defer the recognition of taxable income earned within the contract. While the Tax Reform Act does not change these rules, a future change in law that modifies or eliminates this tax-favored status could reduce demand for our products. Also, if the treatment of earnings accrued inside an annuity contract was changed prospectively, and the tax-favored status of existing contracts was grandfathered, holders of existing contracts would be less likely to surrender or rollover their contracts. Each of these changes could reduce our earnings and negatively impact our business.
Legal and regulatory actions could have a material adverse effect on our reputation, business, results of operations or financial condition.
A number of lawsuits, claims, assessments and regulatory inquiries have been filed or commenced against us and other life and health insurers and asset managers in the jurisdictions in which we do business. These actions and proceedings involve, 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, payment of death benefits and the reporting and escheatment of unclaimed property, alleged breach of fiduciary duties, discrimination, alleged mismanagement of client funds and other general business-related matters. Some of these matters have resulted in the award of substantial fines and judgments, including material amounts of punitive damages, or in substantial settlements. In some states, juries have substantial discretion in awarding punitive damages.
We face a significant risk of, and from time to time we are involved in, such actions and proceedings, including class action lawsuits. Our consolidated results of operations or financial position could be materially and adversely affected by defense and settlement costs and any unexpected material adverse outcomes in such matters, as well as in other material actions and proceedings pending against us. The frequency of large damage awards, including large punitive damage awards and regulatory fines that bear little or no relation to actual economic damages incurred, continues to create the potential for an unpredictable judgment in any given matter. For instance, we are a defendant in a number of lawsuits related to cost of insurance increases, including class actions in federal and state court alleging breach of contract and other claims under UL policies. For information regarding these and others legal proceedings pending against us, see Note 17 of the Notes to the Consolidated Financial Statements.
In addition, investigations or examinations by federal and state regulators and other governmental and self-regulatory agencies including, among others, the SEC, FINRA, the CFTC, the National Futures Association (the “NFA”), state attorneys general, the NYDFS and other state insurance regulators, and other regulators could result in legal proceedings (including securities class actions and stockholder derivative litigation), adverse publicity, sanctions, fines and other costs. We have provided and, in certain cases, continue to provide information and documents to the SEC, FINRA, the CFTC, the NFA, state attorneys general, the NYDFS and other state insurance regulators, and other regulators on a wide range of issues. On March 30, 2018, we received a copy of an anonymous letter containing general allegations relating to the preparation of our financial statements. Our audit committee, with the assistance of independent outside counsel, has reviewed these matters and concluded that the allegations were not substantiated and accordingly did not present any issue material to our financial statements. At this time, management cannot predict what actions the SEC, FINRA, the CFTC, the NFA, state attorneys general, the NYDFS and other state insurance regulators, or other regulators may take or what the impact of such actions might be.
A substantial legal liability or a significant federal, state or other regulatory action against us, as well as regulatory inquiries or investigations, may divert management’s time and attention, could create adverse publicity and harm our reputation, result in material fines or penalties, result in significant expense, including legal costs, and otherwise have a material adverse effect on our business, results of operations or financial condition.

47



Part I, Item 1B.
UNRESOLVED STAFF COMMENTS
None.
Part I, Item 2.
PROPERTIES
AXA Equitable’s principal executive offices at 1290 Avenue of the Americas, New York, New York are occupied pursuant to a lease that extends to 2023. AXA Equitable also has the following significant office space leases in: Syracuse, NY, under a lease that expires in 2023; Jersey City, NJ, under a lease that expires in 2023, Charlotte, NC, under a lease that expires in 2028; and Secaucus, NJ, under a lease that expires in 2020.
Part I, Item 3.
LEGAL PROCEEDINGS
For information regarding certain legal proceedings pending against us, see Note 17 of the Notes to the Consolidated Financial Statements. See “Risk Factors—Legal and Regulatory Risks—Legal and regulatory actions could have a material adverse effect on our reputation, business, results of operations or financial condition.”
Part I, Item 4.
MINE SAFETY DISCLOSURES
Not Applicable.

Part II, Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
General
At December 31, 2018, all of AXA Equitable’s common equity was owned by AXA Equitable Financial Services, LLC. Consequently, there is no established public market for AXA Equitable’s common equity.
Dividends
In 2018, 2017 and 2016, AXA Equitable paid $1.1 billion, $0 and $1.1 billion, respectively, in shareholder dividends. For information on AXA Equitable’s present and future ability to pay dividends, see Note 18 of the Notes to the Consolidated Financial Statements.
Part II, Item 6.
SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I(2)(a) of Form 10-K.

48



Part II, Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s narrative analysis of the results of operations is presented pursuant to General Instruction I(2)(a) of Form 10-K.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our annual financial statements included elsewhere herein. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Actual results may differ materially from those discussed in the forward-looking statements as a result of various factors. Factors that could or do contribute to these differences include those factors discussed below and elsewhere in this Form 10-K, particularly under the captions “Risk Factors” and “Note Regarding Forward-Looking Statements and Information.”
Executive Summary
Overview
We are one of America’s leading financial services companies, providing advice and solutions for helping Americans set and meet their retirement goals and protect and transfer their wealth across generations.
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.
GMxB Unwind
On April 12, 2018, we completed an unwind of the reinsurance provided to us by AXA RE Arizona for certain variable annuities with GMxB features (the “GMxB Unwind”). Accordingly, all business previously reinsured to AXA RE Arizona, with the exception of the GMxB business, was novated to EQ AZ Life Re Company (“EQ AZ Life Re”), a newly formed captive insurance company organized under the laws of Arizona, which is an indirect wholly owned subsidiary of Holdings. As of December 31, 2018, our GMIB reinsurance contract asset with EQ AZ Life Re had carrying value of $259 million and is reported in GMIB reinsurance contract asset at fair value in the consolidated balance sheets. Following the novation of this business to EQ AZ Life Re, AXA RE Arizona was merged with and into AXA Equitable. Following AXA RE Arizona’s merger with and into AXA Equitable, the GMxB business is not subject to any new internal or third-party reinsurance arrangements, though in the future AXA Equitable may reinsure the GMxB Business with third parties. See “Products — Individual Variable Annuities — Risk Management — Reinsurance — Captive Reinsurance” and Note 12 of the Notes to the Consolidated Financial Statements for further details of the GMxB Unwind.
Transfer of AB Units
In the fourth quarter of 2018, we transferred our interest in AB (including units of the limited partnership interest in AllianceBernstein L.P., units representing assignments of beneficial ownership of limited partnership interests in AllianceBernstein Holding L.P. and shares of AllianceBernstein Corporation) to a wholly-owned subsidiary of Holdings (the “AB Business Transfer”). As a result of this transaction, the previously consolidated results of AB have been reclassified to Discontinued operations in the consolidated financial statements. See Note 19 of the Notes to the Consolidated Financial Statements for further details of the transfer of the AB Units.
As a result of the AB Business Transfer, we now operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources.
Revenues
Our revenues come from three principal sources:
•
fee income and premiums from our traditional life insurance and annuity products; and

49



•
investment income from our General Account investment portfolio.
Our fee income varies directly in relation to the amount of the underlying account value or benefit base of our retirement and protection products 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 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 impacted by market wages, 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.
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

50



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 implemented 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 new program in addition to our dynamic hedge program is expected to increase the size of our derivative positions, resulting in an increase in net income volatility.
•
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 Account 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 (“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 during 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 the Notes to the Consolidated Financial Statements and “—Summary of Critical Accounting Estimates—Liability for Future Policy Benefits.”
Assumption Updates and Model Changes
In 2018, we began conducting our annual review of our assumptions and models during the third quarter, consistent with industry practice.
Our annual review encompasses assumptions underlying the valuation of unearned revenue liabilities, embedded derivatives for our insurance business, liabilities for future policyholder benefits, DAC and DSI assets. As a result of this review, some assumptions were updated, resulting in increases and decreases in the carrying values of these product liabilities and assets.
The table below presents the impact of our actuarial assumption updates during 2018 and 2017 to our Income (loss) from continuing operations, before income taxes and Net income (loss):

51



 
Years Ended December 31,
 
2018
 
2017
 
(in millions)
Impact of assumption updates on Net income (loss):
 
 
 
Variable annuity product features related assumption updates
$
(331
)
 
$
1,324

All other assumption updates
103

 
342

Impact of assumption updates on Income (loss) from continuing operations, before income tax

(228
)
 
1,666

Income tax (expense) benefit on assumption updates

41

 
(583
)
Net income (loss) impact of assumption updates

$
(187
)
 
$
1,083

2018 Assumption Updates
The impact of assumption updates in 2018 on Income (loss) from continuing operations, before income taxes was a decrease of $228 million and a decrease to Net income (loss) of $187 million. This includes a $331 million unfavorable impact on the reserves for our Variable annuity product features as a result of unfavorable updates to policyholder behavior, primarily due to annuitization assumptions, partially offset by favorable updates to economic assumptions.
The assumption changes during 2018 consisted of a decrease in Policy charges and fee income of $12 million, a decrease in Policyholders’ benefits of $684 million, an increase in Net derivative losses of $1,065 million, and a decrease in the Amortization of DAC of $165 million.
2017 Assumption Updates
The impact of the assumption updates in 2017 on Income (loss) from continuing operations, before income taxes was an increase of $1,666 million and an increase to Net income (loss) of approximately $1,083 million. This includes a $1,324 million favorable impact on the reserves for our Variable annuity product features as a result of favorable updates to policyholder behavior assumptions.
The assumption changes during 2017 consisted of a decrease in Policy charges and fee income of $88 million, a decrease in Policyholders’ benefits of $23 million, an increase in Amortization of DAC of $247 million, and a decrease in Net derivative losses by $1,978 million.
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 Environment
A wide variety of factors continue to impact global financial and economic 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. See “Risk Factors—Legal and Regulatory Risks—Future changes in the U.S. tax laws and regulations or interpretations of the Tax Reform Act could reduce our earnings and negatively impact our business, results of operations or financial condition, including by making our products less attractive to consumers.
Stressed conditions, volatility and disruptions in the 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 our insurance liabilities and derivatives 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 Account Values.

52



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 Account Values 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:
•
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.
Regulatory Developments
We are regulated primarily by the NYDFS, with some policies and products also subject to federal regulation. On an ongoing basis, regulators refine capital requirements and introduce new reserving standards. Regulations recently adopted or currently under review can potentially impact our statutory reserve and capital requirements.
•
National Association of Insurance Commissioners (“NAIC”). In 2015, the NAIC Financial Condition (E) Committee 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 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, 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.
•
Fiduciary Rules/ “Best Interest” Standards of Conduct. In the wake of the March 2018 federal appeals court decision to vacate 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.

53



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 assessing Regulation 187 to determine 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 those 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.
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 changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies.
The Tax Reform Act reduced the federal corporate income tax rate to 21% and repealed the corporate Alternative Minimum Tax (“AMT”) while keeping existing AMT credits. It also contained measures affecting our insurance companies, including changes to the DRD, insurance reserves and tax DAC. As a result of the Tax Reform Act, our Net Income has improved.
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, which resulted in a reduction to our Combined RBC Ratio.
Overall, the Tax Reform Act had a net positive economic impact on us and we continue to monitor regulations related to this reform.
Consolidated Results of Operations
Our consolidated results of operations are significantly affected by conditions in the capital markets and the economy because we offer 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 AXA Equitable for the periods presented below results from the mismatch between (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 fluctuations 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.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company revised the presentation of the capitalization of deferred policy acquisition costs (“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 benefits, Commissions and distribution plan payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of deferred acquisition costs. There was no impact on Net income (loss) or Comprehensive income of this reclassification.
The reclassification adjustments for the years ended December 31, 2017 and 2016 are presented in the table below. Capitalization of DAC reclassified to Compensation and benefits, Commissions and distribution plan payments, and Other operating costs and expenses reduced the amounts previously reported in those expense line items, while the capitalization of

54



DAC reclassified from the Amortization of deferred policy acquisition costs line item increases that expense line item.
 
Year Ended December 31,
 
2017
 
2016
 
(in millions)
Reductions to expense line items:
 
 
 
Compensation and benefits
$
128

 
$
128

Commissions and distribution plan payments
443

 
460

Other operating costs and expenses
7

 
6

Total reductions
$
578

 
$
594

 
 
 
 
Increase to expense line item:
 
 
 
Amortization of deferred policy acquisition costs
$
578

 
$
594

The following table summarizes our consolidated statements of income (loss) for the years ended December 31, 2018 and 2017:
Consolidated Statement of Income (Loss)
 
Year Ended December 31,
 
2018
 
2017
 
(in millions)
REVENUES
 
 
 
Policy charges and fee income
$
3,523

 
$
3,294

Premiums
862

 
904

Net derivative gains (losses)
(1,010
)
 
894

Net investment income (loss)
2,478

 
2,441

Investment gains (losses), net:
 
 
 
Total other-than-temporary impairment losses
(37
)
 
(13
)
Other investment gains (losses), net
41

 
(112
)
Total investment gains (losses), net
4

 
(125
)
Investment management and service fees
1,029

 
1,007

Other income
65

 
41

Total revenues
6,951

 
8,456

BENEFITS AND OTHER DEDUCTIONS
 
 
 
Policyholders’ benefits
3,005

 
3,473

Interest credited to policyholders’ account balances
1,002

 
921

Compensation and benefits
422

 
327

Commissions and distribution related payments
620

 
628

Interest expense
34

 
23

Amortization of deferred policy acquisition costs
431

 
900

Other operating costs and expenses
2,918

 
635

Total benefits and other deductions
8,432

 
6,907

Income (loss) from continuing operations, before income taxes
(1,481
)
 
1,549

Income tax (expense) benefit from continuing operations
446

 
1,210

Net income (loss) from continuing operations
(1,035
)
 
2,759

Net income (loss) from discontinued operations, net of taxes and noncontrolling interest
114

 
85

Less: net (income) loss attributable to the noncontrolling interest
3

 
(1
)
Net income (loss) attributable to AXA Equitable
$
(918
)
 
$
2,843


The following discussion compares the results for the year ended December 31, 2018 to the year ended December 31, 2017.

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Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017
Net Income (Loss) Attributable to AXA Equitable
The $3,761 million decrease in net income attributable to AXA Equitable, to a loss of $918 million for the year ended 2018 from net income of $2,843 million for the year ended 2017, was primarily driven by the following notable items:
•
Other operating costs and expenses increased by $2,283 million mainly due to $1,882 million of amortization of the deferred cost of reinsurance asset in 2018 including the write-off of $1,840 million of this asset, and the settlement of outstanding payments of $248 million, both related to the GMxB Unwind.
•
Net derivative gains (losses) decreased by $1,904 million mainly due to the unfavorable impact of assumption updates in 2018 compared to the favorable impact of assumption updates in 2017.
•
Compensation and benefits increased by $95 million primarily due to the loss resulting from the annuity purchase transaction and partial settlement of the employee pension plan in 2018.
•
Interest credited to policyholders’ account balances increased by $81 million primarily driven by higher SCS AV due to new business growth.
•
Interest expense increased by $11 million due to higher repurchase agreement costs.
•
Income tax benefit decreased by $764 million primarily driven by a one-time tax benefit in 2017 related to the Tax Reform Act.
Partially offsetting this decrease were the following notable items:
•
Amortization of deferred policy acquisition costs decreased by $469 million mainly due to the favorable impact of assumption updates in 2018.
•
Policyholders’ benefits decreased by $468 million mainly due to the favorable impact of assumption updates in 2018 compared to the unfavorable impact of assumption updates in 2017, combined with the favorable impact of rising interest rates, partially offset by the impact of equity market declines affecting our GMxB liabilities.
•
Policy charges, fee income and premiums increased by $187 million primarily due to higher cost of insurance charges.
•
Total investment gains (losses), net increased by $129 million primarily due to the sale of fixed maturities.
•
Investment management, service fees and other income increased by $46 million primarily due to higher equity markets.
•
Increase in Net investment income of $37 million primarily due to higher assets from the GMxB Unwind and General Account optimization.

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Contractual Obligations
The table below summarizes the future estimated cash payments related to certain contractual obligations as of December 31, 2018. The estimated payments reflected in this table are based on management’s estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the actual cash outflows in future periods will vary, possibly materially, from those reflected in the table. In addition, we do not believe that our cash flow requirements can be adequately assessed based solely upon an analysis of these obligations, as the table below does not contemplate all aspects of our cash inflows, such as the level of cash flow generated by certain of our investments, nor all aspects of our cash outflows.
 
Estimated Payments Due by Period
 
Total
 
2019
 
2020-2022
 
2023-2024
 
2025 and thereafter
 
(in millions)
Contractual obligations:
 
 
 
 
 
 
 
 
 
Policyholders’ liabilities (1)
$
100,158

 
$
1,745

 
$
5,025

 
$
6,722

 
$
86,666

FHLBNY Funding Agreements
3,990

 
1,640

 
1,094

—

475

 
781

Interest on FHLBNY Funding Agreements
267

 
65

 
109

—

50

 
43

Operating leases
419

 
81

 
143

 
129

 
66

Loan from affiliates
572

 
572

 
—

 
—

 
—

Employee benefits
3,941

 
214

 
431

 
410

 
2,886

Total Contractual Obligations
$
109,347

 
$
4,317

 
$
6,802

 
$
7,786

 
$
90,442

_______________
(1)
Policyholders’ liabilities represent estimated cash flows out of the General Account related to the payment of death and disability claims, policy surrenders and withdrawals, annuity payments, minimum guarantees on Separate Account funded contracts, matured endowments, benefits under accident and health contracts, policyholder dividends and future renewal premium-based and fund-based commissions offset by contractual future premiums and deposits on in-force contracts. These estimated cash flows are based on mortality, morbidity and lapse assumptions comparable with the Company’s experience and assume market growth and interest crediting consistent with actuarial assumptions used in amortizing DAC. These amounts are undiscounted and, therefore, exceed the policyholders’ account balances and future policy benefits and other policyholder liabilities included in the consolidated balance sheet. They do not reflect projected recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows will differ from these estimates, see “—Summary of Critical Accounting Policies—Liability for Future Policy Benefits.” Separate Account liabilities have been excluded as they are legally insulated from General Account obligations and will be funded by cash flows from Separate Account assets.

Unrecognized tax benefits of $273 million, were not included in the above table because it is not possible to make reasonably reliable estimates of the occurrence or timing of cash settlements with the respective taxing authorities.
Off-Balance Sheet Arrangements
At December 31, 2018, the Company was not a party to any off-balance sheet transactions other than those guarantees and commitments described in Notes 10 and 17 of the Notes to the Consolidated Financial Statements.
Summary of Critical Accounting Estimates
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. The most critical estimates include those used in determining:
•
liabilities for future policy benefits;
•
accounting for reinsurance;
•
capitalization and amortization of DAC and policyholder bonus interest credits;
•
estimated fair values of investments in the absence of quoted market values and investment impairments;

57



•
estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation;
•
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.
Liability for Future Policy Benefits
We establish reserves for future policy benefits to, or on behalf of, policyholders in the same period in which the policy is issued or acquired, using methodologies prescribed by U.S. GAAP. The assumptions used in establishing reserves are generally based on our experience, industry experience or other factors, as applicable. At least annually we review our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior assumptions, and update assumptions when appropriate. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term.
The reserving methodologies used include the following:
•
Universal life (“UL”) and investment-type contract policyholder account balances are equal to the policy AV. The policy AV represent an accumulation of gross premium payments plus credited interest less expense and mortality charges and withdrawals.
•
Participating traditional life insurance future policy benefit liabilities are calculated using a net level premium method on the basis of actuarial assumptions equal to guaranteed mortality and dividend fund interest rates.
•
Non-participating traditional life insurance future policy benefit liabilities are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest.
For most long-duration contracts, we utilize best estimate assumptions as of the date the policy is issued or acquired with provisions for the risk of adverse deviation, as appropriate. After the liabilities are initially established, we perform premium deficiency tests using best estimate assumptions as of the testing date without provisions for adverse deviation. If the liabilities determined based on these best estimate assumptions are greater than the net reserves (i.e., U.S. GAAP reserves net of any DAC or DSI), the existing net reserves are adjusted by first reducing the DAC or DSI by the amount of the deficiency or to zero through a charge to current period earnings. If the deficiency is more than these asset balances for insurance contracts, we then increase the net reserves by the excess, again through a charge to current period earnings. If a premium deficiency is recognized, the assumptions as of the premium deficiency test date are locked in and used in subsequent valuations and the net reserves continue to be subject to premium deficiency testing.
For certain reserves, such as those related to GMDB and GMIB features, we use current best estimate assumptions in establishing reserves. The reserves are subject to adjustments based on periodic reviews of assumptions and quarterly adjustments for experience, including market performance, and the reserves may be adjusted through a benefit or charge to current period earnings.
For certain GMxB features, the benefits are accounted for as embedded derivatives, with fair values calculated as the present value of expected future benefit payments to contractholders less the present value of assessed rider fees attributable to the embedded derivative feature. Under U.S. GAAP, the fair values of these benefit features are based on assumptions a market participant would use in valuing these embedded derivatives. Changes in the fair value of the embedded derivatives are recorded quarterly through a benefit or charge to current period earnings.
The assumptions used in establishing reserves are generally based on our experience, industry experience and/or other factors, as applicable. We typically update our actuarial assumptions, such as mortality, morbidity, retirement and policyholder behavior assumptions, annually, unless a material change is observed in an interim period that we feel is indicative of a long-term trend. Generally, we do not expect trends to change significantly in the short-term and, to the extent these trends may change, we expect such changes to be gradual over the long-term. In a sustained low interest rate environment, there is an increased likelihood that the reserves determined based on best estimate assumptions may be greater than the net liabilities.

58



See Note 8 of the Notes to the Consolidated Financial Statements for additional information on our accounting policy relating to GMxB features and liability for future policy benefits and Note 2 of the Notes to the Consolidated Financial Statements for future policyholder benefit liabilities.
Sensitivity of Future Rate of Return Assumptions on GMDB/GMIB Reserves
The Separate Account future rate of return assumptions that are used in establishing reserves for GMxB features are set using a long-term-view of expected average market returns by applying a reversion to the mean approach, consistent with that used for DAC amortization. For additional information regarding the future expected rate of return assumptions and the reversion to the mean approach, see, “—DAC and Policyholder Bonus Interest Credits”.
The GMDB/GMIB reserve balance before reinsurance ceded was $8.4 billion at December 31, 2018. The following table provides the sensitivity of the reserves GMxB features related to variable annuity contracts relative to the future rate of return assumptions by quantifying the adjustments to these reserves that would be required assuming both a 1% increase and decrease in the future rate of return. This sensitivity considers only the direct effect of changes in the future rate of return on operating results due to the change in the reserve balance before reinsurance ceded and not changes in any other assumptions such as persistency, mortality, or expenses included in the evaluation of the reserves, or any changes on DAC or other balances including hedging derivatives and the GMIB reinsurance asset.
GMDB/GMIB Reserves
Sensitivity - Rate of Return
December 31, 2018
 
Increase/(Decrease) in GMDB/GMIB Reserves
 
(in millions)
1% decrease in future rate of return
$
1,259.3

1% increase in future rate of return
$
(1,333.2
)
Traditional Annuities
The reserves for future policy benefits for annuities include group pension and payout annuities, and, during the accumulation period, are equal to accumulated policyholders’ fund balances and, after annuitization, are equal to the present value of expected future payments based on assumptions as to mortality, retirement, maintenance expense, and interest rates. Interest rates used in establishing such liabilities range from 1.6% to 5.5% (weighted average of 4.8%). If reserves determined based on these assumptions are greater than the existing reserves, the existing reserves are adjusted to the greater amount.
Health
Individual health benefit liabilities for active lives are estimated using the net level premium method and assumptions as to future morbidity, withdrawals and interest. Benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
Reinsurance
Accounting for reinsurance requires extensive use of assumptions and estimates, particularly related to the future performance of the underlying business and the potential impact of counterparty credit risk with respect to reinsurance receivables. We periodically review actual and anticipated experience compared to the aforementioned assumptions used to establish assets and liabilities relating to ceded and assumed reinsurance and evaluate the financial strength of counterparties to our reinsurance agreements using criteria similar to those evaluated in our security impairment process. See “—Estimated Fair Value of Investments.” Additionally, for each of our reinsurance agreements, we determine whether the agreement provides indemnification against loss or liability relating to insurance risk, in accordance with applicable accounting standards. We review all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims. If we determine that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, we record the agreement using the deposit method of accounting.

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For reinsurance contracts other than those covering GMIB exposure, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities. GMIB reinsurance contracts are used to cede affiliated and non-affiliated reinsurers a portion of the exposure on variable annuity products that offer the GMIB feature. The GMIB reinsurance contracts are accounted for as derivatives and are reported at fair value. Gross reserves for GMIB, on the other hand, are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts, therefore, will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market and/or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts.
See Note 10 of the Notes to the Consolidated Financial Statements for additional information on our reinsurance agreements.
DAC and Policyholder Bonus Interest Credits
We incur significant costs in connection with acquiring new and renewal insurance business. Costs that relate directly to the successful acquisition or renewal of insurance contracts are deferred as DAC. In addition to commissions, certain direct-response advertising expenses and other direct costs, other deferrable costs include the portion of an employee’s total compensation and benefits related to time spent selling, underwriting or processing the issuance of new and renewal insurance business only with respect to actual policies acquired or renewed. We utilize various techniques to estimate the portion of an employee’s time spent on qualifying acquisition activities that result in actual sales, including surveys, interviews, representative time studies and other methods. These estimates include assumptions that are reviewed and updated on a periodic basis or more frequently to reflect significant changes in processes or distribution methods.
Amortization Methodologies
Participating Traditional Life Policies
For participating traditional life policies (substantially all of which are in the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield.
At December 31, 2018, the average investment yields assumed (excluding policy loans) were 4.7% grading to 4.3% in 2024. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
Non-participating Traditional Life Insurance Policies
DAC associated with non-participating traditional life policies are amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earnings (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy.
Universal Life and Investment-type Contracts
DAC associated with certain variable annuity products is amortized based on estimated assessments, with the remainder of variable annuity products, UL and investment-type products amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Account fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated

60



gross profits or assessments is reflected in net income (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
Quarterly adjustments to the DAC balance are made for current period experience and market performance related adjustments, and the impact of reviews of estimated total gross profits. The quarterly adjustments for current period experience reflect the impact of differences between actual and previously estimated expected gross profits for a given period. Total estimated gross profits include both actual experience and estimates of gross profits for future periods. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, cumulative adjustment to all previous periods’ costs is recognized.
During each accounting period, the DAC balances are evaluated and adjusted with a corresponding charge or credit to current period earnings for the effects of the Company’s actual gross profits and changes in the assumptions regarding estimated future gross profits. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
For the variable and UL policies a significant portion of the gross profits is derived from mortality margins and therefore, are significantly influenced by the mortality assumptions used. Mortality assumptions represent our expected claims experience over the life of these policies and are based on a long-term average of actual company experience. This assumption is updated periodically to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Loss Recognition Testing
After the initial establishment of reserves, loss recognition tests are performed using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC is first written off, and thereafter a premium deficiency reserve is established by a charge to earnings.
In 2018 and 2017, we determined that we had a loss recognition in certain of our variable interest-sensitive life insurance products due to the release of life reserves and low interest rates. As of December 31, 2018 and 2017, we wrote off $162 million and $656 million, respectively, of the DAC balance through accelerated amortization.
Additionally, in certain policyholder liability balances for a particular line of business may not be deficient in the aggregate to trigger loss recognition; however, the pattern of earnings may be such that profits are expected to be recognized in earlier years and then followed by losses in later years. This pattern of profits followed by losses is exhibited in our VISL business and is generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. We accrue for these Profits Followed by Losses (“PFBL”) using a dynamic approach that changes over time as the projection of future losses change.
In addition, we are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. This may result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on available-for-sale investment securities within the statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, which is based on changes in net unrealized investment (gains) losses, these adjustments may reverse from period to period. In 2017, due primarily to the release of life reserves, we recorded an unrealized loss in Other comprehensive income (loss). There was no impact to Net income (loss).

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Sensitivity of DAC to Changes in Future Mortality Assumptions
The following table demonstrates the sensitivity of the DAC balance relative to future mortality assumptions by quantifying the adjustments that would be required, assuming an increase and decrease in the future mortality rate by 1.0%. This information considers only the direct effect of changes in the mortality assumptions on the DAC balance and not changes in any other assumptions used in the measurement of the DAC balance and does not assume changes in reserves.
DAC Sensitivity - Mortality
December 31, 2018
 
Increase/(Decrease) in DAC
 
(in millions)
Decrease in future mortality by 1%
$
20

Increase in future mortality by 1%
$
(20
)
Sensitivity of DAC to Changes in Future Rate of Return Assumptions
A significant assumption in the amortization of DAC on variable annuity products and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future Separate Accounts performance. Management sets estimated future gross profit or assessment assumptions related to Separate Account performance using a long-term view of expected average market returns by applying a Reversion to the Mean (“RTM”) approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. In second quarter 2015, based upon management’s then-current expectations of interest rates and future fund growth, we updated our reversion to the mean assumption from 9.0% to 7.0%. The average gross long-term return measurement start date was also updated to December 31, 2014. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At December 31, 2018, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuity products was 7.0% (4.7% net of product weighted average Separate Accounts fees), and 0.0% (2.3)% net of product weighted average Separate Account fees), respectively. The maximum duration over which these rate limitations may be applied is five years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than five years in order to reach the average gross long-term return estimate, the application of the five-year maximum duration limitation would result in an acceleration of DAC amortization. Conversely, actual market returns resulting in assumed future market returns of 0.0% for more than five years would result in a required deceleration of DAC amortization. At December 31, 2018, current projections of future average gross market returns assume a 1.6% annualized return for the next two quarters, followed by 7.0% thereafter. Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
The following table provides an example of the sensitivity of the DAC balance of variable annuity products and variable and interest-sensitive life insurance relative to future return assumptions by quantifying the adjustments to the DAC balance that would be required assuming both an increase and decrease in the future rate of return by 1.0%. This information considers only the effect of changes in the future Separate Accounts rate of return and not changes in any other assumptions used in the measurement of the DAC balance.

62



DAC Sensitivity - Rate of Return
December 31, 2018
 
Increase/(Decrease) in DAC
 
(in millions)
Decrease in future rate of return by 1%
$
(97
)
Increase in future rate of return by 1%
$
121

Estimated Fair Value of Investments
The Company’s investment portfolio principally consists of public and private fixed maturities, mortgage loans, equity securities and derivative financial instruments, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options used to manage various risks relating to its business operations.
Fair Value Measurements
Investments reported at fair value in the consolidated balance sheets of the Company include fixed maturity securities classified as available-for-sale, equity and trading securities and certain other invested assets, such as freestanding derivatives. In addition, reinsurance contracts covering GMIB exposure and the liabilities in the SCS variable annuity products, SIO in the EQUI-VEST variable annuity product series, MSO in the variable life insurance products, IUL insurance products and the GMAB, GIB, GMWB and GWBL feature in certain variable annuity products issued by the Company are considered embedded derivatives and reported at fair value.
When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable; these generally are the most liquid holdings and their valuation does not involve management judgment. When quoted prices in active markets are not available, we estimate fair value based on market standard valuation methodologies. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment. For securities with reasonable price transparency, the significant inputs to these valuation methodologies either are observable in the market or can be derived principally from or corroborated by observable market data. When the volume or level of activity results in little or no price transparency, significant inputs no longer can be supported by reference to market observable data but instead must be based on management’s estimation and judgment. Substantially the same approach is used by us to measure the fair values of freestanding and embedded derivatives with exception for consideration of the effects of master netting agreements and collateral arrangements as well as incremental value or risk ascribed to changes in own or counterparty credit risk.
As required by the accounting guidance, we categorize our assets and liabilities measured at fair value into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique, giving the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). For additional information regarding the key estimates and assumptions surrounding the determinations of fair value measurements, see Note 7 of the Notes to the Consolidated Financial Statements.
Impairments and Valuation Allowances
The assessment of whether OTTIs have occurred is performed quarterly by our Investments Under Surveillance (“IUS”) Committee, with the assistance of its investment advisors, on a security-by-security basis for each available-for-sale fixed maturity that has experienced a decline in fair value for purpose of evaluating the underlying reasons. The analysis begins with a review of gross unrealized losses by the following categories of securities: (i) all investment grade and below investment grade fixed maturities for which fair value has declined and remained below amortized cost by 20% or more and (ii) below-investment-grade fixed maturities for which fair value has declined and remained below amortized cost for a period greater than 12 months. Integral to the analysis is an assessment of various indicators of credit deterioration to determine whether the investment security is expected to recover, including, but not limited to, consideration of the duration and severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity, and continued viability of the

63



issuer and, for equity securities only, the intent and ability to hold the investment until recovery, resulting in identification of specific securities for which OTTI is recognized.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting OTTI is recognized in earnings and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage- and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and valuation allowances. Valuation allowances are based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or on its collateral value if the loan is collateral dependent. However, if foreclosure is or becomes probable, the collateral value measurement method is used.
For commercial and agricultural mortgage loans, an allowance for credit loss is typically recommended when management believes it is probable that principal and interest will not be collected according to the contractual terms. Factors that influence management’s judgment in determining allowance for credit losses include the following:
•
Loan-to-value ratio— Derived from current loan balance divided by the fair market value of the property. An allowance for credit loss is typically recommended when the loan-to-value ratio is in excess of 100%. In the case where the loan-to-value is in excess of 100%, the allowance for credit loss is derived by taking the difference between the fair market value (less cost of sale) and the current loan balance.
•
Debt service coverage ratio—Derived from actual operating earnings divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt.
•
Occupancy—Criteria vary by property type but low or below market occupancy is an indicator of sub-par property performance.
•
Lease expirations—The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor.
•
Maturity—Mortgage loans that are not fully amortizing and have upcoming maturities within the next 12 to 24 months are monitored in conjunction with the capital markets to determine the borrower’s ability to refinance the debt and/or pay off the balloon balance.
•
Borrower/tenant related issues—Financial concerns, potential bankruptcy, or words or actions that indicate imminent default or abandonment of property.
•
Payment status - current vs. delinquent—A history of delinquent payments may be a cause for concern.
•
Property condition—Significant deferred maintenance observed during the lenders annual site inspections.
•
Other—Any other factors such as current economic conditions may call into question the performance of the loan.
Mortgage loans also are individually evaluated quarterly by the IUS Committee for impairment on a loan-by-loan basis, including an assessment of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages also is identified, consisting of mortgage loans not currently classified as problems but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
For problem mortgage loans a valuation allowance is established to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for loans determined to be non-performing as a result of the loan review process. A non-performing loan is defined as a loan for which it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan specific portion of the loss allowance is based on our

64



assessment as to ultimate collectability of loan principal and interest. Valuation allowances for a non-performing loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The valuation allowance for mortgage loans can increase or decrease from period to period based on such factors.
Impaired mortgage loans without provision for losses are mortgage loans where the fair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on mortgage loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on mortgage loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows. Changes in the present value attributable to changes in the amount or timing of expected cash flows are reported as investment gains or losses.
Mortgage loans are placed on nonaccrual status once management believes the collection of accrued interest is doubtful. Once mortgage loans are classified as nonaccrual mortgage 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.
See Notes 2 and 3 of the Notes to the Consolidated Financial Statements for additional information relating to our determination of the amount of allowances and impairments.
Derivatives
We use freestanding derivative instruments to hedge various capital market risks in our products, including: (i) certain guarantees, some of which are reported as embedded derivatives; (ii) current or future changes in the fair value of our assets and liabilities; and (iii) current or future changes in cash flows. All derivatives, whether freestanding or embedded, are required to be carried on the balance sheet at fair value with changes reflected in either net income (loss) or in other comprehensive income, depending on the type of hedge. Below is a summary of critical accounting estimates by type of derivative.
Freestanding Derivatives
The determination of the estimated fair value of freestanding derivatives, when quoted market values are not available, is based on market standard valuation methodologies and inputs that management believes are consistent with what other market participants would use when pricing such instruments. Derivative valuations can be affected by changes in interest rates, foreign currency exchange rates, financial indices, credit spreads, default risk, nonperformance risk, volatility, liquidity and changes in estimates and assumptions used in the pricing models. See Note 7 of the Notes to the Consolidated Financial Statements for additional details on significant inputs into the OTC derivative pricing models and credit risk adjustment.
Embedded Derivatives
We issue variable annuity products with guaranteed minimum benefits, some of which are embedded derivatives measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in net derivative gains (losses). We also have assumed from an affiliate the risk associated with certain guaranteed minimum benefits, which are accounted for as embedded derivatives measured at estimated fair value. The estimated fair values of these embedded derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees attributable to the guarantee. The projections of future benefits and future fees require capital markets and actuarial assumptions, including expectations concerning policyholder behavior. A risk-neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates.
Market conditions, including, but not limited to, changes in interest rates, equity indices, market volatility and variations in actuarial assumptions, including policyholder behavior, mortality and risk margins related to non-capital market inputs, as well as changes in our nonperformance risk adjustment may result in significant fluctuations in the estimated fair value of the guarantees that could materially affect net income. Changes to actuarial assumptions, principally related to contract holder behavior such as annuitization utilization and withdrawals associated with GMIB riders, can result in a change of expected future cash outflows of a guarantee between the accrual-based model for insurance liabilities and the fair-value based model for embedded derivatives. See Note 2 of the Notes to the Consolidated Financial Statements for additional information relating to the determination of the accounting model. Risk margins are established to capture the non-capital market risks of the instrument which represent the additional compensation a market participant would require to assume the risks related to the

65



uncertainties in certain actuarial assumptions. The establishment of risk margins requires the use of significant management judgment, including assumptions of the amount and cost of capital needed to cover the guarantees.
With respect to assumptions regarding policyholder behavior, we have recorded charges, and in some cases benefits, in prior years as a result of the availability of sufficient and credible data at the conclusion of each review.
We ceded the risk associated with certain of the variable annuity products with GMxB features described in the preceding paragraphs. The value of the embedded derivatives on the ceded risk is determined using a methodology consistent with that described previously for the guarantees directly written by us with the exception of the input for nonperformance risk that reflects the credit of the reinsurer. However, because certain of the reinsured guarantees do not meet the definition of an embedded derivative and, thus are not accounted for at fair value, significant fluctuations in net income may occur when the change in the fair value of the reinsurance recoverable is recorded in net income without a corresponding and offsetting change in fair value of the directly written guaranteed liability.
Nonperformance Risk Adjustment
The valuation of our embedded derivatives includes an adjustment for the risk that we fail to satisfy our obligations, which we refer to as our nonperformance risk. The nonperformance risk adjustment, which is captured as a spread over the risk-free rate in determining the discount rate to discount the cash flows of the liability, is determined by taking into consideration publicly available information relating to spreads on corporate bonds in the secondary market comparable to AXA Equitable Life’s financial strength rating.
The table below illustrates the impact that a range of reasonably likely variances in credit spreads would have on our consolidated balance sheet, excluding the effect of income tax, related to the embedded derivative valuation on certain variable annuity products measured at estimated fair value. Even when credit spreads do not change, the impact of the nonperformance risk adjustment on fair value will change when the cash flows within the fair value measurement change. The table only reflects the impact of changes in credit spreads on our consolidated financial statements included elsewhere herein and not these other potential changes. In determining the ranges, we have considered current market conditions, as well as the market level of spreads that can reasonably be anticipated over the near term. The ranges do not reflect extreme market conditions such as those experienced during the 2008–2009 Financial Crisis as we do not consider those to be reasonably likely events in the near future.
 
Future policyholders’ benefits and other policyholders’ liabilities

 
(in billions)
100% increase in AXA Equitable Life’s credit spread
$
3.6

As reported
$
5.3

50% decrease in AXA Equitable Life’s credit spread
$
6.4

See Note 3 of the Notes to the Consolidated Financial Statements for additional information on our derivatives and hedging programs.
Litigation Contingencies
We are a party to a number of legal actions and are involved in a number of regulatory investigations. Given the inherent unpredictability of these matters, it is difficult to estimate the impact on our financial position.
Liabilities are established when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. On a quarterly and annual basis, we review relevant information with respect to liabilities for litigation, regulatory investigations and litigation-related contingencies to be reflected in our consolidated financial statements included elsewhere herein. See Note 17 of the Notes to the Consolidated Financial Statements for information regarding our assessment of litigation contingencies.
Income Taxes
Income taxes represent the net amount of income taxes that we expect to pay to or receive from various taxing jurisdictions in connection with its operations. We provide for Federal and state income taxes currently payable, as well as those deferred

66



due to temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryforward periods under the tax law in the applicable jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred tax assets will not be realized. Management considers all available evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. Our accounting for income taxes represents management’s best estimate of the tax consequences of various events and transactions.
Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities, and in evaluating our tax positions including evaluating uncertainties under the guidance for Accounting for Uncertainty in Income taxes. Under the guidance, we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. Tax positions are then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.
Our tax positions are reviewed quarterly and the balances are adjusted as new information becomes available.
Adoption of New Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements for a complete discussion of newly issued accounting pronouncements.

67



Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
AXA EQUITABLE LIFE INSURANCE COMPANY
 
 
Consolidated Financial Statements:
 
 

Audited Consolidated Financial Statement Schedules
 

68



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholder of AXA Equitable Life Insurance Company:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AXA Equitable Life Insurance Company and its subsidiaries (the Company) as of December 31, 2018 and 2017, and the related consolidated statements of income (loss), comprehensive income (loss), equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed in 2018 the manner in which it accounts for certain income tax effects originally recognized in accumulated other comprehensive income.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/PricewaterhouseCoopers LLP
New York, NY
March 28, 2019

We have served as the Company’s auditor since 1993.

69



AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2018 AND 2017
 
2018
 
2017
 
(in millions, except share amounts)
ASSETS
 
Investments:
 
 
 
Fixed maturities available for sale, at fair value (amortized cost of $42,492 and $34,831)
$
41,915

 
$
36,358

Mortgage loans on real estate (net of valuation allowance of $7 and $8)
11,818

 
10,935

Real estate held for production of income
52

 
390

Policy loans
3,267

 
3,315

Other equity investments
1,144

 
1,264

Trading securities, at fair value
15,166

 
12,277

Other invested assets
1,554

 
1,830

Total investments
74,916

 
66,369

Cash and cash equivalents
2,622

 
2,400

Cash and securities segregated, at fair value
—

 
9

Deferred policy acquisition costs
5,011

 
4,492

Amounts due from reinsurers
3,124

 
5,079

Loans to affiliates
600

 
703

GMIB reinsurance contract asset, at fair value
1,991

 
10,488

Current and deferred income taxes
438

 
—

Other assets
2,763

 
4,018

Assets of disposed subsidiary
—

 
9,835

Separate Accounts assets
108,487

 
122,537

Total Assets
$
199,952

 
$
225,930

LIABILITIES
 
 
 
Policyholders' account balances
$
46,403

 
$
43,805

Future policy benefits and other policyholders' liabilities
29,808

 
29,070

Broker-dealer related payables
69

 
430

Securities sold under agreements to repurchase
573

 
1,887

Amounts due to reinsurers
113

 
134

Long-term debt
—

 
203

Loans from affiliates
572

 
—

Current and deferred income taxes
—

 
1,550

Other liabilities
1,460

 
1,242

Liabilities of disposed subsidiary
—

 
4,954

Separate Accounts liabilities
108,487

 
122,537

Total Liabilities
$
187,485

 
$
205,812

Redeemable noncontrolling interest:
 
 
 
Continuing operations
$
39

 
$
24

Disposed subsidiary
—

 
602

Redeemable noncontrolling interest
$
39

 
$
626

Commitments and contingent liabilities (Note 17)

 

EQUITY
 
 
 
Equity attributable to AXA Equitable:
 
 


Common stock, $1.25 par value; 2,000,000 shares authorized, issued and outstanding
$
2

 
$
2

Capital in excess of par value
7,807

 
6,859

Retained earnings
5,098

 
8,938

Accumulated other comprehensive income (loss)
(491
)
 
598

Total equity attributable to AXA Equitable
12,416

 
16,397

Noncontrolling interest
12

 
3,095

Total Equity
12,428

 
19,492

Total Liabilities, Redeemable Noncontrolling Interest and Equity
$
199,952

 
$
225,930


See Notes to the Consolidated Financial Statements.

70



AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
2018
 
2017
 
2016
 
(in millions)
REVENUES
 
 
 
 
 
Policy charges and fee income
$
3,523

 
$
3,294

 
$
3,311

Premiums
862

 
904

 
880

Net derivative gains (losses)
(1,010
)
 
894

 
(1,321
)
Net investment income (loss)
2,478

 
2,441

 
2,168

Investment gains (losses), net:
 
 
 
 
 
Total other-than-temporary impairment losses
(37
)
 
(13
)
 
(65
)
Other investment gains (losses), net
41

 
(112
)
 
83

Total investment gains (losses), net
4

 
(125
)
 
18

Investment management and service fees
1,029

 
1,007

 
951

Other income
65

 
41

 
36

Total revenues
6,951

 
$
8,456

 
$
6,043

 
 
 
 
 
 
BENEFITS AND OTHER DEDUCTIONS
 
 
 
 
 
Policyholders’ benefits
3,005

 
3,473

 
2,771

Interest credited to policyholders’ account balances
1,002

 
921

 
905

Compensation and benefits
422

 
327

 
364

Commissions and distribution related payments
620

 
628

 
635

Interest expense
34

 
23

 
13

Amortization of deferred policy acquisition costs
431

 
900

 
642

Other operating costs and expenses
2,918

 
635

 
753

Total benefits and other deductions
8,432

 
6,907

 
6,083

Income (loss) from continuing operations, before income taxes
(1,481
)
 
1,549

 
(40
)
Income tax (expense) benefit from continuing operations
446

 
1,210

 
164

Net income (loss) from continuing operations
(1,035
)
 
2,759

 
124

Net income (loss) from discontinued operations, net of taxes and noncontrolling interest
114

 
85

 
66

Net income (loss)
(921
)
 
2,844

 
190

Less: net (income) loss attributable to the noncontrolling interest
3

 
(1
)
 
—

Net income (loss) attributable to AXA Equitable
$
(918
)
 
$
2,843

 
$
190


See Notes to the Consolidated Financial Statements.
    

71



AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
2018
 
2017
 
2016
 
(in millions)
COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
Net income (loss)
$
(921
)
 
$
2,844

 
$
190

Other Comprehensive income (loss) net of income taxes:
 
 
 
 
 
Change in unrealized gains (losses), net of reclassification adjustment
(1,230
)
 
625

 
(233
)
Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment
(4
)
 
(5
)
 
(3
)
Other comprehensive income (loss) from discontinued operations
—

 
(18
)
 
17

Total other comprehensive income (loss), net of income taxes
(1,234
)
 
602

 
(219
)
Comprehensive income (loss) attributable to AXA Equitable
$
(2,155
)
 
$
3,446

 
$
(29
)

See Notes to the Consolidated Financial Statements.

72



AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
2018
 
2017
 
2016
 
(in millions)
Equity attributable to AXA Equitable:
 
 
 
 
 
Common stock, at par value, beginning and end of year
$
2

 
$
2

 
$
2

 
 
 
 
 
 
Capital in excess of par value, beginning of year
$
6,859

 
$
5,339

 
$
5,321

Capital contribution from parent company
—

 
1,500

 
—

Transfer of deferred tax asset in GMxB Unwind
1,209

 
—

 
—

Settlement of intercompany payables in GMxB Unwind
(297
)
 
—

 
—

Other
36

 
20

 
18

Capital in excess of par value, end of year
$
7,807

 
$
6,859

 
$
5,339

 
 
 
 
 
 
Retained earnings, beginning of year
$
8,938

 
$
6,095

 
$
6,955

Cumulative effect of adoption of revenue recognition standard ASC 606
8

 
—

 
—

Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects Attribute to Disposed Subsidiary
(83
)
 
—

 
—

Net income (loss) attributable to AXA Equitable
(918
)
 
2,843

 
190

Dividend to parent company
(1,672
)
 
—

 
(1,050
)
Distribution of disposed subsidiary
(1,175
)
 
—

 
—

Retained earnings, end of year
$
5,098

 
$
8,938

 
$
6,095

 
 
 
 
 
 
Accumulated other comprehensive income (loss), beginning of year
$
598

 
$
(4
)
 
$
215

Cumulative effect of adoption of ASU 2018-02, Reclassification of Certain Tax Effects
83

 
—

 
—

Other comprehensive income (loss)
(1,234
)
 
602

 
(219
)
Transfer of accumulated other comprehensive income to discontinued operations
62

 
—

 
—

Accumulated other comprehensive income (loss), end of year
(491
)
 
598

 
(4
)
Total AXA Equitable's equity, end of year
$
12,416

 
$
16,397

 
$
11,432

 
 
 
 
 
 
Equity attributable to the Noncontrolling Interest
 
 
 
 
 
Noncontrolling interest, continuing operations, beginning of year
$
19

 
$
—

 
$
—

Net earnings (loss) attributable to noncontrolling interest
1

 
—

 
—

Net earnings (loss) attributable to redeemable noncontrolling interests
2

 
(1
)
 
—

Consolidation of real estate joint ventures
—

 
19

 
—

Deconsolidation of real estate joint ventures
(8
)
 
—

 
—

Reclassification of net earnings (loss) attributable to redeemable noncontrolling interests
(2
)
 
1

 
—

Noncontrolling interest, continuing operations, end of year
$
12

 
$
19

 
$
—

 
 
 


 
 
Noncontrolling interest, discontinued operations, beginning of year
$
3,076

 
$
3,096

 
$
3,059

Repurchase of AB Holding Units
—

 
(158
)
 
(168
)
Net earnings (loss) attributable to noncontrolling interest
—

 
485

 
491

Dividends paid to noncontrolling interest
—

 
(457
)
 
(384
)
Transfer of AB Holding Units
(3,076
)
 
—

 
—

Other changes in noncontrolling interest
—

 
110

 
98

Noncontrolling interest, discontinued operations, end of year
$
—

 
$
3,076

 
$
3,096

Equity attributable to the Noncontrolling Interest
$
12

 
$
3,095

 
$
3,096

Total equity, end of Year
$
12,428

 
$
19,492

 
$
14,528


73



See Notes to the Consolidated Financial Statements.


74



AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
2018
 
2017
 
2016
 
(in millions)
Net income (loss) (1)
$
(358
)
 
$
3,377

 
$
686

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
Interest credited to policyholders’ account balances
1,002

 
921

 
905

Policy charges and fee income
(3,523
)
 
(3,294
)
 
(3,311
)
Net derivative (gains) losses
1,010

 
(870
)
 
1,337

Investment (gains) losses, net
(3
)
 
125

 
(16
)
Realized and unrealized (gains) losses on trading securities
221

 
(166
)
 
41

Non-cash long-term incentive compensation expense (2)
218

 
185

 
152

Amortization of deferred cost of reinsurance asset
1,882

 
(84
)
 
159

Amortization and depreciation (2)
340

 
825

 
614

Cash received on the recapture of captive reinsurance
1,273

 
—

 
—

Equity (income) loss from limited partnerships
(120
)
 
(157
)
 
(91
)
Changes in:
 
 
 
 
 
Net broker-dealer and customer related receivables/payables
838

 
(278
)
 
608

Reinsurance recoverable (2)
(390
)
 
(1,018
)
 
(304
)
Segregated cash and securities, net
(345
)
 
130

 
(381
)
Capitalization of deferred policy acquisition costs (2)
(597
)
 
(578
)
 
(594
)
Future policy benefits
(284
)
 
1,189

 
431

Current and deferred income taxes
(556
)
 
(1,174
)
 
(753
)
Other, net (2)
810

 
486

 
56

Net cash provided by (used in) operating activities
$
1,418

 
$
(381
)
 
$
(461
)
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
 
 
Fixed maturities, available-for-sale
$
8,935

 
$
9,738

 
$
7,154

Mortgage loans on real estate
768

 
934

 
676

Trading account securities
9,298

 
9,125

 
6,271

Real estate joint ventures
139

 
—

 
—

Short-term investments (2)
2,315

 
2,204

 
2,984

Other
190

 
228

 
32

Payment for the purchase/origination of:
 
 
 
 
 
Fixed maturities, available-for-sale
(11,110
)
 
(12,465
)
 
(7,873
)
Mortgage loans on real estate
(1,642
)
 
(2,108
)
 
(3,261
)
Trading account securities
(11,404
)
 
(12,667
)
 
(8,691
)
Short-term investments (2)
(1,852
)
 
(2,456
)
 
(3,187
)
Other
(170
)
 
(280
)
 
(250
)
Cash settlements related to derivative instruments
805

 
(1,259
)
 
102

Repayments of loans to affiliates
900

 
—

 
384

Investment in capitalized software, leasehold improvements and EDP equipment
(115
)
 
(100
)
 
(85
)
Purchase of business, net of cash acquired
—

 
(130
)
 
(21
)
Issuance of loans to affiliates
(1,100
)
 
—

 
—

Cash disposed due to distribution of disposed subsidiary
(672
)
 
—

 
—

Other, net (2)
(91
)
 
322

 
407

Net cash provided by (used in) investing activities
$
(4,806
)
 
$
(8,914
)
 
$
(5,358
)
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
Policyholders’ account balances:
 
 
 
 
 
Deposits
$
9,365

 
$
9,334

 
$
9,746

Withdrawals
(4,496
)
 
(3,926
)
 
(2,874
)
Transfer (to) from Separate Accounts
1,809

 
1,566

 
1,202


75



AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(CONTINUED)
 
2018
 
2017
 
2016
 
(in millions)
Change in short-term financings
(26
)
 
53

 
(69
)
Change in collateralized pledged assets
1

 
710

 
(677
)
Change in collateralized pledged liabilities
(291
)
 
1,108

 
125

(Decrease) increase in overdrafts payable
3

 
63

 
(85
)
Additional loans from affiliates
572

 
—

 
—

Shareholder dividends paid
(1,672
)
 
—

 
(1,050
)
Repurchase of AB Holding Units
(267
)
 
(220
)
 
(236
)
Purchases (redemptions) of noncontrolling interests of consolidated company-sponsored investment funds
(472
)
 
120

 
(137
)
Distribution to noncontrolling interest of consolidated subsidiaries
(610
)
 
(457
)
 
(385
)
Increase (decrease) in securities sold under agreement to repurchase
(1,314
)
 
(109
)
 
104

(Increase) decrease in securities purchased under agreement to resell
—

 
—

 
79

Capital contribution from parent company
—

 
1,500

 
—

Other, net
11

 
(10
)
 
8

Net cash provided by (used in) financing activities
$
2,613

 
$
9,732

 
$
5,751

 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(12
)
 
22

 
(10
)
 
 
 
 
 
 
Change in cash and cash equivalents
(787
)
 
459

 
(78
)
Cash and cash equivalents, beginning of year
3,409

 
2,950

 
3,028

Cash and cash equivalents, end of year
$
2,622

 
$
3,409

 
$
2,950

 
 
 
 
 
 
Cash and cash equivalents of disposed subsidiary:
 
 
 
 
 
Beginning of year
$
1,009

 
$
1,006

 
$
561

End of year
$
—

 
$
1,009

 
$
1,006

 
 
 
 
 
 
Cash and cash equivalents of continuing operations
 
 
 
 
 
Beginning of year
$
2,400

 
$
1,944

 
$
2,467

End of year
$
2,622

 
$
2,400

 
$
1,944

 
 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
 
Interest paid
$
—

 
$
(8
)
 
$
(11
)
Income taxes (refunded) paid
$
(8
)
 
$
(33
)
 
$
613

 
 
 
 
 
 
Cash flows of disposed subsidiary:
 
 
 
 
 
Net cash provided by (used in) operating activities
$
1,137

 
$
715

 
$
1,041

Net cash provided by (used in) investing activities
(102
)
 
(297
)
 
323

Net cash provided by (used in) financing activities
(1,360
)
 
(437
)
 
(909
)
Effect of exchange rate changes on cash and cash equivalents
(12
)
 
22

 
(10
)
 


 


 


Non-cash transactions:
 
 
 
 
 
Continuing operations
 
 
 
 
 
(Settlement) issuance of long-term debt
$
(202
)
 
$
202

 
$
—

Transfer of assets to reinsurer
$
(604
)
 
$
—

 
$
—

Repayments of loans from affiliates
$
300

 
$
—

 
$
—


76



AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
(CONTINUED)
 
2018
 
2017
 
2016
 
(in millions)
Discontinued operations
 
 
 
 
 
Fair value of assets acquired
$
—

 
$
—

 
$
34

Fair value of liabilities assumed
$
—

 
$
—

 
$
1

Payables recorded under contingent payment arrangements
$
—

 
$
—

 
$
12

 
 
 
 
 
 
Disposal of subsidiary
 
 
 
 
 
Assets disposed
$
9,156

 
$
—

 
$
—

Liabilities disposed
4,914

 
—

 
—

Net assets disposed
4,242

 
—

 
—

Cash disposed
672

 
—

 
—

Net non-cash disposed
$
3,570

 
$
—

 
$
—

_____________
(1)
Net income (loss) includes $564 million, $533 million and $496 million in 2018, 2017 and 2016, respectively, of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss).
(2)
Prior period amounts have been reclassified to conform to current period presentation. See Note 20 for further information.


See Notes to the Consolidated Financial Statements.



77


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



1)    ORGANIZATION
Consolidation
AXA Equitable Life Insurance Company’s (“AXA Equitable” and, collectively with its consolidated subsidiaries, the “Company”) primary business is providing life insurance and employee benefit products to both individuals and businesses. The Company is an indirect, wholly-owned subsidiary of AXA Equitable Holdings, Inc. (“Holdings”). Prior to the closing of the initial public offering of shares of Holdings’ common stock on May 14, 2018 (the “IPO”), 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 of December 31, 2018, AXA owns approximately 59% of the outstanding common stock of Holdings.
In March 2018, AXA contributed its 0.5% minority interest in AXA Financial, Inc. (“AXA Financial”) to Holdings, increasing Holdings’ ownership of AXA Financial to 100%. On October 1, 2018, AXA Financial merged with and into its direct parent, Holdings, with Holdings continuing as the surviving entity (the “AXA Financial Merger”). As a result of the AXA Financial Merger, Holdings assumed all of AXA Financial’s liabilities, including two assumption agreements under which it legally assumed primary liability for certain employee benefit plans of AXA Equitable Life and various guarantees for its subsidiaries.
The accompanying consolidated financial statements represent the consolidated results and financial position of AXA Equitable and not the consolidated results and financial position of Holdings.
Discontinued Operations
In the fourth quarter of 2018, the Company transferred its economic interest in the business of AllianceBernstein Holding L.P. (“AB Holding”), AllianceBernstein L.P. (“ABLP”) and their subsidiaries (collectively, “AB”) to a newly created wholly-owned subsidiary of Holdings (the “AB Business Transfer”). The results of AB are reflected in the Company’s consolidated financial statements as a discontinued operation and, therefore, are presented as Assets of disposed subsidiary, Liabilities of disposed subsidiary on the consolidated balance sheets and Net income (loss) from discontinued operations, net of taxes, on the consolidated statements of income (loss). Intercompany transactions between the Company and AB prior to the AB Business Transfer have been eliminated. Ongoing service transactions will be reported as related party transactions going forward. See Note 19 for information on discontinued operations and transactions with AB.
As a result of the AB Business Transfer, we have reassessed the Company's segment structure and concluded that the Company operates as a single reportable segment as information on a more segmented basis is not evaluated by the Chief Operating Decision Maker and as such there is only a single reporting segment.

2)
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates.
The accompanying consolidated financial statements present the consolidated results of operations, financial condition and cash flows of the Company and its subsidiaries and those investment companies, partnerships and joint ventures in which the Company has control and a majority economic interest as well as those variable interest entities (“VIEs”) that meet the requirements for consolidation.
Financial results in the historical consolidated financial statements may not be indicative of the results of operations, comprehensive income (loss), financial position, equity or cash flows that would have been achieved had we operated

78


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


as a separate, standalone entity during the reporting periods presented. We believe that the consolidated financial statements include all adjustments necessary for a fair presentation of the results of operations of the Company.
All significant intercompany transactions and balances have been eliminated in consolidation. The years “2018”, “2017” and “2016” refer to the years ended December 31, 2018, 2017 and 2016, respectively.
Adoption of New Accounting Pronouncements
Description
Effect on the Financial Statement or Other Significant Matters
ASU 2014-09: Revenue from Contracts with Customers (Topic 606)
This ASU contains new guidance that clarifies the principles for recognizing revenue arising from contracts with customers and develops a common revenue standard for U.S. GAAP.
On January 1, 2018, the Company adopted the new revenue recognition guidance on a modified retrospective basis. The impact of the adoption of the new revenue recognition guidance related to the disposed subsidiary resulted in an opening retained earnings adjustment to the Company of $8 million. Adoption did not change the amounts or timing of the Company’s revenue recognition for investment management and advisory fees related to continuing operations.
ASU 2016-01: Financial Instruments - Overall (Subtopic 825-10)
This ASU provides new guidance related 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. The FASB also clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on 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 were reported in 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 for the net unrealized gains, net of tax, related to approximately $13 million of common stock securities and eliminated their designation as AFS equity securities. The Company does not currently report any of its financial liabilities under the fair value option.
ASU 2016-15: Statement of Cash Flows (Topic 230)
This ASU provides 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 requires application of a retrospective transition method.
Adoption of this guidance on January 1, 2018, did not have a material impact on the Company’s consolidated financial statements.
ASU 2017-07: Compensation - Retirement Benefits (Topic 715)
This ASU provides 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.
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.
ASU 2017-09: Compensation - Stock Compensation (Topic 718)
This ASU provides clarity and reduces both 1) diversity in practice and 2) cost and complexity when applying guidance in Topic 718, Compensation - Stock Compensation, to a change to the terms or conditions of a share-based payment award.
Adoption of this amendment on January 1, 2018 did not have a material impact on the Company’s consolidated financial statements.
ASU 2018-02: Income Statement - Reporting Comprehensive Income
This ASU contains new guidance that permits 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. If elected, the stranded tax effects for all items must be reclassified in AOCI, including, but not limited to, AFS securities and employee benefits.
The company early adopted the ASU effective October 1, 2018 and recognized the impact in the period of adoption. As a result, the company reclassified stranded effects resulting from the Tax Act of 2017 by decreasing AOCI and increasing retained earnings by $83 million.
ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20)

79


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Description
Effect on the Financial Statement or Other Significant Matters
This ASU improves the effectiveness of disclosures related to defined benefit plans in the notes to the financial statements. The amendments in this ASU remove disclosures that are no longer considered cost beneficial, clarify the specific requirements of disclosures, and add new, relevant disclosure requirements.
Effective for the year ended December 31, 2018 the Company early adopted new guidance that amends the disclosure guidance for employee benefit plans, applied on a retrospective basis to all periods presented. See Note 13 for additional information regarding the Company’s employee benefit plans.
Future Adoption of New Accounting Pronouncements
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 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.
ASU 2018-13: Fair Value Measurement (Topic 820)
This ASU improves the effectiveness of fair value disclosures in the notes to financial statements. Amendments in this ASU impact the disclosure requirements in Topic 820, including the removal, modification and addition to existing disclosure 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 disclosure requirements delayed until the stated 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.

80


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Description
Effective Date and Method of Adoption
Effect on the Financial Statement or Other Significant Matters
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.

Amortization of deferred acquisition costs. The ASU simplifies the amortization of deferred 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.

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 account liabilities and deferred acquisition costs.  Companies will also be required to disclose information about significant inputs, judgements, assumptions and methods used in measurement.
Effective date for public business entities for fiscal years and interim periods with those 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 acquisition costs.

For MRBs, the ASU should be applied retrospectively as of the earliest period presented by a retrospective application to all prior periods.

For deferred 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.
Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements and related disclosures. The Company has formed a project implementation team to work on compiling all significant information needed to assess the impact of the new guidance, including changes to system requirements and internal controls. The Company expects adoption of the ASU will have a significant impact on its consolidated financial condition, results of operations, cash flows and required disclosures, as well as processes and controls.

81


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Description
Effective Date and Method of Adoption
Effect on the Financial Statement or Other Significant Matters
ASU 2018-07: Compensation - Stock Compensation (Topic 718)
This ASU contains new guidance that largely aligns the accounting for share-based payment awards issued to employees and non-employees.
Effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods, with early adoption permitted.
The Company has granted share-based payment awards only to employees as defined by accounting guidance and does not expect this guidance will have a material impact on its consolidated financial statements.

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.
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption.
Management does not expect this guidance will 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.
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 does not expect this guidance will have a material impact on the Company’s consolidated financial statements.
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 for 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. Although early adoption is permitted, the Company expects to adopt ASU 2016-13 when it becomes effective for the Company on January 1, 2020.

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.
Effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, for public business entities. Early application is permitted. Lessees and lessors are required to apply a modified retrospective transition approach, which includes optional practical expedients that entities may elect to apply. In July 2018, the FASB issued ASU 2018-11 which allows for an additional transition method. The Company will adopt the standard utilizing the additional transition method, which allows entities to initially apply the new leases standard at the adoption date.

The Company adopted ASU 2016-02, as well as other related clarifications and interpretive guidance issued by the FASB effective January 1, 2019. The Company has identified its significant existing leases, which primarily include real estate leases for office space, that will be impacted by the new guidance. The Company’s adoption of this guidance is expected to result in a material impact on the consolidated balance sheets, however it will not have a material impact on the Consolidated Statement of Income (Loss). The Company’s adoption of this guidance will result in the recognition, as of January 1, 2019, of additional right of use (RoU) operating lease assets ranging from $300 million to $400 million and operating lease liabilities ranging from $400 million to $500 million, respectively.
 
The adoption of this standard will not have a significant impact on opening retained earnings.



Investments
The carrying values of fixed maturities classified as available-for-sale (“AFS”) are reported at fair value. Changes in fair value are reported in other comprehensive income (“OCI”), net of policy related amounts and deferred income

82


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


taxes. The amortized cost of fixed maturities is adjusted for impairments in value deemed to be other than temporary which are recognized in Investment gains (losses), net. The redeemable preferred stock investments that are reported in fixed maturities include real estate investment trusts (“REIT”), perpetual preferred stock and redeemable preferred stock. These securities may not have a stated maturity, may not be cumulative and do not provide for mandatory redemption by the issuer.
The Company determines the fair values of fixed maturities and equity securities based upon quoted prices in active markets, when available, or through the use of alternative approaches when market quotes are not readily accessible or available. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment.
The Company’s management, with the assistance of its investment advisors, monitors the investment performance of its portfolio and reviews AFS securities with unrealized losses for other-than-temporary impairments (“OTTI”). Integral to this review is an assessment made each quarter, on a security-by-security basis, by the Company’s Investments Under Surveillance (“IUS”) Committee, of various indicators of credit deterioration to determine whether the investment security is expected to recover. This assessment includes, but is not limited to, consideration of the duration and severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity and continued viability of the issuer.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting OTTI is recognized in income (loss) and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Real estate held for the production of income is stated at depreciated cost less valuation allowances.
Depreciation of real estate held for production of income is computed using the straight-line method over the estimated useful lives of the properties, which generally range from 40 to 50 years.
Policy loans represent funds loaned to policyholders up to the cash surrender value of the associated insurance policies and are carried at the unpaid principal balances due to the Company from the policyholders. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.
Partnerships, investment companies and joint venture interests that the Company has control of and has an economic interest in or those that meet the requirements for consolidation under accounting guidance for consolidation of VIEs are consolidated. Those that the Company does not have control of and does not have a majority economic interest in and those that do not meet the VIE requirements for consolidation are reported on the equity method of accounting and are reported in other equity investments. The Company records its interests in certain of these partnerships on a month or one quarter lag.
Trading securities, which include equity securities and fixed maturities, are carried at fair value based on quoted market prices, with realized and unrealized gains (losses) reported in net investment income (loss) in the statements of Net income (loss).
Corporate owned life insurance (“COLI”) has been purchased by the Company and certain subsidiaries on the lives of certain key employees and the Company and these subsidiaries are named as beneficiaries under these policies. COLI is carried at the cash surrender value of the policies. At December 31, 2018, 2017 and 2016 the carrying value of COLI was $873 million, $911 million and $892 million, respectively, and is reported in Other invested assets in the consolidated balance sheets.

83


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Cash and cash equivalents includes cash on hand, demand deposits, money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less. Due to the short-term nature of these investments, the recorded value is deemed to approximate fair value.
All securities owned, including U.S. government and agency securities, mortgage-backed securities, futures and forwards transactions, are reported in the consolidated financial statements on a trade date basis.
Derivatives
Derivatives are financial instruments whose values are derived from interest rates, foreign exchange rates, financial indices, values of securities or commodities, credit spreads, market volatility, expected returns and liquidity. Values can also be affected by changes in estimates and assumptions, including those related to counterparty behavior and non-performance risk used in valuation models. Derivative financial instruments generally used by the Company include equity, currency, and interest rate futures, total return and/or other equity swaps, interest rate swaps and floors, swaptions, variance swaps and equity options, all of which may be exchange-traded or contracted in the over-the-counter market. All derivative positions are carried in the consolidated balance sheets at fair value, generally by obtaining quoted market prices or through the use of valuation models.
Freestanding derivative contracts are reported in the consolidated balance sheets either as assets within “Other invested assets” or as liabilities within “Other liabilities”. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related Credit Support Annex (“CSA”) have been executed. The Company uses derivatives to manage asset/liability risk and has designated some of those economic relationships under the criteria to qualify for hedge accounting treatment. All changes in the fair value of the Company’s freestanding derivative positions not designated to hedge accounting relationships, including net receipts and payments, are included in “Net derivative gains (losses)” without considering changes in the fair value of the economically associated assets or liabilities.
The Company is a party to financial instruments and other contracts that contain “embedded” derivative instruments. At inception, the Company assesses whether the economic characteristics of the embedded instrument are “clearly and closely related” to the economic characteristics of the remaining component of the “host contract” and whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument. When those criteria are satisfied, the resulting embedded derivative is bifurcated from the host contract, carried in the consolidated balance sheets at fair value, and changes in its fair value are recognized immediately and captioned in the consolidated statements of income (loss) according to the nature of the related host contract. For certain financial instruments that contain an embedded derivative that otherwise would need to be bifurcated and reported at fair value, the Company instead may elect to carry the entire instrument at fair value.
Securities Repurchase and Reverse Repurchase Agreements
Securities repurchase and reverse repurchase transactions involve the temporary exchange of securities for cash or other collateral of equivalent value, with agreement to redeliver a like quantity of the same or similar securities at a future date prior to maturity at a fixed and determinable price. Transfers of securities under these agreements to repurchase or resell are evaluated by the Company to determine whether they satisfy the criteria for accounting treatment as secured borrowing or lending arrangements. Agreements not meeting the criteria would require recognition of the transferred securities as sales or purchases with related forward repurchase or resale commitments. All of the Company’s securities repurchase transactions are accounted for as collateralized borrowings with the related obligations distinctly captioned in the consolidated balance sheets. Earnings from investing activities related to the cash received under the Company’s securities repurchase arrangements are reported in the consolidated statements of income (loss) as “Net investment income” and the associated borrowing cost is reported as “Interest expense.” The Company has not actively engaged in securities reverse repurchase transactions.
Commercial and Agricultural Mortgage Loans on Real Estate
Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and valuation allowances. Valuation allowances are based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or on its collateral value if the loan is collateral dependent. However, if foreclosure is or becomes probable, the collateral value measurement method is used.

84


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


For commercial and agricultural mortgage loans, an allowance for credit loss is typically recommended when management believes it is probable that principal and interest will not be collected according to the contractual terms. Factors that influence management’s judgment in determining allowance for credit losses include the following:
•
Loan-to-value ratio – Derived from current loan balance divided by the fair market value of the property. An allowance for credit loss is typically recommended when the loan-to-value ratio is in excess of 100%. In the case where the loan-to-value is in excess of 100%, the allowance for credit loss is derived by taking the difference between the fair market value (less cost of sale) and the current loan balance.
•
Debt service coverage ratio – Derived from actual operating earnings divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt.
•
Occupancy – Criteria varies by property type but low or below market occupancy is an indicator of sub-par property performance.
•
Lease expirations – The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor.
•
Maturity – Mortgage loans that are not fully amortizing and have upcoming maturities within the next 12 to 24 months are monitored in conjunction with the capital markets to determine the borrower’s ability to refinance the debt and/or pay off the balloon balance.
•
Borrower/tenant related issues – Financial concerns, potential bankruptcy or words or actions that indicate imminent default or abandonment of property.
•
Payment status (current vs. delinquent) – A history of delinquent payments may be a cause for concern.
•
Property condition – Significant deferred maintenance observed during the lenders annual site inspections.
•
Other – Any other factors such as current economic conditions may call into question the performance of the loan.
Mortgage loans also are individually evaluated quarterly by the Company’s IUS Committee for impairment, including an assessment of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages are also identified, consisting of mortgage loans not currently classified as problem mortgages but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
For problem mortgage loans, a valuation allowance is established to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for mortgage loans determined to be non-performing as a result of the loan review process. A non-performing loan is defined as a loan for which it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan-specific portion of the loss allowance is based on the Company’s assessment as to ultimate collectability of loan principal and interest. Valuation allowances for a non-performing loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The valuation allowance for mortgage loans can increase or decrease from period to period based on such factors.
Impaired mortgage loans without provision for losses are mortgage loans where the fair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on mortgage loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on mortgage loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows. Changes in the present value attributable to changes in the amount or timing of expected cash flows are reported as investment gains or losses.
Mortgage loans are placed on nonaccrual status once management believes the collection of accrued interest is doubtful. Once mortgage loans are classified as nonaccrual mortgage loans, interest income is recognized under the

85


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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 has been restructured to where the collection of interest is considered likely.
Net Investment Income (Loss), Investment Gains (Losses), Net and Unrealized Investment Gains (Losses)
Realized investment gains (losses) are determined by identification with the specific asset and are presented as a component of revenue. Changes in the valuation allowances are included in Investment gains (losses), net.
Realized and unrealized holding gains (losses) on trading and equity securities are reflected in Net investment income (loss).
Unrealized investment gains (losses) on fixed maturities designated as AFS held by the Company are accounted for as a separate component of AOCI, net of related deferred income taxes, as are amounts attributable to certain pension operations, Closed Block’s policyholders’ dividend obligation, insurance liability loss recognition, DAC related to UL policies, investment-type products and participating traditional life policies.
Changes in unrealized gains (losses) reflect changes in fair value of only those fixed maturities classified as AFS and do not reflect any change in fair value of policyholders’ account balances and future policy benefits.
Fair Value of Financial Instruments
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. See Note 7 for additional information regarding determining the fair value of financial instruments.
Recognition of Insurance Income and Related Expenses
Deposits related to universal life (“UL”) and investment-type contracts are reported as deposits to policyholders’ account balances. Revenues from these contracts consist of fees assessed during the period against policyholders’ account balances for mortality charges, policy administration charges and surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policyholders’ account balances.
Premiums from participating and non-participating traditional life and annuity policies with life contingencies generally are recognized in income when due. Benefits and expenses are matched with such income so as to result in the recognition of profits over the life of the contracts. This match is accomplished by means of the provision for liabilities for future policy benefits and the deferral and subsequent amortization of DAC.
For contracts with a single premium or a limited number of premium payments due over a significantly shorter period than the total period over which benefits are provided, premiums are recorded as revenue when due with any excess profit deferred and recognized in income in a constant relationship to insurance in-force or, for annuities, the amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over the period to which the premiums relate in proportion to the amount of insurance protection provided.
DAC
Acquisition costs that vary with and are primarily related to the acquisition of new and renewal insurance business, reflecting incremental direct costs of contract acquisition with independent third parties or employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts including commissions, underwriting, agency and policy issue expenses, are deferred. In each reporting period, DAC is amortized to Amortization of deferred policy acquisition costs of the accrual of imputed interest on DAC balances. DAC is subject to recoverability testing at the time of policy issue and loss recognition testing at the end of each accounting period.
After the initial establishment of reserves, premium deficiency and loss recognition tests are performed each period end using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities

86


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC would first be written off and thereafter, if required, a premium deficiency reserve would be established by a charge to earnings.
Amortization Policy
In accordance with the guidance for the accounting and reporting by insurance enterprises for certain long-duration contracts and participating contracts and for realized gains and losses from the sale of investments, current and expected future profit margins for products covered by this guidance are examined regularly in determining the amortization of DAC.
DAC associated with certain variable annuity products is amortized based on estimated assessments, with DAC on the remainder of variable annuities, UL and investment-type products amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Accounts fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, embedded derivatives and changes in the reserve of products that have indexed features such as SCS IUL and MSO, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated gross profits or assessments is reflected in earnings (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
A significant assumption in the amortization of DAC on variable annuities and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future separate account performance. Management sets estimated future gross profit or assessment assumptions related to separate account performance using a long-term view of expected average market returns by applying a Reversion to the Mean (“RTM”) approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At December 31, 2018, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuities was 7.0% (4.7% net of product weighted average Separate Accounts fees), and the gross maximum and minimum short-term annual rate of return limitations were 15.0% (12.7% net of product weighted average Separate Accounts fees) and 0.0% ((2.3)% net of product weighted average Separate Accounts fees), respectively. The maximum duration over which these rate limitations may be applied is five years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
In addition, projections of future mortality assumptions related to variable and interest-sensitive life products are based on a long-term average of actual experience. This assumption is updated periodically to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization.
Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
For participating traditional life policies (substantially all of which are in the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield. At December 31, 2018, the average rate of assumed investment yields, excluding policy loans, for the Company was

87


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


4.7% grading to 4.3% over six years. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
DAC associated with non-participating traditional life policies are amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in income (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy. DAC related to these policies are subject to recoverability testing as part of the Company’s premium deficiency testing. If a premium deficiency exists, DAC are reduced by the amount of the deficiency or to zero through a charge to current period earnings (loss). If the deficiency exceeds the DAC balance, the reserve for future policy benefits is increased by the excess, reflected in earnings (loss) in the period such deficiency occurs.
For some products, policyholders can elect to modify product benefits, features, rights or coverages that occur by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by election or coverage within a contract. These transactions are known as internal replacements. If such modification substantially changes the contract, the associated DAC is written off immediately through income and any new deferrable costs associated with the replacement contract are deferred. If the modification does not substantially change the contract, the DAC amortization on the original contract will continue and any acquisition costs associated with the related modification are expensed.
Reinsurance
For each of its reinsurance agreements, the Company determines whether the agreement provides indemnification against loss or liability relating to insurance risk in accordance with applicable accounting standards. Cessions under reinsurance agreements do not discharge the Company’s obligations as the primary insurer. The Company reviews all contractual features, including those that may limit the amount of insurance risk to which the reinsurer is subject or features that delay the timely reimbursement of claims.
For reinsurance of existing in-force blocks of long-duration contracts that transfer significant insurance risk, the difference, if any, between the amounts paid (received), and the liabilities ceded (assumed) related to the underlying contracts is considered the net cost of reinsurance at the inception of the reinsurance agreement. The net cost of reinsurance is recorded as an adjustment to DAC and recognized as a component of other expenses on a basis consistent with the way the acquisition costs on the underlying reinsured contracts would be recognized. Subsequent amounts paid (received) on the reinsurance of in-force blocks, as well as amounts paid (received) related to new business, are recorded as Premiums ceded (assumed); and Amounts due from reinsurers (Amounts due to reinsurers) are established.
Amounts currently recoverable under reinsurance agreements are included in Amounts due from reinsurers and amounts currently payable are included in Amounts due to reinsurers. Assets and liabilities relating to reinsurance agreements with the same reinsurer may be recorded net on the balance sheet, if a right of offset exists within the reinsurance agreement. In the event that reinsurers do not meet their obligations to the Company under the terms of the reinsurance agreements, reinsurance recoverable balances could become uncollectible. In such instances, reinsurance recoverable balances are stated net of allowances for uncollectible reinsurance.
Premiums, Policy charges and fee income and Policyholders’ benefits include amounts assumed under reinsurance agreements and are net of reinsurance ceded. Amounts received from reinsurers for policy administration are reported in other revenues. With respect to GMIBs, a portion of the directly written GMIBs are accounted for as insurance liabilities, but the associated reinsurance agreements contain embedded derivatives. These embedded derivatives are included in GMIB reinsurance contract asset, at fair value with changes in estimated fair value reported in Net derivative gains (losses).

88


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


If the Company determines that a reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk, the Company records the agreement using the deposit method of accounting. Deposits received are included in Other liabilities and deposits made are included within premiums, reinsurance and other receivables. As amounts are paid or received, consistent with the underlying contracts, the deposit assets or liabilities are adjusted. Interest on such deposits is recorded as other revenues or other expenses, as appropriate. Periodically, the Company evaluates the adequacy of the expected payments or recoveries and adjusts the deposit asset or liability through other revenues or other expenses, as appropriate.
For reinsurance contracts other than those accounted for as derivatives, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities.
Policyholder Bonus Interest Credits
Policyholder bonus interest credits are offered on certain deferred annuity products in the form of either immediate bonus interest credited or enhanced interest crediting rates for a period of time. The interest crediting expense associated with these policyholder bonus interest credits is deferred and amortized over the lives of the underlying contracts in a manner consistent with the amortization of DAC. Unamortized balances are included in Other assets in the consolidated balance sheets and amortization is included in Interest credited to policyholders’ account balances in the consolidated statements of income (loss).
Policyholders’ Account Balances and Future Policy Benefits
Policyholders’ account balances relate to contracts or contract features where the Company has no significant insurance risk. This liability represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date.
For participating traditional life insurance policies, future policy benefit liabilities are calculated using a net level premium method on the basis of actuarial insurance assumptions equal to guaranteed mortality and dividend fund interest rates. The liability for annual dividends represents the accrual of annual dividends earned. Terminal dividends are accrued in proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy benefit liabilities are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on the Company’s experience that, together with interest and expense assumptions, includes a margin for adverse deviation. Benefit liabilities for traditional annuities during the accumulation period are equal to accumulated policyholders’ fund balances and, after annuitization, are equal to the present value of expected future payments. Interest rates used in establishing such liabilities range from 4.5% to 6.3% (weighted average of 5.0%) for approximately 99.2% of life insurance liabilities and from 1.6% to 5.5% (weighted average of 4.8%) for annuity liabilities.
Individual health benefit liabilities for active lives are estimated using the net level premium method and assumptions as to future morbidity, withdrawals and interest. Benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest. While management believes its disability income (“DI”) reserves have been calculated on a reasonable basis and are adequate, there can be no assurance reserves will be sufficient to provide for future liabilities.
When the liabilities for future policy benefits plus the present value of expected future gross premiums for a product are insufficient to provide for expected future policy benefits and expenses for that product, DAC is written off and thereafter, if required, a premium deficiency reserve is established by a charge to earnings.
Funding agreements are also reported in Policyholders’ account balances in the consolidated balance sheets. As a member of the Federal Home Loan Bank of New York (“FHLBNY”), the Company has access to collateralized borrowings. The Company may also issue funding agreements to the FHLBNY. Both the collateralized borrowings and funding agreements would require the Company to pledge qualified mortgage-backed assets and/or government securities as collateral.
The Company has issued and continues to offer certain variable annuity products with guaranteed minimum death benefits (“GMDB”) and/or contain a guaranteed minimum living benefit (“GMLB,” and together with GMDB, the “GMxB features”) which, if elected by the policyholder after a stipulated waiting period from contract issuance,

89


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


guarantees a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of what the contract account value can purchase at then-current annuity purchase rates. This minimum lifetime annuity is based on predetermined annuity purchase rates applied to a guaranteed minimum income benefit (“GMIB”) base. The Company previously issued certain variable annuity products with and guaranteed income benefit (“GIB”) features, guaranteed withdrawal benefit for life (“GWBL”), guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) features. The Company has also assumed reinsurance for products with GMxB features.
Reserves for products that have GMIB features, but do not have no-lapse guarantee features, and products with GMDB features are determined by estimating the expected value of death or income benefits in excess of the projected contract accumulation value and recognizing the excess over the estimated life based on expected assessments (i.e., benefit ratio). The determination of this estimated liability is based on models that involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, contract surrender and withdrawal rates, mortality experience, and, for contracts with the GMIB feature, GMIB election rates. Assumptions regarding separate account performance used for purposes of this calculation are set using a long-term view of expected average market returns by applying a RTM approach, consistent with that used for DAC amortization. There can be no assurance that actual experience will be consistent with management’s estimates.
Products that have a GMIB feature with a no-lapse guarantee rider (“GMIBNLG”), GIB, GWBL, GMWB and GMAB features and the assumed products with GMIB features (collectively “GMxB derivative features”) are considered either freestanding or embedded derivatives and discussed below under (“Embedded and Freestanding Insurance Derivatives”).
After the initial establishment of reserves, premium deficiency and loss recognition tests are performed each period end using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC would first be written off and thereafter, if required, a premium deficiency reserve would be established by a charge to earnings. Premium deficiency reserves have been recorded for the group single premium annuity business, certain interest-sensitive life contracts, structured settlements, individual disability income and major medical. Additionally, in certain instances the policyholder liability for a particular line of business may not be deficient in the aggregate to trigger loss recognition, but the pattern of earnings may be such that profits are expected to be recognized in earlier years followed by losses in later years. This pattern of profits followed by losses is exhibited in our VISL business and is generated by the cost structure of the product or secondary guarantees in the contract. The secondary guarantee ensures that, subject to specified conditions, the policy will not terminate and will continue to provide a death benefit even if there is insufficient policy value to cover the monthly deductions and charges. We accrue for these Profits Followed by Losses (“PFBL”) using a dynamic approach that changes over time as the projection of future losses change.
Embedded and Freestanding Insurance Derivatives
Reserves for products considered either embedded or freestanding derivatives are measured at estimated fair value separately from the host variable annuity product, with changes in estimated fair value reported in Net derivative gains (losses). The estimated fair values of these derivatives are determined based on the present value of projected future benefits minus the present value of projected future fees attributable to the guarantee. The projections of future benefits and future fees require capital markets and actuarial assumptions, including expectations concerning policyholder behavior. A risk-neutral valuation methodology is used under which the cash flows from the guarantees are projected under multiple capital market scenarios using observable risk-free rates.
Additionally, the Company cedes and assumes reinsurance of products with GMxB features, which are considered either an embedded or freestanding derivative and measured at fair value. The GMxB reinsurance contract asset and liabilities’ fair values reflect the present value of reinsurance premiums and recoveries and risk margins over a range of market-consistent economic scenarios.
Changes in the fair value of embedded and freestanding derivatives are reported in Net derivative gains (losses). Embedded derivatives in direct and assumed reinsurance contracts are reported in Future policyholders’ benefits and other policyholders’ liabilities and embedded derivatives in ceded reinsurance contracts are reported in the GMIB reinsurance contract asset, at fair value in the consolidated balance sheets.

90


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Embedded and freestanding insurance derivatives fair values are determined based on the present value of projected future benefits minus the present value of projected future fees. At policy inception, a portion of the projected future guarantee fees to be collected from the policyholder equal to the present value of projected future guaranteed benefits is attributed to the embedded derivative. The percentage of fees included in the fair value measurement is locked-in at inception. Fees above those amounts represent “excess” fees and are reported in Policy charges and fee income.
Policyholders’ Dividends
The amount of policyholders’ dividends to be paid (including dividends on policies included in the Closed Block) is determined annually by the board of directors of the issuing insurance company. The aggregate amount of policyholders’ dividends is related to actual interest, mortality, morbidity and expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by the Company.
Separate Accounts
Generally, Separate Accounts established under New York State and Arizona State Insurance Law are not chargeable with liabilities that arise from any other business of the Company. Separate Accounts assets are subject to General Account claims only to the extent Separate Accounts assets exceed separate accounts liabilities. Assets and liabilities of the Separate Account represent the net deposits and accumulated net investment earnings (loss) less fees, held primarily for the benefit of policyholders, and for which the Company does not bear the investment risk. Separate Accounts assets and liabilities are shown on separate lines in the consolidated balance sheets. Assets held in Separate Accounts are reported at quoted market values or, where quoted values are not readily available or accessible for these securities, their fair value measures most often are determined through the use of model pricing that effectively discounts 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. Investment performance (including investment income, net investment gains (losses) and changes in unrealized gains (losses)) and the corresponding amounts credited to policyholders of such Separate Accounts are offset within the same line in the consolidated statements of income (loss). For 2018, 2017 and 2016, investment results of such Separate Accounts were losses of $7.2 billion, and gains of $16.7 billion and $8.2 billion, respectively.
Deposits to Separate Accounts are reported as increases in Separate Accounts assets and liabilities and are not reported in revenues or expenses. Mortality, policy administration and surrender charges on all policies including those funded by Separate Accounts are included in revenues.
The Company reports the General Account’s interests in Separate Accounts as Other trading in the consolidated balance sheets.
Broker-Dealer Revenues, Receivables and Payables
AXA Advisors and certain of the Company’s other subsidiaries provide investment management, brokerage and distribution services for affiliates and third parties. Third-party revenues earned from these services are reported in Other income in the Company’s consolidated statement of income (loss).
Receivables from and payables to clients include amounts due on cash and margin transactions. Securities owned by customers are held as collateral for receivables; such collateral is not reflected in the consolidated financial statements.
Internal-use Software
Capitalized internal-use software, included in Other assets in the consolidated balance sheets, is amortized on a straight-line basis over the estimated useful life of the software that ranges between three and five years. Capitalized amounts are periodically tested for impairment in accordance with the guidance on impairment of long-lived assets. An immediate charge to earnings is recognized if capitalized software costs no longer are deemed to be recoverable. In addition, service potential is periodically reassessed to determine whether facts and circumstances have compressed the software’s useful life such that acceleration of amortization over a shorter period than initially determined would be required.

91


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Long-Term Debt
Liabilities for long-term debt are primarily carried at an amount equal to unpaid principal balance, net of unamortized discount or premium and debt issue costs. Original-issue discount or premium and debt-issue costs are recognized as a component of interest expense over the period the debt is expected to be outstanding, using the interest method of amortization. Interest expense is generally presented within Interest expense in the consolidated statements of income (loss). See Note 11 for additional information regarding long-term debt.
Income Taxes
The Company and certain of its consolidated subsidiaries and affiliates file a consolidated federal income tax return. The Company provides for federal and state income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred tax assets will not be realized.
Under accounting for uncertainty in income taxes guidance, the Company determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the consolidated financial statements. Tax positions are then measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement.
Recognition of Investment Management and Service Fees and Related Expenses
Investment management, advisory and service fees
Reported as Investment management and service fees in the Company’s consolidated statements of income (loss) are investment management and administrative service fees earned by AXA Equitable Funds Management Group, LLC (“AXA Equitable FMG”) as well as certain asset-based fees associated with insurance contracts.
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.
Sub-advisory and sub-administrative expenses associated with these services are calculated and recorded as the related services are performed in Other operating costs and expense in the consolidated statements of income (loss) as the Company is acting in a principal capacity in these transactions and, as such, reflects these revenues and expenses on a gross basis.
Distribution services
Revenues from distribution services include fees received as partial reimbursement of expenses incurred in connection with the sale of certain 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.
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

92


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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).
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 mutual fund reimbursements and other brokerage income.
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.
Discontinued Operations
The results of operations of a component of the Company that has been disposed of are reported in discontinued operations if certain criteria are met; such as if the disposal represents a strategic shift that has or will have a major effect on the Company’s operations and financial results.  The results of AB are reflected in the Company.’s consolidated financial statements as discontinued operations and, therefore, are presented as assets and liabilities of disposed subsidiary on the consolidated balance sheets and net income (loss) from discontinued operations, net of taxes and noncontrolling interest on the consolidated statements of income (loss). Intercompany transactions between the Company and AB prior to the disposal have been eliminated. See Note 19 for information on discontinued operations and transactions with AB.
Assumption Updates and Model Changes
In 2018, the Company began conducting its annual review of our 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 our insurance business, liabilities for future policyholder benefits, DAC and deferred sales inducement assets (“DSI”). As a result of this review, some assumptions were updated, resulting in increases and decreases in the carrying values of these product liabilities and assets.
The net impact of assumption changes in the third quarter of 2018 decreased Policy charges and fee income by $12 million, decreased Policyholders’ benefits by $684 million, increased Net derivative losses by $1.1 billion, and decreased the Amortization of DAC by $165 million. This resulted in a decrease in the third quarter of 2018 in Income (loss) from operations, before income taxes of $228 million and decreased Net income (loss) by approximately $187 million.
In 2017, the Company made several assumption updates and model changes, including the following: (1) updated the expectation of long-term Separate Accounts volatility used in estimating policyholders’ benefits for variable annuities with GMDB and GMIB guarantees and variable universal life contracts with secondary guarantees; (2) updated the estimated duration used to calculate policyholders’ benefits for variable annuities with GMDB and GMIB guarantees

93



and the period over which DAC is amortized; (3) updated policyholder behavior assumptions based on emerging experience, including expectations of long-term lapse and partial withdrawal rates for variable annuities with GMxB features; (4) updated premium funding assumptions for certain universal life and variable universal life products with secondary guarantees; (5) completed its periodic review and updated its long-term mortality assumption for universal, variable universal and traditional life products; (6) updated the assumption for long-term General Account spread and yield assumptions in the DAC amortization and loss recognition testing calculations for universal life, variable universal life and deferred annuity business lines; (7) updated our maintenance expense assumption for universal life and variable universal life products; and (8) implemented other actuarial assumption updates and model changes, resulting in the full release of the reserve. The net impact of assumption changes in 2017 increased Policyholders’ benefits by $23 million, decreased the Amortization of DAC by $247 million, decreased Policy charges and fee income by $88 million, increased the fair value of our GMIB reinsurance asset by $1.5 billion and decreased the fair value of the GMIBNLG liability by $447 million.  This resulted in an increase in Income (loss) from operations, before income taxes of $1.7 billion and increased Net income by approximately $1.1 billion.
In 2016, the Company made several assumption updates and model changes including the following (1) updated the premium funding assumption used in setting variable life policyholder benefit reserves; (2) made changes in the model used in calculating premium loads, which increased interest sensitive life policyholder benefit reserves; (3) updated its mortality assumption for certain variable interest-sensitive life (“VISL”) products as a result of favorable mortality experience for some of its older products and unfavorable mortality experience on some of its newer products and (4) updated the General Account spread and yield assumptions for certain VISL products to reflect lower expected investment yields. The net impact of assumption updates and model changes in 2016 decreased Policyholders’ benefits by $135 million, increased the Amortization of DAC by $193 million, increased Policy charges and fee income by $35 million, decreased Income (loss) from operations, before income taxes by $23 million and decreased Net income by approximately $15 million.
Revision of Prior Year Financial Statements
During the fourth quarter of 2018, the Company identified certain cash flows that were incorrectly classified in the Company’s consolidated statements of cash flows. The Company has determined that these mis-classifications were not material to the financial statements of any period. However, in order to improve the consistency and comparability of the financial statements, management revised the consolidated statements of cash flows for the year ended December 31, 2017. See Note 21 for further information.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company changed the presentation of the capitalization of deferred policy acquisition costs (“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 benefits, Commissions and distribution plan payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of deferred acquisition costs. There was no impact on Net income (loss) or Comprehensive income of this reclassification.
The reclassification adjustments for the years ended December 31, 2017 and 2016 are presented in the table below. Capitalization of DAC reclassified to Compensation and benefits, Commissions and distribution plan payments, and Other operating costs and expenses reduced the amounts 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.

94



 
Years Ended December 31,
 
2017
 
2016
 
(in millions)
Reductions to expense line items:
 
 
 
Compensation and benefits
$
128

 
$
128

Commissions and distribution plan payments
443

 
460

Other operating costs and expenses
7

 
6

Total reductions
$
578

 
$
594

 
 
 
 
Increase to expense line item:
 
 
 
Amortization of deferred policy acquisition costs
$
578

 
$
594

3)    INVESTMENTS
Fixed Maturities
The following tables provide information relating to fixed maturities classified as AFS. As a result of the adoption of “Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities” (ASU 2016-01) on January 1, 2018 (see Note 2), equity securities are no longer classified and accounted for as available-for-sale securities.
Available-for-Sale Securities by Classification
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value    
 
OTTI
in AOCI (4)
 
(in millions)
December 31, 2018:
 
 
 
 
 
 
 
 
 
Fixed Maturities:
 
 
 
 
 
 
 
 
 
Corporate (1)
$
26,690

 
$
385

 
$
699

 
$
26,376

 
$
—

U.S. Treasury, government and agency
13,646

 
143

 
454

 
13,335

 
—

States and political subdivisions
408

 
47

 
1

 
454

 
—

Foreign governments
515

 
17

 
13

 
519

 
—

Residential mortgage-backed (2)
193

 
9

 
—

 
202

 
—

Asset-backed (3)
600

 
1

 
11

 
590

 
2

Redeemable preferred stock
440

 
16

 
17

 
439

 
—

Total at December 31, 2018
$
42,492

 
$
618

 
$
1,195

 
$
41,915

 
$
2

 
 
 
 
 
 
 
 
 
 
December 31, 2017:
 
 
 
 
 
 
 
 
 
Fixed Maturities:
 
 
 
 
 
 
 
 
 
Corporate (1)
$
20,596

 
$
942

 
$
56

 
$
21,482

 
$
—

U.S. Treasury, government and agency
12,644

 
676

 
185

 
13,135

 
—

States and political subdivisions
414

 
67

 
—

 
481

 
—

Foreign governments
387

 
27

 
5

 
409

 
—

Residential mortgage-backed (2)
236

 
15

 
—

 
251

 
—

Asset-backed (3)
93

 
3

 
—

 
96

 
2

Redeemable preferred stock
461

 
44

 
1

 
504

 
—

Total Fixed Maturities
34,831

 
1,774

 
247

 
36,358

 
2

Equity securities
157

 
—

 
—

 
157

 
—

Total at December 31, 2017
$
34,988

 
$
1,774

 
$
247

 
$
36,515

 
$
2


95


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


____________
(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.
(4)
Amounts represent OTTI losses in AOCI, which were not included in income (loss) in accordance with current accounting guidance.
The contractual maturities of AFS fixed maturities at December 31, 2018 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
 
Amortized Cost
 
Fair Value
 
(in millions)
December 31, 2018:
 
 
 
Due in one year or less
$
2,085

 
$
2,090

Due in years two through five
8,087

 
8,141

Due in years six through ten
14,337

 
14,214

Due after ten years
16,750

 
16,239

Subtotal
41,259

 
40,684

Residential mortgage-backed securities
193

 
202

Asset-backed securities
600

 
590

Redeemable preferred stock
440

 
439

Total at December 31, 2018
$
42,492

 
$
41,915

The following table shows proceeds from sales, gross gains (losses) from sales and OTTI for AFS fixed maturities for the years ended December 31, 2018, 2017 and 2016:
 
For the Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Proceeds from sales
$
7,136

 
$
7,232

 
$
4,324

Gross gains on sales
$
145

 
$
98

 
$
111

Gross losses on sales
$
(103
)
 
$
(211
)
 
$
(58
)
 
 
 
 
 
 
Total OTTI
$
(37
)
 
$
(13
)
 
$
(65
)
Non-credit losses recognized in OCI
—

 
—

 
—

Credit losses recognized in net income (loss)
$
(37
)
 
$
(13
)
 
$
(65
)
The following table sets forth the amount of credit loss impairments on AFS fixed maturities held by the Company at the dates indicated and the corresponding changes in such amounts:

96


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Fixed Maturities - Credit Loss Impairments
 
2018
 
2017
 
(in millions)
Balances at January 1,
$
(10
)
 
$
(190
)
Previously recognized impairments on securities that matured, paid, prepaid or sold
1

 
193

Recognized impairments on securities impaired to fair value this period (1)
—

 
—

Impairments recognized this period on securities not previously impaired
(37
)
 
(13
)
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 December 31,
$
(46
)
 
$
(10
)
____________
(1)
Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost.
Net unrealized investment gains (losses) on fixed maturities 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:
 
As of December 31,
 
2018
 
2017
 
(in millions)
AFS Securities:
 
 
 
Fixed maturities:
 
 
 
With OTTI loss
$
—

 
$
1

All other
(577
)
 
1,526

Net Unrealized Gains (Losses)
$
(577
)
 
$
1,527

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 maturities 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, January 1, 2018
$
1

 
$
1

 
$
(1
)
 
$
(5
)
 
$
(4
)
Net investment gains (losses) arising
    during the period
(1
)
 
—

 
—

 
—

 
(1
)
Reclassification adjustment:
 
 
 
 
 
 
 
 
 
Included in Net income (loss)
—

 
—

 
—

 
—

 
—

Excluded from Net income (loss) (1)
—

 
—

 
—

 
—

 
—

Impact of net unrealized investment gains (losses) on:
 
 
 
 
 
 
 
 
 
DAC
—

 
(1
)
 
—

 
—

 
(1
)
Deferred income taxes
—

 
—

 
—

 
5

 
5

Policyholders’ liabilities
—

 
—

 
1

 
—

 
1

Balance, December 31, 2018
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

97


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
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, January 1, 2017
$
19

 
$
(1
)
 
$
(10
)
 
$
(3
)
 
$
5

Net investment gains (losses) arising during the period
(18
)
 
—

 
—

 
—

 
(18
)
Reclassification adjustment:
 
 
 
 
 
 
 
 
 
Included in Net income (loss)
—

 
—

 
—

 
—

 
—

Excluded from Net income (loss) (1)
—

 
—

 
—

 
—

 
—

Impact of net unrealized investment gains (losses) on:
 
 
 
 
 
 
 
 
 
DAC
—

 
2

 
—

 
—

 
2

Deferred income taxes
—

 
—

 
—

 
(2
)
 
(2
)
Policyholders’ liabilities
—

 
—

 
9

 
—

 
9

Balance, December 31, 2017
$
1

 
$
1

 
$
(1
)
 
$
(5
)
 
$
(4
)
____________
(1)
Represents “transfers in” related to the portion of OTTI losses recognized during the period that were not recognized in income (loss) for securities with no prior OTTI loss.
All Other Net Unrealized Investment Gains (Losses) in 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) 
 
(in millions)
Balance, January 1, 2018
$
1,526

 
$
(315
)
 
$
(232
)
 
$
(300
)
 
$
679

Net investment gains (losses) arising during the period
(2,098
)
 
—

 
—

 
—

 
(2,098
)
Reclassification adjustment:
 
 
 
 
 
 
 
 
 
Included in Net income (loss)
(5
)
 
—

 
—

 
—

 
(5
)
Excluded from Net income (loss) (1)
—

 
—

 
—

 
—

 
—

Impact of net unrealized investment gains (losses) on:
 
 
 
 
 
 
 
 
 
DAC
—

 
354

 
—

 
—

 
354

Deferred income taxes (2)
—

 
—

 
—

 
425

 
425

Policyholders’ liabilities
—

 
—

 
177

 
—

 
177

Balance, December 31, 2018
$
(577
)
 
$
39

 
$
(55
)
 
$
125

 
$
(468
)
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
$
428

 
$
(104
)
 
$
(188
)
 
$
(47
)
 
$
89

Net investment gains (losses) arising during the period
1,085

 
—

 
—

 
—

 
1,085

Reclassification adjustment:
 
 
 
 
 
 
 
 
 
Included in Net income (loss)
13

 
—

 
—

 
—

 
13

Excluded from Net income (loss) (1)
—

 
—

 
—

 
—

 
—

Impact of net unrealized investment gains (losses) on:
 
 
 
 
 
 
 
 
 
DAC
—

 
(211
)
 
—

 
—

 
(211
)
Deferred income taxes
—

 
—

 
—

 
(253
)
 
(253
)
Policyholders’ liabilities
—

 
—

 
(44
)
 
—

 
(44
)
Balance, December 31, 2017
$
1,526

 
$
(315
)
 
$
(232
)
 
$
(300
)
 
$
679


98


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


____________
(1)
Represents “transfers out” related to the portion of OTTI losses during the period that were not recognized in income (loss) for securities with no prior OTTI loss.
(2)
Includes a $86 million income tax benefit from the impact of adoption of ASU 2018-02.
The following tables disclose the fair values and gross unrealized losses of the 1,471 issues at December 31, 2018 and the 620 issues at December 31, 2017 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)
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
8,369

 
$
306

 
$
6,161

 
$
393

 
$
14,530

 
$
699

U.S. Treasury, government and agency
2,636

 
68

 
3,154

 
386

 
5,790

 
454

States and political subdivisions
—

 
—

 
19

 
1

 
19

 
1

Foreign governments
109

 
3

 
76

 
10

 
185

 
13

Residential mortgage-backed
—

 
—

 
13

 
—

 
13

 
—

Asset-backed
558

 
11

 
6

 
—

 
564

 
11

Redeemable preferred stock
160

 
12

 
31

 
5

 
191

 
17

Total
$
11,832

 
$
400

 
$
9,460

 
$
795

 
$
21,292

 
$
1,195

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
2,102

 
$
17

 
$
1,163

 
$
39

 
$
3,265

 
$
56

U.S. Treasury, government and agency
2,150

 
6

 
3,005

 
179

 
5,155

 
185

States and political subdivisions
20

 
—

 
—

 
—

 
20

 
—

Foreign governments
11

 
—

 
73

 
5

 
84

 
5

Residential mortgage-backed
18

 
—

 
—

 
—

 
18

 
—

Asset-backed
7

 
—

 
2

 
—

 
9

 
—

Redeemable preferred stock
7

 
—

 
12

 
1

 
19

 
1

Total
$
4,315

 
$
23

 
$
4,255

 
$
224

 
$
8,570

 
$
247

The Company’s investments in fixed maturities 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 0.8% of total investments. The largest exposures to a single issuer of corporate securities held at December 31, 2018 and 2017 were $210 million and $182 million, respectively.
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 December 31, 2018 and 2017, respectively, approximately $1,228 million and $1,309 million, or 2.9% and 3.8%, of the $42,492 million and $34,831 million aggregate amortized cost of fixed maturities held by the Company were considered to be other than investment grade. These securities had net unrealized (losses) and gains of $(30) million and $5 million at December 31, 2018 and 2017, respectively.

99


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


At December 31, 2018 and 2017, respectively, the $795 million and $224 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 these securities was not warranted at either December 31, 2018 or 2017. At December 31, 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 December 31, 2018, the carrying value of fixed maturities that were non-income producing for the twelve months preceding that date was $1 million.
At December 31, 2018 and 2017, respectively, the fair value of the Company’s trading account securities was $15,166 million and $12,277 million. Also at December 31, 2018 and 2017, respectively, trading account securities included the General Account’s investment in Separate Accounts, which had carrying values of $48 million and $49 million.
Mortgage Loans
The payment terms of mortgage loans may from time to time be restructured or modified.
At December 31, 2018 and 2017, the carrying values of problem commercial mortgage loans on real estate that had been classified as non-accrual loans were $19 million and $19 million, respectively.
Valuation Allowances for Mortgage Loans:
The change in the valuation allowance for credit losses for commercial mortgage loans during the years ended December 31, 2018, 2017 and 2016 was as follows:
 
Commercial Mortgage Loans
 
2018
 
2017
 
2016
 
(in millions)
Allowance for credit losses:
 
 
 
 
 
Beginning Balance, January 1,
$
8

 
$
8

 
$
6

Charge-offs
—

 
—

 
—

Recoveries
(1
)
 
—

 
(2
)
Provision
—

 
—

 
4

Ending Balance, December 31,
$
7

 
$
8

 
$
8

 
 
 
 
 
 
Ending Balance, December 31,
 
 
 
 
 
Individually Evaluated for Impairment
$
7

 
$
8

 
$
8

There were no allowances for credit losses for agricultural mortgage loans in 2018, 2017 and 2016.
The following tables provide information relating to the loan-to-value and debt service coverage ratios for commercial and agricultural mortgage loans at December 31, 2018 and 2017. 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.

100


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios
 
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)
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage Loans (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
780

 
$
21

 
$
247

 
$
24

 
$
—

 
$
—

 
$
1,072

50% - 70%
4,908

 
656

 
1,146

 
325

 
151

 
—

 
7,186

70% - 90%
260

 
—

 
117

 
370

 
98

 
—

 
845

90% plus
—

 
—

 
—

 
27

 
—

 
—

 
27

Total Commercial Mortgage Loans
$
5,948

 
$
677

 
$
1,510

 
$
746

 
$
249

 
$
—

 
$
9,130

Agricultural Mortgage Loans (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
282

 
$
147

 
$
267

 
$
543

 
$
321

 
$
51

 
$
1,611

50% - 70%
112

 
46

 
246

 
379

 
224

 
31

 
1,038

70% - 90%
—

 
—

 
—

 
19

 
27

 
—

 
46

90% plus
—

 
—

 
—

 
—

 
—

 
—

 
—

Total Agricultural Mortgage Loans
$
394

 
$
193

 
$
513

 
$
941

 
$
572

 
$
82

 
$
2,695

Total Mortgage Loans (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
1,062

 
$
168

 
$
514

 
$
567

 
$
321

 
$
51

 
$
2,683

50% - 70%
5,020

 
702

 
1,392

 
704

 
375

 
31

 
8,224

70% - 90%
260

 
—

 
117

 
389

 
125

 
—

 
891

90% plus
—

 
—

 
—

 
27

 
—

 
—

 
27

Total Mortgage Loans
$
6,342

 
$
870

 
$
2,023

 
$
1,687

 
$
821

 
$
82

 
$
11,825

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage Loans (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
742

 
$
—

 
$
320

 
$
74

 
$
—

 
$
—

 
$
1,136

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
$
4,999

 
$
792

 
$
1,609

 
$
774

 
$
195

 
$
—

 
$
8,369

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%
$
1,014

 
$
149

 
$
595

 
$
589

 
$
316

 
$
30

 
$
2,693

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
$
5,382

 
$
987

 
$
2,111

 
$
1,652

 
$
732

 
$
79

 
$
10,943

__________

101


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


(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 December 31, 2018 and 2017, respectively:
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)
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
—

 
$
—

 
$
27

 
$
27

 
$
9,103

 
$
9,130

 
$
—

Agricultural
18

 
8

 
42

 
68

 
2,627

 
2,695

 
40

Total Mortgage Loans
$
18

 
$
8

 
$
69

 
$
95

 
$
11,730

 
$
11,825

 
$
40

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
27

 
$
—

 
$
—

 
$
27

 
$
8,342

 
$
8,369

 
$
—

Agricultural
49

 
3

 
22

 
74

 
2,500

 
2,574

 
22

Total Mortgage Loans
$
76

 
$
3

 
$
22

 
$
101

 
$
10,842

 
$
10,943

 
$
22

The following table provides information relating to impaired mortgage loans at December 31, 2018 and 2017, respectively:
Impaired Mortgage Loans
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment (1)
 
Interest Income Recognized
 
(in millions)
December 31, 2018:
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial mortgage loans - other
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Agricultural mortgage loans
2

 
2

 
—

 
—

 
—

Total
$
2

 
$
2

 
$
—

 
$
—

 
$
—

With related allowance recorded:
 
 
 
 
 
 
 
 
 
Commercial mortgage loans - other
$
27

 
$
31

 
$
(7
)
 
$
27

 
$
—

Agricultural mortgage loans
—

 
—

 
—

 
—

 
—

Total
$
27

 
$
31

 
$
(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

 
$
31

 
$
(8
)
 
$
27

 
$
2

Agricultural mortgage loans
—

 
—

 
—

 
—

 
—

Total
$
27

 
$
31

 
$
(8
)
 
$
27

 
$
2


102


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


____________
(1)Represents a five-quarter average of recorded amortized cost.
Derivatives and Offsetting Assets and Liabilities
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 Use 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 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 its hedging strategy, the Company targets 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. CTE98 denotes the financial resources a company would need to cover the average of the worst 2% of scenarios.)
Derivatives utilized to hedge exposure to Variable Annuities with Guarantee Features
The Company has issued and continues to offer 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 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 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.
Derivatives utilized 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

103


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


to caps and buffers without any basis risk due to market exposures, thereby substantially reducing any exposure to market-related earnings volatility.
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 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 dollar or euro-equivalent of the derivative 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.
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.
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 $3,905 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 December 31, 2018, the aggregate fair value of U.S. Treasury securities derecognized under this program was approximately $3,690 million. Reported in Other invested assets in the Company’s balance sheet at December 31, 2018 is approximately $24 million, representing the fair value of the total return swap contracts.

104


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Derivatives used to hedge currency fluctuations on affiliated loans
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 December 31, 2018
 
 
 
Fair Value
 
Gains (Losses)
Reported In
Earnings (Loss)
 
Notional
Amount
 
Asset
Derivatives
 
Liability
Derivatives
 
 
(in millions)
Freestanding Derivatives (1) (4):
 
 
 
 
 
 
 
Equity contracts:
 
 
 
 
 
 
 
Futures
$
10,411

 
$
—

 
$
—

 
$
550

Swaps
7,697

 
140

 
168

 
675

Options
21,698

 
2,119

 
1,163

 
(899
)
Interest rate contracts:
 
 
 
 
 
 
 
Swaps
27,003

 
632

 
194

 
(456
)
Futures
11,448

 
—

 
—

 
118

Credit contracts:
 
 
 
 
 
 
 
Credit default swaps
1,282

 
17

 
—

 
(3
)
Other freestanding contracts:
 
 
 
 
 
 
 
Foreign currency contracts
2,097

 
27

 
14

 
6

Margin
—

 
7

 
5

 
—

Collateral
—

 
3

 
1,564

 
—

 
 
 
 
 
 
 
 
Embedded Derivatives:
 
 
 
 
 
 
 
GMIB reinsurance contracts (4)
—

 
1,991

 
—

 
(1,068
)
GMxB derivative features liability (2) (4)
—

 
—

 
5,431

 
(786
)
SCS, SIO, MSO and IUL indexed features (3) (4)
—

 
—

 
687

 
853

Balances, December 31, 2018
$
81,636

 
$
4,936

 
$
9,226

 
$
(1,010
)
____________
(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, SIO, MSO and IUL indexed features are reported in Policyholders’ account balances in the consolidated balance sheets.
(4)Reported in Net derivative gains (losses) in the consolidated statements of income (loss).

105


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Derivative Instruments by Category
At December 31, 2017
 
 
 
Fair Value
 
Gains (Losses)
Reported In
Earnings (Loss)
 
Notional Amount
 
Asset Derivatives
 
Liability Derivatives
 
 
(in millions)
Freestanding Derivatives (1) (4):
 
 
 
 
 
 
 
Equity contracts:
 
 
 
 
 
 
 
Futures
$
2,950

 
$
—

 
$
—

 
$
(655
)
Swaps
4,587

 
3

 
125

 
(842
)
Options
20,630

 
3,334

 
1,426

 
1,203

Interest rate contracts:
 
 
 
 
 
 
 
Swaps
18,988

 
319

 
190

 
655

Futures
11,032

 
—

 
—

 
125

Credit contracts:
 
 
 
 
 
 
 
Credit default swaps
2,057

 
34

 
2

 
21

Other freestanding contracts:
 
 
 
 
 
 
 
Foreign currency contracts
1,297

 
11

 
2

 
(38
)
Margin
—

 
18

 
—

 
—

Collateral
—

 
3

 
1,855

 
—

 
 
 
 
 
 
 
 
Embedded Derivatives:
 
 
 
 
 
 
 
GMIB reinsurance contracts (4)
—

 
10,488

 
—

 
69

GMxB derivative features liability (2) (4)
—

 
—

 
4,256

 
1,592

SCS, SIO, MSO and IUL indexed features (3) (4)
—

 
—

 
1,698

 
(1,236
)
Balances, December 31, 2017
$
61,541

 
$
14,210

 
$
9,554

 
$
894

____________
(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, SIO, MSO and UIL indexed features are reported in Policyholders’ account balances in the consolidated balance sheets.
(4)Reported in Net derivative gains (losses) in the consolidated statements of income (loss).
Equity-Based and Treasury Futures Contracts Margin
All outstanding equity-based and treasury futures contracts at December 31, 2018 are exchange-traded and net settled daily in cash. At December 31, 2018, 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 $245 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 $70 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 $25 million.
Collateral Arrangements
The Company generally has executed a Credit Support Annex (“CSA”) under the International Swaps and Derivatives Association Master Agreement (“ISDA Master Agreement”) it maintains with each of its over-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. 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 December 31, 2018 and 2017, respectively, the Company held $1,564 million and $1,855 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

106


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


invested assets. The Company posted collateral of $3 million and $3 million at December 31, 2018 and 2017, respectively, in the normal operation of its collateral arrangements.
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 requirements of each respective counterparty. 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. At December 31, 2018 and 2017, the balance outstanding under securities repurchase transactions was $573 million and $1,887 million, respectively. The Company utilized these repurchase and reverse repurchase agreements for asset liability and cash management purposes. For other instruments used for asset liability management purposes, see “Obligations under Funding Agreements” in Note 17 - Commitments and Contingent Liabilities.
The following table presents information about the Company’s offsetting of 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
 
 
 
 
 
Total Derivatives
$
2,946

 
$
2,912

 
$
34

Other financial instruments
1,520

 
—

 
1,520

Other invested assets
$
4,466

 
$
2,912

 
$
1,554

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Total Derivatives
$
3,109

 
$
2,912

 
$
197

Other financial liabilities
1,263

 
—

 
1,263

Other liabilities
$
4,372

 
$
2,912

 
$
1,460

Securities sold under agreement to repurchase (1)
$
571

 
$
—

 
$
571

____________
(1)
Excludes expense of $2 million in securities sold under agreement to repurchase.
The following table presents information about the Company’s gross collateral amounts that are not offset in the consolidated balance sheets at December 31, 2018.

107


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Collateral Amounts Not Offset in the Consolidated Balance Sheets
At December 31, 2018
 
Net Amount Presented in the Balance Sheets
 
Collateral (Received)/Held
 
 
 
Financial Instruments
 
Cash (3)
 
Net Amount
 
(in millions)
Assets
 
 
 
 
 
 
 
Total Derivatives
$
1,397

 
$
—

 
$
(1,363
)
 
$
34

Other financial instruments
1,520

 
—

 
—

 
1,520

Other invested assets
$
2,917

 
$
—

 
$
(1,363
)
 
$
1,554

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Total Derivatives
$
197

 
$
—

 
$
—

 
$
197

Other financial liabilities
1,263

 
—

 
—

 
1,263

Other liabilities
$
1,460

 
$
—

 
$
—

 
$
1,460

Securities sold under agreement to repurchase (1) (2) (3)
$
571

 
$
(588
)
 
$
—

 
$
(17
)
____________
(1)
Excludes expense of $2 million in securities sold under agreement to repurchase.
(2)
US Treasury and agency securities are in fixed maturities available-for-sale on the consolidated balance sheets.
(3)
Cash is in Cash and cash equivalents on consolidated balance sheets.
The following table presents information about repurchase agreements accounted for as secured borrowings in the consolidated balance sheets at December 31, 2018:
Repurchase Agreement Accounted for as Secured Borrowings
December 31, 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
$
—

 
$
571

 
$
—

 
$
—

 
$
571

Total
$
—

 
$
571


$
—

 
$
—

 
$
571

____________
(1)
Excludes expense of $2 million in securities sold under agreement to repurchase.
The following table presents information about the Company’s offsetting of financial assets and liabilities and derivative instruments at December 31, 2017.

108


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Offsetting of Financial Assets and Liabilities and Derivative Instruments
At December 31, 2017
 
Gross Amount Recognized
 
Gross Amount Offset in the Balance Sheets
 
Net Amount Presented in the Balance Sheets
 
(in millions)
Assets
 
 
 
 
 
Total Derivatives
$
3,740

 
$
3,614

 
$
126

Other financial instruments
1,704

 
—

 
1,704

Other invested assets
$
5,444

 
$
3,614

 
$
1,830

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Total Derivatives
$
3,614

 
$
3,614

 
$
—

Other financial liabilities
1,242

 
—

 
1,242

Other liabilities
$
4,856

 
$
3,614

 
$
1,242

Securities sold under agreement to repurchase (1)
$
1,882

 
$
—

 
$
1,882

____________
(1)
Excludes expense of $5 million included in Securities sold under agreements to repurchase on the consolidated balance sheets.
The following table presents information about the Company’s gross collateral amounts that are not offset in the consolidated balance sheets at December 31, 2017:
Collateral Amounts Not Offset in the Consolidated Balance Sheets
At December 31, 2017
 
Net Amount Presented in the Balance Sheets
 
Collateral (Received)/Held
 
 
 
Financial Instruments
 
Cash (3)
 
Net Amount
 
(in millions)
Assets
 
 
 
 
 
 
 
Total derivatives
$
1,954

 
$
—

 
$
(1,828
)
 
$
126

Other financial instruments
1,704

 
—

 
—

 
1,704

Other invested assets
$
3,658

 
$
—

 
$
(1,828
)
 
$
1,830

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Other financial liabilities
$
1,242

 
$
—

 
$
—

 
$
1,242

Other liabilities
$
1,242

 
$
—

 
$
—

 
$
1,242

Securities sold under agreement to repurchase (1) (2) (3)
$
1,882

 
$
(1,988
)
 
$
(21
)
 
$
(127
)
____________
(1)
Excludes expense of $5 million in securities sold under agreement to repurchase.
(2)
U.S. Treasury and agency securities are in fixed maturities available-for-sale on the consolidated balance sheets.
(3)
Cash is included in Cash and cash equivalents on consolidated balance sheets.
The following table presents information about repurchase agreements accounted for as secured borrowings in the consolidated balance sheets at December 31, 2017:

109


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Repurchase Agreement Accounted for as Secured Borrowings
At December 31, 2017
 
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
$
—

 
$
1,882

 
$
—

 
$
—

 
$
1,882

Total
$
—

 
$
1,882

 
$
—

 
$
—

 
$
1,882

____________
(1)
Excludes expense of $5 million in securities sold under agreements to repurchase on the consolidated balance sheets.
Net Investment Income (Loss)
The following table breaks out Net investment income (loss) by asset category:
 
Years Ended December 31
 
2018
 
2017
 
2016
 
(in millions)
Fixed maturities
$
1,540

 
$
1,365

 
$
1,418

Mortgage loans on real estate
494

 
453

 
461

Real estate held for the production of income
(6
)
 
2

 
—

Repurchase agreement
—

 
—

 
1

Other equity investments
123

 
169

 
55

Policy loans
201

 
205

 
210

Trading securities
128

 
258

 
64

Other investment income
69

 
54

 
16

Gross investment income (loss)
2,549

 
2,506

 
2,225

Investment expenses (1)
(71
)
 
(65
)
 
(57
)
Net Investment Income (Loss)
$
2,478

 
$
2,441

 
$
2,168

____________
(1)Investment expenses includes expenses related to the management of the two buildings sold in 2016.
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 from trading account securities during the years ended December 31, 2018, 2017 and 2016:
Net Investment Income (Loss) from Trading Securities
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Net investment gains (losses) recognized during the period on securities held at the end of the period
$
(174
)
 
$
63

 
$
(45
)
Net investment gains (losses) recognized on securities sold during the period
(24
)
 
(19
)
 
(11
)
Unrealized and realized gains (losses) on trading securities
(198
)
 
44

 
(56
)
Interest and dividend income from trading securities
326

 
214

 
120

Net investment income (loss) from trading securities
$
128

 
$
258

 
$
64


110


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Investment Gains (Losses), Net
Investment gains (losses), net including changes in the valuation allowances and OTTI are as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Fixed maturities
$
6

 
$
(130
)
 
$
(3
)
Mortgage loans on real estate
—

 
2

 
(2
)
Other equity investments
—

 
3

 
—

Other
(2
)
 
—

 
23

Investment gains (losses), net
$
4

 
$
(125
)
 
$
18

For the years ended December 31, 2018, 2017 and 2016, respectively, investment results passed through to certain participating group annuity contracts as Interest credited to policyholders’ account balances totaled $3 million, $3 million and $4 million.
4)    INTANGIBLE ASSETS
Capitalized Software
Capitalized software, net of accumulated amortization, amounted to $115 million and $96 million at December 31, 2018 and 2017, respectively, and is recorded in Other assets. Amortization of capitalized software in 2018, 2017 and 2016 was $35 million, $37 million and $42 million, respectively, recorded in other Operating costs and expenses in the consolidated statements of income (loss). Amortization expense for capitalized software is expected to be approximately $43 million in 2019, $47 million in 2020, $47 million in 2021, $47 million in 2022 and $47 million 2023.
5)    CLOSED BLOCK
As a result of demutualization, the Company’s Closed Block was established in 1992 for the benefit of certain individual participating policies that were in force on that date. Assets, liabilities and earnings of the Closed Block are specifically identified to support its participating policyholders.
Assets allocated to the Closed Block inure solely to the benefit of the Closed Block policyholders and will not revert to the benefit of the Company. No reallocation, transfer, borrowing or lending of assets can be made between the Closed Block and other portions of the Company’s General Account, any of its Separate Accounts or any affiliate of the Company without the approval of the New York State Department of Financial Services (the “NYDFS”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the General Account.
The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in AOCI) represents the expected maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. As of January 1, 2001, the Company has developed an actuarial calculation of the expected timing of the Closed Block’s earnings.
If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has

111



insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.
Many expenses related to Closed Block operations, including amortization of DAC, are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block.
Summarized financial information for the Company’s Closed Block is as follows:
 
As of December 31,
 
2018
 
2017
 
(in millions)
Closed Block Liabilities:
 
 
 
Future policy benefits, policyholders’ account balances and other
$
6,709

 
$
6,958

Policyholder’ dividend obligation
—

 
19

Other liabilities
47

 
271

Total Closed Block liabilities
6,756

 
7,248

 
 
 
 
Assets Designated To The Closed Block:
 
 
 
Fixed maturities, available for sale, at fair value (amortized cost of $ 3,680 and $3,923)
3,672

 
4,070

Mortgage loans on real estate, net of valuation allowance of $- and $-
1,824

 
1,720

Policy loans
736

 
781

Cash and other invested assets
76

 
351

Other assets
179

 
182

Total assets designated to the Closed Block
6,487

 
7,104

 
 
 
 
Excess of Closed Block liabilities over assets designated to the Closed Block
269

 
144

Amounts included in Accumulated other comprehensive income (loss):
 
 
 
Net unrealized investment gains (losses), net of policyholders’ dividend obligation of $- and $19
8

 
138

Maximum future income to be recognized from closed block assets and liabilities
$
277

 
$
282


112



The Company’s Closed Block revenues and expenses follow:
 
Years ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Revenues:
 
 
 
 
 
Premiums and other income
$
194

 
$
224

 
$
212

Net investment income (loss)
291

 
314

 
349

Investment gains (losses), net
(3
)
 
(20
)
 
(1
)
Total revenues
482

 
518

 
560

 
 
 
 
 
 
Benefits and Other Deductions:
 
 
 
 
 
Policyholders’ benefits and dividends
471

 
537

 
522

Other operating costs and expenses
3

 
2

 
4

Total benefits and other deductions
474

 
539

 
526

Net income, before income taxes
8

 
(21
)
 
34

Income tax (expense) benefit
(3
)
 
(36
)
 
(12
)
Net income (losses)
$
5

 
$
(57
)
 
$
22

A reconciliation of the Company’s policyholders’ dividend obligation follows:
 
December 31,
 
2018
 
2017
 
(in millions)
Balance, beginning of year
$
19

 
$
52

Unrealized investment gains (losses)
(19
)
 
(33
)
Balance, end of year
$
—

 
$
19

6)    DAC AND POLICYHOLDER BONUS INTEREST CREDITS
Changes in the deferred policy acquisition cost asset for the years ended December 31, 2018, 2017 and 2016 were as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Balance, beginning of year
$
4,492

 
$
5,025

 
$
5,079

Capitalization of commissions, sales and issue expenses
597

 
578

 
594

Amortization:
 
 
 
 
 
Impact of assumptions updates and model changes
165

 
(247
)
 
(193
)
All other
(596
)
 
(653
)
 
(449
)
Total amortization
(431
)
 
(900
)
 
(642
)
Change in unrealized investment gains and losses
353

 
(211
)
 
(6
)
Balance, end of year
$
5,011

 
$
4,492

 
$
5,025


113



Changes in the deferred asset for policyholder bonus interest credits for the years ended December 31, 2018, 2017 and 2016 were as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Balance, beginning of year
$
473

 
$
504

 
$
534

Policyholder bonus interest credits deferred
4

 
6

 
13

Amortization charged to income
(51
)
 
(37
)
 
(43
)
Balance, end of year
$
426

 
$
473

 
$
504

7)    FAIR VALUE DISCLOSURES
The accounting guidance establishes 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.
The Company uses unadjusted quoted market prices to measure fair value for 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 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 December 31, 2018 and December 31, 2017, 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

114


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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.
Fair Value Measurements at December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
Corporate (1)
$
—

 
$
25,202

 
$
1,174

 
$
26,376

U.S. Treasury, government and agency
—

 
13,335

 
—

 
13,335

States and political subdivisions
—

 
416

 
38

 
454

Foreign governments
—

 
519

 
—

 
519

Residential mortgage-backed (2)
—

 
202

 
—

 
202

Asset-backed (3)
—

 
71

 
519

 
590

Redeemable preferred stock
163

 
276

 
—

 
439

Total fixed maturities, available-for-sale
163

 
40,021

 
1,731

 
41,915

Other equity investments
12

 
—

 
—

 
12

Trading securities
218

 
14,919

 
29

 
15,166

Other invested assets:
 
 
 
 
 
 
 
Short-term investments
—

 
412

 
—

 
412

Assets of consolidated VIEs/VOEs
—

 
—

 
19

 
19

Swaps
—

 
423

 
—

 
423

Credit default swaps
—

 
17

 
—

 
17

Options
—

 
956

 
—

 
956

Total other invested assets
—

 
1,808


19


1,827

Cash equivalents
2,160

 
—

 
—

 
2,160

GMIB reinsurance contracts asset
—

 
—

 
1,991

 
1,991

Separate Accounts assets
105,159

 
2,733

 
374

 
108,266

Total Assets
$
107,712

 
$
59,481

 
$
4,144

 
$
171,337

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
GMxB derivative features’ liability
$
—

 
$
—

 
$
5,431

 
$
5,431

SCS, SIO, MSO and IUL indexed features’ liability
—

 
687

 
—

 
687

Total Liabilities
$
—

 
$
687

 
$
5,431

 
$
6,118

____________
(1)
Corporate fixed maturities includes 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.

115


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Fair Value Measurements at December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Assets
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
Corporate (1)
$
—

 
$
20,343

 
$
1,139

 
$
21,482

U.S. Treasury, government and agency
—

 
13,135

 
—

 
13,135

States and political subdivisions
—

 
441

 
40

 
481

Foreign governments
—

 
409

 
—

 
409

Residential mortgage-backed (2)
—

 
251

 
—

 
251

Asset-backed (3)
—

 
88

 
8

 
96

Redeemable preferred stock
180

 
324

 
—

 
504

Total fixed maturities, available-for-sale
180

 
34,991

 
1,187

 
36,358

Other equity investments
13

 
—

 
—

 
13

Trading securities
180

 
12,097

 
—

 
12,277

Other invested assets
 
 
 
 
 
 

Short-term investments
—

 
763

 
—

 
763

Assets of consolidated VIEs/VOEs
—

 
—

 
25

 
25

Swaps
—

 
15

 
—

 
15

Credit default swaps
—

 
33

 
—

 
33

Options
—

 
1,907

 
—

 
1,907

Total other invested assets
—

 
2,718

 
25

 
2,743

Cash equivalents
1,908

 
—

 
—

 
1,908

Segregated securities
—

 
9

 
—

 
9

GMIB reinsurance contracts asset
—

 
—

 
10,488

 
10,488

Separate Accounts assets
118,983

 
2,983

 
349

 
122,315

Total Assets
$
121,264

 
$
52,798

 
$
12,049

 
$
186,111

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
GMxB derivative features’ liability
$
—

 
$
—

 
$
4,256

 
$
4,256

SCS, SIO, MSO and IUL indexed features’ liability
—

 
1,698

 
—

 
1,698

Total Liabilities
$
—

 
$
1,698

 
$
4,256

 
$
5,954

_______________
(1)
Corporate fixed maturities includes 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.
The fair values of the Company’s public fixed maturities 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 maturities 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 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

116


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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.
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.
The net fair value of the Company’s freestanding derivative positions as disclosed in Note 3 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.
Investments classified as Level 1 primarily include redeemable preferred stock, trading securities, cash equivalents and Separate Account assets. Fair value measurements classified as Level 1 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.
Investments classified as Level 2 are 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 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. The 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.

117


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Certain Company products such as the SCS and EQUI-VEST variable annuity 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.
The Company’s investments classified as Level 3 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 are 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, asset-backed securities are classified as Level 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 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 account 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 $184 million and $69 million at December 31, 2018 and 2017, respectively, to recognize incremental counterparty non-performance risk.
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

118


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


to lapse. For valuing the embedded derivative, lapse rates vary throughout the period over which cash flows are projected.
The Company’s consolidated VIEs/VOEs hold investments that are classified as Level 3 and primarily consist of corporate bonds that are vendor priced with no ratings available, bank loans, non-agency collateralized mortgage obligations and asset-backed securities.
In 2018, AFS fixed maturities with fair values of $28 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 $83 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 0.9% of total equity at December 31, 2018.
In 2017, AFS fixed maturities with fair values of $6 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 $7 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 0.1% of total equity at December 31, 2017.
The table below presents a reconciliation for all Level 3 assets and liabilities at December 31, 2018, 2017 and 2016 respectively:
Level 3 Instruments Fair Value Measurements
 
Corporate
 
State and Political Subdivisions
 
Foreign Governments
 
Commercial Mortgage- backed
 
Asset-backed
 
(in millions)
Balance, January 1, 2018
$
1,139

 
$
40

 
$
—

 
$
—

 
$
8

Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
 
 
 
 
Income (loss) as:
 
 
 
 
 
 
 
 
 
Net investment income (loss)
7

 
—

 
—

 
—

 
(2
)
Investment gains (losses), net
(8
)
 
—

 
—

 
—

 
—

Subtotal
(1
)
 
—

 
—

 
—

 
(2
)
Other comprehensive income (loss)
(20
)
 
(1
)
 
—

 
—

 
(7
)
Purchases
322

 
—

 
—

 
—

 
550

Sales
(321
)
 
(1
)
 
—

 
—

 
(30
)
Transfers into Level 3 (1)
83

 
—

 
—

 
—

 
—

Transfers out of Level 3 (1)
(28
)
 
—

 
—

 
—

 
—

Balance, December 31, 2018
$
1,174

 
$
38

 
$
—

 
$
—

 
$
519


119


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
Corporate
 
State and Political Subdivisions
 
Foreign Governments
 
Commercial Mortgage- backed
 
Asset-backed
 
(in millions)
Balance, January 1, 2017
$
845

 
$
42

 
$
—

 
$
349

 
$
24

Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
 
 
 
 
Income (loss) as:
 
 
 
 
 
 
 
 
 
Net investment income (loss)
5

 
—

 
—

 
(2
)
 
—

Investment gains (losses), net
2

 
—

 
—

 
(63
)
 
15

Subtotal
7

 
—

 
—

 
(65
)
 
15

Other comprehensive income (loss)
4

 
(1
)
 
—

 
45

 
(9
)
Purchases
612

 
—

 
—

 
—

 
—

Sales
(331
)
 
(1
)
 
—

 
(329
)
 
(21
)
Transfers into Level 3 (1)
7

 
—

 
—

 
—

 
—

Transfers out of Level 3 (1)
(5
)
 
—

 
—

 
—

 
(1
)
Balance, December 31, 2017
$
1,139

 
$
40

 
$
—

 
$
—

 
$
8

 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
$
420

 
$
45

 
$
1

 
$
503

 
$
40

Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
 
 
 
 
Income (loss) as:
 
 
 
 
 
 
 
 
 
Investment gains (losses), net
1

 
—

 
—

 
(67
)
 
—

Subtotal
1

 
—

 
—

 
(67
)
 
—

Other comprehensive income (loss)
7

 
(2
)
 
—

 
14

 
1

Purchases
572

 
—

 
—

 
—

 
—

Sales
(142
)
 
(1
)
 
—

 
(87
)
 
(8
)
Transfers into Level 3 (1)
25

 
—

 
—

 
—

 
—

Transfers out of Level 3 (1)
(38
)
 
—

 
(1
)
 
(14
)
 
(9
)
Balance, December 31, 2016
$
845

 
$
42

 
$
—

 
$
349

 
$
24

 
Redeemable Preferred Stock
 
Other Equity Investments (2)
 
GMIB Reinsurance Asset
 
Separate Account Assets
 
GMxB Derivative Features Liability
 
(in millions)
Balance, January 1, 2018
$
—

 
$
25

 
$
10,488

 
$
349

 
$
(4,256
)
Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
 
 
 
 
Income (loss) as:
 
 
 
 
 
 
 
 
 
Investment gains (losses), net
—

 
—

 
—

 
26

 
—

Net derivative gains (losses), excluding non-performance risk
—

 
—

 
(972
)
 
—

 
(296
)
Non-performance risk (4)
—

 
—

 
(96
)
 
—

 
(490
)
Subtotal
—

 
—


(1,068
)

26


(786
)
Purchases (2)
—

 
29

 
96

 
5

 
(403
)
Sales (3)
—

 
—

 
(62
)
 
(1
)
 
14

Settlements
—

 
—

 
(7,463
)
 
(5
)
 
—

Activity related to consolidated VIEs/VOEs
—

 
(6
)
 
—

 
—

 
—

Transfers into Level 3 (1)
—

 
5

 
—

 
—

 
—

Transfers out of Level 3 (1)
—

 
(5
)
 
—

 
—

 
—

Balance, December 31, 2018
$
—

 
$
48

 
$
1,991

 
$
374

 
$
(5,431
)

120


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
Redeemable Preferred Stock
 
Other Equity Investments (2)
 
GMIB Reinsurance Asset
 
Separate Account Assets
 
GMxB Derivative Features Liability
 
(in millions)
Balance, January 1, 2017
$
1

 
$
40

 
$
10,313

 
$
313

 
$
(5,473
)
Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
 
 
 
 
Income (loss) as:
 
 
 
 
 
 
 
 
 
Investment gains (losses), net
—

 
—

 
—

 
29

 
—

Net derivative gains (losses), excluding non-performance risk
—

 
—

 
(6
)
 
—

 
1,443

Non-performance risk (4)
—

 
—

 
75

 
—

 
149

Subtotal
—

 
—

 
69

 
29

 
1,592

Other comprehensive
income(loss)
(1
)
 
—

 
—

 
—

 
—

Purchases (2)
—

 
—

 
221

 
13

 
(381
)
Sales (3)
—

 
—

 
(115
)
 
(2
)
 
6

Settlements
—

 
—

 
—

 
(4
)
 
—

Activity related to consolidated VIEs/VOEs
—

 
(15
)
 
—

 
—

 
—

Transfers into level 3 (1)
—

 
—

 
—

 
—

 
—

Transfers out of level 3 (1)
—

 
—

 
—

 
—

 
—

Balance, December 31, 2017
$
—

 
$
25

 
$
10,488

 
$
349

 
$
(4,256
)
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2016
$
—

 
$
1

 
$
10,582

 
$
313

 
$
(5,266
)
Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
 
 
 
 
Income (loss) as:
 
 
 
 
 
 
 
 
 
Investment gains (losses), net
—

 
—

 
—

 
19

 
—

Net derivative gains (losses), excluding non-performance risk
—

 
—

 
(242
)
 
—

 
(126
)
Non-performance risk (4)
—

 
—

 
(20
)
 
—

 
263

Subtotal
—

 
—

 
(262
)
 
19

 
137

Other comprehensive income (loss)
—

 
(1
)
 
—

 
—

 
—

Purchases (2)
1

 
—

 
223

 
10

 
(348
)
Sales (3)
—

 
—

 
(230
)
 
—

 
4

Settlements
—

 
—

 
—

 
(7
)
 
—

Activities related to consolidated VIEs/VOEs
—

 
40

 
—

 
—

 
—

Transfers into level 3 (1)
—

 
—

 
—

 
1

 
—

Transfers out of level 3 (1)
—

 


 
—

 
(23
)
 
—

Balance, December 31, 2016
$
1

 
$
40

 
$
10,313

 
$
313

 
$
(5,473
)
______________
(1)
Transfers into/out of Level 3 classification are reflected at beginning-of-period fair values.
(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)
The Company’s non-performance risk is recorded through Net derivative gains (losses).
The table below details changes in unrealized gains (losses) for 2018, 2017 and 2016 by category for Level 3 assets and liabilities still held at December 31, 2018, 2017 and 2016 respectively.

121


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
Earnings (Loss)
 
 
Investment Gains (Losses), Net
 
Net Derivative Gains (Losses)
 
OCI
 
(in millions)
Held as of December 31, 2018:
 
 
 
 
 
Change in unrealized gains (losses):
 
 
 
 
 
Fixed maturities, available-for-sale
 
 
 
 
 
Corporate
$
—

 
$
—

 
$
(18
)
State and political subdivisions
—

 
—

 
(1
)
Asset-backed
—

 
—

 
(7
)
Subtotal
—

 
—

 
(26
)
GMIB reinsurance contracts
—

 
(1,068
)
 
—

Separate Accounts assets (1)
26

 
—

 
—

GMxB derivative features liability
—

 
(786
)
 
—

Total
$
26

 
$
(1,854
)
 
$
(26
)
 
 
 
 
 
 
Held as of December 31, 2017:
 
 
 
 
 
Change in unrealized gains (losses):
 
 
 
 
 
Fixed maturities, available-for-sale
 
 
 
 
 
Corporate
$
—

 
$
—

 
$
4

Commercial mortgage-backed
—

 
—

 
45

Asset-backed
—

 
—

 
(9
)
Subtotal
—

 
—

 
40

GMIB reinsurance contracts
—

 
69

 
—

Separate Accounts assets (1)
29

 
—

 
—

GMxB derivative features liability
—

 
1,592

 
—

Total
$
29

 
$
1,661

 
$
40

 
 
 
 
 
 
Held as of December 31, 2016:
 
 
 
 
 
Change in unrealized gains (losses):
 
 
 
 
 
Fixed maturities, available-for-sale
 
 
 
 
 
Corporate
$
—

 
$
—

 
$
11

State and political subdivisions
—

 
—

 
(1
)
Commercial mortgage-backed
—

 
—

 
9

Asset-backed
—

 
—

 
1

Subtotal
—

 
—

 
20

GMIB reinsurance contracts
—

 
(262
)
 
—

Separate Accounts assets (1)
20

 
—

 
—

GMxB derivative features liability
—

 
137

 
—

Total
$
20

 
$
(125
)
 
$
20

____________
(1)There is an investment expense that offsets this investment gain (loss).

122


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


The following tables disclose quantitative information about Level 3 fair value measurements by category for assets and liabilities as of December 31, 2018 and 2017, respectively.
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
 
$
93

 
Matrix pricing 
model
 
Spread over Benchmark
 
15 - 580 bps
 
104 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
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
 
248 bps
5.1%
 
 
GMIB reinsurance contract asset
 
1,991

 
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
 
1.0% - 6.27%
0.0% - 8.0%
0.0% - 16.0%
74 - 159 bps
10.0% - 34.0%


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%
 
 
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
 
1.0% - 5.7%
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.

123


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Quantitative Information about Level 3 Fair Value Measurements at December 31, 2017
 
 
Fair
Value
 
Valuation Technique
 
Significant
Unobservable Input
 
Range
 
Weighted Average
 
 
(in millions)
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
53

 
Matrix pricing model
 
Spread over the industry-specific benchmark yield curve
 
0 - 565 bps
 
125 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
Separate Accounts assets
 
326

 
Third party appraisal
 
Capitalization rate
Exit capitalization rate
Discount rate
 
4.6%
5.6%
6.6%
 
 
 
 
1

 
Discounted 
cash flow
 
Spread over U.S. Treasury curve
Discount factor
 
243 bps
4.4%
 
 
GMIB reinsurance contract asset
 
10,488

 
Discounted cash flow
 
Lapse rates
Withdrawal rates
GMIB Utilization rates
Non-performance risk
Volatility rates - Equity
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115
 
1.0% - 6.3%
0.0% - 8.0%
0.0% - 16.0%
5bps - 10bps
9.9% - 30.9%

0.01% - 0.18%
0.07% - 0.54%
0.42% - 42.0%
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
GMIBNLG
 
4,149

 
Discounted cash flow
 
Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
NLG Forfeiture rates
Long-term equity volatility
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115
 
1.0%
0.8% - 26.2%
0.0% - 12.4%
0.0% - 16.0%
0.6% - 2.1%
20.0%

0.01% - 0.19%
0.06% - 0.53%
0.41% - 41.2%
 
 
GWBL/GMWB
 
130

 
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%
 
 
GIB
 
(27
)
 
Discounted cash flow
 
Lapse rates
Volatility rates - Equity
 
0.5% - 11.0%
9.9% - 30.9%
 
 
GMAB
 
5

 
Discounted cash flow
 
Lapse rates
Volatility rates - Equity
 
0.5% - 11.0%
9.9% - 30.9%
 
 
____________
(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 December 31, 2018 and 2017, respectively, are approximately $826 million and $392 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. These investments primarily consist of certain 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.

124


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


The fair value of private placement securities is determined by application of a matrix pricing model or a market comparable company value 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 December 31, 2018 and 2017, 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 December 31, 2018 and 2017, 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 Accounts assets classified as Level 3 in the table at December 31, 2018 and 2017, primarily consist of a private real estate fund and mortgage loans. A third-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. 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.
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

125


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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.
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 December 31, 2018 and 2017 for financial instruments not otherwise disclosed in Note 3 are presented in the table below.
 
Carrying
Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
December 31, 2018:
 
 
 
 
 
 
 
 
 
Mortgage loans on real estate
$
11,818

 
$
—

 
$
—

 
$
11,478

 
$
11,478

Loans to affiliates
600

 
—

 
603

 
—

 
603

Policyholders’ liabilities: Investment contracts
1,974

 
—

 
—

 
2,015

 
2,015

FHLBNY funding agreements
4,002

 
—

 
3,956

 
—

 
3,956

Policy loans
3,267

 
—

 
—

 
3,944

 
3,944

Short-term and long-term debt
—

 
—

 
—

 
—

 
—

Loans from affiliates
572

 
—

 
572

 
—

 
572

Separate Accounts liabilities
7,406

 
—

 
—

 
7,406

 
7,406

 
 
 
 
 
 
 
 
 
 
December 31, 2017:
 
 
 
 
 
 
 
 
 
Mortgage loans on real estate
$
10,935

 
$
—

 
$
—

 
$
10,895

 
$
10,895

Loans to affiliates
703

 
—

 
700

 
—

 
700

Policyholders’ liabilities: Investment contracts
2,068

 
—

 
—

 
2,170

 
2,170

FHLBNY funding agreements
3,014

 
—

 
3,020

 
—

 
3,020

Policy loans
3,315

 
—

 
—

 
4,210

 
4,210

Short-term and long-term debt
203

 
—

 
202

 
—

 
202

Separate Accounts liabilities
7,537

 
—

 
—

 
7,537

 
7,537

As our COLI policies are recorded at their cash surrender value, they are not required to be included in the table above. For further details of our accounting policies pertaining to COLI, see Note 2.
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 based on the appropriate U.S. Treasury rate with a like term to the remaining term of the loan to which a spread reflective of the risk premium associated with the specific 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-party appraisal and assessed for reasonableness. The Company’s short-term debt primarily includes commercial paper with short-term maturities and carrying 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.

126


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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.
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.
8)    INSURANCE LIABILITIES
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.
Liabilities for Variable Annuity Contracts with GMDB and GMIB Features and no NLG Feature
The change in the liabilities for variable annuity contracts with GMDB and GMIB features and no NLG feature are summarized in the tables below. The amounts for the direct contracts (before reinsurance ceded) and assumed contracts are reflected in the consolidated balance sheets in Future policy benefits and other policyholders’ 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 Years Ended December 31, 2018, 2017 and 2016
 
GMDB
 
GMIB
 
Direct
Ceded
 
Direct
Ceded
 
(in millions)
Balance at January 1, 2016
$
2,991

$
(1,430
)
 
$
3,886

$
(10,575
)
Paid guarantee benefits
(357
)
174

 
(281
)
230

Other changes in reserve
525

(302
)
 
203

31

Balance at December 31, 2016
3,159

(1,558
)
 
3,808

(10,314
)
Paid guarantee benefits
(354
)
171

 
(151
)
115

Other changes in reserve
1,249

(643
)
 
1,097

(289
)
Balance at December 31, 2017
4,054

(2,030
)
 
4,754

(10,488
)
Paid guarantee benefits
(394
)
70

 
(153
)
61

Other changes in reserve
994

1,853

 
(860
)
8,435

Balance at December 31, 2018
$
4,654

$
(107
)
 
$
3,741

$
(1,992
)

127


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Liabilities for Embedded and Freestanding Insurance Related Derivatives
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 contracts are considered embedded or freestanding insurance derivatives and are reported at fair value. For the fair value of the assets and liabilities associated with these embedded or freestanding insurance derivatives, see Note 7.
Account Values and Net Amount at Risk
Account Values and Net Amount at Risk (“NAR”) for direct variable annuity contracts in force with GMDB and GMIB features as of December 31, 2018 are presented in the following tables by guarantee type. For contracts with the GMDB feature, the NAR in the event of death is the amount by which the GMDB feature exceeds the related Account Values. For contracts with the GMIB feature, the NAR in the event of annuitization is the amount by which the present value of the GMIB benefits exceed the related 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 features may also offer GMIB guarantees in the same contract, the GMDB and GMIB amounts listed are not mutually exclusive.
Direct Variable Annuity Contracts with GMDB and GMIB Features
As of December 31, 2018
 
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
$
14,035

 
$
102

 
$
61

 
$
184

 
$
14,382

Separate Accounts
41,463

 
8,382

 
2,903

 
30,406

 
83,154

Total Account Values
$
55,498

 
$
8,484

 
$
2,964

 
$
30,590

 
$
97,536

 
 
 
 
 
 
 
 
 
 
Net Amount at Risk, gross
$
418

 
$
791

 
$
2,291

 
$
20,587

 
$
24,087

Net Amount at Risk, net of amounts reinsured
$
418

 
$
772

 
$
1,615

 
$
20,587

 
$
23,392

 
 
 
 
 
 
 
 
 
 
Average attained age of policyholders (in years)
51.4

 
67.0

 
73.6

 
69.0

 
55.3

Percentage of policyholders over age 70
10.0
%
 
43.0
%
 
65.5
%
 
49.9
%
 
18.8
%
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

 
$
251

 
$
270

Separate Accounts
—

 
—

 
19,407

 
33,428

 
52,835

Total Account Values
$
—

 
$
—

 
$
19,426

 
$
33,679

 
$
53,105

 
 
 
 
 
 
 
 
 
 
Net Amount at Risk, gross
$
—

 
$
—

 
$
994

 
$
9,156

 
$
10,150

Net Amount at Risk, net of amounts reinsured
$
—

 
$
—

 
$
309

 
$
8,268

 
$
8,577

 
 
 
 
 
 
 
 
 
 
Average attained age of policyholders (in years)
N/A

 
N/A

 
68.9

 
68.8

 
68.8

Weighted average years remaining until annuitization
N/A

 
N/A

 
1.7

 
0.5

 
0.6

Range of contractually specified interest rates
N/A

 
N/A

 
3% - 6%

 
3% - 6.5%

 
3% - 6.5%

For more information about the reinsurance programs of the Company’s GMDB and GMIB exposure, see “Reinsurance Agreements” in Note 10.

128


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Separate Account 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 part 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 features. The investment performance of the assets impacts the related Account Values and, consequently, the NAR 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 December 31,
 
2018
 
2017
 
GMDB
 
GMIB
 
GMDB
 
GMIB
 
(in millions)
Investment type:
 
 
 
 
 
 
 
Equity
$
35,541

 
$
15,759

 
$
41,658

 
$
19,676

Fixed income
5,173

 
2,812

 
5,469

 
3,110

Balanced
41,588

 
33,974

 
46,577

 
38,398

Other
852

 
290

 
968

 
314

Total
$
83,154

 
$
52,835

 
$
94,672

 
$
61,498

Hedging Programs for GMDB, GMIB, GIB and Other Features
Beginning in 2003, the Company established 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.
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 investment income (loss) in the period in which they occur, and may contribute to income (loss) volatility.
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.
The change in the liabilities for NLG liabilities, reflected in the General Account in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets is summarized in the table below:
 
Direct Liability
 
Reinsurance Ceded
 
Net
 
(in millions)
Balance at January 1, 2016
$
1,144

 
$
(510
)
 
$
634

Other changes in reserves
38

 
(96
)
 
(58
)
Balance at December 31, 2016
1,182

 
(606
)
 
576

Paid guarantee benefits
(24
)
 
—

 
(24
)
Other changes in reserves
(466
)
 
(58
)
 
(524
)
Balance at December 31, 2017
692

 
(664
)
 
28


129


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
Direct Liability
 
Reinsurance Ceded
 
Net
 
(in millions)
Paid guarantee benefits
(23
)
 
—

 
(23
)
Other changes in reserves
118

 
(69
)
 
49

Balance at December 31, 2018
$
787

 
$
(733
)
 
$
54


9)    REVENUE RECOGNITION
See “Revenue Recognition” in Note 2 for a description of the revenues presented in the table below. The adoption of ASC 606 had no material impact on revenue recognition in 2018. The table below presents the revenues recognized for the years ended December 31, 2018, 2017 and 2016, disaggregated by category:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Investment management, advisory and service fees:
 
 
 
 
 
Base fees
$
728

 
$
720

 
$
674

Distribution services
301

 
287

 
277

Total investment management and service fees
$
1,029

 
$
1,007

 
$
951

 
 
 
 
 
 
Other income
$
33

 
$
35

 
$
23

For revenue related to AB, see Note 19.
10)    REINSURANCE AGREEMENTS
The Company assumes and cedes reinsurance with other insurance companies. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Ceded reinsurance does not relieve the originating insurer of liability. The following table summarizes the effect of reinsurance:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
 
 
(in millions)
 
 
Direct premiums
$
836

 
$
880

 
$
850

Reinsurance assumed
186

 
195

 
206

Reinsurance ceded
(160
)
 
(171
)
 
(176
)
Net premiums
$
862

 
$
904

 
$
880

Policy charges and fee income ceded
$
467

 
$
718

 
$
640

Policyholders’ benefits ceded
$
592

 
$
694

 
$
942

Ceded Reinsurance
The Company reinsures most of its new variable life, UL and term life policies on an excess of retention basis. The Company generally retains on a per life basis up to $25 million for single lives and $30 million for joint lives with the excess 100% reinsured. The Company also reinsures risk on certain substandard underwriting risks and in certain other cases.
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

130


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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.
At December 31, 2018 and 2017, the Company had reinsured with non-affiliates in the aggregate approximately 2.9% and 3.5%, respectively, of its current exposure to the GMDB obligation on annuity contracts in-force and, subject to certain maximum amounts or caps in any one period, approximately 15.5% and 16.8% of its current liability exposure, respectively, resulting from the GMIB feature. For additional information, see Note 8 .
Based on management’s estimates of future contract cash flows and experience, the estimated net fair values of the ceded GMIB reinsurance contracts, considered derivatives were $1,991 million and $10,488 million at December 31, 2018 and 2017, respectively. The estimated fair values decreased $8,497 million and $268 million during 2018 and 2016, respectively, and increased $174 million during 2017.
At December 31, 2018 and 2017, third-party reinsurance recoverables related to insurance contracts amounted to $2,243 million and $2,420 million, respectively. Additionally, $1,689 million and $1,882 million of the amounts due from reinsurers related to two specific reinsurers, Zurich Insurance Company Ltd. (AA - rating by S&P), and Paul Revere Life Insurance Company (A- rating by S&P).
Reinsurance payables related to insurance contracts were $113 million and $134 million, at December 31, 2018 and 2017, respectively.
The Company cedes substantially all of its group health business to a third-party insurer. Insurance liabilities ceded totaled $62 million and $71 million at December 31, 2018 and 2017, respectively.
The Company also cedes a portion of its extended term insurance and paid-up life insurance and substantially all of its individual disability income business through various coinsurance agreements.
Assumed Reinsurance
In addition to the sale of insurance products, the Company currently acts as a professional retrocessionaire by assuming risk from professional reinsurers. The Company assumes accident, life, health, aviation, special risk and space risks by participating in or reinsuring various reinsurance pools and arrangements. Reinsurance assumed reserves were $712 million and $716 million at December 31, 2018 and 2017, respectively.
For reinsurance agreements with affiliates, see “Related Party Transactions” in Note 12.
11)    LONG-TERM DEBT
Disposition of Real Estate Joint Ventures
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 $202 million of long-term debt on the Company’s balance sheet for the year ended December 31, 2018.
12)    RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party in making financial or operating decisions. The Company has entered into a number of related party transactions with AXA and its subsidiaries that are not part of the Company (collectively, “AXA Affiliates”) and other related parties that are described herein.
Since transactions with related parties may raise potential or actual conflicts of interest between the related party and the Company, the Company is subject to Holdings’ related party transaction policy which requires certain related party transactions to be reviewed and approved by independent Audit Committee members.

131


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Cost Sharing and General Service Agreements 
In the second quarter of 2018, AXA Equitable entered into a general services agreement with Holdings whereby AXA Equitable will benefit from the services received by Holdings from AXA Affiliates for a limited period following the Holdings IPO under a transition services agreement. The general services agreement with Holdings replaces existing cost-sharing and general service agreements with various AXA Affiliates. AXA Equitable continues to provide services to Holdings and various AXA Affiliates under a separate existing general services agreement with Holdings. Costs allocated to the Company from Holdings totaled $138 million for the year ended December 31, 2018 and are allocated based on cost center tracking of expenses. The cost centers are approved once a year and are updated based on business area needs throughout the year.
Loans to Affiliates:
Affiliate Loans
On April 20, 2018, AXA Equitable made a loan of $800 million to Holdings with an interest rate of 3.69% and maturing on April 20, 2021. Holdings repaid $200 million of the note on December 21, 2018. The unpaid principal balance of the note as of December 31, 2018 is $600 million.
In September 2007, AXA issued a $700 million 5.7% Senior Unsecured Note to the Company. In January 2018, AXA pre-paid $50 million of the note. In April 2018, AXA pre-paid the remaining unpaid principal balance of this note.
Senior Surplus Notes
On December 28, 2018, AXA Equitable, issued a $572 million senior surplus note due December 28, 2019 to Holdings, which bears interest at a fixed rate of 3.75%, payable semi-annually. The surplus note is intended to have priority in right of payments and in all other respects to any and all other surplus notes issued by AXA Equitable at any time. AXA Equitable repaid this note on March 5, 2019.
Affiliate fees, revenue and expenses
Investment management and service fees and expenses
AXA Equitable FMG, a subsidiary of AXA Equitable, provides investment management and administrative services to EQAT, VIP Trust, 1290 Funds and Other AXA Trusts, all of which are considered related parties. Investment management and service fees earned are calculated as a percentage of assets under management and are recorded as revenue as the related services are performed.
AXA Investment Managers Inc. (“AXA IM”) and AXA Rosenberg Investment Management LLC (“AXA Rosenberg”) provide sub-advisory services with respect to certain portfolios of EQAT, VIP Trust and the Other AXA Trusts. Also, AXA IM and AXA Real Estate Investment Managers (“AXA REIM”) manage certain General Account investments. Fees paid to these affiliates are based on investment advisory service agreements with each affiliate.
Effective December 31, 2018, AXA Equitable transferred its interest in ABLP, AB Holdings and the General Partner to a newly formed subsidiary and distributed the shares of the subsidiary to its direct parent which subsequently distributed the shares to Holdings (the “AB Business Transfer”). Accordingly, AB’s related party transactions with AXA Affiliates and mutual funds sponsored by AB are now reflected as a discontinued operation in the Company’s consolidated financial statements for all periods presented. Investment management and other services provided by AB to mutual funds sponsored by AB prior to the AB Business Transfer will continue based upon the Company’s business needs. See Note 19 for further details of the AB Business Transfer and the discontinued operation.
Affiliated distribution revenue and expenses
AXA Distributors receives commissions and fee revenue from MONY America for sales of its insurance products. The commissions and fees earned from MONY America are based on the various selling agreements.
AXA Equitable pays commissions and fees to AXA Distribution Holding Corporation and its subsidiaries (“AXA Distribution”) for sales of insurance products. The commissions and fees paid to AXA Distribution are based on various selling agreements.

132


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Insurance related transactions
Prior to April 2018, AXA Equitable ceded to AXA RE Arizona, an indirect, wholly owned subsidiary of Holdings, a (i) 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”), (ii) 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, and (iii) 90% quota share of level premium term insurance issued by AXA Equitable 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 on or after June 1, 2003 through June 30, 2007.
On April 12, 2018, AXA Equitable completed the unwind of the reinsurance previously provided to AXA Equitable by AXA RE Arizona. Accordingly, all of the business previously ceded to AXA RE Arizona, with the exception of the GMxB Business, was novated to EQ AZ Life Re Company (“EQ AZ Life Re”), a newly formed captive insurance company organized under the laws of Arizona, which is an indirect wholly owned subsidiary of Holdings. Following the novation of business to EQ AZ Life Re, AXA RE Arizona was merged with and into AXA Equitable. Following AXA RE Arizona’s merger with and into AXA Equitable, the GMxB Business is not subject to any new internal or third-party reinsurance arrangements, though in the future AXA Equitable may reinsure the GMxB Business with third parties.
AXA RE Arizona novated the Life Business from AXA RE Arizona to EQ AZ Life Re as part of the GMxB Unwind. As a result, EQ AZ Life Re reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under UL insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007 and the Excess Risks.
The GMxB Unwind was considered a pre-existing relationship required to be effectively settled at fair value. The loss relating to this relationship resulted from the settlement of the reinsurance contracts at fair value and the write-off of previously recorded assets and liabilities related to this relationship recorded in the Company’s historical accounts. The pre-tax loss recognized in the second quarter of 2018 was $2.6 billion ($2.1 billion net of tax). The Company wrote-off a $1.8 billion deferred cost of reinsurance asset which was previously reported in Other assets. Additionally, the remaining portion of the loss was determining by calculating the difference between the fair value of the assets received compared to the fair value of the assets and liabilities already recorded within the Company’s consolidated financial statements. The Company’s primary assets previously recorded were reinsurance recoverables, including the reinsurance recoverable associated with GMDB business. There was an approximate $400 million difference between the fair value of the GMDB recoverable compared to its carrying value which is accounted for under ASC 944.  
The assets received and the assets removed were as follows:        
 
As of April 12, 2018
 
(in millions)
 
Assets Received
Assets Removed
Assets at fair value:
 
 
Fixed income securities
$
7,083

 
Short-term investments
205

 
Money market funds
2

 
Accrued interest
43

 
Derivatives
282

 
Cash and cash equivalents
1,273

 
 Total
$
8,888

 
 
 
 
Deferred cost of reinsurance asset
 
$
1,839

GMDB ceded reserves
 
2,317

GMIB reinsurance contract asset
 
7,463

Payable to AXA RE Arizona
 
270

Total
 
$
11,889


133


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Significant non-cash transactions involved in the unwind of the reinsurance previously provided to AXA Equitable Life by AXA RE Arizona included: (a) the increase in total investments includes non-cash activities of $7,615 million for assets received related to the recapture transaction, (b) cancellation of the $300 million surplus note between the Company and AXA RE Arizona, and (c) settlement of the intercompany receivables/payables to AXA RE Arizona of $270 million. In addition, upon merging the remaining assets of AXA Re Arizona into AXA Equitable, $1.2 billion of deferred tax assets were recorded on the balance sheet through an adjustment to Capital in excess of par value.
The reinsurance arrangements with EQ AZ Life Re provide important capital management benefits to AXA Equitable. At December 31, 2018, the Company’s GMIB reinsurance asset with EQ AZ Life Re had carrying values of $259 million and is reported in Guaranteed minimum income benefit reinsurance asset, at fair value in the consolidated balance sheets. Ceded premiums and policy fee income in 2018 totaled approximately $100 million. Ceded claims paid in 2018 were $78 million.
Prior to April 2018, AXA Equitable reinsured to AXA RE Arizona, a 100% quota share of all liabilities for variable annuities with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. AXA RE Arizona also reinsured a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under UL insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. The reinsurance arrangements with AXA RE Arizona provided important capital management benefits to AXA Equitable. At December 31, 2017, the Company’s GMIB reinsurance asset with AXA RE Arizona had a carrying value of $8,594 million and was reported in Guaranteed minimum income benefit reinsurance asset, at fair value in the consolidated balance sheets. Ceded premiums and policy fee income in 2017 and 2016 totaled approximately $454 million and $447 million, respectively. Ceded claims paid in 2017 and 2016 were $213 million and $65 million, respectively.
The Company receives statutory reserve credits for reinsurance treaties with EQ AZ Life Re to the extent that EQ AZ Life Re holds assets in an irrevocable trust (the “Trust”). At December 31, 2018, EQ AZ Life Re held assets of $1.6 billion in the Trust, and had letters of credit of $2.5 billion, which are guaranteed by Holdings. Under the reinsurance transactions, EQ AZ Life Re is permitted to transfer assets from the Trust under certain circumstances. The level of statutory reserves held by EQ AZ Life Re fluctuate based on market movements, mortality experience and policyholder behavior. Increasing reserve requirements may necessitate that additional assets be placed in trust and/or securing additional letters of credit, which could adversely impact EQ AZ Life Re’s liquidity.
AXA Global Life retrocedes a quota share portion of certain life and health risks of various AXA Affiliates to AXA Equitable on a one-year term basis. Also, AXA Life Insurance Company Ltd. cedes a portion of its variable deferred annuity business to AXA Equitable.
Premiums earned in 2018, 2017 and 2016 were $20 million, $20 million and $20 million, respectively. Claims and expenses paid in 2018, 2017 and 2016 were $8 million, $5 million, and $6 million, respectively.
Reinsurance Ceded
AXA Equitable cedes a portion of its life, health and catastrophe insurance business through reinsurance agreements to AXA Global Life, an affiliate. AXA Global Life, in turn, retrocedes a quota share portion of these risks prior to 2008 to AXA Equitable on a one-year term basis.
AXA Equitable has entered into a Life Catastrophe Excess of Loss Reinsurance Agreement with a number of subscribing reinsurers, including AXA Global Life. AXA Global Life participates in 5% of the pool, pro-rata, across the upper and lower layers.
Premiums and expenses paid for the above agreements in 2018, 2017 and 2016 were $4 million, $4 million, and $4 million, respectively.
Other Transactions
On October 1, 2018, AXA Financial merged with and into its direct parent, Holdings, with Holdings continuing as the surviving entity. As a result, Holdings assumed AXA Financial’s obligations with respect to the Company, including obligations related to certain benefit plans.

134


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


In March 2018, AXA Equitable 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 $202 million of long-term debt on the Company’s balance sheet for the year ended December 31, 2018.
In 2016, AXA Equitable and Saum Sing LLC (“Saum Sing”), an affiliate, formed Broad Vista Partners LLC (“Broad Vista”), of which AXA Equitable owns 70% and Saum Sing owns 30%. On June 30, 2016, Broad Vista entered into a real estate joint venture with a third party and AXA Equitable invested approximately $25 million.
Insurance Coverage Provided by XL Catlin
On September 12, 2018, AXA Group acquired XL Catlin. Prior to the acquisition, AXA Equitable had ceded part of our disability income business to XL Catlin and as of December 31, 2018, the reserves ceded were $93 million.
Expenses and Revenues for 2018, 2017 and 2016
The table below summarizes the expenses reimbursed to/from the Company and the fees received/paid by the Company in connection with certain services described above for the years ended December 31, 2018, 2017 and 2016.
 
Years ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Expenses paid or accrued for:
 
 
 
 
 
Paid or accrued commission and fee expenses for sale of insurance products by AXA Distribution
$
613

 
$
608

 
$
587

General services provided by AXA Affiliates
109

 
186

 
188

Investment management services provided by AXA IM, AXA REIM and AXA Rosenberg
2

 
5

 
2

Total
$
724

 
$
799

 
$
777

 
 
 
 
 
 
Revenue received or accrued for:
 
 
 
 
 
Investment management and administrative services provided to EQAT, VIP Trust, 1290 Funds and Other AXA Trusts
$
727

 
$
720

 
$
674

General services provided to AXA Affiliates
463

 
439

 
497

Amounts received or accrued for commissions and fees earned for sale of MONY America’s insurance products
44

 
45

 
43

Total
$
1,234

 
$
1,204

 
$
1,214

13)    EMPLOYEE BENEFIT PLANS
401(k)
AXA Equitable 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 $19 million, $15 million and $16 million for the years ended December 31, 2018, 2017 and 2016, respectively. In December 2018 the Company announced a 3% Company match for the AXA Equitable 401(k) Plan beginning January 1, 2019. This match will supplement the existing Company contribution on eligible compensation.
Pension plan
AXA Equitable also sponsors the AXA Equitable Retirement Plan (the “AXA Equitable QP”), a frozen qualified defined benefit pension plan covering its eligible employees and financial professionals. This pension plan is non-contributory and its benefits are generally based on a cash balance formula and/or, for certain participants, years of service and average income over a specified period in the plan. Effective December 31, 2015, primary liability for the obligations of AXA Equitable Life under the AXA Equitable Life QP was transferred from AXA Equitable Life to AXA Financial, and upon the merger of AXA Financial into Holdings, Holdings assumes primary liability under terms

135


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


of an Assumption Agreement. AXA Equitable Life remains secondarily liable for its obligations under the AXA Equitable Life QP and would recognize such liability in the event Holdings does not perform under the terms of the Assumption Agreement.
The AXA Equitable QP is not governed by a collective-bargaining agreement and is not under a financial improvement plan or a rehabilitation plan. For the years ended December 31, 2018, 2017 and 2016, expenses related to the plan were $60 million, $27 million and $31 million, respectively.
The following table presents the funded status of the plan.
 
 
As of December 31,
 
 
2018
 
2017
 
 
(in millions)
Legal Name of Plan: AXQ Equitable Retirement Plan
EIN# 13-5570651
 
 
 
Total Plan Assets
 
$
1,993

 
$
2,325

Accumulated Benefit Obligation
 
$
2,039

 
$
2,389

 
 
 
 
 
Funded Status
 
97.8
%
 
97.3
%

In addition to the AXA Equitable QP, AXA Equitable Life sponsors a non-qualified retirement plan, a medical and life retiree plan, and a post employment plan. The expenses related to these plans were $70 million, $37 million and $44 million for the years ended December 31, 2018, 2017 and 2016, respectively.
14)    SHARE-BASED COMPENSATION PROGRAMS
Compensation costs for 2018, 2017 and 2016 for share-based payment arrangements as further described herein are as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Performance Shares (1)
$
12

 
$
18

 
$
17

Stock Options
2

 
1

 
1

AXA Shareplan
—

 
9

 
14

Restricted Stock Unit Awards (2)
16

 
2

 
—

Other Compensation Plans (3)
—

 
—

 
1

Total Compensation Expenses
$
30

 
$
30

 
$
33

____________
(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 million adjustment for awards in 2018 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.
In 2017 and prior years, equity awards for employees and directors were available under the umbrella of AXA’s global equity program. Accordingly, equity awards granted in 2017 and prior years were linked to AXA’s stock.
Following the IPO, Holdings has granted equity awards under the AXA Equitable Holdings, Inc. 2018 Omnibus Incentive Plan (the “Omnibus Plan”) which was adopted by Holdings on April 25, 2018. Awards under the Omnibus Plan are linked to Holdings’ common stock. As of December 31, 2018, the common stock reserved and available for issuance under the Omnibus Plan was 5.5 million shares.
2018 Equity Awards

136


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


All 2018 equity awards for Company employees and directors were granted under the Omnibus Plan. Accordingly, all grants discussed in this section will be settled in shares of Holdings’ common stock. As described below, Holdings made various grants of equity awards linked to the value of Holdings’ common stock in 2018. For awards with graded vesting schedules and service-only vesting conditions, including restricted stock units (“RSUs”) and other forms of share-based payment awards, the Company applies a straight-line expense attribution policy for the recognition of compensation cost. Actual forfeitures with respect to the 2018 grants were considered immaterial in the recognition of compensation cost.
Transaction Incentive Awards
On May 9, 2018, coincident with the IPO, Holdings granted one-time “Transaction Incentive Awards” to executive officers and certain other Company employees in the form of 0.6 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% of the Performance Units may still vest based on five years of continued service and the remaining Performance Units will be forfeited. The $6 million aggregate grant-date fair value of the 0.3 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 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 million compensation expense will be recognized. In 2018, the Company recognized compensation expense associated with the Transaction Incentive Awards of approximately $6 million.
Special IPO Grant
Also, on May 9, 2018, Holdings made a grant of 0.2 million Holdings RSUs to Company employees , or 50 restricted stock units to each eligible individual, that cliff vested 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 $5 million has been recognized as compensation expense over the six-month service period ending November 9, 2018.
Annual Awards Under 2018 Equity Program
Annual awards under Holdings’ 2018 equity program consisted of a mix of equity vehicles including Holdings RSUs, Holdings stock options and Holdings performance shares. If Holdings pays any ordinary dividend in cash, all outstanding Holdings RSUs and performance shares will accrue dividend equivalents in the form of additional Holdings RSUs or performance shares to be settled or forfeited consistent with the terms of the related award.
Holdings RSUs
On May 17, 2018, Holdings granted 0.8 million Holdings RSUs to Company 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 closing price of the Holdings share on the grant date, and the resulting $18 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.
Holdings Stock Options
On June 11, 2018, Holdings granted 0.9 million Holdings stock options to Company 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-

137


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


free interest rate of 2.83%. The total fair value of these options of approximately $4 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 2018, the Company recognized expense associated with the June 11, 2018 option grant of approximately $2 million.
Holdings Performance Shares
On May 17, 2018, Holdings granted 0.4 million unearned Holdings performance shares to Company employees, subject to performance conditions and a cliff-vesting term ending March 1, 2021. The performance shares consist of two distinct tranches; one based on the Company’s return-on-equity targets (the “ROE Performance Shares”) and the other based on the Holdings’ 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 the 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 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 2018, the Company recognized expense associated with the TSR Performance Share awards of approximately $2 million.
Prior Equity Award Grants and Settlements
Prior to adoption of the Omnibus Plan, Company employees were granted AXA ordinary share options under the AXA Stock Option Plan for AXA Financial Employees and Associates (the “Stock Option Plan”). There is no limitation in the Stock Option Plan on the number of shares that may be issued pursuant to option or other grants.
Employees were also granted AXA performance shares under the AXA International Performance Shares Plan established for each year (the “Performance Share Plan”).
The fair values of these prior awards are measured at the grant date by reference to the closing price of the AXA ordinary share, and the result, as adjusted for achievement of performance targets and pre-vesting forfeitures, generally is attributed over the shorter of the requisite service period, the performance period, if any, or to the date at which retirement eligibility is achieved and subsequent service no longer is required for continued vesting of the award.
2017 Performance Shares Grant
On June 21, 2017, under the terms of the Performance Share Plan, AXA awarded approximately 1.7 million unearned performance shares to Company employees. The extent to which 2017-2019 cumulative performance targets measuring the performance of AXA and the Company are achieved will determine the number of performance shares earned, which may vary between 0% and 130% of the number of performance shares at stake. The performance shares earned during this performance period will vest and be settled on the fourth anniversary of the award date. The plan will settle in AXA ordinary shares to all participants. In 2018 and 2017, the expense associated with the June 21, 2017 grant of performance shares was approximately $4 million and $9 million, respectively.
2016 Performance Shares Grant
On June 6, 2016, under the terms of the Performance Share Plan, AXA awarded approximately 1.9 million unearned performance shares to Company employees of AXA Equitable. The extent to which 2017-2019 cumulative performance targets measuring the performance of AXA and the Company are achieved will determine the number of performance shares earned, which may vary between 0% and 130% of the number of performance shares at stake. The performance shares earned during this performance period will vest and be settled on the fourth anniversary of the award date. The plan will settle in AXA ordinary shares to all participants. In 2018, 2017 and 2016, the expense associated with the June 6, 2016 grant of performance shares was approximately $4 million, $4 million and $10 million, respectively.
Settlement of 2014 Grant in 2017

138


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


On March 24, 2017, share distributions totaling of approximately $21 million were made to active and former AXA Equitable employees in settlement of 2.3 million performance shares earned under the terms of the AXA Performance Share Plan 2014.
Other Grants
Prior to the IPO, non-officer directors were granted restricted AXA ordinary shares (prior to 2011, AXA ADRs) and unrestricted AXA ordinary shares (prior to March 15, 2010, AXA ADRs) annually under The Equity Plan for Directors.
AXA restricted stock units (“AXA RSUs”) were also granted to certain Company executives. The AXA RSUs are phantom AXA ordinary shares that, once vested, entitle the recipient to a cash payment based on the average closing price of the AXA ordinary share over the twenty trading days immediately preceding the vesting date.
Summary of Stock Option Activity
A summary of activity in the AXA and Holdings option plans during 2018 follows:
 
Options Outstanding
 
EQH Shares
 
AXA Ordinary Shares
 
AXA ADRs (2)
 
Number
Outstanding  
(In 000’s)
 
Weighted
Average
Exercise
Price
 
Number
Outstanding  
(In 000’s)
 
Weighted
Average
Exercise
Price
 
Number
Outstanding
(In 000’s)
 
Weighted
Average
Exercise
Price
Options Outstanding at January 1, 2018
—

 
$
—

 
3,653

 
€
17.36

 
20

 
$
20.98

Options granted
869

 
$
21.34

 
—

 
€
—

 
—

 
$
—

Options exercised
—

 
$
—

 
(337
)
 
€
11.80

 
—

 
$
—

Options forfeited, net
(35
)
 
$
21.34

 
—

 
€
—

 
—

 
$
—

Options expired
—

 
$
—

 
(707
)
 
€
17.45

 
(5
)
 
$
35.25

Options Outstanding at December 31, 2018
834

 
$
21.34

 
2,609

 
€
18.20

 
15

 
$
15.37

Aggregate Intrinsic Value (1)
 
 
$
—

 
 
 
€
2,383

 
 
 
$
151

Weighted Average Remaining Contractual Term (in years)
9.16

 
 
 
4.50

 
 
 
0.58

 
 
Options Exercisable at December 31, 2018
—

 
$
—

 
1,369

 
€
15.27

 
15

 
$
15.37

Aggregate Intrinsic Value (1)
 
 
$
—

 
 
 
€
7,698

 
 
 
$
151

Weighted Average Remaining Contractual Term (in years)
—

 
 
 
2.45

 
 
 
0.58

 
 
____________
(1)
Aggregate intrinsic value, presented in thousands, is calculated as the excess of the closing market price on December 31, 2018 of the respective underlying shares over the strike prices of the option awards. For awards with strike prices higher then market prices, intrinsic value is shown as zero.
(2)
AXA ordinary shares will be delivered to participants in lieu of AXA ADRs at exercise or maturity.
For the purpose of estimating the fair value of stock option awards, the Company applies the Black-Scholes model and attributes the result over the requisite service period using the graded-vesting method. A Monte-Carlo simulation approach was used to model the fair value of the conditional vesting feature of the awards of options to purchase Holdings and AXA ordinary shares. Shown below are the relevant input assumptions used to derive the fair values of options awarded in 2018, 2017 and 2016, respectively.
 
EQH Shares
 
AXA Ordinary Shares (1)
 
2018
 
2018
 
2017
 
2016
Dividend yield
2.44
%
 
NA
 
6.53
%
 
6.49
%
Expected volatility
25.40
%
 
NA
 
25.05
%
 
26.6
%
Risk-free interest rates
2.83
%
 
NA
 
0.59
%
 
0.33
%
Expected life in years
9.7

 
NA
 
8.8

 
8.1

Weighted average fair value per option at grant date
$
4.61

 
NA
 
$
2.01

 
$
2.06


139


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


____________
(1)
There were no options to buy AXA Ordinary Shares awarded during 2018. As such, the input assumptions for 2018 are not applicable.

As of December 31, 2018, approximately $1 million of unrecognized compensation cost related to unvested stock option awards, net of estimated pre-vesting forfeitures, is expected to be recognized by the Company over a weighted average period of 2.2 years. As of December 31, 2018, approximately $3 million of unrecognized compensation cost related to Holdings unvested stock option awards, net of estimated pre-vesting forfeitures, is expected to be recognized by the Company over a weighted average period of 0.8 years.
Options
The fair value of AXA stock options is calculated using the Black-Scholes option pricing model. The expected AXA dividend yield is based on market consensus. AXA share price volatility is estimated on the basis of implied volatility, which is checked against an analysis of historical volatility to ensure consistency. The risk-free interest rate is based on the Euro Swap Rate curve for the appropriate term. The effect of expected early exercise is taken into account through the use of an expected life assumption based on historical data.
Restricted Awards
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 2018, 2017 and 2016, respectively, the Company recognized compensation costs of $16 million, $2 million and $0 million for outstanding restricted stock and AXA RSUs. The fair values of awards made under these programs are measured at the grant date by reference to the closing price of the unrestricted shares, and the result generally is attributed over the shorter of the requisite service period, the performance period, if any, or to the date at which retirement eligibility is achieved and subsequent service no longer is required for continued vesting of the award. Remeasurements of fair value for subsequent price changes until settlement are made only for AXA RSUs. At December 31, 2018, approximately 2.3 million restricted Holdings and AXA ordinary share awards remain unvested. Unrecognized compensation cost related to these awards totaled approximately $19 million, net of estimated pre-vesting forfeitures, and is expected to be recognized over a weighted average period of 1.2 years.
The following table summarizes restricted Holdings share and AXA ordinary share activity for 2018.
 
Shares of Holdings Restricted Stock
(in thousands)
 
Weighted Average Grant Date 
Fair Value
 
Shares of AXA Restricted Stock
(in thousands)
 
Weighted Average Grant Date Fair Value
Unvested as of January 1, 2018
—

 
$
—

 
84

 
$
21.07

Granted
1,696

 
$
20.83

 
—

 
$
—

Cancelled
56

 
$
21.21

 
—

 
$
26.64

Vested
381

 
$
21.09

$
—

36

 
$
21.99

Unvested as of December 31, 2018
1,259

 
$
21.00

$
—

48

 
$
20.38

Employee Stock Purchase Plans
AXA Shareplan 2017
In 2017, eligible employees of AXA Equitable were offered the opportunity to purchase newly issued AXA ordinary shares, subject to plan limits, under the terms of AXA Shareplan, AXA’s annual global stock purchase plan. Eligible employees could have reserved a share purchase during the reservation period from August 28, 2017 through September 8, 2017 and could have canceled their reservation or elected to make a purchase for the first time during the retraction/subscription period from October 13, 2017 through October 17, 2017. The U.S. dollar purchase price was determined by applying the U.S. dollar/Euro forward exchange rate on October 11, 2017 to the discounted formula subscription price in Euros. Investment Option A permitted participants to purchase AXA ordinary shares at a 20% formula discounted price of €20.19 per share. Investment Option B permitted participants to purchase AXA ordinary shares at an 8.98% formula discounted price of €22.96 per share on a leveraged basis with a guaranteed return of initial investment plus a portion of any appreciation in the undiscounted value of the total shares purchased. For purposes of determining the amount of any appreciation, the AXA ordinary share price will be measured over a fifty-

140


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


two week period preceding the scheduled end date of AXA Shareplan 2018, which is July 1, 2022. All subscriptions became binding and irrevocable on October 17, 2017.
The Company recognized compensation expense of $9 million and $14 million in the years ended December 31, 2017 and 2016 respectively, in connection with each respective year’s offering of AXA stock under the AXA Shareplan, representing the aggregate discount provided to AXA Equitable participants for their purchase of AXA stock under each of those plans, as adjusted for the post-vesting, five-year holding period. AXA Equitable participants in AXA Shareplan 2017 and 2016 primarily invested under Investment Option B for the purchase of approximately of 4 million and 6 million AXA ordinary shares, respectively.
Holdings Stock Purchase Plan
During 2018, Holdings introduced the AXA Equitable Holdings, Inc. Stock Purchase Program (“SPP”). Participants are able to contribute up to 100% of their eligible compensation and receive a matching contribution in cash equal to 15% of their payroll contribution, which will be used to purchase Holdings shares. Purchases will be made on the last trading day of each month at the prevailing market rate.
15)    INCOME TAXES
A summary of the income tax (expense) benefit in the consolidated statements of income (loss) follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Income tax (expense) benefit:
 
 
 
 
 
Current (expense) benefit
$
234

 
$
(6
)
 
$
(274
)
Deferred (expense) benefit
212

 
1,216

 
438

Total
$
446

 
$
1,210

 
$
164


The Federal income taxes attributable to consolidated operations are different from the amounts determined by multiplying the earnings before income taxes and noncontrolling interest by the expected Federal income tax rate of 21%, 35% and 35% for 2018, 2017 and 2016, respectively. The sources of the difference and their tax effects are as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Expected income tax (expense) benefit
$
311

 
$
(542
)
 
$
14

Noncontrolling interest
(1
)
 
—

 
—

Non-taxable investment income (loss)
104

 
241

 
173

Tax audit interest
(11
)
 
(6
)
 
(14
)
State income taxes
(1
)
 
(3
)
 
(6
)
Tax settlements/uncertain tax position release
—

 
221

 
—

Change in tax law
46

 
1,308

 
—

Other
(2
)
 
(9
)
 
(3
)
Income tax (expense) benefit
$
446

 
$
1,210

 
$
164


The Tax Cuts and Jobs Act (the “Tax Reform Act”) was enacted on December 22, 2017. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations where a company does not have the necessary information available to complete its accounting for certain income tax effects of the Tax Reform Act. In accordance with SAB 118, the Company determined reasonable estimates for certain effects of the Tax Reform Act and recorded those estimates as provisional amounts in the 2017 financial statements. The accounting for the income tax effects of the Tax Reform Act has been completed.
The components of change in tax law are as follows:

141


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


•
An income tax expense of $4 million from the revaluation of deferred tax assets and liabilities that existed at the time of enactment. The calculation of cumulative temporary differences has been refined.
•
An income tax expense of $13 million related to the decrease in federal tax benefit allowable for audit interest as a result of lower corporate tax rates.
•
An income tax benefit of $20 million to reverse the sequestration fee applied to a portion of accumulated minimum tax credits in the 2017 financial statements. The Internal Revenue Service has since clarified that refundable minimum tax credits are not subject to sequestration.
•
During the fourth quarter of 2018, the Company adopted the Internal Revenue Service’s directive related to the calculation of tax reserves for variable annuity contracts. As a result of adoption of the directive, the Company released audit interest accrued for uncertainties in the calculation of variable annuity tax reserves. The impact on the Company’s financial statements was a benefit of $43 million.
During the second quarter of 2017, the Company agreed to the Internal Revenue Service’s Revenue Agent’s Report for its consolidated 2008 and 2009 Federal corporate income tax returns. The impact on the Company’s financial statements and unrecognized tax benefits was a tax benefit of $221 million.
The components of the net deferred income taxes are as follows:
 
As of December 31,
 
2018
 
2017
 
Assets      
 
Liabilities      
 
Assets      
 
Liabilities      
 
(in millions)
Compensation and related benefits
$
47

 
$
—

 
$
47

 
$
—

Net operating loss
239

 
—

 
—

 
—

Reserves and reinsurance
—

 
32

 
—

 
83

DAC
—

 
864

 
—

 
821

Unrealized investment gains (losses)
123

 
—

 
—

 
298

Investments
670

 
—

 
—

 
997

Tax credits
314

 
—

 
387

 
—

Other
14

 
—

 
67

 
—

Total
$
1,407

 
$
896

 
$
501

 
$
2,199


The Company had $314 million and $387 million of AMT credits for the years ended December 31, 2018 and 2017, respectively, which are expected to be refunded or utilized against future taxable income.
A reconciliation of unrecognized tax benefits (excluding interest and penalties) follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Balance at January 1,
$
205

 
$
444

 
$
406

Additions for tax positions of prior years
98

 
28

 
38

Reductions for tax positions of prior years
(30
)
 
(234
)
 
—

Settlements with tax authorities
—

 
(33
)
 
—

Balance at December 31,
$
273

 
$
205

 
$
444

 
 
 
 
 
 
Unrecognized tax benefits that, if recognized, would impact the effective rate
$
202

 
$
172

 
$
329


The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. Interest and penalties included in the amounts of unrecognized tax benefits at December 31, 2018 and 2017 were $41 million and $23 million, respectively. For 2018, 2017 and 2016, respectively, there were $18 million, $(44) million and $15 million in interest expense (benefit) related to unrecognized tax benefits.

142


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


It is reasonably possible that the total amount of unrecognized tax benefits will change within the next 12 months due to the conclusion of IRS proceedings and the addition of new issues for open tax years. The possible change in the amount of unrecognized tax benefits cannot be estimated at this time.
As of December 31, 2018, tax years 2010 and subsequent remain subject to examination by the IRS.
16)    ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
AOCI represents cumulative gains (losses) on items that are not reflected in income (loss). The balances for the past three years follow:
 
December 31,
 
2018
 
2017
 
2016
 
(in millions)
Unrealized gains (losses) on investments (1)
$
(484
)
 
$
581

 
$
(44
)
Defined benefit pension plans (2)
(7
)
 
(51
)
 
(46
)
Total accumulated other comprehensive income (loss) from continuing operations
(491
)
 
530

 
(90
)
Less: Accumulated other comprehensive (income) loss attributable to non-controlling interest
—

 
68

 
86

Accumulated other comprehensive income (loss) attributable to AXA Equitable
$
(491
)
 
$
598

 
$
(4
)
____________
(1)
2018 includes a $86 million decrease to Accumulated other comprehensive loss from the impact of adoption of ASU 2018-02.
(2)
2018 includes a $3 million increase to Accumulated other comprehensive loss from the impact of adoption of ASU 2018-02.

The components of OCI for the years ended December 31, 2018, 2017 and 2016, net of tax, follow:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Change in net unrealized gains (losses) on investments:
 
 
 
 
 
Net unrealized gains (losses) arising during the year
$
(1,663
)
 
$
782

 
$
(178
)
(Gains) losses reclassified into net income (loss) during the year (1)
(4
)
 
8

 
2

Net unrealized gains (losses) on investments
(1,667
)
 
790

 
(176
)
Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other
437

 
(165
)
 
(57
)
Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of $(310), $244, and $(97))
(1,230
)
 
625

 
(233
)
Change in defined benefit plans:
 
 
 
 
 
Less: Reclassification adjustments to Net income (loss) for: (2)
 
 
 
 
 
Amortization of net (gains) losses included in net periodic cost
(4
)
 
(5
)
 
(3
)
Change in defined benefit plans (net of deferred income tax expense (benefit) of $0, $(2) and $(2))
(4
)
 
(5
)
 
(3
)
Total other comprehensive income (loss), net of income taxes from continuing operations
(1,234
)
 
620

 
(236
)
Other comprehensive income (loss) from discontinued operations, net of income taxes
—

 
(18
)
 
17

Other comprehensive income (loss) attributable to AXA Equitable
$
(1,234
)
 
$
602

 
$
(219
)
____________
(1)
See “Reclassification adjustments” in Note 3. Reclassification amounts presented net of income tax expense (benefit) of $(1) million, $(5) million and $(1) million for the years ended December 31, 2018, 2017 and 2016, respectively.
(2)
These AOCI components are included in the computation of net periodic costs (see “Employee Benefit Plans” in Note 13). Reclassification amounts presented net of income tax expense (benefit) of $0 million, $2 million and $2 million for the years ended December 31, 2018, 2017 and 2016, respectively.


143


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


Investment gains and losses reclassified from AOCI to net 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 Net 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 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.
17)    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 December 31, 2018, 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 $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

144


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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 August 2015, a 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 lawsuit is a putative class action on behalf of all persons who purchased variable annuities from AXA Equitable, 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 September 2018, the Second Circuit issued its mandate, following AXA Equitable Life’s notification to the court 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 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. A second putative class action was filed in Arizona in 2017 and consolidated with the Brach matter. The current consolidated amended class 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 seek; (a) compensatory damages, costs, and, pre- and post-judgment 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; and (c) injunctive relief and attorneys’ fees in connection with their statutory claims. Five other federal actions challenging the COI rate increase are also pending against AXA Equitable and have been coordinated with the Brach action for the purposes of pre-trial activities. They contain allegations similar to those in the Brach action as well as additional allegations for violations of various states’ consumer protection statutes and common law fraud. Two actions are also pending against AXA Equitable in New York state court. AXA Equitable is vigorously defending each of these matters.
Leases
The Company has entered into operating leases for office space and certain other assets, principally information technology equipment and office furniture and equipment. Future minimum payments under non-cancelable operating leases for 2019 and the four successive years are $81 million, $74 million, $69 million, $67 million, $63 million and $66 million thereafter. Minimum future sublease rental income on these non-cancelable operating leases for 2019 and the four successive years is $12 million, $12 million, $12 million, $12 million, $12 million and $0 million thereafter.
Rent expense, which is amortized on a straight-line basis over the life of the lease, was $82 million, $78 million, $72 million, respectively, for the years ended December 31, 2018, 2017 and 2016, net of sublease income of $12 million, $16 million, $13 million, respectively, for the years ended December 31, 2018, 2017 and 2016.
Obligations under Funding Agreements
Entering into FHLBNY membership, borrowings and funding agreements requires the ownership of FHLBNY stock and the pledge of assets as collateral. AXA Equitable has purchased FHLBNY stock of $190 million and pledged collateral with a carrying value of $6.1 billion, as of December 31, 2018. AXA Equitable issues short-term funding agreements to the FHLBNY and uses the funds for asset liability and cash management purposes. AXA Equitable issues long-term funding agreements to the FHLBNY and uses the funds for spread lending purposes. Funding agreements are reported in Policyholders’ account balances in the consolidated balance sheets. For other instruments used for asset/liability and cash management purposes, see “Derivative and offsetting assets and liabilities” included in Note 3. The table below summarizes the Company’s activity of funding agreements with the FHLBNY.

145


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
Outstanding balance at end of period
 
Maturity of outstanding balance
 
Issued during the period
 
Repaid during the period
 
(in millions)
December 31, 2018:
 
 
 
 
 
 
 
Short-term FHLBNY funding agreements
$
1,490

 
Less than one month
 
$
7,980

 
$
6,990

Long-term FHLBNY funding agreements
1,621

 
Less than four years
 
—

 
—

 
98

 
Less than five years
 
—

 
—

 
781

 
Greater than five years
 
—

 
—

Total long-term funding agreements
2,500

 
 
 
—

 
—

Total FHLBNY funding agreements at December 31, 2018 (1)
$
3,990

 
 
 
$
7,980

 
$
6,990

 
 
 
 
 
 
 
 
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 four years
 
324

 

 
377

 
Less than five years
 
303

 

 
879

 
Greater than five years
 
135

 

Total long-term funding agreements
2,500

 
 
 
762

 
$
—

Total FHLBNY funding agreements at December 31, 2017 (1)
$
3,000

 
 
 
$
6,762

 
$
6,000

____________
(1)
The $11 million and $14 million difference between the funding agreements carrying value shown in fair value table for 2018 and 2017, respectively, reflects the remaining amortization of a hedge implemented and closed, which locked in the funding agreements borrowing rates.
Guarantees and Other Commitments
The Company provides certain guarantees or commitments to affiliates and others. At December 31, 2018, these arrangements include commitments by the Company to provide equity financing of $927 million (including $280 million with affiliates and $12 million on consolidated VIEs) to certain limited partnerships and real estate joint ventures under certain conditions. Management believes the Company will not incur material losses as a result of these commitments.
AXA Equitable is the obligor under certain structured settlement agreements it had entered into with unaffiliated insurance companies and beneficiaries. To satisfy its obligations under these agreements, AXA Equitable owns single premium annuities issued by previously wholly owned life insurance subsidiaries. AXA Equitable has directed payment under these annuities to be made directly to the beneficiaries under the structured settlement agreements. A contingent liability exists with respect to these agreements should the previously wholly owned subsidiaries be unable to meet their obligations. Management believes the need for AXA Equitable to satisfy those obligations is remote.
The Company had $18 million of undrawn letters of credit related to reinsurance at December 31, 2018. The Company had $606 million of commitments under existing mortgage loan agreements at December 31, 2018.
Pursuant to certain assumption agreements (the “Assumption Agreements”), AXA Financial legally assumed primary liability from AXA Equitable for all current and future liabilities of AXA Equitable under certain employee benefit plans that provide participants with medical, life insurance and deferred compensation benefits as well as under the AXA Equitable Retirement plan, a frozen qualified pension plan. AXA Equitable remains secondarily liable for its obligations under these plans and would recognize such liabilities in the event AXA Financial does not perform under the terms of the Assumption Agreements. On October 1, 2018, AXA Financial merged with and into its direct parent, Holdings, with Holdings continuing as the surviving entity. See Note 1 for further information.
18)    INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
For 2018, 2017 and 2016, respectively, AXA Equitable’s statutory net income (loss) totaled $3,120 million, $748 million and $679 million. Statutory surplus, Capital stock and Asset Valuation Reserve (“AVR”) totaled $7.9 billion and $8.7 billion at December 31, 2018 and 2017, respectively. At December 31, 2018, AXA Equitable, in accordance

146


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


with various government and state regulations, had $55 million of securities on deposit with such government or state agencies.
In 2018, AXA Equitable Life paid to its direct parent which subsequently distributed such amount to Holdings an ordinary shareholder dividend of $1.1 billion. Also in 2018, AXA Equitable Life transferred its interests in ABLP, AB Holding and the General Partner to Alpha Units Holdings, Inc., a newly formed subsidiary, and distributed the shares of that subsidiary to its direct parent which subsequently distributed such shares to Holdings (the “AB Ownership Transfer”). The AB Ownership transfer was considered an extraordinary dividend of $1.7 billion representing the equity value of Alpha Units Holdings, Inc. 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. The surplus note was repaid on March 5, 2019.
In 2017, AXA Equitable Life did not pay shareholder dividends and in 2016, AXA Equitable paid $1.1 billion in shareholder dividends.
Dividend Restrictions
As a domestic insurance subsidiary regulated by the insurance laws of New York State, AXA Equitable Life, is subject to restrictions as to the amounts permitted to be paid as dividends and the amounts of any outstanding surplus notes permitted to be repaid to Holdings.
New York State insurance law provides that a stock life insurer may not, without prior approval of the New York State Department of Financial Services (“NYDFS”), pay a dividend to its stockholders exceeding an amount calculated under one of two standards (the “Standards”). The first standard allows payment of an ordinary dividend out of the insurer’s earned surplus (as reported on 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. 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.
In applying the Standards, AXA Equitable Life could pay ordinary dividends up to approximately $1.0 billion during 2019 or, if the amount under the Earned Surplus Standard was limited to the amount of AXA Equitable Life’s positive unassigned funds as reported on its 2019 annual statement, $2.1 billion. However, in connection with the AB Ownership Transfer, AXA Equitable Life agreed with the NYDFS that it would not seek a dividend of greater than $1.0 billion under the Earned Surplus Standard during 2019.
Prescribed and Permitted Accounting Practices
At December 31, 2018 and for the year then ended, there were no differences in net income (loss) and capital and surplus resulting from practices prescribed and permitted by NYDFS and those prescribed by NAIC Accounting Practices and Procedures effective at December 31, 2018.
The Company cedes a portion of their statutory reserves to EQ AZ Life Re, a captive reinsurer, as part of the Company’s capital management strategy. EQ AZ Life Re prepares financial statements in a special purpose framework for statutory reporting.
Differences between Statutory Accounting Principles and U.S. GAAP
Accounting practices used to prepare statutory financial statements for regulatory filings of stock life insurance companies differ in certain instances from U.S. GAAP. The differences between statutory surplus and capital stock determined in accordance with Statutory Accounting Principles (“SAP”) and total equity under GAAP are primarily: (a) the inclusion in SAP of an AVR intended to stabilize surplus from fluctuations in the value of the investment portfolio; (b) future policy benefits and policyholders’ account balances under SAP differ from U.S. GAAP due to differences between actuarial assumptions and reserving methodologies; (c) certain policy acquisition costs are expensed under SAP but deferred under U.S. GAAP and amortized over future periods to achieve a matching of revenues and expenses; (d) under SAP, Federal income taxes are provided on the basis of amounts currently payable with limited recognition of deferred tax assets while under U.S. GAAP, deferred taxes are recorded for temporary differences between the financial statements and tax basis of assets and liabilities where the probability of realization

147


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


is reasonably assured; (e) the valuation of assets under SAP and U.S. GAAP differ due to different investment valuation and depreciation methodologies, as well as the deferral of interest-related realized capital gains and losses on fixed income investments; (f) the valuation of the investment in AB and AB Holding under SAP reflected a portion of the market value appreciation rather than the equity in the underlying net assets as required under U.S. GAAP; (g) reporting the surplus notes as a component of surplus in SAP but as a liability in U.S. GAAP; (h) computer software development costs are capitalized under U.S. GAAP but expensed under SAP; (i) certain assets, primarily prepaid assets, are not admissible under SAP but are admissible under U.S. GAAP, (j) the fair valuing of all acquired assets and liabilities including intangible assets are required for U.S. GAAP purchase accounting and (k) cost of reinsurance which is recognized as expense under SAP and amortized over the life of the underlying reinsured policies under U.S. GAAP.
19)    DISCONTINUED OPERATIONS
Distribution of AllianceBernstein to Holdings
Effective December 31, 2018, the Company and its subsidiaries transferred all economic interests in the business of AB to a newly created entity, Alpha Unit Holdings, LLC (“Alpha”). The Company distributed all equity interests in Alpha to AXA Equitable Financial Services, LLC, a wholly-owned subsidiary of Holdings. The AB transfer and subsequent distribution of Alpha equity interests (“the AB Business Transfer”) removed the authority to control the business of AB and as such AB’s operations are now reflected as a discontinued operation in the Company’s consolidated financial statements in all periods presented. Prior to the fourth quarter of 2018, the Company reported the operations of AB as its Investment Management and Research segment.
In connection with the transfer, the Company paid an extraordinary dividend in cash to Holdings in the amount of $572 million. The Company also issued a one-year senior surplus note to Holdings for $572 million that was repaid on March 5, 2019. See Note 12 for details of the senior surplus note.
Transactions Prior to Distribution
Intercompany transactions prior to the AB Business Transfer between the Company and AB were eliminated and excluded from the consolidated statements of income (loss) and consolidated balance sheets.
The table below presents AB’s revenues recognized in 2018, 2017 and 2016, disaggregated by category:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Investment management, advisory and service fees:
 
 
 
 
 
Base fees
$
2,156

 
$
2,025

 
$
1,809

Performance-based fees
118

 
95

 
33

Research services
439

 
450

 
480

Distribution services
419

 
412

 
384

Other revenues:


 


 


Shareholder services
76

 
75

 
78

Other
35

 
42

 
21

Total investment management and service fees
$
3,243

 
$
3,099

 
$
2,804

Transactions Ongoing after Distribution
After the AB Business Transfer, services provided by AB will consist primarily of an investment management service agreement and will be included in investment expenses and identified as a related party transaction.
Discontinued Operations
The following table presents the amounts related to the Net income (loss) of AB that has been reflected in Discontinued operations:

148


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
REVENUES
 
 
 
 
 
Net derivative gains (losses)
$
12

 
$
(24
)
 
$
(16
)
Net investment income (loss)
24

 
142

 
150

Investment gains (losses), net:

 

 

Other investment gains (losses), net
—

 
—

 
(2
)
Total investment gains (losses), net
—

 
—

 
(2
)
Investment management and service fees
3,243

 
3,099

 
2,804

Total revenues
$
3,279

 
$
3,217

 
$
2,936

 
 
 
 
 
 
BENEFITS AND OTHER DEDUCTIONS

 

 

Compensation and benefits
$
1,370

 
$
1,307

 
$
1,231

Commissions and distribution related payments
427

 
415

 
372

Interest expense
8

 
6

 
3

Other operating costs and expenses
727

 
789

 
699

Total benefits and other deductions
2,532

 
2,517

 
2,305

Income (loss) from discontinued operations, before income taxes
747

 
700

 
631

Income tax (expense) benefit
(69
)
 
(82
)
 
(69
)
Net income (loss) from discontinued operations, net of taxes
678

 
618

 
562

Less: Net (income) loss attributable to the noncontrolling interest
(564
)
 
(533
)
 
(496
)
Net income (loss) from discontinued operations, net of taxes and noncontrolling interest
$
114

 
$
85

 
$
66

The following table presents the amounts related to the financial position of AB as of December 31, 2017. As the Company deconsolidated AB effective December 31, 2018, amounts related to AB’s financial position as of December 31, 2018 are not included in the Company’s consolidated balance sheet as of that date. The amounts as of December 31, 2017 have been reflected in either the Assets of disposed subsidiary or Liabilities of disposed subsidiary, as applicable, in the Company’s consolidated balance sheet:
Assets and Liabilities of Disposed Subsidiary
 
As of December 31, 2017
 
(in millions)
ASSETS
 
Investments:
 
Other equity investments
$
87

Trading securities, at fair value
351

Other invested assets
1,291

Total investments
1,729

Cash and cash equivalents
1,009

Cash and securities segregated, at fair value
816

Broker-dealer related receivables
2,158

Intangible assets, net
3,709

Other assets
414

Total Assets of Disposed Subsidiary
$
9,835


149


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
As of December 31, 2017
 
(in millions)
LIABILITIES

Broker-dealer related payables
$
334

Customer related payables
2,229

Long-term debt
566

Current and deferred income taxes
404

Other liabilities
1,421

Total Liabilities of Disposed Subsidiary
$
4,954

 
 
Redeemable noncontrolling interest of disposed subsidiary
602

20)
REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS
During the fourth quarter of 2018, the Company identified certain cash flows that were incorrectly classified in the Company’s consolidated statements of cash flows. The Company has determined that these misclassifications were not material to the financial statements of any period. These have been corrected in the comparative consolidated statements of cash flows for the year ended December 31, 2017 contained elsewhere in this filing.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company changed the presentation of the capitalization of deferred policy acquisition costs (“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 benefits, Commissions and distribution plan payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of deferred acquisition costs. There was no impact on Net income (loss) or Comprehensive income of this reclassification. See Note 2 for further details of this reclassification.
Discontinued Operations
In addition, as further described in Note 19, as a result of the AB Business Transfer in the fourth quarter of 2018, AB’s operations are now reflected as a discontinued operation in the Company’s consolidated financial statements. The financial information for prior periods presented in the consolidated financial statements have been adjusted to reflect AB as a discontinued operation.
Consolidated Financial Statements as of and for the Year Ended December 31, 2017
The following tables present line items in the consolidated financial statements as of and for the year ended December 31, 2017 that have been affected by the revisions. This information has been corrected from the information previously presented in the 2017 Form 10-K. For these items, the tables detail the amounts as previously reported, the impact upon those line items due to the revisions, and the amounts as currently revised.

150


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
As of December 31, 2017
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs
$
4,547

 
$
—

 
$
4,547

 
$
(55
)
 
$
4,492

Total Assets
$
225,985

 
$
—

 
$
225,985

 
$
(55
)
 
$
225,930

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Future policyholders’ benefits and other policyholders’ liabilities
29,034

 
—

 
29,034

 
36

 
29,070

Current and deferred taxes
1,973

 
(404
)
 
1,569

 
(19
)
 
1,550

Total Liabilities
205,795

 
—

 
205,795

 
17

 
205,812

Equity:
 
 
 
 
 
 
 
 
 
Retained Earnings
9,010

 
—

 
9,010

 
(72
)
 
8,938

AXA Equitable Equity
16,469

 
—

 
16,469

 
(72
)
 
16,397

Total Equity
19,564

 
—

 
19,564

 
(72
)
 
19,492

Total Liabilities, Redeemable Noncontrolling Interest and Equity
$
225,985

 
$
—

 
$
225,985

 
$
(55
)
 
$
225,930

 
Year Ended December 31, 2017
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Policy charges and fee income
$
3,334

 
$
—

 
$
—

 
$
3,334

 
$
(40
)
 
$
3,294

Net derivative gains (losses)
890

 
—

 
24

 
914

 
(20
)
 
894

Total revenues
11,733

 
—

 
(3,217
)
 
8,516

 
(60
)
 
8,456

Benefits and other deductions:
 
 
 
 
 
 
 
 
 
 
 
Policyholders’ benefits
3,462

 
—

 
—

 
3,462

 
11

 
3,473

Interest credited to policyholder’s account balances
1,040

 
—

 
—

 
1,040

 
(119
)
 
921

Compensation and benefits
1,762

 
(128
)
 
(1,307
)
 
327

 
—

 
327

Commissions and distribution related payments
1,486

 
(443
)
 
(415
)
 
628

 
—

 
628

Amortization of deferred policy acquisition costs
268

 
578

 
—

 
846

 
54

 
900

Other operating costs and expenses
1,431

 
(7
)
 
(789
)
 
635

 
—

 
635

Total benefits and other deductions
9,478

 
—

 
(2,517
)
 
6,961

 
(54
)
 
6,907

 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations, before income taxes
2,255

 
—

 
(700
)
 
1,555

 
(6
)
 
1,549

Income tax (expense) benefit from continuing operations
1,139

 
—

 
(111
)
 
1,028

 
182

 
1,210

Net income (loss) from continuing operations
3,394

 
—

 
(811
)
 
2,583

 
176

 
2,759

Net income (loss)
3,394

 
—

 
(533
)
 
2,861

 
(17
)
 
2,844

Net income (loss) attributable to AXA Equitable
$
2,860

 
$
—

 
$
—

 
$
2,860

 
$
(17
)
 
$
2,843


151


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
Year Ended December 31, 2017
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
$
3,394

 
$
(533
)
 
$
2,861

 
$
(17
)
 
$
2,844

Change in unrealized gains (losses), net of reclassification adjustment
563

 
—

 
563

 
21

 
584

Other comprehensive income
599

 
(18
)
 
581

 
21

 
602

Comprehensive income (loss)
3,993

 
(551
)
 
3,442

 
4

 
3,446

Comprehensive income (loss) attributable to AXA Equitable
$
3,441

 
$
—

 
$
3,441

 
$
4

 
$
3,445

 
Year Ended December 31, 2017
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Equity:
 
 
 
 
 
 
 
 
 
Retained earnings, beginning of year
$
6,150

 
$
—

 
$
6,150

 
$
(55
)
 
$
6,095

Net income (loss) attributable to AXA Equitable
2,860

 
—

 
2,860

 
(17
)
 
2,843

Retained earnings, end of period
9,010

 
—

 
9,010

 
(72
)
 
8,938

Accumulated other comprehensive income, beginning of year
17

 
—

 
17

 
(21
)
 
(4
)
Other comprehensive income (loss)
581

 
—

 
581

 
21

 
602

Accumulated other comprehensive income, end of year
598

 
—

 
598

 
—

 
598

Total AXA Equitable’s equity, end of year
16,469

 
—

 
16,469

 
(72
)
 
16,397

Total Equity, End of Year
$
19,564

 
$
—

 
$
19,564

 
$
(72
)
 
$
19,492

 
Year Ended December 31, 2017
 
As Reported
 
Presentation Reclassifi-cations
 
Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Cash Flows:
 
 
 
 
 
 
 
Net income (loss) (1)
$
3,394

 
$
—

 
$
(17
)
 
$
3,377

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Interest credited to policyholders’ account balances
1,040

 
—

 
(119
)
 
921

Policy charges and fee income
(3,334
)
 
—

 
40

 
(3,294
)
Net derivative (gains) losses
(890
)
 
—

 
20

 
(870
)
Amortization and depreciation
(136
)
 
907

 
54

 
825

Amortization of deferred sales commission
32

 
(32
)
 
—

 
—

Amortization of other intangibles
31

 
(31
)
 
—

 
—

Equity (income) loss from limited partnerships
—

 
(157
)
 
—

 
(157
)
Distributions from joint ventures and limited partnerships
140

 
(140
)
 
—

 
—


152


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
Year Ended December 31, 2017
 
As Reported
 
Presentation Reclassifi-cations
 
Revisions
 
As Revised
 
(in millions)
Changes in:
 
 
 
 
 
 


Reinsurance recoverable
(416
)
 
—

 
(602
)
 
(1,018
)
Deferred policy acquisition costs
268

 
(268
)
 
—

 
—

Capitalization of deferred policy acquisition costs
—

 
(578
)
 
—

 
(578
)
Future policy benefits
1,511

 
—

 
(322
)
 
1,189

Current and deferred income taxes
(664
)
 
—

 
(510
)
 
(1,174
)
Other, net
189

 
297

 
—

 
486

Net cash provided by (used in) operating activities
$
1,077

 
$
(2
)
 
$
(1,456
)
 
$
(381
)
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
 
 
 
 
Short-term investments
$
—

 
$
2,204

 
$
—

 
$
2,204

Payment for the purchase/origination of:
 
 
 
 
 
 
 
Short-term investments
—

 
(2,456
)
 
—

 
(2,456
)
Change in short-term investments
(264
)
 
254

 
10

 
—

Other, net
238

 
—

 
84

 
322

Net cash provided by (used in) investing activities
$
(9,010
)
 
$
2

 
$
94

 
$
(8,914
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Policyholders’ account balances:
 
 
 
 
 
 
 
Deposits
$
9,882

 
$
—

 
$
(548
)
 
$
9,334

Withdrawals
(5,926
)
 
—

 
2,000

 
(3,926
)
Transfer (to) from Separate Accounts
1,656

 
—

 
(90
)
 
1,566

Net cash provided by (used in) financing activities
$
8,370

 
$
—

 
$
1,362

 
$
9,732

_______________
(1)
Net income (loss) includes $533 million in 2017 of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss).

Consolidated Financial Statements for the Year Ended December 31, 2016
The following table presents line items for the consolidated financial statements for the year ended December 31, 2016 that have been affected by the aforementioned adjustments and revisions. This information has been corrected from the information previously presented and restated in the 2017 Form 10-K. For these items, the table details the amounts as previously reported and the impact upon those line items due to the reclassifications to conform to the current presentation, adjustments for the discontinued operation, and revisions and the amounts as currently revised.
 
Year Ended December 31, 2016
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Policy charges and fee income
$
3,344

 
$
—

 
$
—

 
$
3,344

 
$
(33
)
 
$
3,311

Net derivative gains (losses)
(1,211
)
 
—

 
16

 
(1,195
)
 
(126
)
 
(1,321
)
Total revenues
9,138

 
—

 
(2,936
)
 
6,202

 
(159
)
 
6,043


153


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
Year Ended December 31, 2016
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Benefits and other deductions:
 
 
 
 
 
 
 
 
 
 
 
Interest credited to Policyholder’s account balances
1,029

 
—

 
—

 
1,029

 
(124
)
 
905

Compensation and benefits
1,723

 
(128
)
 
(1,231
)
 
364

 
—

 
364

Commissions and distribution related payments
1,467

 
(460
)
 
(372
)
 
635

 
—

 
635

Amortization of deferred policy acquisition costs
52

 
594

 
—

 
646

 
(4
)
 
642

Other operating costs and expenses
1,458

 
(6
)
 
(699
)
 
753

 
—

 
753

Total benefits and other deductions
8,516

 
—

 
(2,305
)
 
6,211

 
(128
)
 
6,083

Income (loss) from continuing operations, before income taxes
622

 
—

 
(631
)
 
(9
)
 
(31
)
 
(40
)
Income tax (expense) benefit from continuing operations
84

 
—

 
69

 
153

 
11

 
164

Net income (loss) from continuing operations
706

 
—

 
(562
)
 
144

 
(20
)
 
124

Net income (loss)
706

 
—

 
(496
)
 
210

 
(20
)
 
190

Net income (loss) attributable to AXA Equitable
$
210

 
$
—

 
$
—

 
$
210

 
$
(20
)
 
$
190

 
Year Ended December 31, 2016
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
$
706

 
$
(496
)
 
$
210

 
$
(20
)
 
$
190

Change in unrealized gains (losses), net of reclassification adjustment
(194
)
 
—

 
(194
)
 
(21
)
 
(215
)
Other comprehensive income
(215
)
 
17

 
(198
)
 
(21
)
 
(219
)
Comprehensive income (loss)
491

 
(479
)
 
12

 
(41
)
 
(29
)
Comprehensive income (loss) attributable to AXA Equitable
$
12

 
$
—

 
$
12

 
$
(41
)
 
$
(29
)
 
Year Ended December 31, 2016
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Equity:
 
 
 
 
 
 
 
 
 
Retained earnings, beginning of year
$
6,990

 
$
—

 
$
6,990

 
$
(35
)
 
$
6,955

Net income (loss) attributable to AXA Equitable
210

 
—

 
210

 
(20
)
 
190

Retained earnings, end of period
6,150

 
—

 
6,150

 
(55
)
 
6,095

Other comprehensive income (loss)
(198
)
 
—

 
(198
)
 
(21
)
 
(219
)
Accumulated other comprehensive income, end of period
17

 
—

 
17

 
(21
)
 
(4
)
Total AXA Equitable’s equity, end of period
$
11,508

 
$
—

 
$
11,508

 
$
(76
)
 
$
11,432


154


AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


 
Year Ended December 31, 2016
 
As Reported
 
Presentation Reclassifications
 
Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Cash Flows:
 
 
 
 
 
 
 
Net income (loss) (1)
$
706

 
$
—

 
$
(20
)
 
$
686

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Interest credited to policyholders’ account balances
1,029

 
—

 
(124
)
 
905

Policy charges and fee income
(3,344
)
 
—

 
33

 
(3,311
)
Net derivative (gains) losses
1,211

 
—

 
126

 
1,337

Amortization and depreciation
—

 
618

 
(4
)
 
614

Amortization of deferred sales commission
41

 
(41
)
 
—

 
—

Other depreciation and amortization
(98
)
 
98

 
—

 
—

Amortization of other intangibles
29

 
(29
)
 
—

 
—

Equity (income) loss from limited partnerships
—

 
(91
)
 
—

 
(91
)
Return of real estate joint venture and limited partnerships
126

 
(126
)
 
—

 
—

Changes in:
 
 
 
 
 
 
 
Deferred policy acquisition costs
52

 
(52
)
 
—

 
—

Capitalization of deferred policy acquisition costs
—

 
(594
)
 
—

 
(594
)
Current and deferred income taxes
(742
)
 
—

 
(11
)
 
(753
)
Other, net
(161
)
 
217

 
—

 
56

Net cash provided by (used in) operating activities
$
(461
)
 
$
—

 
$
—

 
$
(461
)
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
 
 
 
 
Short-term investments
—

 
2,984

 
—

 
2,984

Payment for the purchase/origination of:
 
 
 
 
 
 
 
Short-term investments
—

 
(3,187
)
 
—

 
(3,187
)
Change in short-term investments
(205
)
 
205

 
—

 
—

Other, net
409

 
(2
)
 
—

 
407

Net cash provided by (used in) investing activities
$
(5,358
)
 
$
—

 
$
—

 
$
(5,358
)
_______________
(1)
Net income (loss) includes $496 million in 2016 of the discontinued operations that are not included in Net income (loss) in the Consolidated Statements of Income (Loss).

21)     QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The unaudited quarterly financial information for the years ended December 31, 2018 and 2017 are summarized in the table below:
 
Three Months Ended
 
March 31    
 
June 30    
 
September 30
 
December 31
 
(in millions)
2018
 
 
 
 
 
 
 
Total revenues
$
1,139

 
$
1,621

 
$
27

 
$
4,164

Total benefits and other deductions
1,512

 
4,278

 
763

 
1,879

Net income (loss)
$
(264
)
 
$
(2,084
)
 
$
(509
)
 
$
1,936

 
 
 
 
 
 
 
 
2017
 
 
 
 
 
 
 
Total revenues
$
1,554

 
$
3,763

 
$
1,621

 
$
1,518

Total benefits and other deductions
1,921

 
1,858

 
1,708

 
1,420

Net income (loss)
$
(201
)
 
$
1,508

 
$
23

 
$
1,515


155



Net Income (Loss) Volatility
With the exception of the GMxB Unwind during the second quarter of 2018 that is further described in Note 12, the fluctuation in the Company’s quarterly Net income (loss) during 2018 and 2017 is not due to any specific events or transactions, but instead is driven primarily by the impact of changes in market conditions on the Company’s liabilities associated with GMxB features embedded in its variable annuity products, partially offset by derivatives the Company has in place to mitigate the movement in those liabilities. As those derivatives do not qualify for hedge accounting treatment, volatility in Net income (loss) result from the changes in value of the derivatives being recognized in the period in which they occur, with offsetting changes in the liabilities being partially recognized in the current period.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company revised the presentation of the capitalization of deferred policy acquisition costs (“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 benefits, Commissions and distribution plan payments and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of deferred acquisition costs. There was no impact on Net income (loss) or Comprehensive income of this reclassification. See Note 2 for further details of this reclassification.
Revisions of Prior Period Interim Consolidated Financial Statements
The Company’s third quarter 2018 financial statements were revised to reflect the correction of errors identified by the Company in its previously issued financial statements. The impact of these errors was not considered to be material. However, in order to improve the consistency and comparability of the financial statements, management revised the Company’s consolidated financial statements for the three and six months ended March 31, 2018 and June 30, 2018, respectively, as well as the three and six months ended March 31, 2017 and June 30, 2017.
In addition, during the fourth quarter of 2018, the Company identified certain cash flows that were incorrectly classified in the Company’s historical consolidated statements of cash flows. The Company has determined that these mis-classifications were not material to the financial statements for any period. These misclassifications will be corrected in the comparative consolidated statements of cash flows for the three, six and nine months ended March 31, 2019, June 30, 2019 and September 30, 2019 that will appear in the Company’s first, second and third quarter 2019 Form 10-Q filings, respectively.
Discontinued Operations
In addition, as further described in Note 19, as a result of the AB Business Transfer effective as of December 31, 2018, AB’s operations are now reflected as Discontinued operations in the Company’s consolidated financial statements. The financial information for prior periods presented in the consolidated financial statements have been adjusted to reflect AB as Discontinued operations.
Revision of Consolidated Financial Statements as of and for the Three Months Ended March 31, 2018
The following tables present line items of the consolidated financial statements 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, adjustment for the discontinued operation, 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.

156



 
As of March 31, 2018
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs
4,826

 
—

 
4,826

 
(119
)
 
4,707

Total Assets
$
222,424

 
$
—

 
$
222,424

 
$
(119
)
 
$
222,305

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Future policyholders’ benefits and other policyholders’ liabilities
$
28,374

 
$
—

 
$
28,374

 
$
(10
)
 
$
28,364

Current and deferred taxes
1,728

 
(432
)
 
1,296

 
(38
)
 
1,258

Other liabilities
3,041

 
(1,941
)
 
1,100

 
70

 
1,170

Total Liabilities
$
202,767

 
$
—

 
$
202,767

 
$
22

 
$
202,789

Equity:
 
 
 
 
 
 
 
 
 
Retained Earnings
$
8,824

 
$
—

 
$
8,824

 
$
(141
)
 
$
8,683

AXA Equitable Equity
15,545

 
—

 
15,545

 
(141
)
 
15,404

Total Equity
18,633

 
—

 
18,633

 
(141
)
 
18,492

Total Liabilities, Redeemable Noncontrolling Interest and Equity
$
222,424

 
$
—

 
$
222,424

 
$
(119
)
 
$
222,305

 
Three Months Ended March 31, 2018
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Policy charges and fee income
$
869

 
$
—

 
$
—

 
$
869

 
$
(8
)
 
$
861

Net derivative gains (losses)
(777
)
 
—

 
(2
)
 
(779
)
 
(38
)
 
(817
)
Total Revenues
2,031

 
—

 
(846
)
 
1,185

 
(46
)
 
1,139

Benefits and other deductions:
 
 
 
 
 
 
 
 
 
 
 
Policyholders’ benefits
489

 
—

 
—

 
489

 
(9
)
 
480

Interest credited to policyholders’ account balances
338

 
—

 
—

 
338

 
(83
)
 
255

Compensation and benefits
456

 
(33
)
 
(344
)
 
79

 
70

 
149

Commissions and distribution related payments
371

 
(101
)
 
(110
)
 
160

 
—

 
160

Amortization of deferred policy acquisition costs
10

 
135

 
—

 
145

 
64

 
209

Other operating costs and expenses
440

 
(1
)
 
(189
)
 
250

 
—

 
250

Total benefits and other deductions
2,115

 
—

 
(645
)
 
1,470

 
42

 
1,512

Income (loss) from continuing operations, before income taxes
(84
)
 
—

 
(201
)
 
(285
)
 
(88
)
 
(373
)
Income tax (expense) benefit from continuing operations
44

 
—

 
17

 
61

 
19

 
80

Net income (loss) from continuing operations
(40
)
 
—

 
(184
)
 
(224
)
 
(69
)
 
(293
)
Net income (loss)
(40
)
 
—

 
(155
)
 
(195
)
 
(69
)
 
(264
)
Net income (loss) attributable to AXA Equitable
$
(194
)
 
$
—

 
$
—

 
$
(194
)
 
$
(69
)
 
$
(263
)

157



 
Three Months Ended March 31, 2018
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Statements of Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(40
)
 
$
(155
)
 
$
(195
)
 
$
(69
)
 
$
(264
)
Comprehensive income (loss)
$
(789
)
 
$
(162
)
 
$
(951
)
 
$
(69
)
 
$
(1,020
)
Comprehensive income (loss) attributable to AXA Equitable
$
(950
)
 
$
—

 
$
(950
)
 
$
(69
)
 
$
(1,019
)
 
Three Months Ended March 31, 2018
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Equity:
 
 
 
 
 
 
 
 
 
Retained earnings, beginning of year
$
9,010

 
$
—

 
$
9,010

 
$
(72
)
 
$
8,938

Net income (loss)
(194
)
 
—

 
(194
)
 
(69
)
 
(263
)
Retained earnings, end of period
8,824

 
—

 
8,824

 
(141
)
 
8,683

Total AXA Equitable’s equity, end of period
15,545

 
 
 
15,545

 
(141
)
 
15,404

Total Equity, End of Period
$
18,633

 
$
—

 
$
18,633

 
$
(141
)
 
$
18,492

 
Three Months Ended March 31, 2018
 
As Reported
 
Presentation Reclassifi- cations
 
Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Cash Flows:
 
 
 
 
 
 
 
Net income (loss) (1)
$
(40
)
 
$
—

 
$
(69
)
 
$
(109
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Interest credited to policyholders’ account balances
$
338

 
$
—

 
$
(83
)
 
$
255

Policy charges and fee income
(869
)
 
—

 
8

 
(861
)
Net derivative (gains) losses
777

 
—

 
38

 
815

Amortization and depreciation
—

 
137

 
64

 
201

Amortization of deferred sales commission
7

 
(7
)
 
—

 
—

Other depreciation and amortization
(23
)
 
23

 
—

 
—

Amortization of other Intangibles
8

 
(8
)
 
—

 
—

Equity (income) loss from limited partnerships
—

 
(39
)
 
—

 
(39
)
Distributions from joint ventures and limited partnerships
25

 
(25
)
 
—

 
—

Changes in:


 


 


 


Reinsurance recoverable
2

 
—

 
(149
)
 
(147
)
Deferred policy acquisition costs
10

 
(10
)
 
—

 
—

Capitalization of deferred policy acquisition costs
—

 
(135
)
 
—

 
(135
)
Future policy benefits
(191
)
 
—

 
(7
)
 
(198
)
Current and deferred income taxes
(52
)
 
—

 
132

 
80

Other, net
(122
)
 
64

 
70

 
12

Net cash provided by (used in) operating activities
$
(21
)
 
$
—

 
$
4

 
$
(17
)

158



 
Three Months Ended March 31, 2018
 
As Reported
 
Presentation Reclassifi- cations
 
Revisions
 
As Revised
 
(in millions)
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from the sale/maturity/prepayment of:


 


 


 


Trading account securities
$
1,606

 
$
—

 
$
77

 
$
1,683

Real estate held for the production of income
—

 
140

 
—

 
140

Short-term investments
—

 
688

 
—

 
688

Other
54

 
(140
)
 
—

 
(86
)
Payment for the purchase/origination of:


 


 


 


Short-term investments
—

 
(377
)
 
—

 
(377
)
Cash settlements related to derivative instruments
(14
)
 
—

 
(489
)
 
(503
)
Change in short-term investments
396

 
(311
)
 
(85
)
 
—

Other, net
(560
)
 
—

 
153

 
(407
)
Net cash provided by (used in) investing activities
$
(639
)
 
$
—

 
$
(344
)
 
$
(983
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Policyholders’ account balances:
 
 
 
 
 
 
 
Deposits
$
2,366

 
$
—

 
$
(468
)
 
$
1,898

Withdrawals
(1,322
)
 
—

 
241

 
(1,081
)
Transfer (to) from Separate Accounts
(115
)
 
—

 
567

 
452

Net cash provided by (used in) financing activities
$
1,040

 
$
—

 
$
340

 
$
1,380

________________
(1)
Net income (loss) includes $154 million in the three months ended March 31, 2018 of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss).
The following tables present line items of the consolidated financial statements as of June 30, 2018 and for the three and six months ended June 30, 2018 that have been affected by the revisions. This information has been corrected from the information previously presented in the Company’s June 30, 2018 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, the adjustment for the discontinued operation, 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.

159



 
As of June 30, 2018
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs
$
4,786

 
$
—

 
$
4,786

 
$
(76
)
 
$
4,710

Amounts due from reinsurers
3,088

 
—

 
3,088

 
(9
)
 
3,079

Current and deferred taxes
159

 
422

 
581

 
3

 
584

Total Assets
$
219,306

 
$
—

 
$
219,306

 
$
(82
)
 
$
219,224

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Future policyholders’ benefits and other policyholders’ liabilities
$
28,122

 
$
—

 
$
28,122

 
$
(64
)
 
$
28,058

Total Liabilities
$
202,196

 
$
—

 
$
202,196

 
$
(64
)
 
$
202,132

 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
 
 
Retained Earnings
$
6,617

 
$
—

 
$
6,617

 
$
(18
)
 
$
6,599

AXA Equitable Equity
13,925

 
—

 
13,925

 
(18
)
 
13,907

Total Equity
16,964

 
—

 
16,964

 
(18
)
 
16,946

Total Liabilities, Redeemable Noncontrolling Interest and Equity
$
219,306

 
$
—

 
$
219,306

 
$
(82
)
 
$
219,224

 
Three Months Ended June 30, 2018
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Policy charges and fee income
$
904

 
$
—

 
$
—

 
$
904

 
$
(21
)
 
$
883

Net derivative gains (losses)
(312
)
 
—

 
—

 
(312
)
 
27

 
(285
)
Total revenues
2,439

 
—

 
(824
)
 
1,615

 
6

 
1,621

Benefits and other deductions:
 
 
 
 
 
 
 
 
 
 
 
Policyholders’ benefits
1,339

 
—

 
—

 
1,339

 
(38
)
 
1,301

Compensation and benefits
466

 
(32
)
 
(360
)
 
74

 
—

 
74

Commissions and distribution related payments
377

 
(112
)
 
(106
)
 
159

 
—

 
159

Amortization of deferred policy acquisition costs
31

 
145

 
1

 
177

 
5

 
182

Other operating costs and expenses
2,486

 
(1
)
 
(172
)
 
2,313

 
—

 
2,313

Total benefits and other deductions
4,950

 
—

 
(639
)
 
4,311

 
(33
)
 
4,278

Income (loss) from continuing operations, before income taxes
(2,511
)
 
—

 
(185
)
 
(2,696
)
 
39

 
(2,657
)
Income tax (expense) benefit from continuing operations
553

 
—

 
8

 
561

 
(9
)
 
552

Net income (loss) from continuing operations
(1,958
)
 
—

 
(177
)
 
(2,135
)
 
30

 
(2,105
)
Net income (loss)
(1,958
)
 
—

 
(156
)
 
(2,114
)
 
30

 
(2,084
)
Net income (loss) attributable to AXA Equitable
$
(2,114
)
 
$
—

 
$
—

 
$
(2,114
)
 
$
30

 
$
(2,084
)

160



 
Three Months Ended June 30, 2018
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(1,958
)
 
$
(156
)
 
$
(2,114
)
 
$
30

 
$
(2,084
)
Comprehensive income (loss)
(2,278
)
 
(142
)
 
(2,420
)
 
30

 
(2,390
)
Comprehensive income (loss) attributable to AXA Equitable
$
(2,420
)
 
$
—

 
$
(2,420
)
 
$
30

 
$
(2,390
)
 
Six Months Ended June 30, 2018
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Policy charges and fee income
$
1,773

 
$
—

 
$
—

 
$
1,773

 
$
(29
)
 
$
1,744

Net derivative gains (losses)
(1,172
)
 
—

 
(2
)
 
(1,174
)
 
72

 
(1,102
)
Total revenues
4,387

 
—

 
(1,670
)
 
2,717

 
43

 
2,760

Benefits and other deductions:
 
 
 
 
 
 
 
 
 
 
 
Policyholders’ benefits
1,828

 
—

 
—

 
1,828

 
(47
)
 
1,781

Compensation and benefits
992

 
(65
)
 
(704
)
 
223

 
—

 
223

Commissions and distribution related payments
748

 
(213
)
 
(216
)
 
319

 
—

 
319

Amortization of deferred policy acquisition costs
89

 
280

 
1

 
370

 
21

 
391

Other operating costs and expenses
2,926

 
(2
)
 
(361
)
 
2,563

 
—

 
2,563

Total benefits and other deductions
7,100

 
—

 
(1,284
)
 
5,816

 
(26
)
 
5,790

Income (loss) from continuing operations, before income taxes
(2,713
)
 
—

 
(386
)
 
(3,099
)
 
69

 
(3,030
)
Income tax (expense) benefit from continuing operations
622

 
—

 
25

 
647

 
(15
)
 
632

Net income (loss) from continuing operations
(2,091
)
 
—

 
(361
)
 
(2,452
)
 
54

 
(2,398
)
Net income (loss)
(2,091
)
 
—

 
(311
)
 
(2,402
)
 
54

 
(2,348
)
Net income (loss) attributable to AXA Equitable
$
(2,401
)
 
$
—

 
$
—

 
$
(2,401
)
 
$
54

 
$
(2,347
)
 
Six Months Ended June 30, 2018
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(2,091
)
 
$
(311
)
 
$
(2,402
)
 
$
54

 
$
(2,348
)
Comprehensive income (loss)
(3,160
)
 
(305
)
 
(3,465
)
 
54

 
(3,411
)
Comprehensive income (loss) attributable to AXA Equitable
$
(3,463
)
 
$
—

 
$
(3,463
)
 
$
54

 
$
(3,409
)

161



 
Six Months Ended June 30, 2018
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Equity:
 
 
 
 
 
 
 
 
 
Retained earnings, beginning of year
$
9,010

 
$
—

 
$
9,010

 
$
(72
)
 
$
8,938

Net income (loss) attributable to AXA Equitable
(2,401
)
 
—

 
(2,401
)
 
54

 
(2,347
)
Retained earnings, end of period
6,617

 
—

 
6,617

 
(18
)
 
6,599

Total AXA Equitable’s equity, end of period
13,925

 
—

 
13,925

 
(18
)
 
13,907

Total Equity, End of Period
$
16,964

 
$
—

 
$
16,964

 
$
(18
)
 
$
16,946

 
Six Months Ended June 30, 2018
 
As Reported
 
Presentation Reclassifi-cations
 
Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Cash Flows:
 
 
 
 
 
 
 
Net income (loss) (1)
$
(2,091
)
 
$
—

 
$
54

 
$
(2,037
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Policy charges and fee income
(1,773
)
 
—

 
29

 
(1,744
)
Net derivative (gains) losses
1,172

 
—

 
(72
)
 
1,100

Amortization and depreciation
—

 
335

 
21

 
356

Amortization of deferred sales commission
13

 
(13
)
 
—

 
—

Other depreciation and amortization
(45
)
 
45

 
—

 
—

Equity (income) loss from limited partnerships
—

 
(60
)
 
—

 
(60
)
Distributions from joint ventures and limited partnerships
44

 
(44
)
 
—

 
—

Cash received on the recapture of captive reinsurance
1,099

 
—

 
174

 
1,273

Changes in:
 
 
 
 
 
 


Reinsurance recoverable
15

 
—

 
166

 
181

Deferred policy acquisition costs
89

 
(89
)
 
—

 
—

Capitalization of deferred policy acquisition costs
—

 
(280
)
 
—

 
(280
)
Future policy benefits
396

 
—

 
(554
)
 
(158
)
Current and deferred income taxes
(645
)
 
—

 
167

 
(478
)
Other, net
416

 
104

 
(304
)
 
216

Net cash provided by (used in) operating activities
$
1,190

 
$
(2
)
 
$
(319
)
 
$
869

 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
 
 
 
 
Trading account securities
4,843

 
—

 
24

 
4,867

Real estate joint ventures
$
—

 
$
140

 
$
—

 
$
140

Short-term investments
—

 
1,331

 
(24
)
 
1,307

Other
260

 
(140
)
 
—

 
120

Payment for the purchase/origination of:
 
 
 
 
 
 
 
Short-term investments
—

 
(1,081
)
 
205

 
(876
)
Cash settlements related to derivative instruments
(267
)
 
—

 
(489
)
 
(756
)
Change in short-term investments
248

 
(248
)
 
—

 
—

Other, net
379

 
—

 
11

 
390

Net cash provided by (used in) investing activities
$
(1,605
)
 
$
2

 
$
(273
)
 
$
(1,876
)

162



 
Six Months Ended June 30, 2018
 
As Reported
 
Presentation Reclassifi-cations
 
Revisions
 
As Revised
 
(in millions)
Cash flows from financing activities:
 
 
 
 
 
 
 
Policyholders’ account balances:
 
 
 
 
 
 
 
Deposits
$
5,227

 
$
—

 
$
(1,107
)
 
$
4,120

Withdrawals
(2,611
)
 
—

 
480

 
(2,131
)
Transfer (to) from Separate Accounts
(305
)
 
—

 
1,219

 
914

________________
(1)
Net income (loss) includes $310 million in the six months ended June 30, 2018 of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss).
The following tables present line items of the consolidated statement of cash flows for the nine months ended September 30, 2018 that have been affected by the revisions. This information has been corrected from the information previously presented in the Company’s September 30, 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, the adjustment for the discontinued operation, 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. Tables for the other consolidated financial statements as of or for the three and nine months ended September 30, 2018 are not presented as these revisions were already reflected in the Company’s September 30, 2018 Form 10-Q.
 
Nine Months Ended September 30, 2018
 
As Reported
 
Presentation Reclassifi- cations
 
Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Cash Flows:
 
 
 
 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Amortization and depreciation
$
—

 
$
258

 
$
—

 
$
258

Amortization of deferred sales commission
17

 
(17
)
 
—

 
—

Other depreciation and amortization
(60
)
 
60

 
—

 
—

Equity (income) loss from limited partnerships
—

 
(83
)
 
—

 
(83
)
Distribution from joint ventures and limited partnerships
63

 
(63
)
 
—

 
—

Cash received on the recapture of captive reinsurance
1,099

 
—

 
174

 
1,273

Changes in:
 
 
 
 
 
 


Reinsurance recoverable
20

 
—

 
86

 
106

Deferred policy acquisition costs
(129
)
 
129

 
—

 
—

Capitalization of deferred policy acquisition costs
—

 
(432
)
 
—

 
(432
)
Future policy benefits
(58
)
 
—

 
(541
)
 
(599
)
Current and deferred income taxes
(264
)
 
—

 
(400
)
 
(664
)
Other, net
123

 
146

 
179

 
448

Net cash provided by (used in) operating activities
$
1,614

 
$
(2
)
 
$
(502
)
 
$
1,110


163



 
Nine Months Ended September 30, 2018
 
As Reported
 
Presentation Reclassifi- cations
 
Revisions
 
As Revised
 
(in millions)
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
 
 
 
 
Trading account securities
$
6,913

 
$
—

 
$
77

 
$
6,990

Real estate joint ventures
—

 
140

 
—

 
140

Short-term investments
—

 
1,806

 
—

 
1,806

Other
344

 
(140
)
 
—

 
204

Short-term investments
—

 
(1,530
)
 
204

 
(1,326
)
Cash settlements related to derivative instruments
(584
)
 
—

 
(492
)
 
(1,076
)
Change in short-term investments
350

 
(274
)
 
(77
)
 
(1
)
Other, net
305

 
—

 
(19
)
 
286

Net cash provided by (used in) investing activities
$
(2,990
)
 
$
2

 
$
(307
)
 
$
(3,295
)
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Policyholders’ account balances:
 
 
 
 
 
 
 
Deposits
$
7,852

 
$
—

 
$
(1,668
)
 
$
6,184

Withdrawals
(4,014
)
 
—

 
760

 
(3,254
)
Transfer (to) from Separate Accounts
(338
)
 
—

 
1,717

 
1,379

Net cash provided by (used in) financing activities
$
1,293

 
$
—

 
$
809

 
$
2,102

The following tables present line items of the consolidated financial statements as of and for the three months ended March 31, 20 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, the adjustment for the discontinued operation, 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.
 
As of March 31, 2017
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs
4,961

 
—

 
4,961

 
(64
)
 
4,897

Total Assets
$
210,013

 
$
—

 
$
210,013

 
$
(64
)
 
$
209,949

 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Future policyholders’ benefits and other policyholders’ liabilities
28,691

 
—

 
28,691

 
66

 
28,757

Current and deferred taxes
2,726

 
(562
)
 
2,164

 
(46
)
 
2,118

Total Liabilities
$
195,091

 
$
—

 
$
195,091

 
$
20

 
$
195,111

 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
 
 
Retained Earnings
$
5,978

 
$
—

 
$
5,978

 
$
(84
)
 
$
5,894

AXA Equitable Equity
11,459

 
—

 
11,459

 
(84
)
 
11,375

Noncontrolling interest
3,046

 
—

 
3,046

 
—

 
3,046

Total Equity
14,505

 
—

 
14,505

 
(84
)
 
14,421

Total Liabilities, Redeemable Noncontrolling Interest and Equity
$
210,013

 
$
—

 
$
210,013

 
$
(64
)
 
$
209,949


164



 
Three Months Ended March 31, 2017
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Policy charges and fee income
$
852

 
$
—

 
$
—

 
$
852

 
$
(22
)
 
$
830

Net derivative gains (losses)
(362
)
 
—

 
10

 
(352
)
 
7

 
(345
)
Total revenues
2,314

 
—

 
(745
)
 
1,569

 
(15
)
 
1,554

Benefits and other deductions:
 
 
 
 
 
 
 
 
 
 
 
Policyholders’ benefits
975

 
—

 
—

 
975

 
(3
)
 
972

Interest credited to policyholders’ account balances
279

 
—

 
—

 
279

 
(30
)
 
249

Compensation and benefits
438

 
(33
)
 
(322
)
 
83

 
—

 
83

Commissions and distribution related payments
382

 
(114
)
 
(96
)
 
172

 
—

 
172

Amortization of deferred policy acquisition costs
29

 
148

 
—

 
177

 
63

 
240

Other operating costs and expenses
381

 
(1
)
 
(179
)
 
201

 
—

 
201

Total benefits and other deductions
2,489

 
—

 
(598
)
 
1,891

 
30

 
1,921

Income (loss) from continuing operations, before income taxes
(175
)
 
—

 
(147
)
 
(322
)
 
(45
)
 
(367
)
Income tax (expense) benefit from continuing operations
121

 
—

 
11

 
132

 
16

 
148

Net income (loss) from continuing operations
(54
)
 
—

 
(136
)
 
(190
)
 
(29
)
 
(219
)
Net income (loss)
(54
)
 
—

 
(118
)
 
(172
)
 
(29
)
 
(201
)
Net income (loss) attributable to AXA Equitable
$
(172
)
 
$
—

 
$
—

 
$
(172
)
 
$
(29
)
 
$
(201
)
 
Three Months Ended March 31, 2017
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(54
)
 
$
(118
)
 
$
(172
)
 
$
(29
)
 
$
(201
)
Change in unrealized gains (losses), net of reclassification adjustment
92

 
—

 
92

 
21

 
113

Total other comprehensive income (loss), net of income taxes
127

 
(7
)
 
120

 
21

 
141

Comprehensive income (loss)
73

 
(125
)
 
(52
)
 
(8
)
 
(60
)
Comprehensive income (loss) attributable to AXA Equitable
$
(52
)
 
$
—

 
$
(52
)
 
$
(8
)
 
$
(60
)

165



 
Three Months Ended March 31, 2017
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Equity:
 
 
 
 
 
 
 
 
 
Retained earnings, beginning of year
$
6,150

 
$
—

 
$
6,150

 
$
(55
)
 
$
6,095

Net income (loss) attributable to AXA Equitable
(172
)
 
—

 
(172
)
 
(29
)
 
(201
)
Retained earnings, end of period
5,978

 
—

 
5,978

 
(84
)
 
5,894

Accumulated other comprehensive income, beginning of year
17

 
—

 
17

 
(21
)
 
(4
)
Other comprehensive income (loss)
120

 
—

 
120

 
21

 
141

Accumulated other comprehensive income, end of period
137

 
—

 
137

 
—

 
137

Total AXA Equitable’s equity, end of period
11,459

 
—

 
11,459

 
(84
)
 
11,375

Total Equity, End of Period
$
14,505

 
$
—

 
$
14,505

 
$
(84
)
 
$
14,421

 
Three Months Ended March 31, 2017
 
As Reported
 
Presentation Reclassifi-cations
 
Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Cash Flows:
 
 
 
 
 
 
 
Net income (loss) (1)
$
(54
)
 
$
—

 
$
(29
)
 
$
(83
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Interest credited to policyholders’ account balances
279

 
—

 
(30
)
 
249

Policy charges and fee income
(852
)
 
—

 
22

 
(830
)
Net derivative (gains) losses
362

 
—

 
(7
)
 
355

Amortization and depreciation
—

 
229

 
63

 
292

Amortization of deferred sales commission
9

 
(9
)
 
—

 
—

Other depreciation and amortization
36

 
(36
)
 
—

 
—

Amortization of other intangibles
8

 
(8
)
 
—

 
—

Equity (income) loss from limited partnerships
—

 
(39
)
 
—

 
(39
)
Distributions from joint ventures and limited partnerships
26

 
(26
)
 
—

 
—

Changes in:
 
 
 
 
 
 
—

Reinsurance recoverable
(23
)
 
—

 
(173
)
 
(196
)
Deferred policy acquisition costs
29

 
(29
)
 
—

 
—

Capitalization of deferred policy acquisition costs
—

 
(148
)
 
—

 
(148
)
Future policy benefits
241

 
—

 
17

 
258

Current and deferred income taxes
(188
)
 
—

 
(6
)
 
(194
)
Other, net
151

 
65

 
—

 
216

Net cash provided by (used in) operating activities
$
18

 
$
(1
)
 
$
(143
)
 
$
(126
)
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
 
 
 
 
Short-term investments
—

 
631

 
—

 
631

Payment for the purchase/origination of:
 
 
 
 
 
 


Short-term investments
—

 
(376
)
 
(289
)
 
(665
)
Change in short-term investments
254

 
(254
)
 
—

 
—

Other, net
43

 
—

 
100

 
143

Net cash provided by (used in) investing activities
$
(2,447
)
 
$
1

 
$
(189
)
 
$
(2,635
)

166



 
Three Months Ended March 31, 2017
 
As Reported
 
Presentation Reclassifi-cations
 
Revisions
 
As Revised
 
(in millions)
Cash flows from financing activities:
 
 
 
 
 
 
 
Policyholders’ account balances:
 
 
 
 
 
 
 
Deposits
$
2,240

 
$
—

 
$
269

 
$
2,509

Withdrawals
(785
)
 
—

 
(157
)
 
(942
)
Transfer (to) from Separate Accounts
176

 
—

 
220

 
396

Net cash provided by (used in) financing activities
$
2,306

 
$
—

 
$
332

 
$
2,638

________________
(1)
Net income (loss) includes $118 million in the three months ended March 31, 2017 of the discontinued operations that are not included in Net income (loss) in the Consolidated Statements of Income (Loss).
The following tables present line items of the consolidated financial statements as of and for the three and six months ended June 30, 2017 that have been affected by the revisions. This information has been corrected from the information previously presented in the Company’s June 30, 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, the adjustment for the discontinued operation, 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.
 
As of June 30, 2017
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Balance Sheet:
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Deferred policy acquisition costs
4,913

 
—

 
4,913

 
(63
)
 
4,850

Total Assets
$
215,713

 
$
—

 
$
215,713

 
$
(63
)
 
$
215,650

Liabilities:
 
 
 
 
 
 
 
 
 
Future policyholders’ benefits and other policyholders’ liabilities
$
29,679

 
$
—

 
$
29,679

 
$
53

 
$
29,732

Current and deferred taxes
3,267

 
(542
)
 
2,725

 
(39
)
 
2,686

Total Liabilities
$
199,095

 
$
—

 
$
199,095

 
$
14

 
$
199,109

 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
 
 
Retained Earnings
$
7,479

 
$
—

 
$
7,479

 
$
(77
)
 
$
7,402

AXA Equitable Equity
13,273

 
—

 
13,273

 
(77
)
 
13,196

Total Equity
16,257

 
—

 
16,257

 
(77
)
 
16,180

Total Liabilities, Redeemable Noncontrolling Interest and Equity
$
215,713

 
$
—

 
$
215,713

 
$
(63
)
 
$
215,650

 
Three Months Ended June 30, 2017
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Policy charges and fee income
$
846

 
$
—

 
$
—

 
$
846

 
$
(12
)
 
$
834

Net derivative gains (losses)
1,763

 
—

 
5

 
1,768

 
8

 
1,776

Total revenues
4,548

 
—

 
(781
)
 
3,767

 
(4
)
 
3,763


167



 
Three Months Ended June 30, 2017
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and other deductions:
 
 
 
 
 
 
 
 
 
 
 
Policyholders’ benefits
1,363

 
—

 
—

 
1,363

 
(7
)
 
1,356

Interest credited to policyholders’ account balances
208

 
—

 
—

 
208

 
(9
)
 
199

Compensation and benefits
450

 
(32
)
 
(328
)
 
90

 
—

 
90

Commissions and distribution related payments
389

 
(116
)
 
(103
)
 
170

 
—

 
170

Amortization of deferred policy acquisition costs
(49
)
 
150

 
—

 
101

 
(1
)
 
100

Other operating costs and expenses
149

 
(2
)
 
(208
)
 
(61
)
 
—

 
(61
)
Total benefits and other deductions
2,516

 
—

 
(641
)
 
1,875

 
(17
)
 
1,858

Income (loss) from continuing operations, before income taxes
2,032

 
—

 
(140
)
 
1,892

 
13

 
1,905

Income tax (expense) benefit from continuing operations
(419
)
 
—

 
11

 
(408
)
 
(5
)
 
(413
)
Net income (loss) from continuing operations
1,613

 
—

 
(129
)
 
1,484

 
8

 
1,492

Net income (loss)
1,613

 
—

 
(113
)
 
1,500

 
8

 
1,508

Net income (loss) attributable to AXA Equitable
$
1,500

 
$
—

 
$
—

 
$
1,500

 
$
8

 
$
1,508

 
Three Months Ended June 30, 2017
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
$
1,613

 
$
(113
)
 
$
1,500

 
$
8

 
$
1,508

Comprehensive income (loss)
1,887

 
(93
)
 
1,794

 
8

 
1,802

Comprehensive income (loss) attributable to AXA Equitable
$
1,794

 
$
—

 
$
1,794

 
$
8

 
$
1,802

 
Six Months Ended June 30, 2017
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Income (Loss):
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Policy charges and fee income
$
1,698

 
$
—

 
$
—

 
$
1,698

 
$
(34
)
 
$
1,664

Net derivative gains (losses)
1,362

 
—

 
15

 
1,377

 
54

 
1,431

Total revenues
6,823

 
—

 
(1,526
)
 
5,297

 
20

 
5,317


168



 
Six Months Ended June 30, 2017
 
As Pre-viously
Reported
 
Gross DAC Adjustment
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
Benefits and other deductions:
 
 
 
 
 
 
 
 
 
 
 
Policyholders’ benefits
2,338

 
—

 
—

 
2,338

 
(10
)
 
2,328

Compensation and benefits
888

 
(65
)
 
(650
)
 
173

 
—

 
173

Commissions and distribution related payments
771

 
(230
)
 
(199
)
 
342

 
—

 
342

Amortization of deferred policy acquisition costs
(20
)
 
298

 
—

 
278

 
62

 
340

Other operating costs and expenses
530

 
(3
)
 
(387
)
 
140

 
—

 
140

Total benefits and other deductions
4,966

 
—

 
(1,239
)
 
3,727

 
52

 
3,779

Income (loss) from continuing operations, before income taxes
1,857

 
—

 
(287
)
 
1,570

 
(32
)
 
1,538

Income tax (expense) benefit from continuing operations
(298
)
 
—

 
22

 
(276
)
 
11

 
(265
)
Net income (loss) from continuing operations
1,559

 
—

 
(265
)
 
1,294

 
(21
)
 
1,273

Net income (loss)
1,559

 
—

 
(231
)
 
1,328

 
(21
)
 
1,307

Net income (loss) attributable to AXA Equitable
$
1,328

 
$
—

 
$
—

 
$
1,328

 
$
(21
)
 
$
1,307

 
Six Months Ended June 30, 2017
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Comprehensive Income (Loss):
 
 
 
 
 
 
 
 
 
Net income (loss)
$
1,559

 
$
(231
)
 
$
1,328

 
$
(21
)
 
$
1,307

Change in unrealized gains (losses), net of reclassification adjustment
386

 
—

 
386

 
21

 
407

Other comprehensive income
401

 
13

 
414

 
21

 
435

Comprehensive income (loss) attributable to AXA Equitable
$
1,742

 
$
—

 
$
1,742

 
$
—

 
$
1,742

 
Six Months Ended June 30, 2017
 
As Pre-viously
Reported
 
Dis-continued Operations Adjustment
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Statements of Equity:
 
 
 
 
 
 
 
 
 
Retained earnings, beginning of year
$
6,151

 
$
—

 
$
6,151

 
$
(56
)
 
$
6,095

Net income (loss) attributable to AXA Equitable
1,328

 
—

 
1,328

 
(21
)
 
1,307

Retained earnings, end of period
7,479

 
—

 
7,479

 
(77
)
 
7,402

Accumulated other comprehensive income, beginning of year
17

 
—

 
17

 
(21
)
 
(4
)
Other comprehensive income (loss)
414

 
—

 
414

 
21

 
435

Accumulated other comprehensive income, end of period
431

 
—

 
431

 
—

 
431

Total AXA Equitable’s equity, end of period
13,273

 
—

 
13,273

 
(77
)
 
13,196

Noncontrolling interest, end of period
2,984

 
—

 
2,984

 
—

 
2,984

Total Equity, End of Period
$
16,257

 
$
—

 
$
16,257

 
$
(77
)
 
$
16,180


169



 
Six Months Ended June 30, 2017
 
As Reported
 
Presentation Reclassifi-cations
 
Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Cash Flows:
 
 
 
 
 
 
 
Net income (loss) (1)
$
1,559

 
$
—

 
$
(21
)
 
$
1,538

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Policy charges and fee income
(1,698
)
 
—

 
34

 
(1,664
)
Net derivative (gains) losses
(1,362
)
 
—

 
(54
)
 
(1,416
)
Amortization and depreciation
—

 
233

 
62

 
295

Amortization of deferred sales commission
17

 
(17
)
 
—

 
—

Other depreciation and amortization
(61
)
 
61

 
—

 
—

Equity (income) loss from limited partnerships
—

 
(65
)
 
—

 
(65
)
Distribution from joint ventures and limited partnerships
50

 
(50
)
 
—

 
—

Changes in:
 
 
 
 
 
 


Reinsurance recoverable
(194
)
 
—

 
(354
)
 
(548
)
Deferred policy acquisition costs
43

 
(43
)
 
—

 
—

Capitalization of deferred policy acquisition costs
(63
)
 
(235
)
 
—

 
(298
)
Future policy benefits
1,303

 
—

 
45

 
1,348

Current and deferred income taxes
204

 
—

 
3

 
207

Other, net
84

 
115

 
—

 
199

Net cash provided by (used in) operating activities
$
(75
)
 
$
(1
)
 
$
(285
)
 
$
(361
)
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
 
 
 
 
Short-term investments
$
—

 
$
1,078

 
$
—

 
$
1,078

Payment for the purchase/origination of:
 
 
 
 
 
 


Short-term investments
—

 
(1,599
)
 
—

 
(1,599
)
Change in short-term investments
(508
)
 
522

 
(14
)
 
$
—

Other, net
243

 
—

 
(197
)
 
46

Net cash provided by (used in) investing activities
$
(3,588
)
 
$
1

 
$
(211
)
 
$
(3,798
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Policyholders’ account balances:
 
 
 
 
 
 
 
Deposits
$
4,109

 
$
—

 
$
784

 
$
4,893

Withdrawals
(1,557
)
 
—

 
(284
)
 
(1,841
)
Transfer (to) from Separate Accounts
767

 
—

 
(4
)
 
763

Net cash provided by (used in) financing activities
$
4,182

 
$
—

 
$
496

 
$
4,678

_______________
(1)
Net income (loss) includes $231 million in the six months ended June 30, 2017 of the discontinued operations that are not included in net income (loss) in the Consolidated Statements of Income (Loss).
The following tables present line items in the consolidated statement of cash flows for the nine months ended September 30, 2017 financial information that has been affected by the revisions. This information has been corrected from the information previously presented in the Company’s September 30, 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, the adjustment for the discontinued operation, 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. Tables for the other consolidated financial statements as of and for the three and nine months ended September 30, 2017 are not included as these revisions were already reflected in the Company’s September 30, 2018 Form 10-Q.

170



 
Nine Months Ended September 30, 2017
 
As Reported
 
Presentation Reclassifi- cations
 
Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Cash Flows:
 
 
 
 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
Amortization and depreciation
$
—

 
$
432

 
$
—

 
$
432

Other depreciation and amortization
(67
)
 
67

 
—

 
—

Equity (income) loss from limited partnerships
—

 
(103
)
 
—

 
(103
)
Distribution from joint ventures and limited partnerships
94

 
(94
)
 
—

 
—

Changes in:
 
 
 
 
 
 
 
Reinsurance recoverable
(361
)
 
—

 
(455
)
 
(816
)
Deferred policy acquisition costs
42

 
(42
)
 
—

 
—

Capitalization of deferred policy acquisition costs
—

 
(433
)
 
—

 
(433
)
Future policy benefits
1,146

 
—

 
168

 
1,314

Current and deferred income taxes
640

 
—

 
(389
)
 
251

Other, net
617

 
197

 
—

 
814

Net cash provided by (used in) operating activities
$
994

 
$
(1
)
 
$
(676
)
 
$
317

 


 


 


 


Cash flows from investing activities:


 


 


 


Proceeds from the sale/maturity/prepayment of:


 


 


 


Short-term investments
$
—

 
$
1,909

 
$
—

 
$
1,909

Payment for the purchase/origination of:
 
 
 
 
 
 
 
Short-term investments
—

 
(2,174
)
 
—

 
(2,174
)
Change in short-term investments
(266
)
 
266

 
—

 
—

Other, net
(258
)
 
—

 
203

 
(55
)
Net cash provided by (used in) investing activities
$
(5,231
)
 
$
1

 
$
203

 
$
(5,027
)
 


 


 


 


Cash flows from financing activities:
 
 
 
 
 
 
 
Policyholders’ account balances:
 
 
 
 
 
 
 
Deposits
$
5,871

 
$
—

 
$
1,116

 
$
6,987

Withdrawals
(2,574
)
 
—

 
(244
)
 
(2,818
)
Transfer (to) from Separate Accounts
1,617

 
—

 
(399
)
 
1,218

Net cash provided by (used in) financing activities
$
5,460

 
$
—

 
$
473

 
$
5,933

22)     SUBSEQUENT EVENTS     
AXA Equitable Holdings, Inc. 2019 Omnibus Incentive Plan (the “2019 Plan”)
In November 2018, Holdings’ Board of Directors and AXA, as Holdings’ then controlling stockholder, adopted the 2019 Plan, which became effective January 1, 2019, with a total of 5.2 million shares of common stock reserved for issuance thereunder. On February 25, 2019, the Compensation Committee of Holdings’ Board of Directors approved an amendment to the 2019 Plan increasing the amount of shares of Holdings’ common stock available for issuance in connection with equity awards granted under the 2019 Plan by two million shares. The holder of a majority of the outstanding shares of Holdings’ common stock executed a written consent approving the increase on February 28, 2019.
AXA Secondary Offering of Holdings Common Stock and Holdings Share Buy-back
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.

171



Repayment of Senior Surplus Note
On December 28, 2018, the Company, issued a $572 million senior surplus note due December 28, 2019 to Holdings, which bears interest at a fixed rate of 3.75%, payable semi-annually. The Company repaid this note on March 5, 2019.

172



AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE I
SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS IN RELATED PARTIES
AS OF DECEMBER 31, 2018
 
Cost (1)
 
Fair Value
 
Amount at Which Shown on Balance Sheet
 
(in millions)
Fixed Maturities:
 
 
 
 
 
U.S. government, agencies and authorities
$
13,646

 
$
13,335

 
$
13,335

State, municipalities and political subdivisions
408

 
454

 
454

Foreign governments
515

 
519

 
519

Public utilities
4,614

 
4,569

 
4,569

All other corporate bonds
22,076

 
21,807

 
21,807

Residential mortgage-backed
193

 
202

 
202

Asset-backed
600

 
590

 
590

Redeemable preferred stocks
440

 
439

 
439

Total fixed maturities
42,492

 
41,915

 
41,915

Mortgage loans on real estate (2)
11,825

 
11,478

 
11,818

Real estate held for the production of income
52

 
52

 
52

Policy loans
3,267

 
3,944

 
3,267

Other equity investments
1,103

 
1,144

 
1,144

Trading securities
15,361

 
15,166

 
15,166

Other invested assets
1,554

 
1,554

 
1,554

Total Investments
$
75,654

 
$
75,253

 
$
74,916

_____________
(1)
Cost for fixed maturities represents original cost, reduced by repayments and write-downs and adjusted for amortization of premiums or accretion of discount; 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 reduced by distributions.
(2)
Balance Sheet amount for mortgage loans on real estate represents original cost adjusted for amortization of premiums or accretion of discount and reduced by valuation allowance.

173



AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE IV
REINSURANCE (1)
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2018, 2017 AND 2016
 
Gross
Amount
 
Ceded to
Other
Companies
 
Assumed
from
Other
Companies
 
Net
Amount
 
Percentage
of Amount
Assumed
to Net
 
(in millions)
As of December 31, 2018
 
 
 
 
 
 
 
 
 
Life insurance in-force
$
390,374

 
$
69,768

 
$
30,322

 
$
350,928

 
8.6
%
 
 
 
 
 
 
 
 
 
 
For the year ended December 31, 2018
 
 
 
 
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
 
 
Life insurance and annuities
$
787

 
$
128

 
$
177

 
$
836

 
21.2
%
Accident and health
49

 
32

 
9

 
26

 
34.6
%
Total Premiums
$
836

 
$
160

 
$
186

 
$
862

 
21.6
%
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
 
 
 
 
 
 
 
 
Life insurance in-force (2)
$
392,926

 
$
73,843

 
$
30,300

 
$
349,383

 
8.7
%
 
 
 
 
 
 
 
 
 
 
For the year ended December 31, 2017
 
 
 
 
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
 
 
Life insurance and annuities
$
826

 
$
135

 
$
186

 
$
877

 
21.2
%
Accident and health
54

 
36

 
9

 
27

 
33.3
%
Total Premiums
$
880

 
$
171

 
$
195

 
$
904

 
21.6
%
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
 
 
 
 
 
 
 
 
Life insurance in-force
$
399,230

 
$
78,760

 
$
31,722

 
$
352,192

 
9.0
%
 
 
 
 
 
 
 
 
 
 
For the year ended December 31, 2016
 
 
 
 
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
 
 
Life insurance and annuities
$
790

 
$
135

 
$
197

 
$
852

 
23.1
%
Accident and health
60

 
41

 
9

 
28

 
32.1
%
Total Premiums
$
850

 
$
176

 
$
206

 
$
880

 
23.4
%
_____________
(1)
Includes amounts related to the discontinued group life and health business.
(2)
Previously reported amounts for “Life insurance in-force—Ceded to other companies” of $41,330 million and “Net amount” of $381,896 have been revised due to an error.


174



Part II, Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part II, Item 9A
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 1934a) as of December 31, 2018, as amended. 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 December 31, 2018.
Management’s annual report on internal control over financial reporting
Management, including the CEO and CFO, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Internal control over financial reporting, no matter how well designed, have inherent limitations. Therefore, even effective internal control over financial reporting may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. The Company’s management, including the Company’s CEO and CFO, assessed the effectiveness of its internal control over financial reporting as of December 31, 2018 in relation to the criteria for effective internal control over financial reporting described in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Management concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2018, based on the criteria in Internal Control-Integrated Framework (2013) issued by COSO due to the two material weaknesses described below.
Management’s report regarding internal control over financial reporting was not subject to attestation by the Company’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in its annual report.
Identification of Material Weaknesses
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:

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(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 are completely and accurately recorded to the appropriate accounts 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:
(i)
the revision of the interim financial statements for the nine, six, and three months ended September 30, June 30, and March 31, 2018 and 2017, respectively, and the annual financial statements for the year ended December 31, 2017;
(ii)
the revision for the three and six months ended March 31, 2018, and June 30, 2018, respectively, as well as the three, six and nine months ended March 31, 2017, June 30, 2017 and September 30, 2017, respectively and for the years ended December 31, 2017 and 2016
(iii)
the revision of the interim financial statements for the three months ended March 31, 2018, the nine months ended September 30, 2017, the six months ended June 30, 2017 and the annual financial statements for the years ended December 31, 2017 and 2016 and
(iv) the restatement of the annual financial statements for the year ended December 31, 2016, the revision to each of the quarterly interim periods for 2017 and 2016, and the revision of the annual financial statements for the year ended December 31, 2015.
These revisions and restatements were directly related to the material weaknesses described above and not indicative of any new material weaknesses. Until 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 not be prevented or detected.
Remediation Status of Material Weaknesses
Management continues to execute its plan moving towards remediation of the material weaknesses. Since identifying the material weaknesses, management has performed the following activities:
Material Weakness Related to Actuarial Models, Assumptions and Data
•
We have designed and implemented an enhanced model validation control framework, including a rotational schedule to periodically 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 and assumptions. We have initiated a validation review and a control design assessment of these data flows.
•
We are in the process of completing 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 adding approximately 25 employees to the 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 staff.
•
To improve controls over journal entries, a less controlled secondary process that was used for consolidating certain entities, reflecting adjustments to prior periods and generating the business segment disclosures, has been eliminated. Beginning with third quarter 2018, all journal entries are recorded in the Company’s general ledger and the secondary process is no longer necessary.

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•
We have enhanced the controls over journal entries through the implementation of new standards designed to ensure effective review and 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 December 31, 2018, we are still 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 the material weaknesses, and we continue to devote 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 are effective. Accordingly, the material weaknesses are not remediated as of December 31, 2018.
Changes in Internal Control over Financial Reporting
We have undertaken the following activities which represent changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended December 31, 2018 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting:
•
Implementation of an enhanced model validation control framework to periodically re-validate all U.S. GAAP models.
•
Design and implementation of 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.
As described above, the Company continues to design and implement additional controls in connection with its remediation plan. These remediation efforts related to the material weaknesses described above represent changes in our internal control over financial reporting for the quarter ended December 31, 2018 that have materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II, Item 9B.
OTHER INFORMATION
None.

Part III, Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Omitted pursuant to General Instruction I to Form 10-K.
Part III, Item 11.
EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I to Form 10-K.
Part III, Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Omitted pursuant to General Instruction I to Form 10-K.
Part III, Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Omitted pursuant to General Instruction I to Form 10-K.

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Part III, Item 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
In 2018 and 2017, PricewaterhouseCoopers LLP ("PwC") served as the principal external auditing firm for our parent company. Subsidiaries, including AXA Equitable Life, are allocated PwC fees attributable to services rendered by PwC to each subsidiary. PwC fees allocated to AXA Equitable Life along with a description of the services rendered by PwC to AXA Equitable Life are detailed below for the periods indicated.
 
2018
 
2017
 
(in millions)
Principal Accounting Fees and Services:
 
 
 
Audit fees
$
7

 
$
12

Audit related fees
3

 
4

Tax fees
—

 
2

All other fees
—

 
—

Total (1)
$
10

 
$
18

_______________
(1)
Does not include fees of $11.5 million and $11.7 million for 2018 and 2017, respectively, that were paid directly by AB to PwC. For more information on these fees, see AB's Annual Report on Form 10-K for the year ended December 31, 2018 as filed with the SEC.

Audit related fees in both years principally consist of fees for audits of financial statements of certain employee benefit plans, internal control related reviews and services and accounting consultation.
Tax fees consist of fees for tax preparation, consultation and compliance services.
All other fees consist of miscellaneous non-audit services.
AXA Equitable’s audit committee has determined that all services to be provided by its independent registered public accounting firm must be reviewed and approved by the audit committee on a case-by-case basis provided, however, that the audit committee has delegated to its chairperson the ability to pre-approve any non-audit engagement where the fees are expected to be less than or equal to $200,000 per engagement. Any exercise of this delegated authority by the audit committee chairperson is required to be reported at the next audit committee meeting.
All services provided by PwC in 2018 were pre-approved in accordance with the procedures described above.


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Part IV, Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
(A)
The following documents are filed as part of this report:

Part IV, Item 16.

FORM 10-K SUMMARY
None.

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INDEX TO EXHIBITS
Number
 
Description
 
Method of Filing
 
Restated Charter of AXA Equitable, as amended September 16, 2010
 
Filed as Exhibit 3.1 to registrant’s Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference
 
Restated By-laws of Equitable Life, as amended November 21, 1996
 
Filed as Exhibit 3.2(a) to registrant’s Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference
 
Consent of PricewaterhouseCoopers LLP
 
Filed herewith
 
Section 302 Certification made by the registrant’s Chief Executive Officer
 
Filed herewith
 
Section 302 Certification made by the registrant’s Chief Financial Officer
 
Filed herewith
 
Section 906 Certification made by the registrant’s Chief Executive Officer
 
Filed herewith
 
Section 906 Certification made by the registrant’s Chief Financial Officer
 
Filed herewith
101.INS
 
XBRL Instance Document
 
Filed herewith
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Filed herewith
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
Filed herewith
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
Filed herewith
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
Filed herewith
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
Filed herewith

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, AXA Equitable Life Insurance Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 28, 2019.
 
 
AXA EQUITABLE LIFE INSURANCE COMPANY
 
By:
/s/ Mark Pearson
 
Name:
Mark Pearson
 
 
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on March 28, 2019.
 
 
 
/s/ Mark Pearson
 

Chief Executive Officer and Director
Mark Pearson
 
 
 
 
/s/ Anders B. Malmström
 
Senior Executive Director and
Chief Financial Officer
Anders B. Malmström
 
 
 
 
/s/ Andrea M. Nitzan
 
Executive Director, Chief Accounting
Officer and Controller
Andrea M. Nitzan
 
 
 
 
/s/ Thomas Buberl
 
Director
Thomas Buberl
 
 
 
 
/s/ Gérald Harlin
 
Director
Gérald Harlin
 
 
 
 
/s/ Daniel G. Kaye
 
Director
Daniel G. Kaye
 
 
 
 
/s/ Kristi A. Matus
 
Director
Kristi A. Matus
 
 
 
 
/s/ George H. Stansfield
 
Director
George H. Stansfield
 
 
 
 
/s/ Charles G.T. Stonehill
 
Director
Charles G.T. Stonehill
 

181