10-K 1 eqhs-1and10xk.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. 001-38469
 
AXA Equitable Holdings, Inc.
(Exact name of registrant as specified in its charter) 
Delaware
 
90-0226248
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
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)
Title of each Class
Name of exchange on which registered
Common stock, $0.01 par value
New York Stock Exchange

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. x

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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
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at June 29, 2018 was approximately $3.3 billion.
As of March 7, 2019, 521,187,924 shares of the registrant’s Common Stock, $0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s proxy statement relating to the 2019 Annual Meeting of Shareholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2018 (the “2019 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K.

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TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
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 Holdings, Inc. (“Holdings”) and its consolidated subsidiaries. “We,” “us” and “our” refer to Holdings and its consolidated subsidiaries, unless the context refers only to Holdings as a corporate entity. There can be no assurance that future developments affecting Holdings 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, impacts on our goodwill and changes in liquidity and access to and cost of capital; (ii) operational factors, including reliance on the payment of dividends to Holdings by its subsidiaries, remediation of our material weaknesses, fulfilling our obligations related to being a public company, 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) our Investment Management and Research segment, including fluctuations in assets under management, the industry-wide shift from actively-managed investment services to passive services and potential termination of investment advisory agreements; (viii) legal and regulatory risks, including federal and state legislation affecting financial institutions, insurance regulation and tax reform; (ix) risks related to our controlling stockholder, including conflicts of interest, waiver of corporate opportunities and costs associated with separation and rebranding; and (x) risks related to our common stock and future offerings, including the market price for our common stock being volatile and potential stock price declines due to future sales of shares by existing stockholders.
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.

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CERTAIN IMPORTANT TERMS

As used in this Annual Report on Form 10-K, “we,” “us,” “our” and the “Company” mean AXA Equitable Holdings, Inc. and its consolidated subsidiaries, unless the context refers only to AXA Equitable Holdings, Inc. (which we refer to as “Holdings”) as a corporate entity. We also use the following capitalized terms:
“AB” or “AllianceBernstein” means AB Holding and ABLP.
“AB Holding” means AllianceBernstein Holding L.P., a Delaware limited partnership.
“AB Holding Units” means units representing assignments of beneficial ownership of limited partnership interests in AB Holding.
“AB Units” means units of limited partnership interests in ABLP.
“ABLP” means AllianceBernstein L.P., a Delaware limited partnership and the operating partnership for the AB business.
“ACS Life” means AXA Corporate Solutions Life Reinsurance Company, a Delaware corporation and a wholly owned direct subsidiary of Holdings.
“AXA” means AXA S.A., a société anonyme organized under the laws of France, our controlling stockholder. AXA owns approximately 59% of our outstanding common stock.
“AXA Advisors” means AXA Advisors, LLC, a Delaware limited liability company, our retail broker/dealer for our retirement and protection businesses and a wholly owned indirect subsidiary of Holdings.
“AXA Distributors” means AXA Distributors, LLC, a Delaware limited liability company, our wholesale broker/dealer for our retirement and protection businesses and a wholly owned indirect subsidiary of Holdings.
“AXA Equitable FMG” means AXA Equitable Funds Management Group, LLC, a Delaware limited liability company and a wholly owned indirect subsidiary of Holdings.
“AXA Equitable L&A” means AXA Equitable Life and Annuity Company, a Colorado corporation and a wholly owned indirect subsidiary of Holdings.
“AEFS” means AXA Equitable Financial Services, LLC, a Delaware corporation and a wholly owned direct subsidiary Holdings.
“AXA Equitable Life” means AXA Equitable Life Insurance Company, a New York corporation, a life insurance company and a wholly owned subsidiary of AEFS.
“AXA Financial” means AXA Financial, Inc., a Delaware corporation and a wholly owned direct subsidiary of Holdings. On October 1, 2018, AXA Financial merged with and into Holdings, with Holdings assuming the obligations of AXA Financial
“AXA Network” means AXA Network, LLC, a Delaware limited liability company and wholly owned indirect subsidiary of Holdings, and its subsidiary, AXA Network of Puerto Rico, Inc.
“AXA Premier VIP Trust” means AXA Premier VIP Trust, a series trust that is a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended (the “Investment Company Act”), as an open-end management investment company.
“AXA RE Arizona” means AXA RE Arizona Company, formerly an Arizona corporation and a wholly owned indirect subsidiary of Holdings, which merged with and into AXA Equitable Life in April 2018.
“AXA Tech” means AXA Technology Services America, Inc.
“CS Life RE” means CS Life RE Company, an Arizona corporation and a wholly owned indirect subsidiary of Holdings.
“EQAT” means EQ Advisors Trust, a series trust that is a Delaware statutory trust and is registered under the Investment Company Act as an open-end management investment company.
“EQ AZ Life Re” means EQ AZ Life Re Company, an Arizona corporation and a wholly owned indirect subsidiary of Holdings.
The “General Partner” means AllianceBernstein Corporation, a Delaware corporation and the general partner of AB Holding and ABLP.

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“MLOA” means MONY Life Insurance Company of America, an Arizona corporation and a wholly owned indirect subsidiary of Holdings.
“SCB LLC” means Sanford C. Bernstein & Co., LLC, a registered investment adviser and broker-dealer.
“USFL” means U.S. Financial Life Insurance Company, an Ohio corporation and a wholly owned indirect subsidiary of Holdings.
For definitions of selected financial and product-related terms used herein, please refer to “Glossary.”

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Part I, Item 1.
BUSINESS
Overview
We are one of America’s leading financial services companies and have helped clients prepare for their financial future with confidence since 1859. Our approximately 12,500 employees and advisors are entrusted with more than $600 billion of assets under management through two complementary and well-established principal franchises, AXA Equitable Life and AllianceBernstein, providing:
Advice and solutions for helping Americans set and meet their retirement goals and protect and transfer their wealth across generations; and
A wide range of investment management insights, expertise and innovations to drive better investment decisions and outcomes for clients and institutional investors worldwide.
We aim to be a trusted partner to our clients by providing advice, products and services that help them navigate complex financial decisions. Our financial strength and the quality of our people, their ingenuity and the service they provide help us build relationships of trust with our clients.
We believe that the growing and aging U.S. population, shift of responsibility for retirement planning from employers to individuals and overall growth in total investable assets will drive significant demand for our products and services going forward. Throughout our long history, we have embraced change and looked to the future, and we continue to see significant opportunities to find new solutions and new ways to deliver service to clients within our target markets.
We have a leading position at the intersection of advice, asset management, retirement and financial protection that we believe provides our clients with products and solutions that meet their long-term financial needs and our stockholders with attractive growth prospects. We have market-leading positions in our four segments:
Individual Retirement—We are a leading provider of variable annuity products, which primarily meet the needs of individuals saving for retirement or seeking retirement income by allowing them to invest in various markets through underlying investment options. As of December 31, 2018, we had more than 900,000 variable annuity policies in force, representing $94.6 billion of Account Value (“AV”).
Group Retirement—We 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. As of December 31, 2018, we had approximately $32.4 billion of AV. For the nine months ended September 30, 2018, we were the #1 provider by gross premiums of retirement plans to kindergarten, primary and secondary schools (the “K–12 education market”).
Investment Management and Research—We are a leading provider of diversified investment management, research and related services to a broad range of clients around the world. As of December 31, 2018, our Investment Management and Research segment had $516 billion in assets under management (“AUM”) consisting of 36% equities, 52% fixed income and 12% multi-asset class solutions, alternatives and other assets.
Protection SolutionsWe focus on attractive protection segments such as variable universal life (“VUL”) insurance, where for 2017 we ranked fourth in sales overall and first in the retail channel and indexed universal life (“IUL”) insurance, where we ranked second in the retail channel in the same period, according to the Life Insurance Marketing and Research Association (“LIMRA”). As of December 31, 2018, we had approximately 900,000 outstanding policies with a face value of $442 billion. This business provides capital diversification benefits alongside the longevity profile of our retirement businesses.
We manage our segments in a complementary way. We strive to create value for our clients and stockholders by pricing and managing risks on the liability side of our balance sheet and by generating attractive risk-adjusted investment returns on the asset side. We leverage our underwriting, risk management and investment management skills across our segments, General Account and Separate Accounts.

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We distribute our products through a premier affiliated and third-party distribution platform with a successful track record of marketing our innovative and less capital-intensive products and solutions allowing us to respond to our clients’ evolving needs and manage our capital and risks responsibly, consisting of:
Affiliated Distribution:
Our affiliated retail sales force, AXA Advisors, which has over 4,700 licensed financial professionals who advise on retirement, protection and investment advisory solutions; and
More than 200 Bernstein Financial Advisors, who are responsible for the sale of investment products and solutions to Private Wealth Management clients.
Third-Party Distribution:
Distribution agreements with more than 1,000 third-party firms including broker-dealers, banks, insurance partners and brokerage general agencies, giving us access to more than 150,000 financial professionals to market our retirement, protection and investment solutions; and
An AB global distribution team of more than 500 professionals, who engage with our approximately 4,900 retail distribution partners and more than 500 institutional clients.
Our product approach is to ensure that design characteristics are attractive to both our customers and our stockholders. We currently focus on products across our businesses that expose us to less market and customer behavior risk, are more easily hedged and, overall, are less capital intensive than many traditional products. For example, in our Individual Retirement segment, we have evolved our variable annuity products to promote products with only a return of premium death benefit (such as index-linked and investment only annuities) and have restructured products that provide variable annuity guaranteed benefits (“GMxB features”). We believe these efforts have been successful with our customers—approximately 63% of our variable annuity product sales in 2018 had no GMxB feature—and for our stockholders—we hold less capital and reserves and do less hedging than would be needed when compared with variable annuity products with GMxB features. Many of our other products, such as those sold in our Group Retirement and Investment Management and Research segments, by their very nature, require little to no incremental capital over the product lifecycle. We also apply this approach to our most capital-intensive segment—Protection Solutions. We do so by focusing on products such as VUL and IUL insurance (which collectively accounted for 82% of our 2018 sales in the Protection Solutions segment), which require substantially less up-front capital relative to other types of life insurance (such as whole life insurance and traditional universal life insurance). In addition, by providing diversification to our more market-oriented products, the Protection Solutions segment helps improve our overall capital efficiency.
We are confident that our market leading positions, premier distribution platform, competitive products and investment expertise position us well to continue to generate a diversified and growing stream of earnings, maintain stability through market cycles and generate attractive returns and strong cash flows for our stockholders.
Our History
We are a majority-owned subsidiary of AXA, a worldwide leader in life, property and casualty and health insurance and asset management. AXA is headquartered in France, with operations in 62 countries and approximately 160,000 employees and distributors. AXA operates primarily in Europe, North America, the Asia/Pacific region and, to a lesser extent, in other regions including the Middle East, Africa and Latin America. Neither AXA nor any affiliate of AXA has any obligation to provide additional capital or credit support to us.
Founded in 1859, our retirement and protection businesses distribute products to individuals and business owners through our affiliated distribution channel, AXA Advisors, and to the financial services market through our wholesalers serving third-party firms.
 Our business also includes AB, of which we own an approximate 65% economic interest. Our economic interest consists of approximately 64% of the AB Units and approximately 4% of the AB Holding Units (representing an approximate 1% economic interest in ABLP). Our indirect, wholly owned subsidiary, AllianceBernstein Corporation, is the General Partner of AB with the authority to manage and control AB, and accordingly, AB is consolidated in our financial statements. AB has been in the investment management and research business for more than 50 years. ABLP is the operating partnership for the AB business, and AB Holding’s activities consist of owning AB Units and engaging in related activities. AB Holding Units trade on the NYSE under the ticker symbol “AB”. AB Units do not trade publicly.

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Our Organizational Structure
AXA holds approximately 59% of our common stock. As a result, we are a “controlled company” within the meaning of NYSE rules. This status allows us to rely on exemptions from certain corporate governance requirements otherwise applicable to NYSE-listed companies for so long as AXA continues to hold more than 50% of our common stock and a transition period after it ceases to do so.
We are a holding company incorporated in Delaware in May 2003. We operate our businesses through a number of direct and indirect subsidiaries.
Market Opportunities
Global asset accumulation markets continued their strong recent growth trend with total AUM reaching $93.8 trillion, up 15.6% year over year, including in the North American market, where total AUM increased by 15.1% year-over-year to $54.5 trillion as of December 31, 2017, according to Willis Towers Watson. In addition, the United States has experienced a decline in the traditional employer-based defined benefit retirement plan system which has raised concerns about the sustainability of safety nets historically provided by governments such as Social Security and employer-sponsored defined benefit plans. These trends have increased the need for Americans to prepare and plan for their own long-term financial security. Our complementary businesses are designed to provide affluent and high net worth Americans with the guidance, products and solutions they need to achieve their wealth accumulation and retirement income goals. We believe the following long-term trends will continue to favorably impact our business over time.
Continued rapid growth in the retirement-aged U.S. population. Technological advances and improvements in healthcare are projected to continue to contribute to increasing average life expectancy, and aging individuals must be prepared to fund retirement periods that will last longer than previously anticipated. The U.S. Census Bureau estimated that approximately 15% of the population was 65 years of age or older in 2017, compared to approximately 9% in 1960. This segment of the population is estimated to double from approximately 48 million in 2017 to more than 98 million by 2060, and it is expected to represent approximately 24% of the overall population, as the youngest members of the “baby boomer” generation continue to reach retirement age.
Shifting retirement savings landscape. Only 14% of millennial households (those under 36 years old) will have access to a defined benefit plan pension, compared to 52% of households of those 71 years old or older, according to LIMRA’s analysis of the Federal Reserve Board’s 2016 Survey of Consumer Finances. Increased life expectancy coupled with this transition away from defined benefit plans has shifted the responsibility for retirement savings and income planning from employers to individuals. We expect that this shift in responsibility will drive demand for our products and services including wealth accumulation, income producing investments and financial advice.
 
Expected growth in retirement assets. U.S. retirement assets are estimated to increase by 4.3% per year from 2018 through 2023 to $32.4 trillion with assets in the not-for-profit/governmental defined contribution sector projected to grow slightly faster at 5.7% for the same period, according to Cerulli’s 2018 U.S. Retirement Markets report. We believe that our retirement focused asset accumulation business will continue to benefit from this trend.
Strong need for financial planning advice. According to the 2018 Insurance Barometer Study by LIMRA, 69% of consumers said that meeting with an agent or advisor before buying life insurance was important to them. We believe that due to the complexity of financial planning, many consumers will continue to seek advice in connection with the purchase of these products, providing companies with broad distribution platforms and in-house advice capabilities a competitive advantage.
We believe that these trends, together with our competitive strengths and strategy discussed below, provide us an opportunity to increase the value of our business.
Our Competitive Strengths
Our two well-established principal franchises, AXA Equitable Life and AllianceBernstein, have a history of agility and innovation. At a time of significant challenges for investors—increased regulation, new technologies and a likely continued low yield environment—the ability to develop new creative solutions is critical for meeting clients’ needs and growing our businesses. Our company has a long history of developing innovative solutions, including introducing variable life insurance to the U.S. market, being one of the pioneers in performance fees for actively managed funds and launching our Structured Capital Strategies (“SCS”) product. Through Bernstein Research, we have a strong reputation for demonstrating that deeper research results in greater investment value.

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Our strong balance sheet provides confidence for the future. We believe the strength of our balance sheet and the statutory capitalization of our insurance companies provide confidence to our clients and business partners and help position us for continued growth. In particular:
In 2017, we increased the statutory capital and reserves of our retirement and protection businesses by approximately $2.3 billion, improving our ability to withstand adverse economic scenarios. Additionally, in April 2018, we effected an unwind of the reinsurance provided to AXA Equitable Life by AXA RE Arizona for certain variable annuities with GMxB features (the “GMxB Unwind”). These positive impacts were offset by the changes to the RBC calculation adopted by the NAIC in 2018, 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. As of December 31, 2018, our insurance company subsidiaries had statutory total adjusted capital (“TAC”) of approximately $8.5 billion, resulting in a Combined RBC Ratio of approximately 670%;
We target maintaining an asset level for all variable annuities at or above a CTE98 level under most economic scenarios and an RBC ratio of 350–400% for non-variable annuity insurance liabilities, which, combined with the variable annuity capital, would result in a Combined RBC Ratio in excess of 500%; and
We have a diversified, high quality $81.3 billion investment portfolio as of December 31, 2018, including $46.3 billion in fixed maturities classified as available-for-sale, of which 97.3% are investment grade rated.
Our business generates significant cash and we have in place a hedging program to protect our cash flows even in adverse economic scenarios. Our two principal operating companies are well established and have been generating, and are expected to continue to generate, significant cash, enabling us to pay dividends, provide capital needed to support our business and service our debt over time. From 2014 to 2016, Holdings received net distributions from our subsidiaries of $2.6 billion. In 2017, in accordance with an agreement with the New York Department of Financial Services (the “NYDFS”) and in preparation for the initial public offering of our common stock (the “IPO”), Holdings made $2.3 billion in aggregate capital contributions to AXA Equitable Life and AXA RE Arizona. In 2018, Holdings received net distributions from its subsidiaries of $1.4 billion. In addition, we have implemented a hedging program intended to protect our variable annuity assets and statutory capital in the event of adverse economic scenarios.
In addition, on December 31, 2018, Holdings and certain of its subsidiaries executed a series of transactions that transferred all of the interests in AB held by AXA Equitable Life to a wholly-owned non-insurance company subsidiary of Holdings. These transactions were undertaken in order to simplify Holdings’ corporate structure and streamline Holdings’ cash flow and capital management.
Our leading retirement businesses are well-positioned to grow. There is a growing need for financial products that provide retirement income as well as a measure of protection against equity market volatility. In both the affluent and high net worth markets and in the K–12 education market, we believe that we are well-positioned to benefit from the growing and aging U.S. population and the continued shift away from defined benefit plans.
For affluent and high net worth clients approaching retirement, our individual retirement products offer customers protection against market volatility and help instill confidence that their income needs will be satisfied in their retirement years.
In our Group Retirement business, we are the leading provider of retirement products and related solutions for the growing 403(b) K–12 education market. Our nationwide footprint of advisors provides valuable advisory services to a wide range of clients in the education market saving for retirement.
Our Investment Management and Research business is strategically positioned to grow. We believe our Investment Management and Research business is well-positioned to navigate an evolving environment in which growth in passive strategies is pressuring fees for many active asset managers. We sell products and solutions that are difficult to replicate through passive mechanisms, including many of our credit, multi-asset and alternative strategies. We are present in markets worldwide, many of which have been less affected by the growth of passive investment options, such as parts of Asia. Additionally, a significant majority of our active equity and fixed income assets are in services that regularly exceed their benchmarks for the three-year performance period. AB’s full year results reflect its sustained investment in active equities, which grew at an organic rate of nearly 8%, and the growth of its equities and alternatives services drove an improvement of 1% in its average fee rate.
Our Protection Solutions business is well established and has growth potential in select segments. We are one of the leading life insurance providers in the United States, specifically with respect to VUL and IUL, and are committed to

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disciplined underwriting. Our in-force portfolio provides diversification on our statutory capital base and attractive cash flows. Over the years, much of this market has become commoditized, and we now selectively focus on the less capital-intensive VUL and IUL accumulation segments of the market.
Our focus on less capital-intensive fee-based products results in lower capital needs. Our ability to create less capital-intensive products and solutions that meet the evolving needs of our clients, while still achieving our risk-adjusted return targets, has allowed us in recent years to capture increased market share, particularly in the variable annuity market. Our Individual Retirement, Group Retirement and Investment Management and Research segments’ earnings are predominantly fee-based.
Our premier affiliated retail and institutional distribution platform differentiates us from competitors. We benefit from a broad reach across affiliated and third-party channels. Our affiliated retail distribution platform consists of over 4,700 licensed AXA Advisors as well as a direct network of more than 200 Bernstein Financial Advisors serving approximately 15,000 high net worth clients as of December 31, 2018. The institutional platform in our retirement and protection segments is broad with more than 1,000 third-party relationships providing access to an additional approximately 150,000 financial professionals, while AB’s global distribution team of more than 500 professionals reach approximately 4,900 distribution partners and more than 500 institutional clients. We believe that our close alignment with our affiliated distribution platform, in conjunction with our extensive and growing network of third-party relationships, differentiates us from our competitors and allows us to effectively distribute our products and write high-quality new business.
Our disciplined risk management framework protects our balance sheet. We have well-developed technical risk management capabilities which are embedded throughout our business. Our decisions are driven by an internal economic model designed to ensure that we protect our solvency, honor our obligations to our clients and provide attractive risk-adjusted returns for our stockholders. For example, our variable annuity hedging strategy is focused on protecting the economic value of our liabilities while allowing us to return cash to our stockholders through dividends and share repurchases across a variety of economic scenarios.
Our highly experienced management team brings strong capabilities. We are led by well-respected industry veterans who bring diverse U.S. and global experiences with long-standing experience in the financial services industry.
Our Strategy
Our overarching objective is to position the Company as the most trusted partner to clients by providing advice, products and services that help them navigate complex financial situations. We believe we are well-positioned to use our competitive strengths to grow our earnings base, actively manage our capital and generate attractive risk-adjusted returns for our stockholders. We have identified specific initiatives that are designed to grow our business, enhance productivity and optimize our capital. Underpinning this strategy is our commitment to disciplined risk management and a sound people strategy.
Growth Strategies
Deliver organic growth by focusing on attractive market segments. We intend to continue to innovate across our businesses, enhancing existing products and creating new products to service the needs of our retail and institutional clients.
Individual Retirement. We plan to further build on our market-leading position in the variable annuity market through continued innovation in our product portfolio to address evolving customer preferences and will seek opportunities to continue to expand our distribution network by deepening relationships with existing partners and developing relationships with new partners and channels. A key component of our strategy is to ensure that we maintain an “all-weather” portfolio to meet the needs and risk appetites of consumers through different market cycles. An example of this is the significant success we have had with SCS, which is designed to meet consumers’ preference for some downside protection while sharing in the potential for market upside.
Group Retirement. We will take advantage of our market-leading position in the K–12 education market where we expect attractive growth prospects through approximately 1,000 dedicated advisors serving clients in more than 9,000 public school plans as of December 31, 2018. We see further growth opportunities through expansion of our distribution capabilities and plan to use our new mutual fund platform to retain existing clients and expand our client base. We will continue to leverage technology through our direct marketing and online enrollment program, which provides an omni-channel capability to augment our proven advisor model.

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Investment Management and Research. We will continue to build on AB’s heritage of research excellence and ingenuity to develop new actively managed solutions for which investors see value and are willing to pay a price premium over passively managed alternatives. AB has a suite of actively managed, differentiated equity and fixed income services, delivering strong risk-adjusted returns. For instance, 90% of our fixed income services and 62% of our equity services have outperformed their benchmarks over the three-year period ended December 31, 2018. In addition, our Multi-Asset Solutions group develops outcome-oriented services for institutional and retail clients, including innovative offerings such as our multi-manager target-date funds and our hedge fund replication strategies. We also have a diverse offering of alternative strategies with strong emerging track records that we expect to commercialize and grow over the next three years.
Protection Solutions. We will focus our strategy on asset accumulation segments that are less capital-intensive, such as VUL and IUL insurance which offer attractive risk-adjusted returns. We plan to improve our performance over time through earnings generated from sales of our repositioned product portfolio and by proactively managing and optimizing our in-force book. In 2015, we entered the employee benefits market and have been focused on growing our capabilities. Using our strong presence in the small and medium-sized businesses market, we have developed a differentiated value proposition for employers where margins remain attractive.
Continue to expand and deepen our distribution channels. Over the last three years, we have had strong sales growth while maintaining attractive risk-adjusted returns. The combination of a strong affiliated sales force, symbiotic third-party relationships, financial strength and innovative product design has allowed us to achieve this while shifting our mix of business towards less capital-intensive products.
We see opportunities for continued growth by expanding our affiliated and third-party distribution channels. We plan to expand our third-party distribution footprint with select partners and grow our footprint in the fee-based registered investment adviser channel. We have a track record in building new channels such as selling retirement products through insurance partners, which commenced in 2011 and accounted for approximately $810 million of first year premium and deposits (“FYP”) for the year ended December 31, 2018.
We plan to enhance sales delivery through investments in automation, analytics and digital capabilities. In recent years, we have upgraded our financial planning tool software for our advisers and built new distribution capabilities alongside our affiliated sales force such as our outbound customer relations unit.
At AB, we are investing in our distribution capabilities to accelerate growth of well-performing products in U.S. and European retail channels. We are building our institutional sales capability to drive increased penetration of Multi-Asset Solutions and alternatives and deploying digital technologies to accelerate growth in our Private Wealth Management division. In addition, we will continue to leverage AB’s leading position in certain Asian markets to distribute our differentiated equity and fixed income solutions.
Productivity Strategies
Enhance profitability through diligent focus on managing expenses while still delivering a best-in-class customer experience. From 2012 through 2017 we delivered more than $350 million in productivity and efficiency gains, principally through right-sizing our organization, selectively outsourcing certain functions, reducing our real estate footprint and implementing information technology productivity measures. We see additional opportunities to improve profitability across our businesses through operating expense reductions, without impacting our ability to serve our existing clients and grow our businesses. In particular, we plan to:
Shift our real estate footprint away from the New York metropolitan area to provide space efficiencies and lower labor costs and, where possible, take advantage of state and local tax incentives;
Replace costly technology infrastructure with more efficient and more up-to-date alternatives, including cloud-based solutions, and use lean management and agile practices to both enhance service and reduce infrastructure cost;
Leverage new technologies to further drive productivity, including accelerating our eDelivery, self-service and paperless initiatives to both improve service and reduce operating costs; and
Expand existing outsourcing arrangements (currently several hundred roles supporting service and finance) to further improve cost competitiveness.

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Capital Optimization
Optimize our General Account investment portfolio. Prior to 2018, we had an outsized position in U.S. Treasury bonds when compared to many of our principal competitors in the United States and a relatively short credit portfolio duration. We have begun to gradually transition our portfolio to be in line with our economic liabilities and better optimize our capital under a U.S. framework. Principally, we have begun the transition of our investment portfolio from U.S. Treasury bonds to high quality investment grade bonds and have extended our investment portfolio’s credit duration. We expect this transition to contribute a meaningful increase in net investment income when complete.
Proactively manage our business portfolio. One of our primary objectives is to improve our financial performance. In addition to driving operating earnings, we plan to continue to proactively manage our in-force portfolio to ensure we optimize equity invested in our businesses. This includes market transactions, reinsurance and exercising contractual rights as appropriate. Underpinning this is our strong experience in managing our various portfolios through actions such as buyouts, fund substitutions and portfolio sales.
Return capital to stockholders. We will focus on returning excess capital to stockholders actively and prudently. Our expected sources of excess capital generation over the course of the next several years include cash flow generated by earnings associated with our diverse, seasoned portfolio of retirement and protection businesses and quarterly unitholder distributions from our economic interest in AB, of which, as of December 31, 2018, nearly all is held outside of our insurance company subsidiaries.
Risk Management Strategy
Maintain risk management discipline. The goal of our risk management strategy is to protect capital, enable growth and achieve profitable results across various market cycles. For our variable annuity business, we use a dynamic hedging strategy to offset changes in the economic liability of our GMxB features due to changes in equity markets and interest rates. In addition to our dynamic hedging strategy, in the fourth quarter of 2017 and the first quarter of 2018, we implemented static hedge positions to maintain a target asset level for all variable annuities at or above a CTE98 level under most economic scenarios, and to maintain a CTE95 level even in extreme scenarios. We expect to adjust from time to time our static equity hedge positions to maintain our target level of CTE protection over time. For our non-variable annuity insurance businesses, we aim to maintain a 350–400% RBC ratio, which, combined with the variable annuity capital, would result in a Combined RBC Ratio in excess of 500%.
In addition, we expect that our diverse, seasoned in-force book of business should continue to generate statutory earnings further bolstering our statutory capital position. As of December 31, 2018, our debt-to-capital ratio excluding Accumulated Other Comprehensive Income (“AOCI”) was approximately 25%, which we believe supports strong financial strength ratings, and we expect to maintain a mid-20s% debt-to-capital ratio going forward.
We have enhanced our internal economic model to orient the company more toward U.S. regulatory and capital frameworks and away from the European Solvency II framework. Product pricing, new portfolio investments and capital distribution decisions are driven by this economic model and are designed to protect our economic solvency, honor our obligations to our clients and provide attractive risk-adjusted returns for our stockholders.
People Strategy
Raising likelihood of success through our people strategy. We understand that to execute our plan successfully we need not only a sound business strategy but an equally well-developed people strategy. In addition to ensuring strong alignment across our organization to our goals and strategies, we will continue our long-standing commitment to building a culture of inclusion, professional excellence and continuous learning. We are very pleased to have been recognized as a “Great Place to Work” in 2016, 2017 and 2018 by the Great Place to Work® Institute, an independent workplace authority. Professional development has always been a key part of our philosophy. For example, we were a founding partner with The American College of Financial Services in developing the Chartered Life Underwriter designation, which remains the industry standard. In addition to investing in our people’s development, we continually look for opportunities to bring in fresh talent to augment our team.
Financial Goals
We have designed our financial goals to maintain a strong balance sheet while delivering disciplined profitable growth. We have established the following financial goals which we believe best measure the execution of our business strategy and align with our stockholders’ interests:

13


Target asset level for all variable annuities at or above a CTE98 and an RBC ratio of 350-400% for our non-variable annuity insurance liabilities;
Return of capital to stockholders equal to at least 50-60% of our Non-GAAP Operating Earnings on an annualized basis starting in 2019, including payment of dividends and share repurchases; previously our target was 40-60%;
Target a compound annual growth rate in our Non-GAAP Operating Earnings of 5-7% through 2020, subject to market conditions; and
We expect that the target growth in Non-GAAP Operating Earnings combined with our target return of capital to stockholders will result in Non-GAAP Operating ROE in the mid-teens by 2020.
We focus on Non-GAAP Operating ROE, which is a measure of our Non-GAAP Operating Earnings divided by our Total equity attributable to Holdings, excluding AOCI, as a key measure of profitability for our Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Measures—Non-GAAP Operating ROE and Non-GAAP Operating ROC by Segment”.
The Tax Reform Act reduced our effective tax rate on Non-GAAP Operating Earnings, which resulted in an improvement to Non-GAAP Operating Earnings. In addition to the favorable change in tax rate, we anticipate that the following key initiatives will assist us in increasing our Non-GAAP Operating ROE to our stated goal:
General Account Optimization: We have begun to transition $5 billion of our General Account investment portfolio from U.S. Treasury bonds to high quality investment grade corporate bonds and $2 billion of our General Account investment portfolio from shorter duration, high quality investment grade corporate bonds to longer duration, high quality investment grade corporate bonds. We expect this transition to increase the yield on the reallocated portion of our investment portfolio. At current market rates and corporate spreads over U.S. Treasury bonds, once the transition and other investment actions are completed, we estimate an improvement to Non-GAAP Operating Earnings of approximately $160 million per annum on our General Account investments by 2020. We have thus far completed approximately two-thirds of the General Account optimization initiatives toward achieving our 2020 goal. We do not expect the change in our investment allocation to have a meaningful impact on our RBC ratio.
AB’s Margin Target Expansion: AB previously adopted a goal of increasing AB’s consolidated adjusted operating margin to 30% by 2020. Significant declines in the equity and certain fixed income markets during the fourth quarter of 2018, most notably in December 2018, reduced AB’s AUM by $34.0 billion, or 6.2%, during the fourth quarter to $516.4 billion from $550.4 billion at the end of the third quarter of 2018. Given the impact AB expects this lower AUM will have on its ability to generate the level of investment advisory fee revenues AB initially forecast when establishing this goal, presently AB does not believe that achieving this goal by 2020 is likely. However, AB is taking additional actions to better align its expenses with these lower AUM and expected revenues. AB remains committed to achieving an adjusted operating margin of 30% in years subsequent to 2020 and will take continued actions in this regard, subject to prevailing market conditions and the evolution of its business mix.
AB’s adjusted operating margin is a financial measure that is not comparable to our Non-GAAP Operating Earnings measure. Adjusted operating margin is a non-GAAP financial measure used by AB’s management in evaluating AB’s financial performance on a standalone basis and to compare its performance, as reported by AB, in its periodic reports. In setting this goal, AB made a number of significant assumptions, including with respect to levels of positive net flows into its investment services, the growth in its alternative products business, rates of increase in fixed costs as well as transitional costs associated with establishing its headquarters in Nashville, TN, including employee relocation, severance, recruitment and duplicative occupation and occupancy costs, and the timing of such costs, its success in achieving planned cost reductions and the timing of such cost reductions, investments it makes in its business and general market conditions.
Productivity Strategies: We expect to continue to build upon our recent productivity improvements, through which we have delivered more than $350 million in efficiency improvements from 2012 through 2017. We have identified several additional initiatives, including reallocating some of our real estate footprint away from New York, replacing or updating less efficient legacy technology infrastructure and expanding existing outsourcing arrangements, that we believe will reduce costs and improve productivity. We anticipate that the savings from these strategies should offset any incremental ongoing expenses we incur as a standalone company and we expect these initiatives to improve our operating leverage, increasing our Non-GAAP Operating Earnings by approximately $75 million per annum by 2020.
Capital Optimization: We plan to return capital to shareholders through dividends and share repurchases, which we expect, in aggregate, will represent at least 50-60% of our Non-GAAP Operating Earnings. We also plan to

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opportunistically manage our in-force portfolio through potential market transactions, reinsurance and the exercise of our contractual rights.
Growth Strategies: We plan to continue to grow our core business through further refinement of our product offerings, expansion of our third-party distribution network and our AXA Advisors affiliated salesforce and increased penetration of our target markets.
These goals are based on our baseline business plan scenario, developed at the time of our IPO, which we refer to as our “Base Case Scenario.” Our Base Case Scenario assumes 6.25% annual equity market returns, the yield on the 10-year U.S. Treasury note rising ratably over the next 10 years to 2.8% and policyholder behavior based on our current best estimate assumptions which include dynamic variables to reflect the impact of a change in market levels. Actual results related to these targets may vary depending on various factors, including actual capital market outcomes, changes in actuarial models or emergence of actual experience, changes in regulation as well as other risks and factors discussed in “Risk Factors.” Non-GAAP Operating ROE and Non-GAAP Operating Earnings are non-GAAP financial measures. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Operating Measures” for a discussion of our non-GAAP financial measures.
In setting the targets described above, we have made significant assumptions with respect to, among other things:
our amount of new sales of individual retirement, group retirement and protection solutions products;
net flows at AB and the amount of distributions from AB;
the absence of new regulation such as NAIC variable annuity reserve and capital reform;
effective tax rates lower than the federal statutory rate of 21%;
our degree of leverage, including indebtedness incurred in connection with the IPO;
limited differences between actual experience and existing actuarial assumptions, including assumptions for which existing experience is limited and experience will emerge over time;
the efficacy and maturity of existing actuarial models to appropriately reflect all aspects of our existing and in-force businesses;
the effectiveness and cost of our proposed hedging program, the timing of its implementation and the impact of our hedging strategy on net income volatility and possible negative effects on our statutory capital;
our ability to implement our business strategy, including optimizing our General Account portfolio and reducing expenses;
the successful implementation of our key initiatives outlined above;
our access to capital; and
general conditions of the markets in which our businesses operate.
While these targets are presented with numerical specificity, and we believe such targets to be reasonable as of the date of this Annual Report on Form 10-K, given the uncertainties surrounding such assumptions, there are significant risks that these assumptions may not be realized and as a result, the financial goals may not be achieved. In calculating these goals, we exclude several significant impacts to our Protection Solutions segment in 2017 including actuarial assumption updates and model changes, a maintenance expense assumption update, a mortality table update and loss recognition testing. For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations by Segment—Protection Solutions.” We also exclude the anticipated beneficial impact of tax reform on Non-GAAP Operating Earnings. Accordingly, our actual results may differ from these financial goals and the differences may be material and adverse, particularly if actual events adversely differ from one or more of our key assumptions. The financial goals and their underlying assumptions are forward-looking statements and can be affected by any of the factors discussed in “Risk Factors” and “Note Regarding Forward-Looking Statements and Information.” We strongly caution investors not to place undue reliance on any of these assumptions or financial goals. Except as may be required by applicable securities laws, we are not under any obligation and expressly disclaim any obligation to update or alter any assumptions, estimates, financial goals, projections or other related statements that we may make.

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Segment Information
We are organized into four segments: Individual Retirement, Group Retirement, Investment Management and Research, and Protection Solutions. We report certain activities and items that are not included in our segments in Corporate and Other.
 The following table presents operating earnings (loss) by segment and Corporate and Other for the years ended December 31, 2018, 2017 and 2016:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
 
 
 
 
 
 
Operating earnings (loss) by segment:
 
 
 
 
 
Individual Retirement
$
1,555

 
$
1,252

 
$
1,167

Group Retirement
389

 
283

 
167

Investment Management and Research
381

 
211

 
161

Protection Solutions
197

 
502

 
77

Corporate and Other
(356
)
 
(213
)
 
(181
)
Non-GAAP Operating Earnings
$
2,166

 
$
2,035

 
$
1,391

For additional financial information on segments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations by Segment” and Note 19 of the Notes to the Consolidated Financial Statements.
Individual Retirement
Our Individual Retirement segment is 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 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. Our Individual Retirement business is an important source of earnings and cash flow for our company, and we believe our hedging strategy preserves a substantial portion of these cash flows across a wide range of risk scenarios. The primary sources of revenue for our Individual Retirement segment include fee revenue and investment income. As of December 31, 2018, we had more than 900,000 variable annuity contracts in force, representing approximately $94.6 billion of AV.
We principally focus on selling three variable annuity products, each of which provides policyholders with distinct benefits, features and return profiles. 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. Due to our innovation, our product mix has evolved considerably since the financial crisis. The majority of our sales in 2018 consisted of products without GMxB features (other than the return of premium (“ROP”) death benefit), and 1% of 2018 FYP was attributable to products with fixed rate guarantees. We believe that our current portfolio of less capital-intensive products offers a range of solutions for our clients and provides us with attractive risk-adjusted returns.
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. This differentiated distribution network, along with our diverse product portfolio, has enabled us to rank among the industry leaders in sales of variable annuity products. As of December 31, 2017, we ranked third in variable annuity market share based on sales, according to Morningstar, Inc. (“Morningstar”), and our wholesalers serving third-party firms ranked second in variable annuity sales productivity in the third-party channel, according to Market Metrics. As of December 31, 2017, our in-force block ranked fifth based on variable annuity net assets, according to Morningstar.
We believe that our current portfolio of less capital-intensive products offers a range of solutions for our clients and provides us with attractive risk-adjusted returns. To further our growth, we plan to continue to innovate our product portfolio, expand and deepen our distribution channels and effectively manage risk in our business.
 
Product Innovation. We have created a diverse portfolio of variable annuity products that are designed to be attractive in different market scenarios and economic conditions. We will seek opportunities to expand our product line-up in new segments

16


of the individual variable annuity market that leverage our product design, risk management and distribution capabilities and provide additional growth opportunities with favorable risk-adjusted returns. For affluent and high net worth clients approaching retirement, our individual retirement products offer customers protection against market volatility and help instill confidence that their income needs will be satisfied in their retirement years.
Distribution Expansion. We have a large and differentiated distribution network that includes AXA Advisors and a wide range of financial services firms including broker-dealers, banks, insurance partners and brokerage general agencies. We have had considerable success in evolving our third-party distribution network by growing in the bank, broker-dealer and insurance partner channels and will seek opportunities to continue to expand our distribution network by deepening relationships with existing partners and developing relationships with new partners and channels.
Risk Management. We have taken a multi-pronged approach to actively manage the economic risks associated with our in-force variable annuity products. We use a dynamic hedging strategy to offset changes in the economic liability of our GMxB features due to changes in equity markets and interest rates (within this strategy we reevaluate our economic exposure at least daily and rebalance our hedge positions accordingly). In the fourth quarter of 2017 and the first quarter of 2018, we supplemented this dynamic strategy with additional static hedge positions (derivatives positions intended to be held to maturity with less frequent re-balancing) 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. In addition to these hedging strategies, we employ various other methods to manage the risks of our in-force variable annuity products, including asset-liability matching, volatility management tools within the Separate Accounts, and an active in-force management program, including buyout offers.
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 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. As of December 31, 2018, the total AV of our variable annuity products was $94.6 billion, consisting of $74.0 billion of Separate Account AV and $20.6 billion of General Account AV.
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.
 The following table presents our variable annuity AV by GMxB feature for our variable annuity business in our Individual Retirement segment as of December 31, 2018, 2017 and 2016:
 
As of December 31,
 
2018
 
2017
 
2016
 
(in millions)
Account Value
 
 
 
 
 
Non-GMxB
$
23,759

 
$
22,429

 
$
17,433

ROP Death Benefit Only
8,730

 
9,592

 
9,309

Total Non-GMxB & ROP Death Benefit Only
$
32,489

 
$
32,021

 
$
26,742

Floating Rate GMxB
20,633

 
21,599

 
18,768

Fixed Rate GMxB
41,467

 
49,803

 
48,094

Total Variable Annuity AV
$
94,589

 
$
103,423

 
$
93,604


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The following table presents our variable annuity benefit base by GMxB feature for the Individual Retirement segment as of December 31, 2018, 2017 and 2016. Many of our variable annuity contracts offer more than one type of GMxB feature such that the amounts listed below are not mutually exclusive. Thus, the benefit base cannot be totaled.
 
As of December 31,
 
2018
 
2017
 
2016
 
(in millions)
Benefit Base
 
 
 
 
 
ROP Death Benefit Only
$
6,072

 
$
6,281

 
$
6,640

Floating Rate GMxB
 
 
 
 
 
GMDB
21,924

 
20,628

 
18,948

GMIB
19,670

 
18,412

 
16,211

Fixed Rate GMxB
 
 
 
 
 
GMDB
61,220

 
62,702

 
63,926

GMIB
63,431

 
64,673

 
66,310

The guaranteed benefit received by a policyholder pursuant to a GMxB feature is calculated based on the benefit base. The benefit base is defined as a hypothetical amount (i.e., not actual cash value) used to calculate the policyholder’s optional benefits within a variable annuity. A benefit base cannot be withdrawn for cash and is used solely to calculate the variable annuity’s optional guarantees. Generally, the benefit base is not subject to a cap on the value. However, the benefit base stops increasing after a defined time period or at a maximum age, usually age 85 or 95, as defined in the contract.
The calculation of the benefit base varies by benefit type and may differ in value from the policyholder’s AV for the following reasons:
The benefit base is defined to exclude the effects of a decline in the market value of the policyholder’s AV. Accordingly, actual claim payments to be made in the future to the policyholder will be determined without giving effect to market declines.
The terms of the benefit base may allow it to increase at a guaranteed rate irrespective of the rate of return on the policyholder’s AV.
We currently offer GMxB riders. Their principal features are as follows:
GMDBs provide that in the event of the death of the policyholder, the beneficiary will receive the higher of the current contract account balance or the benefit base upon the death of the owner (or annuitant).
GMIBs provide, if elected by the policyholder after a stipulated waiting period from contract issuance, guaranteed minimum annual lifetime payments based on predetermined guaranteed annuity purchase factors that may exceed what the contract AV can purchase at then-current annuity purchase rates.
For a detailed discussion of GMxB riders, see “—Overview of GMxB Features.”
Products
We primarily sell three variable annuity products, each providing policyholders with distinct features and return profiles. We believe these products offer us attractive risk-adjusted returns. Our current primary product offering, ordered below according to sales volume for the year ended December 31, 2018, includes:
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 (“ETF”), 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

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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.
Other products. We offer other products which offer optional GMxB benefits. These other products do not contribute significantly to our sales.
 Our variable annuity portfolio is mature with gross premiums for our fixed rate GMxB products, ranging from $8.5 billion to $11.3 billion from 2005 to 2008. Since 2009, gross premiums for these products have decreased substantially. Over this period, we shifted our business from selling variable annuity products with GMxB features with fixed roll-up rates, to predominantly (i) variable annuity products without GMxB features (other than the return of premium death benefit in some cases) and (ii) variable annuity products with GMxB features with floating roll-up rates. We had a total of $11 billion of FYP for our entire variable annuity portfolio in 2008. Based on FYP, we have shifted our portfolio from 90% fixed rate GMxB products in 2008 to 93% floating rate GMxB products and non-GMxB products in 2018. In addition, AV has shifted from 77% Fixed Rate GMxB products in 2008 to 44% in 2018.
Evolution of Variable Annuity FYP
chart-56eeb7ab13a05407872.jpgchart-81cb10229af865069c5.jpg
 
The following tables present the relative contribution to FYP of each of the above products and GMxB features for the years ended December 31, 2018, 2017 and 2016.
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
 
 
(in millions)
 
 
FYP by Product
 
 
 
 
 
SCS
$
3,926

 
$
3,781

 
$
3,424

Retirement Cornerstone
2,479

 
2,522

 
3,042

Investment Edge
537

 
418

 
408

Other
366

 
374

 
470

Total FYP
$
7,308

 
$
7,095

 
$
7,344


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Years Ended December 31,
 
2018
 
2017
 
2016
 
 
 
(in millions)
 
 
FYP by Guarantee Feature
 
 
 
 
 
Non-GMxB
$
4,640

 
$
4,622

 
$
4,265

ROP Death Benefit Only
496

 
276

 
271

Total Non-GMxB & ROP Death Benefit Only
$
5,136

 
$
4,898

 
$
4,536



 

 

Floating Rate GMxB
2,124

 
2,108

 
2,600

Fixed Rate GMxB
48

 
89

 
208

Total GMxB
$
2,172

 
$
2,197

 
$
2,808



 

 

Total FYP
$
7,308

 
$
7,095

 
$
7,344

Our sales for the years ended December 31, 2018, 2017 and 2016 further demonstrate the result of our product sales evolution, as 63%, 65% and 58% of FYP, respectively, came from variable annuity products that do not contain GMxB riders, and of the GMxB riders sold, they overwhelmingly featured floating, as opposed to fixed, roll-up rates.
Our Individual Retirement segment works 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.”
Markets
For our Individual Retirement segment, we target sales of our products to affluent and high net worth individuals and families saving for retirement or seeking retirement income. As the retirement age population in the United States continues to grow and employers continue to shift away from defined benefit plans, we expect the need for these retirement savings and income products to expand.
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.
Distribution
We distribute our variable annuity products through AXA Advisors, and through third-party distribution channels. For the year ended December 31, 2018, AXA Advisors represented 38% of our variable annuity FYP in this segment, while our third-party distribution channel represented 62% of our variable annuity FYP in this segment. We employ over 150 external and internal wholesalers who distribute our variable annuity products across both channels. Our wholesalers serving third-party firms ranked second in third-party variable annuity wholesale productivity for the year ended December 31, 2017, according to Market Metrics.
Affiliated Distribution. We offer our variable annuity 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.
Third-Party Distribution. 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. For example, in 2011, we began distributing our variable annuity products to insurance partners. Today, we work with some of the country’s largest insurance partners and our sales through this channel have grown to comprise 11% of our total FYP for the year ended December 31, 2018.

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 The table below presents the contributions to and percentage of FYP of our variable annuity products by distribution channel for the year ended December 31, 2018.
FYP by Distribution
chart-de6e5969c63a20836fd.jpg
Other than AXA Advisors, no single distribution firm contributed more than 10% of our sales in 2018.
Competition
Our Individual Retirement business competes with traditional life insurers, as well as banks, mutual fund companies and other investment managers. The variable annuities market is highly competitive, with no single provider dominating the market across products. The main factors that distinguish competitors to clients include product features, access to capital, access to diversified sources of distribution, financial and claims-paying ratings, investment options, brand recognition, quality of service, technological capabilities and tax-favored status of certain products. Competition may affect, among other matters, both the growth of our business and the pricing and features of our products.
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.
Fees on AV, Fund Assets, Benefit Base and Investment Income
We earn various types of fee revenue based on AV, fund assets and benefit base. In general, fees from GMxB features that are calculated based on the benefit base are more stable compared to fees calculated based on the AV.
Mortality & Expense, Administrative Charges and Distribution Charges. We deduct a daily charge from the net assets in each variable investment option to compensate us for mortality risks, administrative expenses and a portion of our sales expenses under the variable annuity contract. These charges are calculated based on the portion of the policyholder’s AV allocated to the Separate Accounts and are expressed as an annual percentage.
 Withdrawal Charges. Some variable annuity contracts may also impose charges on withdrawals for a period after the purchase, and in certain products for a period after each subsequent contribution, also known as the withdrawal charge period. A withdrawal charge is calculated as a percentage of the contributions withdrawn. The percentage of the withdrawal charge that applies to each contribution depends on how long each contribution had been invested in the contract. Withdrawal charges generally decline gradually over the withdrawal charge period, which can range from zero to 12 years depending on the product

21


and share class. Our variable annuity contracts typically permit policyholders to withdraw up to 10% of their AV each year without any withdrawal charge, although their guarantees may be significantly negatively impacted by such withdrawals. Contracts may also specify circumstances when no surrender charges apply (for example, upon payment of a death benefit or due to disability, terminal illness or confinement to a nursing home).
Investment Management Fees. We charge investment management fees for the proprietary funds managed by AXA Equitable FMG that are offered as investments under the variable annuities. Investment management fees are also paid on the non-proprietary funds managed by investment advisers unaffiliated with us to the unaffiliated investment advisers. Investment management fees differ by fund. A portion of the investment management fees charged on funds managed by sub-advisers unaffiliated with us are paid by us to the sub-advisers. Investment management fees reduce the net returns on the variable annuity investments.
12b-1 Fees and Other Revenue. 12b-1 fees are paid by the mutual funds which our policyholders chose to invest in and are calculated based on the net assets of the funds allocated to our sub-accounts. These fees reduce the returns policyholders earn from these funds. Additionally, mutual fund companies with funds that are available to policyholders through the variable annuity sub-accounts pay us fees consistent with the terms of administrative service agreements. These fees are funded from the fund companies’ net revenues.
Death Benefit Rider Charges. We deduct a charge annually from the policyholders’ AV on each contract date anniversary for most of our optional death benefits. This charge is in addition to the base mortality and expense charge for promising to pay the GMDB. The charges earned vary by generation and rider type. For some death benefits, the charges are calculated based on AV, but for enhanced death benefits, the charges are normally calculated based on the benefit base.
Living Benefit Riders Charges. We deduct a charge annually from the policyholders’ AV on each contract date anniversary. We earn these fees for promising to pay guaranteed benefits while the policyholder is alive, such as for any type of GMLB (including GMIB, GWBL, GMWB and GMAB). The fees earned vary by generation and rider type and are calculated based on the benefit base.
Investment Income. We earn revenue from investment income on our General Account investments.
Risk Management
We approach risk management of our variable annuity products: (i) prospectively, by assessing, and from time to time, modifying our current product offerings to manage our risk and (ii) retrospectively, by implementing actions to reduce our exposure and manage the risks associated with in-force variable annuity contracts.
Current GMxB Product Strategy
Over the last decade, we have redesigned our variable annuity product offering by introducing new variable annuities without GMxB features, discontinuing the offering of certain GMxB features and adding or adjusting other features to better enable us to manage the risk associated with these products. Through the increase in sales of our products without GMxB features, sales of our variable annuity contracts with GMxB features have decreased significantly as a percentage of our total sales. We continue to offer certain GMxB features to meet evolving consumer demand while maintaining attractive risk-adjusted returns and effectively managing our risk.
 Some of the features of our GMxB products have been redesigned over the past several years to better manage our risk and to meet customer demand. For example:
we primarily offer floating (tied to interest rates), as opposed to fixed, roll-up rates;
we offer lower risk investment options, including passive investments and bond funds with reduced credit risk if certain optional guaranteed benefits are elected; and
we offer managed volatility funds, which seek to reduce the risk of large, sudden declines in AV during market downturns by managing the volatility or draw-down risk of the underlying fund holdings through re-balancing the fund holdings within certain guidelines or overlaying hedging strategies at the fund level.
To further manage our risk, features in our current GMxB products provide us with the right to make adjustments post-sale, including the ability to increase benefit charges. For more information on GMxB features contained in our current and in-force products, see below “—Overview of GMxB Features.”

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In-force Variable Annuity Management
Since the financial crisis, we have implemented several actions to reduce our exposure and manage the risks associated with in-force variable annuity contracts while ensuring policyholder rights are fully respected. We manage the risks associated with our in-force variable annuity business through our dynamic hedging program, reinsurance and product design. The dynamic hedging program was implemented in the early 2000s and today is managed by a dedicated team focused on managing our total variable annuity assets to a CTE level consistent with our financial goals. In addition, we use reinsurance for the GMxB riders on our older variable annuity products (generally issued 1996-2004). We have also introduced several other risk management programs, some of which are described in this section below.
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 the first quarter of 2018, we implemented static hedge positions to maintain a target asset level for all variable annuities at to maintain a target asset level for all variable annuities at 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 (“NAR”) resulting from the GMIB feature and approximately 2.9% of our NAR to the GMDB obligation on variable annuity contracts in force as of December 31, 2018.
Captive Reinsurance. In addition to non-affiliated reinsurance, AXA Equitable Life 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 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”). On April 12, 2018, we effected the GMxB Unwind. As a result of the GMxB Unwind, AXA Equitable Life assumed all of the liabilities of the GMxB Business that were previously ceded to AXA RE Arizona and the Excess Risks were novated to a newly formed captive reinsurance company. For additional information on the GMxB Unwind, see “—Unwind of Reinsurance of GMxB Business with a Captive Reinsurer.”
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. As a result, the investment strategy mix of our in-force variable

23


annuity products with GMxB features shifted from 90% active based on AV as of December 31, 2008 to 81% passive based on AV as of December 31, 2018. 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. As of December 31, 2018, 57% of our in-force variable annuity products with GMxB features were invested in managed volatility assets based on AV. Coupled with our shift towards passive strategies, as of December 31, 2018, 91% of our in-force variable annuity products with GMxB features were invested in passive and/or managed volatility assets based on AV.
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.
 Overview of GMxB Features
We have historically offered a variety of variable annuity benefit features, including GMxB features, to our policyholders in our Individual Retirement segment.
Guaranteed Minimum Death Benefits Summary
We have historically offered GMDB features in isolation or together with GMLB features, including the following (with no additional charge unless noted):
Return of Premium Death Benefit. This death benefit pays the greater of the AV at the time of a claim following the owner’s death or the total contributions to the contract (subject to adjustment for withdrawals). The charge for this benefit is usually included in the Mortality & Expense charge that is deducted daily from the net assets in each variable investment option.
RMD Wealthguard Death Benefit. This death benefit features a benefit base that does not decrease by the amount of any IRS-mandated withdrawals, or “required minimum distributions” (“RMD”), from the contract. The benefit base automatically increases to equal the highest AV on the current or any prior contract anniversary until RMD withdrawals begin or until the owner reaches a specified maximum age, even if the AV is reduced by negative investment performance. The charges for this benefit are calculated based on the benefit base value and deducted annually from the AV.
Annual Ratchet (also referred to as Highest Anniversary Value). This death benefit features a benefit base that is reset each year to equal the higher of total contributions to the contract or the highest AV on the current or any prior contract anniversary (subject to adjustment for withdrawals), even if the AV is reduced by negative investment performance. The charge for this benefit is calculated based on the benefit base value and deducted annually from the AV.
Roll-up Death Benefit. This death benefit features a benefit base that increases (or “rolls up”) at a specified guaranteed annual rate (subject to adjustment for withdrawals), even if the AV is reduced by negative investment performance. The charge for this benefit is calculated based on the benefit base value and deducted annually from the AV. This GMxB feature was discontinued in 2003.
Greater of Roll-up or Annual Ratchet. This death benefit features a benefit base that increases each year to equal the higher of the initial benefit base accumulated at a specified guaranteed rate or the highest AV on the current or any prior contract anniversary (subject to adjustment for withdrawals), even if the AV is reduced by negative investment performance. The charge for this benefit is calculated based on the benefit base value and deducted annually from the AV.

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In addition, we offered two guaranteed minimum death benefits with our GWBL rider, available at issue.
GWBL Standard Death Benefit. This death benefit features a benefit base that is equal to total contributions to the contract less a deduction reflecting the amount of any withdrawals made.
GWBL Enhanced Death Benefit. This death benefit features a benefit base that is equal to total contributions to the contract plus the amounts of any ratchets and deferral bonus, less a deduction reflecting the amount of any withdrawals made. This benefit was available for an additional fee.
The following table presents the AV and benefit base by type of guaranteed minimum death benefit. Because variable annuity contracts with GMDB features may also offer GMLB features, the GMDB amounts listed are not mutually exclusive from the GMLB amounts provided in the table below.
 
As of December 31,
 
2018
 
2017
 
2016
 
Account
 
Benefit
 
Account
 
Benefit
 
Account
 
Benefit
 
Value
 
Base
 
Value
 
Base
 
Value
 
Base
 
(in millions)
GMDB In-Force (1)
 
 
 
 
 
 
 
 
 
 
 
ROP Death Benefit Only
$
8,730

 
$
6,072

 
$
9,592

 
$
6,281

 
$
9,309

 
$
6,640

Floating Rate GMDB
 
 
 
 
 
 
 
 
 
 
 
Greater of Ratchet or Roll-up
6,310

 
7,665

 
6,880

 
7,332

 
6,175

 
6,821

All Other (2)
14,323

 
14,259

 
14,720

 
13,297

 
12,593

 
12,127

     Total Floating Rate GMDB
$
20,633

 
$
21,924

 
$
21,600

 
$
20,629

 
$
18,768

 
$
18,948

 
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate GMDB
 
 
 
 
 
 
 
 
 
 
 
Greater of Ratchet or Roll-up
$
24,242

 
$
43,422

 
$
29,061

 
$
43,750

 
$
27,858

 
$
43,790

All Other (2)
17,225

 
17,798

 
20,742

 
18,952

 
20,236

 
20,136

     Total Fixed Rate GMDB
$
41,467

 
$
61,220

 
$
49,803

 
$
62,702

 
$
48,094

 
$
63,926

 
 
 
 
 
 
 
 
 
 
 
 
Total GMDB
$
70,830

 
$
89,216

 
$
80,995

 
$
89,612

 
$
76,171

 
$
89,514

___________
(1)
See table summarizing the NAR and reserves of policyholders by type of GMxB feature for variable annuity contracts as of December 31, 2018, 2017 and 2016 under “—Net Amount at Risk.”
(2)
All Other includes individual variable annuity policies with Annual Ratchet or Roll-up GMDB, either stand-alone or in conjunction with a GMLB, or with ROP GMDB in conjunction with a GMLB.
 
Guaranteed Living Benefits Summary
We have historically offered a variety of guaranteed living benefits to our policyholders in our Individual Retirement segment. Our block of variable annuities includes four types of guaranteed living benefit riders: GMIB, GWBL/GMWB, GMAB and GIB. Based on total AV, approximately 66% of our variable annuity block included living benefit guarantees as of December 31, 2018.
GMIB. GMIB is our largest block of living benefit guarantees based on in-force AV. Policyholders who purchase the GMIB rider will be eligible, at the end of a defined waiting period, to receive annuity payments for life that will never be less than a guaranteed minimum amount, regardless of the performance of their investment options prior to the first payment. During this waiting period, which is often referred to as the accumulation phase of the contract and is usually 10 years, policyholders can invest their contributions in a range of variable and guaranteed investment options to grow their AV on a tax-deferred basis while increasing the value of the GMIB benefit base that helps determine the minimum annuity payment amount. Policyholders may elect to continue the accumulation phase beyond the waiting period if they wish to maintain the ability to take withdrawals from their AV or continue to participate in the growth of both their AV and GMIB benefit base.
The second phase of the contract starts when the policyholder annuitizes the contract, either by exercising the GMIB or through the contract’s standard annuitization provisions. Upon exercise of their GMIB, policyholders receive guaranteed lifetime income payments that are calculated as the higher of (i) application of their GMIB benefit base to

25


the GMIB guaranteed annuity purchase factors specified in the contract or (ii) application of their AV to our then current or guaranteed annuity purchase factors. Beginning in 2005 we started offering a no-lapse guarantee on our GMIB riders that provides for the automatic exercise of the GMIB in the event that the policyholder’s AV falls to zero and provided no “excess withdrawals” (as defined in the contract) have been taken.
The charge for the GMIB is calculated based on the GMIB benefit base value and deducted annually from the AV.
GWBL. This benefit guarantees that a policyholder can take lifetime withdrawals from their contract up to a maximum amount per year without reducing their GWBL benefit base. The amount of each guaranteed annual withdrawal is based on the value of the GWBL benefit base. The GWBL benefit base is equal to the total initial contributions to the contract and will increase by subsequent contributions (where permitted), ratchets or deferral bonuses (if applicable), and will be reduced by any “excess withdrawals,” which are withdrawals that exceed the guaranteed annual withdrawal amount. The policyholder may elect one of our automated withdrawal plans or take ad hoc withdrawals. This benefit can be purchased on a single life or joint life basis. The charge for the GWBL is calculated based on the GWBL benefit base value and deducted annually from the AV. We ceased offering a stand-alone GWBL rider in 2008.
GMWB. This benefit guarantees that the policyholder can take withdrawals from their contract up to the amount of their total contributions, even if the AV subsequently falls to zero, provided that during each contract year total withdrawals do not exceed annual GMWB withdrawal amount that is calculated under the terms of the contract. The policyholder may choose either a 5% GMWB Annual withdrawal option or a 7% GMWB Annual withdrawal option. Annual withdrawal amounts are not cumulative year over year. The charge for the GMWB is calculated based on the GMWB benefit base value and deducted annually from the AV. We ceased offering GMWB riders in 2008.
GMAB. This benefit guarantees that the AV can never fall below a minimum amount for a set period, which can also include locking in capital market gains. This rider protects the policyholder from market fluctuations. Two options we offered were a 100% principal guarantee and a 125% principal guarantee. Each option limited the policyholder to specified investment options. The charge for the GMAB is calculated based on the GMAB benefit base value and deducted annually from the AV. We ceased offering GMAB riders in 2008.
GIB. This benefit 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. The charge for the GIB is calculated based on the GIB benefit base value and deducted annually from the AV. We ceased offering the GIB in 2012.
Below are examples of policyholder benefit utilization choices that can affect benefit payment patterns and reserves:
Lapse. The policyholder may lapse or exit the contract, at which time the GMIB and any other GMxB guarantees are terminated. If the policyholder partially exits, the GMIB benefit base and any other GMxB benefit bases will be reduced in accordance with the contract terms.
Dollar-for-Dollar Withdrawals. A policyholder may request a onetime withdrawal or take systematic withdrawals from his or her contract at any time. All withdrawals reduce a contract’s AV by the dollar amount of a withdrawal. However, the impact of withdrawals on the GMIB and any other guaranteed benefit bases may vary depending on the terms of the contract. Withdrawals will reduce guaranteed benefit bases on a dollar-for-dollar basis as long as the sum of withdrawals in a contract year is equal to or less than the dollar-for-dollar withdrawal threshold defined in the contract, beyond which all withdrawals are considered “excess withdrawals.” An excess withdrawal may reduce the guaranteed benefit bases on a pro rata basis, which can have a significantly adverse effect on their values. A policyholder wishing to take the maximum amount of dollar-for-dollar withdrawals on a systematic basis may sign up for our dollar-for-dollar withdrawal service at no additional charge. Withdrawals under this automated service will never result in a pro rata reduction of the guaranteed benefit bases, provided that no withdrawals are made outside the service. If making dollar-for-dollar withdrawals in combination with negative investment reduces the AV to zero, the contract may have a no-lapse guarantee that triggers the automatic exercise of the GMIB, providing the policyholder with a stream of lifetime annuity payments determined by the GMIB benefit base value, the age and gender of the annuitant and predetermined annuity purchase factors.
Voluntary Annuitization. The policyholder may choose to annuitize their AV or exercise their GMIB (if eligible). GMIB annuitization entitles the policyholder to receive a stream of lifetime (with or without period certain) annuity payments determined by the GMIB benefit base value, the age and gender of the annuitant and predetermined annuity purchase factors. GMIB annuitization cannot be elected past the maximum GMIB exercise age as stated in the

26


contract, generally age 85 or 95. The policyholder may otherwise annuitize the AV and choose one of several payout options.
Convert to a GWBL. In some products, policyholders have the option to convert their GMIB into a GWBL to receive guaranteed income through a lifetime withdrawal feature. This choice can be made as an alternative to electing to annuitize at the maximum GMIB exercise age and may be appealing to policyholders who would prefer the ability to withdraw higher annual dollar-for-dollar amounts from their contract than permitted under the GMIB, for as long as their AV remains greater than zero.
Remain in Accumulation Phase. If the policyholder chooses to remain in the contract’s accumulation phase past the maximum GMIB exercise age—that is, by not electing annuitization or converting to a GWBL—and as long as the AV has not fallen to zero, then the GMIB will terminate and the contract will continue until the contractual maturity date. In these circumstances, depending on the GMDB elected at issue (if any) and the terms of the contract, the benefit base for the GMDB may be equal to the GMIB benefit base at the time the GMIB was terminated, may no longer increase and will be reduced by future withdrawals.
The likelihood of a policyholder choosing a particular option cannot be predicted with certainty at the time of contract issuance. Accordingly, we make assumptions as to policyholder benefit elections and resulting benefit payments at the time of issuance based on our experience. The incidents and timing of benefit elections and the amounts of resulting benefit payments may materially differ from those we anticipate at that time. As we observe actual policyholder behavior, we update our assumptions at least annually with respect to future policyholder activity and take appropriate action with respect to the amount of the reserves we establish for the future payment of such benefits. Additionally, upon the death of a policyholder (or annuitant), if the sole beneficiary is a surviving spouse, they can choose to continue the contract and benefits subject to age restrictions.
The following table presents the AV and benefit base by type of guaranteed living benefit. Because variable annuity contracts with GMLB features may also offer GMDB features, the GMLB amounts listed are not mutually exclusive from the GMDB amounts provided in the table above.
 
As of December 31,
 
2018
 
2017
 
2016
 
Account
 
Benefit
 
Account
 
Benefit
 
Account
 
Benefit
 
Value
 
Base
 
Value
 
Base
 
Value
 
Base
 
(in millions)
GMLB In-Force (1)
 
 
 
 
 
 
 
 
 
 
 
Floating Rate GMLB
 
 
 
 
 
 
 
 
 
 
 
GMIB
$
16,728

 
$
19,670

 
$
17,840

 
$
18,412

 
$
15,039

 
$
16,211

Other (GIB)
3,581

 
4,214

 
3,439

 
3,664

 
3,478

 
3,829

Total Floating Rate GMLB
$
20,309

 
$
23,884

 
$
21,279

 
$
22,076

 
$
18,517

 
$
20,040

 
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate GMLB
 
 
 
 
 
 
 
 
 
 
 
GMIB
$
36,326

 
$
63,431

 
$
43,900

 
$
64,673

 
$
43,106

 
$
66,310

All Other (e.g., GWBL / GMWB, GMAB, other) (2)
785

 
1,223

 
977

 
1,288

 
1,003

 
1,371

Total Fixed Rate GMLB
$
37,111

 
$
64,654

 
$
44,877

 
$
65,961

 
$
44,109

 
$
67,681

 
 
 
 
 
 
 
 
 
 
 
 
Total GMLB
$
57,420

 
$
88,538

 
$
66,156

 
$
88,037

 
$
62,626

 
$
87,721

______
(1)
See table summarizing the NAR and reserves of policyholders by type of GMxB feature for variable annuity contracts as of December 31, 2018, 2017 and 2016 under “—Net Amount at Risk.”
(2)
All Other includes individual variable annuity policies with stand-alone Annual Ratchet or stand-alone Roll-up GMDB.

Net Amount at Risk
The NAR for the GMDB is the amount of death benefits payable in excess of the total AV (if any) as of the balance sheet date, net of reinsurance. It represents the amount of the claim we would incur if death claims were made on all contracts with a GMDB on the balance sheet date and includes any additional contractual claims associated with riders purchased to assist with covering income taxes payable upon death.

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The NAR for the GMIB is the amount (if any) that would be required to be added to the total AV to purchase a lifetime income stream, based on current annuity rates, equal to the minimum amount provided under the GMIB. This amount represents our potential economic exposure to such guarantees in the event all policyholders were to annuitize on the balance sheet date, even though the guaranteed amount under the contracts may not be annuitized until after the waiting period of the contract.
The NAR for the GWBL, GMWB and GMAB is the actuarial present value in excess of the AVs (if any) as of the balance sheet date. The NAR assumes utilization of benefits by all policyholders as of the balance sheet date. For the GMWB and GWBL benefits, only a small portion of the benefit base is available for withdrawal on an annual basis. For the GMAB, the NAR would not be available until the GMAB maturity date.
NAR reflects the difference between the benefit base (as adjusted, in some cases, as described above) and the AV. We believe that NAR alone provides an inadequate presentation of the risk exposure of our in-force variable annuity portfolio. NAR does not take into consideration the aggregate amount of reserves and capital that we hold against our variable annuity portfolio, particularly the target asset level for all variable annuities at a CTE98 level under most economic scenarios. Additionally, the NAR calculation includes a number of assumptions that are not reflective of our actual or expected experience of the assumptions related to the reserves we hold on our variable annuity portfolio.
The NAR and reserves of contract owners by type of GMxB feature for variable annuity contracts are summarized below as of December 31, 2018, 2017 and 2016. Many of our variable annuity contracts offer more than one type of guarantee such that the GMIB amounts are not mutually exclusive to the amounts in the GMDB table.
 
As of December 31,
 
2018
 
2017
 
2016
 
NAR
 
Reserves
 
NAR
 
Reserves
 
NAR
 
Reserves
 
(in millions)
GMDB
 
 
 
 
 
 
 
 
 
 
 
ROP Death Benefit Only (1)
$
320

 
N/A

 
$
119

 
N/A

 
$
177

 
N/A

Floating Rate GMDB
1,621

 
$
178

 
519

 
$
160

 
695

 
$
123

Fixed Rate GMDB
21,332

 
4,367

 
16,237

 
3,787

 
17,647

 
2,976

Total
$
23,273

 
$
4,545

 
$
16,875

 
$
3,947

 
$
18,519

 
$
3,099

 
Years Ended December 31,
 
2018
 
2017
 
2016
 
NAR
 
Reserves
 
NAR
 
Reserves
 
NAR
 
Reserves
 
 
 
 
 
(in millions)
 
 
 
 
GMIB
 
 
 
 
 
 
 
 
 
 
 
Floating Rate GMIB
$

 
$
42

 
$

 
$
91

 
$

 
$
190

Fixed Rate GMIB
8,572

 
7,307

 
5,980

 
6,919

 
6,348

 
7,159

Total
$
8,572

 
$
7,349

 
$
5,980

 
$
7,010

 
$
6,348

 
$
7,349

____________
(1)
U.S. GAAP reserves for ROP death benefit only are not available, as U.S. GAAP reserve valuation basis applies on policy contracts grouped by issue year.

Group Retirement
Our Group Retirement segment offers 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 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.
In Group Retirement, for the nine months ended September 30, 2018, we were the #1 provider by gross premiums of retirement plans to the K–12 education market, according to LIMRA. The tax-exempt 403(b)/457(b) market, which includes

28


our 403(b) K–12 business, accounted for the majority of sales within the Group Retirement business for the year ended December 31, 2018 and represented 76% of Group Retirement AV, as of December 31, 2018.
The recurring nature of the revenues from our Group Retirement business makes this segment an important and stable contributor of earnings and cash flow to our business. The primary sources of revenue for the Group Retirement business include fee revenue and investment income.
To further growth of our Group Retirement segment, we plan to generate new sales by innovating our products and expanding our distribution footprint and to optimize participant contributions and client retention by providing superior client service.
Product Innovation. We continuously seek to improve our products by offering several product features that differentiate us from our competition including our index-linked investment, guaranteed income and fixed interest rate features. More recently, we launched a mutual fund-based product to complement our variable annuity products, which will enable us to accelerate growth in certain segments of the market.
Distribution Expansion. We believe that RBG is a strategic differentiator in the 403(b) market. Our nationwide footprint of advisors provides valuable services to a wide range of clients in the education market saving for retirement. For 401(k) products, we primarily focus on the under $20 million plan market, which is attractive to us because it is aligned with our affiliated advisor distribution focus on small businesses and business owners and because of the relatively high level of new plan creation and takeover opportunities in this market. We seek to grow our distribution footprint through hiring and developing new RBG advisors and expanding third-party distribution relationships.
In-force Client Engagement. Through our RBG advisors and direct education efforts, such as direct mail and email, we regularly provide our in-force clients with information to keep them on track for a secure retirement. Through this interactive client engagement model, many of our clients choose to increase the amount of contributions into our retirement plans to achieve their retirement goals.
Client Retention. Our strong retention rate in the 403(b) market, driven by our interactive client engagement model and strong customer service, places us among the top companies in the industry. We had a retention rate of 92.0% for 2018. Our Group Retirement business customer service team has won the DALBAR Annuity Service Award for seven straight years from 2011 to 2017. In addition to engaging with our clients through advisors as noted above, we also engage our customers digitally with our learning lab and education platform. In 2017, we launched additional retirement income readiness tools that leverage peer benchmarking and other behavioral economics strategies to drive increased contributions from existing participants in all markets. The overall objective of this and our other client retention programs is to maintain a high level of customer engagement and satisfaction and limit asset outflows.
Products
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.
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 both the Individual Retirement and Group Retirement products. In addition, our variable annuity products offer the following features:
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.

29


Personal Income Benefit—An optional GMxB feature that enables participants to obtain a guaranteed withdrawal benefit for life for an additional fee.
While GMxB features provide differentiation in the market, only approximately $45 million, or 0.1%, of our total AV is invested in products with GMxB features (other than ROP death benefits) as of December 31, 2018, and based on current utilization, we do not expect significant flows into these types of GMxB features.
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 are 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.
The chart below illustrates our net flows for the years ended December 31, 2018, 2017 and 2016.
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Net Flows
 
 
 
 
 
Gross Premiums
$
3,383

 
$
3,205

 
$
3,137

Surrenders, Withdrawals and Benefits
(3,287
)
 
(2,938
)
 
(2,458
)
Net Flows
$
96

 
$
267

 
$
679

The following table presents the gross premiums for each of our markets for the periods specified.
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Gross Premiums by Market
 
 
 
 
 
Tax-Exempt
$
911

 
$
872

 
$
842

Corporate
479

 
470

 
497

Other
38

 
40

 
34

Total FYP
1,428

 
1,382

 
1,373

 
 
 
 
 
 
Tax-Exempt
1,450

 
1,330

 
1,280

Corporate
319

 
293

 
275

Other
186

 
200

 
209

Total Renewal Premiums
1,955

 
1,823

 
1,764

Gross Premiums
$
3,383

 
$
3,205

 
$
3,137

Markets
We primarily operate in the tax-exempt 403(b)/457(b), corporate 401(k) and other markets.
Tax-exempt 403(b)/457(b). We primarily serve employees of public school systems and have access to clients in more than 9,000 public school plans. We serve more than 758,000 educators with access to approximately 3.2 million

30


educators in the plans where we are an approved provider. To a lesser extent, we also market to 1,100 government entities that sponsor 457(b) plans.
Overall, the 403(b) and 457(b) markets represent 64% of FYP in the Group Retirement segment for the year ended December 31, 2018. We seek to grow in these markets by increasing our presence in the school districts where we currently operate and also by potentially growing our presence in school districts where we currently do not have access.
Corporate 401(k). 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. Typically, our products appeal to companies with strong contribution flows and a smaller number of participants with relatively high average participant balances. Our corporate 401(k) business serves more than 4,600 employers and more than 74,000 participants. The under $20 million asset plan market is well aligned with our advisor distribution, which has a strong presence in the small and medium-sized business market, and complements our other products focused on this market (such as life insurance and employee benefits products aimed at this market).
Other. Our other business includes an affinity-based direct marketing program where we offer retirement and individual products to employers that are members of industry or trade associations and various other sole proprietor and small business retirement accounts.
The following table presents the relative contribution of each of our markets to AV as of the dates indicated.
 
As of December 31,
 
2018
 
2017
 
2016
 
(in millions)
AV by Market
 
 
 
 
 
Tax-Exempt
$
24,639

 
$
25,383

 
$
22,454

Corporate
3,634

 
3,959

 
3,422

Other
4,128

 
4,564

 
4,262

AV
$
32,401

 
$
33,906

 
$
30,138

Distribution
We primarily distribute our products and services to this market through AXA Advisors and third-party distribution firms. For the year ended December 31, 2018, these channels represented 89% and 11% of our sales, respectively. We also distribute through direct online sales. We employ more than 50 internal and external wholesalers to exclusively market our products through AXA Advisors and third-party firms.
AXA Advisors, through RBG, is the primary distribution channel for our products. RBG has a group of more than 1,000 advisors dedicated to helping educators prepare for retirement as of December 31, 2018. The cornerstone of the RBG model is a repeatable and scalable advisor recruiting and training model that we believe is more effective than the overall industry model. RBG advisors complete several levels of training that are specific to the education market and give them the requisite skills to assess the educators’ retirement needs and how our products can help to address those needs. AXA Advisors also accounted for 94% of our 403(b) sales in 2018.
Group Retirement products are also distributed through third-party firms and directly to customers online. Beginning in 2015, we created a digital engagement strategy to supplement our traditional advisor-based model. The program uses data analysis combined with digital media to engage educators, teach them about their retirement needs and increase awareness of our products and services. Educators can then complete the process to enroll in a 403(b) product fully online, through a phone conversation or face-to-face with an advisor.

31


The following table presents first year premium by distribution channel for the periods indicated:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
FYP by Distribution
 
 
 
 
 
AXA Advisors
$
1,277

 
$
1,226

 
$
1,151

Third-Party
151

 
161

 
222

Total
$
1,428

 
$
1,387

 
$
1,373

Competition
We compete with select insurance companies, asset managers, record keepers and diversified financial institutions that target similar market segments. Competition varies in all market segments with no one company dominating across all market segments. In the K–12 education market, competitors are primarily insurance-based providers that focus on school districts. In the small and medium-sized business market, the primary competitors are insurance-based providers and mutual fund companies. The main features that distinguish our offering to clients include our RBG distribution model; the product features we offer to clients, including guarantees; our financial strength and our award-winning customer service.
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.
Fees
We earn various types of fee revenue based on AV, fund assets and benefit base. Fees that we collect include mortality & expense, administrative charges and distribution charges; withdrawal charges; investment management fees; 12b-1 fees; death benefit rider charges; and living benefit riders charges. For a more detailed description of these types of fees, see “—Individual Retirement—Fees on AV, Fund Assets, Benefit Base and Investment Income.”
Risk Management
We design our Group Retirement 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.
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 do not offer death benefits in excess of the AV.
 

32


As of December 31, 2018, approximately 63% of our General Account AV has a minimum guaranteed rate of 3-4%. Given the growth in net flows to our newer products and the slowing in flows to older blocks due to retirement, we expect that guarantees at a rate over 3% will continue to diminish as a percentage of our overall General Account AV. The table below illustrates the guaranteed minimum rates applicable to our General Account AV for products with the GIO, as of December 31, 2018.
 
Total General
Guaranteed Minimum Interest Rate
Account AV
 
(in billions)
1 – < 2%
$
2.7

2 – < 3%
1.4

3%
6.9

4%
0.2

Total
$
11.2

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 Accounts 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.
Investment Management and Research
Our global Investment Management and Research business provides diversified investment management, research and related solutions to a broad range of clients around the world. We distribute our investment management products and solutions through three main client channels—Institutional, Retail and Bernstein Private Wealth Management—and distribute our institutional research products and solutions through Bernstein Research Services. AB Holding is a master limited partnership publicly listed on the NYSE. We own an approximate 65% economic interest in AB. As the general partner of AB, we have the authority to manage and control its business, and accordingly, this segment reflects AB’s consolidated financial results.
Our Investment Management and Research business had approximately $516.4 billion in AUM as of December 31, 2018, composed of 36% equities, 52% fixed income and 12% multi-asset class solutions, alternatives and other assets. By distribution channel, institutional clients represented 48% of AUM, while retail and private wealth management clients represented 35% and 17% respectively, as of December 31, 2018.
AB has a suite of actively managed, differentiated equity and fixed income services, delivering strong risk-adjusted returns. For instance, 90% of our fixed income services and 62% of our equity services have outperformed their benchmarks over the three-year period ended December 31, 2018. In addition, 80% of AB’s rated U.S. retail assets were invested in funds rated four or five stars by Morningstar as of December 31, 2018.
Bernstein Research Services has received top Institutional Investor rankings and Bernstein Private Wealth Management ranks among the top 20 wealth management firms in the United States, according to Barron’s.
AB has a strong global distribution footprint. For the year ended December 31, 2018, 42.4% of AB’s revenues came from outside the United States, with a significant portion derived from retail fixed income sales in the Asia region (excluding Japan). We have strong market positions in many of the region’s largest markets. As of December 31, 2018, we had a 13.9% market share of total retail assets for global managers in Taiwan, and our market share was 13.2% in Hong Kong, 8.4% in Singapore, and 5.8% in Korea.

33


Additionally, over the past several years AB has significantly broadened and strengthened its product portfolio, introducing more than 100 new and enhanced offerings since 2009. These services account for approximately 30% of AB’s AUM as of December 31, 2018. Examples include our Select Equities and U.S. and Global Concentrated Equity services, our middle markets private lending service and our real estate private equity and debt service.
We and other AXA affiliates, collectively, are AB’s largest client. We represented 24% of AB’s total AUM as of December 31, 2018 and 5% of AB’s net revenues for the year ended December 31, 2018. AXA and its affiliates other than us represented 6% of AB’s total AUM as of December 31, 2018 and 2% of AB’s net revenues for the year ended December 31, 2018. Additionally, AXA and its affiliates (including us) have made seed investments in various AB investment services. By letter dated March 31, 2018, AXA advised AB of its current intention to continue using AB for the foreseeable future as a preferred provider of asset management services and to continue making commercial and seed investments that suit AXA from an investment perspective, in each case: (i) consistent with past practice; (ii) subject to investment performance/returns; and (iii) subject to applicable fiduciary duties.
AB provides research, diversified investment management and related services globally to a broad range of clients. Its principal services include:
Institutional Services—servicing its institutional clients, including private and public pension plans, foundations and endowments, insurance companies, central banks and governments worldwide, and affiliates such as AXA and its subsidiaries, by means of separately-managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, hedge funds and other investment vehicles.
Retail Services—servicing its retail clients, primarily by means of retail mutual funds sponsored by AB or AXA Equitable FMG, sub-advisory relationships with mutual funds sponsored by third parties, separately-managed account programs sponsored by financial intermediaries worldwide and other investment vehicles.
Private Wealth Management Services—servicing its private clients, including high net worth individuals and families, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities, by means of separately-managed accounts, hedge funds, mutual funds and other investment vehicles.
Bernstein Research Services—servicing institutional investors, such as pension fund, hedge fund and mutual fund managers, seeking high-quality fundamental research, quantitative services and brokerage-related services in equities and listed options.
AB also provides distribution, shareholder servicing, transfer agency services and administrative services to the mutual funds it sponsors.
Generally, AB is compensated for its investment services on the basis of investment advisory and services fees calculated as a percentage of AUM.
Products and Services
Investment Services
AB provides a broad range of investment services with expertise in:
Actively-managed equity strategies, with global and regional portfolios across capitalization ranges, concentration ranges and investment strategies, including value, growth and core equities
Actively-managed traditional and unconstrained fixed income strategies, including taxable and tax-exempt strategies;
Passive management, including index and enhanced index strategies;
Alternative investments, including hedge funds, fund of funds, private equity (e.g., direct lending); and
Multi-asset solutions and services, including dynamic asset allocation, customized target-date funds and target-risk funds.
AB’s services span various investment disciplines, including market capitalization (e.g., large-, mid- and small-cap equities), term (e.g., long-, intermediate- and short-duration debt securities) and geographic location (e.g., U.S., international, global, emerging markets, regional and local), in major markets around the world.

34


Research
AB’s high-quality, in-depth research is the foundation of its business. AB believes that its global team of research professionals, whose disciplines include economic, fundamental equity, fixed income and quantitative research, gives it a competitive advantage in achieving investment success for its clients. AB also has experts focused on multi-asset strategies, wealth management and alternative investments.
Custody
AB’s U.S.-based broker-dealer subsidiary acts as custodian for the majority of AB’s Private Wealth Management AUM and some of its Institutions AUM. Other custodial arrangements are maintained by client-designated banks, trust companies, brokerage firms or custodians.
For additional information about AB’s investment advisory fees, including performance-based fees, see “Risk Factors—Risks Relating to Our Investment Management and Research Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations by Segment—Investment Management and Research.”
Markets
AB operates in major markets around the world, including the United States, EMEA (Europe, the Middle East and Africa) and Asia. Our AUM is disbursed as follows:
By Investment Service ($ in billions):
chart-b04900abd113373848e.jpgchart-dd57f6ab6503c402fc7.jpgchart-73b2391cfaa8dc25b5d.jpg

By Client Domicile ($ in billions):
chart-9a6589c0c4b5a8cb777.jpgchart-ecfed5787b40973c249.jpgchart-7904931fb4ed0280e2c.jpg
Distribution
We distribute our products and solutions through three main client channels: Institutional, Retail and Bernstein Private Wealth Management.

35


Institutional
AB offers to its institutional clients, which include private and public pension plans, foundations and endowments, insurance companies, central banks and governments worldwide, various of AB’s AXA affiliates, separately-managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, hedge funds and other investment vehicles (“Institutional Services”).
AB manages the assets of its institutional clients pursuant to written investment management agreements or other arrangements, which generally are terminable at any time or upon relatively short notice by either party. In general, AB’s written investment management agreements may not be assigned without the client’s consent.
Retail
AB provides investment management and related services to a wide variety of individual retail investors, both in the United States and internationally, through retail mutual funds AB sponsors, mutual fund sub-advisory relationships, separately-managed account programs and other investment vehicles (“Retail Products and Services”).
AB distributes its Retail Products and Services through financial intermediaries, including broker-dealers, insurance sales representatives, banks, registered investment advisers and financial planners. These products and services include open-end and closed-end funds that are either (i) registered as investment companies under the Investment Company Act or (ii) not registered under the Investment Company Act and generally not offered to U.S. persons. They also include separately-managed account programs, which are sponsored by financial intermediaries and generally charge an all-inclusive fee covering investment management, trade execution, asset allocation and custodial and administrative services. In addition, AB provides distribution, shareholder servicing, transfer agency services and administrative services for its Retail Products and Services.
Private Wealth Management
AB offers to its private clients, which include high net worth individuals and families, trusts and estates, charitable foundations, partnerships, private and family corporations and other entities, separately-managed accounts, hedge funds, mutual funds and other investment vehicles (“Private Wealth Services”).
AB manages these accounts pursuant to written investment advisory agreements, which generally are terminable at any time or upon relatively short notice by any party and may not be assigned without the client’s consent.
Competition
AB competes in all aspects of its business with numerous investment management firms, mutual fund sponsors, brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions that often provide investment products that have similar features and objectives as those AB offers. AB’s competitors offer a wide range of financial services to the same customers that AB seeks to serve.
To grow its business, AB believes it must be able to compete effectively for AUM. Key competitive factors include (i) AB’s investment performance for clients; (ii) AB’s commitment to place the interests of its clients first; (iii) the quality of AB’s research; (iv) AB’s ability to attract, motivate and retain highly skilled, and often highly specialized, personnel; (v) the array of investment products AB offers; (vi) the fees AB charges; (vii) Morningstar/Lipper rankings for the AB Funds; (viii) AB’s ability to sell its actively-managed investment services despite the fact that many investors favor passive services; (ix) AB’s operational effectiveness; (x) AB’s ability to further develop and market its brand; and (xi) AB’s global presence.
AUM
AUM by distribution channel were as follows:
 
As of December 31,
 
2018
 
2017
 
2016
 
(in billions)
Institutions
$
246.3

 
$
269.3

 
$
239.3

Retail
180.8

 
192.9

 
160.2

Private Wealth Management
89.3

 
92.3

 
80.7

Total
$
516.4

 
$
554.5

 
$
480.2


36


AUM by investment service were as follows:
 
As of December 31,
 
2018
 
2017
 
2016
 
(in billions)
Equity
 
 
 
 
 
Actively Managed
$
136.2

 
$
139.4

 
$
111.9

Passively Managed (1)
50.2

 
54.3

 
48.1

Total Equity
186.4

 
193.7

 
160.0

 
 
 
 
 
 
Fixed Income
 
 
 
 
 
Actively Managed
 
 
 
 
 
Taxable
219.7

 
247.9

 
220.9

Tax-exempt
41.7

 
40.4

 
36.9

Total Actively Managed
261.4

 
288.3

 
257.8

Passively Managed (1)
9.4

 
9.9

 
11.1

Total Fixed Income
270.8

 
298.2

 
268.9

 
 
 
 
 
 
Other (2)
 
 
 
 
 
Actively Managed
58.3

 
61.9

 
$
50.8

Passively Managed (1)
0.9

 
0.7

 
0.5

Total Other
59.2

 
62.6

 
51.3

Total
$
516.4

 
$
554.5

 
$
480.2

___________
(1)
Includes index and enhanced index services.
(2)
Includes certain multi-asset solutions and services and certain alternative investments.

Changes in AUM for the year ended December 31, 2018 are as follows:
 
Distribution Channel
 
Institutions
 
Retail
 
Private Wealth Management
 
Total
 
(in billions)
Balance as of December 31, 2017
$
269.3

 
$
192.9

 
$
92.3

 
$
554.5

Long-term flows
 
 
 
 
 
 
 
Sales/new accounts
26.1

 
54.2

 
13.5

 
93.8

Redemptions/terminations
(30.1
)
 
(46.5
)
 
(11.0
)
 
(87.6
)
Cash flow/unreinvested dividends
(6.0
)
 
(7.7
)
 
(0.6
)
 
(14.3
)
Net long-term (outflows) inflows
(10.0
)
 

 
1.9

 
(8.1
)
Transfers
0.2

 
0.2

 
(0.4
)
 

Market depreciation
(13.2
)
 
(12.3
)
 
(4.5
)
 
(30.0
)
Net change
(23.0
)
 
(12.1
)
 
(3.0
)
 
(38.1
)
Balance as of December 31, 2018
$
246.3

 
$
180.8

 
$
89.3

 
$
516.4


37


 
Investment Services
 
Equity Actively Managed
 
Equity Passively Managed (1)
 
Fixed Income Actively Managed—Taxable
 
Fixed Income Actively Managed—Tax Exempt
 
Fixed Income Passively Managed (1)
 
Other (2)
 
Total
 
(in billions)
Balance as of December 31, 2017
$
139.4

 
$
54.3

 
$
247.9

 
$
40.4

 
$
9.9

 
$
62.6

 
$
554.5

Long-term flows
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales/new accounts
36.7

 
4.0

 
27.6

 
7.9

 
0.1

 
17.5

 
93.8

Redemptions/terminations
(22.2
)
 
(0.6
)
 
(40.8
)
 
(6.7
)
 
(0.6
)
 
(16.7
)
 
(87.6
)
Cash flow/unreinvested dividends
(3.7
)
 
(3.6
)
 
(6.2
)
 
(0.4
)
 
0.2

 
(0.6
)
 
(14.3
)
Net long-term (outflows) inflows
10.8

 
(0.2
)
 
(19.4
)
 
0.8

 
(0.3
)
 
0.2

 
(8.1
)
Market appreciation/depreciation
(14.0
)
 
(3.9
)
 
(8.8
)
 
0.5

 
(0.2
)
 
(3.6
)
 
(30.0
)
Net change
(3.2
)
 
(4.1
)
 
(28.2
)
 
1.3

 
(0.5
)
 
(3.4
)
 
(38.1
)
Balance as of December 31, 2018
$
136.2

 
$
50.2

 
$
219.7

 
$
41.7

 
$
9.4

 
$
59.2

 
$
516.4

___________
(1)
Includes index and enhanced index services.
(2)
Includes certain multi-asset solutions and services and certain alternative investments.

Net long-term inflows (outflows) for actively-managed investment services as compared to passively managed investment services for years ended December 31, 2018, 2017 and 2016, respectively, are as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in billions)
Actively Managed
 
 
 
 
 
Equity
$
10.8

 
$
0.8

 
$
(7.6
)
Fixed Income
(18.6
)
 
14.7

 
9.0

Other
(0.1
)
 
3.6

 
(9.5
)
Total
$
(7.9
)
 
$
19.1

 
$
(8.1
)
 
 
 
 
 
 
Passively Managed
 
 
 
 
 
Equity
$
(0.2
)
 
$
(4.3
)
 
$
(2.5
)
Fixed Income
(0.3
)
 
(1.7
)
 
0.7

Other
0.3

 
0.1

 
0.1

Total
(0.2
)
 
(5.9
)
 
(1.7
)
Total net long-term inflows (outflows)
$
(8.1
)
 
$
13.2

 
$
(9.8
)
Average AUM by distribution channel and investment service were as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in billions)
Distribution Channel:
 
 
 
 
 
Institutions
$
258.1

 
$
253.8

 
$
243.4

Retail
191.8

 
177.5

 
157.7

Private Wealth Management
94.3

 
86.7

 
78.9

Total
$
544.2

 
$
518.0

 
$
480.0


38


 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in billions)
Investment Service:
 
 
 
 
 
Equity Actively Managed
$
146.4

 
$
125.6

 
$
109.4

Equity Passively Managed (1)
53.8

 
50.8

 
46.5

Fixed Income Actively Managed – Taxable
230.3

 
236.3

 
221.5

Fixed Income Actively Managed – Tax-exempt
41.3

 
38.8

 
36.3

Fixed Income Passively Managed (1)
9.8

 
10.3

 
11.0

Other (2)
62.6

 
56.2

 
55.3

Total
$
544.2

 
$
518.0

 
$
480.0

___________
(1)Includes index and enhanced index services.
(2)Includes certain multi-asset solutions and services and certain alternative investments.

Fees
Generally, AB is compensated for its investment services on the basis of investment advisory and services fees calculated as a percentage of AUM. Bernstein Research Services revenue consists principally of commissions received for providing equity research and brokerage-related services to institutional investors. The components of net revenues are as follows:
 
Years Ended December 31,
 
2018
 
2017
 
2016
 
(in millions)
Investment advisory and services fees:
 
 
 
 
 
Institutions
 
 
 
 
 
Base fees
$
445

 
$
430

 
$
404

Performance-based fees
33

 
45

 
17

Total
478

 
475

 
421

Retail
 
 
 
 
 
Base fees
992

 
923

 
806

Performance-based fees
18

 
24

 
3

Total
1,010

 
947

 
809

Private Wealth Management
 
 
 
 
 
Base fees
807

 
754

 
692

Performance-based fees
67

 
25

 
12

Total
874

 
779

 
704

Total

 


 

Base fees
2,244

 
2,107

 
1,902

Performance-based fees
118

 
94

 
32

Total
$
2,362

 
$
2,201

 
$
1,934

Bernstein Research Services
$
439

 
$
450

 
$
480

Distribution revenues
419

 
412

 
384

Dividend and interest income
98

 
71

 
47

Investment gains (losses)
3

 
92

 
93

Other revenues
99

 
98

 
100

Total revenues
3,420

 
3,324

 
3,038

Less: Interest expense
53

 
25

 
9

Net revenues
$
3,367

 
$
3,299

 
$
3,029


39


Protection Solutions
Our Protection Solutions segment includes our life insurance and employee benefits businesses. 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, which represented 51%, 39% and 9% of our total life insurance annualized premium, respectively, for the year ended December 31, 2018. Our products are distributed through AXA Advisors and select third-party firms. We benefit from a long-term, stable distribution relationship with AXA Advisors, with AXA Advisors representing approximately 79% of our total life insurance sales for the year ended December 31, 2018.
As of December 31, 2018, we had approximately 900,000 outstanding life insurance policies with a face value of $442 billion. In 2017, our VUL sales ranked fourth in the total U.S. market and first in the retail channel, and our IUL sales ranked second in the retail channel, according to LIMRA.
In 2015, we entered the employee benefits market focusing on small and medium-sized businesses, a target market for our life insurance business and Group Retirement 401(k) market. We currently offer a suite of employee benefits products, including life, short- and long-term disability, dental and vision insurance products. We believe our employee benefits business will further augment our solutions for small and medium-sized businesses and is differentiated by a high-quality technology platform. We sell our employee benefit products through AXA Advisors and third-party distributors, including regional, national and local brokers.
Our Protection Solutions segment provides strong cash flows generated by our in-force book and capital diversification benefits. The primary sources of revenue are premiums, investment income, asset-based fees (investment management and 12b-1 fees), and policy charges (expense loads, surrender charges, mortality charges and other policy charges), as well as fees collected from AXA Advisors non-proprietary sales through AXA Network.
To grow our Protection Solutions segment, we remain focused on the accumulation segment of the market supported by our VUL and IUL products and are expanding our commitment to the small and medium-sized business market through our employee benefits offerings. We plan to grow our distribution footprint by maintaining our presence through AXA Advisors, and opportunistically growing our relationship with targeted third-party firms. We plan to improve our performance over time through earnings generated from sales of our repositioned product portfolio and by proactively managing and optimizing our in-force book.
Life Insurance
We have been serving the financial needs of our clients and their families since 1859. We have an established reputation in product innovation by pioneering the VUL market in 1976 and continuing today with our range of innovative IUL offerings. As of December 31, 2018, we had approximately 900,000 outstanding policies and $442 billion of life insurance face amount in-force. As of December 31, 2018, Protection Solutions Reserves for our life insurance products accounted for $11 billion in Separate Accounts and $18 billion in the General Account.
Products
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.

40


We have three permanent life insurance offerings built upon a 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 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 tailore