10-Q 1 ael3q201910q.htm AEL 3Q 2019 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019 
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 Number 000-20501
 
AXA Equitable Life Insurance Company
(Exact name of registrant as specified in its charter) 
New York
 
13-5570651
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
1290 Avenue of the Americas, New York, New York
 
10104
(Address of principal executive offices)
 
(Zip Code)
(212) 554-1234
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address, and former fiscal year if changed since last report.)

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 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol
 
Name of exchange on which registered
Not Applicable
 
Not Applicable
 
Not Applicable
As of November 7, 2019, 2,000,000 shares of the registrant’s Common Stock were outstanding.
REDUCED DISCLOSURE FORMAT
AXA Equitable Life Insurance Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q in the reduced disclosure format.



TABLE OF CONTENTS

 
 
Page
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 


NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
Certain of the statements included or incorporated by reference in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “intends,” “seeks,” “aims,” “plans,” “assumes,” “estimates,” “projects,” “should,” “would,” “could,” “may,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon AXA Equitable Life Insurance Company (“AXA Equitable”) and its consolidated subsidiaries. “We,” “us” and “our” refer to AXA Equitable and its consolidated subsidiaries, unless the context refers only to AXA Equitable as a corporate entity. There can be no assurance that future developments affecting AXA Equitable will be those anticipated by management. Forward-looking statements include, without limitation, all matters that are not historical facts.
These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (i) conditions in the financial markets and economy, including equity market declines and volatility, interest rate fluctuations and changes in liquidity and access to and cost of capital; (ii) operational factors, remediation of our material weaknesses, indebtedness, elements of our business strategy not being effective in accomplishing our objectives, protection of confidential customer information or proprietary business information, information systems failing or being compromised and strong industry competition; (iii) credit, counterparties and investments, including counterparty default on derivative contracts, failure of financial institutions, defaults, errors or omissions by third parties and affiliates and gross unrealized losses on fixed maturity and equity securities; (iv) our reinsurance and hedging programs; (v) our products, structure and product distribution, including variable annuity guaranteed benefits features within certain of our products, complex regulation and administration of our products, variations in statutory capital requirements, financial strength and claims-paying ratings and key product distribution relationships; (vi) estimates, assumptions and valuations, including risk management policies and procedures, potential inadequacy of reserves, actual mortality, longevity and morbidity experience differing from pricing expectations or reserves, amortization of deferred policy acquisition costs and financial models; (vii) legal and regulatory risks, including federal and state legislation affecting financial institutions, insurance regulation and tax reform; and (viii) risks related to our separation and rebranding.
Forward-looking statements should be read in conjunction with the other cautionary statements, risks, uncertainties and other factors identified in AXA Equitable’s Annual Report on Form 10-K for the year ended December 31, 2018, as amended or supplemented in our subsequently filed Quarterly Reports on Form 10-Q, including in the section entitled “Risk Factors,” and elsewhere in this Quarterly Report on Form 10-Q. 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.




1
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

 
September 30, 2019
 
December 31, 2018
 
(in millions, except share data)
ASSETS
 
 
 
Investments:
 
Fixed maturities available-for-sale, at fair value (amortized cost of $57,475 and $42,492)
$
61,445

 
$
41,915

Mortgage loans on real estate (net of valuation allowance of $0 and $7)
12,005

 
11,818

Real estate held for production of income (1)
27

 
52

Policy loans
3,272

 
3,267

Other equity investments (1)
1,148

 
1,144

Trading securities, at fair value
8,444

 
15,166

Other invested assets
1,753

 
1,554

Total investments
88,094

 
74,916

Cash and cash equivalents
1,553

 
2,622

Deferred policy acquisition costs
4,237

 
5,011

Amounts due from reinsurers
3,008

 
3,124

Loans to affiliates
600

 
600

GMIB reinsurance contract asset, at fair value
2,853

 
1,991

Current and deferred income taxes
—

 
438

Other assets
3,071

 
2,763

Separate Accounts assets
118,907

 
108,487

Total Assets
$
222,323

 
$
199,952

LIABILITIES
 
 
 
Policyholders’ account balances
$
53,060

 
$
46,403

Future policy benefits and other policyholders' liabilities
35,211

 
29,808

Broker-dealer related payables
221

 
69

Securities sold under agreements to repurchase
—

 
573

Amounts due to reinsurers
85

 
113

Loans from affiliates
—

 
572

Current and deferred income taxes
174

 
—

Other liabilities
1,368

 
1,460

Separate Accounts liabilities
118,907

 
108,487

Total Liabilities
$
209,026

 
$
187,485

Redeemable noncontrolling interest (2)
46

 
39

Commitments and contingent liabilities (Note 13)

 

EQUITY
 
 
 
Equity attributable to AXA Equitable:
 
 
 
Common stock, $1.25 par value; 2,000,000 shares authorized, issued and outstanding
$
2

 
$
2

Additional paid-in capital
7,829

 
7,807

Retained earnings
3,270

 
5,098

Accumulated other comprehensive income (loss)
2,138

 
(491
)
Total equity attributable to AXA Equitable
13,239

 
12,416

Noncontrolling interest
12

 
12

Total Equity
13,251

 
12,428

Total Liabilities, Redeemable Noncontrolling Interest and Equity
$
222,323

 
$
199,952

______________
(1)
See Note 2 for details of balances with variable interest entities.
(2)
See Note 12 for detail of Redeemable noncontrolling interest.
See Notes to Consolidated Financial Statements (Unaudited).


2
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
REVENUES
 
 
 
 
 
 
 
Policy charges and fee income
$
853

 
$
900

 
$
2,577

 
$
2,644

Premiums
232

 
217

 
696

 
657

Net derivative gains (losses)
(342
)
 
(2,000
)
 
(2,075
)
 
(3,102
)
Net investment income (loss)
744

 
642

 
2,527

 
1,693

Investment gains (losses), net:

 


 

 


Total other-than-temporary impairment losses
—

 
(4
)
 
—

 
(4
)
Other investment gains (losses), net
201

 
(5
)
 
181

 
77

Total investment gains (losses), net
201

 
(9
)
 
181

 
73

Investment management and service fees
258

 
267

 
761

 
781

Other income
—

 
10

 
40

 
41

Total revenues
1,946

 
27

 
4,707

 
2,787

 
 
 
 
 
 
 
 
BENEFITS AND OTHER DEDUCTIONS
 
 
 
 
 
 
 
Policyholders’ benefits
1,634

 
206

 
3,321

 
1,987

Interest credited to policyholders’ account balances
280

 
259

 
837

 
754

Compensation and benefits
70

 
77

 
237

 
300

Commissions
153

 
146

 
462

 
465

Interest expense
—

 
9

 
4

 
27

Amortization of deferred policy acquisition costs
32

 
(88
)
 
341

 
303

Other operating costs and expenses
214

 
154

 
614

 
2,717

Total benefits and other deductions
2,383

 
763

 
5,816

 
6,553

Income (loss) from continuing operations, before income taxes
(437
)
 
(736
)
 
(1,109
)
 
(3,766
)
Income tax (expense) benefit from continuing operations
175

 
196

 
284

 
828

Net income (loss) from continuing operations
(262
)
 
(540
)
 
(825
)
 
(2,938
)
Less: Net (income) loss from discontinued operations, net of taxes and noncontrolling interest
—

 
(31
)
 
—

 
(81
)
Net income (loss)
(262
)
 
(509
)
 
(825
)
 
(2,857
)
Less: Net income (loss) attributable to the noncontrolling interest
—

 
2

 
3

 
1

Net income (loss) attributable to AXA Equitable
$
(262
)
 
$
(511
)
 
$
(828
)
 
$
(2,858
)

See Notes to Consolidated Financial Statements (Unaudited).


3
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Net income (loss)
$
(262
)
 
$
(509
)
 
$
(825
)
 
$
(2,857
)
Other comprehensive income (loss) net of income taxes:
 
 
 
 
 
 
 
Change in unrealized gains (losses), net of reclassification adjustment
574

 
(403
)
 
2,629

 
(1,458
)
Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment
—

 
(3
)
 
—

 
(8
)
Other comprehensive income (loss) from discontinued operations
—

 
3

 
—

 
1

Total other comprehensive income (loss), net of income taxes
574

 
(403
)
 
2,629

 
(1,465
)
Comprehensive income (loss) attributable to AXA Equitable
$
312

 
$
(912
)
 
$
1,804

 
$
(4,322
)
See Notes to Consolidated Financial Statements (Unaudited).



4
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)


 
Three Months Ended September 30,
 
AXA Equitable Equity
 
Noncontrolling Interest
 
Total Equity
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
Continuing Operations
 
Discontinued Operations
 
Total
 
 
(in millions)
July 1, 2019
$
2

 
$
7,822

 
$
4,532

 
$
1,564

 
$
13,920

 
$
12

 
$
—

 
$
12

 
$
13,932

Dividend to parent company
—


—


(1,000
)

—


(1,000
)

—


—


—


(1,000
)
Net income (loss)
—

 
—

 
(262
)
 
—

 
(262
)
 
—

 
—

 
—

 
(262
)
Other comprehensive income (loss)
—

 
—

 
—

 
574

 
574

 
—

 
—

 
—

 
574

Other
—

 
7

 
—

 
—

 
7

 
—

 
—

 
—

 
7

September 30, 2019
$
2

 
$
7,829

 
$
3,270

 
$
2,138

 
$
13,239

 
$
12

 
$
—

 
$
12

 
$
13,251

July 1, 2018
$
2

 
$
7,770

 
$
6,599

 
$
(464
)
 
$
13,907

 
$
12

 
$
3,027

 
$
3,039

 
$
16,946

Repurchase of AB Holding units
—

 
—

 
—

 
—

 
—

 
—

 
(34
)
 
(34
)
 
(34
)
Dividend to parent company
—

 
—

 
(1,100
)
 
—

 
(1,100
)
 
—

 
—

 
—

 
(1,100
)
Dividends paid to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
(134
)
 
(134
)
 
(134
)
Net income (loss)
—

 
—

 
(511
)
 
—

 
(511
)
 
—

 
143

 
143

 
(368
)
Other comprehensive income (loss)
—

 
—

 
—

 
(403
)
 
(403
)
 
—

 
(3
)
 
(3
)
 
(406
)
Other (1)
—

 
1

 
—

 
—

 
1

 
—

 
(3
)
 
(3
)
 
(2
)
September 30, 2018
$
2

 
$
7,771

 
$
4,988

 
$
(867
)
 
$
11,894

 
$
12

 
$
2,996

 
$
3,008

 
$
14,902



5
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY — CONTINUED
(UNAUDITED)


 
Nine Months Ended September 30,
 
AXA Equitable Equity
 
Noncontrolling Interest
 
Total Equity
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
Continuing Operations
 
Discontinued Operations
 
Total
 
 
(in millions)
January 1, 2019
$
2

 
$
7,807

 
$
5,098

 
$
(491
)
 
$
12,416

 
$
12

 
$
—

 
$
12

 
$
12,428

Dividend to parent company
—


—


(1,000
)

—


(1,000
)

—


—


—


(1,000
)
Net income (loss)
—

 
—

 
(828
)
 
—

 
(828
)
 
—

 
—

 
—

 
(828
)
Other comprehensive income (loss)
—

 
—

 
—

 
2,629

 
2,629

 
—

 
—

 
—

 
2,629

Other
—

 
22

 
—

 
—

 
22

 
—

 
—

 
—

 
22

September 30, 2019
$
2

 
$
7,829

 
$
3,270

 
$
2,138

 
$
13,239

 
$
12

 
$
—

 
$
12

 
$
13,251

January 1, 2018
$
2

 
$
6,859

 
$
8,938

 
$
598

 
$
16,397

 
$
19

 
$
3,076

 
$
3,095

 
$
19,492

Cumulative effect of adoption of revenue recognition standard ASC 606
—

 
—

 
8

 
—

 
8

 
—

 
25

 
25

 
33

De-consolidation of real estate joint ventures
—

 
—

 
—

 
—

 
—

 
(8
)
 
—

 
(8
)
 
(8
)
Repurchase of AB Holding units
—

 
—

 
—

 
—

 
—

 
—

 
(59
)
 
(59
)
 
(59
)
Dividend to parent company
—

 
—

 
(1,100
)
 
—

 
(1,100
)
 
—

 
—

 
—

 
(1,100
)
Dividends paid to noncontrolling interest
—

 
—

 
—

 
—

 
—

 
—

 
(468
)
 
(468
)
 
(468
)
Net income (loss)
—

 
—

 
(2,858
)
 
—

 
(2,858
)
 
1

 
417

 
418

 
(2,440
)
Other comprehensive income (loss)
—

 
—

 
—

 
(1,465
)
 
(1,465
)
 
—

 
(10
)
 
(10
)
 
(1,475
)
Other (1)
—

 
912

 
—

 
—

 
912

 
—

 
15

 
15

 
927

September 30, 2018
$
2

 
$
7,771

 
$
4,988

 
$
(867
)
 
$
11,894

 
$
12

 
$
2,996

 
$
3,008

 
$
14,902

______________
(1)
Includes impact of the GMxB unwind with AXA RE Arizona. See Note 12 in the Company’s Annual Report on Form 10-K.
See Notes to Consolidated Financial Statements (Unaudited).




6
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


 
Nine Months Ended September 30,
2019
 
2018
 
(in millions)
Cash flows from operating activities:
 
 
 
Net income (loss) (1)
$
(825
)
 
$
(2,419
)
Adjustments to reconcile Net income (loss) to Net cash provided by (used in) operating activities:
 
 
 
Interest credited to policyholders’ account balances
837

 
754

Policy charges and fee income
(2,577
)
 
(2,644
)
Net derivative (gains) losses
2,075

 
3,106

Investment (gains) losses, net
(181
)
 
(73
)
Realized and unrealized (gains) losses on trading securities
(421
)
 
206

Non-cash long-term incentive compensation expense
23

 
13

Amortization and depreciation (2)
267

 
258

Amortization of deferred cost of reinsurance asset
—

 
1,884

Equity (income) loss from limited partnerships (2)
(63
)
 
(83
)
Cash received on the recapture of captive reinsurance
—

 
1,273

Changes in:
 
 
 
Net broker-dealer and customer related receivables/payables
3

 
414

Reinsurance recoverable
(123
)
 
106

Segregated cash and securities, net
—

 
(438
)
Capitalization of deferred policy acquisition costs (2)
(466
)
 
(432
)
Future policy benefits
1,035

 
(599
)
Current and deferred income taxes
(81
)
 
(664
)
Other, net
(215
)
 
448

Net cash provided by (used in) operating activities
$
(712
)
 
$
1,110

 
 
 
 
Cash flows from investing activities:
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
Fixed maturities, available-for-sale
$
9,394

 
$
5,942

Mortgage loans on real estate
708

 
375

Trading account securities
8,216

 
6,990

Real estate joint ventures
3

 
140

Short-term investments (2)
1,916

 
1,806

Other
145

 
204

Payment for the purchase/origination of:
 
 
 
Fixed maturities, available-for-sale
(23,834
)
 
(6,422
)
Mortgage loans on real estate
(913
)
 
(1,485
)
Trading account securities
(923
)
 
(8,103
)
Short-term investments (2)
(2,134
)
 
(1,326
)
Other
(305
)
 
(146
)
Cash settlements related to derivative instruments
191

 
(1,076
)
Issuance of loans to affiliates
—

 
(1,100
)
Repayments of loans to affiliates
—

 
700

Investment in capitalized software, leasehold improvements and EDP equipment
(49
)
 
(79
)
Other, net
—

 
285

Net cash provided by (used in) investing activities
$
(7,585
)
 
$
(3,295
)


7
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS-CONTINUED
(UNAUDITED)

 
Nine Months Ended September 30,
2019
 
2018
 
(in millions)
Cash flows from financing activities:
 
 
 
Policyholders’ account balances:
 
 
 
Deposits
$
9,464

 
$
6,184

Withdrawals
(3,433
)
 
(3,254
)
Transfers (to) from Separate Accounts
1,427

 
1,379

Change in short-term financings
—

 
(168
)
Change in collateralized pledged assets
3

 
(62
)
Change in collateralized pledged liabilities
1,898

 
279

 Increase (decrease) in overdrafts payable
—

 
(39
)
Shareholder dividend paid
(1,000
)
 
(1,100
)
Purchases of AB Holding Units to fund long-term incentive compensation plan
awards, net
—

 
(83
)
Repurchase of AB Holding Units
—

 
(59
)
Purchase (redemption) of noncontrolling interests of consolidated company-sponsored investment funds
14

 
(519
)
Distribution to noncontrolling interests in consolidated subsidiaries
—

 
(468
)
Repayment of loans from affiliates
(572
)
 
13

Increase (decrease) in securities sold under agreement to repurchase
(573
)
 
—

Other, net
—

 
(1
)
Net cash provided by (used in) financing activities
$
7,228

 
$
2,102

 
 
 
 
Effect of exchange rate changes on Cash and cash equivalents
—

 
(9
)
Change in Cash and cash equivalents
(1,069
)
 
(92
)
Cash and cash equivalents, beginning of year
2,622

 
3,409

Cash and cash equivalents, end of period
$
1,553

 
$
3,317

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

End of period
 
 
$
635

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

End of period
 
 
$
2,682

 
 
 
 
Cash flows of disposed subsidiary:
 
 
 
Net cash provided by (used in):
 
 
 
Operating activities
 
 
$
705

Investing activities
 
 
$
204

Financing activities
 
 
$
(1,274
)
Effect of exchange rate changes on Cash and cash equivalents
 
 
$
(9
)
 
 
 
 
Non-cash transactions during the period:
 
 
 
(Settlement) issuance of long-term debt


 
$
(202
)
Transfer of assets to reinsurer


 
$
(604
)
Repayment of loans from affiliates
 
 
$
300

_____________
(1)
Net income (loss) includes $438 million in the nine months ended September 30, 2018 of the discontinued operations that are not included in Net income (loss) in the Consolidated Statements of Income (Loss).
(2)
Prior period amounts have been reclassified to conform to the current period’s presentation. See Note 15 for further information.

See Notes to Consolidated Financial Statements (Unaudited).


8
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


1)    ORGANIZATION
Consolidation
AXA Equitable Life Insurance Company’s (“AXA Equitable” and, collectively with its consolidated subsidiaries, the “Company”) primary business is providing variable annuity, life insurance and employee benefit products to both individuals and businesses. The Company is an indirect, wholly-owned subsidiary of AXA Equitable Holdings, Inc. (“Holdings”). As of September 30, 2019 and December 31, 2018, AXA S.A. (“AXA”), a French holding company for the AXA Group, owned approximately 39% and 59%, respectively, of the outstanding common stock of Holdings.
The accompanying consolidated financial statements represent the consolidated results and financial position of AXA Equitable and not the consolidated results and financial position of Holdings.
Discontinued Operations
In the fourth quarter of 2018, the Company transferred its economic interest in the business of AllianceBernstein Holding L.P. (“AB Holding”), AllianceBernstein L.P. (“ABLP”) and their subsidiaries (collectively, “AB”) to a newly created wholly-owned subsidiary of Holdings (the “AB Business Transfer”). See Note 14 for additional information.
2)    SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) on a basis consistent with reporting interim financial information in accordance with instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Intercompany balances and transactions have been eliminated.
In the opinion of management, all adjustments necessary for a fair statement of the financial position and results of operations have been made. All such adjustments are of a normal, recurring nature. Interim results are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The terms “third quarter 2019” and “third quarter 2018” refer to the three months ended September 30, 2019 and 2018, respectively. The terms “first nine months of 2019” and “first nine months of 2018” refer to the nine months ended September 30, 2019 and 2018, respectively.
Adoption of New Accounting Pronouncements
Description
Effect on the Financial Statement or Other Significant Matters
ASU 2017-12: Derivatives and Hedging (Topic 815), as clarified and amended by ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses; Topic 815, Derivatives and Hedging; and Topic 825, Financial Instruments
The amendments in these ASUs better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.
On January 1, 2019, the Company adopted the new hedging guidance. Adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.


9
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Description
Effect on the Financial Statement or Other Significant Matters
ASU 2017-08: Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20)
This ASU requires certain premiums on callable debt securities to be amortized to the earliest call date and is intended to better align interest income recognition with the manner in which market participants price these instruments.
On January 1, 2019, the Company adopted the new guidance on accounting for certain premiums on callable debt securities. As the Company’s existing accounting practices aligned with the guidance in the ASU, adoption of the new standard did not have a material impact on the Company’s consolidated financial statements.
ASU 2016-02: Leases (Topic 842)
This ASU contains revised guidance to lease accounting that will require lessees to recognize on the balance sheet a “right-of-use” asset and a lease liability for virtually all lease arrangements, including those embedded in other contracts. Lessor accounting will remain substantially unchanged from the current model but has been updated to align with certain changes made to the lessee model.
On January 1, 2019, the Company adopted the new leases standard using the simplified modified retrospective transition method, as of the adoption date. Prior comparable periods will not be adjusted or presented under this method. We applied several practical expedients offered by ASC 842 upon adoption of this standard. These included continuing to account for existing leases based on judgment made under legacy U.S. GAAP as it relates to determining classification of leases, unamortized initial direct costs and whether contracts are leases or contain leases. We also used the practical expedient to use hindsight in determining lease terms (using knowledge and expectations as of the standard’s adoption date instead of the previous assumptions under legacy U.S. GAAP) and evaluated impairment of our right-of-use (“RoU”) assets in the transition period (using most up-to-date information.) Adoption of this standard resulted in the recognition, as of January 1, 2019, of additional RoU operating lease assets of $347 million reported in Other assets and operating lease liabilities of $439 million reported in Other liabilities in accompanying consolidated balance sheets. The operating RoU assets recognized as of January 1, 2019 are net of deferred rent of $58 million and liabilities associated with previously recognized impairments of $34 million. See Note 8 for additional information.
Future Adoption of New Accounting Pronouncements
Description
Effective Date and Method of Adoption
Effect on the Financial Statement or Other Significant Matters
ASU 2018-17: Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
This ASU provides guidance requiring that indirect interests held through related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests.
Effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. All entities are required to apply the amendments in this update retrospectively with a cumulative-effect adjustment to retained earnings at the beginning of the earliest period presented.
The Company will adopt this new standard effective for January 1, 2020. Management does not expect the adoption of this standard to materially impact the Company’s financial position or results of operations.
ASU 2018-13: Fair Value Measurement (Topic 820)
This ASU improves the effectiveness of fair value disclosures in the notes to financial statements. Amendments in this ASU modify disclosure requirements in Topic 820, including the removal or modification of certain disclosure requirements, and the addition of new disclosure requirements.
Effective for fiscal years beginning after December 15, 2019. Early adoption is permitted, with the option to early adopt amendments to remove or modify disclosures, with full adoption of additional requirements delayed until their effective date. Amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively. All other amendments should be applied retrospectively.
Management has elected to early adopt the removed disclosures relating to transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and valuation processes for Level 3 fair value measurements. The Company will delay adoption of the additional disclosures until their effective date.


10
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Description
Effective Date and Method of Adoption
Effect on the Financial Statement or Other Significant Matters
ASU 2018-12: Financial Services—Insurance (Topic 944)
This ASU provides targeted improvements to existing recognition, measurement, presentation, and disclosure requirements for long-duration contracts issued by an insurance entity. The ASU primarily impacts four key areas, including:
Effective for fiscal years beginning after December 31, 2020. Early adoption is permitted.

On October 16, 2019, the FASB affirmed its previous decision to delay the effective date to fiscal years beginning after December 15, 2021, and interim periods within those fiscal years.
Management currently is evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements, however the adoption of the ASU is expected to have a significant impact on the Company’s consolidated financial condition, results of operations, cash flows and required disclosures, as well as processes and controls.
Measurement of the liability for future policy benefits for traditional and limited payment contracts. The ASU requires companies to review, and if necessary, update, cash flow assumptions at least annually for non-participating traditional and limited-payment insurance contracts. Interest rates used to discount the liability will need to be updated quarterly using an upper medium grade (low credit risk) fixed-income instrument yield.
For the liability for future policyholder benefits for traditional and limited payment contracts, companies can elect one of two adoption methods. Companies can either elect a modified retrospective transition method applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or a full retrospective transition method using actual historical experience information as of contract inception. The same adoption method must be used for deferred policy acquisition costs.
 
Measurement of market risk benefits (“MRBs”). MRBs, as defined under the ASU, will encompass certain GMxB features associated with variable annuity products and other general account annuities with other than nominal market risk. The ASU requires MRBs to be measured at fair value with changes in value attributable to changes in instrument-specific credit risk recognized in OCI.

Amortization of deferred policy acquisition costs. The ASU simplifies the amortization of deferred policy acquisition costs and other balances amortized in proportion to premiums, gross profits, or gross margins, requiring such balances to be amortized on a constant level basis over the expected term of the contracts.  Deferred costs will be required to be written off for unexpected contract terminations but will not be subject to impairment testing.

Expanded footnote disclosures. The ASU requires additional disclosures including disaggregated rollforwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, MRBs, Separate Accounts liabilities and deferred policy acquisition costs. Companies will also be required to disclose information about significant inputs, judgements, assumptions and methods used in measurement.
For MRBs, the ASU should be applied retrospectively as of the beginning of the earliest period presented.

For deferred policy acquisition costs,
companies can elect one of two adoption methods. Companies can either elect a modified retrospective transition method applied to contracts in force as of the beginning of the earliest period presented on the basis of their existing carrying amounts, adjusted for the removal of any related amounts in AOCI or a full retrospective transition method using actual historical experience information as of contract inception. The same adoption method must be used for the liability for future policyholder benefits for traditional and limited payment contracts.





11
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Description
Effective Date and Method of Adoption
Effect on the Financial Statement or Other Significant Matters
ASU 2016-13: Financial Instruments—Credit Losses (Topic 326), as clarified and amended by ASU 2018-19: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, ASU 2019-04: Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and ASU 2019-05: Financial Instruments—Credit Losses (Topic 326) Targeted Transition Relief
ASU 2016-13 contains new guidance which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination.
ASU 2019-05 provides entities that have instruments within the scope of Subtopic 326-20 an option to irrevocably elect the fair value option on an instrument-by instrument basis upon adoption of Topic 326. ASU 2018-19 and ASU 2019-05, clarified the codification guidance and did not materially change the standards.
Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. These amendments should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.
The Company is continuing to develop, validate and implement its updated expected credit loss models, processes and controls related to the identified financial assets that fall within the scope of the new standard. While Management expects the adoption will not materially impact the Company’s financial position or results of operations, it currently anticipates that the standard will have the most impact to its commercial and agricultural mortgage loan portfolios. However, the extent of the impact will depend on various factors including the economic environment, structure and size of the Company’s loan portfolio and other assets impacted by the standard.
Accounting and Consolidation of Variable Interest Entities (“VIEs”)
At September 30, 2019, the Company held $1.1 billion of investment assets in the form of equity interests issued by non-corporate legal entities determined under the guidance to be VIEs, such as limited partnerships and limited liability companies, including hedge funds, private equity funds and real estate-related funds. As an equity investor, the Company is considered to have a variable interest in each of these VIEs as a result of its participation in the risks and/or rewards these funds were designed to create by their defined portfolio objectives and strategies. Primarily through qualitative assessment, including consideration of related party interests or other financial arrangements, if any, the Company was not identified as primary beneficiary of any of these VIEs, largely due to its inability to direct the activities that most significantly impact their economic performance. Consequently, the Company continues to reflect these equity interests in the consolidated balance sheets as Other equity investments and to apply the equity method of accounting for these positions. The net assets of these non-consolidated VIEs are $169.6 billion at September 30, 2019. The Company’s maximum exposure to loss from its direct involvement with these VIEs is the carrying value of its investment of $1.1 billion and $865 million of unfunded commitments at September 30, 2019. The Company has no further economic interest in these VIEs in the form of guarantees, derivatives, credit enhancements or similar instruments and obligations.
At September 30, 2019, the Company consolidated one real estate joint venture for which it was identified as primary beneficiary under the VIE model. The consolidated entity is jointly owned by AXA Equitable Life Insurance Company (“AXA Equitable Life”) and AXA France and holds an investment in a real estate venture. Included in the Company’s consolidated balance sheet at September 30, 2019 related to this VIE is $33 million of Real estate held for production of income. In addition, one non-consolidated real estate joint venture totaling $19 million at September 30, 2019 has been deemed to be “held for sale” and is reported in Other invested assets.
Assumption Updates and Model Changes
The Company conducts its annual review of its assumptions and models during the third quarter of each year. The annual review encompasses assumptions underlying the valuation of unearned revenue liabilities, embedded derivatives for the Company’s insurance business, liabilities for future policyholder benefits, deferred policy acquisition cost (“DAC”) and deferred sales inducement (“DSI”) assets. There was no material impact from model changes during the third quarter of 2019 and 2018 to our Income (loss) from continuing operations, before income taxes or Net income (loss).
The net impact of assumption changes in the third quarter of 2019 decreased Policy charges and fee income by $11 million, increased Policyholders’ benefits by $886 million, increased Net derivative losses by $548 million, decreased Interest credited to policyholders’ account balances by $14 million and decreased Amortization of DAC by $77


12
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

million. This resulted in a decrease in Income (loss) from operations, before income taxes of $1.4 billion and decreased Net income (loss) by $1.1 billion.
The net impact of assumption changes in the third quarter of 2018 decreased Policy charges and fee income by $12 million, decreased Policyholders’ benefits by $684 million, increased Net derivative losses by $1.1 billion and decreased the Amortization of DAC by $165 million. This resulted in a decrease in Income (loss) from operations, before income taxes of $228 million and decreased Net income (loss) by $187 million.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company changed the presentation of the capitalization of DAC in the consolidated statements of income for all prior periods presented herein by netting the capitalized amounts within the applicable expense line items, such as Compensation and benefits, Commissions and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of DAC. There was no impact on Net income (loss) or Comprehensive income (loss) from this reclassification.
The reclassification adjustments for the three and nine months ended September 30, 2018 are presented in the table below. Capitalization of DAC reclassified to Compensation and benefits, Commissions and Other operating costs and expenses reduced the amounts previously reported in those expense line items, while the capitalization of DAC reclassified from the Amortization of deferred policy acquisition costs line item increases that expense line item.
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
(in millions)
Reductions to expense line items:
 
 
 
Compensation and benefits
$
33

 
$
98

Commissions
118

 
331

Other operating costs and expenses
—

 
3

Total reductions
$
151

 
$
432

 
 
 
 
Increase to expense line item:
 
 
 
Amortization of deferred policy acquisition costs
$
151

 
$
432


Revision of Prior Period Financial Statements
During the fourth quarter of 2018, the Company identified certain cash flows that were incorrectly classified in the Company’s consolidated statements of cash flows. The Company has determined that these misclassifications were not material to its financial statements of any period.
The impact of items included in the revision tables within Note 15 on the consolidated statement of cash flows for the nine months ended September 30, 2018 were corrected in the comparative consolidated statements of cash flows included herein. See Note 15 for further information.
3)    INVESTMENTS
Fixed Maturities
The following tables provide information relating to fixed maturities classified as available-for-sale (“AFS”).


13
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Available-for-Sale Fixed Maturities by Classification
 
Amortized
Cost
 
Gross Unrealized
Gains
 
Gross Unrealized
Losses
 
Fair
Value
 
OTTI
in AOCI (4)
 
(in millions)
September 30, 2019:
 
 
 
 
 
 
 
 
 
Fixed Maturities:
 
 
 
 
 
 
 
 
 
Corporate (1)
$
41,221

 
$
2,189

 
$
49

 
$
43,361

 
$
—

U.S. Treasury, government and agency
14,036

 
1,743

 
55

 
15,724

 
—

States and political subdivisions
567

 
79

 
1

 
645

 
—

Foreign governments
481

 
42

 
6

 
517

 
—

Residential mortgage-backed (2)
170

 
12

 
—

 
182

 
—

Asset-backed (3)
600

 
4

 
2

 
602

 
—

Redeemable preferred stock
400

 
17

 
3

 
414

 
—

Total at September 30, 2019
$
57,475

 
$
4,086

 
$
116

 
$
61,445

 
$
—

 
 
 
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
 
 
 
 
 
 
Fixed Maturities:
 
 
 
 
 
 
 
 
 
Corporate (1)
$
26,690

 
$
385

 
$
699

 
$
26,376

 
$
—

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

 
143

 
454

 
13,335

 
—

States and political subdivisions
408

 
47

 
1

 
454

 
—

Foreign governments
515

 
17

 
13

 
519

 
—

Residential mortgage-backed (2)
193

 
9

 
—

 
202

 
—

Asset-backed (3)
600

 
1

 
11

 
590

 
2

Redeemable preferred stock
440

 
16

 
17

 
439

 
—

Total at December 31, 2018
$
42,492

 
$
618

 
$
1,195

 
$
41,915

 
$
2

______________
(1)
Corporate fixed maturities includes both public and private issues.
(2)
Includes publicly traded agency pass-through securities and collateralized obligations.
(3)
Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans.
(4)
Amounts represent OTTI losses in AOCI, which were not included in Net income (loss).
The contractual maturities of AFS fixed maturities at September 30, 2019 are shown in the table below. Bonds not due at a single maturity date have been included in the table in the final year of maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Contractual Maturities of Available-for-Sale Fixed Maturities
 
Amortized Cost
 
Fair Value
 
(in millions)
September 30, 2019:
 
 
 
Due in one year or less
$
3,099

 
$
3,118

Due in years two through five
13,296

 
13,691

Due in years six through ten
15,689

 
16,769

Due after ten years
24,221

 
26,669

Subtotal
56,305

 
60,247

Residential mortgage-backed
170

 
182

Asset-backed
600

 
602

Redeemable preferred stock
400

 
414

Total at September 30, 2019
$
57,475

 
$
61,445



14
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table shows proceeds from sales, gross gains (losses) from sales for AFS fixed maturities during the three and nine months ended September 30, 2019 and 2018:
Proceeds and Gains (Losses) on Sales for Available-for-Sale Fixed Maturities
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Proceeds from sales
$
3,839

 
$
973

 
$
6,756

 
$
4,774

Gross gains on sales
$
207

 
$
6

 
$
224

 
$
140

Gross losses on sales
$
(4
)
 
$
(4
)
 
$
(25
)
 
$
(59
)
 
 
 
 
 
 
 
 
Total OTTI
$
—

 
$
(4
)
 
$
—

 
$
(4
)
Non-credit losses recognized in OCI
—

 
—

 
—

 
—

Credit losses recognized in Net income (loss)
$
—

 
$
(4
)
 
$
—

 
$
(4
)
The following table sets forth the amount of credit loss impairments on AFS fixed maturities held by the Company at the dates indicated and the corresponding changes in such amounts:
Available-for-Sale Fixed Maturities - Credit Loss Impairments 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Balances, beginning of period
$
(18
)
 
$
(9
)
 
$
(46
)
 
$
(10
)
Previously recognized impairments on securities that matured, paid, prepaid or sold
3

 
—

 
31

 
1

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

 
—

 
—

 
—

Impairments recognized this period on securities not previously impaired
—

 
(4
)
 
—

 
(4
)
Additional impairments this period on securities previously impaired
—

 
—

 
—

 
—

Increases due to passage of time on previously recorded credit losses
—

 
—

 
—

 
—

Accretion of previously recognized impairments due to increases in expected cash flows
—

 
—

 
—

 
—

Balances at September 30,
$
(15
)
 
$
(13
)
 
$
(15
)
 
$
(13
)
______________
(1)
Represents circumstances where the Company determined in the current period that it intends to sell the security, or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost.
Net unrealized investment gains (losses) on fixed maturities classified as AFS are included in the consolidated balance sheets as a component of AOCI.
Changes in net unrealized investment gains (losses) recognized in AOCI include reclassification adjustments to reflect amounts realized in Net income (loss) for the current period that had been part of OCI in earlier periods. The tables that follow below present a roll-forward of net unrealized investment gains (losses) recognized in AOCI:


15
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Net Unrealized Gains (Losses) on Available-for-Sale Fixed Maturities
 
Net
Unrealized
Gains
(Losses) on
Investments
 
DAC
 
Policyholders’
Liabilities
 
Deferred
Income
Tax Asset
(Liability)
 
AOCI Gain
(Loss) Related
to Net
Unrealized
Investment
Gains (Losses)
 
(in millions)
Balances at July 1, 2019
$
2,622

 
$
(534
)
 
$
(86
)
 
$
(420
)
 
$
1,582

Net investment gains (losses) arising during the period
1,548

 
—

 
—

 
—

 
1,548

Reclassification adjustment:
 
 
 
 
 
 
 
 
—

Included in Net income (loss)
(201
)
 
—

 
—

 
—

 
(201
)
Excluded from Net income (loss) (1)
—

 
—

 
—

 
—

 
—

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

 
(291
)
 
—

 
—

 
(291
)
Deferred income taxes
—

 
—

 
—

 
(156
)
 
(156
)
Policyholders’ liabilities
—

 
—

 
(315
)
 
—

 
(315
)
Net unrealized investment gains (losses) excluding OTTI losses
3,969

 
(825
)
 
(401
)
 
(576
)
 
2,167

Net unrealized investment gains (losses) with OTTI losses
1

 
(1
)
 
—

 
—

 
—

Balances at September 30, 2019
$
3,970

 
$
(826
)
 
$
(401
)
 
$
(576
)
 
$
2,167

 
 
 
 
 
 
 
 
 
 
Balances at July 1, 2018
$
(245
)
 
$
11

 
$
(110
)
 
$
(27
)
 
$
(371
)
Net investment gains (losses) arising during the period
(554
)
 
—

 
—

 
—

 
(554
)
Reclassification adjustment:
 
 
 
 
 
 
 
 
 
Included in Net income (loss)
10

 
—

 
—

 
—

 
10

Excluded from Net income (loss) (1)
—

 
—

 
—

 
—

 
—

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

 
72

 
—

 
—

 
72

Deferred income taxes
—

 
—

 
—

 
112

 
112

Policyholders’ liabilities
—

 
—

 
(62
)
 
—

 
(62
)
Net unrealized investment gains (losses) excluding OTTI losses
(789
)
 
83

 
(172
)
 
85

 
(793
)
Net unrealized investment gains (losses) with OTTI losses
1

 
—

 
—

 
—

 
1

Balances at September 30, 2018
$
(788
)
 
$
83

 
$
(172
)
 
$
85

 
$
(792
)
______________
(1)
Represents “transfers out” related to the portion of OTTI losses during the period that were not recognized in Net income (loss) for securities with no prior OTTI losses.


16
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Net
Unrealized
Gains
(Losses) on
Investments
 
DAC
 
Policyholders’
Liabilities
 
Deferred
Income
Tax Asset
(Liability)
 
AOCI Gain
(Loss) Related
to Net
Unrealized
Investment
Gains (Losses)
 
(in millions)
Balances at January 1, 2019
$
(577
)
 
$
39

 
$
(55
)
 
$
125

 
$
(468
)
Net investment gains (losses) arising during the period
4,754

 
—

 
—

 
—

 
4,754

Reclassification adjustment:
 
 
 
 
 
 
 
 
—

Included in Net income (loss)
(208
)
 
—

 
—

 
—

 
(208
)
Excluded from Net income (loss) (1)
—

 
—

 
—

 
—

 
—

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

 
(864
)
 
—

 
—

 
(864
)
Deferred income taxes
—

 
—

 
—

 
(701
)
 
(701
)
Policyholders’ liabilities
—

 
—

 
(346
)
 
—

 
(346
)
Net unrealized investment gains (losses) excluding OTTI losses
3,969

 
(825
)
 
(401
)
 
(576
)
 
2,167

Net unrealized investment gains (losses) with OTTI losses
1

 
(1
)
 
—

 
—

 
—

Balances at September 30, 2019
$
3,970

 
$
(826
)
 
$
(401
)
 
$
(576
)
 
$
2,167

 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2018
$
1,526

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

Net investment gains (losses) arising during the period
(2,240
)
 
—

 
—

 
—

 
(2,240
)
Reclassification adjustment:
 
 
 
 
 
 
 
 

Included in Net income (loss)
(75
)
 
—

 
—

 
—

 
(75
)
Excluded from Net income (loss) (1)
—

 
—

 
—

 
—

 
—

Impact of net unrealized investment gains (losses) on:
 
 
 
 
 
 
 
 

DAC
—

 
398

 
—

 
—

 
398

Deferred income taxes
—

 
—

 
—

 
385

 
385

Policyholders’ liabilities
—

 
—

 
60

 
—

 
60

Net unrealized investment gains (losses) excluding OTTI losses
(789
)
 
83

 
(172
)
 
85

 
(793
)
Net unrealized investment gains (losses) with OTTI losses
1

 
—

 
—

 
—

 
1

Balances at September 30, 2018
$
(788
)
 
$
83

 
$
(172
)
 
$
85

 
$
(792
)
______________
(1)
Represents “transfers out” related to the portion of OTTI losses during the period that were not recognized in Net income (loss) for securities with no prior OTTI losses.
The following tables disclose the fair values and gross unrealized losses of the 339 securities at September 30, 2019 and the 1,471 securities at December 31, 2018 that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position for the specified periods at the dates indicated:


17
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Continuous Gross Unrealized Losses for Available-for-Sale Fixed Maturities
 
Less Than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
(in millions)
September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
2,489

 
$
24

 
$
526

 
$
25

 
$
3,015

 
$
49

U.S. Treasury, government and agency
1,568

 
55

 
—

 
—

 
1,568

 
55

States and political subdivisions
33

 
1

 
—

 
—

 
33

 
1

Foreign governments
—

 
—

 
47

 
6

 
47

 
6

Asset-backed
251

 
1

 
143

 
1

 
394

 
2

Redeemable preferred stock
—

 
—

 
50

 
3

 
50

 
3

Total at September 30, 2019
$
4,341

 
$
81

 
$
766

 
$
35

 
$
5,107

 
$
116

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturities:
 
 
 
 
 
 
 
 
 
 
 
Corporate
$
8,369

 
$
306

 
$
6,161

 
$
393

 
$
14,530

 
$
699

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

 
68

 
3,154

 
386

 
5,790

 
454

States and political subdivisions
—

 
—

 
19

 
1

 
19

 
1

Foreign governments
109

 
3

 
76

 
10

 
185

 
13

Residential mortgage-backed
—

 
—

 
13

 
—

 
13

 
—

Asset-backed
558

 
11

 
6

 
—

 
564

 
11

Redeemable preferred stock
160

 
12

 
31

 
5

 
191

 
17

Total at December 31, 2018
$
11,832

 
$
400

 
$
9,460

 
$
795

 
$
21,292

 
$
1,195

The Company’s investments in fixed maturities do not include concentrations of credit risk of any single issuer greater than 10% of the consolidated equity of the Company, other than securities of the U.S. government, U.S. government agencies, and certain securities guaranteed by the U.S. government. The Company maintains a diversified portfolio of corporate securities across industries and issuers and does not have exposure to any single issuer in excess of 0.6% of total corporate securities. The largest exposures to a single issuer of corporate securities held at September 30, 2019 and December 31, 2018 were $278 million and $210 million, respectively, representing 2.1% and 1.7% of the consolidated equity of the Company
Corporate high yield securities, consisting primarily of public high yield bonds, are classified as other than investment grade by the various rating agencies, i.e., a rating below Baa3/BBB- or the National Association of Insurance Commissioners (“NAIC”) designation of 3 (medium investment grade), 4 or 5 (below investment grade) or 6 (in or near default). At September 30, 2019 and December 31, 2018, respectively, approximately $1.4 billion and $1.2 billion, or 2.4% and 2.9%, of the $57.5 billion and $42.5 billion aggregate amortized cost of fixed maturities held by the Company were considered to be other than investment grade. These securities had unrealized losses of $21 million and $30 million at September 30, 2019 and December 31, 2018, respectively.
At September 30, 2019 and December 31, 2018, respectively, the $35 million and $795 million of gross unrealized losses of twelve months or more were concentrated in corporate and U.S. Treasury, government and agency securities. In accordance with the policy described in Note 2, the Company concluded that an adjustment to income for OTTI for these securities was not warranted at either September 30, 2019 or 2018. At September 30, 2019 and December 31, 2018, the Company did not intend to sell the securities nor will it likely be required to dispose of the securities before the anticipated recovery of their remaining amortized cost basis.
At September 30, 2019 and December 31, 2018, the fair value of the Company’s trading account securities was $8.4 billion and $15.2 billion, respectively. At September 30, 2019 and December 31, 2018, trading account securities


18
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

included the General Account’s investment in Separate Accounts which had carrying values of $54 million and $48 million, respectively.
Net unrealized and realized gains (losses) on trading account equity securities are included in Net investment income (loss) in the Consolidated Statements of Income (Loss). The table below shows a breakdown of Net investment income (loss) from trading account securities during the three and nine months ended September 30, 2019 and 2018:
Net Investment Income (Loss) from Trading Account Securities
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Net investment gains (losses) recognized during the period on securities held at the end of the period
$
7

 
$
(36
)
 
$
431

 
$
(231
)
Net investment gains (losses) recognized on securities sold during the period
13

 
(19
)
 
(10
)
 
(17
)
Net investment gains (losses) on trading securities arising during the period
20

 
(55
)
 
421

 
(248
)
Interest and dividend income from trading securities
59

 
89

 
220

 
228

Net investment income (loss) from trading securities
$
79

 
$
34

 
$
641

 
$
(20
)
Mortgage Loans
The payment terms of mortgage loans may from time to time be restructured or modified.
At September 30, 2019 and December 31, 2018, the carrying values of problem commercial mortgage loans on real estate that had been classified as non-accrual loans were $– and $19 million, respectively.
Allowances for credit losses for commercial mortgage loans were $– and $7 million for the nine months ended September 30, 2019 and 2018, respectively. There were no allowances for credit losses for agricultural mortgage loans for the nine months ended September 30, 2019 and 2018.
The following tables provide information relating to the loan-to-value and debt service coverage ratios for commercial and agricultural mortgage loans at September 30, 2019 and December 31, 2018. The values used in these ratio calculations were developed as part of the periodic review of the commercial and agricultural mortgage loan portfolio, which includes an evaluation of the underlying collateral value.
Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios
 
Debt Service Coverage Ratio (1)
 
Total Mortgage
Loans
Loan-to-Value Ratio (2):
Greater than 2.0x
 
1.8x to 2.0x
 
1.5x to 1.8x
 
1.2x to 1.5x
 
1.0x to 1.2x
 
Less than 1.0x
 
 
(in millions)
September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
794

 
$
39

 
$
215

 
$
24

 
$
—

 
$
—

 
$
1,072

50% - 70%
4,296

 
1,041

 
1,255

 
769

 
208

 
—

 
7,569

70% - 90%
158

 
110

 
70

 
98

 
142

 
—

 
578

90% plus
—

 
—

 
46

 
—

 
—

 
—

 
46

Total Commercial Mortgage Loans
$
5,248

 
$
1,190

 
$
1,586

 
$
891

 
$
350

 
$
—

 
$
9,265



19
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Debt Service Coverage Ratio (1)
 
Total Mortgage
Loans
Loan-to-Value Ratio (2):
Greater than 2.0x
 
1.8x to 2.0x
 
1.5x to 1.8x
 
1.2x to 1.5x
 
1.0x to 1.2x
 
Less than 1.0x
 
 
(in millions)
Agricultural Mortgage Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
291

 
$
108

 
$
257

 
$
568

 
$
327

 
$
45

 
$
1,596

50% - 70%
106

 
81

 
240

 
403

 
263

 
32

 
1,125

70% - 90%
—

 
—

 
—

 
19

 
—

 
—

 
19

90% plus
—

 
—

 
—

 
—

 
—

 
—

 
—

Total Agricultural Mortgage Loans
$
397

 
$
189

 
$
497

 
$
990

 
$
590

 
$
77

 
$
2,740

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Mortgage Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
1,085

 
$
147

 
$
472

 
$
592

 
$
327

 
$
45

 
$
2,668

50% - 70%
4,402

 
1,122

 
1,495

 
1,172

 
471

 
32

 
8,694

70% - 90%
158

 
110

 
70

 
117

 
142

 
—

 
597

90% plus
—

 
—

 
46

 
—

 
—

 
—

 
46

Total Mortgage Loans
$
5,645

 
$
1,379

 
$
2,083

 
$
1,881

 
$
940

 
$
77

 
$
12,005

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial Mortgage Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
780

 
$
21

 
$
247

 
$
24

 
$
—

 
$
—

 
$
1,072

50% - 70%
4,908

 
656

 
1,146

 
325

 
151

 
—

 
7,186

70% - 90%
260

 
—

 
117

 
370

 
98

 
—

 
845

90% plus
—

 
—

 
—

 
27

 
—

 
—

 
27

Total Commercial Mortgage Loans
$
5,948

 
$
677

 
$
1,510

 
$
746

 
$
249

 
$
—

 
$
9,130

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agricultural Mortgage Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
282

 
$
147

 
$
267

 
$
543

 
$
321

 
$
51

 
$
1,611

50% - 70%
112

 
46

 
246

 
379

 
224

 
31

 
1,038

70% - 90%
—

 
—

 
—

 
19

 
27

 
—

 
46

90% plus
—

 
—

 
—

 
—

 
—

 
—

 
—

Total Agricultural Mortgage Loans
$
394

 
$
193

 
$
513

 
$
941

 
$
572

 
$
82

 
$
2,695

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Mortgage Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
0% - 50%
$
1,062

 
$
168

 
$
514

 
$
567

 
$
321

 
$
51

 
$
2,683

50% - 70%
5,020

 
702

 
1,392

 
704

 
375

 
31

 
8,224

70% - 90%
260

 
—

 
117

 
389

 
125

 
—

 
891

90% plus
—

 
—

 
—

 
27

 
—

 
—

 
27

Total Mortgage Loans
$
6,342

 
$
870

 
$
2,023

 
$
1,687

 
$
821

 
$
82

 
$
11,825

______________
(1)
The debt service coverage ratio is calculated using the most recently reported operating income results from property operations divided by annual debt service.
(2)
The loan-to-value ratio is derived from current loan balance divided by the most recent fair value estimate of the property. The fair value of the underlying commercial properties is updated annually.
The following table provides information relating to the aging analysis of past due mortgage loans at September 30, 2019 and December 31, 2018.


20
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Age Analysis of Past Due Mortgage Loans
 
30-59 Days
 
60-89 Days
 
90 Days
or More
 
Total
 
Current
 
Total Financing Receivables
 
Recorded Investment 90 Days or More and Accruing
 
 
 
 
 
 
 
(in millions)
 
 
 
 
September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
—

 
$
—

 
$
—

 
$
—

 
$
9,265

 
$
9,265

 
$
—

Agricultural
25

 
5

 
75

 
105

 
2,635

 
2,740

 
75

Total Mortgage Loans
$
25

 
$
5

 
$
75

 
$
105

 
$
11,900

 
$
12,005

 
$
75

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial
$
—

 
$
—

 
$
27

 
$
27

 
$
9,103

 
$
9,130

 
$
—

Agricultural
18

 
8

 
42

 
68

 
2,627

 
2,695

 
40

Total Mortgage Loans
$
18

 
$
8

 
$
69

 
$
95

 
$
11,730

 
$
11,825

 
$
40

4)    DERIVATIVES
The Company uses derivatives as part of its overall asset/liability risk management primarily to reduce exposures to equity market and interest rate risks. Derivative hedging strategies are designed to reduce these risks from an economic perspective and are all executed within the framework of a “Derivative Use Plan” approved by applicable states’ insurance law. Derivatives are generally not accounted for using hedge accounting, with the exception of Treasury Inflation-Protected Securities (“TIPS”), which is discussed further below. Operation of these hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates, election rates, fund performance, market volatility and interest rates. A wide range of derivative contracts are used in these hedging programs, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, bond and bond-index total return swaps, swaptions, variance swaps and equity options, credit and foreign exchange derivatives, as well as bond and repo transactions to support the hedging. The Company bought interest rate swaptions during the second quarter of 2019 to reduce the impact of unfavorable changes in interest rates. The derivative contracts are collectively managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in capital markets. In addition, as part of its hedging strategy, the Company targets an asset level for all variable annuity products at or above a CTE98 level under most economic scenarios. CTE is a statistical measure of tail risk which quantifies the total asset requirement to sustain a loss if an event outside a given probability level has occurred. CTE98 denotes the financial resources a company would need to cover the average of the worst 2% of scenarios.
Derivatives Utilized to Hedge Exposure to Variable Annuities with Guarantee Features
The Company has issued and continues to offer variable annuity products with GMxB features. The risk associated with the GMDB feature is that under-performance of the financial markets could result in GMDB benefits, in the event of death, being higher than what accumulated policyholders’ account balances would support. The risk associated with the GMIB feature is that under-performance of the financial markets could result in the present value of GMIB, in the event of annuitization, being higher than what accumulated policyholders’ account balances would support, taking into account the relationship between current annuity purchase rates and the GMIB guaranteed annuity purchase rates. The risk associated with products that have a GMxB derivative features liability is that under-performance of the financial markets could result in the GMxB derivative features’ benefits being higher than what accumulated policyholders’ account balances would support.
For GMxB features, the Company retains certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected actuarial assumptions for mortality, lapse and surrender, withdrawal and policyholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMxB features that result from financial markets movements. A portion of exposure to realized equity volatility is hedged using equity options and variance swaps and a portion of exposure to credit risk is hedged using total return swaps on fixed income indices. Additionally, the Company is party to total return swaps for which the


21
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

reference U.S. Treasury securities are contemporaneously purchased from the market and sold to the swap counterparty. As these transactions result in a transfer of control of the U.S. Treasury securities to the swap counterparty, the Company derecognizes these securities with consequent gain or loss from the sale. The Company has also purchased reinsurance contracts to mitigate the risks associated with GMDB features and the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts issued by the Company.
The Company has in place an economic hedge program using interest rate swaps and treasury futures to partially protect the overall profitability of future variable annuity sales against declining interest rates.
Derivatives Utilized to Hedge Crediting Rate Exposure on SCS, SIO, MSO and IUL Products/Investment Options
The Company hedges crediting rates in the Structured Capital Strategies (“SCS”) variable annuity, Structured Investment Option in the EQUI-VEST variable annuity series (“SIO”), Market Stabilizer Option (“MSO”) in the variable life insurance products and Indexed Universal Life (“IUL”) insurance products. These products permit the contract owner to participate in the performance of an index, ETF or commodity price movement up to a cap for a set period of time. They also contain a protection feature, in which the Company will absorb, up to a certain percentage, the loss of value in an index, ETF or commodity price, which varies by product segment.
In order to support the returns associated with these features, the Company enters into derivative contracts whose payouts, in combination with fixed income investments, emulate those of the index, ETF or commodity price, subject to caps and buffers, thereby substantially reducing any exposure to market-related earnings volatility.
Derivatives Used to Hedge Equity Market Risks Associated with the General Account’s Seed Money Investments in Retail Mutual Funds
The Company’s General Account seed money investments in retail mutual funds expose us to market risk, including equity market risk which is partially hedged through equity-index futures contracts to minimize such risk.
Derivatives Used for General Account Investment Portfolio
The Company maintains a strategy in its General Account investment portfolio to replicate the credit exposure of fixed maturity securities otherwise permissible for investment under its investment guidelines through the sale of credit default swaps (“CDSs”). Under the terms of these swaps, the Company receives quarterly fixed premiums that, together with any initial amount paid or received at trade inception, replicate the credit spread otherwise currently obtainable by purchasing the referenced entity’s bonds of similar maturity. These credit derivatives generally have terms of five years or less and are recorded at fair value with changes in fair value, including the yield component that emerges from initial amounts paid or received, reported in Net derivative gains (losses).
The Company manages its credit exposure taking into consideration both cash and derivatives based positions and selects the reference entities in its replicated credit exposures in a manner consistent with its selection of fixed maturities. In addition, the Company generally transacts the sale of CDSs in single name reference entities of investment grade credit quality and with counterparties subject to collateral posting requirements. If there is an event of default by the reference entity or other such credit event as defined under the terms of the swap contract, the Company is obligated to perform under the credit derivative and, at the counterparty’s option, either pay the referenced amount of the contract less an auction-determined recovery amount or pay the referenced amount of the contract and receive in return the defaulted or similar security of the reference entity for recovery by sale at the contract settlement auction.
To date, there have been no events of default or circumstances indicative of a deterioration in the credit quality of the named referenced entities to require or suggest that the Company will have to perform under these CDSs. The maximum potential amount of future payments the Company could be required to make under these credit derivatives is limited to the par value of the referenced securities which is the U.S. dollar or euro-equivalent of the derivative’s notional amount. The Standard North American CDS Contract (“SNAC”) or Standard European Corporate Contract (“STEC”) under which the Company executes these CDS sales transactions does not contain recourse provisions for recovery of amounts paid under the credit derivative.


22
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company purchased 30-year TIPS and other sovereign bonds, both inflation linked and non-inflation linked, as General Account investments and enters into asset or cross-currency basis swaps, to result in payment of the given bond’s coupons and principal at maturity in the bond’s specified currency to the swap counterparty in return for fixed dollar amounts. These swaps, when considered in combination with the bonds, together result in a net position that is intended to replicate a dollar-denominated fixed-coupon cash bond with a yield higher than a term-equivalent U.S. Treasury bond.
In June 2019, the Company terminated a program to mitigate its duration gap using total return swaps for which the reference U.S. Treasury securities are sold to the swap counterparty under arrangements economically similar to repurchase agreements. The Company terminated $3.9 billion, in notional, of total return swaps reported in other invested assets in the Company’s balance sheet. The terminated total return swaps had a gain of $121 million.
The tables below present quantitative disclosures about the Company’s derivative instruments, including those embedded in other contracts required to be accounted for as derivative instruments.
Derivative Instruments by Category
 
At September 30, 2019
 
Gains (Losses) Reported in Net Income (Loss) Nine Months Ended September 30, 2019
 
 
 
Fair Value
 
 
Notional
Amount
 
Asset
Derivatives
 
Liability
Derivatives
 
 
(in millions)
Freestanding Derivatives (1) (2):
 
 
 
 
 
 
 
Equity contracts:
 
 
 
 
 
 
 
Futures
$
6,686

 
$
—

 
$
—

 
$
(967
)
Swaps
9,561

 
81

 
56

 
(1,263
)
Options
49,081

 
3,946

 
1,513

 
1,241

Interest rate contracts:
 
 
 
 
 
 
 
Swaps
25,781

 
1,196

 
382

 
2,844

Futures
15,934

 
—

 
—

 
183

Swaptions
3,201

 
196

 
—

 
146

Credit contracts:
 
 
 
 
 
 
 
Credit default swaps
1,232

 
19

 
—

 
13

Other freestanding contracts:
 
 
 
 
 
 
 
Foreign currency contracts
1,114

 
5

 
5

 
(13
)
Margin
—

 
—

 
—

 
—

Collateral
—

 
—

 
3,472

 
—

 
 
 
 
 
 
 
 
Embedded Derivatives (2):
 
 
 
 
 
 
 
GMIB reinsurance contracts
—

 
2,853

 
—

 
882

GMxB derivative features liability (3)
—

 
—

 
9,363

 
(3,643
)
SCS, SIO, MSO and IUL indexed features (4)
—

 
—

 
2,178

 
(1,498
)
Total
$
112,590

 
$
8,296

 
$
16,969

 
$
(2,075
)
______________
(1)
Reported in Other invested assets in the consolidated balance sheets.
(2)
Reported in Net derivative gains (losses) in the consolidated statements of income (loss).
(3)
Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.
(4)
SCS, SIO, MSO and IUL indexed features are reported in Policyholders’ account balances in the consolidated balance sheets.


23
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
At December 31, 2018
 
Gains (Losses) Reported in Net Income (Loss) Nine Months Ended September 30, 2018
 
 
 
Fair Value
 
 
Notional
Amount
 
Asset
Derivatives
 
Liability
Derivatives
 
 
(in millions)
Freestanding Derivatives (1) (2):
 
 
 
 
 
 
 
Equity contracts:
 
 
 
 
 
 
 
Futures
$
10,411

 
$
—

 
$
—

 
$
(489
)
Swaps
7,697

 
140

 
168

 
(482
)
Options
21,698

 
2,119

 
1,163

 
674

Interest rate contracts:
 
 
 
 
 
 
 
Swaps
27,003

 
632

 
194

 
(1,012
)
Futures
11,448

 
—

 
—

 
52

Credit contracts:
 
 
 
 
 
 
 
Credit default swaps
1,282

 
17

 
—

 
4

Other freestanding contracts:
 
 
 
 
 
 
 
Foreign currency contracts
2,097

 
27

 
14

 
59

Margin
—

 
7

 
5

 
—

Collateral
—

 
3

 
1,564

 
—

 
 
 
 
 
 
 
 
Embedded Derivatives (2):
 
 
 
 
 
 
 
GMIB reinsurance contracts
—

 
1,991

 
—

 
(1,488
)
GMxB derivative features liability (3)
—

 
—

 
5,431

 
394

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

 
—

 
687

 
(814
)
Total
$
81,636

 
$
4,936

 
$
9,226

 
$
(3,102
)
______________
(1)
Reported in Other invested assets in the consolidated balance sheets.
(2)
Reported in Net derivative gains (losses) in the consolidated statements of income (loss).
(3)
Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.
(4)
SCS, SIO, MSO and IUL indexed features are reported in Policyholders’ account balances in the consolidated balance sheets.
Equity-Based and Treasury Futures Contracts Margin
All outstanding equity-based and treasury futures contracts at September 30, 2019 are exchange-traded and net settled daily in cash. At September 30, 2019, the Company had open exchange-traded futures positions on: (i) the S&P 500, Russell 2000, and Emerging Market indices, having initial margin requirements of $253 million, (ii) the 2-year, 5-year and 10-year U.S. Treasury Notes on U.S. Treasury bonds and ultra-long bonds, having initial margin requirements of $44 million and (iii) the Euro Stoxx, FTSE 100, Topix, ASX 200, and European, Australasia, and Far East (“EAFE”) indices as well as corresponding currency futures on the Euro/U.S. dollar, Pound/U.S. dollar, Australian dollar/U.S. dollar, and Yen/U.S. dollar, having initial margin requirements of $26 million.
Collateral Arrangements
The Company generally has executed a Credit Support Annex (“CSA”) under the International Swaps and Derivatives Association Master Agreement (“ISDA Master Agreement”) it maintains with each of its over-the-counter (“OTC”) derivative counterparties that requires both posting and accepting collateral either in the form of cash or high-quality securities, such as U.S. Treasury securities, U.S. government and government agency securities and investment grade corporate bonds. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related CSA have been executed. At September 30, 2019 and December 31, 2018, respectively, the Company held $3.5 billion and $1.6 billion in cash and securities collateral delivered by trade counterparties, representing the fair value of the related derivative agreements. The unrestricted cash collateral is


24
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

reported in Other invested assets. The Company posted collateral of $– and $3 million at September 30, 2019 and December 31, 2018, respectively, in the normal operation of its collateral arrangements.
Securities Repurchase and Reverse Repurchase Transactions
Securities repurchase and reverse repurchase transactions are conducted by the Company under a standardized securities industry master agreement, amended to suit the requirements of each respective counterparty. The Company’s securities repurchase and reverse repurchase agreements are accounted for as secured borrowing or lending arrangements, respectively and are reported in the consolidated balance sheets on a gross basis. At September 30, 2019 and December 31, 2018, the balance outstanding under securities repurchase transactions was $– and $573 million, respectively. The Company utilized these repurchase and reverse repurchase agreements for asset liability and cash management purposes. For other instruments used for asset and liability management purposes, see Note 13.
The following table presents information about the Company’s offsetting of financial assets and liabilities and derivative instruments at September 30, 2019.
Offsetting of Financial Assets and Liabilities and Derivative Instruments
At September 30, 2019
 
Gross Amount
Recognized
 
Gross Amount
Offset in the Balance Sheets
 
Net Amount
Presented in the
Balance Sheets
 
(in millions)
Assets:
 
 
 
 
 
Total derivatives
$
5,445

 
$
5,404

 
$
41

Other financial instruments
1,712

 
—

 
1,712

Other invested assets
$
7,157

 
$
5,404

 
$
1,753

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Total derivatives
$
5,429

 
$
5,404

 
$
25

Other financial liabilities
1,343

 
—

 
1,343

Other liabilities
$
6,772

 
$
5,404

 
$
1,368


The following table presents information about the Company’s gross collateral amounts that are not offset in the consolidated balance sheets at September 30, 2019.
Collateral Amounts Not Offset in the Consolidated Balance Sheets
At September 30, 2019
 
Net Amount of Derivative Contracts
 
Collateral (Received)/Held
 
 
 
Financial
Instruments
 
Cash
 
Net
Amount
 
(in millions)
Assets:
 
 
 
 
 
 
Total derivatives
$
3,488

 
$
10

 
$
3,437

 
$
41

Other financial instruments
1,712

 
—

 
—

 
1,712

Other invested assets
$
5,200

 
$
10

 
$
3,437

 
$
1,753

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 

Total derivatives
$
25

 
$
—

 
$
—

 
$
25

Other financial liabilities
1,343

 
—

 
—

 
1,343

Other liabilities
$
1,368

 
$
—

 
$
—

 
$
1,368


The Company had no securities sold under agreements to repurchase at September 30, 2019.


25
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents information about the Company’s offsetting financial assets and liabilities and derivative instruments at December 31, 2018.
Offsetting of Financial Assets and Liabilities and Derivative Instruments
At December 31, 2018
 
Gross Amount Recognized
 
Gross Amount Offset in the Balance Sheets
 
Net Amount Presented in the Balance Sheets
 
(in millions)
Assets:
 
 
 
 
 
Total derivatives
$
2,946

 
$
2,912

 
$
34

Other financial instruments
1,520

 
—

 
1,520

Other invested assets
$
4,466

 
$
2,912

 
$
1,554

Securities purchased under agreement to resell
$
—

 
$
—

 
$
—

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Total derivatives
$
3,109

 
$
2,912

 
$
197

Other financial liabilities
1,263

 
—

 
1,263

Other liabilities
$
4,372

 
$
2,912

 
$
1,460

Securities sold under agreement to repurchase (1)
$
571

 
$
—

 
$
571

______________
(1)
Excludes expense of $2 million in Securities sold under agreement to repurchase.
The following table presents information about the Company’s gross collateral amounts that are not offset in the consolidated balance sheets at December 31, 2018.
Collateral Amounts Not Offset in the Consolidated Balance Sheets
At December 31, 2018
 
Net Amount of Derivative Contracts
 
Collateral (Received)/Held
 
 
 
Financial Instruments
 
Cash (3)
 
Net
Amount
 
(in millions)
Assets:
 
 
 
 
 
 
 
Total derivatives
$
1,397

 
$
—

 
$
(1,363
)
 
$
34

Other financial instruments
1,520

 
—

 
—

 
1,520

Other invested assets
$
2,917

 
$
—

 
$
(1,363
)
 
$
1,554

Securities purchased under agreement to resell
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Total derivatives
$
197

 
$
—

 
$
—

 
$
197

Other financial liabilities
1,263

 
—

 
—

 
1,263

Other liabilities
$
1,460

 
$
—

 
$
—

 
$
1,460

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

 
$
(588
)
 
$
—

 
$
(17
)
______________
(1)
Excludes expense of $2 million in Securities sold under agreement to repurchase.
(2)
U.S. Treasury and agency securities are in Fixed maturities available-for-sale on the consolidated balance sheets.
(3)
Cash is included in Cash and cash equivalents on consolidated balance sheets.
The following table presents information about repurchase agreements accounted for as secured borrowings in the consolidated balance sheets at December 31, 2018.


26
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Repurchase Agreement Accounted for as Secured Borrowings
At December 31, 2018
 
Remaining Contractual Maturity of the Agreements
 
Overnight and Continuous
 
Up to 30 days
 
30–90 days
 
Greater Than 90 days
 
Total
 
(in millions)
Securities sold under agreement to repurchase (1):
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
$
—

 
$
571

 
$
—

 
$
—

 
$
571

Total
$
—

 
$
571

 
$
—

 
$
—

 
$
571

______________
(1)
Excludes expense of $2 million in Securities sold under agreement to repurchase on the consolidated balance sheets.
5)    CLOSED BLOCK
Summarized financial information for the Company’s Closed Block is as follows:
 
September 30, 2019
 
December 31, 2018
 
(in millions)
Closed Block Liabilities:
 
 
 
Future policy benefits, policyholders’ account balances and other
$
6,558

 
$
6,709

Policyholder dividend obligation
5

 
—

Other liabilities
61

 
47

Total Closed Block liabilities
6,624

 
6,756

 
 
 
 
Assets Designated to the Closed Block:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost of $3,648 and $3,680)
3,869

 
3,672

Mortgage loans on real estate, net of valuation allowance of $0 and $0
1,800

 
1,824

Policy loans
716

 
736

Cash and other invested assets
10

 
76

Other assets
167

 
179

Total assets designated to the Closed Block
6,562

 
6,487

 
 
 
 
Excess of Closed Block liabilities over assets designated to the Closed Block
62

 
269

Amounts included in accumulated other comprehensive income (loss):
 
 
 
Net unrealized investment gains (losses), net of policyholders' dividend obligation $5 and $0
219

 
8

Maximum future earnings to be recognized from Closed Block assets and liabilities
$
281

 
$
277



27
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


The Company’s Closed Block revenues and expenses are as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Revenues:
 
 
 
 
 
 
 
Premiums and other income
$
42

 
$
44

 
$
136

 
$
144

Net investment income (loss)
69

 
72

 
208

 
218

Investment gains (losses), net
—

 
—

 
(1
)
 
1

Total revenues
111

 
116

 
343

 
363

 
 
 
 
 
 
 
 
Benefits and Other Deductions:
 
 
 
 
 
 
 
Policyholders’ benefits and dividends
108

 
123

 
343

 
372

Other operating costs and expenses
—

 
1

 
1

 
3

Total benefits and other deductions
108

 
124

 
344

 
375

Net income (loss) before income taxes
3

 
(8
)
 
(1
)
 
(12
)
Income tax (expense) benefit
—

 
2

 
(2
)
 
2

Net income (loss)
$
3

 
$
(6
)
 
$
(3
)
 
$
(10
)
6)    INSURANCE LIABILITIES
Variable Annuity Contracts – GMDB, GMIB, GIB and GWBL and Other Features
The Company has certain variable annuity contracts with GMDB, GMIB, GIB and GWBL and other features in-force that guarantee one of the following:
•
Return of Premium: the benefit is the greater of current account value or premiums paid (adjusted for withdrawals);
•
Ratchet: the benefit is the greatest of current account value, premiums paid (adjusted for withdrawals), or the highest account value on any anniversary up to contractually specified ages (adjusted for withdrawals);
•
Roll-Up: the benefit is the greater of current account value or premiums paid (adjusted for withdrawals) accumulated at contractually specified interest rates up to specified ages;
•
Combo: the benefit is the greater of the ratchet benefit or the roll-up benefit, which may include either a five year or an annual reset; or
•
Withdrawal: the withdrawal is guaranteed up to a maximum amount per year for life.
Liabilities for Variable Annuity Contracts with GMDB and GMIB Features without No-Lapse Guarantee Rider (“NLG”) Feature
The change in the liabilities for variable annuity contracts with GMDB and GMIB features and no NLG feature are summarized in the tables below. The amounts for the direct contracts (before reinsurance ceded) are reflected in the consolidated balance sheets in Future policy benefits and other policyholders’ liabilities. The amounts for the ceded contracts are reflected in the consolidated balance sheets in Amounts due from reinsurers.


28
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Change in Liability for Variable Annuity Contracts with GMDB Features and No NLG Feature
Three and Nine Months Ended September 30, 2019 and 2018
 
Three Months Ended September 30,
 
2019
 
2018
 
Direct
 
Ceded
 
Direct
 
Ceded
 
(in millions)
Beginning balance
$
4,710

 
$
(100
)
 
$
4,124

 
$
(97
)
Paid guarantee benefits
(102
)
 
2

 
(91
)
 
3

Other changes in reserve
159

 
(3
)
 
485

 
(9
)
Ending balance
$
4,767

 
$
(101
)
 
$
4,518

 
$
(103
)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2019
 
2018
 
Direct
 
Ceded
 
Direct
 
Ceded
 
(in millions)
Beginning balance
$
4,654

 
$
(107
)
 
$
4,054

 
$
(2,030
)
Paid guarantee benefits
(328
)
 
11

 
(291
)
 
67

Other changes in reserve
441

 
(5
)
 
755

 
1,860

Ending balance
$
4,767

 
$
(101
)
 
$
4,518

 
$
(103
)
Change in Liability for Variable Annuity Contracts with GMIB Features and No NLG Feature
Three and Nine Months Ended September 30, 2019 and 2018
 
Three Months Ended September 30,
 
2019
 
2018
 
Direct
 
Ceded
 
Direct
 
Ceded
 
(in millions)
Beginning balance
$
3,759

 
$
(2,196
)
 
$
4,701

 
$
(1,825
)
Paid guarantee benefits
(70
)
 
20

 
(43
)
 
1

Other changes in reserve
992

 
(677
)
 
(1,053
)
 
253

Ending balance
$
4,681

 
$
(2,853
)
 
$
3,605

 
$
(1,571
)
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2019
 
2018
 
Direct
 
Ceded
 
Direct
 
Ceded
 
(in millions)
Beginning balance
$
3,741

 
$
(1,991
)
 
$
4,754

 
$
(10,488
)
Paid guarantee benefits
(182
)
 
55

 
(108
)
 
49

Other changes in reserve
1,122

 
(917
)
 
(1,041
)
 
8,868

Ending balance
$
4,681

 
$
(2,853
)
 
$
3,605

 
$
(1,571
)

Liabilities for Embedded and Freestanding Insurance Related Derivatives
The liability for the GMxB derivative features liability, the liability for SCS, SIO, MSO and IUL indexed features and the asset and liability for the GMIB reinsurance contracts are considered embedded or freestanding insurance derivatives and are reported at fair value. For the fair value of the assets and liabilities associated with these embedded or freestanding insurance derivatives, see Note 7.
Account Values and Net Amount at Risk
Account Values and Net Amount at Risk (“NAR”) for direct variable annuity contracts in-force with GMDB and GMIB features as of September 30, 2019 are presented in the following tables by guarantee type. For contracts with the GMDB feature, the NAR in the event of death is the amount by which the GMDB feature exceeds the related


29
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Account Values. For contracts with the GMIB feature, the NAR in the event of annuitization is the amount by which the present value of the GMIB benefits exceed the related Account Values, taking into account the relationship between current annuity purchase rates and the GMIB guaranteed annuity purchase rates. Since variable annuity contracts with GMDB features may also offer GMIB guarantees in the same contract, the GMDB and GMIB amounts listed are not mutually exclusive:
Direct Variable Annuity Contracts with GMDB and GMIB Features
at September 30, 2019
 
Guarantee Type
 
Return of
Premium
 
Ratchet
 
Roll-Up
 
Combo
 
Total
 
(in millions, except age and interest rate)
Variable annuity contracts with GMDB features
 
 
 
 
 
 
 
 
 
Account Values invested in:
 
 
 
 
 
 
 
 
 
General Account
$
14,483

 
$
94

 
$
58

 
$
181

 
$
14,816

Separate Accounts
46,286

 
8,937

 
3,071

 
32,067

 
90,361

Total Account Values
$
60,769

 
$
9,031

 
$
3,129

 
$
32,248

 
$
105,177

 
 
 
 
 
 
 
 
 
 
Net amount at risk, gross
$
123

 
$
80

 
$
1,980

 
$
18,846

 
$
21,029

Net amount at risk, net of amounts reinsured
$
123

 
$
76

 
$
1,388

 
$
18,846

 
$
20,433

 
 
 
 
 
 
 
 
 
 
Average attained age of policyholders (in years)
51.2
 
67.4
 
74.1
 
69.2
 
55.1
Percentage of policyholders over age 70
10.5
%
 
44.9
%
 
67.5
%
 
49.9
%
 
19.3
%
Range of contractually specified interest rates
N/A

 
N/A

 
3% - 6%

 
3% - 6.5%

 
3% - 6.5%

 
 
 
 
 
 
 
 
 
 
Variable annuity contracts with GMIB features
 
 
 
 
 
 
 
 
 
Account Values invested in:
 
 
 
 
 
 
 
 
 
General Account
$
—

 
$
—

 
$
20

 
$
233

 
$
253

Separate Accounts
—

 
—

 
22,484

 
34,718

 
57,202

Total Account Values
$
—

 
$
—

 
$
22,504

 
$
34,951

 
$
57,455

 
 
 
 
 
 
 
 
 
 
Net amount at risk, gross
$
—

 
$
—

 
$
981

 
$
10,696

 
$
11,677

Net amount at risk, net of amounts reinsured
$
—

 
$
—

 
$
309

 
$
9,678

 
$
9,987

 
 
 
 
 
 
 
 
 
 
Average attained age of policyholders (in years)
N/A
 
N/A
 
68.7

 
69.3

 
69.2

Weighted-average number of years remaining until annuitization
N/A
 
N/A
 
1.7

 
0.4

 
0.5

Range of contractually specified interest rates
N/A
 
N/A
 
3% - 6%
 
3% - 6.5%
 
3% - 6.5%
For more information about the reinsurance programs of the Company’s GMDB and GMIB exposure, see “Reinsurance Agreements” in Note 10 of the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.
Separate Accounts Investments by Investment Category Underlying Variable Annuity Contracts with GMDB and GMIB Features
The total account values of variable annuity contracts with GMDB and GMIB features include amounts allocated to the guaranteed interest option, which is part of the General Account and variable investment options that invest through Separate Accounts in variable insurance trusts. The following table presents the aggregate fair value of assets, by major investment category, held by Separate Accounts that support variable annuity contracts with GMDB and GMIB features. The investment performance of the assets impacts the related account values and, consequently, the


30
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NAR associated with the GMDB and GMIB benefits and guarantees. Because the Company’s variable annuity contracts offer both GMDB and GMIB features, GMDB and GMIB amounts are not mutually exclusive.
Investment in Variable Insurance Trust Mutual Funds
 
September 30, 2019
 
December 31, 2018
Mutual Fund Type
GMDB
 
GMIB
 
GMDB
 
GMIB
 
(in millions)
Equity
$
39,866

 
$
17,056

 
$
35,541

 
$
15,759

Fixed income
5,277

 
2,748

 
5,173

 
2,812

Balanced
44,347

 
37,132

 
41,588

 
33,974

Other
871

 
266

 
852

 
290

Total
$
90,361

 
$
57,202

 
$
83,154

 
$
52,835

Hedging Programs for GMDB, GMIB, GIB and Other Features
The Company has a program intended to hedge certain risks associated first with the GMDB feature and with the GMIB feature of the Accumulator series of variable annuity products. The program has also been extended to cover other guaranteed benefits as they have been made available. This program utilizes derivative contracts, such as exchange-traded equity, currency and interest rate futures contracts, total return and/or equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options, that collectively are managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in the capital markets. At the present time, this program hedges certain economic risks on products sold from 2001 forward, to the extent such risks are not externally reinsured.
These programs do not qualify for hedge accounting treatment. Therefore, gains (losses) on the derivatives contracts used in these programs, including current period changes in fair value, are recognized in Net derivative gains (losses) in the period in which they occur, and may contribute to income (loss) volatility.
Variable and Interest-Sensitive Life Insurance Policies - NLG
The NLG feature contained in variable and interest-sensitive life insurance policies keeps them in force in situations where the policy value is not sufficient to cover monthly charges then due. The NLG remains in effect so long as the policy meets a contractually specified premium funding test and certain other requirements.
The change in the fair value of the NLG feature reflected in the General Account in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets is summarized in the table below.


31
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Three Months Ended September 30,
 
2019
 
2018
 
Direct
Liability
 
Reinsurance
Ceded
 
Net
 
Direct
Liability
 
Reinsurance
Ceded
 
Net
 
(in millions)
Beginning balance
$
819

 
$
(755
)
 
$
64

 
$
716

 
$
(689
)
 
$
27

Paid guaranteed benefits
(6
)
 
—

 
(6
)
 
(4
)
 
—

 
(4
)
Other changes in reserves
52

 
(37
)
 
15

 
43

 
(28
)
 
15

Ending balance
$
865

 
$
(792
)
 
$
73

 
$
755

 
$
(717
)
 
$
38

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2019
 
2018
 
Direct
Liability
 
Reinsurance
Ceded
 
Net
 
Direct
Liability
 
Reinsurance
Ceded
 
Net
 
(in millions)
Beginning balance
$
787

 
$
(733
)
 
$
54

 
$
692

 
$
(664
)
 
$
28

Paid guaranteed benefits
(16
)
 
—

 
(16
)
 
(13
)
 
—

 
(13
)
Other changes in reserves
94

 
(59
)
 
35

 
76

 
(53
)
 
23

Ending balance
$
865

 
$
(792
)
 
$
73

 
$
755

 
$
(717
)
 
$
38

7)    FAIR VALUE DISCLOSURES
The accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, and identifies three levels of inputs that may be used to measure fair value:
Level 1
Unadjusted quoted prices for identical instruments in active markets. Level 1 fair values generally are supported by market transactions that occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, and inputs to model-derived valuations that are directly observable or can be corroborated by observable market data.
Level 3
Unobservable inputs supported by little or no market activity and often requiring significant management judgment or estimation, such as an entity’s own assumptions about the cash flows or other significant components of value that market participants would use in pricing the asset or liability.
The Company uses unadjusted quoted market prices to measure fair value for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are measured using present value or other valuation techniques. The fair value determinations are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such adjustments do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value cannot be substantiated by direct comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument.
Management is responsible for the determination of the value of investments carried at fair value and the supporting methodologies and assumptions. Under the terms of various service agreements, the Company often utilizes independent valuation service providers to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual securities. These independent valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. As further described below with respect to specific asset classes, these inputs include, but are not limited to, market prices for recent trades and transactions in comparable securities, benchmark yields, interest rate yield curves, credit spreads, quoted prices for similar securities, and other market-


32
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

observable information, as applicable. Specific attributes of the security being valued also are considered, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security- or issuer-specific information. When insufficient market observable information is available upon which to measure fair value, the Company either will request brokers knowledgeable about these securities to provide a non-binding quote or will employ internal valuation models. Fair values received from independent valuation service providers and brokers and those internally modeled or otherwise estimated are assessed for reasonableness.
Assets and liabilities measured at fair value on a recurring basis are summarized below. At September 30, 2019 and December 31, 2018, no assets were required to be measured at fair value on a non-recurring basis. Fair value measurements are required on a non-recurring basis for certain assets, including goodwill and mortgage loans on real estate, only when an impairment or other event occurs. When such fair value measurements are recorded, they must be classified and disclosed within the fair value hierarchy.
Fair Value Measurements at September 30, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
Assets:
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
Corporate (1)
$
—

 
$
42,153

 
$
1,208

 
$
43,361

U.S. Treasury, government and agency
—

 
15,724

 
—

 
15,724

States and political subdivisions
—

 
606

 
39

 
645

Foreign governments
—

 
517

 
—

 
517

Residential mortgage-backed (2)
—

 
182

 
—

 
182

Asset-backed (3)
—

 
70

 
532

 
602

Redeemable preferred stock
141

 
273

 
—

 
414

Total fixed maturities, available-for-sale
141

 
59,525

 
1,779

 
61,445

Other equity investments
13

 
—

 
—

 
13

Trading securities
314

 
8,130

 
—

 
8,444

Other invested assets:
 
 
 
 
 
 
 
Short-term investments
—

 
437

 
—

 
437

Assets of consolidated VIEs/VOEs
—

 
—

 
16

 
16

Swaps
—

 
839

 
—

 
839

Credit default swaps
—

 
19

 
—

 
19

Options
—

 
2,433

 
—

 
2,433

Swaptions
—

 
196

 
—

 
196

Total other invested assets
—

 
3,924

 
16

 
3,940

Cash equivalents
1,379

 
—

 
—

 
1,379

GMIB reinsurance contract asset
—

 
—

 
2,853

 
2,853

Separate Accounts assets
115,405

 
2,927

 
358

 
118,690

Total Assets
$
117,252

 
$
74,506

 
$
5,006

 
$
196,764

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
GMxB derivative features’ liability
$
—

 
$
—

 
$
9,363

 
$
9,363

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

 
2,178

 
—

 
2,178

Total Liabilities
$
—

 
$
2,178

 
$
9,363

 
$
11,541

______________
(1)
Corporate fixed maturities includes both public and private issues.
(2)
Includes publicly traded agency pass-through securities and collateralized obligations.
(3)
Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans.


33
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

 
$
25,202

 
$
1,174

 
$
26,376

U.S. Treasury, government and agency
—

 
13,335

 
—

 
13,335

States and political subdivisions
—

 
416

 
38

 
454

Foreign governments
—

 
519

 
—

 
519

Residential mortgage-backed (2)
—

 
202

 
—

 
202

Asset-backed (3)
—

 
71

 
519

 
590

Redeemable preferred stock
163

 
276

 
—

 
439

Total fixed maturities, available-for-sale
163

 
40,021

 
1,731

 
41,915

Other equity investments
12

 
—

 
—

 
12

Trading securities
218

 
14,919

 
29

 
15,166

Other invested assets:
 
 
 
 
 
 
 
Short-term investments
—

 
412

 
—

 
412

Assets of consolidated VIEs/VOEs
—

 
—

 
19

 
19

Swaps
—

 
423

 
—

 
423

Credit default swaps
—

 
17

 
—

 
17

Options
—

 
956

 
—

 
956

Total other invested assets
—

 
1,808

 
19

 
1,827

Cash equivalents
2,160

 
—

 
—

 
2,160

GMIB reinsurance contracts asset
—

 
—

 
1,991

 
1,991

Separate Accounts assets
105,159

 
2,733

 
374

 
108,266

Total Assets
$
107,712

 
$
59,481

 
$
4,144

 
$
171,337

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
GMxB derivative features’ liability
$
—

 
$
—

 
$
5,431

 
$
5,431

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

 
687

 
—

 
687

Total Liabilities
$
—

 
$
687

 
$
5,431

 
$
6,118

______________
(1)
Corporate fixed maturities includes both public and private issues.
(2)
Includes publicly traded agency pass-through securities and collateralized obligations.
(3)
Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans.
The fair values of the Company’s public fixed maturities are generally based on prices obtained from independent valuation service providers and for which the Company maintains a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. Although each security generally is priced by multiple independent valuation service providers, the Company ultimately uses the price received from the independent valuation service provider highest in the vendor hierarchy based on the respective asset type, with limited exception. To validate reasonableness, prices also are internally reviewed by those with relevant expertise through comparison with directly observed recent market trades. Consistent with the fair value hierarchy, public fixed maturities validated in this manner generally are reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs.
The fair values of the Company’s private fixed maturities are determined from prices obtained from independent valuation service providers. Prices not obtained from an independent valuation service provider are determined by using a discounted cash flow model or a market comparable company valuation technique. In certain cases, these models use observable inputs with a discount rate based upon the average of spread surveys collected from private


34
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model or a market comparable company valuation technique may also incorporate unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the fair value measurement of a security, a Level 3 classification generally is made.
The net fair value of the Company’s freestanding derivative positions as disclosed in Note 4 are generally based on prices obtained either from independent valuation service providers or derived by applying market inputs from recognized vendors into industry standard pricing models. The majority of these derivative contracts are traded in the OTC derivative market and are classified in Level 2. The fair values of derivative assets and liabilities traded in the OTC market are determined using quantitative models that require use of the contractual terms of the derivative instruments and multiple market inputs, including interest rates, prices, and indices to generate continuous yield or pricing curves, including overnight index swap (“OIS”) curves, and volatility factors, which then are applied to value the positions. The predominance of market inputs is actively quoted and can be validated through external sources or reliably interpolated if less observable.
Investments classified as Level 1 primarily include redeemable preferred stock, trading securities, cash equivalents and Separate Accounts assets. Fair value measurements classified as Level 1 include exchange-traded prices of fixed maturities, equity securities and derivative contracts, and net asset values for transacting subscriptions and redemptions of mutual fund shares held by Separate Accounts. Cash equivalents classified as Level 1 include money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less and are carried at cost as a proxy for fair value measurement due to their short-term nature.
Investments classified as Level 2 are measured at fair value on a recurring basis and primarily include U.S. government and agency securities and certain corporate debt securities, such as public and private fixed maturities. As market quotes generally are not readily available or accessible for these securities, their fair value measures are determined utilizing relevant information generated by market transactions involving comparable securities and often are based on model pricing techniques that effectively discount prospective cash flows to present value using appropriate sector-adjusted credit spreads commensurate with the security’s duration, also taking into consideration issuer-specific credit quality and liquidity.
Observable inputs generally used to measure the fair value of securities classified as Level 2 include benchmark yields, reported secondary trades, issuer spreads, benchmark securities and other reference data. Additional observable inputs are used when available, and as may be appropriate, for certain security types, such as prepayment, default, and collateral information for the purpose of measuring the fair value of mortgage- and asset-backed securities. The Company’s AAA-rated mortgage- and asset-backed securities are classified as Level 2 for which the observability of market inputs to their pricing models is supported by sufficient, albeit more recently contracted, market activity in these sectors.
Certain Company products, such as the SCS and EQUI-VEST variable annuity products, IUL and the MSO fund available in some life contracts, offer investment options which permit the contract owner to participate in the performance of an index, ETF or commodity price. These investment options, which depending on the product and on the index selected can currently have one, three, five or six year terms, provide for participation in the performance of specified indices, ETF or commodity price movement up to a segment-specific declared maximum rate. Under certain conditions that vary by product, e.g., holding these segments for the full term, these segments also shield policyholders from some or all negative investment performance associated with these indices, ETF or commodity prices. These investment options have defined formulaic liability amounts, and the current values of the option component of these segment reserves are accounted for as Level 2 embedded derivatives. The fair values of these embedded derivatives are based on data obtained from independent valuation service providers.
The Company’s investments classified as Level 3 primarily include corporate debt securities, such as private fixed maturities and asset-backed securities. Determinations to classify fair value measures within Level 3 of the valuation hierarchy generally are based upon the significance of the unobservable factors to the overall fair value measurement. Included in the Level 3 classification are fixed maturities with indicative pricing obtained from brokers that otherwise could not be corroborated to market observable data.


35
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company also issues certain benefits on its variable annuity products that are accounted for as derivatives and are also considered Level 3. The GMIBNLG feature allows the policyholder to receive guaranteed minimum lifetime annuity payments based on predetermined annuity purchase rates applied to the contract’s benefit base if and when the contract account value is depleted and the NLG feature is activated. The GMWB feature allows the policyholder to withdraw at minimum, over the life of the contract, an amount based on the contract’s benefit base. The GWBL feature allows the policyholder to withdraw, each year for the life of the contract, a specified annual percentage of an amount based on the contract’s benefit base. The GMAB feature increases the contract account value at the end of a specified period to a GMAB base. The GIB feature provides a lifetime annuity based on predetermined annuity purchase rates if and when the contract account value is depleted. This lifetime annuity is based on predetermined annuity purchase rates applied to a GIB base.
Level 3 also includes the GMIB reinsurance contract assets which are accounted for as derivative contracts. The GMIB reinsurance contract asset and liabilities’ fair value reflects the present value of reinsurance premiums and recoveries and risk margins over a range of market consistent economic scenarios while GMxB derivative features liability reflects the present value of expected future payments (benefits) less fees, adjusted for risk margins and nonperformance risk, attributable to GMxB derivative features’ liability over a range of market-consistent economic scenarios.
The valuations of the GMIB reinsurance contract asset and GMxB derivative features liability incorporate significant non-observable assumptions related to policyholder behavior, risk margins and projections of equity Separate Accounts funds. The credit risks of the counterparty and of the Company are considered in determining the fair values of its GMIB reinsurance contract asset and GMxB derivative features liability positions, respectively, after taking into account the effects of collateral arrangements. Incremental adjustment to the swap curve for non-performance risk is made to the fair values of the GMIB reinsurance contract asset and liabilities and GMIBNLG feature to reflect the claims-paying ratings of counterparties and the Company. Equity and fixed income volatilities were modeled to reflect current market volatilities. Due to the unique, long duration of the GMIBNLG feature, adjustments were made to the equity volatilities to remove the illiquidity bias associated with the longer tenors and risk margins were applied to the non-capital markets inputs to the GMIBNLG valuations.
After giving consideration to collateral arrangements, the Company reduced the fair value of its GMIB reinsurance contract asset by $237 million and $184 million at September 30, 2019 and December 31, 2018, respectively, to recognize incremental counterparty non-performance risk.
Lapse rates are adjusted at the contract level based on a comparison of the actuarially calculated guaranteed values and the current policyholder account value, which include other factors such as considering surrender charges. Generally, lapse rates are assumed to be lower in periods when a surrender charge applies. A dynamic lapse function reduces the base lapse rate when the guaranteed amount is greater than the account value as in the money contracts are less likely to lapse. For valuing the embedded derivative, lapse rates vary throughout the period over which cash flows are projected.
The Company’s consolidated VIEs/VOEs hold investments that are classified as Level 3, and primarily consist of corporate bonds that are vendor priced with no ratings available, bank loans, non-agency collateralized mortgage obligations and asset-backed securities.
During the nine months ended September 30, 2019, AFS fixed maturities with fair values of $104 million were transferred out of Level 3 and into Level 2 principally due to the availability of trading activity and/or market observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $14 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 0.9% of total equity at September 30, 2019.
During the nine months ended September 30, 2018, AFS fixed maturities with fair values of $28 million were transferred out of Level 3 and into Level 2 principally due to the availability of trading activity and/or market observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $65 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 0.6% of total equity at September 30, 2018.
The tables below present reconciliations for all Level 3 assets and liabilities for the three and nine months ended September 30, 2019 and 2018.


36
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Level 3 Instruments - Fair Value Measurements
 
Corporate
 
State and Political Subdivisions
 
Asset-
backed
 
(in millions)
Balance, July 1, 2019
$
1,290

 
$
39

 
$
534

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

 
—

 
—

Investment gains (losses), net
—

 
—

 
—

Subtotal
—

 
—

 
—

Other comprehensive income (loss)
(7
)
 
1

 
—

Purchases
(2
)
 
—

 
71

Sales
(42
)
 
(1
)
 
(73
)
Transfers into Level 3 (1)
—

 
—

 
—

Transfers out of Level 3 (1)
(31
)
 
—

 
—

Balance, September 30, 2019
$
1,208

 
$
39

 
$
532

 
 
 
 
 
 
Balance, July 1, 2018
$
1,152

 
$
38

 
$
538

Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
Net income (loss) as:
 
 
 
 
 
Net investment income (loss)
3

 
—

 
(1
)
Investment gains (losses), net
(4
)
 
—

 
—

Subtotal
(1
)
 
—

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

 
1

Purchases
36

 
—

 
—

Sales
(52
)
 
—

 
(1
)
Transfers into Level 3 (1)
—

 
—

 
—

Transfers out of Level 3 (1)
—

 
—

 
—

Balance, September 30, 2018
$
1,134

 
$
38

 
$
537

______________
(1)
Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values.
 
Corporate
 
State and Political Subdivisions
 
Asset-
backed
 
(in millions)
Balance, January 1, 2019
$
1,174

 
$
38

 
$
519

Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
Net income (loss) as:
 
 
 
 
 
Net investment income (loss)
3

 
—

 
—

Investment gains (losses), net
—

 
—

 
—

Subtotal
3

 
—

 
—

Other comprehensive income (loss)
3

 
3

 
5

Purchases
219

 
—

 
81

Sales
(101
)
 
(2
)
 
(73
)
Transfers into Level 3 (1)
14

 
—

 
—

Transfers out of Level 3 (1)
(104
)
 
—

 
—

Balance, September 30, 2019
$
1,208

 
$
39

 
$
532



37
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Corporate
 
State and Political Subdivisions
 
Asset-
backed
 
(in millions)
 
 
 
 
 
 
Balance, January 1, 2018
$
1,139

 
$
40

 
$
8

Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
Net income (loss) as:
 
 
 
 
 
Net investment income (loss)
8

 
—

 
(1
)
Investment gains (losses), net
(4
)
 
—

 
—

Subtotal
4

 
—

 
(1
)
Other comprehensive income (loss)
(15
)
 
(1
)
 
—

Purchases
236

 
—

 
533

Sales
(267
)
 
(1
)
 
(3
)
Transfers into Level 3 (1)
65

 
—

 
—

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

 
—

Balance, September 30, 2018
$
1,134

 
$
38

 
$
537

______________
(1)
Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values.
 
Other Equity Investments
 
GMIB Reinsurance Contract Asset
 
Separate Accounts Assets
 
GMxB Derivative Features Liability
 
(in millions)
Balance, July 1, 2019
$
16

 
$
2,196

 
$
389

 
$
(6,749
)
Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
 
 
Net income (loss) as:
 
 
 
 
 
 
 
Investment gains (losses), net
—

 
—

 
(14
)
 
—

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

 
694

 
—

 
(2,682
)
Non-performance risk (1)
—

 
(29
)
 
—

 
154

Subtotal
—

 
665

 
(14
)
 
(2,528
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

Purchases (2)
—

 
12

 
(4
)
 
(99
)
Sales (3)
—

 
(20
)
 
(1
)
 
13

Settlements
—

 
—

 
(1
)
 
—

Activity related to consolidated VIEs/VOEs
—

 
—

 
—

 
—

Transfers into Level 3 (4)
—

 
—

 
—

 
—

Transfers out of Level 3 (4)
—

 
—

 
(11
)
 
—

Balance, September 30, 2019
$
16

 
$
2,853

 
$
358

 
$
(9,363
)


38
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Other Equity Investments
 
GMIB Reinsurance Contract Asset
 
Separate Accounts Assets
 
GMxB Derivative Features Liability
 
(in millions)
Balance, July 1, 2018
$
23

 
$
1,825

 
$
361

 
$
(3,534
)
Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
 
 
Net income (loss) as:
 
 
 
 
 
 
 
Net investment income (loss)
—

 
—

 
—

 
—

Investment gains (losses), net
—

 
—

 
6

 
—

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

 
(311
)
 
—

 
(485
)
Non-performance risk (1)
—

 
56

 
—

 
(49
)
Subtotal
—

 
(255
)
 
6

 
(534
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

Purchases (2)
—

 
12

 
1

 
(96
)
Sales (3)
—

 
(11
)
 
—

 
7

Settlements
—

 
—

 
(1
)
 
—

Activity related to consolidated VIEs/VOEs
(1
)
 
—

 
—

 
—

Transfers into Level 3 (4)
—

 
—

 
—

 
—

Transfers out of Level 3 (4)
—

 
—

 
—

 
—

Balance, September 30, 2018
$
22

 
$
1,571

 
$
367

 
$
(4,157
)
______________
(1)
The Company’s non-performance risk is recorded through Net derivative gains (losses).
(2)
For the GMIB reinsurance contract asset and GMxB derivative features liability, represents attributed fee.
(3)
For the GMIB reinsurance contract asset, represents recoveries from reinsurers and for the GMxB derivative features liability represents benefits paid.
(4)
Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values.


39
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Other Equity Investments
 
GMIB Reinsurance Contract Asset
 
Separate Accounts Assets
 
GMxB Derivative Features Liability
 
(in millions)
Balance, January 1, 2019
$
48

 
$
1,991

 
$
374

 
$
(5,431
)
Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
 
 
Net income (loss) as:
 
 
 
 
 
 
 
Investment gains (losses), net
—

 
—

 
(2
)
 
—

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

 
859

 
—

 
(3,338
)
Non-performance risk (1)
—

 
23

 
—

 
(306
)
Subtotal
—

 
882

 
(2
)
 
(3,643
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

Purchases (2)
—

 
35

 
3

 
(309
)
Sales (3)
—

 
(55
)
 
(1
)
 
20

Settlements
—

 
—

 
(4
)
 
—

Activity related to consolidated VIEs/VOEs
(3
)
 
—

 
—

 
—

Transfers into Level 3 (4)
—

 
—

 
—

 
—

Transfers out of Level 3 (4)
(29
)
 
—

 
(12
)
 
—

Balance, September 30, 2019
$
16

 
$
2,853

 
$
358

 
$
(9,363
)
 
 
 
 
 
 
 
 
Balance, January 1, 2018
$
25

 
$
10,488

 
$
349

 
$
(4,256
)
Total gains (losses), realized and unrealized, included in:
 
 
 
 
 
 
 
Net income (loss) as:
 
 
 
 
 
 
 
Net investment income (loss)
—

 
—

 
—

 
—

Investment gains (losses), net
—

 
—

 
19

 
—

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

 
(1,487
)
 
—

 
322

Non-performance risk (1)
—

 
(1
)
 
—

 
72

Subtotal
—

 
(1,488
)
 
19

 
394

Other comprehensive income (loss)
—

 
—

 
—

 
—

Purchases (2)
—

 
83

 
4

 
(305
)
Sales (3)
—

 
(49
)
 
(1
)
 
10

Settlements
—

 
(7,463
)
 
(4
)
 
—

Activity related to consolidated VIEs/VOEs
(3
)
 
—

 
—

 
—

Transfers into Level 3 (4)
5

 
—

 
—

 
—

Transfers out of Level 3 (4)
(5
)
 
—

 
—

 
—

Balance, September 30, 2018
$
22

 
$
1,571

 
$
367

 
$
(4,157
)
______________
(1)
The Company’s non-performance risk is recorded through Net derivative gains (losses).
(2)
For the GMIB reinsurance contract asset and GMxB derivative features liability, represents attributed fee.
(3)
For the GMIB reinsurance contract asset, represents recoveries from reinsurers and for the GMxB derivative features liability represents benefits paid.
(4)
Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values.
The table below details changes in unrealized gains (losses) for the nine months ended September 30, 2019 and 2018 by category for Level 3 assets and liabilities still held at September 30, 2019 and 2018.


40
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Change in Unrealized Gains (Losses) for Level 3 Instruments
 
Net Income (Loss)
 
 
Investment Gains (Losses), Net
 
Net Derivative Gains (Losses)
 
OCI
 
(in millions)
Held at September 30, 2019:
 
 
 
 
 
Change in unrealized gains (losses):
 
 
 
 
 
Fixed maturities, available-for-sale:
 
 
 
 
 
Corporate
$
—

 
$
—

 
$
3

State and political subdivisions
—

 
—

 
3

Asset-backed
—

 
—

 
4

Subtotal
—

 
—

 
10

GMIB reinsurance contracts
—

 
882

 
—

Separate Accounts assets (1)
(14
)
 
—

 
—

GMxB derivative features liability
—

 
(3,643
)
 
—

Total
$
(14
)
 
$
(2,761
)
 
$
10

 
 
 
 
 
 
Held at September 30, 2018:
 
 
 
 
 
Change in unrealized gains (losses):
 
 
 
 
 
Fixed maturities, available-for-sale:
 
 
 
 
 
Corporate
$
—

 
$
—

 
$
(13
)
State and political subdivisions
—

 
—

 
(1
)
Asset-backed
—

 
—

 
—

Subtotal
—

 
—

 
(14
)
GMIB reinsurance contracts
—

 
(1,488
)
 
—

Separate Accounts assets (1)
19

 
—

 
—

GMxB derivative features liability
—

 
394

 
—

Total
$
19

 
$
(1,094
)
 
$
(14
)
______________
(1)
There is an investment expense that offsets this investment gain (loss).
The following tables disclose quantitative information about Level 3 fair value measurements by category for assets and liabilities at September 30, 2019 and December 31, 2018.
Quantitative Information about Level 3 Fair Value Measurements at September 30, 2019
 
 
Fair
Value
 
Valuation
Technique
 
Significant
Unobservable Input
 
Range
 
Weighted Average
 
 
(in millions)
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
60

 
Matrix pricing model
 
Spread over benchmark
 
15 - 580 bps
 
181 bps
 
 
996

 
Market 
comparable 
companies
 
EBITDA multiples
Discount rate
Cash flow multiples
 
3.9x - 63.3x
6.5% - 16.5%
4.5x - 54.6x
 
14.9x
10.1%
11.0x
Separate Accounts assets
 
350

 
Third party appraisal
 
Capitalization rate
Exit capitalization rate
Discount rate
 
4.4%
5.5%
6.4%
 
 
 
 
1

 
Discounted cash flow
 
Spread over U.S. Treasury curve
Discount factor
 
253 bps
4.3%
 
 


41
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
Fair
Value
 
Valuation
Technique
 
Significant
Unobservable Input
 
Range
 
Weighted Average
 
 
(in millions)
 
 
GMIB reinsurance contract asset
 
2,853

 
Discounted cash flow
 
Lapse rates
Withdrawal rates
Utilization rates
Non-performance risk
Volatility rates - Equity
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115
 
0.8% - 10%
0.0% - 8.0%
0.0% - 49.0%
56 - 138 bps
10.0% - 31.0%

0.01% - 0.18%
0.07% - 0.54%
0.42% - 42.0%
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
GMIBNLG
 
9,206

 
Discounted cash flow
 
Non-performance risk
Lapse rates
Withdrawal rates
Annuitization rates
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115
 
159 bps
0.8% - 19.9%
0.3% - 11.0%
0.0% - 100.0%

0.01% - 0.19%
0.06% - 0.53%
0.41% - 41.2%
 
 
GWBL/GMWB
 
125

 
Discounted cash flow
 
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity
 
0.8% - 10.0%
0.0% - 7.0%
100% after starting
10.0% - 31.0%
 
 
GIB
 
25

 
Discounted cash flow
 
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity
 
1.2% - 19.9%
0.0% - 8.0%
0.0% - 100.0%
10.0% - 31.0%
 
 
GMAB
 
7

 
Discounted cash flow
 
Lapse rates
Volatility rates - Equity
 
1.0% - 10.0%
10.0% - 31.0%
 
 
______________
(1)
Mortality rates vary by age and demographic characteristic such as gender. Mortality rate assumptions are based on a combination of company and industry experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuating the embedded derivatives.
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2018
 
 
Fair
Value
 
Valuation
Technique
 
Significant
Unobservable Input
 
Range
 
Weighted Average
 
 
(in millions)
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
 
 
 
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
93

 
Matrix pricing model
 
Spread over benchmark
 
15 - 580 bps
 
104 bps
 
 
881

 
Market comparable companies
 
EBITDA multiples
Discount rate
Cash flow multiples
 
4.1x - 37.8x
6.4% - 16.5%
1.8x - 18.0x
 
12.1x
10.7%
11.4x
Separate Accounts assets
 
352

 
Third party appraisal
 
Capitalization rate
Exit capitalization rate
Discount rate
 
4.4%
5.6%
6.5%
 
 
 
 
1

 
Discounted cash flow
 
Spread over U.S. Treasury curve
Discount factor
 
248 bps
5.1%
 
 
GMIB reinsurance contract asset
 
1,991

 
Discounted cash flow
 
Lapse rates
Withdrawal rates
Utilization rates
Non-performance risk
Volatility rates - Equity
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115
 
1.0% - 6.27%
0.0% - 8.0%
0.0% - 16.0%
74 - 159 bps
10.0% - 34.0%

0.01% - 0.18%
0.07% - 0.54%
0.42% - 42.0%
 
 


42
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
 
Fair
Value
 
Valuation
Technique
 
Significant
Unobservable Input
 
Range
 
Weighted Average
 
 
(in millions)
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
GMIBNLG
 
5,341

 
Discounted cash flow
 
Non-performance risk
Lapse rates
Withdrawal rates
Annuitization rates
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115
 
189 bps
0.8% - 26.2%
0.0% - 12.1%
0.0% - 100.0%

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

 
Discounted cash flow
 
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity
 
0.5% - 5.7%
0.0% - 7.0%
100% after starting
10.0% - 34.0%
 
 
GIB
 
(48
)
 
Discounted cash flow
 
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity
 
0.5% - 5.7%
0.0% - 8.0%
0.0% - 16.0%
10.0% - 34.0%
 
 
GMAB
 
7

 
Discounted cash flow
 
Lapse rates
Volatility rates - Equity
 
1.0% - 5.7%
10.0% - 34.0%
 
 
______________
(1)
Mortality rates vary by age and demographic characteristic such as gender. Mortality rate assumptions are based on a combination of company and industry experience. A mortality improvement assumption is also applied. For any given contract, mortality rates vary throughout the period over which cash flows are projected for purposes of valuating the embedded derivatives.
Excluded from the tables above at September 30, 2019 and December 31, 2018, respectively, are approximately $746 million and $826 million of Level 3 fair value measurements of investments for which the underlying quantitative inputs are not developed by the Company and are not readily available. These investments primarily consist of certain privately placed debt securities with limited trading activity, including residential mortgage- and asset-backed instruments, and their fair values generally reflect unadjusted prices obtained from independent valuation service providers and indicative, non-binding quotes obtained from third-party broker-dealers recognized as market participants. Significant increases or decreases in the fair value amounts received from these pricing sources may result in the Company’s reporting significantly higher or lower fair value measurements for these Level 3 investments.
The fair value of private placement securities is determined by application of a matrix pricing model or a market comparable company value technique. The significant unobservable input to the matrix pricing model valuation technique is the spread over the industry-specific benchmark yield curve. Generally, an increase or decrease in spreads would lead to directionally inverse movement in the fair value measurements of these securities. The significant unobservable input to the market comparable company valuation technique is the discount rate. Generally, a significant increase (decrease) in the discount rate would result in significantly lower (higher) fair value measurements of these securities.
Residential mortgage-backed securities classified as Level 3 primarily consist of non-agency paper with low trading activity. Included in the tables above at September 30, 2019 and December 31, 2018, there were no Level 3 securities that were determined by application of a matrix pricing model and for which the spread over the U.S. Treasury curve is the most significant unobservable input to the pricing result. Generally, a change in spreads would lead to directionally inverse movement in the fair value measurements of these securities.
Asset-backed securities classified as Level 3 primarily consist of non-agency mortgage loan trust certificates, including subprime and Alt-A paper, credit tenant loans, and equipment financings. Included in the tables above at September 30, 2019 and December 31, 2018, there were no securities that were determined by the application of matrix-pricing for which the spread over the U.S. Treasury curve is the most significant unobservable input to the pricing result. Significant increases (decreases) in spreads would have resulted in significantly lower (higher) fair value measurements.
Separate Accounts assets classified as Level 3 in the table at September 30, 2019 and December 31, 2018, primarily consist of a private real estate fund and mortgage loans. A third-party appraisal valuation technique is used to measure the fair value of the private real estate investment fund, including consideration of observable replacement cost and


43
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

sales comparisons for the underlying commercial properties, as well as the results from applying a discounted cash flow approach. Significant increase (decrease) in isolation in the capitalization rate and exit capitalization rate assumptions used in the discounted cash flow approach to the appraisal value would have resulted in a higher (lower) measure of fair value. With respect to the fair value measurement of mortgage loans a discounted cash flow approach is applied, a significant increase (decrease) in the assumed spread over U.S. Treasury securities would have produced a lower (higher) fair value measurement. Changes in the discount rate or factor used in the valuation techniques to determine the fair values of these private equity investments and mortgage loans generally are not correlated to changes in the other significant unobservable inputs. Significant increase (decrease) in isolation in the discount rate or factor would have resulted in significantly lower (higher) fair value measurements. These fair value measurements are determined using substantially the same valuation techniques as earlier described above for the Company’s General Account investments in these securities.
Significant unobservable inputs with respect to the fair value measurement of the Level 3 GMIB reinsurance contract asset and the Level 3 liabilities identified in the table above are developed using the Company data.
The significant unobservable inputs used in the fair value measurement of the Company’s GMIB reinsurance contract asset are lapse rates, withdrawal rates and GMIB utilization rates. Significant increases in GMIB utilization rates or decreases in lapse or withdrawal rates in isolation would tend to increase the GMIB reinsurance contract asset.
Fair value measurement of the GMIB reinsurance contract asset and liabilities includes dynamic lapse and GMIB utilization assumptions whereby projected contractual lapses and GMIB utilization reflect the projected net amount of risks of the contract. As the net amount of risk of a contract increases, the assumed lapse rate decreases and the GMIB utilization increases. Increases in volatility would increase the asset and liabilities.
The significant unobservable inputs used in the fair value measurement of the Company’s GMIBNLG liability are lapse rates, withdrawal rates, GMIB utilization rates, adjustment for Non-performance risk and NLG forfeiture rates.  NLG forfeiture rates are caused by excess withdrawals above the annual GMIB accrual rate that cause the NLG to expire. Significant decreases in lapse rates, NLG forfeiture rates, adjustment for non-performance risk and GMIB utilization rates would tend to increase the GMIBNLG liability, while decreases in withdrawal rates and volatility rates would tend to decrease the GMIBNLG liability.
The significant unobservable inputs used in the fair value measurement of the Company’s GMWB and GWBL liability are lapse rates and withdrawal rates. Significant increases in withdrawal rates or decreases in lapse rates in isolation would tend to increase these liabilities. Increases in volatility would increase these liabilities.
Certain financial instruments are exempt from the requirements for fair value disclosure, such as insurance liabilities other than financial guarantees and investment contracts, limited partnerships accounted for under the equity method and pension and other postretirement obligations.
The carrying values and fair values at September 30, 2019 and December 31, 2018 for financial instruments not otherwise disclosed in Note 3 and Note 4 are presented in the table below.


44
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Carrying Values and Fair Values for Financial Instruments Not Otherwise Disclosed
 
Carrying Value
 
Fair Value
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(in millions)
September 30, 2019:
 
 
 
 
 
 
 
 
 
Mortgage loans on real estate
$
12,005

 
$
—

 
$
—

 
$
12,274

 
$
12,274

FHLBNY Funding Agreements
$
6,510

 
$
—

 
$
6,562

 
$
—

 
$
6,562

Policy loans
$
3,272

 
$
—

 
$
—

 
$
4,246

 
$
4,246

Loans to affiliates
$
600

 
$
—

 
$
613

 
$
—

 
$
613

Policyholders’ liabilities: Investment contracts
$
1,931

 
$
—

 
$
—

 
$
2,127

 
$
2,127

Separate Accounts liabilities
$
8,424

 
$
—

 
$
—

 
$
8,424

 
$
8,424

 
 
 
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
 
 
 
 
 
 
Mortgage loans on real estate
$
11,818

 
$
—

 
$
—

 
$
11,478

 
$
11,478

FHLBNY Funding Agreements
$
4,002

 
$
—

 
$
3,956

 
$
—

 
$
3,956

Policy loans
$
3,267

 
$
—

 
$
—

 
$
3,944

 
$
3,944

Loans to affiliates
$
600

 
$
—

 
$
603

 
$
—

 
$
603

Policyholders’ liabilities: Investment contracts
$
1,974

 
$
—

 
$
—

 
$
2,015

 
$
2,015

Loans from affiliates
$
572

 
$
—

 
$
572

 
$
—

 
$
572

Separate Accounts liabilities
$
7,406

 
$
—

 
$
—

 
$
7,406

 
$
7,406

As the Company’s COLI policies are recorded at their cash surrender value, they are not required to be included in the table above.
Fair values for commercial and agricultural mortgage loans on real estate are measured by discounting future contractual cash flows to be received on the mortgage loan using interest rates at which loans with similar characteristics and credit quality would be made. The discount rate is derived based on the appropriate U.S. Treasury rate with a like term to the remaining term of the loan to which a spread reflective of the risk premium associated with the specific loan is added. Fair values for mortgage loans anticipated to be foreclosed and problem mortgage loans are limited to the fair value of the underlying collateral, if lower.
The fair value of policy loans is calculated by discounting expected cash flows based upon the U.S. treasury yield curve and historical loan repayment patterns.
The fair values of the Company's funding agreements are determined by discounted cash flow analysis based on the indicative funding agreement rates published by the FHLB.
The fair values for the Company’s association plans contracts, supplementary contracts not involving life contingencies (“SCNILC”), deferred annuities and certain annuities, which are included in Policyholders’ account balances and liabilities for investment contracts with fund investments in Separate Accounts are estimated using projected cash flows discounted at rates reflecting current market rates. Significant unobservable inputs reflected in the cash flows include lapse rates and withdrawal rates. Incremental adjustments may be made to the fair value to reflect non-performance risk. Certain other products such as Access Accounts and Escrow Shield Plus product reserves are held at book value.


45
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

8)    LEASES
The Company does not record leases with an initial term of 12 months or less in its consolidated balance sheets, but instead recognizes lease expense for these leases on a straight-line basis over the lease term. For leases with a term greater than one year, the Company records in its consolidated balance sheets at the time of lease commencement or modification a right of use (“RoU”) operating lease asset and a lease liability, initially measured at the present value of the lease payments. Lease costs are recognized in the consolidated statements of income over the lease term on a straight-line basis. RoU operating lease assets represent the Company’s right to use an underlying asset for the lease term and RoU operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease.
The Company's operating leases primarily consist of real estate leases for office space. The Company also has operating leases for various types of office furniture and equipment. For certain equipment leases, the Company applies a portfolio approach to effectively account for the RoU operating lease assets and liabilities. For certain lease agreements entered into after the adoption of ASC 842 or for lease agreements for which the lease term or classification was reassessed after the occurrence of a change in the lease terms or a modification of the lease that did not result in a separate contract, the Company elected to combine the lease and related non-lease components for its operating leases; however, the non-lease components associated with the Company’s operating leases are primarily variable in nature and as such are not included in the determination of the RoU operating lease asset and lease liability, but are recognized in the period in which the obligation for those payments is incurred.
The Company’s operating leases may include options to extend or terminate the lease, which are not included in the determination of the RoU operating asset or lease liability unless they are reasonably certain to be exercised. The Company's operating leases have remaining lease terms of 1 year to 12 years, some of which include options to extend the leases. The Company typically does not include its renewal options in its lease terms for calculating its RoU operating lease asset and lease liability as the renewal options allow the Company to maintain operational flexibility and the Company is not reasonably certain it will exercise these renewal options until close to the initial end date of the lease. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the Company's operating leases do not provide an implicit rate, the Company’s incremental borrowing rate, based on the information available at the lease commencement date, is used in determining the present value of lease payments.
The Company primarily subleases floor space within its New Jersey and New York lease properties to various third parties. The lease term for these subleases typically corresponds to the original lease term.
Balance Sheet Classification of Operating Lease Assets and Liabilities
 
Balance Sheet Line Item
 
September 30, 2019
 
(in millions)
Assets
 
 
 
Operating lease assets
Other Assets
 
$
333

Liabilities
 
 
 
Operating lease liabilities
Other Liabilities
 
$
426



46
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The table below summarizes the components of lease costs for the three and nine months ended September 30, 2019.
Lease Costs
 
Three Months Ended
September 30, 2019
 
Nine Months Ended
September 30, 2019
 
(in millions)
Operating lease cost (1)
$
20

 
$
57

Variable operating lease cost
3

 
8

Sublease income
(5
)
 
(13
)
Short-term lease expense
—

 
2

Net lease cost
$
18

 
$
54

_____________
(1)
Operating lease cost for the three months ended March 31, 2019 previously reported as $53 million, has been revised to $20 million to properly exclude impairments recognized prior to the adoption of ASC 842.
Maturities of lease liabilities as of September 30, 2019 are as follows:
Maturities of Lease Liabilities
 
September 30, 2019
 
(in millions)
Operating Leases (1):
 
2019
$
24

2020
95

2021
91

2022
87

2023
79

Thereafter
90

Total lease payments
466

Less: Interest
(40
)
Present value of lease liabilities
$
426


During 2018, AXA Equitable Life entered into one additional operating real estate lease with an estimated total base rent of $11 million. This operating lease commenced in August 2019 with a lease term of 10 years.
The below table presents the Company’s weighted-average remaining operating lease term and weighted-average discount rate.
Weighted Averages - Remaining Operating Lease Term and Discount Rate
 
September 30, 2019
Weighted-average remaining operating lease term
6 years

Weighted-average discount rate for operating leases
3.10
%
Supplemental cash flow information related to leases was as follows:
Lease Liabilities Information
 
Nine Months Ended September 30, 2019
 
(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
65

Non-cash transactions:
 
Leased assets obtained in exchange for new operating lease liabilities
$
42



47
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table presents the Company’s future minimum lease obligation under ASC 840 as of December 31, 2018:
 
December 31, 2018
Calendar Year
(in millions)
2019
$
81

2020
$
74

2021
$
69

2022
$
67

2023
$
63

Thereafter
$
66

9)    INCOME TAXES
Income tax expense for the three and nine months ended September 30, 2019 and 2018 was computed using an estimated annual effective tax rate (“ETR”), with discrete items recognized in the period in which they occur. The estimated ETR is revised, as necessary, at the end of successive interim reporting periods. The tax benefit recognized year-to-date 2019 was limited to the amount that would have been recognized if the year-to-date loss was the anticipated loss for the full year.
10)    RELATED PARTY TRANSACTIONS
The Company’s significant transactions during the nine months ended September 30, 2019 with related parties are summarized below.
Loans from Affiliates
Senior Surplus Notes
On December 28, 2018, AXA Equitable issued a $572 million senior surplus note due December 28, 2019 to Holdings, which bears interest at a fixed rate of 3.75%, payable semi-annually. The surplus note is intended to have priority in right of payments and in all other respects to any and all other surplus notes issued by AXA Equitable at any time. AXA Equitable repaid this note and $4 million of related interest expense on March 5, 2019.
Investment management fees
The Company recorded investment management fee expense from AllianceBernstein of $25 million and $23 million for the three months ended September 30, 2019 and 2018, respectively, and $76 million and $65 million, for the nine months ended September 30, 2019 and 2018, respectively.
Commitment to Invest in Fund Sponsored by AXA Real Estate Investment Managers US LLC (“AXA REIM”)
AXA Equitable has an outstanding commitment as of September 30, 2019 to invest $15 million in a real estate private equity fund sponsored by AXA REIM.


48
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

11)     EQUITY
Accumulated Other Comprehensive Income (Loss)
AOCI represents cumulative gains (losses) on items that are not reflected in Net income (loss). The balances as of September 30, 2019 and 2018 follow:
 
September 30,
 
2019
 
2018
 
(in millions)
Unrealized gains (losses) on investments
$
2,145

 
$
(845
)
Defined benefit pension plans
(7
)
 
(4
)
Total accumulated other comprehensive income (loss) from continuing operations
2,138

 
(849
)
Less: Accumulated other comprehensive income (loss) attributable to discontinued operations, net of noncontrolling interest
—

 
18

Accumulated other comprehensive income (loss) attributable to AXA Equitable
$
2,138

 
$
(867
)
The components of OCI, net of taxes for the three and nine months ended September 30, 2019 and 2018 follow:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Change in net unrealized gains (losses) on investments:
 
 
 
 
 
 
 
Net unrealized gains (losses) arising during the period
$
1,224

 
$
(438
)
 
$
3,750

 
$
(1,770
)
(Gains) losses reclassified to Net income (loss) during the period (1)
(159
)
 
8

 
(157
)
 
(59
)
Net unrealized gains (losses) on investments
1,065

 
(430
)
 
3,593

 
(1,829
)
Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other
(491
)
 
27

 
(964
)
 
371

Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of $152, $(107), $693 and $(387))
574

 
(403
)
 
2,629

 
(1,458
)
Change in defined benefit plans:
 
 
 
 
 
 
 
Reclassification to Net income (loss) of amortization of net prior service credit included in net periodic cost
—

 
(3
)
 
—

 
(8
)
Change in defined benefit plans (net of deferred income tax expense (benefit) of $0, $(1), $0 and $(2))
—

 
(3
)
 
—

 
(8
)
Total other comprehensive income (loss), net of income taxes from continuing operations
574

 
(406
)
 
2,629

 
(1,466
)
Other comprehensive income (loss) from discontinued operations, net of income taxes
—

 
3

 
—

 
1

Other comprehensive income (loss) attributable to AXA Equitable
$
574

 
$
(403
)
 
$
2,629

 
$
(1,465
)
______________
(1)
See “Reclassification adjustments” in Note 3. Reclassification amounts are presented net of income tax expense (benefit) of $(43) million, $2 million, $(42) million and $(16) million for the three and nine months ended September 30, 2019 and 2018, respectively.
Investment gains and losses reclassified from AOCI to Net income (loss) primarily consist of realized gains (losses) on sales and OTTI of AFS securities and are included in Total investment gains (losses), net on the consolidated statements of income (loss). Amounts reclassified from AOCI to Net income (loss) as related to defined benefit plans primarily consist of amortizations of net (gains) losses and net prior service cost (credit) recognized as a component of net periodic cost and reported in Compensation and benefit expenses in the consolidated statements of income (loss). Amounts presented in the table above are net of tax.


49
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

12)     REDEEMABLE NONCONTROLLING INTEREST
The changes in the components of redeemable noncontrolling interests were:
 
Three Months Ended September 30,
 
Nine Months Ended
September 30, 2019
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Balance, beginning of period
$
42

 
$
37

 
$
39

 
$
25

Net earnings (loss) attributable to redeemable noncontrolling interests
—

 
2

 
3

 
—

Purchase/change of redeemable noncontrolling interests
3

 
(1
)
 
4

 
13

Balance, end of period
$
46

 
$
38

 
$
46

 
$
38

13)    COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
Litigation, regulatory and other loss contingencies arise in the ordinary course of the Company’s activities as a diversified financial services firm. The Company is a defendant in a number of litigation matters arising from the conduct of its business. In some of these matters, claimants seek to recover very large or indeterminate amounts, including compensatory, punitive, treble and exemplary damages. Modern pleading practice in the U.S. permits considerable variation in the assertion of monetary damages and other relief. Claimants are not always required to specify the monetary damages they seek, or they may be required only to state an amount sufficient to meet a court’s jurisdictional requirements. Moreover, some jurisdictions allow claimants to allege monetary damages that far exceed any reasonably possible verdict. The variability in pleading requirements and past experience demonstrates that the monetary and other relief that may be requested in a lawsuit or claim often bears little relevance to the merits or potential value of a claim. Litigation against the Company includes a variety of claims including, among other things, insurers’ sales practices, alleged agent misconduct, alleged failure to properly supervise agents, contract administration, product design, features and accompanying disclosure, cost of insurance increases, the use of captive reinsurers, payments of death benefits and the reporting and escheatment of unclaimed property, alleged breach of fiduciary duties, alleged mismanagement of client funds and other matters.
As with other financial services companies, the Company periodically receives informal and formal requests for information from various state and federal governmental agencies and self-regulatory organizations in connection with inquiries and investigations of the products and practices of the Company or the financial services industry. It is the practice of the Company to cooperate fully in these matters.
The outcome of a litigation or regulatory matter is difficult to predict, and the amount or range of potential losses associated with these or other loss contingencies requires significant management judgment. It is not possible to predict the ultimate outcome or to provide reasonably possible losses or ranges of losses for all pending regulatory matters, litigation and other loss contingencies. While it is possible that an adverse outcome in certain cases could have a material adverse effect upon the Company’s financial position, based on information currently known, management believes that neither the outcome of pending litigation and regulatory matters, nor potential liabilities associated with other loss contingencies, are likely to have such an effect. However, given the large and indeterminate amounts sought in certain litigation and the inherent unpredictability of all such matters, it is possible that an adverse outcome in certain of the Company’s litigation or regulatory matters, or liabilities arising from other loss contingencies, could, from time to time, have a material adverse effect upon the Company’s results of operations or cash flows in a particular quarterly or annual period.
For some matters where a loss is reasonably possible, the Company is able to estimate a possible range of loss. For such matters in which a loss is probable, an accrual has been made. For matters where the Company, however, believes a loss is reasonably possible, but not probable, no accrual is required. For matters for which an accrual has been made, but there remains a reasonably possible range of loss in excess of the amounts accrued or for matters where no accrual is required, the Company develops an estimate of the unaccrued amounts of the reasonably possible range of losses. As


50
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

of September 30, 2019, the Company estimates the aggregate range of reasonably possible losses, in excess of any amounts accrued for these matters as of such date, to be up to approximately $100 million.
For other matters, the Company is currently not able to estimate the reasonably possible loss or range of loss. The Company is often unable to estimate the possible loss or range of loss until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from plaintiffs and other parties, investigation of factual allegations, rulings by a court on motions or appeals, analysis by experts and the progress of settlement discussions. On a quarterly and annual basis, the Company reviews relevant information with respect to litigation and regulatory contingencies and updates the Company’s accruals, disclosures and reasonably possible losses or ranges of loss based on such reviews.
In August 2015, a lawsuit was filed in Connecticut Superior Court, Judicial Division of New Haven entitled Richard T. O’Donnell, on behalf of himself and all others similarly situated v. AXA Equitable Life Insurance Company. This lawsuit is a putative class action on behalf of all persons who purchased variable annuities from AXA Equitable, which were subsequently subjected to the volatility management strategy and who suffered injury as a result thereof. Plaintiff asserts a claim for breach of contract alleging that AXA Equitable implemented the volatility management strategy in violation of applicable law. In November 2015, the Connecticut Federal District Court transferred this action to the United States District Court for the Southern District of New York. In March 2017, the Southern District of New York granted AXA Equitable’s motion to dismiss the complaint. In April 2017, the plaintiff filed a notice of appeal. In April 2018, the United States Court of Appeals for the Second Circuit reversed the trial court’s decision with instructions to remand the case to Connecticut state court. In September 2018, the Second Circuit issued its mandate, following AXA Equitable’s notification to the court that it would not file a petition for writ of certiorari. The case was transferred in December 2018 and is pending in Connecticut Superior Court, Judicial District of Stamford. We are vigorously defending this matter.
In February 2016, a lawsuit was filed in the United States District Court for the Southern District of New York entitled Brach Family Foundation, Inc. v. AXA Equitable Life Insurance Company. This lawsuit is a putative class action brought on behalf of all owners of universal life (“UL”) policies subject to AXA Equitable’s COI rate increase. In early 2016, AXA Equitable raised COI rates for certain UL policies issued between 2004 and 2007, which had both issue ages 70 and above and a current face value amount of $1 million and above. A second putative class action was filed in Arizona in 2017 and consolidated with the Brach matter. The current consolidated amended class action complaint alleges the following claims: breach of contract; misrepresentations by AXA Equitable in violation of Section 4226 of the New York Insurance Law; violations of New York General Business Law Section 349; and violations of the California Unfair Competition Law, and the California Elder Abuse Statute. Plaintiffs seek; (a) compensatory damages, costs, and, pre- and post-judgment interest; (b) with respect to their claim concerning Section 4226, a penalty in the amount of premiums paid by the plaintiffs and the putative class; and (c) injunctive relief and attorneys’ fees in connection with their statutory claims. Five other federal actions challenging the COI rate increase are also pending against AXA Equitable and have been coordinated with the Brach action for the purposes of pre-trial activities. They contain allegations similar to those in the Brach action as well as additional allegations for violations of various states’ consumer protection statutes and common law fraud. Three actions are also pending against AXA Equitable in New York state court. AXA Equitable is vigorously defending each of these matters.
Obligation under Funding Agreements
As a member of the FHLBNY, AXA Equitable has access to collateralized borrowings. It also may issue funding agreements to the FHLBNY. Both the collateralized borrowings and funding agreements would require AXA Equitable to pledge qualified mortgage-backed assets and/or government securities as collateral. AXA Equitable issues short-term funding agreements to the FHLBNY and uses the funds for asset, liability and cash management purposes. AXA Equitable issues long-term funding agreements to the FHLBNY and uses the funds for spread lending purposes. For other instruments used for asset liability management purposes see Note 4. Funding agreements are reported in Policyholders’ account balances in the consolidated balance sheets.


51
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Change in FHLBNY Funding Agreements during the Nine Months Ended September 30, 2019
 
Outstanding Balance at December 31, 2018
 
Issued During the Period
 
Repaid During the Period
 
Long-term Agreements Maturing Within One Year
 
Outstanding Balance at September 30, 2019
 
(in millions)
Short-term funding agreements:
 
 
 
 
 
 
 
 
 
Due in one year or less
$
1,640

 
$
17,080

 
$
14,570

 
$
58

 
$
4,208

Long-term funding agreements:
 
 
 
 
 
 
 
 
 
Due in years two through five
1,569

 
—

 
—

 
(58
)
 
1,511

Due in more than five years
781

 
—

 
—

 
—

 
781

Total long-term funding agreements
2,350

 
—

 
—

 
(58
)
 
2,292

Total funding agreements (1)
$
3,990

 
$
17,080

 
$
14,570

 
$
—

 
$
6,500

______________
(1)
The $10 million and $12 million difference between the funding agreements carrying values shown in Note 7 in the Carrying Values and Fair Values for Financial Instruments Not Otherwise Disclosed table at September 30, 2019 and December 31, 2018, respectively, reflects the remaining amortization of a hedge implemented and closed, which locked in the funding agreements’ borrowing rates.
Guarantees and Other Commitments
At September 30, 2019, the Company had $876 million of commitments under equity financing arrangements to certain limited partnerships, including $246 million of commitments to funds managed by affiliates. In addition, at September 30, 2019, the Company had $179 million of commitments under equity financing arrangements to existing mortgage loan agreements.
The Company had $17 million of undrawn letters of credit related to reinsurance at September 30, 2019.
Pursuant to certain assumption agreements (the “Assumption Agreements”) on October 1, 2018, Holdings legally assumed primary liability from AXA Equitable for all current and future liabilities of AXA Equitable under certain employee benefit plans that provide participants with medical, life insurance and deferred compensation benefits as well as under the AXA Equitable Retirement plan, a frozen qualified pension plan. AXA Equitable remains secondarily liable for its obligations under these plans and would recognize such liabilities in the event Holdings does not perform under the terms of the Assumption Agreements.
14)    DISCONTINUED OPERATIONS
Effective December 31, 2018, the Company and its subsidiaries transferred all economic interests in the business of AB to a newly created entity, Alpha Unit Holdings, LLC (“Alpha”). The Company distributed all equity interests in Alpha to AXA Equitable Financial Services, LLC, a wholly-owned subsidiary of Holdings. The AB transfer and subsequent distribution of Alpha equity interests (“the AB Business Transfer”) removed the authority to control the business of AB and as such, the results of AB are reflected in the Company’s consolidated financial statements as discontinued operations and are presented in Net income (loss) from discontinued operations, net of taxes. Intercompany transactions between the Company and AB prior to the AB Business Transfer have been eliminated. Ongoing service transactions with AB are reported as related party transactions as further described in Note 10.


52
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The table below presents AB’s revenues recognized in three and nine months ended September 30, 2018, disaggregated by category:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
(in millions)
Investment management and service fees:
 
 
 
Base fees
$
571

 
$
1,700

Performance-based fees
41

 
83

Research services
103

 
324

Distribution services
104

 
318

Shareholder services
19

 
58

Other
5

 
16

Total investment management and service fees
$
843

 
$
2,499

The following table presents the amounts related to the Net income of AB that has been reflected in Discontinued Operations:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
(in millions)
REVENUES
 
 
 
Net derivative gains (losses)
$
(6
)
 
$
(4
)
Net investment income (loss)
10

 
55

Investment management and service fees
826

 
2,446

Other income
3

 
6

Total revenues
833

 
2,503

 
 
 
 
BENEFITS AND OTHER DEDUCTIONS
 
 
 
Compensation and benefits
357

 
1,061

Distribution-related payments
107

 
323

Interest expense
3

 
7

Other operating costs and expenses
187

 
547

Total benefits and other deductions
654

 
1,938

Income from discontinued operations, before income taxes
179

 
565

Income tax expense
(21
)
 
(46
)
Net income from discontinued operations, net of taxes
158

 
519

Less: Net income attributable to the noncontrolling interest
(127
)
 
(438
)
Net income from discontinued operations, net of taxes and noncontrolling interest
$
31


$
81

15)     REVISION OF PRIOR PERIOD FINANCIAL STATEMENTS
Reclassification of DAC Capitalization
During the fourth quarter of 2018, the Company changed the presentation of the capitalization of DAC in the consolidated statements of income for all prior periods presented herein by netting the capitalized amounts within the applicable expense line items, such as Compensation and benefits, Commissions and Other operating costs and expenses. Previously, the Company had netted the capitalized amounts within the Amortization of DAC. There was no impact on Net income (loss) or Comprehensive income (loss) from this reclassification. See Note 2 for further details of this reclassification.


53
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Revisions of Prior Period Financial Statements
During the fourth quarter of 2018, the Company identified certain cash flows that were incorrectly classified in the Company’s consolidated statements of cash flows. The Company has determined that these misclassifications were not material to its financial statements of any period.
The impact of items included in the following revision tables on the consolidated statement of cash flows for the nine months ended September 30, 2018 were corrected in the comparative consolidated statements of cash flows included herein for the nine months ended September 30, 2019 and 2018.
Discontinued Operations
As further described in Note 14, as a result of the AB Business Transfer in the fourth quarter of 2018, AB’s operations are now reflected as discontinued operations in the Company’s consolidated financial statements. The financial information for prior periods presented in the consolidated financial statements have been adjusted to reflect AB as discontinued operations.
Revision of Consolidated Financial Statements for the Nine Months Ended September 30, 2018
The following tables present line items of the consolidated statement of cash flows for the nine months ended September 30, 2018 that have been affected by the revisions. This information has been corrected from the information previously presented in the Company’s September 30, 2018 Form 10-Q. For these items, the tables detail the amounts as previously reported and the impact upon those line items due to the reclassifications to conform to the current presentation, the adjustment for discontinued operations, revisions and the amounts as currently revised. Prior period amounts have been reclassified to conform to current period presentation, where applicable, and are summarized in the accompanying tables. Tables for the other consolidated financial statements as of or for the three and nine months ended September 30, 2018 are not presented as these revisions were already reflected in the Company’s September 30, 2018 Form 10-Q.


54
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 
Nine Months Ended September 30, 2018
 
As Pre-viously
Reported
 
Presentation Reclassifi-cations
 
As Adjusted
 
Impact of Revisions
 
As Revised
 
(in millions)
Consolidated Statement of Cash Flows:
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Adjustments to reconcile Net income (loss) to Net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
Amortization of deferred sales commission
$
17

 
$
(17
)
 
$
—

 
$
—

 
$
—

Amortization and depreciation
(60
)
 
318

 
258

 
—

 
258

Equity (income) loss from limited partnerships
—

 
(83
)
 
(83
)
 
—

 
(83
)
Distribution from joint ventures and limited partnerships
63

 
(63
)
 
—

 
—

 
—

Cash received on the recapture of captive reinsurance
1,099

 
—

 
1,099

 
174

 
1,273

Changes in:
 
 
 
 
 
 
 
 
 
DAC
(129
)
 
129

 
—

 
—

 
—

Capitalization of DAC
—

 
(432
)
 
(432
)
 
—

 
(432
)
Future policy benefits
(58
)
 
—

 
(58
)
 
(541
)
 
(599
)
Reinsurance recoverable
20

 
—

 
20

 
86

 
106

Current and deferred income taxes
(264
)
 
—

 
(264
)
 
(400
)
 
(664
)
Other, net
123

 
146

 
269

 
179

 
448

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

 
$
(2
)
 
$
1,612

 
$
(502
)
 
$
1,110

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Proceeds from the sale/maturity/prepayment of:
 
 
 
 
 
 
 
 
 
Trading account securities
$
6,913

 
$
—

 
$
6,913

 
$
77

 
$
6,990

Real estate joint ventures
—

 
140

 
140

 
—

 
140

Short-term investments
—

 
1,806

 
1,806

 
—

 
1,806

Other
344

 
(140
)
 
204

 
—

 
204

Short-term investments
—

 
(1,530
)
 
(1,530
)
 
204

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

 
(584
)
 
(492
)
 
(1,076
)
Change in short-term investments
350

 
(273
)
 
77

 
(77
)
 
—

Other, net
305

 
(1
)
 
304

 
(19
)
 
285

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

 
$
(2,988
)
 
$
(307
)
 
$
(3,295
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Policyholders’ account balances:
 
 
 
 
 
 
 
 
 
Deposits
$
7,852

 
$
—

 
$
7,852

 
$
(1,668
)
 
$
6,184

Withdrawals
(4,014
)
 
—

 
(4,014
)
 
760

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

 
(338
)
 
1,717

 
1,379

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

 
$
—

 
$
1,293

 
$
809

 
$
2,102


16)    SUBSEQUENT EVENTS
Holdings Notes
On November 4, 2019, Holdings issued $900 million of floating rate notes due November 4, 2024 to AXA Equitable (the “Notes”). The Notes will generally bear interest at a rate per annum equal to the sum of: (i) the LIBOR rate calculated for the interest period; and (ii) 1.33%.


55

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis of financial condition and results of operations is presented pursuant to General Instruction (H)(2)(a) of Form 10-Q. The management’s narrative that follows should be read in conjunction with the consolidated financial statements and the related Notes to Consolidated Financial Statements included elsewhere herein, with the information provided under “Note Regarding Forward-looking Statements and Information” included elsewhere herein and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in Part II, Item 7 and “Risk Factors” in Part I, Item 1A included in AXA Equitable’s Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Form 10-K”). The management’s narrative that follows represents a discussion and analysis of AXA Equitable’s financial condition and results of operations and not the financial condition and results of operations of AXA Equitable Holdings, Inc. (“Holdings”).
Executive Summary
Overview
We are one of America’s leading financial services companies, providing advice and solutions for helping Americans set and meet their retirement goals and protect and transfer their wealth across generations.
We benefit from our complementary mix of businesses. This business mix provides diversity in our earnings sources, which helps offset fluctuations in market conditions and variability in business results, while offering growth opportunities.
GMxB Unwind
On April 12, 2018, we completed an unwind of the reinsurance provided to us by AXA RE Arizona for certain variable annuities with GMxB features (the “GMxB Unwind”). Accordingly, all business previously reinsured to AXA RE Arizona, with the exception of the GMxB business, was novated to EQ AZ Life Re Company (“EQ AZ”), a newly formed captive insurance company organized under the laws of Arizona, which is an indirect wholly owned subsidiary of Holdings. For more information about the GMxB Unwind, see note 12 of the Notes to the Consolidated Financial Statements included in our 2018 Form 10-K for more information about the GMxB unwind.
Transfer of AB Units
In the fourth quarter of 2018, we transferred our interest in AB (including units of the limited partnership interest in AllianceBernstein L.P., units representing assignments of beneficial ownership of limited partnership interests in AllianceBernstein Holding L.P. and shares of AllianceBernstein Corporation) to a wholly-owned subsidiary of Holdings (the “AB Business Transfer”). As a result of this transaction, the previously consolidated results of AB have been reclassified to Discontinued operations in the consolidated financial statements. For more information about the Transfer of AB Units, see Note 14 of the Notes to the Consolidated Financial Statements.
As a result of the AB Business Transfer, we now operate as a single segment entity based on the manner in which we use financial information to evaluate business performance and to determine the allocation of resources.
Revenues
Our revenues come from three principal sources:
•
fee income derived from our products
•
premiums from our traditional life insurance and annuity products; and
•
investment income from our General Account investment portfolio.
Our fee income varies directly in relation to the amount of the underlying account value or benefit base of our life insurance and annuity products are influenced by changes in economic conditions, primarily equity market returns, as well as net flows. Our premium income is driven by the growth in new policies written and the persistency of our in-force policies, both of which are influenced by a combination of factors, including our efforts to attract and retain customers and market conditions that influence demand for our products. Our investment income is driven by the yield on our General Account investment portfolio and is impacted by the prevailing level of interest rates as we reinvest cash associated with maturing investments and net flows to the portfolio.


56

Benefits and Other Deductions
Our primary expenses are:
•
policyholders’ benefits and interest credited to policyholders’ account balances;
•
sales commissions and compensation paid to intermediaries and advisors that distribute our products and services; and
•
compensation and benefits provided to our employees and other operating expenses.
Policyholders’ benefits are driven primarily by mortality, customer withdrawals and benefits which change in response to changes in capital market conditions. In addition, some of our policyholders’ benefits are directly tied to the AV and benefit base of our variable annuity products. Interest credited to policyholders varies in relation to the amount of the underlying AV or benefit base. Sales commissions and compensation paid to intermediaries and advisors vary in relation to premium and fee income generated from these sources, whereas compensation and benefits to our employees are more constant and impacted by market wages and decline with increases in efficiency. Our ability to manage these expenses across various economic cycles and products is critical to the profitability of our company.
Net Income Volatility
We have offered and continue to offer variable annuity products with variable annuity guaranteed benefits (“GMxB”) features. The future claims exposure on these features is sensitive to movements in the equity markets and interest rates. Accordingly, we have implemented hedging and reinsurance programs designed to mitigate the economic exposure to us from these features due to equity market and interest rate movements. Changes in the values of the derivatives associated with these programs due to equity market and interest rate movements are recognized in the periods in which they occur while corresponding changes in offsetting liabilities are recognized over time. This results in net income volatility as further described below. See “—Significant Factors Impacting Our Results—Impact of Hedging and GMIB Reinsurance on Results.”
In addition to our dynamic hedging strategy, we have static hedge positions designed to mitigate the adverse impact of changing market conditions on our statutory capital. We believe this program will continue to preserve the economic value of our variable annuity contracts and better protect our target variable annuity asset level. However, these static hedge positions increase the size of our derivative positions and may result in higher net income volatility on a period-over-period basis.
Significant Factors Impacting Our Results
The following significant factors have impacted, and may in the future impact, our financial condition, results of operations or cash flows.
Impact of Hedging and GMIB Reinsurance on Results
We have offered and continue to offer variable annuity products with GMxB features. The future claims exposure on these features is sensitive to movements in the equity markets and interest rates. Accordingly, we have implemented hedging and reinsurance programs designed to mitigate the economic exposure to us from these features due to equity market and interest rate movements. These programs include:
•
Variable annuity hedging programs. We use a dynamic hedging program (within this program, generally, we reevaluate our economic exposure at least daily and rebalance our hedge positions accordingly) to mitigate certain risks associated with the GMxB features that are embedded in our liabilities for our variable annuity products. This program utilizes various derivative instruments that are managed in an effort to reduce the economic impact of unfavorable changes in GMxB features’ exposures attributable to movements in the equity markets and interest rates. Although this program is designed to provide a measure of economic protection against the impact of adverse market conditions, it does not qualify for hedge accounting treatment. Accordingly, changes in value of the derivatives will be recognized in the period in which they occur with offsetting changes in reserves partially recognized in the current period, resulting in net income volatility. In addition to our dynamic hedging program, we have a hedging program using static hedge positions (derivative positions intended to be held to maturity with less frequent re-balancing) to protect our statutory capital against stress scenarios. This program in addition to our dynamic hedge program has increased the size of our derivative positions, resulting in an increase in net income volatility. 
•
GMIB reinsurance contracts. Historically, GMIB reinsurance contracts were used to cede to non-affiliated reinsurers a portion of our exposure to variable annuity products that offer a GMIB feature. We account for the GMIB reinsurance


57

contracts as derivatives and report them at fair value. Gross GMIB reserves are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts. Accordingly, our gross reserves will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts. Because changes in the fair value of the GMIB reinsurance contracts are recorded in the period in which they occur and a majority of the changes in gross reserves for GMIB are recognized over time, net income will be more volatile.
Effect of Assumption Updates on Operating Results
During the third quarter 2019, we conducted our annual review of the assumptions underlying the valuation of DAC, deferred sales inducement assets, unearned revenue liabilities, liabilities for future policyholder benefits and embedded derivatives. Assumptions are based on a combination of company experience, industry experience, management actions and expert judgment and reflect our best estimate as of the date of each financial statement. As a result of this review, some assumptions were updated, resulting in increases and decreases in the carrying values of these product liabilities and assets.
Most of the variable annuity products, variable universal life insurance and universal life insurance products we offer maintain policyholder deposits that are reported as liabilities and classified within either Separate Accounts liabilities or policyholder account balances. Our products and riders also impact liabilities for future policyholder benefits and unearned revenues and assets for DAC and deferred sales inducements (“DSI”). The valuation of these assets and liabilities (other than deposits) are based on differing accounting methods depending on the product, each of which requires numerous assumptions and considerable judgment. The accounting guidance applied in the valuation of these assets and liabilities includes, but is not limited to, the following: (i) traditional life insurance products for which assumptions are locked in at inception; (ii) universal life insurance and variable life insurance secondary guarantees for which benefit liabilities are determined by estimating the expected value of death benefits payable when the account balance is projected to be zero and recognizing those benefits ratably over the accumulation period based on total expected assessments; (iii) certain product guarantees for which benefit liabilities are accrued over the life of the contract in proportion to actual and future expected policy assessments; and (iv) certain product guarantees reported as embedded derivatives at fair value.
Assumption Updates and Model Changes
We conduct our annual review of our assumptions and models during the third quarter of each year.
Impact of Assumption Updates and Model Changes on Income from Continuing Operations before income taxes and Net income (loss)
The table below presents the impact of our actuarial assumption updates during the third quarter of 2019 and 2018 to our Income (loss) from continuing operations, before income taxes and Net income (loss). There was no material impact from model changes during the third quarter of 2019 and 2018 to our Income (loss) from continuing operations, before income taxes or Net income (loss).
 
Nine Months Ended September 30,
 
2019
 
2018
 
(in millions)
Impact of assumption updates on Net income (loss):
 
 
 
Variable annuity product features related assumption updates
$
(1,438
)
 
$
(331
)
All other assumption updates
84

 
103

Impact of assumption updates on Income (loss) from continuing operations, before income tax
(1,354
)
 
(228
)
Income tax (expense) benefit on assumption updates
284

 
41

Net income (loss) impact of assumption updates
$
(1,070
)
 
$
(187
)

2019 Assumption Updates
The impact of assumption updates in the third quarter of 2019 was a decrease of $1.4 billion to Income (loss) from continuing operations, before income taxes and a decrease to Net income (loss) of $1.1 billion. This includes a $1.4 billion unfavorable impact on the reserves for our Variable annuity product features as a result of unfavorable updates to our: (i)


58

interest rate assumptions; and (ii) policyholder behavior, primarily lapse and withdrawal assumptions, further magnified by low interest rates.
The net impact of these assumption updates on Income (loss) from continuing operations, before income taxes of $1.4 billion consisted of a decrease in Policy charges and fee income of $11 million, an increase in Policyholders’ benefits of $886 million, an increase in Net derivative losses of $548 million, a decrease in Interest credited to policyholders’ account balances of $14 million and a decrease in Amortization of DAC of $77 million.
2018 Assumption Updates
The impact of assumption updates in the third quarter of 2018 was a decrease of $228 million to Income (loss) from continuing operations, before income taxes and a decrease to Net income (loss) of $187 million. This includes a $331 million unfavorable impact on the reserves for our Variable annuity product features as a result of unfavorable updates to policyholder behavior, primarily due to annuitization assumptions, partially offset by favorable updates to economic assumptions.
The assumption changes during 2018 consisted of a decrease in Policy charges and fee income of $12 million, a decrease in Policyholders’ benefits of $684 million, an increase in Net derivative losses of $1.1 billion, and a decrease in the Amortization of DAC of $165 million.
Macroeconomic and Industry Trends
Our business and consolidated results of operations are significantly affected by economic conditions and consumer confidence, conditions in the global capital markets and the interest rate environment.
Financial and Economic Environment
A wide variety of factors continue to impact global financial and economic conditions. These factors include, among others, concerns over economic growth in the United States, continued low interest rates including following the sharp decline in the second quarter of 2019, falling unemployment rates, the U.S. Federal Reserve’s potential plans to lower short-term interest rates, fluctuations in the strength of the U.S. dollar, the uncertainty created by what actions the current administration may pursue, concerns over global trade wars, changes in tax policy, global economic factors including programs by the European Central Bank and the United Kingdom’s vote to exit from the European Union and other geopolitical issues. Additionally, many of the products and solutions we sell are tax-advantaged or tax-deferred. If U.S. tax laws were to change, such that our products and solutions are no longer tax-advantaged or tax-deferred, demand for our products could materially decrease.
Stressed conditions, volatility and disruptions in the capital markets, particular markets, or financial asset classes can have an adverse effect on us, in part because we have a large investment portfolio and our insurance liabilities and derivatives are sensitive to changing market factors. An increase in market volatility could affect our business, including through effects on the yields we earn on invested assets, changes in required reserves and capital and fluctuations in the value of our Account Values. These effects could be exacerbated by uncertainty about future fiscal policy, changes in tax policy, the scope of potential deregulation and levels of global trade.
In the short- to medium-term, the potential for increased volatility, coupled with prevailing interest rates remaining below historical averages, could pressure sales and reduce demand for our products as consumers consider purchasing alternative products to meet their objectives. In addition, this environment could make it difficult to consistently develop products that are attractive to customers. Financial performance can be adversely affected by market volatility and equity market declines as fees driven by Account Values fluctuate, hedging costs increase and revenues decline due to reduced sales and increased outflows.
We monitor the behavior of our customers and other factors, including mortality rates, morbidity rates, annuitization rates and lapse and surrender rates, which change in response to changes in capital market conditions, to ensure that our products and solutions remain attractive and profitable.
Interest Rate Environment
We believe the interest rate environment will continue to impact our business and financial performance in the future for several reasons, including the following:
•
Certain of our variable annuity and life insurance products pay guaranteed minimum interest crediting rates. We are required to pay these guaranteed minimum rates even if earnings on our investment portfolio decline, with the resulting investment margin compression negatively impacting earnings. In addition, we expect more policyholders to


59

hold policies with comparatively high guaranteed rates longer (lower lapse rates) in a low interest rate environment. Conversely, a rise in average yield on our investment portfolio should positively impact earnings. Similarly, we expect policyholders would be less likely to hold policies with existing guaranteed rates (higher lapse rates) as interest rates rise.
•
A prolonged low interest rate environment also may subject us to increased hedging costs or an increase in the amount of statutory reserves that our insurance subsidiaries are required to hold for GMxB features, lowering their statutory surplus, which would adversely affect their ability to pay dividends to us. In addition, it may also increase the perceived value of GMxB features to our policyholders, which in turn may lead to a higher rate of annuitization and higher persistency of those products over time. Finally, low interest rates may continue to cause an acceleration of DAC amortization or reserve increase due to loss recognition for interest-sensitive products.
For a discussion on derivatives we used to hedge interest rates, see Note 4 of the Notes to the Consolidated Financial Statements.
Regulatory Developments
We are regulated primarily by the New York State Department of Financial Services (“NYDFS”), with some policies and products also subject to federal regulation. On an ongoing basis, regulators refine capital requirements and introduce new reserving standards. Regulations recently adopted or currently under review can potentially impact our statutory reserve and capital requirements.
•
National Association of Insurance Commissioners (“NAIC”). In 2015, the NAIC Financial Condition (E) Committee established a working group to study and address, as appropriate, regulatory issues resulting from variable annuity captive reinsurance transactions, including reforms that would improve the current statutory reserve and RBC framework for insurance companies that sell variable annuity products. In August 2018, the NAIC adopted the new framework developed and proposed by this working group. Following its referral to various NAIC committees to develop the full implementation details, the new framework becomes operational in January 2020, unless adopted earlier. Among other changes, the new framework includes new prescriptions for reflecting hedge effectiveness, investment returns, interest rates, mortality and policyholder behavior in calculating statutory reserves and RBC. Once effective, it is expected to materially change the level of variable annuity reserves and RBC requirements as well as their sensitivity to capital markets including interest rate, equity markets, volatility and credit spreads. Overall, we believe the NAIC reform has moved variable annuity capital standards towards an economic framework and is consistent with how we manage our business. The Company intends to adopt the NAIC reserve and capital framework for the year ended December 31, 2019. However, the NYDFS recently proposed a rule for adoption that differs from the standards of the NAIC framework. The proposed rule requires reserves to be the greater of the NAIC standard or a revised version of the current NYDFS requirement for policies issued prior to January 1, 2020, and for policies issued after that date, it establishes a new standard that is more conservative than the NAIC standard. Other state insurance regulators may also propose and adopt standards different from the NAIC framework.
•
Fiduciary Rules/“Best Interest” Standards of Conduct. In the wake of the March 2018 federal appeals court decision to vacate the DOL Rule, the NAIC as well as state regulators are currently considering whether to apply an impartial conduct standard similar to the DOL Rule to recommendations made in connection with certain annuities and, in one case, to life insurance policies. For example, the NAIC is actively working on a proposal to raise the advice standard for annuity sales and in July 2018, the NYDFS issued a final version of Regulation 187 that adopts a “best interest” standard for recommendations regarding the sale of life insurance and annuity products in New York. Regulation 187 took effect on August 1, 2019 with respect to annuity sales and will take effect on February 1, 2020 for life insurance sales and is applicable to sales of life insurance and annuity products in New York. In November 2018, the primary agent groups in New York launched a legal challenge against the NYDFS over the adoption of Regulation 187. In July 2019, the New York State Supreme Court dismissed the plaintiff’s legal challenge, and upheld the NYDFS’s authority to extend the rule to life insurance products. A notice of appeal was filed in September 2019. We have developed our compliance framework for Regulation 187 with respect to annuity sales and are assessing the impact it may have on our life insurance business. In addition, state regulators and legislatures in Nevada, New Jersey and Maryland have proposed measures that would make broker-dealers, sales agents, and investment advisers and their representatives to be subject to a fiduciary duty when providing products and services to customers, including pension plans and IRAs. Beyond the New York regulation, the likelihood of enactment of any such state-based regulation is uncertain at this time, but if implemented, these regulations could have adverse effects on our business and consolidated results of operations.


60

•
In June 2019, the SEC released a set of rules that, among other things, enhance the existing standard of conduct for broker-dealers to require them to act in the best interest of their clients “Regulation Best Interest”; clarify the nature of the fiduciary obligations owed by registered investment advisers to their clients; impose new disclosure requirements aimed at ensuring investors understand the nature of their relationship with their investment professionals; and restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor”. The effective date for compliance with these rules is June 30, 2020. Investment advisers to retail clients will also be required to file new Form CRS, providing disclosures about its standard of conduct and conflicts of interest, with the SEC and deliver copies of the Form to its retail clients. The intent of these rules is to impose on broker-dealers an enhanced duty of care to their customers similar to that which applies to investment advisers under existing law. Two lawsuits, one by several states and the District of Columbia and the other by private firms, were filed in September 2019 and currently are pending, seeking to vacate Regulation Best Interest. We are monitoring these developments and evaluating the potential effect they may have on our business.
•
Derivatives Regulation. The amount of collateral we are required to pledge and the expenses we incur under our derivatives transactions are expected to increase as a result of the requirement to pledge initial margin for non-centrally cleared derivative transactions (“OTC” derivatives) entered into after the phase-in period, which will likely be applicable to us in September 2020 as a result of adoption by the Office of the Comptroller of the Currency (“OCC”), the Federal Reserve Board, the FDIC, the Farm Credit Administration, and the Federal Housing Finance Agency and the CFTC of final margin requirements for OTC derivatives. Also, in June and September 2019, the SEC adopted a set of rules that establish capital, margin and segregation requirements for security-based swaps and set recordkeeping and reporting requirements for security-based swap dealers, major security-based swap participants and broker-dealers. The rules are part of the larger regulatory framework that the SEC is establishing over non-bank security-based swap dealers (“SBSD’s”), non-bank major security-based swap dealers (“MSBSP’s”), and certain broker-dealers that are not SBSD’s that imposes registration, disqualification, recordkeeping and reporting requirements, and cross-border regulation. The compliance date for the new rules is 18 months after the adoption by the SEC of the final rules on cross-border application of security-based swap requirements, which have been proposed and are pending. We are monitoring these developments and evaluating the potential effect these rules might have on our business.
Impact of the Tax Reform Act
On December 22, 2017, President Trump signed into law the Tax Reform Act, a broad overhaul of the U.S. Internal Revenue Code that changed long-standing provisions governing the taxation of U.S. corporations, including life insurance companies.
The Tax Reform Act reduced the federal corporate income tax rate to 21% and repealed the corporate Alternative Minimum Tax (“AMT”) while keeping existing AMT credits. It also contained measures affecting our insurance companies, including changes to the DRD, insurance reserves and tax DAC. As a result of the Tax Reform Act, our Net income has improved.
In August 2018, the NAIC adopted changes to the RBC calculation, including the C-3 Phase II Total Asset Requirement for variable annuities, to reflect the 21% corporate income tax rate in RBC, which resulted in a reduction to our Combined RBC Ratio.
Overall, the Tax Reform Act had a net positive economic impact on us and we continue to monitor regulations related to this reform.
Consolidated Results of Operations
Our consolidated results of operations are significantly affected by conditions in the capital markets and the economy because we offer market sensitive products. These products have been a significant driver of our results of operations. Because the future claims exposure on these products is sensitive to movements in the equity markets and interest rates, we have in place various hedging and reinsurance programs that are designed to mitigate the economic risks of movements in the equity markets and interest rates. The volatility in Net income attributable to AXA Equitable for the periods presented below results from the mismatch between: (i) the change in carrying value of the reserves for GMDB and certain GMIB features that do not fully and immediately reflect the impact of equity and interest market fluctuations; and (ii) the change in fair value of products with the GMIB feature that has a no-lapse guarantee, and our hedging and reinsurance programs.
Reclassification of DAC Capitalization


61

During the fourth quarter of 2018, we changed the presentation of the capitalization of DAC in the consolidated statements of income for all prior periods presented herein by netting the capitalized amounts within the applicable expense line items, such as Compensation and benefits, Commissions and Other operating costs and expenses. Previously, the capitalized amounts were netted within the Amortization of DAC. There was no impact on Net income (loss) or Comprehensive income (loss) from this reclassification. See Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements for further detail of the reclassification adjustments for the nine months ended September 30, 2018.
The following table summarizes our consolidated statements of income (loss) for the nine months ended September 30, 2019 and 2018:
 
Nine Months Ended September 30,
 
2019
 
2018
 
(in millions)
REVENUES
 
 
 
Policy charges and fee income
$
2,577

 
$
2,644

Premiums
696

 
657

Net derivative gains (losses)
(2,075
)
 
(3,102
)
Net investment income (loss)
2,527

 
1,693

Investment gains (losses), net:
 
 
 
Total other-than-temporary impairment losses
—

 
(4
)
Other investment gains (losses), net
181

 
77

Total investment gains (losses), net
181

 
73

Investment management and service fees
761

 
781

Other income
40

 
41

Total revenues
4,707

 
2,787

BENEFITS AND OTHER DEDUCTIONS
 
 
 
Policyholders’ benefits
3,321

 
1,987

Interest credited to policyholders’ account balances
837

 
754

Compensation and benefits
237

 
300

Commissions
462

 
465

Interest expense
4

 
27

Amortization of deferred policy acquisition costs
341

 
303

Other operating costs and expenses
614

 
2,717

Total benefits and other deductions
5,816

 
6,553

Income (loss) from continuing operations, before income taxes
(1,109
)
 
(3,766
)
Income tax (expense) benefit from continuing operations
284

 
828

Net income (loss) from continuing operations
(825
)
 
(2,938
)
Less: Net (income) loss from discontinued operations, net of taxes and noncontrolling interest
—

 
(81
)
Net income (loss)
(825
)
 
(2,857
)
Less: Net income (loss) attributable to the noncontrolling interest
3

 
1

Net income (loss) attributable to AXA Equitable
$
(828
)
 
$
(2,858
)
The following discussion compares the results for the nine months ended September 30, 2019 to the results for the nine months ended September 30, 2018.
Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018
Net Income Attributable to AXA Equitable
Net loss attributable to AXA Equitable decreased by $2.0 billion, to a net loss of $828 million for the first nine months of 2019 from a net loss of $2.9 billion for the first nine months of 2018, primarily driven by the following notable items:


62

•
Other operating costs and expenses decreased by $2.1 billion mainly due to the $1.9 billion amortization of the deferred cost of reinsurance asset, including the write-off of $1.8 billion of this asset and the settlement of outstanding payments of $273 million, both related to the GMxB Unwind in 2018.
•
Net derivative losses decreased by $1.0 billion mainly due to income from freestanding derivatives reflecting lower interest rates partially offset by an increase in the fair value of the GMIBNLG liability reflecting the impact of lower interest rates partially offset by less of an increase in the liability as a result of assumption updates (a $548 million and $1.1 billion unfavorable impact of assumption updates in 2019 and 2018, respectively).
•
Net investment income (loss) increased by $834 million mainly due to a change in the market value of trading securities supporting our variable annuity products due to lower interest rates and higher investment income from higher asset balances and General Account investment portfolio optimization.
•
Net investment gains increased by $108 million primarily due to the rebalancing of our U.S. Treasury portfolio partially offset by a real estate impairment in 2019.
•
Compensation and benefits decreased by $63 million mainly due to a non-recurring loss resulting from the annuity purchase transaction and partial settlement of the employee pension plan in the first nine months of 2018.
•
Interest expense decreased by $23 million due to lower repurchase agreement costs.
Partially offsetting this decrease were the following notable items:
•
Policyholders’ benefits increased by $1.3 billion mainly driven by the impact of assumption updates in our GMxB reserves (the $889 million impact of unfavorable assumption updates in 2019 compared to the $734 million impact of favorable assumption updates in 2018), the impacts of interest rates and equity markets and the absence of a $490 million write-off of ceded reserves resulting from the GMxB unwind in 2018. Partially offsetting the increase in our GMxB reserves was a decrease in our life reserves mainly driven by the $31 million impact of favorable assumption updates in 2019 compared to the $48 million impact of unfavorable assumption updates in 2018, combined with a reserve adjustment on our disability waiver rider reserves.
•
Interest credited to policyholders’ account balances increased by $83 million primarily driven by higher SCS AV as a result of new business growth and higher interest credited on funding agreements, due to higher balances.
•
Amortization of DAC increased by $38 million mainly due to higher amortization in our Retirement products primarily due to the impact of interest rate and equity market movements on assets supporting our SCS block and higher normal amortization partially offset by the higher favorable impact of assumption updates ($93 million in 2019 compared to $77 million in 2018). Partially offsetting the higher amortization of DAC in our Retirement products was lower amortization in our Life products mainly due to the non repeat of a $187 million DAC write-off as we exited loss recognition in the second quarter of 2018 and an in force update that reduced the amortization of DAC by $27 million (offset in policy charges and fee income) in 2019 partially offset by the $16 million impact of unfavorable assumption updates in 2019 compared to the $88 million impact of favorable assumption updates in 2018.
•
Policy charges and fee income and Premiums decreased by $28 million mainly due to lower fees from our retirement products driven by lower average Separate Accounts AV and an inforce update that reduced our policy charges and fee income (offset in Amortization of DAC) for our life products. Partially offsetting the lower fee income were higher premiums from our employee benefits and term life products and and lower ceded fee income as a result of the GMxB unwind.
•
Investment management and service fees and Other income decreased by $21 million primarily due to lower average Separate Accounts AV in our individual retirement products.
•
Income tax benefit decreased by $544 million primarily driven by a lower pre-tax loss.
See “—Significant Factors Impacting Our Results—Assumption Updates and Model Changes” for more information regarding assumption updates.
Adoption and Future Adoption of New Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements included herein.


63

Summary of Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to adopt accounting policies and make estimates and assumptions that affect amounts reported in our consolidated financial statements included elsewhere herein. For a discussion of our significant accounting policies, see Note 2 of the Notes to the Consolidated Financial Statements included in our 2018 Form 10-K. The most critical estimates include those used in determining:
•
liabilities for future policy benefits;
•
accounting for reinsurance;
•
capitalization and amortization of DAC and policyholder bonus interest credits;
•
estimated fair values of investments in the absence of quoted market values and investment impairments;
•
estimated fair values of freestanding derivatives and the recognition and estimated fair value of embedded derivatives requiring bifurcation;
•
measurement of income taxes and the valuation of deferred tax assets; and
•
liabilities for litigation and regulatory matters.
In applying our accounting policies, we make subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. Many of these policies, estimates and related judgments are common in the insurance and financial services industries while others are specific to our business and operations. Actual results could differ from these estimates.
A discussion of each of the critical accounting estimates may be found in the 2018 Form 10-K, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Critical Accounting Estimates.”
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.


64

Item 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The management of the Company, with the participation of the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2019. This evaluation is performed to determine if our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934, as amended, is accumulated and communicated to management, including the Company’s CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms.
Due to the material weaknesses described below, the Company’s CEO and CFO, concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2019.
As previously reported, the Company identified two material weaknesses in the design and operation of the Company’s internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis. The Company’s management, including the Company’s CEO and CFO, have concluded that we do not:
(i)
maintain effective controls to timely validate that actuarial models are properly configured to capture all relevant product features and provide reasonable assurance timely reviews of assumptions and data have occurred, and, as a result, errors were identified in future policyholders’ benefits and DAC balances; and
(ii)
maintain sufficient experienced personnel to prepare the Company’s consolidated financial statements and to verify consolidating and adjusting journal entries are completely and accurately recorded to the appropriate accounts and, as a result, errors were identified in the consolidated financial statements, including in the presentation and disclosure between sections of the statements of cash flows.
These material weaknesses resulted in misstatements in the Company’s previously issued annual and interim financial statements and resulted in:
(i)
the revision of the interim financial statements for the nine, six, and three months ended September 30, June 30, and March 31, 2018 and 2017, respectively, and the annual financial statements for the year ended December 31, 2017;
(ii)
the revision for the three and six months ended March 31, 2018, and June 30, 2018, respectively, as well as the three, six and nine months ended March 31, 2017, June 30, 2017 and September 30, 2017, respectively and for the years ended December 31, 2017 and 2016
(iii)
the revision of the interim financial statements for the three months ended March 31, 2018, the nine months ended September 30, 2017, the six months ended June 30, 2017 and the annual financial statements for the years ended December 31, 2017 and 2016 and
(iv) the restatement of the annual financial statements for the year ended December 31, 2016, the revision to each of the quarterly interim periods for 2017 and 2016, and the revision of the annual financial statements for the year ended December 31, 2015.
These revisions and restatements were directly related to the material weaknesses described above and not indicative of any new material weaknesses. Until remediated, there is a reasonable possibility that these material weaknesses could result in a material misstatement of the Company’s consolidated financial statements or disclosures that would not be prevented or detected.


65

Remediation Status of Material Weaknesses
Management continues to execute its plan moving towards remediation of the material weaknesses. Since identifying the material weaknesses, management has performed the following activities:
Material Weakness Related to Actuarial Models, Assumptions and Data
•
We have designed and implemented an enhanced model validation control framework, including a rotational schedule to periodically re-validate all U.S. GAAP models.
•
We have designed and implemented enhanced controls and governance processes for new model implementations.
•
We have designed and implemented enhanced controls for model changes.
•
We have designed and implemented enhanced controls over the annual assumption setting process, including a comprehensive master assumption inventory and risk framework.
•
We have designed and implemented new controls to validate the reliability of significant data flows feeding actuarial models and assumptions.
•
We have begun the process of testing the design and operating effectiveness of the newly implemented controls.
Material Weakness Related to Insufficient Personnel and Journal Entry Process
•
With respect to insufficient personnel, we have strengthened our finance team by adding approximately 25 employees to the Accounting and Financial Reporting areas. These additional resources have provided the additional requisite skills and experience needed to support a public-company accounting and reporting environment, with the majority possessing a CPA license, “Big 4” public accounting experience, and/or prior working experience in public-company finance roles. We have conducted both specific job-related training and general training on SOX controls and U.S. GAAP-related technical topics to new and existing staff.
•
To improve controls over journal entries, a less controlled secondary process that was used for consolidating certain entities, reflecting adjustments to prior periods and generating the business segment disclosures, has been eliminated. Beginning with third quarter 2018, all journal entries are recorded in the Company’s general ledger and the secondary process is no longer necessary.
•
We have enhanced the controls over journal entries through the implementation of new standards designed to ensure effective review and approval of journal entries with sufficient supporting documentation.
•
We have designed and implemented new management review controls within the period end financial reporting process that will operate at a level of precision sufficient to detect errors that could result in a material misstatement.
•We have begun the process of testing the design and operating effectiveness of the newly implemented controls.
While progress has been made to remediate both material weaknesses, as of September 30, 2019, we are still in the process of developing and implementing the enhanced processes and procedures and testing the operating effectiveness of these improved controls. We believe our actions will be effective in remediating the material weaknesses, and we continue to devote significant time and attention to these efforts. In addition, the material weaknesses will not be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. Accordingly, the material weaknesses are not remediated as of September 30, 2019. Management will conclude on the effectiveness of the above remediation efforts of the material weaknesses in connection with the Company’s December 31, 2019 consolidated financial statements.
Changes in Internal Control Over Financial Reporting
As described above, the Company continues to design and implement additional controls in connection with its remediation plan. These remediation efforts related to the material weaknesses described above represent changes in our internal control over financial reporting for the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


66

PART II. OTHER INFORMATION
Item 1.    Legal Proceedings
See Note 13 of Notes to Consolidated Financial Statements contained herein. Except as disclosed in Note 13, there have been no new material legal proceedings and no new material developments in legal proceedings previously reported in the 2018 Form 10-K.
Item 1A. Risk Factors
You should carefully consider the risks described in the “Risk Factors” section included in our Annual Report on Form 10-K for the year ended December 31, 2018, as amended or supplemented in our subsequently filed Quarterly Report on Form 10-Q. These risks could materially affect our business, consolidated results of operations or financial condition. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Note Regarding Forward-Looking Statements and Information” above and the risks of our businesses described elsewhere in this Quarterly Report on Form 10-Q.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3.    Defaults Upon Senior Securities
Not applicable.
Item 4.    Mine Safety Disclosures
Not Applicable.
Item 5.    Other Information
Iran Threat Reduction and Syria Human Rights Act
Holdings, AXA Equitable and their subsidiaries had no transactions or activities requiring disclosure under the Iran Threat Reduction and Syria Human Rights Act, nor were they involved in the AXA Group matters described immediately below.
The non-U.S. based subsidiaries of AXA operate in compliance with applicable laws and regulations of the various jurisdictions in which they operate, including applicable international (United Nations and European Union) laws and regulations. While AXA Group companies based and operating outside the United States generally are not subject to U.S. law, as an international group, AXA has in place policies and standards (including the AXA Group International Sanctions Policy) that apply to all AXA Group companies worldwide and often impose requirements that go well beyond local law.
AXA has informed us that AXA Konzern AG, an AXA insurance subsidiary organized under the laws of Germany, provides accident and health insurance to diplomats based at the Iranian Embassy in Berlin, Germany. The total annual premium of these policies is approximately $109,150 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $18,385.
In addition, AXA has informed us that AXA Insurance Ireland, an AXA insurance subsidiary, provides statutorily required car insurance under four separate policies to the Iranian Embassy in Dublin, Ireland. AXA has informed us that compliance with the Declined Cases Agreement of the Irish Government prohibits the cancellation of these policies unless another insurer is willing to assume the coverage. The total annual premium for these policies is approximately $7,115 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $853.
Also, AXA has informed us that AXA Sigorta, a subsidiary of AXA organized under the laws of the Republic of Turkey, provides car insurance coverage for vehicle pools and compulsory earthquake coverage of the Iranian General Consulate and the Iranian Embassy in Istanbul, Turkey. Motor liability insurance coverage is compulsory in Turkey and cannot be canceled unilaterally. The total annual premium in respect of these policies is approximately $3,150 and the annual net profit, which is difficult to calculate with precision, is estimated to be $473.


67

Additionally, AXA has informed us that AXA Winterthur, an AXA insurance subsidiary organized under the laws of Switzerland, provides Naftiran Intertrade, a wholly-owned subsidiary of the Iranian state-owned National Iranian Oil Company, with life, disability and accident coverage for its employees. In addition, AXA Winterthur also provides car and property insurance coverage for the Iranian Embassy in Bern. The provision of these forms of coverage is mandatory in Switzerland. The total annual premium of these policies is approximately $396,597 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $59,489.
Also, AXA has informed us that AXA Egypt, an AXA insurance subsidiary organized under the laws of Egypt, provides the Iranian state-owned Iran Development Bank, two life insurance contracts, covering individuals who have loans with the bank. The total annual premium of these policies is approximately $20,650 and annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $2,000.
In addition, AXA has informed us that AXA Hong Kong, an AXA insurance subsidiary organized under the laws of Hong Kong, provided the Iranian state-owned Hong Kong Branch of Melli Bank PLC, which was re-designated on November 5, 2018 pursuant to E.O. 13224, with group health insurance for its employees. This business has now been canceled. The total annual premium of these policies is approximately $27,122 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $4,339.
Lastly, AXA has informed us that AXA XL, which AXA acquired during the third quarter of 2018, through various non-U.S. subsidiaries, provides insurance to marine policyholders located outside of the U.S. or reinsurance coverage to non-U.S. insurers of marine risks as well as mutual associations of ship owners that provide their members with protection and liability coverage. The provision of these coverages may involve entities or activities related to Iran, including transporting crude oil, petrochemicals and refined petroleum products. AXA XL’s non-U.S. subsidiaries insure or reinsure multiple voyages and fleets containing multiple ships, so they are unable to attribute gross revenues and net profits from such marine policies to activities with Iran. As the activities of these insureds and re-insureds are permitted under applicable laws and regulations, AXA XL intends for its non-U.S. subsidiaries to continue providing such coverage to its insureds and re-insureds to the extent permitted by applicable law.
The aggregate annual premium for the above-referenced insurance policies is approximately $563,784, representing approximately 0.0006% of AXA’s 2018 consolidated revenues, which exceed $100 billion. The related net profit, which is difficult to calculate with precision, is estimated to be $85,539, representing approximately 0.002% of AXA’s 2018 aggregate net profit.
Item 6.    Exhibits 
Number
Description and Method of Filing
Certification of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Registrant’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Registrant’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
_____________
#
Filed herewith.


68

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, AXA Equitable Life Insurance Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 8, 2019
AXA EQUITABLE LIFE INSURANCE COMPANY
 
 
 
 
By:
/s/ Anders Malmström
 
 
Name:
Anders Malmström
 
 
Title:
Senior Executive Director and Chief Financial Officer
 
 
 
 
Date: November 8, 2019
 
/s/ William Eckert
 
 
Name:
William Eckert
 
 
Title:
Managing Director, Chief Accounting Officer and Controller


69