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.nature, with the exception of the Company’s update of its interest rate assumption and adoption of new economic scenario generator as further described below in Assumption Updates and Model Changes. 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 consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
Future Adoption of New Accounting Pronouncements |
| | | | | | | |
| Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
ASU 2018-12:2018-12: Financial Services—Services - Insurance (Topic 944); ASU 2019-09: Financial Services - Insurance (Topic 944): Effective Date |
| 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. |
1. 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. | In November 2019, ASU 2019-09 was issued which modified ASU 2018-12 to be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted. On September 30, 2020, the FASB tentatively affirmed its decision to defer the effective date of the amendments in ASU 2018-12, for all insurance entities by one year. Early adoption would still be allowed.
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 AOCIAccumulated other comprehensive income (“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. | The Company is currently 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. |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | |
Description | Effective Date and Method of Adoption | Effect on the Financial Statement or Other Significant Matters |
2. Measurement of market risk benefits (“MRBs”). MRBs, as defined under the ASU, will encompass certain GMxBvariable annuity guaranteed benefit (“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.
Other comprehensive income (“OCI”).
3. 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.
4. Expanded footnote disclosures. The ASU requires additional disclosures including disaggregated rollforwardsroll-forwards of beginning to ending balances of the liability for future policy benefits, policyholder account balances, MRBs, Separate Accountsseparate account 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.
|
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
| |
Description | Effective Date and Method of Adoption | Effect onASU 2019-12: Income Taxes (Topic 740): Simplifying the Financial Statement or Other Significant Matters |
ASU 2016-13: Financial Instruments—Credit Losses (Topic 326), as clarified and amended byASU 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 andASU 2019-05: Financial Instruments—Credit Losses (Topic 326) Targeted Transition ReliefAccounting for Income Taxes
|
This ASU 2016-13 contains new guidance which introduces an approach based on expected lossessimplifies the accounting for income taxes by removing certain exceptions to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securitiesgeneral principles in Topic 740, as well as clarifying 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.amending existing guidance. | Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, including interim periods within those fiscal years.2020. 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.permitted. | The Company is continuing to develop, validate and implement its updated expected credit loss models, processes and controls related tocurrently evaluating the identifiedimpact adopting the guidance will have on the Company’s consolidated financial assets that fall within the scope of the new standard. While Management expectsstatements, however the adoption willis not expected to 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 extentoperation, or cash flows. |
ASU2020-04: Reference Rate Reform (Topic 848): Facilitation of the impactEffects of Reference Rate Reform on Financial Reporting |
| The amendments in this ASU provide optional expedients and exceptions to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. | This ASU is effective as of March 12, 2020 through December 31, 2022. | The Company will depend on various factors includingdetermine the economic environment, structure and sizeapplicability of the Company’s loan portfoliooptional expedients and other assets impacted byexceptions provided under the standard.ASU as reference rate reform continues to develop. |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Investments
The carrying values of fixed maturities classified as available-for-sale (“AFS”) are reported at fair value. Changes in fair value are reported in OCI, net of allowance for credit losses, policy related amounts and deferred income taxes. With the adoption of the new Financial Instruments-Credit Losses standard, changes in credit losses are recognized in Investment gains (losses), net. The redeemable preferred stock investments that are reported in fixed maturities include real estate investment trusts (“REIT”), perpetual preferred stock and redeemable preferred stock. These securities may not have a stated maturity, may not be cumulative, and do not provide for mandatory redemption by the issuer.
The Company determines the fair values of fixed maturities and equity securities based upon quoted prices in active markets, when available, or through the use of alternative approaches when market quotes are not readily accessible or available. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment. The Company’s management, with the assistance of its investment advisors, evaluates AFS debt securities that experienced a decline in fair value below amortized cost for credit losses which are evaluated in accordance with the new financial instruments credit losses guidance effective January 1, 2020. Integral to this review is an assessment made each quarter, on a security-by-security basis, by the Company’s Investments Under Surveillance (“IUS”) Committee, of various indicators of credit deterioration to determine whether the investment security has experienced a credit loss. This assessment includes, but is not limited to, consideration of the severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, and the financial strength, liquidity and continued viability of the issuer.
The Company recognizes an allowance for credit losses on AFS debt securities with a corresponding adjustment to earnings rather than a direct write down that reduces the cost basis of the investment, and credit losses are limited to the amount by which the security’s amortized cost basis exceeds its fair value. Any improvements in estimated credit losses on AFS debt securities are recognized immediately in earnings. Management does not use the length of time a security has been in an unrealized loss position as a factor, either by itself or in combination with other factors, to conclude that a credit loss does not exist, as they were permitted to do prior to January 1, 2020.
When the Company determines that there is more than 50% likelihood that it is not going to recover the principal and interest cash flows related to an AFS debt security, the security is placed on nonaccrual status and the Company reverses accrued interest receivable against interest income. Since the nonaccrual policy results in a timely reversal of accrued interest receivable, the Company does not record an allowance for credit losses on accrued interest receivable.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting allowance is recognized in income (loss) and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security at the date of acquisition. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security.
Write-offs of AFS debt securities are recorded when all or a portion of a financial asset is deemed uncollectible. Full or partial write-offs are recorded as reductions to the amortized cost basis of the AFS debt security and deducted from the allowance in the period in which the financial assets are deemed uncollectible. The Company elected to reverse accrued interest deemed uncollectible as a reversal of interest income. In instances where the Company collects cash that it has previously written off, the recovery will be recognized through earnings or as a reduction of the amortized cost basis for interest and principal, respectively.
Real estate held for the production of income is stated at depreciated cost less allowance for credit losses. Depreciation of real estate held for production of income is computed using the straight-line method over the estimated useful lives of the properties, which generally range from 40 to 50 years.
Policy loans represent funds loaned to policyholders up to the cash surrender value of the associated insurance policies and are carried at the unpaid principal balances due to the Company from the policyholders. Interest income on policy loans is recognized in net investment income at the contract interest rate when earned. Policy loans are fully collateralized by the cash surrender value of the associated insurance policies.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Partnerships, investment companies and joint venture interests that the Company has control of and has an economic interest in or those that meet the requirements for consolidation under accounting guidance for consolidation of VIEs are consolidated. Those that the Company does not have control of and does not have a majority economic interest in and those that do not meet the VIE requirements for consolidation are reported on the equity method of accounting and are reported in other equity investments. The Company records its interests in certain of these partnerships on a month or one quarter lag.
Trading securities, which include equity securities and fixed maturities, are carried at fair value based on quoted market prices, with realized and unrealized gains (losses) reported in net investment income (loss) in the consolidated statements of income (loss).
Corporate owned life insurance (“COLI”) has been purchased by the Company and certain subsidiaries on the lives of certain key employees and the Company and these subsidiaries are named as beneficiaries under these policies. COLI is carried at the cash surrender value of the policies. At September 30, 2020 and December 31, 2019, the carrying value of COLI was $962 million and $942 million, respectively, and is reported in Other invested assets in the consolidated balance sheets.
Cash and cash equivalents includes cash on hand, demand deposits, money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less. Due to the short-term nature of these investments, the recorded value is deemed to approximate fair value.
All securities owned, including U.S. government and agency securities, mortgage-backed securities, futures and forwards transactions, are reported in the consolidated financial statements on a trade-date basis.
Mortgage Loans on Real Estate
Mortgage loans are stated at unpaid principal balances, net of unamortized discounts and the allowance for credit losses. The Company calculates the allowance for credit losses in accordance with the CECL model in order to provide for the risk of credit losses in the lending process.
Expected credit losses for loans with similar risk characteristics are estimated on a collective (i.e., pool) basis in order to meet CECL’s risk of loss concept which requires the Company to consider possibilities of loss, even if remote.
For collectively evaluated mortgages, the Company estimates the allowance for credit losses based on the amortized cost basis of its mortgages over their expected life using a probability of default (“PD”) / loss given default (“LGD”) model. The PD/LGD model incorporates the Company’s reasonable and supportable forecast of macroeconomic information over a specified period. The length of the reasonable and supportable forecast period is reassessed on a quarterly basis and may be adjusted as appropriate over time to be consistent with macroeconomic conditions and the environment as of the reporting date. For periods beyond the reasonable and supportable forecast period, the model reverts to historical loss information. The PD and LGD are estimated at the loan-level based on loans’ current and forecasted risk characteristics as well as macroeconomic forecasts. The PD is estimated using both macroeconomic conditions as well as individual loan risk characteristics including LTV ratios, DSC ratios, seasoning, collateral type, geography, and underlying credit. The LGD is driven primarily by the type and value of collateral, and secondarily by expected liquidation costs and time to recovery.
The CECL model is configured to the Company’s specifications and takes into consideration the detailed risk attributes of each discrete loan in the mortgage portfolio which include, but are not limited to the following:
•Loan-to-value (“LTV”) ratio - Derived from current loan balance divided by the fair market value of the property. An LTV ratio in excess of 100% indicates an underwater mortgage.
•Debt service coverage (“DSC”) ratio - Derived from actual operating earnings divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt.
•Occupancy - Criteria varies by property type but low or below market occupancy is an indicator of sub-par property performance.
•Lease expirations - The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor.
•Other - Any other factors such as maturity, borrower/tenant related issues, payment status, property condition, or current economic conditions may call into question the performance of the loan.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Mortgage loans that do not share similar risk characteristics with other loans in the portfolio are individually evaluated quarterly by the Company’s IUS Committee. The allowance for credit losses on these individually evaluated mortgages is a loan-specific reserve as a result of the loan review process that is recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral. The individually assessed allowance for mortgage loans can increase or decrease from period to period based on such factors.
Individually assessed loans may include, but are not limited to, mortgages that have deteriorated in credit quality such as troubled debt restructurings (“TDR”) and reasonably expected TDRs, mortgages for which foreclosure is probable, and mortgages which have been classified as “potential problem” or “problem” loans within the Company’s IUS Committee processes as described below.
Within the IUS process, Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem loans. Based on its monthly monitoring of mortgages, a class of potential problem loans are also identified, consisting of mortgage loans not currently classified as problem loans but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being modified. The decision whether to classify a performing mortgage loan as a potential problem involves judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
Individually assessed mortgage loans without provision for losses are mortgage loans where the fair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on mortgage loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on mortgage loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows.
Mortgage loans are placed on nonaccrual status once management believes the collection of accrued interest is not probable. Once mortgage loans are classified as nonaccrual mortgage loans, interest income is recognized under the cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured to where the collection of interest is considered likely. The Company charges off loan balances and accrued interest that are deemed uncollectible.
The components of amortized cost for mortgage loans on the consolidated balance sheets excludes accrued interest amounts because the Company presents accrued interest receivables within Other assets. Once mortgage loans are placed on nonaccrual status, the Company reverses accrued interest receivable against interest income. Since the nonaccrual policy results in the timely reversal of accrued interest receivable, the Company does not record an allowance for credit losses on accrued interest receivable.
Troubled Debt Restructuring
The Company invests in commercial and agricultural mortgage loans included in the balance sheet as Mortgage loans on real estate and privately negotiated fixed maturities included in the balance sheet as Fixed maturities AFS. Under certain circumstances, modifications are granted to these contracts. Each modification is evaluated as to whether a troubled debt restructuring has occurred. A modification is a troubled debt restructuring when the borrower is in financial difficulty and the creditor makes concessions. Generally, the types of concessions may include reducing the face amount or maturity amount of the debt as originally stated, reducing the contractual interest rate, extending the maturity date at an interest rate lower than current market interest rates and/or reducing accrued interest. The Company considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific credit allowance recorded in connection with the troubled debt restructuring. A credit allowance may have been recorded prior to the quarter when the loan is modified in a troubled debt restructuring. Accordingly, the carrying value (net of the allowance) before and after modification through a troubled debt restructuring may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.
Net Investment Income (Loss), Investment Gains (Losses), Net, and Unrealized Investment Gains (Losses)
Realized investment gains (losses) are determined by identification with the specific asset and are presented as a component of revenue. Changes in the allowance for credit losses are included in Investment gains (losses), net.
Realized and unrealized holding gains (losses) on trading and equity securities are reflected in Net investment income (loss).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Unrealized investment gains (losses) on fixed maturities designated as AFS held by the Company are accounted for as a separate component of AOCI, net of related deferred income taxes, as are amounts attributable to certain pension operations, Closed Block’s policyholders’ dividend obligation, insurance liability loss recognition, DAC related to UL policies, investment-type products and participating traditional life policies.
Changes in unrealized gains (losses) reflect changes in fair value of only those fixed maturities classified as AFS and do not reflect any change in fair value of policyholders’ account balances and future policy benefits.
Accounting and Consolidation of Variable Interest EntitiesVIEs
For all new investment products and entities developed by the Company (other than Collateralized Debt Obligations (“VIEs”CDOs”)), the Company first determines whether the entity is a VIE, which involves determining an entity’s variability and variable interests, identifying the holders of the equity investment at risk and assessing the five characteristics of a VIE. Once an entity has been determined to be a VIE, the Company then identifies the primary beneficiary of the VIE. If the Company is deemed to be the primary beneficiary of the VIE, then the Company consolidates the entity.
Management of the Company reviews quarterly its investment management agreements and its investments in, and other financial arrangements with, certain entities that hold client assets under management (“AUM”) to determine the entities that the Company is required to consolidate under this guidance. These entities include certain mutual fund products, hedge funds, structured products, group trusts, collective investment trusts and limited partnerships.
The analysis performed to identify variable interests held, determine whether entities are VIEs or voting interest entities (“VOEs”), and evaluate whether the Company has a controlling financial interest in such entities requires the exercise of judgment and is updated on a continuous basis as circumstances change or new entities are developed. The primary beneficiary evaluation generally is performed qualitatively based on all facts and circumstances, including consideration of economic interests in the VIE held directly and indirectly through related parties and entities under common control, as well as quantitatively, as appropriate.
Consolidated VIEs
At September 30, 2020 and December 31, 2019, the Company consolidated 1 real estate joint venture for which it was identified as the primary beneficiary under the VIE model. The consolidated entity is jointly owned by Equitable Financial and AXA France and holds an investment in a real estate venture. Included in Other invested assets in the Company’s consolidated balance sheets at September 30, 2020 and December 31, 2019 are total assets of $31 million and $32 million, respectively related to this VIE, primarily resulting from the consolidated presentation of this real estate joint venture as real estate held for sale. Redeemable noncontrolling interests are presented in mezzanine equity and non-redeemable noncontrolling interests are presented within permanent equity.
Non-Consolidated VIEs
At September 30, 2020 and December 31, 2019, respectively, the Company held approximately $1.2 billion and $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. Additionally, as of September 30, 2020, Equitable Financial holds $18 million of equity interests in a newly formed Special Purpose Entity (“SPE”) established to purchase loans from the market in anticipation of a Collateralized Loan Obligation (“CLO”) transaction. 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 applyapplies the equity method of accounting for these positions. The net assets of these non-consolidated VIEs are $169.6approximately $156.6 billion and $160.2 billion at September 30, 2019.2020 and December 31, 2019, respectively. The Company’s maximum exposure to loss from its direct involvement with these VIEs is the carrying value of its investment of $1.2 billion and $1.1 billion and $865 millionapproximately $1.2 billion and $1.1 billion of unfunded commitments at September 30, 2019.2020 and December 31, 2019, respectively. 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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
In addition, at September 30, 2020 and December 31, 2019, related to this VIE is $33 million of RealOther invested assets includes real estate held for production of income. In addition, oneincome of $(4) million and $(5) million, respectively, as related to 1 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.venture.
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’sour insurance business, liabilities for future policyholder benefits, deferred policy acquisition cost (“DAC”)DAC and deferred sales inducement (“DSI”) assets. There was no material impact from model changes during
However, 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 changesCompany updates its assumptions as needed in the third quarterevent it becomes aware of 2019decreased Policy chargeseconomic conditions or events that could require a change in assumptions that it believes may have a significant impact to the carrying value of product liabilities 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 millionassets and decreased Amortizationconsequently materially impact its earnings in the period of DAC by $77the change.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
million. This resulted in a decrease in Income (loss) from operations, before incometaxesof$1.4 billion and decreased Net income (loss) by $1.1 billion.Annual Update
The net impact of assumption changes in the third quarter of 20182020 decreased Policy charges and fee income by $12$21 million, decreasedincreased Policyholders’ benefits by $684$175 million, increased Interest credited to policyholders’ account balances by $8 million, increased Net derivative lossesgains by $1.1 billion$106 million, and decreased theincreased Amortization of DAC by $165$26 million. This resulted in a decrease in Income (loss) from operations, before income taxes of $228$124 million and decreased Net income (loss) by $187$98 million. Third quarter 2020 assumption updates include a pre-tax gain of $421 million attributable to the removal of the credit risk adjustment from our fair value scenario calibration to better align with U.S. valuation practices, offset by updates to our mortality and policyholder behavior assumptions to reflect emerging experience.
ReclassificationThe 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, decreased Interest credited to policyholders’ account balances by $14 million, increased Net derivative losses by $548 million and decreased Amortization of DAC Capitalization
During the fourth quarterby $77 million. This resulted in a decrease in Income (loss) from operations, before income taxes 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$1.4 billion 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 ondecreased Net income (loss) or Comprehensiveby $1.1 billion.
First Quarter Update
In the first quarter of 2020, due to the extraordinary economic conditions driven by the COVID-19 pandemic, the Company updated its interest rate assumption to grade from the current interest rate environment to an ultimate five-year historical average over a 10-year period. As such, the 10-year U.S. Treasury yield grades from the current level to an ultimate 5-year average of 2.25%. The Company determined that no assumption updates were necessary in the second quarter of 2020.
The low interest rate environment and update to the interest rate assumption caused a loss recognition event for the Company’s life interest-sensitive products, as well as to certain run-off business. This loss recognition event caused an acceleration of DAC amortization on the life interest-sensitive products and an increase in the premium deficiency reserve on the run-off business in the first quarter of 2020.
The net impact of the economic assumption update in the first quarter of 2020 increased Policy charges and fee income by $54 million, increased Policyholders’ benefits by $1.3 billion, decreased Interest credited to policyholders’ account balances by $6 million, and increased Amortization of DAC by $840 million. This resulted in a decrease in Income (loss) from continuing operations, before income taxes of $2.1 billion and decreased Net income (loss) of $1.7 billion.
Model Changes
In the first quarter of 2020, the Company adopted a new economic scenario generator to calculate the fair value of the GMIB reinsurance contract asset and GMxB derivative features liability, eliminating reliance on AXA Group for scenario production. The new economic scenario generator allows for a tighter calibration of U.S. indices, better reflecting the Company’s actual portfolio. The net impact of the new economic scenario generator resulted in an increase in Income (loss) from this reclassification.continuing operations, before income taxes of $165 million, and an increase to Net Income (loss) of $130 million during the first nine months of 2020.
Revision of Prior Period Financial Statements
The reclassification adjustmentsCompany identified certain errors in its previously issued financial statements primarily related to the calculation of actuarially determined insurance contract assets and liabilities. The impact of these errors to the current and the prior periods consolidated financial statements were not considered to be material. In order to improve the consistency and comparability of the financial statements, management revised the consolidated financial statements to include the revisions discussed herein. See Note 14 to the Notes to Consolidated Financial Statements for details of the revisions.
3) INVESTMENTS
Fixed Maturities Available-for-Sale
Accounting for credit impairments of fixed maturities classified as AFS has changed from a direct write-down, or other-than-temporary impairment (“OTTI”) approach to an allowance for credit loss model starting in 2020 upon adoption of CECL (see Note 2, Significant Accounting Policies – Investments).
The components of fair value and amortized cost for fixed maturities classified as AFS on the consolidated balance sheets excludes accrued interest receivable because the Company elected to present accrued interest receivable within Other assets. Accrued interest receivable on AFS fixed maturities at September 30, 2020 was $510 million.
There was 0 accrued interest written off for AFS fixed maturities for the three and nine months ended September 30, 2018 are presented2020.
Comparative tables as of December 31, 2019 include OTTI, reported net of tax in the table below. Capitalization of DAC reclassified to CompensationOCI 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 withinNote 15 on the consolidated statement of cash flows for the nine months ended September 30, 2018were corrected in the comparative consolidated statements of cash flows included herein. See Note 15 for further information.
3) INVESTMENTS
Fixed MaturitiesAOCI until realized.
The following tables provide information relating to the Company’s fixed maturities classified as available-for-sale (“AFS”).AFS.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Available-for-SaleAFS Fixed Maturities by Classification
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortized
Cost | | Allowance for Credit Losses (4) | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair Value |
| (in millions) |
| September 30, 2020: | | | | | | | | | |
| Fixed Maturities: | | | | | | | | | |
| Corporate (1) | $ | 47,421 | | | $ | 13 | | | $ | 4,281 | | | $ | 170 | | | $ | 51,519 | |
| U.S. Treasury, government and agency | 13,126 | | | 0 | | | 4,158 | | | 0 | | | 17,284 | |
| States and political subdivisions | 706 | | | 0 | | | 109 | | | 0 | | | 815 | |
| Foreign governments | 828 | | | 0 | | | 80 | | | 6 | | | 902 | |
| Residential mortgage-backed (2) | 132 | | | 0 | | | 13 | | | 0 | | | 145 | |
| Asset-backed (3) | 2,584 | | | 0 | | | 25 | | | 18 | | | 2,591 | |
| Commercial mortgage-backed | 1,067 | | | 0 | | | 50 | | | 0 | | | 1,117 | |
| Redeemable preferred stock | 413 | | | 0 | | | 31 | | | 3 | | | 441 | |
| Total at September 30, 2020 | $ | 66,277 | | | $ | 13 | | | $ | 8,747 | | | $ | 197 | | | $ | 74,814 | |
| | | | | | | | | |
| December 31, 2019: | | | | | | | | | |
| Fixed Maturities: | | | | | | | | | |
| Corporate (1) | $ | 42,347 | | | $ | 0 | | | $ | 2,178 | | | $ | 61 | | | $ | 44,464 | |
| U.S. Treasury, government and agency | 14,385 | | | 0 | | | 1,151 | | | 305 | | | 15,231 | |
| States and political subdivisions | 584 | | | 0 | | | 68 | | | 3 | | | 649 | |
| Foreign governments | 460 | | | 0 | | | 35 | | | 5 | | | 490 | |
| Residential mortgage-backed (2) | 161 | | | 0 | | | 12 | | | 0 | | | 173 | |
| Asset-backed (3) | 843 | | | 0 | | | 3 | | | 2 | | | 844 | |
| Redeemable preferred stock | 498 | | | 0 | | | 18 | | | 5 | | | 511 | |
| Total at December 31, 2019 | $ | 59,278 | | | $ | 0 | | | $ | 3,465 | | | $ | 381 | | | $ | 62,362 | |
|
| | | | | | | | | | | | | | | | | | | |
| | 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 include both public and private issues.
| |
(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). |
(2)Includes publicly traded agency pass-through securities and collateralized obligations.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
(3)Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans.
(4)Amounts represent the allowance for credit losses for 2020 - (see Note 2 Significant Accounting Policies - Investments).
The contractual maturities of AFS fixed maturities at September 30, 20192020 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-SaleAFS Fixed Maturities
| | | | | | | | | | | |
| Amortized Cost (Less Allowance for Credit Losses) | | Fair Value |
| | (in millions) |
| September 30, 2020: | | | |
| Contractual maturities: | | | |
| Due in one year or less | $ | 4,094 | | | $ | 4,126 | |
| Due in years two through five | 14,862 | | | 15,722 | |
| Due in years six through ten | 16,872 | | | 18,691 | |
| Due after ten years | 26,240 | | | 31,981 | |
| Subtotal | 62,068 | | | 70,520 | |
| Residential mortgage-backed | 132 | | | 145 | |
| Asset-backed | 2,584 | | | 2,591 | |
| Commercial mortgage-backed | 1,067 | | | 1,117 | |
| Redeemable preferred stock | 413 | | | 441 | |
| Total at September 30, 2020 | $ | 66,264 | | | $ | 74,814 | |
|
| | | | | | | |
| | 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 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table shows proceeds from sales, gross gains (losses) from sales and credit losses for AFS fixed maturities duringfor the three and nine months ended September 30, 20192020 and 2018:2019:
Proceeds andfrom Sales, Gross Gains (Losses) onfrom Sales and Credit Losses for Available-for-SaleAFS Fixed Maturities
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 | | |
| | (in millions) |
| Proceeds from sales | $ | 1,399 | | | $ | 3,839 | | | $ | 5,985 | | | $ | 6,756 | | | |
| Gross gains on sales | $ | 23 | | | $ | 207 | | | $ | 297 | | | $ | 224 | | | |
| Gross losses on sales | $ | (5) | | | $ | (4) | | | $ | (32) | | | $ | (25) | | | |
| | | | | | | | | |
| Credit losses (1) | $ | 0 | | | $ | 0 | | | $ | (13) | | | $ | 0 | | | |
|
| | | | | | | | | | | | | | | |
| | 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 | ) |
(1)Commencing with the Company’s adoption of ASU 2016-13 on January 1, 2020, credit losses on AFS debt securities were recognized as an allowance for credit losses. Prior to this, credit losses on AFS fixed maturities were recognized as OTTI.
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:amounts.
Available-for-SaleAFS Fixed Maturities - Credit Loss Impairments
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Balance, beginning of period | $ | 28 | | | $ | 18 | | | $ | 15 | | | $ | 46 | |
| Previously recognized impairments on securities that matured, paid, prepaid or sold | 0 | | | (3) | | | 0 | | | (31) | |
| Recognized impairments on securities impaired to fair value this period (1) | 0 | | | 0 | | | 0 | | | 0 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
|
| | | | | | | | | | | | | | | |
| | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Credit losses recognized this period on securities for which credit losses were not previously recognized | (2) | | | 0 | | | 7 | | | 0 | |
| Additional credit losses this period on securities previously impaired | 2 | | | 0 | | | 6 | | | 0 | |
| Increases due to passage of time on previously recorded credit losses | 0 | | | 0 | | | 0 | | | 0 | |
| Accretion of previously recognized impairments due to increases in expected cash flows (for OTTI securities 2019 and prior) | 0 | | | 0 | | | 0 | | | 0 | |
| Balance at September 30, | $ | 28 | | | $ | 15 | | | $ | 28 | | | $ | 15 | |
______________
| |
(1) | (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 partit intends to sell the security, or it is more likely than not that it will be required to sell the security before recovery of OCI in earlier periods. the security’s amortized cost.
The tables that follow below present a roll-forward of net unrealized investment gains (losses) recognized in AOCI,:
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
split between amounts related to fixed maturities on which a credit loss has been recognized, and all other.
Net Unrealized Gains (Losses) on Available-for-SaleAFS 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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| (in millions) |
| Balance, July 1, 2020 | $ | 8,207 | | | $ | (494) | | | $ | (1,801) | | | $ | (1,242) | | | $ | 4,670 | |
| Net investment gains (losses) arising during the period | 345 | | | — | | | — | | | — | | | 345 | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in Net income (loss) | (18) | | | — | | | — | | | — | | | (18) | |
| Excluded from Net income (loss) | 0 | | | — | | | — | | | — | | | 0 | |
| Impact of net unrealized investment gains (losses) | 0 | | | 54 | | | (6) | | | (79) | | | (31) | |
| Net unrealized investment gains (losses) excluding credit losses | 8,534 | | | (440) | | | (1,807) | | | (1,321) | | | 4,966 | |
| Net unrealized investment gains (losses) with credit losses | 3 | | | 0 | | | (1) | | | 0 | | | 2 | |
| Balance, September 30, 2020 | $ | 8,537 | | | $ | (440) | | | $ | (1,808) | | | $ | (1,321) | | | $ | 4,968 | |
| | | | | | | | | |
| Balance, July 1, 2019 | $ | 2,622 | | | $ | (616) | | | $ | (98) | | | $ | (420) | | | $ | 1,488 | |
| 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) | 0 | | | — | | | — | | | — | | | 0 | |
| Impact of net unrealized investment gains (losses) | 0 | | | (324) | | | (122) | | | (156) | | | (602) | |
| Net unrealized investment gains (losses) excluding credit losses | 3,969 | | | (940) | | | (220) | | | (576) | | | 2,233 | |
| Net unrealized investment gains (losses) with credit losses (1) | 1 | | | 0 | | | 0 | | | 0 | | | 1 | |
| Balance, September 30, 2019 | $ | 3,970 | | | $ | (940) | | | $ | (220) | | | $ | (576) | | | $ | 2,234 | |
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized Gains (Losses) on Investments | | DAC | | Policyholders’ Liabilities | | Deferred Income Tax Asset (Liability) | | AOCI Gain (Loss) Related to Net Unrealized Investment Gains (Losses) |
| (in millions) |
| Balance, January 1, 2020 | $ | 3,084 | | | $ | (826) | | | $ | (192) | | | $ | (433) | | | $ | 1,633 | |
| Net investment gains (losses) arising during the period | 5,707 | | | — | | | — | | | — | | | 5,707 | |
| Reclassification adjustment: | | | | | | | | | — | |
| Included in Net income (loss) | (248) | | | — | | | — | | | — | | | (248) | |
| Excluded from Net income (loss) | 0 | | | — | | | — | | | — | | | 0 | |
| Impact of net unrealized investment gains (losses) | 0 | | | 386 | | | (1,617) | | | (889) | | | (2,120) | |
| Net unrealized investment gains (losses) excluding credit losses | 8,543 | | | (440) | | | (1,809) | | | (1,322) | | | 4,972 | |
| Net unrealized investment gains (losses) with credit losses | (6) | | | 0 | | | 1 | | | 1 | | | (4) | |
| Balance, September 30, 2020 | $ | 8,537 | | | $ | (440) | | | $ | (1,808) | | | $ | (1,321) | | | $ | 4,968 | |
| | | | | | | | | |
| Balance, January 1, 2019 | $ | (577) | | | $ | 37 | | | $ | (69) | | | $ | 125 | | | $ | (484) | |
| 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) | 0 | | | — | | | — | | | — | | | 0 | |
| Impact of net unrealized investment gains (losses) | 0 | | | (977) | | | (151) | | | (701) | | | (1,829) | |
| Net unrealized investment gains (losses) excluding credit losses | 3,969 | | | (940) | | | (220) | | | (576) | | | 2,233 | |
| Net unrealized investment gains (losses) with credit losses (1) | 1 | | | 0 | | | 0 | | | 0 | | | 1 | |
| Balance, September 30, 2019 | $ | 3,970 | | | $ | (940) | | | $ | (220) | | | $ | (576) | | | $ | 2,234 | |
______________
|
| | | | | | | | | | | | | | | | | | | |
| | 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 securities709 issues at September 30, 20192020 and the 1,471 securities390 issues at December 31, 20182019 that are not deemed to be other-than-temporarily impaired,have credit losses, 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:
AFS Fixed Maturities in an Unrealized Loss Position for Which No Allowance Is Recorded
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2020: | | | | | | | | | | | |
| Fixed Maturities: | | | | | | | | | | | |
| Corporate | $ | 4,063 | | | $ | 116 | | | $ | 365 | | | $ | 49 | | | $ | 4,428 | | | $ | 165 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Foreign governments | 88 | | | 1 | | | 31 | | | 5 | | | 119 | | | 6 | |
| | | | | | | | | | | |
| Asset-backed | 1,324 | | | 16 | | | 74 | | | 2 | | | 1,398 | | | 18 | |
| | | | | | | | | | | |
| Redeemable preferred stock | 59 | | | 1 | | | 11 | | | 2 | | | 70 | | | 3 | |
| Total at September 30, 2020 | $ | 5,534 | | | $ | 134 | | | $ | 481 | | | $ | 58 | | | $ | 6,015 | | | $ | 192 | |
| | | | | | | | | | | |
| December 31, 2019: (1) | | | | | | | | | | | |
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) |
| Fixed Maturities: | | | | | | | | | | | |
| Corporate | $ | 2,669 | | | $ | 41 | | | $ | 366 | | | $ | 20 | | | $ | 3,035 | | | $ | 61 | |
| U.S. Treasury, government and agency | 4,245 | | | 305 | | | 2 | | | 0 | | | 4,247 | | | 305 | |
| States and political subdivisions | 123 | | | 3 | | | 0 | | | 0 | | | 123 | | | 3 | |
| Foreign governments | 11 | | | 0 | | | 47 | | | 5 | | | 58 | | | 5 | |
| | | | | | | | | | | |
| Asset-backed | 319 | | | 0 | | | 201 | | | 2 | | | 520 | | | 2 | |
| | | | | | | | | | | |
| Redeemable preferred stock | 29 | | | 0 | | | 49 | | | 5 | | | 78 | | | 5 | |
| Total at December 31, 2019 | $ | 7,396 | | | $ | 349 | | | $ | 665 | | | $ | 32 | | | $ | 8,061 | | | $ | 381 | |
Continuous Gross Unrealized Losses______________
(1)Amounts represents fixed maturities in an unrealized loss position that are not deemed to be OTTI for Available-for-Sale Fixed Maturities2019.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 20192020 and December 31, 20182019 were $278$321 million and $210$279 million, respectively, representing 2.1%2.2% and 1.7%2.4% of the consolidated equity of the CompanyCompany.
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, 20192020 and December 31, 2018,2019, respectively, approximately $2.0 billion and $1.4 billion, or 3.0% and $1.2 billion, or 2.4% and 2.9%2.3%, of the $57.5$66.3 billion and $42.5$59.3 billion aggregate amortized cost of fixed maturities held by the Company were considered to be other than investment grade. These securities had gross unrealized losses of $21$81 million and $30$21 million at September 30, 20192020 and December 31, 2018,2019, respectively.
At September 30, 20192020 and December 31, 2018,2019, respectively, the $35$58 million and $795$32 million of gross unrealized losses of twelve months or more were primarily concentrated in corporate and U.S. Treasury, government and agency securities.securities, as applicable. In accordance with the policy described in Note 2, the Company concluded that an adjustment to income for OTTI (prior to January 1, 2020) nor an allowance for credit losses (after January 1, 2020) for these securities was not warranted at either September 30, 20192020 or 2018.December 31, 2019. At September 30, 20192020 and December 31, 2018,2019, 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.
Based on the Company’s evaluation both qualitatively and quantitatively of the drivers of the decline in fair value of fixed maturity securities as of September 30, 2020, the Company determined that the unrealized loss was primarily due to increases in credit spreads and changes in credit ratings due to the impact of the COVID-19 pandemic on financial markets and assessments of fundamental risks.
Mortgage Loans on Real Estate
Accrued interest receivable on commercial and agricultural mortgage loans at September 30, 2020 was $29 million and $32 million, respectively. There was 0 accrued interest written off for commercial and agricultural mortgage loans for the three and nine months ended September 30, 2020.
At September 30, 20192020, the Company had 0 loans for which foreclosure was probable included within the individually assessed mortgage loans, 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
accordingly had 0 associated allowance for credit losses.
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
Allowance for Credit Losses on Mortgage Loans
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)The change in the Consolidated Statements of Income (Loss). The table below shows a breakdown of Net investment income (loss) from trading account securitiesallowance for credit losses for commercial mortgage loans and agricultural mortgage loans during the three and nine months ended September 30, 2019 and 2018:2020 was as follows:
Net Investment Income (Loss) from Trading Account Securities | | | | | | | | | | | | | |
| Three Months Ended September 30, 2020 | | Nine Months Ended September 30, 2020 | | |
| | | | | |
| (in millions) |
| Allowance for credit losses on mortgage loans (1): | | | | | |
| Commercial mortgages: | | | | | |
| Balance, beginning of period | $ | 62 | | | $ | 33 | | | |
| Current-period provision for expected credit losses | 4 | | | 33 | | | |
| Write-offs charged against the allowance | 0 | | | 0 | | | |
| Recoveries of amounts previously written off | 0 | | | 0 | | | |
| Net change in allowance | 4 | | | 33 | | | |
| Ending Balance, September 30, | $ | 66 | | | $ | 66 | | | |
| | | | | |
| Agricultural mortgages: | | | | | |
| Balance, beginning of period | $ | 4 | | | $ | 3 | | | |
| Current-period provision for expected credit losses | 0 | | | 1 | | | |
| Write-offs charged against the allowance | 0 | | | 0 | | | |
| Recoveries of amounts previously written off | 0 | | | 0 | | | |
| Net change in allowance | 0 | | | 1 | | | |
| Ending Balance, September 30, | $ | 4 | | | $ | 4 | | | |
| | | | | |
| Total allowance for credit losses | $ | 70 | | | $ | 70 | | | |
|
| | | | | | | | | | | | | | | |
| | 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(1) See Note 2 for discussion of the allowance of credit losses transition balance, which is included in the Balance, beginning of period.
The payment terms of mortgage loans may from time to time be restructured or modified.
At September 30, 2019 and December 31, 2018,change in the carrying values of problem commercial mortgage loans on real estate that had been classified as non-accrual loans were $– and $19 million, respectively.
Allowancesallowance for credit losses for commercialis attributable to:
•increases/decreases in the loan balance due to new originations, maturing mortgages, and loan amortization;
•changes in credit quality; and
•changes in market assumptions primarily related to COVID-19 driven economic changes.
Credit Quality Information
The following tables summarize the Company’s mortgage loans were $– and $7 million for the nine months endedsegregated by risk rating exposure at September 30, 2019 and 2018, respectively. There were no allowances2020.
LTV Ratios (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2020 |
| Amortized Cost Basis by Origination Year |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| (in millions) |
| Mortgage loans: | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | |
| 0% - 50% | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 324 | | | $ | 170 | | | $ | 650 | | | $ | 1,144 | |
| 50% - 70% | 935 | | | 411 | | | 885 | | | 760 | | | 2,432 | | | 1,608 | | | 7,031 | |
| 70% - 90% | 90 | | | 394 | | | 368 | | | 115 | | | 153 | | | 574 | | | 1,694 | |
| 90% plus | 0 | | | 0 | | | 12 | | | 5 | | | 0 | | | 216 | | | 233 | |
| Total commercial | $ | 1,025 | | | $ | 805 | | | $ | 1,265 | | | $ | 1,204 | | | $ | 2,755 | | | $ | 3,048 | | | $ | 10,102 | |
| | | | | | | | | | | | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2020 |
| Amortized Cost Basis by Origination Year |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| (in millions) |
| Agricultural: | | | | | | | | | | | | | |
| 0% - 50% | $ | 181 | | | $ | 137 | | | $ | 168 | | | $ | 161 | | | $ | 232 | | | $ | 679 | | | $ | 1,558 | |
| 50% - 70% | 253 | | | 131 | | | 172 | | | 110 | | | 136 | | | 372 | | | 1,174 | |
| 70% - 90% | 0 | | | 0 | | | 3 | | | 0 | | | 0 | | | 18 | | | 21 | |
| 90% plus | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total agricultural | $ | 434 | | | $ | 268 | | | $ | 343 | | | $ | 271 | | | $ | 368 | | | $ | 1,069 | | | $ | 2,753 | |
| | | | | | | | | | | | | |
| Total mortgage loans: | | | | | | | | | | | | | |
| 0% - 50% | $ | 181 | | | $ | 137 | | | $ | 168 | | | $ | 485 | | | $ | 402 | | | $ | 1,329 | | | $ | 2,702 | |
| 50% - 70% | 1,188 | | | 542 | | | 1,057 | | | 870 | | | 2,568 | | | 1,980 | | | 8,205 | |
| 70% - 90% | 90 | | | 394 | | | 371 | | | 115 | | | 153 | | | 592 | | | 1,715 | |
| 90% plus | 0 | | | 0 | | | 12 | | | 5 | | | 0 | | | 216 | | | 233 | |
| Total mortgage loans | $ | 1,459 | | | $ | 1,073 | | | $ | 1,608 | | | $ | 1,475 | | | $ | 3,123 | | | $ | 4,117 | | | $ | 12,855 | |
Debt Service Coverage Ratios (2)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| At September 30, 2020 |
| Amortized Cost Basis by Origination Year |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| (in millions) |
| Mortgage loans: | | | | | | | | | | | | | |
| Commercial: | | | | | | | | | | | | | |
| Greater than 2.0x | $ | 749 | | | $ | 492 | | | $ | 772 | | | $ | 268 | | | $ | 2,036 | | | $ | 1,268 | | | $ | 5,585 | |
| 1.8x to 2.0x | 227 | | | 77 | | | 118 | | | 378 | | | 184 | | | 524 | | | 1,508 | |
| 1.5x to 1.8x | 49 | | | 138 | | | 186 | | | 480 | | | 437 | | | 569 | | | 1,859 | |
| 1.2x to 1.5x | 0 | | | 56 | | | 154 | | | 78 | | | 97 | | | 533 | | | 918 | |
| 1.0x to 1.2x | 0 | | | 42 | | | 35 | | | 0 | | | 1 | | | 82 | | | 160 | |
| Less than 1.0x | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 72 | | | 72 | |
| Total commercial | $ | 1,025 | | | $ | 805 | | | $ | 1,265 | | | $ | 1,204 | | | $ | 2,755 | | | $ | 3,048 | | | $ | 10,102 | |
| | | | | | | | | | | | | |
| Agricultural | | | | | | | | | | | | | |
| Greater than 2.0x | $ | 52 | | | $ | 27 | | | $ | 39 | | | $ | 38 | | | $ | 73 | | | $ | 158 | | | $ | 387 | |
| 1.8x to 2.0x | 33 | | | 36 | | | 14 | | | 15 | | | 21 | | | 90 | | | 209 | |
| 1.5x to 1.8x | 103 | | | 38 | | | 45 | | | 41 | | | 52 | | | 212 | | | 491 | |
| 1.2x to 1.5x | 165 | | | 118 | | | 146 | | | 105 | | | 147 | | | 327 | | | 1,008 | |
| 1.0x to 1.2x | 77 | | | 39 | | | 91 | | | 71 | | | 57 | | | 265 | | | 600 | |
| Less than 1.0x | 4 | | | 10 | | | 8 | | | 1 | | | 18 | | | 17 | | | 58 | |
| Total agricultural | $ | 434 | | | $ | 268 | | | $ | 343 | | | $ | 271 | | | $ | 368 | | | $ | 1,069 | | | $ | 2,753 | |
| | | | | | | | | | | | | |
| Total mortgage loans | | | | | | | | | | | | | |
| Greater than 2.0x | $ | 801 | | | $ | 519 | | | $ | 811 | | | $ | 306 | | | $ | 2,109 | | | $ | 1,426 | | | $ | 5,972 | |
| 1.8x to 2.0x | 260 | | | 113 | | | 132 | | | 393 | | | 205 | | | 614 | | | 1,717 | |
| 1.5x to 1.8x | 152 | | | 176 | | | 231 | | | 521 | | | 489 | | | 781 | | | 2,350 | |
| 1.2x to 1.5x | 165 | | | 174 | | | 300 | | | 183 | | | 244 | | | 860 | | | 1,926 | |
| 1.0x to 1.2x | 77 | | | 81 | | | 126 | | | 71 | | | 58 | | | 347 | | | 760 | |
| Less than 1.0x | 4 | | | 10 | | | 8 | | | 1 | | | 18 | | | 89 | | | 130 | |
| Total mortgage loans | $ | 1,459 | | | $ | 1,073 | | | $ | 1,608 | | | $ | 1,475 | | | $ | 3,123 | | | $ | 4,117 | | | $ | 12,855 | |
_____________
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
(1)The LTV ratio is derived from current loan balance divided by the fair value of the property. The fair value of the underlying commercial properties is updated annually for credit losses for agriculturaleach mortgage loans forloan.
(2)The DSC ratio is calculated using the nine months ended September 30, 2019 and 2018.most recently reported operating income results from property operations divided by annual debt service.
The following tables provide information relating to the loan-to-valueLTV and debt service coverageDSC ratios for commercial and agricultural mortgage loans at September 30, 20192020 and December 31, 2018.2019. 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-ValueLTV and Debt Service CoverageDSC Ratios
| | | | | | | | | | | | | | | | | | DSC Ratio (2) (3) |
| LTV Ratio (1) (3): | | LTV Ratio (1) (3): | Greater than 2.0x | | 1.8x to 2.0x | | 1.5x to 1.8x | | 1.2x to 1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total |
| | Debt Service Coverage Ratio (1) | | Total Mortgage Loans | | (in millions) |
| 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: | | | | | | | | | | | | | | |
| September 30, 2020: | | September 30, 2020: | |
| Mortgage loans: | | Mortgage loans: | |
| Commercial: | | Commercial: | |
| 0% - 50% | $ | 794 |
| | $ | 39 |
| | $ | 215 |
| | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 1,072 |
| 0% - 50% | $ | 935 | | | $ | 0 | | | $ | 185 | | | $ | 24 | | | $ | 0 | | | $ | 0 | | | $ | 1,144 | |
| 50% - 70% | 4,296 |
| | 1,041 |
| | 1,255 |
| | 769 |
| | 208 |
| | — |
| | 7,569 |
| 50% - 70% | 3,992 | | | 1,160 | | | 1,342 | | | 511 | | | 26 | | | 0 | | | 7,031 | |
| 70% - 90% | 158 |
| | 110 |
| | 70 |
| | 98 |
| | 142 |
| | — |
| | 578 |
| 70% - 90% | 574 | | | 348 | | | 332 | | | 306 | | | 134 | | | 0 | | | 1,694 | |
| 90% plus | — |
| | — |
| | 46 |
| | — |
| | — |
| | — |
| | 46 |
| 90% plus | 84 | | | 0 | | | 0 | | | 77 | | | 0 | | | 72 | | | 233 | |
| Total Commercial Mortgage Loans | $ | 5,248 |
| | $ | 1,190 |
| | $ | 1,586 |
| | $ | 891 |
| | $ | 350 |
| | $ | — |
| | $ | 9,265 |
| |
| Total commercial | | Total commercial | $ | 5,585 | | | $ | 1,508 | | | $ | 1,859 | | | $ | 918 | | | $ | 160 | | | $ | 72 | | | $ | 10,102 | |
| | Agricultural: | | Agricultural: | |
| 0% - 50% | | 0% - 50% | $ | 283 | | | $ | 107 | | | $ | 271 | | | $ | 529 | | | $ | 335 | | | $ | 33 | | | $ | 1,558 | |
| 50% - 70% | | 50% - 70% | 104 | | | 100 | | | 220 | | | 460 | | | 265 | | | 25 | | | 1,174 | |
| 70% - 90% | | 70% - 90% | 0 | | | 2 | | | 0 | | | 19 | | | 0 | | | 0 | | | 21 | |
| 90% plus | | 90% plus | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total agricultural | | Total agricultural | $ | 387 | | | $ | 209 | | | $ | 491 | | | $ | 1,008 | | | $ | 600 | | | $ | 58 | | | $ | 2,753 | |
| | Total mortgage loans: | | Total mortgage loans: | |
| 0% - 50% | | 0% - 50% | $ | 1,218 | | | $ | 107 | | | $ | 456 | | | $ | 553 | | | $ | 335 | | | $ | 33 | | | $ | 2,702 | |
| 50% - 70% | | 50% - 70% | 4,096 | | | 1,260 | | | 1,562 | | | 971 | | | 291 | | | 25 | | | 8,205 | |
| 70% - 90% | | 70% - 90% | 574 | | | 350 | | | 332 | | | 325 | | | 134 | | | 0 | | | 1,715 | |
| 90% plus | | 90% plus | 84 | | | 0 | | | 0 | | | 77 | | | 0 | | | 72 | | | 233 | |
| Total mortgage loans | | Total mortgage loans | $ | 5,972 | | | $ | 1,717 | | | $ | 2,350 | | | $ | 1,926 | | | $ | 760 | | | $ | 130 | | | $ | 12,855 | |
| | December 31, 2019: | | December 31, 2019: | |
| Mortgage loans: | | Mortgage loans: | |
| Commercial: | | Commercial: | |
| 0% - 50% | | 0% - 50% | $ | 887 | | | $ | 38 | | | $ | 214 | | | $ | 24 | | | $ | 0 | | | $ | 0 | | | $ | 1,163 | |
| 50% - 70% | | 50% - 70% | 4,097 | | | 1,195 | | | 1,118 | | | 795 | | | 242 | | | 0 | | | 7,447 | |
| 70% - 90% | | 70% - 90% | 251 | | | 98 | | | 214 | | | 154 | | | 46 | | | 0 | | | 763 | |
| 90% plus | | 90% plus | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total commercial | | Total commercial | $ | 5,235 | | | $ | 1,331 | | | $ | 1,546 | | | $ | 973 | | | $ | 288 | | | $ | 0 | | | $ | 9,373 | |
|
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | DSC Ratio (2) (3) |
| LTV Ratio (1) (3): | | LTV Ratio (1) (3): | Greater than 2.0x | | 1.8x to 2.0x | | 1.5x to 1.8x | | 1.2x to 1.5x | | 1.0x to 1.2x | | Less than 1.0x | | Total |
| | Debt Service Coverage Ratio (1) | | Total Mortgage Loans | | (in millions) |
| 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: | | | | | | | | | | | | | | |
| Agricultural: | | Agricultural: | |
| 0% - 50% | $ | 291 |
| | $ | 108 |
| | $ | 257 |
| | $ | 568 |
| | $ | 327 |
| | $ | 45 |
| | $ | 1,596 |
| 0% - 50% | $ | 322 | | | $ | 104 | | | $ | 241 | | | $ | 545 | | | $ | 321 | | | $ | 50 | | | $ | 1,583 | |
| 50% - 70% | 106 |
| | 81 |
| | 240 |
| | 403 |
| | 263 |
| | 32 |
| | 1,125 |
| 50% - 70% | 82 | | | 87 | | | 236 | | | 426 | | | 251 | | | 33 | | | 1,115 | |
| 70% - 90% | — |
| | — |
| | — |
| | 19 |
| | — |
| | — |
| | 19 |
| 70% - 90% | 0 | | | 0 | | | 0 | | | 19 | | | 0 | | | 0 | | | 19 | |
| 90% plus | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| 90% plus | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| Total Agricultural Mortgage Loans | $ | 397 |
| | $ | 189 |
| | $ | 497 |
| | $ | 990 |
| | $ | 590 |
| | $ | 77 |
| | $ | 2,740 |
| |
| Total agricultural | | Total agricultural | $ | 404 | | | $ | 191 | | | $ | 477 | | | $ | 990 | | | $ | 572 | | | $ | 83 | | | $ | 2,717 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Mortgage Loans: | | | | | | | | | | | | | | |
| Total mortgage loans: | | Total mortgage loans: | |
| 0% - 50% | $ | 1,085 |
| | $ | 147 |
| | $ | 472 |
| | $ | 592 |
| | $ | 327 |
| | $ | 45 |
| | $ | 2,668 |
| 0% - 50% | $ | 1,209 | | | $ | 142 | | | $ | 455 | | | $ | 569 | | | $ | 321 | | | $ | 50 | | | $ | 2,746 | |
| 50% - 70% | 4,402 |
| | 1,122 |
| | 1,495 |
| | 1,172 |
| | 471 |
| | 32 |
| | 8,694 |
| 50% - 70% | 4,179 | | | 1,282 | | | 1,354 | | | 1,221 | | | 493 | | | 33 | | | 8,562 | |
| 70% - 90% | 158 |
| | 110 |
| | 70 |
| | 117 |
| | 142 |
| | — |
| | 597 |
| 70% - 90% | 251 | | | 98 | | | 214 | | | 173 | | | 46 | | | 0 | | | 782 | |
| 90% plus | — |
| | — |
| | 46 |
| | — |
| | — |
| | — |
| | 46 |
| 90% plus | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| 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 |
| |
| Total mortgage loans | | Total mortgage loans | $ | 5,639 | | | $ | 1,522 | | | $ | 2,023 | | | $ | 1,963 | | | $ | 860 | | | $ | 83 | | | $ | 12,090 | |
______________
| |
(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. |
(1)The LTV ratio is derived from current loan balance divided by the fair value of the property. The fair value of the underlying commercial properties is updated annually for each mortgage loan.
(2)The DSC ratio is calculated using the most recently reported operating income results from property operations divided by annual debt service.
(3)Amounts presented at amortized cost basis.
Past-Due and Nonaccrual Mortgage Loan Status
The following table provides information relating to the aging analysis of past duepast-due mortgage loans at September 30, 20192020 and December 31, 2018.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2019, respectively:
Age Analysis of Past Due Mortgage Loans (1)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Accruing Loans | | Non-accruing Loans | | Total Loans | | Non-accruing Loans with No Allowance | | Interest Income on Non-accruing Loans(2) |
| Past Due | | Current | | Total | |
| 30-59 Days | | 60-89 Days | | 90 Days or More | | Total |
| (in millions) |
| September 30, 2020: | | | | | | | | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | | | | | | | |
| Commercial | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 10,102 | | | $ | 10,102 | | | $ | 0 | | | $ | 10,102 | | | $ | 0 | | | $ | 0 | |
| Agricultural | 24 | | | 6 | | | 135 | | | 165 | | | 2,588 | | | 2,753 | | | 0 | | | 2,753 | | | 0 | | | 0 | |
| Total | $ | 24 | | | $ | 6 | | | $ | 135 | | | $ | 165 | | | $ | 12,690 | | | $ | 12,855 | | | $ | 0 | | | $ | 12,855 | | | $ | 0 | | | $ | 0 | |
| December 31, 2019: | | | | | | | | | | | | | | | | | | | |
| Mortgage loans: | | | | | | | | | | | | | | | | | | | |
| Commercial | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 9,373 | | | $ | 9,373 | | | $ | 0 | | | $ | 9,373 | | | $ | 0 | | | $ | 0 | |
| Agricultural | 57 | | | 1 | | | 66 | | | 124 | | | 2,593 | | | 2,717 | | | 0 | | | 2,717 | | | 0 | | | 0 | |
| Total | $ | 57 | | | $ | 1 | | | $ | 66 | | | $ | 124 | | | $ | 11,966 | | | $ | 12,090 | | | $ | 0 | | | $ | 12,090 | | | $ | 0 | | | $ | 0 | |
_______________
(1)Amounts presented at amortized cost basis.
(2) Amounts for 2020 represent results for both the three and nine months ended September 30, 2020.
At September 30, 2020 and December 31, 2019, the carrying values of problem mortgage loans that had been classified as non-accrual loans were $0 million and $0 million, respectively.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 |
|
For the nine months ended September 30, 2020, the Company had 1 commercial mortgage loan on real estate accounted for as a TDR with a pre-modification cost basis of $75 million and post-modification carrying value of $75 million. The 1 commercial mortgage loan TDR is 0.07% of the Company’s total invested assets. For the nine months ended September 30, 2020, the Company had 6 new privately negotiated fixed maturity TDRs with a pre-modification cost basis of $50 million and post-modification carrying value of $44 million. These TDRs did not have subsequent payment defaults nor additional commitments to lend. The 6 privately negotiated fixed maturity TDRs are 0.04% of the Company’s total invested assets. There were no mortgage loan on real estate or fixed maturities accounted for as a TDR during 2019. Trading Securities
At September 30, 2020 and December 31, 2019, respectively, the fair value of the Company’s trading securities was $5.8 billion and $6.6 billion. At September 30, 2020 and December 31, 2019, respectively, trading securities included the General Account’s investment in Separate Accounts, which had carrying values of $37 million and $58 million.
The table below shows a breakdown of Net investment income (loss) from trading securities during the three and nine months ended September 30, 2020 and 2019:
Net Investment Income (Loss) from Trading Securities
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | |
| (in millions) |
| Net investment gains (losses) recognized during the period on securities held at the end of the period | $ | (1) | | | $ | 7 | | | $ | 86 | | | $ | 431 | | | |
| Net investment gains (losses) recognized on securities sold during the period | (5) | | | 13 | | | 12 | | | (10) | | | |
| Unrealized and realized gains (losses) on trading securities | (6) | | | 20 | | | 98 | | | 421 | | | |
| Interest and dividend income from trading securities | 58 | | | 59 | | | 152 | | | 220 | | | |
| Net investment income (loss) from trading securities | $ | 52 | | | $ | 79 | | | $ | 250 | | | $ | 641 | | | |
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. CTEscenarios (Conditional Tail Expectation, or “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.)
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
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
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 reinsurance of the GMIB features is accounted for as a derivative.
The Company has in place an economic hedge program using interest rate swaps and treasuryU.S. 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, ETFExchange Traded Funds (“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 to Hedge Universal Life Products with Secondary Guarantee (“ULSG”) Policy
The Company implemented a hedge program using fixed income total return swaps to mitigate the interest rate exposure in the ULSG policy statutory liability.
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”CDS”). Under the terms of these swaps, the Company receives quarterly fixed premiums that, together with any initial amount paid or received at trade inception, replicate the credit spread otherwise currently obtainable by purchasing the referenced entity’s bonds of similar maturity. These credit derivatives generally have remaining terms
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
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 CDSsCDS 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. The Company purchased CDS to mitigate its exposure to a reference entity through cash positions. These positions do not replicate credit spreads.
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.CDS. 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.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company purchased 30-year TIPS and other sovereign bonds, both inflation linkedinflation-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.instruments:
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Derivative Instruments by Category
| | | | | | | | | | | | At September 30, 2020 | | Nine Months Ended September 30, 2020 |
| | At September 30, 2019 | | Gains (Losses) Reported in Net Income (Loss) Nine Months Ended September 30, 2019 | | | Fair Value | |
| | | | Fair Value | | | Notional
Amount | | Derivative Assets | | Derivative Liabilities | | Net Derivative Gains (Losses) (2) |
| | Notional Amount | | Asset Derivatives | | Liability Derivatives | | | (in millions) |
| | (in millions) | |
| Freestanding Derivatives (1) (2): | | | | | | | | |
| Derivative instruments: | | Derivative instruments: | |
| Freestanding derivatives (1): | | Freestanding derivatives (1): | |
| Equity contracts: | | | | | | | | Equity contracts: | |
| Futures | $ | 6,686 |
| | $ | — |
| | $ | — |
| | $ | (967 | ) | Futures | $ | 3,739 | | | $ | 0 | | | $ | 0 | | | $ | (347) | |
| Swaps | 9,561 |
| | 81 |
| | 56 |
| | (1,263 | ) | Swaps | 20,667 | | | 27 | | | 18 | | | (594) | |
| Options | 49,081 |
| | 3,946 |
| | 1,513 |
| | 1,241 |
| Options | 31,679 | | | 5,543 | | | 2,791 | | | (480) | |
| Interest rate contracts: | | | | | | | | Interest rate contracts: | |
| Swaps | 25,781 |
| | 1,196 |
| | 382 |
| | 2,844 |
| Swaps | 23,952 | | | 1,696 | | | 338 | | | 3,588 | |
| Futures | 15,934 |
| | — |
| | — |
| | 183 |
| Futures | 19,484 | | | 0 | | | 0 | | | 2,058 | |
| Swaptions | 3,201 |
| | 196 |
| | — |
| | 146 |
| Swaptions | 0 | | | 0 | | | 0 | | | 9 | |
| Credit contracts: | | | | | | | | Credit contracts: | |
| Credit default swaps | 1,232 |
| | 19 |
| | — |
| | 13 |
| Credit default swaps | 1,252 | | | 9 | | | 4 | | | (4) | |
| Other freestanding contracts: | | | | | | | | Other freestanding contracts: | |
| Foreign currency contracts | 1,114 |
| | 5 |
| | 5 |
| | (13 | ) | Foreign currency contracts | 347 | | | 0 | | | 0 | | | (3) | |
| Margin | — |
| | — |
| | — |
| | — |
| Margin | 0 | | | 40 | | | 125 | | | 0 | |
| Collateral | — |
| | — |
| | 3,472 |
| | — |
| Collateral | 0 | | | 14 | | | 4,959 | | | 0 | |
| | | | | | | | | |
| Embedded Derivatives (2): | | | | | | | | |
| Embedded derivatives: | | Embedded derivatives: | |
GMIB reinsurance contracts | — |
| | 2,853 |
| | — |
| | 882 |
| 0 | | | 3,247 | | | 0 | | | 849 | |
GMxB derivative features liability (3)(4) | — |
| | — |
| | 9,363 |
| | (3,643 | ) | 0 | | | 0 | | | 11,985 | | | (3,382) | |
SCS, SIO, MSO and IUL indexed features (4)(5) | — |
| | — |
| | 2,178 |
| | (1,498 | ) | 0 | | | 0 | | | 2,502 | | | 410 | |
| Total | $ | 112,590 |
| | $ | 8,296 |
| | $ | 16,969 |
| | $ | (2,075 | ) | |
| Total derivative instruments | | Total derivative instruments | $ | 101,120 | | | $ | 10,576 | | | $ | 22,722 | | |
| | Net derivative gains (losses) (6) | | Net derivative gains (losses) (6) |
| |
| |
| | $ | 2,104 | |
______________
| |
(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. |
(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 GMIB reinsurance contract asset in the consolidated balance sheets.
(4)Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.
(5)Reported in Policyholders’ account balances in the consolidated balance sheets.
(6)Investment fees of $9 million are reported in Net derivative gains (losses) in the consolidated statements of income (loss).
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
Derivative Instruments by Category
| | | | | | | | | | | | | | | | | | | | | | | |
| At December 31, 2019 | | Nine Months Ended September 30, 2019 |
| | | | Fair Value | |
| | Notional
Amount | | Derivative Assets | | Derivative Liabilities | | Net Derivative Gains (Losses) (2) |
| (in millions) |
| Derivative instruments: | | | | | | | |
| Freestanding derivatives (1): | | | | | | | |
| Equity contracts: | | | | | | | |
| Futures | $ | 3,510 | | | $ | 0 | | | $ | 0 | | | $ | (967) | |
| Swaps | 17,064 | | | 9 | | | 279 | | | (1,263) | |
| Options | 47,766 | | | 5,080 | | | 1,749 | | | 1,241 | |
| Interest rate contracts: | | | | | | | |
| Swaps | 23,700 | | | 467 | | | 523 | | | 2,844 | |
| Futures | 20,424 | | | 0 | | | 0 | | | 183 | |
| Swaptions | 3,201 | | | 16 | | | 0 | | | 146 | |
| Credit contracts: | | | | | | | |
| Credit default swaps | 1,232 | | | 18 | | | 0 | | | 13 | |
| Other freestanding contracts: | | | | | | | |
| Foreign currency contracts | 501 | | | 3 | | | 0 | | | (13) | |
| Margin | 0 | | | 140 | | | 0 | | | 0 | |
| Collateral | 0 | | | 72 | | | 3,001 | | | 0 | |
| | | | | | | |
| Embedded derivatives: | | | | | | | |
| GMIB reinsurance contracts (3) | 0 | | | 2,466 | | | 0 | | | 881 | |
| GMxB derivative features liability (4) | 0 | | | 0 | | | 8,316 | | | (3,656) | |
| SCS, SIO, MSO and IUL indexed features (5) | 0 | | | 0 | | | 3,150 | | | (1,489) | |
| Total derivative instruments | $ | 117,398 | | | $ | 8,271 | | | $ | 17,018 | | | |
| | | | | | | |
| Net derivative gains (losses) |
| |
| |
| | $ | (2,080) | |
|
| | | | | | | | | | | | | | | |
| | 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.
| |
(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. |
(2)Reported in Net derivative gains (losses) in the consolidated statements of income (loss).
(3)Reported in GMIB reinsurance contract asset in the consolidated balance sheets.
(4)Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.
(5)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, 2020 and December 31, 2019 are exchange-traded and net settled daily in cash. At September 30, 2020 and December 31, 2019, respectively, 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$205 million and $58 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$314 million and $165 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$40 million and $60 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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
an ISDA Master Agreement and related CSA have been executed. At September 30, 20192020 and December 31, 2018,2019, respectively, the Company held $3.5$5.0 billion and $1.6$3.0 billion in cash and securities collateral delivered by trade counterparties, representing the fair value of the related derivative agreements. The unrestricted cash collateral is
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
reported in Other invested assets. The Company posted collateral of $–$14 million and $3$72 million at September 30, 20192020 and December 31, 2018,2019, 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, 2019.2020:
Offsetting of Financial Assets and Liabilities and Derivative Instruments
At September 30, 20192020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets | | Gross Amount not Offset in the Balance Sheets (1) | | Net Amount |
| (in millions) | | | | |
| Assets: | | | | | | | | | |
| Derivative assets | $ | 7,330 | | | $ | 7,241 | | | $ | 89 | | | $ | (54) | | | $ | 35 | |
| Other financial assets | 1,434 | | | 0 | | | 1,434 | | | 0 | | | 1,434 | |
| Other invested assets | $ | 8,764 | | | $ | 7,241 | | | $ | 1,523 | | | $ | (54) | | | $ | 1,469 | |
| | | | | | | | | |
| Liabilities: | | | | | | | | | |
| Derivative liabilities | $ | 8,181 | | | $ | 7,241 | | | $ | 940 | | | $ | 0 | | | $ | 940 | |
| Other financial liabilities | 1,579 | | | 0 | | | 1,579 | | | 0 | | | 1,579 | |
| Other liabilities | $ | 9,760 | | | $ | 7,241 | | | $ | 2,519 | | | $ | 0 | | | $ | 2,519 | |
| | | | | | | | | |
|
| | | | | | | | | | | |
| | 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.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Financial instruments sent (held).
The following table presents information about the Company’s offsetting of financial assets and liabilities and derivative instruments at December 31, 2018.2019.
Offsetting of Financial Assets and Liabilities and Derivative Instruments
At December 31, 20182019
| | | | Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets | | Gross Amount Recognized | | Gross Amount Offset in the Balance Sheets | | Net Amount Presented in the Balance Sheets | | Gross Amount not Offset in the Balance Sheets (1) | | Net Amount |
| | (in millions) | | (in millions) |
| Assets: | | | | | | Assets: | |
| Total derivatives | $ | 2,946 |
| | $ | 2,912 |
| | $ | 34 |
| |
| Derivative assets | | Derivative assets | $ | 5,804 | | | $ | 5,429 | | | $ | 375 | | | $ | (77) | | | $ | 298 | |
| Other financial instruments | 1,520 |
| | — |
| | 1,520 |
| Other financial instruments | 1,781 | | | 0 | | | 1,781 | | | 0 | | | 1,781 | |
| Other invested assets | $ | 4,466 |
| | $ | 2,912 |
| | $ | 1,554 |
| Other invested assets | $ | 7,585 | | | $ | 5,429 | | | $ | 2,156 | | | $ | (77) | | | $ | 2,079 | |
| Securities purchased under agreement to resell | $ | — |
| | $ | — |
| | $ | — |
| |
| | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | Liabilities: | |
| Total derivatives | $ | 3,109 |
| | $ | 2,912 |
| | $ | 197 |
| |
| Derivative liabilities | | Derivative liabilities | $ | 5,474 | | | $ | 5,429 | | | $ | 45 | | | $ | 0 | | | $ | 45 | |
| Other financial liabilities | 1,263 |
| | — |
| | 1,263 |
| Other financial liabilities | 1,724 | | | 0 | | | 1,724 | | | 0 | | | 1,724 | |
| Other liabilities | $ | 4,372 |
| | $ | 2,912 |
| | $ | 1,460 |
| Other liabilities | $ | 7,198 | | | $ | 5,429 | | | $ | 1,769 | | | $ | 0 | | | $ | 1,769 | |
| 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(1)Financial instruments sent (held).
5) CLOSED BLOCK
As a result of demutualization, the Company’s gross collateral amountsClosed Block was established in 1992 for the benefit of certain individual participating policies that were in force on that date. Assets, liabilities and earnings of the Closed Block are specifically identified to support its participating policyholders.
Assets allocated to the Closed Block inure solely to the benefit of the Closed Block policyholders and will not offset inrevert to the consolidated balance sheets at December 31, 2018.
Collateral Amounts Not Offset inbenefit of the Consolidated Balance Sheets
At December 31, 2018Company. No reallocation, transfer, borrowing or lending of assets can be made between the Closed Block and other portions of the Company’s General Account, any of its Separate Accounts or any affiliate of the
|
| | | | | | | | | | | | | | | |
| | 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 | ) |
33
______________ | |
(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.
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited)
Repurchase Agreement AccountedCompany without the approval of the New York State Department of Financial Services (the “NYDFS”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the General Account. For more information on the Closed Block, see Note 5 to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for as Secured Borrowings
Atthe year ended December 31, 20182019.
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| | | | | | | | | | | |
| |
| | September 30, 2020 | | December 31, 2019 |
| (in millions) |
| Closed Block Liabilities: | | | |
| Future policy benefits, policyholders’ account balances and other | $ | 6,260 | | | $ | 6,478 | |
| Policyholder dividend obligation | 149 | | | 2 | |
| Other liabilities | 58 | | | 38 | |
| Total Closed Block liabilities | 6,467 | | | 6,518 | |
| | | |
| Assets Designated to the Closed Block: | | | |
| Fixed maturities available-for-sale, at fair value (amortized cost of $3,440 and $3,558) (allowance for credit losses of $0 at September 30, 2020) | 3,788 | | | 3,754 | |
| Mortgage loans on real estate (net of allowance for credit losses of $6 at September 30, 2020) | 1,782 | | | 1,759 | |
| Policy loans | 656 | | | 706 | |
| Cash and other invested assets | 3 | | | 82 | |
| Other assets | 172 | | | 145 | |
| Total assets designated to the Closed Block | 6,401 | | | 6,446 | |
| | | |
| Excess of Closed Block liabilities over assets designated to the Closed Block | 66 | | | 72 | |
| Amounts included in accumulated other comprehensive income (loss): | | | |
| Net unrealized investment gains (losses), net of policyholders’ dividend obligation: $149 and $2; and net of income tax: $42 and $41 | 168 | | | 164 | |
| Maximum future earnings to be recognized from Closed Block assets and liabilities | $ | 234 | | | $ | 236 | |
The Company’s Closed Block revenues and expenses arewere as follows:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| 2020 | | 2019 | 2020 | | 2019 |
| (in millions) |
| Revenues: | | | | | | |
| Premiums and other income | $ | 36 | | | $ | 42 | | $ | 118 | | | $ | 136 | |
| Net investment income (loss) | 61 | | | 69 | | 190 | | | 208 | |
| Investment gains (losses), net | 1 | | | 0 | | (1) | | | (1) | |
| Total revenues | 98 | | | 111 | | 307 | | | 343 | |
| | | | | | |
| Benefits and Other Deductions: | | | | | | |
| Policyholders’ benefits and dividends | 96 | | | 108 | | 302 | | | 343 | |
| Other operating costs and expenses | 0 | | | 0 | | 1 | | | 1 | |
| Total benefits and other deductions | 96 | | | 108 | | 303 | | | 344 | |
| Net income (loss), before income taxes | 2 | | | 3 | | 4 | | | (1) | |
| Income tax (expense) benefit | (1) | | | 0 | | (2) | | | (2) | |
| Net income (loss) | $ | 1 | | | $ | 3 | | $ | 2 | | | $ | (3) | |
|
| | | | | | | | | | | | | | | |
| | 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 | ) |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued 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 nowithout a NLG feature are summarized in the tables below. The amounts for the direct contracts (before reinsurance ceded) and assumed contracts are reflected in the consolidated balance sheets in Future policy benefits and other policyholders’ liabilities. The amounts for the ceded contracts are reflected in the consolidated balance sheets in Amounts due from reinsurers.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The amounts for the ceded IB are reflected in the consolidated balance sheets in GMIB reinsurance contract asset, at fair value.
Change in Liability for Variable Annuity Contracts with GMDB and GMIB Features and No NLG Feature
For the Three and Nine Months Ended September 30, 20192020 and 20182019
| | | | | | | | | | | | | | | | | | | | | | | |
| GMDB | | GMIB |
| Direct | | Ceded | | Direct | | Ceded |
| (in millions) |
| Balance at July 1, 2020 | $ | 4,998 | | | $ | (99) | | | $ | 6,121 | | | $ | (3,433) | |
| Paid guarantee benefits | (121) | | | 3 | | | (110) | | | 21 | |
| Other changes in reserve | 235 | | | 9 | | | 113 | | | 165 | |
| Balance at September 30, 2020 | $ | 5,112 | | | $ | (87) | | | $ | 6,124 | | | $ | (3,247) | |
| | | | | | | |
| Balance at July 1, 2019 | $ | 4,709 | | | $ | (100) | | | $ | 3,757 | | | $ | (2,197) | |
| Paid guarantee benefits | (102) | | | 3 | | | (70) | | | 20 | |
| Other changes in reserve | 155 | | | (4) | | | 979 | | | (676) | |
| Balance at September 30, 2019 | $ | 4,762 | | | $ | (101) | | | $ | 4,666 | | | $ | (2,853) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| GMDB | | GMIB |
| Direct | | Ceded | | Direct | | Ceded |
| (in millions) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Balance at January 1, 2020 | $ | 4,775 | | | $ | (99) | | | $ | 4,671 | | | $ | (2,466) | |
| Paid guarantee benefits | (372) | | | 12 | | | (287) | | | 58 | |
| Other changes in reserve | 709 | | | 0 | | | 1,740 | | | (839) | |
| Balance at September 30, 2020 | $ | 5,112 | | | $ | (87) | | | $ | 6,124 | | | $ | (3,247) | |
| | | | | | | |
| Balance at January 1, 2019 | $ | 4,657 | | | $ | (107) | | | $ | 3,744 | | | $ | (1,993) | |
| Paid guarantee benefits | (328) | | | 11 | | | (182) | | | 55 | |
| Other changes in reserve | 433 | | | (5) | | | 1,104 | | | (915) | |
| Balance at September 30, 2019 | $ | 4,762 | | | $ | (101) | | | $ | 4,666 | | | $ | (2,853) | |
|
| | | | | | | | | | | | | | | |
| | 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 | ) |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Change in Liability for Variable Annuity Contracts with GMIB Features and No NLG FeatureNotes to Consolidated Financial Statements(Unaudited), Continued
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 7.7 Fair Value Disclosures.
Account Values and Net Amount at Risk
Account Values and Net Amount at Risk (“NAR”) for direct variable annuity contracts in-forcein force with GMDB and GMIB features as of September 30, 20192020 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
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:exclusive.
Direct Variable Annuity Contracts with GMDB and GMIB Features
at September 30, 20192020
| | | | Guarantee Type | | Guarantee Type |
| | Return of Premium | | Ratchet | | Roll-Up | | Combo | | Total | | Return of Premium | | Ratchet | | Roll-Up | | Combo | | Total |
| | (in millions, except age and interest rate) | | (in millions, except age and interest rate) |
| Variable annuity contracts with GMDB features | | | | | | | | | | Variable annuity contracts with GMDB features | |
| Account Values invested in: | | | | | | | | | | Account Values invested in: | |
| General Account | $ | 14,483 |
| | $ | 94 |
| | $ | 58 |
| | $ | 181 |
| | $ | 14,816 |
| General Account | $ | 15,155 | | | $ | 89 | | | $ | 57 | | | $ | 171 | | | $ | 15,472 | |
| Separate Accounts | 46,286 |
| | 8,937 |
| | 3,071 |
| | 32,067 |
| | 90,361 |
| Separate Accounts | 48,407 | | | 8,812 | | | 3,021 | | | 31,083 | | | 91,323 | |
| Total Account Values | $ | 60,769 |
| | $ | 9,031 |
| | $ | 3,129 |
| | $ | 32,248 |
| | $ | 105,177 |
| Total Account Values | $ | 63,562 | | | $ | 8,901 | | | $ | 3,078 | | | $ | 31,254 | | | $ | 106,795 | |
| | | | | | | | | | | | | | | | | | | | |
| 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 |
| |
| Net Amount at Risk, gross | | Net Amount at Risk, gross | $ | 125 | | | $ | 94 | | | $ | 1,864 | | | $ | 19,561 | | | $ | 21,644 | |
| Net Amount at Risk, net of amounts reinsured | | Net Amount at Risk, net of amounts reinsured | $ | 125 | | | $ | 91 | | | $ | 1,319 | | | $ | 19,561 | | | $ | 21,096 | |
| | | | | | | | | | | | | | | | | | | | |
| Average attained age of policyholders (in years) | 51.2 | | 67.4 | | 74.1 | | 69.2 | | 55.1 | Average attained age of policyholders (in years) | 51.3 | | | 68.1 | | | 74.7 | | | 70.0 | | | 55.3 | |
| Percentage of policyholders over age 70 | 10.5 | % | | 44.9 | % | | 67.5 | % | | 49.9 | % | | 19.3 | % | Percentage of policyholders over age 70 | 11.0 | % | | 47.7 | % | | 69.8 | % | | 53.3 | % | | 20.0 | % |
| Range of contractually specified interest rates | N/A |
| | N/A |
| | 3% - 6% |
| | 3% - 6.5% |
| | 3% - 6.5% |
| Range of contractually specified interest rates | N/A | | N/A | | 3% - 6% | | 3% - 6.5% | | 3% - 6.5% |
| | | | | | | | | | | |
| Variable annuity contracts with GMIB features | | | | | | | | | | Variable annuity contracts with GMIB features | |
| Account Values invested in: | | | | | | | | | | Account Values invested in: | |
| General Account | $ | — |
| | $ | — |
| | $ | 20 |
| | $ | 233 |
| | $ | 253 |
| General Account | $ | 0 | | | $ | 0 | | | $ | 17 | | | $ | 220 | | | $ | 237 | |
| Separate Accounts | — |
| | — |
| | 22,484 |
| | 34,718 |
| | 57,202 |
| Separate Accounts | 0 | | | 0 | | | 23,124 | | | 33,217 | | | 56,341 | |
| Total Account Values | $ | — |
| | $ | — |
| | $ | 22,504 |
| | $ | 34,951 |
| | $ | 57,455 |
| Total Account Values | $ | 0 | | | $ | 0 | | | $ | 23,141 | | | $ | 33,437 | | | $ | 56,578 | |
| | | | | | | | | | | | | | | | | | | | |
| Net amount at risk, gross | $ | — |
| | $ | — |
| | $ | 981 |
| | $ | 10,696 |
| | $ | 11,677 |
| |
| Net amount at risk, net of amounts reinsured | $ | — |
| | $ | — |
| | $ | 309 |
| | $ | 9,678 |
| | $ | 9,987 |
| |
| Net Amount at Risk, gross | | Net Amount at Risk, gross | $ | 0 | | | $ | 0 | | | $ | 1,100 | | | $ | 14,461 | | | $ | 15,561 | |
| Net Amount at Risk, net of amounts reinsured | | Net Amount at Risk, net of amounts reinsured | $ | 0 | | | $ | 0 | | | $ | 349 | | | $ | 13,066 | | | $ | 13,415 | |
| | | | | | | | | | | | | | | | | | | | |
| Average attained age of policyholders (in years) | N/A | | N/A | | 68.7 |
| | 69.3 |
| | 69.2 |
| Average attained age of policyholders (in years) | N/A | | N/A | | 64.0 | | | 70.0 | | | 67.8 | |
| Weighted-average number of years remaining until annuitization | N/A | | N/A | | 1.7 |
| | 0.4 |
| | 0.5 |
| |
| Weighted average years remaining until annuitization | | Weighted average years remaining until annuitization | N/A | | N/A | | 5.7 | | | 0.7 | | | 2.5 | |
| Range of contractually specified interest rates | N/A | | N/A | | 3% - 6% | | 3% - 6.5% | | 3% - 6.5% | 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”“Reinsurance” in Note 10 of the Notes to the Consolidated Financial StatementsCompany’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2018.2019.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Separate Accounts Investments by Investment Category Underlying Variable Annuity Contracts with GMDB and GMIB Features
The total account valuesAccount 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 valuesAccount Values and, consequently, the
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 | | | September 30, 2020 | | December 31, 2019 |
| Mutual Fund Type | GMDB | | GMIB | | GMDB | | GMIB | Mutual Fund Type | | GMDB | | GMIB | | GMDB | | GMIB |
| | (in millions) | | | (in millions) |
| Equity | $ | 39,866 |
| | $ | 17,056 |
| | $ | 35,541 |
| | $ | 15,759 |
| Equity | | $ | 41,259 | | | $ | 16,739 | | | $ | 42,489 | | | $ | 17,941 | |
| Fixed income | 5,277 |
| | 2,748 |
| | 5,173 |
| | 2,812 |
| Fixed income | | 5,371 | | | 2,679 | | | 5,263 | | | 2,699 | |
| Balanced | 44,347 |
| | 37,132 |
| | 41,588 |
| | 33,974 |
| Balanced | | 43,685 | | | 36,656 | | | 45,872 | | | 38,445 | |
| Other | 871 |
| | 266 |
| | 852 |
| | 290 |
| Other | | 1,008 | | | 267 | | | 865 | | | 263 | |
| Total | $ | 90,361 |
| | $ | 57,202 |
| | $ | 83,154 |
| | $ | 52,835 |
| Total | | $ | 91,323 | | | $ | 56,341 | | | $ | 94,489 | | | $ | 59,348 | |
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 featureliabilities, reflected in the General Account in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets, is summarized in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
| Direct Liability | | Reinsurance Ceded | | Net | | Direct Liability | | Reinsurance Ceded | | Net |
| (in millions) |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 |
| Direct Liability | | Reinsurance Ceded | | Net | | Direct Liability | | Reinsurance Ceded | | Net |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Balance at July 1, | $ | 941 | | | $ | (841) | | | $ | 100 | | | $ | 821 | | | $ | (756) | | | $ | 65 | |
| Paid guarantee benefits | (6) | | | 0 | | | (6) | | | (7) | | | 0 | | | (7) | |
| Other changes in reserves | 61 | | | (31) | | | 30 | | | 54 | | | (31) | | | 23 | |
| Balance at September 30, | $ | 996 | | | $ | (872) | | | $ | 124 | | | $ | 868 | | | $ | (787) | | | $ | 81 | |
| | | | | | | | | | | |
| Balance at January 1, | $ | 894 | | | $ | (808) | | | $ | 86 | | | $ | 788 | | | $ | (734) | | | $ | 54 | |
| Paid guarantee benefits | (32) | | | 0 | | | (32) | | | (16) | | | 0 | | | (16) | |
| Other changes in reserves | 134 | | | (64) | | | 70 | | | 96 | | | (53) | | | 43 | |
| Balance at September 30, | $ | 996 | | | $ | (872) | | | $ | 124 | | | $ | 868 | | | $ | (787) | | | $ | 81 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 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 guidanceU.S. GAAP 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. |
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-
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
observablemarket-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.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are summarized below. At September 30, 20192020 and December 31, 2018,2019, 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, 20192020
| | | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in millions) | | (in millions) |
| Assets: | | | | | | | | Assets: | |
| Investments: | | | | | | | | Investments: | |
| Fixed maturities, available-for-sale: | | | | | | | | |
| Fixed maturities, AFS: | | Fixed maturities, AFS: | |
| Corporate (1) | $ | — |
| | $ | 42,153 |
| | $ | 1,208 |
| | $ | 43,361 |
| Corporate (1) | $ | 0 | | | $ | 50,040 | | | $ | 1,479 | | | $ | 51,519 | |
| U.S. Treasury, government and agency | — |
| | 15,724 |
| | — |
| | 15,724 |
| U.S. Treasury, government and agency | 0 | | | 17,284 | | | 0 | | | 17,284 | |
| States and political subdivisions | — |
| | 606 |
| | 39 |
| | 645 |
| States and political subdivisions | 0 | | | 776 | | | 39 | | | 815 | |
| Foreign governments | — |
| | 517 |
| | — |
| | 517 |
| Foreign governments | 0 | | | 902 | | | 0 | | | 902 | |
| Residential mortgage-backed (2) | — |
| | 182 |
| | — |
| | 182 |
| Residential mortgage-backed (2) | 0 | | | 145 | | | 0 | | | 145 | |
| Asset-backed (3) | — |
| | 70 |
| | 532 |
| | 602 |
| Asset-backed (3) | 0 | | | 2,578 | | | 13 | | | 2,591 | |
| Commercial mortgage-backed | | Commercial mortgage-backed | 0 | | | 1,117 | | | 0 | | | 1,117 | |
| Redeemable preferred stock | 141 |
| | 273 |
| | — |
| | 414 |
| Redeemable preferred stock | 367 | | | 74 | | | 0 | | | 441 | |
| Total fixed maturities, available-for-sale | 141 |
| | 59,525 |
| | 1,779 |
| | 61,445 |
| |
| Total fixed maturities, AFS | | Total fixed maturities, AFS | 367 | | | 72,916 | | | 1,531 | | | 74,814 | |
| Other equity investments | 13 |
| | — |
| | — |
| | 13 |
| Other equity investments | 20 | | | 0 | | | 4 | | | 24 | |
| Trading securities | 314 |
| | 8,130 |
| | — |
| | 8,444 |
| Trading securities | 258 | | | 5,529 | | | 0 | | | 5,787 | |
| Other invested assets: | | | | | | | | Other invested assets: | |
| Short-term investments | — |
| | 437 |
| | — |
| | 437 |
| Short-term investments | 0 | | | 106 | | | 0 | | | 106 | |
| Assets of consolidated VIEs/VOEs | — |
| | — |
| | 16 |
| | 16 |
| Assets of consolidated VIEs/VOEs | 0 | | | 0 | | | 12 | | | 12 | |
| Swaps | — |
| | 839 |
| | — |
| | 839 |
| Swaps | 0 | | | 1,367 | | | 0 | | | 1,367 | |
| Credit default swaps | — |
| | 19 |
| | — |
| | 19 |
| Credit default swaps | 0 | | | 5 | | | 0 | | | 5 | |
| Options | — |
| | 2,433 |
| | — |
| | 2,433 |
| Options | 0 | | | 2,752 | | | 0 | | | 2,752 | |
| Swaptions | — |
| | 196 |
| | — |
| | 196 |
| |
| Total other invested assets | — |
| | 3,924 |
| | 16 |
| | 3,940 |
| Total other invested assets | 0 | | | 4,230 | |
| 12 | |
| 4,242 | |
| Cash equivalents | 1,379 |
| | — |
| | — |
| | 1,379 |
| Cash equivalents | 2,488 | | | 1,031 | | | 0 | | | 3,519 | |
| GMIB reinsurance contract asset | — |
| | — |
| | 2,853 |
| | 2,853 |
| |
| Separate Accounts assets | 115,405 |
| | 2,927 |
| | 358 |
| | 118,690 |
| |
| GMIB reinsurance contracts asset | | GMIB reinsurance contracts asset | 0 | | | 0 | | | 3,247 | | | 3,247 | |
| Separate Accounts assets (4) | | Separate Accounts assets (4) | 118,085 | | | 2,424 | | | 0 | | | 120,509 | |
| Total Assets | $ | 117,252 |
| | $ | 74,506 |
| | $ | 5,006 |
| | $ | 196,764 |
| Total Assets | $ | 121,218 | | | $ | 86,130 | | | $ | 4,794 | | | $ | 212,142 | |
| | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | Liabilities: | |
| GMxB derivative features’ liability | $ | — |
| | $ | — |
| | $ | 9,363 |
| | $ | 9,363 |
| GMxB derivative features’ liability | $ | 0 | | | $ | 0 | | | $ | 11,985 | | | $ | 11,985 | |
| SCS, SIO, MSO and IUL indexed features’ liability | — |
| | 2,178 |
| | — |
| | 2,178 |
| SCS, SIO, MSO and IUL indexed features’ liability | 0 | | | 2,502 | | | 0 | | | 2,502 | |
| Total Liabilities | $ | — |
| | $ | 2,178 |
| | $ | 9,363 |
| | $ | 11,541 |
| Total Liabilities | $ | 0 | | | $ | 2,502 | | | $ | 11,985 | | | $ | 14,487 | |
______________
| |
(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. |
(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)Separate Accounts assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate and commercial mortgages. At September 30, 2020 the fair value of such investments was $356 million.
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
Fair Value Measurements at December 31, 20182019
| | | | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (in millions) | | (in millions) |
| Assets: | | | | | | | | Assets: | |
| Investments: | | | | | | | | Investments: | |
| Fixed maturities, available-for-sale: | | | | | | | | |
| Fixed maturities, AFS: | | Fixed maturities, AFS: | |
| Corporate (1) | $ | — |
| | $ | 25,202 |
| | $ | 1,174 |
| | $ | 26,376 |
| Corporate (1) | $ | 0 | | | $ | 43,218 | | | $ | 1,246 | | | $ | 44,464 | |
| U.S. Treasury, government and agency | — |
| | 13,335 |
| | — |
| | 13,335 |
| U.S. Treasury, government and agency | 0 | | | 15,231 | | | 0 | | | 15,231 | |
| States and political subdivisions | — |
| | 416 |
| | 38 |
| | 454 |
| States and political subdivisions | 0 | | | 610 | | | 39 | | | 649 | |
| Foreign governments | — |
| | 519 |
| | — |
| | 519 |
| Foreign governments | 0 | | | 490 | | | 0 | | | 490 | |
| Residential mortgage-backed (2) | — |
| | 202 |
| | — |
| | 202 |
| Residential mortgage-backed (2) | 0 | | | 173 | | | 0 | | | 173 | |
| Asset-backed (3) | — |
| | 71 |
| | 519 |
| | 590 |
| Asset-backed (3) | 0 | | | 744 | | | 100 | | | 844 | |
| Redeemable preferred stock | 163 |
| | 276 |
| | — |
| | 439 |
| Redeemable preferred stock | 237 | | | 274 | | | 0 | | | 511 | |
| Total fixed maturities, available-for-sale | 163 |
| | 40,021 |
| | 1,731 |
| | 41,915 |
| |
| Total fixed maturities, AFS | | Total fixed maturities, AFS | 237 | | | 60,740 | | | 1,385 | | | 62,362 | |
| Other equity investments | 12 |
| | — |
| | — |
| | 12 |
| Other equity investments | 13 | | | 0 | | | 0 | | | 13 | |
| Trading securities | 218 |
| | 14,919 |
| | 29 |
| | 15,166 |
| Trading securities | 321 | | | 6,277 | | | 0 | | | 6,598 | |
| Other invested assets: | | | | | | | | Other invested assets: | |
| Short-term investments | — |
| | 412 |
| | — |
| | 412 |
| Short-term investments | 0 | | | 468 | | | 0 | | | 468 | |
| Assets of consolidated VIEs/VOEs | — |
| | — |
| | 19 |
| | 19 |
| Assets of consolidated VIEs/VOEs | 0 | | | 0 | | | 16 | | | 16 | |
| Swaps | — |
| | 423 |
| | — |
| | 423 |
| Swaps | 0 | | | (326) | | | 0 | | | (326) | |
| Credit default swaps | — |
| | 17 |
| | — |
| | 17 |
| Credit default swaps | 0 | | | 18 | | | 0 | | | 18 | |
| Options | — |
| | 956 |
| | — |
| | 956 |
| Options | 0 | | | 3,331 | | | 0 | | | 3,331 | |
| Total other invested assets | — |
| | 1,808 |
| | 19 |
| | 1,827 |
| Total other invested assets | 0 | | | 3,491 | | | 16 | | | 3,507 | |
| Cash equivalents | 2,160 |
| | — |
| | — |
| | 2,160 |
| Cash equivalents | 1,155 | | | 0 | | | 0 | | | 1,155 | |
| GMIB reinsurance contracts asset | — |
| | — |
| | 1,991 |
| | 1,991 |
| GMIB reinsurance contracts asset | 0 | | | 0 | | | 2,466 | | | 2,466 | |
| Separate Accounts assets | 105,159 |
| | 2,733 |
| | 374 |
| | 108,266 |
| |
| Separate Accounts assets (4) | | Separate Accounts assets (4) | 121,184 | | | 2,878 | | | 0 | | | 124,062 | |
| Total Assets | $ | 107,712 |
| | $ | 59,481 |
| | $ | 4,144 |
| | $ | 171,337 |
| Total Assets | $ | 122,910 | | | $ | 73,386 | | | $ | 3,867 | | | $ | 200,163 | |
| | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | Liabilities: | |
| GMxB derivative features’ liability | $ | — |
| | $ | — |
| | $ | 5,431 |
| | $ | 5,431 |
| GMxB derivative features’ liability | $ | 0 | | | $ | 0 | | | $ | 8,316 | | | $ | 8,316 | |
| SCS, SIO, MSO and IUL indexed features’ liability | — |
| | 687 |
| | — |
| | 687 |
| SCS, SIO, MSO and IUL indexed features’ liability | 0 | | | 3,150 | | | 0 | | | 3,150 | |
| Total Liabilities | $ | — |
| | $ | 687 |
| | $ | 5,431 |
| | $ | 6,118 |
| Total Liabilities | $ | 0 | | | $ | 3,150 | | | $ | 8,316 | | | $ | 11,466 | |
______________
| |
(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. |
(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)Separate Accounts assets included in the fair value hierarchy exclude investments in entities that calculate NAV per share (or its equivalent) as a practical expedient. Such investments excluded from the fair value hierarchy include investments in real estate and commercial mortgages. At December 31, 2019 the fair value of such investments was $356 million.
Public Fixed Maturities
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.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
Private Fixed Maturities
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
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.
Freestanding Derivative Positions
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.
Level Classifications of the Company’s Financial Instruments
Financial Instruments Classified as Level 1
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.
Financial Instruments Classified as Level 2
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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
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.
Financial Instruments Classified as Level 3
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.
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$263 million and $184$175 million at September 30, 20192020 and December 31, 2018,2019, respectively, to recognize incremental counterparty non-performance risk.
Lapse rates are adjusted at the contract level based on a comparison of the actuariallyactuarial 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.
Transfers of Financial Instruments Between Levels 2 and 3
During the nine months ended September 30, 2020, AFS fixed maturities with fair values of $103 million were transferred out of Level 3 and into Level 2 principally due to the availability of trading activity and/or market
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $189 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 2.0% of total equity at September 30, 2020.
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, 2020 and 2019, and 2018.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
respectively.
Level 3 Instruments - Fair Value Measurements
| | | | | | | | | | Corporate | | State and Political Subdivisions | | | Asset-backed | |
| | Corporate | | State and Political Subdivisions | | Asset- backed | | (in millions) |
| Balance, July 1, 2020 | | Balance, July 1, 2020 | $ | 1,652 | | | $ | 40 | | | | $ | 0 | | |
| Total gains and (losses), realized and unrealized, included in: | | Total gains and (losses), realized and unrealized, included in: | | | | |
| Net income (loss) as: | | Net income (loss) as: | | | | |
| Net investment income (loss) | | Net investment income (loss) | 0 | | | 0 | | | | 0 | | |
| Investment gains (losses), net | | Investment gains (losses), net | (1) | | | 0 | | | | 0 | | |
| Subtotal | | Subtotal | (1) | | | 0 | | | | 0 | | |
| Other comprehensive income (loss) | | Other comprehensive income (loss) | 18 | | | (1) | | | | 0 | | |
| Purchases | | Purchases | (138) | | | 0 | | | | 13 | | |
| Sales | | Sales | (22) | | | 0 | | | | 0 | | |
| Transfers into Level 3 (1) | | Transfers into Level 3 (1) | (30) | | | 0 | | | | 0 | | |
| Transfers out of Level 3 (1) | | Transfers out of Level 3 (1) | 0 | | | 0 | | | | 0 | | |
| Balance, September 30, 2020 | | Balance, September 30, 2020 | $ | 1,479 | | | $ | 39 | | | | $ | 13 | | |
| | (in millions) | | | | | | | | |
| Balance, July 1, 2019 | $ | 1,290 |
| | $ | 39 |
| | $ | 534 |
| Balance, July 1, 2019 | $ | 1,290 | | | $ | 39 | | | | $ | 534 | | |
| Total gains (losses), realized and unrealized, included in: | | | | | | |
| Total gains and (losses), realized and unrealized, included in: | | Total gains and (losses), realized and unrealized, included in: | | | | |
| Net income (loss) as: | | | | | | Net income (loss) as: | | | | |
| Net investment income (loss) | — |
| | — |
| | — |
| Net investment income (loss) | 0 | | | 0 | | | | 0 | | |
| Investment gains (losses), net | — |
| | — |
| | — |
| Investment gains (losses), net | 0 | | | 0 | | | | 0 | | |
| Subtotal | — |
| | — |
| | — |
| Subtotal | 0 | | | 0 | | | | 0 | | |
| Other comprehensive income (loss) | (7 | ) | | 1 |
| | — |
| Other comprehensive income (loss) | (7) | | | 1 | | | | 0 | | |
| Purchases | (2 | ) | | — |
| | 71 |
| Purchases | (2) | | | 0 | | | | 71 | | |
| Sales | (42 | ) | | (1 | ) | | (73 | ) | Sales | (42) | | | (1) | | | | (73) | | |
| Transfers into Level 3 (1) | — |
| | — |
| | — |
| Transfers into Level 3 (1) | 0 | | | 0 | | | | 0 | | |
| Transfers out of Level 3 (1) | (31 | ) | | — |
| | — |
| Transfers out of Level 3 (1) | (31) | | | 0 | | | | 0 | | |
| Balance, September 30, 2019 | $ | 1,208 |
| | $ | 39 |
| | $ | 532 |
| 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. |
(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 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Corporate | | State and Political Subdivisions | | | | | | Asset-backed | | |
| (in millions) |
| Balance, January 1, 2020 | $ | 1,246 | | | $ | 39 | | | | | | | $ | 100 | | | |
| Total gains and (losses), realized and unrealized, included in: | | | | | | | | | | | |
| Net income (loss) as: | | | | | | | | | | | |
| Net investment income (loss) | 2 | | | 0 | | | | | | | 0 | | | |
| Investment gains (losses), net | (14) | | | 0 | | | | | | | 0 | | | |
| Subtotal | (12) | | | 0 | | | | | | | 0 | | | |
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | Corporate | | State and Political Subdivisions | | | Asset-backed | |
| | Corporate | | State and Political Subdivisions | | Asset- backed | | (in millions) |
| Other comprehensive income (loss) | | Other comprehensive income (loss) | (36) | | | 1 | | | | 0 | | |
| Purchases | | Purchases | 207 | | | 0 | | | | 13 | | |
| Sales | | Sales | (112) | | | (1) | | | | 0 | | |
| Transfers into Level 3 (1) | | Transfers into Level 3 (1) | 189 | | | 0 | | | | 0 | | |
| Transfers out of Level 3 (1) | | Transfers out of Level 3 (1) | (3) | | | 0 | | | | (100) | | |
| Balance, September 30, 2020 | | Balance, September 30, 2020 | $ | 1,479 | | | $ | 39 | | | | $ | 13 | | |
| | (in millions) | | | | | | | | |
| | | | | | | |
| Balance, January 1, 2018 | $ | 1,139 |
| | $ | 40 |
| | $ | 8 |
| |
| Total gains (losses), realized and unrealized, included in: | | | | | | |
| Balance, January 1, 2019 | | Balance, January 1, 2019 | $ | 1,174 | | | $ | 38 | | | | $ | 519 | | |
| Total gains and (losses), realized and unrealized, included in: | | Total gains and (losses), realized and unrealized, included in: | | | | |
| Net income (loss) as: | | | | | | Net income (loss) as: | | | | |
| Net investment income (loss) | 8 |
| | — |
| | (1 | ) | Net investment income (loss) | 3 | | | 0 | | | | 0 | | |
| Investment gains (losses), net | (4 | ) | | — |
| | — |
| Investment gains (losses), net | 0 | | | 0 | | | | 0 | | |
| Subtotal | 4 |
| | — |
| | (1 | ) | Subtotal | 3 | | | 0 | | | | 0 | | |
| Other comprehensive income (loss) | (15 | ) | | (1 | ) | | — |
| Other comprehensive income (loss) | 3 | | | 3 | | | | 5 | | |
| Purchases | 236 |
| | — |
| | 533 |
| Purchases | 219 | | | 0 | | | | 81 | | |
| Sales | (267 | ) | | (1 | ) | | (3 | ) | Sales | (101) | | | (2) | | | | (73) | | |
| Transfers into Level 3 (1) | 65 |
| | — |
| | — |
| Transfers into Level 3 (1) | 14 | | | 0 | | | | 0 | | |
| Transfers out of Level 3 (1) | (28 | ) | | — |
| | — |
| Transfers out of Level 3 (1) | (104) | | | 0 | | | | 0 | | |
| Balance, September 30, 2018 | $ | 1,134 |
| | $ | 38 |
| | $ | 537 |
| |
| Balance, September 30, 2019 | | Balance, September 30, 2019 | $ | 1,208 | | | $ | 39 | | | | $ | 532 | | |
|
______________
| |
(1) | Transfers into/out of the Level 3 classification are reflected at beginning-of-period fair values. |
(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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Other Equity Investments | | GMIB Reinsurance Contract Asset | | Separate Accounts Assets | | GMxB Derivative Features Liability | | | | |
| (in millions) | | |
| Balance, July 1, 2020 | $ | 16 | | | $ | 3,433 | | | $ | 0 | | | $ | (12,458) | | | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | | | |
| Investment gains (losses), net | 0 | | | 0 | | | 0 | | | 0 | | | | | |
| Net derivative gains (losses) (1) | 0 | | | (177) | | | 0 | | | 570 | | | | | |
| Total realized and unrealized gains (losses) | 0 | |
| (177) | |
| 0 | |
| 570 | | | | | |
| Other comprehensive income (loss) | 0 | | | 0 | | | 0 | | | 0 | | | | | |
| Purchases (2) | 3 | | | 11 | | | 0 | | | (113) | | | | | |
| Sales (3) | 0 | | | (21) | | | 0 | | | 16 | | | | | |
| Change in estimate (4) | 0 | | | 1 | | | 0 | | | 0 | | | | | |
| Activity related to consolidated VIEs/VOEs | (3) | | | 0 | | | 0 | | | 0 | | | | | |
| Transfers into Level 3 (5) | 0 | | | 0 | | | 0 | | | 0 | | | | | |
| Transfers out of Level 3 (5) | 0 | | | 0 | | | 0 | | | 0 | | | | | |
| Balance, September 30, 2020 | $ | 16 | | | $ | 3,247 | | | $ | 0 | | | $ | (11,985) | | | | | |
| | | | | | | | | | | |
| Balance, July 1, 2019 | $ | 16 | | | $ | 2,198 | | | $ | 25 | | | $ | (6,813) | | | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | | | |
| Investment gains (losses), net | 0 | | | 0 | | | 0 | | | 0 | | | | | |
| Net derivative gains (losses) | 0 | | | 664 | | | 0 | | | (2,535) | | | | | |
| Total realized and unrealized gains (losses) | 0 | |
| 664 | |
| 0 | |
| (2,535) | | | | | |
| Other comprehensive income (loss) | 0 | | | 0 | | | 0 | | | 0 | | | | | |
| Purchases (2) | 0 | | | 11 | | | (5) | | | (100) | | | | | |
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
|
| | | | | | | | | | | | | | | |
| | 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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales (3) | 0 | | | (20) | | | (1) | | | 12 | | | | | |
| Settlements | 0 | | | 0 | | | (1) | | | 0 | | | | | |
| Activity related to consolidated VIEs/VOEs | 0 | | | 0 | | | 0 | | | 0 | | | | | |
| Transfers into Level 3 (5) | 0 | | | 0 | | | 0 | | | 0 | | | | | |
| Transfers out of Level 3 (5) | 0 | | | 0 | | | (11) | | | 0 | | | | | |
| Balance, September 30, 2019 | $ | 16 | | | $ | 2,853 | | | $ | 7 | | | $ | (9,436) | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
______________
| |
(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. |
(1)The Company’s nonperformance risk impact of ($458) million for the GMxB derivative features liability and $6 million for the GMIB reinsurance contract asset the three months ended September 2020, respectively, 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 GMxB derivative features liability, represents benefits paid.
(4)For the GMIB reinsurance contract asset, represents a transfer from amounts due from reinsurers.
(5)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, January 1, 2020 | $ | 16 | | | $ | 2,466 | | | $ | 0 | | | $ | (8,316) | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | |
| Investment gains (losses), net | 0 | | | 0 | | | 0 | | | 0 | | | |
| Net derivative gains (losses) (1) | 0 | | | 849 | | | 0 | | | (3,382) | | | |
| Total realized and unrealized gains (losses) | 0 | |
| 849 | |
| 0 | |
| (3,382) | | | |
| Other comprehensive income (loss) | 0 | | | | | | | | | |
| Purchases (2) | 4 | | | 34 | | | 0 | | | (328) | | | |
| Sales (3) | 0 | | | (58) | | | 0 | | | 41 | | | |
| Settlements | 0 | | | 0 | | | 0 | | | 0 | | | |
| Change in estimate (4) | 0 | | | (44) | | | 0 | | | 0 | | | |
| Activity related to consolidated VIEs/VOEs | (4) | | | 0 | | | 0 | | | 0 | | | |
| Transfers into Level 3 (5) | 0 | | | 0 | | | 0 | | | 0 | | | |
| Transfers out of Level 3 (5) | 0 | | | 0 | | | 0 | | | 0 | | | |
| Balance, September 30, 2020 | $ | 16 | | | $ | 3,247 | | | $ | 0 | | | $ | (11,985) | | | |
| | | | | | | | | |
| Balance, January 1, 2019 | $ | 48 | | | $ | 1,993 | | | $ | 21 | | | $ | (5,491) | | | |
| Realized and unrealized gains (losses), included in Net income (loss) as: | | | | | | | | | |
| Investment gains (losses), net | 0 | | | 0 | | | 0 | | | 0 | | | |
| Net derivative gains (losses) | 0 | | | 881 | | | 0 | | | (3,656) | | | |
| Total realized and unrealized gains (losses) | 0 | | | 881 | | | 0 | | | (3,656) | | | |
| Other comprehensive income (loss) | 0 | | | 0 | | | 0 | | | 0 | | | |
| Purchases (2) | 0 | | | 34 | | | 3 | | | (309) | | | |
| Sales (3) | 0 | | | (55) | | | (1) | | | 20 | | | |
| Settlements | 0 | | | 0 | | | (4) | | | 0 | | | |
| Activity related to consolidated VIEs/VOEs | (3) | | | 0 | | | 0 | | | 0 | | | |
Transfers into Level 3 (5) | 0 | | | 0 | | | 0 | | | 0 | | | |
| Transfers out of Level 3 (5) | (29) | | | 0 | | | (12) | | | 0 | | | |
| Balance, September 30, 2019 | $ | 16 | | | $ | 2,853 | | | $ | 7 | | | $ | (9,436) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
______________
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
(1)The Company’s nonperformance risk impact of $35 million for the GMxB derivative features liability and ($50) million for the GMIB reinsurance contract asset the nine months ended September 2020, respectively, is recorded through Net derivative gains (losses).
(2)For the GMIB reinsurance contract asset and GMxB derivative features liability, represents attributed fee. |
| | | | | | | | | | | | | | | |
| | 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 | ) |
______________(4)For the GMIB reinsurance contract asset, represents a transfer from amounts due from reinsurers.
| |
(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. |
(5)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, 20192020 and 20182019 by category for Level 3 assets and liabilities still held at September 30, 2020 and 2019, and 2018.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
respectively.
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, 2020: | | | | | |
| Change in unrealized gains (losses): | | | | | |
| Fixed maturities, AFS: | | | | | |
| Corporate | $ | 0 | | | $ | 0 | | | $ | (37) | |
| State and political subdivisions | 0 | | | 0 | | | 2 | |
| | | | | |
| | | | | |
| Total fixed maturities, AFS | 0 | | | 0 | | | (35) | |
| GMIB reinsurance contracts | 0 | | | 849 | | | 0 | |
| | | | | |
| GMxB derivative features liability | 0 | | | (3,382) | | | 0 | |
| Total | $ | 0 | | | $ | (2,533) | | | $ | (35) | |
| | | | | |
| Held at September 30, 2019: | | | | | |
| Change in unrealized gains (losses): | | | | | |
| Fixed maturities, AFS: | | | | | |
| Corporate | $ | 0 | | | $ | 0 | | | $ | 3 | |
| State and political subdivisions | 0 | | | 0 | | | 3 | |
| | | | | |
| Asset-backed | 0 | | | 0 | | | 4 | |
| Total fixed maturities, AFS | 0 | | | 0 | | | 10 | |
| GMIB reinsurance contracts | 0 | | | 881 | | | 0 | |
| Separate Account assets | (14) | | | 0 | | | 0 | |
| GMxB derivative features liability | 0 | | | (3,656) | | | 0 | |
| Total | $ | (14) | | | $ | (2,775) | | | $ | 10 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | 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, 20192020 and December 31, 2018.2019, respectively.
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% | | |
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value | Fair
Value | | Valuation
Technique | | Significant
Unobservable Input | | Range | | Weighted Average (2) |
| | (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)Assets: | Mortality rates vary by age and demographic characteristic such as gender. Mortality | | | | | | | | |
| Investments: | | | | | | | | | |
| Fixed maturities, AFS: | | | | | | | | | |
| Corporate | $ | 25 | | | Matrix pricing
model | | Spread over Benchmark | | 270 - 610 bps | | 288 bps |
| 1,105 | | | Market
comparable
companies | | EBITDA multiples
Discount 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.
Cash flow multiples | | 3.5x-31.8x
5.1% - 25.4%
0.9x -25.0x | | 14.4x
10.0%
10.7x |
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% | | |
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Notes to Consolidated Financial Statements(Unaudited), Continued
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value | Fair
Value | | Valuation
Technique | | Significant
Unobservable Input | | Range | | Weighted Average (2) |
| (in millions) | | |
| Other equity investments | 4 | | | Market comparable companies | | Revenue multiple | | 3.5x - 18.0x | | 9.5x |
| GMIB reinsurance contract asset | 3,247 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity
Mortality Rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 61 - 115 | | 60 - 125 bps
0.6%-16%
0%-2%
0%-61%
16%-34%
0.01%-0.18%
0.07%-0.54%
0.42%-42.20% | | 72 bps
1.56%
0.96%
6.37%
25%
2.72%
(same for all ages)
(same for all ages) |
| Liabilities: | | | | | | | | | |
| GMIBNLG | 11,682 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Annuitization rates
Mortality Rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 61 - 115 | | 141.0 bps
1.1%-25.7%
0.4%-2%
0%-100%
0.01%-0.19%
0.06%-0.53%
0.41%-41.39% | |
3.06%
0.96%
5.92%
1.48%
(same for all ages)
(same for all ages) |
| GWBL/GMWB | 220 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity | | 141.0 bps
0.8%-16%
0%-8%
100% once starting
16%-34% | |
1.56%
0.96%
24.57% |
| GIB | 77 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity | | 141.0 bps
0.8%-15.6%
0%-2%
0%-100%
16%-34% | |
1.56%
0.96%
6.37%
25% |
| GMAB | 6 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Volatility rates - Equity | | 141.0 bps
0.8%-16%
16%-34% | |
1.56%
25% |
______________
(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.
(2)For Lapses, Withdrawals, and Utilizations the rates were weighted by counts, for Mortality weighted average rates are shown for all ages combined and for Withdrawals the weighted averages were based on an estimated split of partial withdrawal and dollar-for-dollar withdrawals.
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range | | Weighted Average |
| | (in millions) | | |
Liabilities:Assets: | | | | | | | | | | |
GMIBNLGInvestments: | | 5,341 |
| | | | | | |
| Fixed maturities, AFS: | | | | | | | | | |
| Corporate | $ | 51 | | | Matrix pricing model | | Spread over benchmark | | 65 - 580 bps | | 186 bps |
| 1,025 | | | Market comparable companies | | EBITDA multiples
Discount rate
Cash flow multiples | | 3.3x - 56.7x
3.9% - 16.5%
0.8x - 48.1x | | 14.3x
10.0%
10.7x |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| GMIB reinsurance contract asset | 2,466 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates Annuitization
Utilization rates
Volatility rates - Equity
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115
| | 18955 - 109 bps
0.8% - 26.2%
10%
0.0% - 12.1%
8.0%
0.0% - 49.0%
9.0% - 30.0%
0.01% - 0.18%
0.07% - 0.54%
0.42% - 42.20% | | |
| Liabilities: | | | | | | | | | |
| GMIBNLG | 8,135 | | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Annuitization rates
Mortality rates (1):
Ages 0 - 40
Ages 41 - 60
Ages 60 - 115 | | 124 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%41.39% | | |
| GWBL/GMWB | 172 | 130 |
| | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity | | 0.5%124 bps
0.8% - 5.7%
10.0%
0.0% - 7.0%
100% after starting
10.0%
9.0% - 34.0%30.0% | | |
| GIB | 5 | (48 | ) | | Discounted cash flow | | Non-performance risk
Lapse rates
Withdrawal rates
Utilization rates
Volatility rates - Equity | | 0.5%124 bps
1.2% - 5.7%
19.9%
0.0% - 8.0%
0.0% - 16.0%
10.0%100.0%
9.0% - 34.0%30.0% | | |
| GMAB | 4 | 7 |
| | Discounted cash flow | | Lapse rates
Volatility rates - Equity | | 1.0% - 5.7%
10.0%
9.0% - 34.0%30.0% | | |
______________
| |
(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. |
(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.
Level 3 Financial Instruments for which Quantitative Inputs are Not Available
Certain Privately Placed Debt Securities with Limited Trading Activity
Excluded from the tables above at September 30, 20192020 and December 31, 2018,2019, respectively, are approximately $746$417 million and $826$325 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, 20192020 and December 31, 2018,2019, 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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
above at September 30, 20192020 and December 31, 2018,2019, 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, 2019GMIB Reinsurance Contract Asset 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
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.GMxB Derivative Features Liability
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 guaranteesCarrying Value of Financial Instruments Not Otherwise Disclosed in Note 3 and investment contracts, limited partnerships accounted for under the equity method and pension and other postretirement obligations.Note 4
The carrying values and fair values at September 30, 20192020 and December 31, 20182019 for financial instruments not otherwise disclosed in Note 3 and Note 4 are presented in the table below.
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, 2020: | | | | | | | | | |
| Mortgage loans on real estate | $ | 12,785 | | | $ | 0 | | | $ | 0 | | | $ | 13,032 | | | $ | 13,032 | |
| Policy loans | $ | 3,647 | | | $ | 0 | | | $ | 0 | | | $ | 4,726 | | | $ | 4,726 | |
| Loans to affiliates | $ | 1,200 | | | $ | 0 | | | $ | 1,241 | | | $ | 0 | | | $ | 1,241 | |
| Policyholders’ liabilities: Investment contracts | $ | 2,063 | | | $ | 0 | | | $ | 0 | | | $ | 2,280 | | | $ | 2,280 | |
| FHLB funding agreements (1) | $ | 6,848 | | | $ | 0 | | | $ | 6,940 | | | $ | 0 | | | $ | 6,940 | |
| FABN funding agreements (2) | $ | 1,143 | | | $ | 0 | | | $ | 1,168 | | | $ | 0 | | | $ | 1,168 | |
| Separate Accounts liabilities | $ | 9,000 | | | $ | 0 | | | $ | 0 | | | $ | 9,000 | | | $ | 9,000 | |
| | | | | | | | | |
| December 31, 2019: | | | | | | | | | |
| Mortgage loans on real estate | $ | 12,090 | | | $ | 0 | | | $ | 0 | | | $ | 12,317 | | | $ | 12,317 | |
| Policy loans | $ | 3,270 | | | $ | 0 | | | $ | 0 | | | $ | 4,199 | | | $ | 4,199 | |
| Loans to affiliates | $ | 1,200 | | | $ | 0 | | | $ | 1,224 | | | $ | 0 | | | $ | 1,224 | |
| Policyholders’ liabilities: Investment contracts | $ | 1,922 | | | $ | 0 | | | $ | 0 | | | $ | 2,029 | | | $ | 2,029 | |
| FHLB funding agreements (1) | $ | 6,909 | | | $ | 0 | | | $ | 6,957 | | | $ | 0 | | | $ | 6,957 | |
| Separate Accounts liabilities | $ | 9,041 | | | $ | 0 | | | $ | 0 | | | $ | 9,041 | | | $ | 9,041 | |
_____________
(1)Federal Home Loan Bank of New York (“FHLB”)
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
|
| | | | | | | | | | | | | | | | | | | |
| | 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.(3)Excludes amounts reclassified as Held-for-Sale.
Mortgage Loans on Real Estate
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.
Policy Loans
The fair value of policy loans is calculated by discounting expected cash flows based upon the U.S. treasuryTreasury yield curve and historical loan repayment patterns.
Loans to Affiliates
The fair value of loans to affiliates is calculated by matrix or model pricing. The matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment.
FHLB Funding Agreements
The fair values of the Company'sCompany’s FHLB funding agreements are determined by discounted cash flow analysis based on the indicative funding agreement rates published by the FHLB.
FABN Funding Agreements
The fair values of the Company’s FABN funding agreements are determined by Bloomberg’s evaluated pricing service, which uses direct observations or observed comparables.
Policyholder Liabilities - Investment Contracts and Separate Accounts Liabilities
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 the Company’s association plans contracts, supplementary contracts not involving life contingencies (“SCNILC”), Access Accounts and Escrow Shield Plus product reserves are held at book value.
Financial Instruments Exempt from Fair Value Disclosure or Otherwise Not Required to be Disclosed
Exempt from Fair Value Disclosure Requirements
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.
Otherwise Not Required to be Included in the Table Above
The Company’s investment in Corporate Owned Life Insurance (“COLI”) policies are recorded at their cash surrender value and are therefore not required to be included in the table above. See Note 2 to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019 for further description of the Company’s accounting policy related to its investment in COLI policies.
8) LOANS TO AFFILIATES
Loans Issued to Holdings
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
8) LEASES
In April 2018, Equitable Financial made a $800 million loan to Holdings. The Company does not record leases withloan has an initial terminterest rate of 12 months or less3.69% and matures 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 recordsApril 2021. In December 2018 and in its consolidated balance sheets at the time of lease commencement or modification a right of use (“RoU”) operating lease assetDecember 2019, Holdings repaid $200 million and a lease liability, initially measured at the present value of the lease payments. Lease costs are recognized$300 million 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 |
|
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 endedprincipal, respectively. At September 30, 2019.2020, the amount outstanding was $300 million.
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. |
MaturitiesIn November 2019, Equitable Financial made a $900 million loan to Holdings. The loan has an interest rate of lease liabilities as ofone-month LIBOR plus 1.33%. The loan matures on November 24, 2024. At September 30, 2019 are as follows:2020, the amount outstanding was $900 million.
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 |
|
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, 20192020 and 20182019 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’sCompany did not enter into any new significant transactions with related parties during the nine months ended September 30, 2019 with related parties are summarized below.2020.
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.
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, 20192020 and 20182019 follow:
| | | | | | | | | | | | | |
| | September 30, |
| | 2020 | | 2019 | | |
| (in millions) |
| Unrealized gains (losses) on investments | $ | 4,927 | | | $ | 2,226 | | | |
| Defined benefit pension plans | (4) | | | (7) | | | |
| Accumulated other comprehensive income (loss) attributable to Equitable Financial | $ | 4,923 | | | $ | 2,220 | | | |
|
| | | | | | | |
| | 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, 20192020 and 20182019, follow:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 | | |
| (in millions) | | |
| Change in net unrealized gains (losses) on investments: | | | | | | | | | |
| Net unrealized gains (losses) arising during the period | $ | 295 | | | $ | 1,224 | | | $ | 4,524 | | | $ | 3,750 | | | |
| (Gains) losses reclassified into net income (loss) during the period (1) | (23) | | | (159) | | | (205) | | | (157) | | | |
| Net unrealized gains (losses) on investments | 271 | | | 1,065 | | | 4,318 | | | 3,593 | | | |
| Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other | (24) | | | (335) | | | (992) | | | (872) | | | |
| Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of 66, $194, $884 and $718) | 247 | | | 730 | | | 3,327 | | | 2,721 | | | |
| Other comprehensive income (loss), attributable to Equitable Financial | $ | 247 | | | $ | 730 | | | $ | 3,327 | | | $ | 2,721 | | | |
|
| | | | | | | | | | | | | | | |
| | 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 presented net of income tax expense (benefit) of $(6) million, $(42) million, $(55) million and $(42) million for the three and nine months ended September 30, 2020 and 2019, respectively.
| |
(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 OTTIcredit losses 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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
primarily consist of amortizationsamortization of net (gains) losses and net prior service cost (credit) recognized as a component of net periodic cost and reported in Compensation and benefit expensesbenefits in the consolidated statements of income (loss). Amounts presented in the table above are net of tax.
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:are presented in the table that follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | Nine Months Ended September 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (in millions) |
| Balance, beginning of period | $ | 36 | | | $ | 42 | | | $ | 39 | | | $ | 39 | |
| Net earnings (loss) attributable to redeemable noncontrolling interests | 3 | | | 0 | | | 0 | | | 3 | |
| Purchase/change of redeemable noncontrolling interests | (1) | | | 4 | | | (1) | | | 4 | |
| Balance, end of period | $ | 38 | | | $ | 46 | | | $ | 38 | | | $ | 46 | |
|
| | | | | | | | | | | | | | | |
| | 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
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
develops an estimate of the unaccrued amounts of the reasonably possible range of losses. As
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
of September 30, 2019,2020, 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 Financial, 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 Financial implemented the volatility management strategy in violation of applicable law. Plaintiff seeks an award of damages individually and on a classwide basis, and costs and disbursements, including attorneys’ fees, expert witness fees and other costs. 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’sEquitable Financial’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’sEquitable Financial’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 into the Connecticut Superior Court, Judicial District of Stamford. In December 2018, Equitable Financial sought dismissal of the complaint by filing a motion to strike, which the court granted in August 2019. Plaintiff filed an Amended Class Action Complaint in September 2019. Equitable Financial filed a motion for entry of judgment in October 2019. On August 3, 2020, the court granted Equitable Financial’s motion for entry of judgment. In August 2020, Plaintiff filed a notice of appeal. 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’sEquitable Financial’s COI rate increase. In early 2016, AXA Equitable Financial 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 Financial 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. FiveIn August 2020, the federal district court issued a decision granting in part Brach Plaintiffs’ motion for class certification. The court certified nationwide breach of contract and Section 4226 classes, and a New York State Section 349 class, and class notice has gone out. Equitable Financial filed a petition seeking permission to appeal the decision to certify the Section 4226 class and New York State Section 349 class. NaN other federal actions challenging the COI rate increase are also pending against AXA Equitable Financial 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. ThreeNaN actions are also pending against AXA Equitable Financial in New York state court. AXA Equitable Financial is vigorously defending each of these matters.
ObligationObligations under Funding Agreements
Federal Home Loan Bank of New York
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
As a member of the FHLBNY, AXAFHLB, Equitable Financial 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 Financial to pledge qualified mortgage-backed assets and/or government securities as collateral. AXA Equitable Financial issues short-term funding agreements to the FHLBNY and uses the funds for asset, liability, and cash management purposes. AXA Equitable Financial 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.
Entering into FHLB membership, borrowings and funding agreements requires the ownership of FHLB stock and the pledge of assets as collateral. Equitable Financial has purchased FHLB stock of $320 million and pledged collateral with a carrying value of $8.7 billion as of September 30, 2020.
Funding agreements are reported in Policyholders’ account balances in the consolidated balance sheets. For other instruments used for asset/liability and cash management purposes, see “Derivative and offsetting assets and liabilities” included in Note 4. The table below summarizes the Company’s activity of funding agreements with the FHLB.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Change in FHLBNYFHLB Funding Agreements during the Nine Months Ended September 30, 2020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding Balance at December 31, 2019 | | Issued During the Period | | Repaid During the Period | | Long-term Agreements Maturing Within One Year | | Long-term Agreements Maturing Within Five Years | | Outstanding Balance at September 30, 2020 |
| (in millions) |
| Short-term funding agreements: | | | | | | | | | | | |
| Due in one year or less | $ | 4,608 | | | $ | 34,298 | | | $ | 34,358 | | | $ | 490 | | | $ | 0 | | | $ | 5,038 | |
| Long-term funding agreements: | | | | | | | | | | | |
| Due in years two through five | 1,646 | | | 0 | | | 0 | | | (490) | | | 112 | | | 1,268 | |
| Due in more than five years | 646 | | | 0 | | | 0 | | | 0 | | | (112) | | | 534 | |
| Total long-term funding agreements | 2,292 | | | 0 | | | 0 | | | (490) | | | 0 | | | 1,802 | |
| Total funding agreements (1) | $ | 6,900 | | | $ | 34,298 | | | $ | 34,358 | | | $ | 0 | | | $ | 0 | | | $ | 6,840 | |
| | | | | | | | | | | |
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____________
(1)The $8 million and $9 million difference between the funding agreements carrying value shown in fair value table for September 30, 2020 and December 31, 2019, respectively, reflects the remaining amortization of a hedge implemented and closed, which locked in the funding agreements borrowing rates.
Funding Agreement-Backed Notes Program
Under the FABN, Equitable Financial may issue funding agreements to a Delaware special purpose statutory trust (the “Trust”) in exchange for the proceeds from issuances of fixed and floating rate medium-term marketable notes issued by the Trust from time to time (the “Trust notes”). The funding agreements have matching interest and maturity payment terms to the applicable Trust notes. The maximum aggregate principal amount of Trust notes permitted to be outstanding at any one time is $5 billion. Funding agreements issued to the Trust are reported in policyholders’ account balances in the consolidated balance sheets. The table below summarizes the Company’s activity of funding agreements under the FABN.
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
______________ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Outstanding Balance at December 31, 2019 | | Issued During the Period | | Repaid During the Period | | Long-term Agreements Maturing Within One Year | | Long-term Agreements Maturing Within Five Years | | Outstanding Balance at September 30, 2020 |
| (in millions) |
| Short-term funding agreements: | | | | | | | | | | | |
| Due in one year or less | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| Long-term funding agreements: | | | | | | | | | | | |
| Due in years two through five | 0 | | | 650 | | | 0 | | | 0 | | | 0 | | | 650 | |
| Due in more than five years | 0 | | | 500 | | | 0 | | | 0 | | | 0 | | | 500 | |
| Total long-term funding agreements | 0 | | | 1,150 | | | 0 | | | 0 | | | 0 | | | 1,150 | |
| Total funding agreements (1) | $ | 0 | | | $ | 1,150 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 1,150 | |
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| |
(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. |
_____________
(1) The $7 million difference between the funding agreements notional value shown and carrying value table at September 30,
2020, reflects the remaining amortization of the issuance cost of the funding agreements.
Guarantees and Other Commitments
The Company provides certain guarantees or commitments to affiliates and others. At September 30, 2019,2020, these arrangements include commitments by the Company had $876 million of commitments underto provide equity financing arrangementsof $1.2 billion (including $248 million with affiliates) to certain limited partnerships including $246 million of commitments to funds managed by affiliates. In addition, at September 30, 2019,and real estate joint ventures under certain conditions. Management believes the Company will not incur material losses as a result of these commitments.
The Company is the obligor under certain structured settlement agreements it had $179 million of commitmentsentered into with unaffiliated insurance companies and beneficiaries. To satisfy its obligations under equity financing arrangementsthese agreements, the Company owns single premium annuities issued by previously wholly-owned life insurance subsidiaries. The Company has directed payment under these annuities to existing mortgage loanbe made directly to the beneficiaries under the structured settlement agreements. A contingent liability exists with respect to these agreements should the previously wholly-owned subsidiaries be unable to meet their obligations. Management believes the need for the Company to satisfy those obligations is remote.
The Company had $17 million of undrawn letters of credit related to reinsurance at September 30, 2019.2020. The Company had $469 million of commitments under existing mortgage loan agreements at September 30, 2020.
Pursuant to certain assumption agreements (the “Assumption Agreements”) on October 1, 2018, Holdings, AXA Financial legally assumed primary liability from AXA Equitable Financial for all current and future liabilities of AXA Equitable Financial 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 Financial remains secondarily liable for its obligations under these plans and would recognize such liabilities in the event HoldingsAXA Financial does not perform under the terms of the Assumption Agreements. On October 1, 2018, AXA Financial merged with and into its direct parent, Holdings, with Holdings continuing as the surviving entity.
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.
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.
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revisions of Prior Period Financial Statements
During the fourth quarter of 2018, theThe Company identified certain cash flowserrors primarily related to the calculations of actuarially determined insurance contract assets and liabilities that were incorrectly classified in the Company’simpacted previously issued consolidated statements of cash flows. The Company has determined thatfinancial statements. Management evaluated these misclassificationsadjustments and concluded they were not material to itsany previously reported quarterly or annual financial statements. In order to improve the consistency and comparability of the financial statements, of any period.
The impact of items included inmanagement revised 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 and related disclosures to correct these errors as shown below.
Management assessed the materiality of this change within prior period financial statements based upon SEC Staff Accounting Bulletin Number 99, Materiality, which is since codified in Accounting Standards Codification ("ASC") 250, Accounting Changes and Error Corrections. The prior period comparative financial statements that are presented herein have been adjusted to reflect AB as discontinued operations.
Revision of Consolidated Financial Statements for the Nine Months Ended September 30, 2018revised.
The following tables present line items of the consolidated statement of cash flows for the nine months ended September 30, 2018prior period financial statements 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.revision. For these line 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, revisionsrevision, and the amounts as currently revised. Prior period amounts have been reclassified to conform to current period presentation, where applicable, and are summarized inrevised within 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.
statements.
54
AXA EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATEDNotes to Consolidated Financial Statements(Unaudited), Continued
EQUITABLE FINANCIAL STATEMENTSLIFE INSURANCE COMPANY
(UNAUDITED)Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | March 31, 2020 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Balance Sheets: | | | | | | | | | | | | | | | | | | | |
| ASSETS | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other invested assets | 1,962 | | | | | | | 0 | | | 1,962 | | | 1,595 | | | | | | | 12 | | | 1,607 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Deferred policy acquisition costs | 3,746 | | | | | | | (70) | | | 3,676 | | | 4,068 | | | | | | | (85) | | | 3,983 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total Assets | $ | 232,378 | | | | | | | $ | (70) | | | $ | 232,308 | | | $ | 218,841 | | | | | | | $ | (73) | | | $ | 218,768 | |
| LIABILITIES | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Future policy benefits and other policyholders’ liabilities | 41,382 | | | | | | | 29 | | | 41,411 | | | 37,830 | | | | | | | 32 | | | 37,862 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Current and deferred income taxes | 1,020 | | | | | | | (21) | | | 999 | | | 1,637 | | | | | | | (22) | | | 1,615 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total Liabilities | $ | 217,176 | | | | | | | $ | 8 | | | $ | 217,184 | | | $ | 199,928 | | | | | | | $ | 10 | | | $ | 199,938 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| EQUITY | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Retained earnings | 2,658 | | | | | | | (78) | | | 2,580 | | | 7,953 | | | | | | | (83) | | | 7,870 | |
| | | | | | | | | | | | | | | | | | | |
| Total equity attributable to Equitable Financial | 15,157 | | | | | | | (78) | | | 15,079 | | | 18,872 | | | | | | | (83) | | | 18,789 | |
| | | | | | | | | | | | | | | | | | | |
| Total Equity | 15,166 | | | | | | | (78) | | | 15,088 | | | 18,881 | | | | | | | (83) | | | 18,798 | |
| | | | | | | | | | | | | | | | | | | |
| Total Liabilities, Redeemable Noncontrolling interest and Equity | 232,378 | | | | | | | (70) | | | 232,308 | | | $ | 218,841 | | | | | | | $ | (73) | | | $ | 218,768 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | 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 |
|
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Balance Sheets: | | | | | | | | | | | | | | | | | | | |
| ASSETS | | | | | | | | | | | | | | | | | | | |
| Investments: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Deferred policy acquisition costs | 4,337 | | | | | | | (115) | | | 4,222 | | | 5,011 | | | | | | | (52) | | | 4,959 | |
| | | | | | | | | | | | | | | | | | | |
| Amounts due from reinsurers | 3,001 | | | | | | | 1 | | | 3,002 | | | 3,124 | | | | | | | 0 | | | 3,124 | |
| | | | | | | | | | | | | | | | | | | |
| GMIB reinsurance contract asset, at fair value | 2,466 | | | | | | | 0 | | | 2,466 | | | 1,991 | | | | | | | 1 | | | 1,992 | |
| Current and deferred income taxes | 224 | | | | | | | 25 | | | 249 | | | 438 | | | | | | | 35 | | | 473 | |
| Other assets | 3,050 | | | | | | | 0 | | | 3,050 | | | 2,763 | | | | | | | 22 | | | 2,785 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total Assets | $ | 228,041 | | | | | | | $ | (89) | | | $ | 227,952 | | | $ | 199,952 | | | | | | | $ | 6 | | | $ | 199,958 | |
| LIABILITIES | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Future policy benefits and other policyholders’ liabilities | 33,976 | | | | | | | 3 | | | 33,979 | | | 29,808 | | | | | | | 75 | | | 29,883 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other liabilities | 1,768 | | | | | | | 1 | | | 1,769 | | | 1,460 | | | | | | | 0 | | | 1,460 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total Liabilities | $ | 216,344 | | | | | | | $ | 4 | | | $ | 216,348 | | | $ | 187,485 | | | | | | | $ | 75 | | | $ | 187,560 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| EQUITY | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Retained earnings | 2,242 | | | | | | | (97) | | | 2,145 | | | 5,098 | | | | | | | (59) | | | 5,039 | |
| Accumulated other comprehensive income (loss) | 1,592 | | | | | | | 4 | | | 1,596 | | | (491) | | | | | | | (10) | | | (501) | |
| Total equity attributable to Equitable Financial | 11,645 | | | | | | | (93) | | | 11,552 | | | 12,416 | | | | | | | (69) | | | 12,347 | |
| | | | | | | | | | | | | | | | | | | |
| Total Equity | 11,658 | | | | | | | (93) | | | 11,565 | | | 12,428 | | | | | | | (69) | | | 12,359 | |
| | | | | | | | | | | | | | | | | | | |
| Total Liabilities, Redeemable Noncontrolling interest and Equity | $ | 228,041 | | | | | | | $ | (89) | | | $ | 227,952 | | | $ | 199,952 | | | | | | | $ | 6 | | | $ | 199,958 | |
| | | | | | | | | | | | | | | | | | | |
16)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Income (Loss) | | | | | | | | | | | | | | | | | | | |
| REVENUES | | | | | | | | | | | | | | | | | | | |
| Policy charges and fee income | $ | 825 | | | | | | | $ | (1) | | | $ | 824 | | | $ | 1,729 | | | | | | | $ | 0 | | | $ | 1,729 | |
| | | | | | | | | | | | | | | | | | | |
| Net derivative gains (losses) | (5,903) | | | | | | | (5) | | | (5,908) | | | 3,630 | | | | | | | (6) | | | 3,624 | |
| Net investment income (loss) | 934 | | | | | | | (13) | | | 921 | | | 1,525 | | | | | | | 0 | | | 1,525 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other income | 8 | | | | | | | 2 | | | 10 | | | 25 | | | | | | | 0 | | | 25 | |
| Total revenues | (3,557) | | | | | | | (17) | | | (3,574) | | | 8,031 | | | | | | | (6) | | | 8,025 | |
| | | | | | | | | | | | | | | | | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | | | | | | | | | | |
| Policyholders' benefits | 700 | | | | | | | (9) | | | 691 | | | 3,297 | | | | | | | 20 | | | 3,317 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Amortization of deferred policy acquisition costs | 164 | | | | | | | (15) | | | 149 | | | 1,222 | | | | | | | (51) | | | 1,171 | |
| Other operating costs and expenses | 218 | | | | | | | 0 | | | 218 | | | 431 | | | | | | | 1 | | | 432 | |
| Total benefits and deductions | 1,563 | | | | | | | (24) | | | 1,539 | | | 5,961 | | | | | | | (30) | | | 5,931 | |
| Income (loss) from continuing operations, before income taxes | (5,120) | | | | | | | 7 | | | (5,113) | | | 2,070 | | | | | | | 24 | | | 2,094 | |
| Income tax (expense) benefit from continuing operations | 1,029 | | | | | | | (2) | | | 1,027 | | | (425) | | | | | | | (5) | | | (430) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) | (4,091) | | | | | | | 5 | | | (4,086) | | | 1,645 | | | | | | | 19 | | | 1,664 | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | $ | (4,095) | | | | | | | $ | 5 | | | $ | (4,090) | | | $ | 1,648 | | | | | | | $ | 19 | | | $ | 1,667 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 | |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | |
| (in millions) | |
| Consolidated Statements of Income (Loss) | | | | | | | | | | |
| REVENUES: | | | | | | | | | | |
| Policy charges and fee income | 904 | | | | | | | 1 | | | 905 | | |
| | | | | | | | | | |
| Net derivative gains (losses) | 9,533 | | | | | | | (1) | | | 9,532 | | |
| Net investment income (loss) | 591 | | | | | | | 13 | | | 604 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other income | 17 | | | | | | | (2) | | | 15 | | |
| Total revenues | 11,588 | | | | | | | 11 | | | 11,599 | | |
| | | | | | | | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | |
| Policyholders' benefits | 2,597 | | | | | | | 29 | | | 2,626 | | |
| Interest credited to policyholders’ account balances | 289 | | | | | | | 0 | | | 289 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Amortization of deferred policy acquisition costs | 1,058 | | | | | | | (36) | | | 1,022 | | |
| Other operating costs and expenses | 213 | | | | | | | 1 | | | 214 | | |
| Total benefits and deductions | 4,398 | | | | | | | (6) | | | 4,392 | | |
| Income (loss) from continuing operations, before income taxes | 7,190 | | | | | | | 17 | | | 7,207 | | |
| Income tax (expense) benefit from continuing operations | (1,454) | | | | | | | (3) | | | (1,457) | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | 5,736 | | | | | | | 14 | | | 5,750 | | |
| | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | $ | 5,743 | | | | | | | $ | 14 | | | $ | 5,757 | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Income (Loss) | | | | | | | | | | | | | | | | | | | |
| REVENUES | | | | | | | | | | | | | | | | | | | |
| Policy charges and fee income | $ | 3,450 | | | | | | | $ | 37 | | | $ | 3,487 | | | $ | 3,523 | | | | | | | $ | (8) | | | $ | 3,515 | |
| | | | | | | | | | | | | | | | | | | |
| Net derivative gains (losses) | (3,820) | | | | | | | (11) | | | (3,831) | | | (1,010) | | | | | | | (24) | | | (1,034) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other income | 56 | | | | | | | 0 | | | 56 | | | 65 | | | | | | | (1) | | | 64 | |
| Total revenues | 5,148 | | | | | | | 26 | | | 5,174 | | | 6,951 | | | | | | | (33) | | | 6,918 | |
| | | | | | | | | | | | | | | | | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | | | | | | | | | | |
| Policyholders' benefits | 4,119 | | | | | | | (31) | | | 4,088 | | | 3,005 | | | | | | | (45) | | | 2,960 | |
| Interest credited to policyholders’ account balances | 1,127 | | | | | | | 22 | | | 1,149 | | | 1,002 | | | | | | | (23) | | | 979 | |
| | | | | | | | | | | | | | | | | | | |
| Commissions | 629 | | | | | | | 0 | | | 629 | | | 620 | | | | | | | 5 | | | 625 | |
| | | | | | | | | | | | | | | | | | | |
| Amortization of deferred policy acquisition costs | 452 | | | | | | | 68 | | | 520 | | | 431 | | | | | | | 20 | | | 451 | |
| Other operating costs and expenses | 912 | | | | | | | 0 | | | 912 | | | 2,918 | | | | | | | 1 | | | 2,919 | |
| Total benefits and deductions | 7,578 | | | | | | | 59 | | | 7,637 | | | 8,432 | | | | | | | (42) | | | 8,390 | |
| Income (loss) from continuing operations, before income taxes | (2,430) | | | | | | | (33) | | | (2,463) | | | (1,481) | | | | | | | 9 | | | (1,472) | |
| Income tax (expense) benefit from continuing operations | 584 | | | | | | | (5) | | | 579 | | | 446 | | | | | | | 10 | | | 456 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) | (1,846) | | | | | | | (38) | | | (1,884) | | | (921) | | | | | | | 19 | | | (902) | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | $ | (1,851) | | | | | | | $ | (38) | | | $ | (1,889) | | | $ | (918) | | | | | | | $ | 19 | | | $ | (899) | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Income (Loss) | | | | | | | | | | | | | | | | | | | |
| REVENUES | | | | | | | | | | | | | | | | | | | |
| Policy charges and fee income | $ | 853 | | | | | | | $ | 46 | | | $ | 899 | | | $ | 2,577 | | | | | | | $ | 42 | | | $ | 2,619 | |
| | | | | | | | | | | | | | | | | | | |
| Net derivative gains (losses) | (342) | | | | | | | (1) | | | (343) | | | (2,075) | | | | | | | (5) | | | (2,080) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other income | 0 | | | | | | | (1) | | | (1) | | | 40 | | | | | | | (1) | | | 39 | |
| Total revenues | 1,946 | | | | | | | 44 | | | 1,990 | | | 4,707 | | | | | | | 36 | | | 4,743 | |
| | | | | | | | | | | | | | | | | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | | | | | | | | | | |
| Policyholders' benefits | 1,634 | | | | | | | 8 | | | 1,642 | | | 3,321 | | | | | | | 35 | | | 3,356 | |
| Interest credited to policyholders’ account balances | 280 | | | | | | | 16 | | | 296 | | | 837 | | | | | | | 22 | | | 859 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Amortization of deferred policy acquisition costs | 32 | | | | | | | 22 | | | 54 | | | 341 | | | | | | | 4 | | | 345 | |
| | | | | | | | | | | | | | | | | | | |
| Total benefits and deductions | 2,383 | | | | | | | 46 | | | 2,429 | | | 5,816 | | | | | | | 61 | | | 5,877 | |
| Income (loss) from continuing operations, before income taxes | (437) | | | | | | | (2) | | | (439) | | | (1,109) | | | | | | | (25) | | | (1,134) | |
| Income tax (expense) benefit from continuing operations | 175 | | | | | | | 0 | | | 175 | | | 284 | | | | | | | 5 | | | 289 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) | (262) | | | | | | | (2) | | | (264) | | | (825) | | | | | | | (20) | | | (845) | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | $ | (262) | | | | | | | $ | (2) | | | $ | (264) | | | $ | (828) | | | | | | | $ | (20) | | | $ | (848) | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Income (Loss) | | | | | | | | | | | | | | | | | | | |
| REVENUES | | | | | | | | | | | | | | | | | | | |
| Policy charges and fee income | $ | 865 | | | | | | | $ | (2) | | | $ | 863 | | | $ | 1,724 | | | | | | | $ | (4) | | | $ | 1,720 | |
| | | | | | | | | | | | | | | | | | | |
| Net derivative gains (losses) | (178) | | | | | | | (1) | | | (179) | | | (1,733) | | | | | | | (4) | | | (1,737) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total revenues | 2,071 | | | | | | | (3) | | | 2,068 | | | 2,761 | | | | | | | (8) | | | 2,753 | |
| | | | | | | | | | | | | | | | | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | | | | | | | | | | |
| Policyholders' benefits | 868 | | | | | | | (7) | | | 861 | | | 1,687 | | | | | | | 27 | | | 1,714 | |
| Interest credited to policyholders’ account balances | 288 | | | | | | | 3 | | | 291 | | | 557 | | | | | | | 6 | | | 563 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Amortization of deferred policy acquisition costs | 144 | | | | | | | (2) | | | 142 | | | 309 | | | | | | | (18) | | | 291 | |
| | | | | | | | | | | | | | | | | | | |
| Total benefits and deductions | 1,753 | | | | | | | (6) | | | 1,747 | | | 3,433 | | | | | | | 15 | | | 3,448 | |
| Income (loss) from continuing operations, before income taxes | 318 | | | | | | | 3 | | | 321 | | | (672) | | | | | | | (23) | | | (695) | |
| Income tax (expense) benefit from continuing operations | (53) | | | | | | | 0 | | | (53) | | | 109 | | | | | | | 5 | | | 114 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) | 265 | | | | | | | 3 | | | 268 | | | (563) | | | | | | | (18) | | | (581) | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | $ | 264 | | | | | | | $ | 3 | | | $ | 267 | | | $ | (566) | | | | | | | $ | (18) | | | $ | (584) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statements of Income (Loss) | | | | | | | | | | |
| REVENUES: | | | | | | | | | | |
| Policy charges and fee income | | 859 | | | | | | | (2) | | | 857 | |
| | | | | | | | | | |
| Net derivative gains (losses) | | (1,555) | | | | | | | (3) | | | (1,558) | |
| Net investment income (loss) | | 904 | | | | | | | 0 | | | 904 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other income | | 10 | | | | | | | 0 | | | 10 | |
| Total revenues | | 690 | | | | | | | (5) | | | 685 | |
| | | | | | | | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | |
| Policyholders' benefits | | 819 | | | | | | | 34 | | | 853 | |
| Interest credited to policyholders’ account balances | | 269 | | | | | | | 3 | | | 272 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Amortization of deferred policy acquisition costs | | 165 | | | | | | | (16) | | | 149 | |
| Other operating costs and expenses | | 184 | | | | | | | 0 | | | 184 | |
| Total benefits and deductions | | 1,680 | | | | | | | 21 | | | 1,701 | |
| Income (loss) from continuing operations, before income taxes | | (990) | | | | | | | (26) | | | (1,016) | |
| Income tax (expense) benefit from continuing operations | | 162 | | | | | | | 5 | | | 167 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | | (828) | | | | | | | (21) | | | (849) | |
| | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | | $ | (830) | | | | | | | $ | (21) | | | $ | (851) | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statements of Income (Loss) | | | | | | | | | | |
| REVENUES: | | | | | | | | | | |
| Policy charges and fee income | | 3,294 | | | | | | | (5) | | | 3,289 | |
| | | | | | | | | | |
| Net derivative gains (losses) | | 894 | | | | | | | (16) | | | 878 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total revenues | | 8,456 | | | | | | | (21) | | | 8,435 | |
| | | | | | | | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | |
| Policyholders' benefits | | 3,473 | | | | | | | 8 | | | 3,481 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Commissions | | 628 | | | | | | | 7 | | | 635 | |
| | | | | | | | | | |
| Amortization of deferred policy acquisition costs | | 900 | | | | | | | 25 | | | 925 | |
| | | | | | | | | | |
| Total benefits and deductions | | 6,907 | | | | | | | 40 | | | 6,947 | |
| Income (loss) from continuing operations, before income taxes | | 1,549 | | | | | | | (61) | | | 1,488 | |
| Income tax (expense) benefit from continuing operations | | 1,210 | | | | | | | 8 | | | 1,218 | |
| Net income (loss) from continuing operations | | 2,759 | | | | | | | (53) | | | 2,706 | |
| | | | | | | | | | |
| Net income (loss) | | 2,844 | | | | | | | (53) | | | 2,791 | |
| | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | | $ | 2,843 | | | | | | | $ | (53) | | | $ | 2,790 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | $ | (4,091) | | | | | | | $ | 5 | | | $ | (4,086) | | | $ | 1,645 | | | | | | | $ | 19 | | | $ | 1,664 | |
| | | | | | | | | | | | | | | | | | | |
| Change in unrealized gains (losses), net of reclassification adjustment | 1,569 | | | | | | | 0 | | | 1,569 | | | 3,083 | | | | | | | (4) | | | 3,079 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other comprehensive income | 1,570 | | | | | | | 0 | | | 1,570 | | | 3,084 | | | | | | | (4) | | | 3,080 | |
| Comprehensive income (loss) | (2,521) | | | | | | | 5 | | | (2,516) | | | 4,729 | | | | | | | 15 | | | 4,744 | |
| Less: Comprehensive income (loss) attributable to noncontrolling interest | (3) | | | | | | | 7 | | | 4 | | | (3) | | | | | | | 0 | | | (3) | |
| Comprehensive income (loss) attributable to Equitable Financial | $ | (2,518) | | | | | | | $ | (2) | | | $ | (2,520) | | | $ | 4,732 | | | | | | | $ | 15 | | | $ | 4,747 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 | |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | |
| (in millions) | |
| Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| Net income (loss) | $ | 5,736 | | | | | | | $ | 14 | | | $ | 5,750 | | |
| | | | | | | | | | |
| Change in unrealized gains (losses), net of reclassification adjustment | 1,514 | | | | | | | (4) | | | 1,510 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other comprehensive income | 1,514 | | | | | | | (4) | | | 1,510 | | |
| Comprehensive income (loss) | 7,250 | | | | | | | 10 | | | 7,260 | | |
| | | | | | | | | | |
| Comprehensive income (loss) attributable to Equitable Financial | $ | 7,257 | | | | | | | $ | 10 | | | $ | 7,267 | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | $ | (1,846) | | | | | | | $ | (38) | | | $ | (1,884) | | | $ | (921) | | | | | | | $ | 19 | | | $ | (902) | |
| | | | | | | | | | | | | | | | | | | |
| Change in unrealized gains (losses), net of reclassification adjustment | 2,081 | | | | | | | 14 | | | 2,095 | | | (1,230) | | | | | | | 9 | | | (1,221) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other comprehensive income | 2,083 | | | | | | | 14 | | | 2,097 | | | (1,234) | | | | | | | 9 | | | (1,225) | |
| Comprehensive income (loss) | 237 | | | | | | | (24) | | | 213 | | | (2,155) | | | | | | | 28 | | | (2,127) | |
| Less: Comprehensive income (loss) attributable to noncontrolling interest | 0 | | | | | | | 5 | | | 5 | | | 0 | | | | | | | (3) | | | (3) | |
| Comprehensive income (loss) attributable to Equitable Financial | $ | 237 | | | | | | | $ | (29) | | | $ | 208 | | | $ | (2,155) | | | | | | | $ | 31 | | | $ | (2,124) | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | $ | (262) | | | | | | | $ | (2) | | | $ | (264) | | | $ | (825) | | | | | | | $ | (20) | | | $ | (845) | |
| | | | | | | | | | | | | | | | | | | |
| Change in unrealized gains (losses), net of reclassification adjustment | 574 | | | | | | | 156 | | | 730 | | | 2,629 | | | | | | | 92 | | | 2,721 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other comprehensive income | 574 | | | | | | | 156 | | | 730 | | | 2,629 | | | | | | | 92 | | | 2,721 | |
| Comprehensive income (loss) | 312 | | | | | | | 154 | | | 466 | | | 1,804 | | | | | | | 72 | | | 1,876 | |
| Less: Comprehensive income (loss) attributable to noncontrolling interest | 0 | | | | | | | 0 | | | 0 | | | 0 | | | | | | | 3 | | | 3 | |
| Comprehensive income (loss) attributable to Equitable Financial | $ | 312 | | | | | | | $ | 154 | | | $ | 466 | | | $ | 1,804 | | | | | | | $ | 69 | | | $ | 1,873 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | $ | 265 | | | | | | | $ | 3 | | | $ | 268 | | | $ | (563) | | | | | | | $ | (18) | | | $ | (581) | |
| | | | | | | | | | | | | | | | | | | |
| Change in unrealized gains (losses), net of reclassification adjustment | 1,291 | | | | | | | (65) | | | 1,226 | | | 2,055 | | | | | | | (64) | | | 1,991 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Other comprehensive income | 1,291 | | | | | | | (65) | | | 1,226 | | | 2,055 | | | | | | | (64) | | | 1,991 | |
| Comprehensive income (loss) | 1,556 | | | | | | | (62) | | | 1,494 | | | 1,492 | | | | | | | (82) | | | 1,410 | |
| Less: Comprehensive income (loss) attributable to noncontrolling interest | 0 | | | | | | | 1 | | | 1 | | | 0 | | | | | | | 3 | | | 3 | |
| Comprehensive income (loss) attributable to Equitable Financial | $ | 1,556 | | | | | | | $ | (63) | | | $ | 1,493 | | | $ | 1,492 | | | | | | | $ | (85) | | | $ | 1,407 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statements of Comprehensive Income (Loss) | | | | | | | | | | |
| Net income (loss) | | $ | (828) | | | | | | | $ | (21) | | | $ | (849) | |
| | | | | | | | | | |
| Change in unrealized gains (losses), net of reclassification adjustment | | 764 | | | | | | | 1 | | | 765 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other comprehensive income | | 764 | | | | | | | 1 | | | 765 | |
| Comprehensive income (loss) | | (64) | | | | | | | (20) | | | (84) | |
| Less: Comprehensive income (loss) attributable to noncontrolling interest | | 0 | | | | | | | 2 | | | 2 | |
| Comprehensive income (loss) attributable to Equitable Financial | | $ | (64) | | | | | | | $ | (22) | | | $ | (86) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statements of Comprehensive Income: | | | | | | | | | | |
| Net income (loss) | | $ | 2,844 | | | | | | | $ | (53) | | | $ | 2,791 | |
| | | | | | | | | | |
| Change in unrealized gains (losses), net of reclassification adjustment | | 584 | | | | | | | (20) | | | 564 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other comprehensive income | | 602 | | | | | | | (20) | | | 582 | |
| Comprehensive income (loss) | | 3,446 | | | | | | | (73) | | | 3,373 | |
| Less: Comprehensive income (loss) attributable to noncontrolling interest | | 0 | | | | | | | 1 | | | 1 | |
| Comprehensive income (loss) attributable to Equitable Financial | | $ | 3,446 | | | | | | | $ | (74) | | | $ | 3,372 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Equity: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Retained earnings, beginning of year | $ | 7,953 | | | | | | | $ | (83) | | | $ | 7,870 | | | $ | 2,242 | | | | | | | $ | (97) | | | $ | 2,145 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | (4,095) | | | | | | | 5 | | | (4,090) | | | 1,648 | | | | | | | 19 | | | 1,667 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Retained earnings, end of period | $ | 2,658 | | | | | | | $ | (78) | | | $ | 2,580 | | | $ | 2,658 | | | | | | | $ | (78) | | | $ | 2,580 | |
| Accumulated other comprehensive income (loss), beginning of year | $ | 3,106 | | | | | | | $ | 0 | | | $ | 3,106 | | | $ | 1,592 | | | | | | | $ | 4 | | | $ | 1,596 | |
| | | | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) | 1,570 | | | | | | | 0 | | | 1,570 | | | 3,084 | | | | | | | (4) | | | 3,080 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Total Equitable Financial equity, end of period | $ | 15,157 | | | | | | | $ | (78) | | | $ | 15,079 | | | $ | 15,157 | | | | | | | $ | (78) | | | $ | 15,079 | |
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| | | | | | | | | | | | | | | | | | | |
| Total equity, end of period | $ | 15,166 | | | | | | | $ | (78) | | | $ | 15,088 | | | $ | 15,166 | | | | | | | $ | (78) | | | $ | 15,088 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 | |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | |
| (in millions) | |
| Consolidated Statements of Equity: | | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
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| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Retained earnings, beginning of year | $ | 2,242 | | | | | | | $ | (97) | | | $ | 2,145 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | 5,743 | | | | | | | $ | 14 | | | 5,757 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Retained earnings, end of period | $ | 7,953 | | | | | | | $ | (83) | | | $ | 7,870 | | |
| Accumulated other comprehensive income (loss), beginning of year | $ | 1,592 | | | | | | | $ | 4 | | | $ | 1,596 | | |
| | | | | | | | | | |
| Other comprehensive income (loss) | 1,514 | | | | | | | (4) | | | 1,510 | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total Equitable Financial equity, end of period | $ | 18,872 | | | | | | | $ | (83) | | | $ | 18,789 | | |
| | | | | | | | | | |
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| | | | | | | | | | |
| | | | | | | | | | |
| Total equity, end of period | $ | 18,881 | | | | | | | $ | (83) | | | $ | 18,798 | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | | | |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | | | |
| (in millions) | | | | |
| Consolidated Statements of Equity: | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Retained earnings, beginning of year | $ | 5,098 | | | | | | | $ | (59) | | | $ | 5,039 | | | $ | 8,938 | | | | | | | $ | (78) | | | $ | 8,860 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | (1,851) | | | | | | | (38) | | | (1,889) | | | (918) | | | | | | | 19 | | | (899) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Retained earnings, end of year | $ | 2,242 | | | | | | | $ | (97) | | | $ | 2,145 | | | $ | 5,098 | | | | | | | $ | (59) | | | $ | 5,039 | | | | | |
| Accumulated other comprehensive income (loss), beginning of year | $ | (491) | | | | | | | $ | (10) | | | $ | (501) | | | $ | 598 | | | | | | | $ | (19) | | | $ | 579 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) | 2,083 | | | | | | | 14 | | | 2,097 | | | (1,234) | | | | | | | 9 | | | (1,225) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive income (loss), end of year | $ | 1,592 | | | | | | | $ | 4 | | | $ | 1,596 | | | $ | (491) | | | | | | | $ | (10) | | | $ | (501) | | | | | |
| Total Equitable Financial equity, end of year | $ | 11,645 | | | | | | | $ | (93) | | | $ | 11,552 | | | $ | 12,416 | | | | | | | $ | (69) | | | $ | 12,347 | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total equity, end of year | $ | 11,658 | | | | | | | $ | (93) | | | $ | 11,565 | | | $ | 12,428 | | | | | | | $ | (69) | | | $ | 12,359 | | | | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2019 | | Nine Months Ended September 30, 2019 | | | | |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | | | |
| (in millions) | | | | |
| Consolidated Statements of Equity: | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Retained earnings, beginning of year | $ | 4,532 | | | | | | | $ | (77) | | | $ | 4,455 | | | $ | 5,098 | | | | | | | $ | (59) | | | $ | 5,039 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | (262) | | | | | | | (2) | | | (264) | | | (828) | | | | | | | (20) | | | (848) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Retained earnings, end of period | $ | 3,270 | | | | | | | $ | (79) | | | $ | 3,191 | | | $ | 3,270 | | | | | | | $ | (79) | | | $ | 3,191 | | | | | |
| Accumulated other comprehensive income (loss), beginning of year | $ | 1,564 | | | | | | | $ | (74) | | | $ | 1,490 | | | $ | (491) | | | | | | | $ | (10) | | | $ | (501) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) | 574 | | | | | | | 156 | | | 730 | | | 2,629 | | | | | | | 92 | | | 2,721 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive income (loss), end of period | $ | 2,138 | | | | | | | $ | 82 | | | $ | 2,220 | | | $ | 2,138 | | | | | | | $ | 82 | | | $ | 2,220 | | | | | |
| Total Equitable Financial equity, end of period | $ | 13,239 | | | | | | | $ | 3 | | | $ | 13,242 | | | $ | 13,239 | | | | | | | $ | 3 | | | $ | 13,242 | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total equity, end of period | $ | 13,251 | | | | | | | $ | 3 | | | $ | 13,254 | | | $ | 13,251 | | | | | | | $ | 3 | | | $ | 13,254 | | | | | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Equity: | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Retained earnings, beginning of year | $ | 4,268 | | | | | | | $ | (80) | | | $ | 4,188 | | | $ | 5,098 | | | | | | | $ | (59) | | | $ | 5,039 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | 264 | | | | | | | 3 | | | 267 | | | (566) | | | | | | | (18) | | | (584) | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Retained earnings, end of period | $ | 4,532 | | | | | | | $ | (77) | | | $ | 4,455 | | | $ | 4,532 | | | | | | | $ | (77) | | | $ | 4,455 | |
| Accumulated other comprehensive income (loss), beginning of year | $ | 273 | | | | | | | $ | (9) | | | $ | 264 | | | $ | (491) | | | | | | | $ | (10) | | | $ | (501) | |
| | | | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) | 1,291 | | | | | | | (65) | | | 1,226 | | | 2,055 | | | | | | | (64) | | | 1,991 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive income (loss), end of period | $ | 1,564 | | | | | | | $ | (74) | | | $ | 1,490 | | | $ | 1,564 | | | | | | | $ | (74) | | | $ | 1,490 | |
| Total Equitable Financial equity, end of period | $ | 13,920 | | | | | | | $ | (151) | | | $ | 13,769 | | | $ | 13,920 | | | | | | | $ | (151) | | | $ | 13,769 | |
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| | | | | | | | | | | | | | | | | | | |
| Total equity, end of period | $ | 13,932 | | | | | | | $ | (151) | | | $ | 13,781 | | | $ | 13,932 | | | | | | | $ | (151) | | | $ | 13,781 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statements of Equity: | | | | | | | | | | |
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| | | | | | | | | | |
| Retained earnings, beginning of year | | $ | 5,098 | | | | | | | $ | (59) | | | $ | 5,039 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | | (830) | | | | | | | $ | (21) | | | (851) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Retained earnings, end of period | | $ | 4,268 | | | | | | | $ | (80) | | | $ | 4,188 | |
| Accumulated other comprehensive income (loss), beginning of year | | $ | (491) | | | | | | | $ | (10) | | | $ | (501) | |
| | | | | | | | | | |
| Other comprehensive income (loss) | | 764 | | | | | | | 1 | | | 765 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Accumulated other comprehensive income (loss), end of period | | $ | 273 | | | | | | | $ | (9) | | | $ | 264 | |
| Total Equitable Financial equity, end of period | | $ | 12,358 | | | | | | | $ | (89) | | | $ | 12,269 | |
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| Total equity, end of period | | $ | 12,370 | | | | | | | $ | (89) | | | $ | 12,281 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| | (in millions) |
| Consolidated Statements of Equity: | | | | | | | | | | |
| | | | | | | | | | |
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| Retained earnings, beginning of year | | $ | 6,095 | | | | | | | $ | (25) | | | $ | 6,070 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) attributable to Equitable Financial | | 2,843 | | | | | | | $ | (53) | | | 2,790 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Retained earnings, end of period | | $ | 8,938 | | | | | | | $ | (78) | | | $ | 8,860 | |
| Accumulated other comprehensive income (loss), beginning of year | | $ | (4) | | | | | | | $ | 1 | | | $ | (3) | |
| | | | | | | | | | |
| Other comprehensive income (loss) | | 602 | | | | | | | (20) | | | 582 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Accumulated other comprehensive income (loss), end of period | | $ | 598 | | | | | | | $ | (19) | | | $ | 579 | |
| Total Equitable Financial equity, end of period | | $ | 16,397 | | | | | | | $ | (97) | | | $ | 16,300 | |
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| | | | | | | | | | |
| Total equity, end of period | | $ | 19,492 | | | | | | | $ | (97) | | | $ | 19,395 | |
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | March 31, 2020 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Cash Flows: | | | | | | | | | | | | | | | | | | | |
| Cash flow from operating activities: | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | $ | 1,645 | | | | | | | $ | 19 | | | $ | 1,664 | | | $ | 5,736 | | | | | | | $ | 14 | | | $ | 5,750 | |
| | | | | | | | | | | | | | | | | | | |
| Policy charges and fee income | (1,729) | | | | | | | 0 | | | (1,729) | | | (904) | | | | | | | (1) | | | (905) | |
| | | | | | | | | | | | | | | | | | | |
| Net derivative (gains) losses | (3,630) | | | | | | | 6 | | | (3,624) | | | (9,533) | | | | | | | 1 | | | (9,532) | |
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| | | | | | | | | | | | | | | | | | | |
| Amortization and depreciation | 1,181 | | | | | | | (51) | | | 1,130 | | | 1,025 | | | | | | | (35) | | | 990 | |
| | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | |
| Future policy benefits | 1,666 | | | | | | | 20 | | | 1,686 | | | 1,817 | | | | | | | 29 | | | 1,846 | |
| Reinsurance recoverable | (149) | | | | | | | 0 | | | (149) | | | (97) | | | | | | | 1 | | | (96) | |
| Current and deferred income taxes | 433 | | | | | | | 6 | | | 439 | | | 1,462 | | | | | | | 3 | | | 1,465 | |
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| Net cash provided by (used in) operating activities | $ | (868) | | | | | | | $ | 0 | | | $ | (868) | | | $ | (621) | | | | | | | $ | 12 | | | $ | (609) | |
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| Change in collateralized pledged assets | 58 | | | | | | | 0 | | | 58 | | | 45 | | | | | | | (1) | | | 44 | |
| Change in collateralized pledged liabilities | 247 | | | | | | | 0 | | | 247 | | | 667 | | | | | | | (11) | | | 656 | |
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| Net cash provided by (used in) financing activities | $ | 2,308 | | | | | | | $ | 0 | | | $ | 2,308 | | | $ | 2,504 | | | | | | | $ | (12) | | | $ | 2,492 | |
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| Cash and cash equivalents, end of period | $ | 4,318 | | | | | | | $ | 0 | | | $ | 4,318 | | | $ | 7,492 | | | | | | | $ | 0 | | | $ | 7,492 | |
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EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2018 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Cash Flows: | | | | | | | | | | | | | | | | | | | |
| Cash flow from operating activities: | | | | | | | | | | | | | | | | | | | |
| Net income (loss) (1) | $ | (1,846) | | | | | | | $ | (38) | | | $ | (1,884) | | | $ | (358) | | | | | | | $ | 19 | | | $ | (339) | |
| Adjustments to reconcile Net income (loss) to Net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | |
| Policy charges and fee income | (3,450) | | | | | | | (37) | | | (3,487) | | | (3,523) | | | | | | | 8 | | | (3,515) | |
| Interest credited to policyholders' account balances | 1,127 | | | | | | | 22 | | | 1,149 | | | 1,002 | | | | | | | (23) | | | 979 | |
| Net derivative (gains) losses | 3,820 | | | | | | | 11 | | | 3,831 | | | 1,010 | | | | | | | 24 | | | 1,034 | |
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| Amortization and depreciation | 323 | | | | | | | 68 | | | 391 | | | 340 | | | | | | | 20 | | | 360 | |
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| Capitalization of DAC | (648) | | | | | | | 0 | | | (648) | | | (597) | | | | | | | 5 | | | (592) | |
| Future policy benefits | 1,115 | | | | | | | (31) | | | 1,084 | | | (284) | | | | | | | (46) | | | (330) | |
| | | | | | | | | | | | | | | | | | | |
| Current and deferred income taxes | (334) | | | | | | | 5 | | | (329) | | | (556) | | | | | | | (7) | | | (563) | |
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| Net cash provided by (used in) operating activities | $ | (606) | | | | | | | $ | 0 | | | $ | (606) | | | $ | 1,418 | | | | | | | $ | 0 | | | $ | 1,418 | |
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| Cash and cash equivalents, end of period | $ | 1,492 | | | | | | | $ | 0 | | | $ | 1,492 | | | $ | 2,622 | | | | | | | $ | 0 | | | $ | 2,622 | |
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_____________
(1) December 31, 2018 Net Income (Loss) includes $563 million of discontinued operations that are not included in Net Income (Loss) in the Consolidated Statement of Income (Loss).
EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2019 | | June 30, 2019 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised | | As Previously Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Cash Flows: | | | | | | | | | | | | | | | | | | | |
| Cash flow from operating activities: | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | $ | (825) | | | | | | | $ | (20) | | | $ | (845) | | | $ | (563) | | | | | | | $ | (18) | | | $ | (581) | |
| Adjustments to reconcile Net income (loss) to Net cash provided by (used in) operating activities: | | | | | | | | | | | | | | | | | | | |
| Policy charges and fee income | (2,577) | | | | | | | (42) | | | (2,619) | | | (1,724) | | | | | | | 4 | | | (1,720) | |
| Interest credited to policyholders' account balances | 837 | | | | | | | 22 | | | 859 | | | 557 | | | | | | | 6 | | | 563 | |
| Net derivative (gains) losses | 2,075 | | | | | | | 5 | | | 2,080 | | | 1,733 | | | | | | | 4 | | | 1,737 | |
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| Amortization and depreciation | 267 | | | | | | | 4 | | | 271 | | | 268 | | | | | | | (18) | | | 250 | |
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| Future policy benefits | 1,035 | | | | | | | 40 | | | 1,075 | | | 91 | | | | | | | 27 | | | 118 | |
| Reinsurance recoverable | (123) | | | | | | | (4) | | | (127) | | | (59) | | | | | | | 0 | | | (59) | |
| Current and deferred income taxes | (81) | | | | | | | (5) | | | (86) | | | 99 | | | | | | | (5) | | | 94 | |
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| Net cash provided by (used in) operating activities | $ | (712) | | | | | | | $ | 0 | | | $ | (712) | | | $ | (283) | | | | | | | $ | 0 | | | $ | (283) | |
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| Cash and cash equivalents, end of period | $ | 1,553 | | | | | | | $ | 0 | | | $ | 1,553 | | | $ | 3,093 | | | | | | | $ | 0 | | | $ | 3,093 | |
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EQUITABLE FINANCIAL LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements(Unaudited), Continued
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| March 31, 2019 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Cash Flows: | | | | | | | | | |
| Cash flow from operating activities: | | | | | | | | | |
| Net income (loss) | $ | (828) | | | | | | | $ | (21) | | | $ | (849) | |
| Adjustments to reconcile Net income (loss) to Net cash provided by (used in) operating activities: | | | | | | | | | |
| Policy charges and fee income | (859) | | | | | | | 2 | | | (857) | |
| Interest credited to policyholders' account balances | 269 | | | | | | | 3 | | | 272 | |
| Net derivative (gains) losses | 1,555 | | | | | | | 3 | | | 1,558 | |
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| Amortization and depreciation | 143 | | | | | | | (16) | | | 127 | |
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| Future policy benefits | 41 | | | | | | | 34 | | | 75 | |
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| Current and deferred income taxes | 54 | | | | | | | (5) | | | 49 | |
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| Net cash provided by (used in) operating activities | $ | (148) | | | | | | | $ | 0 | | | $ | (148) | |
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| Cash and cash equivalents, end of period | 2,922 | | | | | | | 0 | | | 2,922 | |
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| December 31, 2017 |
| As Previously
Reported | | | | | | Impact of Revisions | | As Revised |
| (in millions) |
| Consolidated Statements of Cash Flows: | | | | | | | | | |
| Cash flow from operating activities: | | | | | | | | | |
| Net income (loss) (1) | $ | 3,377 | | | | | | | $ | (54) | | | $ | 3,323 | |
| Adjustments to reconcile Net income (loss) to Net cash provided by (used in) operating activities: | | | | | | | | | |
| Policy charges and fee income | (3,294) | | | | | | | 5 | | | (3,289) | |
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| Net derivative (gains) losses | (870) | | | | | | | 16 | | | (854) | |
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| Amortization and depreciation | 825 | | | | | | | 25 | | | 850 | |
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| Future policy benefits | 1,189 | | | | | | | 8 | | | 1,197 | |
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| Net cash provided by (used in) operating activities | $ | (381) | | | | | | | $ | 0 | | | $ | (381) | |
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| Cash and cash equivalents, end of period | 3,409 | | | | | | | 0 | | | 3,409 | |
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_____________
(1) Net Income (Loss) includes $533 million of discontinued operations that are not included in Net Income (Loss) in the Consolidated Statement of Income (Loss).
15) SUBSEQUENT EVENTS
On October 27, 2020, Holdings Notes
On November 4, 2019,entered into a Master Transaction Agreement with Venerable Insurance and Annuity Company (“VIAC”), and Venerable Holdings, issued $900 millionInc., a Delaware corporation. VIAC will acquire all of floatingthe shares of the capital stock of Corporate Solutions Life Reinsurance Company (“CSLRC”), and, immediately following such sale, Equitable Financial will enter into a coinsurance and modified coinsurance agreement, pursuant to which Equitable Financial will cede to CSLRC, on a combined coinsurance and modified coinsurance basis, legacy variable annuity policies sold by Equitable Financial between 2006-2008 supported by general account assets of approximately $12 billion (the “Block”), comprised of non-New York “Accumulator” policies containing fixed rate notes due November 4, 2024 to AXAGuaranteed Minimum Income Benefit and/or Guaranteed Minimum Death Benefit guarantees. Equitable (the “Notes”). The NotesFinancial will generally bear interest at a rate per annum equalreinsure the separate accounts relating to the sum of: (i)Block on a modified coinsurance basis. Equitable Financial will also acquire a surplus note in aggregate principal amount of $50 million issued by VIAC in the LIBOR rate calculated for the interest period; and (ii) 1.33%.
transaction.
55
Item 2. 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 Equitable Financial’s Annual Report on Form 10-K for the year ended December 31, 20182019 (“20182019 Form 10-K”). The management’s narrative that follows represents a discussion and analysis of AXA Equitable’sEquitable Financial’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. We benefit from our complementary mix of product offerings. This mix in product offerings provides diversity in our earnings sources, which helps offset fluctuations in market conditions and variability in business results, while offering growth opportunities.
Reinsurance of Legacy Variable Annuity Block and Sale of Runoff Variable Annuity Reinsurance Entity
On October 27, 2020, Holdings announced that it had entered into a Master Transaction Agreement with Venerable Insurance and Annuity Company, an insurance company domiciled in Iowa (“VIAC”), and Venerable Holdings, Inc., a Delaware corporation, pursuant to which, among other things, VIAC will acquire all of the shares of the capital stock of Corporate Solutions Life Reinsurance Company, an insurance company domiciled in Delaware and wholly owned subsidiary of Holdings (“CSLRC”), and, immediately following such sale, Equitable Financial will enter into a coinsurance and modified coinsurance agreement, pursuant to which Equitable Financial will cede to CSLRC, on a combined coinsurance and modified coinsurance basis, legacy variable annuity policies sold by Equitable Financial between 2006-2008 supported by general account assets of approximately $12 billion (the “Block”), comprised of non-New York “Accumulator” policies containing fixed rate Guaranteed Minimum Income Benefit and/or Guaranteed Minimum Death Benefit guarantees. Equitable Financial will reinsure the separate accounts relating to the Block on a modified coinsurance basis. Equitable Financial will also acquire a surplus note in aggregate principal amount of $50 million issued by VIAC in the transaction.
COVID-19 Impact
The COVID-19 pandemic has negatively impacted the U.S. and global economies. In the third quarter, financial markets continued to experience significant volatility and unemployment levels remained high. The pandemic continues to evolve in the U.S., and while certain states and municipalities have re-opened, others are pausing re-opening plans or reinstating lockdowns due to surges in COVID-19 cases. States and municipalities have instituted varying plans for in-person instruction at schools, but surging national infection rates and the possibility of a localized outbreak create uncertainty and threaten continued in-person instruction. The effects from the pandemic are likely to persist for months to come. Governments around the world continued to implement economic stimulus measures that are intended to steady businesses and consumers until economic activity and financial markets meaningfully recover. The timing and magnitude of any such recovery, however, remains uncertain.
As a financial services company, factors such as the volatility and strength of equity markets, interest rates, consumer spending, and government debt and spending all affect the business and economic environment and, ultimately, the amount and profitability of our business. During the current economic downturn, the demand for our products and services and our investment returns could be materially and adversely affected. In addition, the growing number of COVID-19 related deaths could have an adverse effect on our insurance business due to increased mortality and, in certain cases, morbidity rates.
To date, COVID-related impacts, including adverse mortality experience, have been manageable and below initial expectations. In response to the current environment, we are adapting our processes to meet client needs. For example, we have modified our underwriting policies to offer a fluid-less, touchless process to help more clients access the protection they need. In addition, we have accelerated our digital adoption programs, leading to improved outcomes for clients, advisors, and the company. With schools closed and an uncertain outlook on reopening, we have developed digital tools and enhanced our
remote engagement with our educator clients, which is resulting in improved retention and increases in retirement plan contributions.
Action taken by state insurance departments, including the NYDFS, to require insurers to offer flexible premium payment plans, relax payment dates, waive late fees and penalties in order to avoid canceling or non-renewing polices may negatively affect our results of operations. Additionally, the profitability of many of our retirement, protection and investment products depends in part on the value of the AUM supporting them, which has declined and may continue to decline substantially depending on any of the foregoing conditions. The ongoing economic impact and the potential for continued volatility and declines in the capital markets could have a significant adverse effect on our business, results of operations and financial condition, particularly if economic activity and financial markets do not recover or recover slowly.
While the COVID-19 pandemic significantly affected the capital markets and economy, we believe the actions we have previously taken help assure that our economic balance sheet is protected from interest rate and equity declines. These actions include redesigning our product portfolio to concentrate on offering less capital intensive products and implementing a hedging strategy that manages and protects against the economic risks associated with our in-force GMxB products. In addition to our hedging strategy, we employ various other methods to manage the risks of our in-force variable annuity products, including asset-liability matching, volatility management tools within the Separate Accounts and an active in-force management program, including buyout offers for certain products. Our General Account was impacted both from declining interest rates, which had a positive effect on fair value, and sharply increased credit spreads, which had a negative impact on fair value. Due to the General Account’s exposure to U.S. government bonds and credit quality of the portfolio, we feel that our balance sheet is well positioned to withstand the extreme volatility in the capital markets.
In light of the unprecedented decline in long-term interest rates in the first quarter of 2020, we updated our long-term GAAP interest rate assumption to grade from current rates over 10-years to the 5-year historical average (currently 2.25%). For additional information, see “—Significant Factors Impacting Our Results—Assumption Updates and Model Changes.”
Operationally, we acted quickly and implemented our risk management and contingency plans as the COVID-19 pandemic evolved. For example, among other things, we implemented travel restrictions, imposed self-quarantine requirements for employees and affiliated advisors who were exposed to someone who tested positive or had traveled to certain countries with active COVID-19 outbreaks and, finally, we temporarily closed our corporate locations and affiliated advisor branch offices. As a result, most of our employee and affiliated advisors are currently working remotely. The remote working arrangement has detracted from the ability of our affiliated advisors to sell our products in the normal course and, as a result, the demand for our products and services has been adversely impacted and could decline further as the pandemic persists. We are also mindful that an extended period of remote work arrangements could strain our business continuity plans, introduce additional operational risk, including cybersecurity and privacy risks, and impair our ability to effectively manage our business.
While the COVID-19 pandemic has negatively impacted our business and financial results, the extent and nature of its full financial impact cannot reasonably be estimated at this time due to the uncertainty as to the severity and duration of the pandemic. For additional information regarding the potential impacts of the COVID-19 pandemic, see “Risk Factors—The novel coronavirus (COVID-19) pandemic has adversely impacted our business and could materially adversely affect our business, results of operation or financial condition in the future.” in our Forms 10-Q for the quarters ended March 31, 2020 and June 30, 2020.
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 valueAV or benefit base of our life insurance and annuity products which are influenced by changes in economic conditions, primarily equity market returns, as well as net flows. Our premium income is driven by the growth in new policies written and the persistency of our in-force policies, both of which are influenced by a combination of factors, including our efforts to attract and retain customers and market conditions that influence demand for our products. Our investment income is driven by the yield on our General Account investment portfolio
and is impacted by the prevailing level of interest rates as we reinvest cash associated with maturing investments and net flows to the portfolio.
Benefits and Other Deductions
Our primary expenses are:
•policyholders’ benefits and interest credited to policyholders’ account balances;
•sales commissions and compensation paid to intermediaries and advisors that distribute our products and services; and
•compensation and benefits provided to our employees and other operating expenses.
Policyholders’ benefits are driven primarily by mortality, customer withdrawals and benefits which change in response to changes in capital market conditions. In addition, some of our policyholders’ benefits are directly tied to the AV and benefit base of our variable annuity products. Interest credited to policyholders varies in relation to the amount of the underlying AV or benefit base. Sales commissions and compensation paid to intermediaries and advisors vary in relation to premium and fee income generated from these sources, whereas compensation and benefits to our employees are more constant and impacted by market wages and decline with increases in efficiency. Our ability to manage these expenses across various economic cycles and products is critical to the profitability of our company.
Net Income Volatility
We have offered and continue to offer variable annuity products with variable annuity guaranteed benefits (“GMxB”)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 not measured at fair value, 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.
An additional source of Net income (loss) volatility is the impact of the Company’s annual actuarial assumption review. See “—Significant Factors Impacting Our Results— Assumption Updates and Model Changes”, for further detail of the impact of assumption updates on Net income (loss) in first quarter 2020. 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 maturityheld-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 affiliated and non-affiliated reinsurers a portion of our exposure to variable annuity products that offer a GMIB feature. We account for the GMIB reinsurance
contracts as derivatives and report them at fair value. Gross 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
DuringOur actuaries oversee the valuation of the product liabilities and assets and review the underlying inputs and assumptions. We comprehensively review the actuarial assumptions underlying these valuations and update assumptions 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.each year. Assumptions are based on a combination of companyCompany experience, industry experience, management actions and expert judgment and reflect our best estimate as of the date of eachthe applicable financial statement. Asstatements. Changes in assumptions can result in a result of this review, some assumptions were updated, resulting in increases and decreases insignificant change to the carrying valuesvalue of these product liabilities and assets.assets and, consequently, the impact could be material to earnings in the period of the change.
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”).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.
For further details of our accounting policies and related judgments pertaining to assumption updates, see Note 2 to the Notes to the Company’s consolidated financial statements and “—Summary of Critical Accounting Estimates —Liability for Future Policy Benefits” included in the 2019 Form 10-K. Assumption Updates and Model Changes
We conduct our annual review of our assumptions and models during the third quarter of each year. However, we update our assumptions as needed in the event we become aware of economic conditions or events that could require a change in our assumptions that we believe may have a significant impact to the carrying value of product liabilities and assets and consequently materially impact our earnings in the period of the change.
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 updatesupdate during the third quarter ofthree and nine months ended September 30, 2020 and 2019 and 2018 to our Income (loss) from continuing operations, before income taxes and Net income (loss). There
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, (1) |
| 2020 | | 2019 | | 2020 | | 2019 |
| (in millions) |
| Impact of assumption update on Net income (loss): | | | | | | | |
| Variable annuity product features related assumption update | $ | (41) | | | $ | (1,438) | | | $ | (1,496) | | | $ | (1,438) | |
| Assumption updates for other business | (83) | | | 84 | | | (750) | | | 84 | |
| Impact of assumption updates on Income (loss) from continuing operations, before income tax | (124) | | | (1,354) | | | (2,246) | | | (1,354) | |
| Income tax (expense) benefit on assumption update | 26 | | | 284 | | | 472 | | | 284 | |
| Net income (loss) impact of assumption update | $ | (98) | | | $ | (1,070) | | | $ | (1,774) | | | $ | (1,070) | |
(1) During the first quarter of 2020, we updated interest rate assumption and the impact was no materiala decrease to Net income (loss) of $1.7 billion. See Note 2 for further details on the assumption update.
2020 Assumption Updates
Annual Update
The impact from model changes duringof the economic assumption update in the third quarter of 2019 and 20182020 was a decrease of $124 million to our Income (loss) from continuing operations, before income taxes orand a decrease to Net income (loss). of $98 million.
The net impact of this assumption update on Income (loss) from continuing operations, before income taxes of $124 million consisted of a decrease in Policy charges and fee income of $21 million, an increase in Policyholders’ benefits of $175 million, an increase in Interest credited to policyholders’ account balances of $8 million, an increase in Net derivative gains of $106 million and an increase in the Amortization of DAC of $26 million. Third quarter 2020 assumption updates include a pre-tax gain of $421 million attributable to the removal of the credit risk adjustment from our fair value scenario calibration to better align with US valuation practices, offset by updates to our mortality and policyholder behavior assumptions to reflect emerging experience, |
| | | | | | | |
| | 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 | ) |
In the first quarter of 2020, due to the extraordinary economic conditions driven by the COVID-19 pandemic, we updated our interest rate assumption to grade from the current interest rate environment to an ultimate five-year historical average over a 10-year period. As such, the 10-year U.S. Treasury yield grades from the current level to an ultimate 5-year average of 2.25%. We determined that no assumption updates were necessary in the second quarter of 2020.
The low interest rate environment and update to the interest rate assumption caused a loss recognition event for our life interest-sensitive products, as well as to certain run-off business. This loss recognition event caused an acceleration of DAC amortization on our life interest-sensitive products and an increase in the premium deficiency reserve on the run-off business in the first quarter of 2020.
The impact of the economic assumption update in the first quarter of 2020 was a decrease of $2.1 billion to Income (loss) from continuing operations, before income taxes and a decrease to Net income (loss) of $1.7 billion.
The net impact of this assumption update on Income (loss) from continuing operations, before income taxes of $2.1 billion consisted of an increase in Policy charges and fee income of $54 million, an increase in Policyholders’ benefits of $1.3 billion, a decrease in Interest credited to policyholders’ account balances of $6 million and an increase in the Amortization of DAC of $840 million.
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)
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, an increase in Net derivative losses of $548 million and a decrease in Amortization of DAC of $77 million.
2018Impact of Assumption UpdatesUpdate and COVID-19 Impacts on Income from Continuing Operations before income taxes and Net income (loss)
The unprecedented and rapid spread of COVID-19 and the related restrictions and social distancing measures implemented throughout the world have caused severe, lasting turmoil in the financial markets during the first nine months of 2020.
The table below presents the impact of assumption updates in the third quarter of 2018 was a decrease of $228 million toCOVID-19 related impacts on Income (loss) from continuing operations, before income taxes and a decrease toon Net income (loss) which all occurred during the first six months 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,2020:
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2020 |
| COVID-19 Impacts |
| Interest Rate Assumption Update | | Impacts other than Interest Rate Assumption
Update (1) | | Total |
| (in millions) |
| Net income (loss) from continuing operations, before income taxes | $ | (2,122) | | | $ | (105) | | | $ | (2,227) | |
| Income tax (expense) benefit | 446 | | | 22 | | | 468 | |
| Net income (loss) from continuing operations, net of taxes | $ | (1,676) | | | $ | (83) | | | $ | (1,759) | |
_______________
(1) Includes amounts primarily due to annuitization assumptions, partially offset by favorable updatesnon-variable annuity hedging impacts resulting from unprecedented volatility in equity markets and accelerated amortization of DAC due to loss recognition in the first half of 2020 resulting from first quarter 2020 interest rate assumption update.
2020 Model Changes
In the first quarter of 2020, we adopted a new economic assumptions.
scenario generator to calculate the fair value of the GMIB reinsurance contract asset and GMxB derivative features liability, eliminating reliance on AXA Group for scenario production. The assumption changes during 2018 consistednew economic scenario generator allows for a tighter calibration of a decreaseU.S. indices, better reflecting our actual portfolio. The net impact of the new economic scenario generator resulted 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 DACIncome (loss) from continuing operations, before income taxes of $165 million.million, and an increase to Net Income (loss) of $130 million for the nine months ended September 30, 2020
There was no material impact from model changes during the first nine months of 2019 to our Income (loss) from continuing operations, before income taxes or Net income (loss).
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 varietyIn the face of factors continuethe ongoing pandemic, financial markets continued to impact globalexperience significant volatility and unemployment levels remained high during the third quarter. Although the financial and economic conditions. These factors include, among others, concerns over economic growthmarket recovered most of the first quarter losses in the United States,months since, the prospect of continued low interest rates including followingvolatility remains, especially given the sharp decline in the second quarter of 2019, falling unemployment rates,uncertainty surrounding continued civil unrest across the U.S. Federal Reserve’s potential plans to lower short-term interest rates, fluctuations incentered around racial inequality, the strengthpresidential and congressional election and the continued economic effects 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.
virus. 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 continue to 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.AV, from which we derive our fee income. 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
The potential for increased volatility, coupled with prevailing interest rates continuing to fall and/or 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 ValuesAV 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
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.Statements in this Form 10-Q.
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, capital requirements and capital requirements.profitability of the industry and result in increased regulation and oversight for the industry.
National AssociationCOVID-19 Impact. In March 2020, in connection with the COVID-19 pandemic, many U.S. state insurance regulators began issuing bulletins, directives and guidance encouraging, requesting or directing licensed life insurance companies to implement life insurance policy measures such as: providing grace periods to policyholders for the payment of Insurance Commissioners (“NAIC”)insurance premiums and forbearing on the cancellation or non-renewal of life insurance policies due to non-payment of premium. In addition, some states’ governors have issued emergency orders and state insurance commissioners have promulgated emergency regulations requiring such actions. For example, the NYDFS promulgated emergency regulations requiring insurance company actions with respect to many lines of insurance. Among other requirements, these emergency measures temporarily required New York licensed life insurers to extend the grace period for the payment of premiums and fees to 90 days for any life policyholder or group certificate holder facing financial hardship as a result of the COVID-19 pandemic. In addition, licensed life insurers were required to provide 90 days to exercise rights or benefits for a policyholder who was unable timely to exercise such rights as a result of the COVID-19 pandemic. New York licensed insurers were prohibited from imposing any late fees or reporting such policyholder to a credit reporting agency or debt collection agency in the event of a policyholder’s failure to timely pay premium and were required to permit policyholders who did not make a premium payment due to financial hardship as a result of the COVID-19 pandemic to pay the premium over a 12-month period. These measures expired on July 6, 2020, however we cannot predict what future orders or regulations, if any, will be implemented as a result of the ongoing COVID-19 pandemic.
Variable Annuity Capital Standards. 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 becomesbecame operational in January 2020, unless adopted earlier.2020. 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 toThe new framework will 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 adoptEquitable Financial adopted the NAIC reserve and capital framework for the year ended December 31, 2019. However,
On February 26, 2020, the NYDFS recently proposed a rule for adoptionadopted amendments to Regulation 213 that differsdiffer from the standardsNAIC variable annuity reserve and capital framework. These amendments will not materially affect Equitable Financial’s GAAP financial condition, results of the NAIC framework. The proposed rule requiresoperations or stockholders’ equity. However, Regulation 213, as amended, absent management action, will require Equitable Financial to carry statutory basis reserves for its variable annuity contract obligations equal to be the greater of those required under (i) the NAIC standard or (ii) a revised version of the current NYDFS requirement in effect prior to the adoption of the amendment for policiescontracts issued prior to January 1, 2020, and for policies issued after that date, it establishes a new standard that we believe is more conservative than the NAIC standard. Absent management action, we believe that the amendments will materially increase the statutory basis reserves that Equitable Financial will be required to carry and, will materially and adversely affect the capacity of Equitable Financial to distribute dividends to Holdings beyond 2020. Holdings is considering management actions to mitigate the impact of Regulation 213. These actions could include seeking further amendment of Regulation 213 or exemptive relief therefrom to make the regulation’s application to Equitable Financial more consistent with the NAIC reserve and capital framework, as well as changing Holdings’ underwriting practices to emphasize issuing variable annuity products out of affiliates which are not domiciled in New York, increasing the use of reinsurance and other corporate transactions intended to reduce the impact of the regulation. There can be no assurance that any management action individually or collectively will fully mitigate the impact of Regulation 213. Other state insurance regulators may also propose and adopt standards different from the NAIC framework.
DOL Fiduciary Rules/“BestRule and “Best Interest” Standards of Conduct.PTEs. In the wake of the March 2018 Fifth Circuit federal appeals court decision to vacate the DOL Fiduciary Rule, the DOL announced that it planned to issue revised fiduciary investment advice regulations. In June 2020, the DOL proposed a “best interest” prohibited transaction exemption (“PTE”) for investment advice fiduciaries under ERISA. The proposal restores the five-part test for determining fiduciary status that was in effect prior to the DOL Fiduciary Rule, although the scope of the PTE now extends to rollover transactions if they constitute “investment advice” under the five-part test. If fiduciary status is triggered, the PTE prescribes a set of impartial conduct standards and disclosure obligations that are intended to be consistent with the SEC’s Regulation Best Interest. We are currently assessing the proposed PTE to determine the impact it may have on our business.
Other “Best Interest” Standards of Conduct. Following the decision to vacate the DOL Fiduciary Rule in 2018, , the NAIC as well asadopted, and state regulators either have adopted or are currently considering whether to apply, an impartial conduct or fiduciary 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 onhas amended its Suitability in Annuity Transactions Model Regulation to apply a proposalbest interest of the consumer standard to raiseinsurance producers’ annuity recommendations and require that insurers supervise such recommendations. To date, the advice standard for annuity salesamended regulation has been adopted in Iowa and inArizona. 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 taketook 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.sales. We have developed our compliance framework for Regulation 187 with respect to annuity sales and are assessing the impact it may have onas well as 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. Massachusetts has adopted such a regulation applying a fiduciary duty standard to broker-dealers and their agents, but it does not apply to insurance product sales, including variable annuities. 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.
Regulation Best Interest. 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 “Regulationretail customers (“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 unless they act in an investment advisory capacity. These rules became effective date for compliance with these rules ison June 30, 2020. Investment advisers to retail clients will also beas well as broker-dealers serving retail customers are now required to deliver to retail clients and customers and file with
the SEC the new Form CRS, providingwhich provides disclosures about its standard of conduct and conflicts of interest,interest. Broker-dealers must also provide more detailed disclosures to retail clients in connection with the SEC and deliver copies of the Form to its retail clients.securities transactions. The intent of these rules is to impose on broker-dealers an enhanced duty of care to their natural person customers similar to that which applies to investment advisers under existing law. Two lawsuits, one by several stateslaw and to require both broker-dealers and investment advisers to provide enhanced disclosure regarding the Districtnature of Columbiatheir services to retail clients and the other by private firms, were filedcustomers and associated conflicts of interest. We have developed systems and processes and put in September 2019place policies and currentlyprocedures to ensure that we are pending, seeking to vacatein compliance with Regulation Best Interest. WeMeanwhile, the SEC’s examination staff and FINRA are monitoring these developments and evaluating the potential effect they may havefocusing on our business.examining compliance efforts by broker-dealers with Regulation Best Interest.
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 beis expected to become applicable to us in September 20202021 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 CFTCCommodity Futures Trading Commission of final margin requirements for OTC derivatives.derivatives, absent further delays. Also, in June and September 2019, the SEC has finalized and adopted athe final set of rules that establish capital, margin and segregation requirementsrelated to security-based swaps, which triggers the compliance date for security-based swapsswap entities registration and setcompliance with previously adopted rules regarding margin, capital, segregation, recordkeeping and reporting requirementsand business conduct for security-based swaps. The rules became effective on April 6, 2020. The compliance date for registration of (i) security-based swap dealers that incur a registration obligation as a result of meeting certain thresholds to be set by the SEC on August 6, 2021 will be November 1, 2021 and (ii) 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 imposesincur a 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 applicationobligation as a result of security-based swap requirements, which have been proposedactivities in their quarter ending September 30, 2021 will be December 1, 2021. We continue to monitor developments and are pending. We are monitoring these developments and evaluating the potential effect these rules might have on our business.
Impact of the Tax ReformSECURE Act
On December 22, 2017,20, 2019, President Trump signed into law the Tax ReformSetting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). The SECURE Act contains a number of provisions that affect the administration and operation of defined contribution plans such as 401(k) and 403(b) plans and IRAs, including provisions that encourage additional retirement savings and lifetime income options, promote the adoption of retirement plans by small employers, provide lifetime income portability, and accelerate the distribution of retirement benefits of deceased retirees. Many provisions of the SECURE Act become effective for plan years beginning after December 31, 2019. At this time, we do not expect material impacts to our business from the SECURE Act.
Impact of the CARES Act
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. Several tax provisions were included as part of a broad overhauleconomic relief package. These include the temporary allowance of Net Operating Loss carrybacks and the acceleration of Alternative Minimum Tax (“AMT”) credit refunds. The Company is assessing the economic and financial statement impact of these provisions.
Impact of the U.S. Internal Revenue Code that changed long-standing provisions governingTax Cut and Jobs Act
In December 2017, the taxation of U.S. corporations, including life insurance companies.
Tax Cut and Jobs Act (“TCJA”) was signed into law. The Tax Reform ActTCJA reduced the federal corporate income tax rate to 21% and repealed the corporate Alternative Minimum Tax (“AMT”)AMT while keeping existing AMT credits. It also contained measures affecting our insurance companies,the Company, including changes to the DRD, insurance reserves and tax DAC. As a result of the Tax Reform Act,TCJA, our Net incomeIncome 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 ActTCJA 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 Financial for the periods presented below results from the mismatch between: (i) the change in carrying value of the reserves for GMDB and certain GMIB features that do not fully
and immediately reflect the impact of equity and interest market fluctuations; and (ii) the change in fair value of products with the GMIB feature that has a no-lapse guarantee, and our hedging and reinsurance programs.
Reclassification of DAC Capitalization
During the fourth quarter of 2018, 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, 20192020 and 2018:2019:
Consolidated Statement of Income (Loss) |
| | | | | | | |
| | 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 | ) |
| | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 | |
| (in millions) |
| REVENUES | | | | |
| Policy charges and fee income | $ | 2,582 | | | $ | 2,619 | | |
| Premiums | 613 | | | 696 | | |
| Net derivative gains (losses) | 2,097 | | | (2,080) | | |
| Net investment income (loss) | 2,334 | | | 2,527 | | |
| Investment gains (losses), net: | | | | |
| Credit losses on AFS debt securities and loans | (47) | | | — | | |
| Other investment gains (losses), net | 262 | | | 181 | | |
| Total investment gains (losses), net | 215 | | | 181 | | |
| Investment management and service fees | 744 | | | 761 | | |
| Other income | 43 | | | 39 | | |
| Total revenues | 8,628 | | | 4,743 | | |
| | | | |
| BENEFITS AND OTHER DEDUCTIONS | | | | |
| Policyholders’ benefits | 4,267 | | | 3,356 | | |
| Interest credited to policyholders’ account balances | 845 | | | 859 | | |
| Compensation and benefits | 210 | | | 237 | | |
| Commissions | 462 | | | 462 | | |
| Interest expense | — | | | 4 | | |
| Amortization of deferred policy acquisition costs | 1,290 | | | 345 | | |
| Other operating costs and expenses | 653 | | | 614 | | |
| Total benefits and other deductions | 7,727 | | | 5,877 | | |
| Income (loss) from continuing operations, before income taxes | 901 | | | (1,134) | | |
| Income tax (expense) benefit | (181) | | | 289 | | |
| Net income (loss) | 720 | | | (845) | | |
| Less: Net income (loss) attributable to the noncontrolling interest | (1) | | | 3 | | |
| Net income (loss) attributable to Equitable Financial | $ | 721 | | | $ | (848) | | |
The following discussion compares the results for the nine months ended September 30, 20192020 to the results for the nine months ended September 30, 2018.2019.
Nine Months Ended September 30, 20192020 Compared to the Nine Months Ended September 30, 20182019
Net Income (Loss) Attributable to AXA Equitable Financial
Net lossincome (loss) attributable to AXA Equitable decreasedFinancial increased by $2.0$1.6 billion, to a net lossincome of $828$721 million for the first nine months of 2019ended September 30, 2020 from a net loss of $2.9 billion$848 million for the first nine months of 2018,ended September 30, 2019, primarily driven by the following notable items:
Other operating costs and expenses decreased by $2.1$4.2 billion mainly reflecting the gains from the first quarter 2020 decrease in interest rates and a lower improvement in equity markets in 2020 when compared to 2019.
•Increase in Net investment gains of $34 million primarily due to the $1.9 billion amortizationrebalancing of the deferred costour U.S. Treasury portfolio.
•Decrease in Interest credited to policyholders’ account balances of reinsurance asset, including the write-off of $1.8 billion of this asset and the settlement of outstanding payments of $273$14 million both related to the GMxB Unwind in 2018.
Net derivative losses decreasedmainly driven by $1.0 billion mainlylower FHLB funding agreements costs due to income from freestanding derivatives reflecting lower interest rates partially offset by anhigher interest credited in SCS product due to new business growth.
Partially offsetting this increase were the following notable items:
•Increase in the fair valueAmortization of the GMIBNLG liability reflectingDAC of $945 million mainly due to the impact of lower interest rates partially offset by less of an increase in the liability as a result of assumption updates (a $548including the first quarter of 2020 assumption update related to COVID-19.
•Increase in Policyholders’ benefits of $911 million and $1.1 billionmainly due to the higher unfavorable impact of assumption updates in 20192020 including the first quarter assumption update due to COVID-19, the unfavorable impact of equity markets in our GMxB liabilities, the re-establishment of profits followed by loss (“PFBL”) reserve and 2018, respectively).an increase in term and employee benefits product reserves, partially offset by favorable net mortality.
•Decrease in Net investment income (loss) increased by $834of $193 million mainly due to a changedriven by changes in the market value of trading securities supporting our variable annuity products due toand lower interest rates andincome from alternative investments partially offset by higher investment income from fixed maturities available-for-sale due to higher asset balances and the 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•Decrease in 2019.
CompensationRevenue from fees 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)related items (“fee-type revenue”), 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.
including 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 andManagement service fees and Other income, decreased by $21of $133 million primarily due to lower average Separate Accounts AV in our individual retirementvariable annuity products reflecting outflows in our older fixed-rate GMxB block and lower premiums on traditional products (offset in Policyholders' benefits) as well as higher ceded premiums, partially offset by the favorable impact of assumption updates for our life products.
•Increase in Compensation, benefits and other operating expenses of $12 million mainly driven by higher software and consulting costs partially offset by productivity initiatives and COVID 19 related expense saves.
•Income tax benefit decreasedexpense increased by $544$470 million primarily driven by pre-tax income in 2020 compared to a lower pre-tax loss.loss in 2019.
See “—Significant Factors Impacting Our Results—Assumption Updates and Model Changes” for more information regarding the COVID-19-related assumption updates.update.
Adoption and Future Adoption of New Accounting Pronouncements
See Note 2 of the Notes to the Consolidated Financial Statements included herein.
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 StatementsCompany’s consolidated financial statements included in our 20182019 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.
Item 4.
CONTROLS AND PROCEDURES 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, 2019.2020. 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 weaknessesweakness described below, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2019.2020.
As previously reported, the Company identified twoa material weaknessesweakness 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:not 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 deferred policy acquisition costs balances.
| |
(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. |
TheseThis material weaknessesweakness 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 |
(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 weaknessesweakness described above and not indicative of any new material weaknesses. Until remediated, there is a reasonable possibility that thesethis material weaknessesweakness could result in a material misstatement of the Company’s consolidated financial statements or disclosures that would not be prevented or detected.
Remediation Status of Material WeaknessesWeakness
Management continues to execute its plan moving towards remediation ofFor the material weaknesses. Since identifying the material weaknesses,weakness related to Actuarial Models, Assumptions and Data, management has performed the following activities:implemented and tested new or enhanced controls as described below but determined that further sustained operation is necessary.
Remediation Activities: Material Weakness Related to Actuarial Models, Assumptions and Data
•We have designed, implemented and implementedtested an enhanced model validation control framework, including a rotational schedule to periodically re-validate all U.S. GAAP models.
•We have designed, implemented and implementedtested enhanced controls and governance processes for new model implementations.
•We have designed, implemented and implementedtested enhanced controls for model changes.
•We have designed, implemented and implementedtested enhanced controls over the annual assumption setting process, including a comprehensive master assumption inventory and risk framework.
•We have designed, implemented and implementedtested new controls and are redesigning certain of these controls to validate the reliabilityreliability of significant data flows feeding actuarial models and assumptions.assumptions
WeThird quarter 2020 controls have begunoperated as designed. However, given that certain controls noted above have only operated effectively in one financial closing cycle during the process of testing the designyear, and operating effectiveness of the newly implemented controls.
Material Weakness Related to Insufficient Personnel and Journal Entry Process
With respect to insufficient personnel,controls are still being redesigned, we have strengthened our finance team by adding approximately 25 employees to the Accountingdetermined that further work 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 processsustained operation is no longer necessary.
We have enhancedappropriate before concluding 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 areoperationally 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 additionalcertain controls in connection with its remediation plan. These remediation efforts related to the material weaknessesweakness described above represent changes in our internal control over financial reporting for the quarter ended September 30, 20192020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II.Part II OTHER INFORMATION
Item 1. Legal Proceedings
SeeFor information regarding certain legal proceedings pending against us, see Note 13 of the Notes to the Consolidated Financial Statements contained herein. Except as disclosed(unaudited) in Note 13, therethis Form 10-Q. See “Risk Factors—Legal and Regulatory Risks—Legal and regulatory” actions could have been no newa material legal proceedings and no new material developmentsadverse effect on our reputation, business, results of operations or financial condition” in legal proceedings previously reported inour Form 10-K for the 2018 Form 10-K.year ended December 31, 2019.
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 in2019 and our subsequently filed Quarterly ReportReports on Form 10-Q. These risks could materially affect our business, consolidated results of operations or financial condition. These risks are not exclusive,10-Q for the quarters ended March 31, 2020 and additional risksJune 30, 2020. 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.applicable.
Item 5. Other Information
Iran Threat Reduction and Syria Human Rights ActNone.
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.
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 |
| # | By-laws of Equitable Financial Life Insurance Company, as amended September 23, 2020. |
| # | Section 302 Certification ofmade by the Registrant’sregistrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| # | Section 302 Certification ofmade by the Registrant’sregistrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| # | Section 906 Certification ofmade by the Registrant’sregistrant’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| # | Section 906 Certification ofmade by the Registrant’sregistrant’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 104 | | Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibits 101). |
___________________________
68
SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, AXA Equitable Financial Life Insurance Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | |
| Date: November 5, 2020 | EQUITABLE FINANCIAL LIFE INSURANCE COMPANY |
| | | |
Date: November 8, 2019 | AXA EQUITABLE LIFE INSURANCE COMPANY |
| By: | | |
| By: | /s/ Anders Malmström |
| | Name: | Anders Malmström |
| | Title: | Senior Executive Director and Chief Financial Officer
(Principal Financial Officer) |
| | | |
Date: November 8, 20195, 2020 | | /s/ William Eckert |
| | Name: | William Eckert |
| | Title: | Managing Director and Chief Accounting Officer and Controller
(Principal Accounting Officer)
|
