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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File No. 000-20501

AXA Equitable Life Insurance Company

(Exact name of registrant as specified in its charter)

 

New York   13-5570651
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

1290 Avenue of the Americas, New York, New York   10104
(Address of principal executive offices)   (Zip Code)

(212) 554-1234

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address, and former fiscal year if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

 

Accelerated filer

 

¨

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

 

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of August 10, 2015, 2,000,000 shares of the registrant’s Common Stock were outstanding.


Table of Contents

AXA EQUITABLE LIFE INSURANCE COMPANY

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

TABLE OF CONTENTS

 

                 Page  

PART I

   FINANCIAL INFORMATION   

Item 1.

   Consolidated Financial Statements   
       •    Consolidated Balance Sheets, June 30, 2015 and December 31, 2014 (Unaudited)      4   
       •    Consolidated Statements of Earnings (Loss), Three Months and Six Months Ended June 30, 2015 and 2014 (Unaudited)      6   
       •    Consolidated Statements of Comprehensive Income (Loss), Three Months and Six Months Ended June 30, 2015 and 2014 (Unaudited)      7   
       •    Consolidated Statements of Equity, Six Months Ended June 30, 2015 and 2014 (Unaudited)      8   
       •    Consolidated Statements of Cash Flows, Six Months Ended June 30, 2015 and 2014 (Unaudited)      9   
       •    Notes to Consolidated Financial Statements (Unaudited)      11   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      66   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      110   

Item 4.

   Controls and Procedures      110   

PART II

   OTHER INFORMATION   

Item 1.

   Legal Proceedings      111   

Item 1A.

   Risk Factors      111   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      111   

Item 3.

   Defaults Upon Senior Securities      111   

Item 4.

   Mine Safety Disclosures      111   

Item 5.

   Other Information      111   

Item 6.

   Exhibits      113   

SIGNATURES

     114   

 

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Table of Contents

FORWARD-LOOKING STATEMENTS

Certain of the statements included or incorporated by reference in this Quarterly Report on Form 10-Q, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon AXA Equitable Life Insurance Company and its subsidiaries (“AXA Equitable”). There can be no assurance that future developments affecting AXA Equitable will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (i) difficult conditions in the global capital markets and economy; (ii) equity market declines and volatility causing, among other things, a reduction in the demand for our products, a reduction in the revenue derived from asset-based fees, a reduction in the value of securities held for investment, including the investment in AllianceBernstein, an acceleration in DAC amortization and an increase in the liabilities related to annuity contracts offering enhanced guarantee features, which may lead to changes in the fair value of our GMIB reinsurance contracts, causing our earnings to be volatile; (iii) interest rate fluctuations or prolonged periods of low interest rates causing, among other things, a reduction in our portfolio earnings, a reduction in the margins on interest sensitive annuity and life insurance contracts and an increase in the reserve requirements for such products, and a reduction in the demand for the types of products we offer; (iv) ineffectiveness of our reinsurance and hedging programs to protect against the full extent of the exposure or loss we seek to mitigate; (v) changes in policyholder assumptions, the performance of AXA Arizona’s hedge program, its liquidity needs and changes in regulatory requirements could adversely impact our reinsurance arrangements with AXA Arizona; (vi) regulatory or legislative changes, including government actions in response to the stress experienced by the global financial markets; (vii) changes to statutory capital requirements; (viii) our requirements to pledge collateral or make payments related to declines in estimated fair value of certain assets may impact our liquidity or expose us to counterparty credit risk; (ix) counterparty non-performance; (x) changes in statutory reserve requirements; (xi) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates or market returns and the assumptions used in pricing products, establishing liabilities and reserves or for other purposes; (xii) changes in assumptions related to deferred policy acquisition costs; (xiii) our use of numerous financial models, which rely on estimates, assumptions and projections that are inherently uncertain and involve the exercise of significant judgment; (xiv) market conditions could adversely affect our goodwill; (xv) investment losses and defaults, and changes to investment valuations; (xvi) liquidity of certain investments; (xvii) changes in claims-paying or credit ratings; (xviii) adverse determinations in litigation or regulatory matters; (xix) changes in tax law; (xx) heightened competition, including with respect to pricing, entry of new competitors, consolidation of distributors, the development of new products by new and existing competitors and personnel; (xxi) our inability to recruit, motivate and retain experienced and productive financial professionals and key employees and the ability of our financial professionals to sell competitors’ products; (xxii) changes in accounting standards, practices and/or policies; (xxiii) our computer systems failing or their security being compromised; (xxiv) the effects of business disruption or economic contraction due to terrorism, other hostilities, pandemics, or natural or man-made catastrophes; (xxv) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (xxvi) the perception of our brand and reputation in the marketplace; (xxvii) the impact on our business resulting from changes in the demographics of our client base, as baby-boomers move from the asset-accumulation to the asset-distribution stage of life; (xxviii) the impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including our ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions; (xxix) significant changes in securities market valuations affecting fee income, poor investment performance resulting in a loss of clients or other factors affecting the performance of AllianceBernstein; and (xxx) other risks and uncertainties described from time to time in AXA Equitable’s filings with the SEC.

AXA Equitable does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included in the Annual Report on Form 10-K for the year ended December 31, 2014 and elsewhere in this report for discussion of certain risks relating to its businesses.

 

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PART I FINANCIAL INFORMATION

Item 1: Consolidated Financial Statements

AXA EQUITABLE LIFE INSURANCE COMPANY

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

     June 30,
2015
     December 31,
2014
 
     (In Millions)  

ASSETS

  

Investments:

  

Fixed maturities available for sale, at fair value

   $ 32,760       $ 33,034   

Mortgage loans on real estate

     6,479         6,463   

Policy loans

     3,400         3,408   

Other equity investments

     1,550         1,757   

Trading securities, at fair value

     6,030         5,143   

Other invested assets

     1,638         1,978   
  

 

 

    

 

 

 

Total investments

     51,857         51,783   

Cash and cash equivalents

     2,620         2,716   

Cash and securities segregated, at fair value

     467         476   

Broker-dealer related receivables

     2,349         1,899   

Deferred policy acquisition costs

     4,260         4,271   

Goodwill and other intangible assets, net

     3,748         3,762   

Amounts due from reinsurers

     4,130         4,051   

Loans to affiliates

     1,087         1,087   

Guaranteed minimum income benefit reinsurance contract asset, at fair value

     9,951         10,711   

Other assets

     4,308         4,190   

Separate Accounts’ assets

     112,270         111,059   
  

 

 

    

 

 

 

Total Assets

   $ 197,047       $ 196,005   
  

 

 

    

 

 

 

LIABILITIES

     

Policyholders’ account balances

   $ 32,324       $ 31,848   

Future policy benefits and other policyholders’ liabilities

     24,010         23,484   

Broker-dealer related payables

     2,727         1,501   

Amounts due to reinsurers

     62         74   

Customers related payables

     1,659         1,501   

Short-term debt

     655         689   

Current and deferred income taxes

     3,904         4,785   

Other liabilities

     2,845         2,939   

Separate Accounts’ liabilities

     112,270         111,059   
  

 

 

    

 

 

 

Total liabilities

     180,456         177,880   
  

 

 

    

 

 

 

Commitments and contingent liabilities (Notes 10 and 11)

     
  

 

 

    

 

 

 

Redeemable Noncontrolling Interest

   $ 17       $ 17   
  

 

 

    

 

 

 

 

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AXA EQUITABLE LIFE INSURANCE COMPANY

CONSOLIDATED BALANCE SHEETS - CONTINUED

(UNAUDITED)

 

     June 30,
2015
    December 31,
2014
 
     (In Millions)  

EQUITY

    

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

     2        2   

Capital in excess of par value

     5,973        5,957   

Retained earnings

     7,920        8,809   

Accumulated other comprehensive income (loss)

     (294     351   
  

 

 

   

 

 

 

Total AXA Equitable’s equity

     13,601        15,119   
  

 

 

   

 

 

 

Noncontrolling interest

     2,973        2,989   
  

 

 

   

 

 

 

Total equity

     16,574        18,108   
  

 

 

   

 

 

 

Total Liabilities, Redeemable Noncontrolling Interest and Equity

   $ 197,047      $ 196,005   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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AXA EQUITABLE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)

(UNAUDITED)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

REVENUES

        

Universal life and investment-type product policy fee income

   $ 924      $ 899      $ 1,810      $ 1,712   

Premiums

     121        117        261        268   

Net investment income (loss):

        

Investment income (loss) from derivative instruments

     (915     181        (578     687   

Other investment income (loss)

     532        557        1,063        1,152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net investment income (loss)

     (383     738        485        1,839   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment gains (losses), net:

        

Total other-than-temporary impairment losses

     (16     (38     (18     (51

Portion of loss recognized in other comprehensive income (loss)

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses recognized

     (16     (38     (18     (51

Other investment gains (losses), net

     5        4        4        19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment gains (losses), net

     (11     (34     (14     (32
  

 

 

   

 

 

   

 

 

   

 

 

 

Commissions, fees and other income

     1,019        984        2,005        1,927   

Increase (decrease) in the fair value of the reinsurance contract asset

     (1,450     820        (760     1,516   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     220        3,524        3,787        7,230   
  

 

 

   

 

 

   

 

 

   

 

 

 

BENEFITS AND OTHER DEDUCTIONS

        

Policyholders’ benefits

     619        794        1,542        1,606   

Interest credited to policyholders’ account balances

     268        358        588        654   

Compensation and benefits

     486        466        933        896   

Commissions

     292        287        566        573   

Distribution related payments

     102        101        203        198   

Amortization of deferred sales commissions

     13        9        25        18   

Interest expense

     5        17        10        35   

Amortization of deferred policy acquisition costs

     18        62        158        78   

Capitalization of deferred policy acquisition costs

     (157     (153     (301     (312

Rent expense

     41        40        80        83   

Amortization of other intangible assets

     7        6        14        13   

Other operating costs and expenses

     279        355        592        695   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and other deductions

     1,973        2,342        4,410        4,537   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations, before income taxes

     (1,753     1,182        (623     2,693   

Income tax (expense) benefit

     728        (144     452        (599
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (1,025     1,038        (171     2,094   

Less: net (earnings) loss attributable to the noncontrolling interest

     (106     (93     (201     (172
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Earnings (Loss) Attributable to AXA Equitable

   $ (1,131   $ 945      $ (372   $ 1,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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AXA EQUITABLE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

COMPREHENSIVE INCOME (LOSS)

        

Net earnings (loss)

   $ (1,025   $ 1,038      $ (171   $ 2,094   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss) net of income taxes:

        

Foreign currency translation adjustment

     4        4        (8     6   

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

     (1,020     310        (681     661   

Changes in defined benefit plan related items not yet recognized in periodic benefit cost, net of reclassification adjustment

     20        21        39        40   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (996     335        (650     707   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (2,021     1,373        (821     2,801   

Less: Comprehensive (income) loss attributable to noncontrolling interest

     (110 )      (95     (196 )      (176
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss) Attributable to AXA Equitable

   $ (2,131   $     1,278      $ (1,017   $     2,625   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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Table of Contents

AXA EQUITABLE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF EQUITY

SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(UNAUDITED)

 

     2015     2014  
     (In Millions)  

EQUITY

    

AXA Equitable’s Equity:

    

Common stock, at par value, beginning of year and end of period

   $ 2      $ 2   
  

 

 

   

 

 

 

Capital in excess of par value, beginning of year

     5,957        5,934   

Changes in capital in excess of par value

     16        14   
  

 

 

   

 

 

 

Capital in excess of par value, end of period

     5,973        5,948   
  

 

 

   

 

 

 

Retained earnings, beginning of year

     8,809        5,205   

Net earnings (loss)

     (372     1,922   

Stockholder dividends

     (517     —     
  

 

 

   

 

 

 

Retained earnings, end of period

     7,920        7,127   
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss), beginning of year

     351        (603

Other comprehensive income (loss)

     (645     703   
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss), end of period

     (294     100   
  

 

 

   

 

 

 

Total AXA Equitable’s equity, end of period

     13,601        13,177   
  

 

 

   

 

 

 

Noncontrolling interest, beginning of year

     2,989        2,903   

Repurchase of AllianceBernstein Holding units

     (14     (3

Net earnings (loss) attributable to noncontrolling interest

     201        172   

Dividends paid to noncontrolling interest

     (214     (202

Other comprehensive income (loss) attributable to noncontrolling interest

     (5     4   

Other changes in noncontrolling interest

     16        7   
  

 

 

   

 

 

 

Noncontrolling interest, end of period

     2,973        2,881   
  

 

 

   

 

 

 

Total Equity, End of Period

   $     16,574      $     16,058   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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AXA EQUITABLE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2015 AND 2014

(UNAUDITED)

 

     2015     2014  
     (In Millions)  

Net earnings (loss)

   $ (171   $ 2,094   

Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:

    

Interest credited to policyholders’ account balances

     588        654   

Universal life and investment-type product policy fee income

     (1,810     (1,712

Net change in broker-dealer and customer related receivables/payables

     (106     (442

(Income) loss related to derivative instruments

     578        (687

Change in reinsurance recoverable with affiliate

     (121     (37

Investment (gains) losses, net

     14        32   

Change in segregated cash and securities, net

     9        391   

Change in deferred policy acquisition costs

     (143     (234

Change in future policy benefits

     552        499   

Change in current and deferred income taxes

     (513     501   

Change in accounts payable and accrued expenses

     240        71   

Change in the fair value of the reinsurance contract asset

     760        (1,516

Amortization of deferred compensation

     6        13   

Amortization of deferred sales commission

     25        18   

Other depreciation and amortization

     7        28   

Amortization of reinsurance cost

     20        144   

Amortization of other intangibles

     14        13   

Other, net

     23        (102
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (28     (272
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Maturities and repayments of fixed maturities and mortgage loans on real estate

     2,400        1,294   

Sales of investments

     829        408   

Purchases of investments

     (3,868     (3,595

Purchases of trading account securities

     (7,984     (2,472

Sales maturities and repayment of trading account securities

     7,082        1,934   

Cash settlements related to derivative instruments

     (80     357   

Purchase of business, net of cash acquired

     —          (61

Change in short-term investments

     5        22   

Investment in capitalized software, leasehold improvements and EDP equipment

     (24     (47

Other, net

     11        (11
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (1,629 )      (2,171
  

 

 

   

 

 

 

 

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AXA EQUITABLE LIFE INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2015 AND 2014 - CONTINUED

(UNAUDITED)

 

     2015     2014  
     (In Millions)  

Cash flows from financing activities:

    

Policyholders’ account balances:

    

Deposits and transfers from Separate Accounts

   $ 2,204      $ 2,307   

Withdrawals

     (440     (492

Change in short-term financings

     (34     556   

Repayment of loans from affiliate

            (500

Change in collateralized pledged assets

     (158     24   

Change in collateralized pledged liabilities

     (303     226   

Shareholder dividend paid

     (517       

Repurchase of AllianceBernstein Holding units

     (20     (4

Distribution to noncontrolling interests in consolidated subsidiaries

     (214     (202

Increase (decrease) in Securities sold under agreement to repurchase

     1,183          

Change in securities sold under resale agreement

     (149       

Other, net

     13        1   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     1,565        1,916   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (4     5   

Change in cash and cash equivalents

     (96     (522

Cash and cash equivalents, beginning of year

     2,716        2,283   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 2,620      $ 1,761   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Interest Paid

   $ 8      $ 38   
  

 

 

   

 

 

 

Income Taxes Paid (Refunded)

   $ 65      $ 100   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements (Unaudited).

 

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AXA EQUITABLE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1) ORGANIZATION AND BASIS OF PRESENTATION

The preparation of the accompanying unaudited consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. The accompanying unaudited interim consolidated financial statements reflect all adjustments necessary in the opinion of management for a fair presentation of the consolidated financial position of AXA Equitable and its consolidated results of operations and cash flows for the periods presented. All significant intercompany transactions and balances have been eliminated in consolidation. These statements should be read in conjunction with the Audited Consolidated Financial Statements of the Company for the year ended December 31, 2014. The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the results to be expected for the full year.

At June 30, 2015 and December 31, 2014, the Company’s economic interest in AllianceBernstein was 32.2% and 32.2%. At June 30, 2015 and December 31, 2014, respectively, AXA and its subsidiaries’ economic interest in AllianceBernstein was 62.7% and 62.7%.

The terms “second quarter 2015” and “second quarter 2014” refer to the three months ended June 30, 2015 and 2014, respectively. The terms “first six months of 2015” and “first six months of 2014” refer to the six months ended June 30, 2015 and 2014, respectively. Certain reclassifications have been made in the amounts presented for prior periods to conform those periods to the current presentation.

 

2) SIGNIFICANT ACCOUNTING POLICIES

Accounting for Variable Annuities with GMDB and GMIB Features

Future claims exposure on products with guaranteed minimum death benefit (“GMDB”) and guaranteed minimum income benefit (“GMIB”) features are sensitive to movements in the equity markets and interest rates. The Company has in place various hedging programs utilizing derivatives that are designed to mitigate the impact of movements in equity markets and interest rates. The accounting for these various hedging programs does not qualify for hedge accounting treatment. As a result, changes in the value of the derivatives will be recognized in the period in which they occur while offsetting changes in reserves and deferred policy acquisition costs (“DAC”) will be recognized over time in accordance with policies described in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2014, under “Policyholders’ Account Balances and Future Policy Benefits” and “DAC”. These differences in recognition contribute to earnings volatility.

GMIB reinsurance contracts are used to cede to affiliated and non-affiliated reinsurers a portion of the exposure on variable annuity products that offer the GMIB feature. The GMIB reinsurance contracts are accounted for as derivatives and are reported at fair value. Gross reserves for GMIB are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts and therefore will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market and/or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts. The changes in the fair value of the GMIB reinsurance contracts are recorded in the period in which they occur while offsetting changes in gross reserves and DAC for GMIB are recognized over time in accordance with policies described in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2014 under “Policyholders’ Account Balances and Future Policy Benefits” and “DAC”. These differences in recognition contribute to earnings volatility.

Adoption of New Accounting Pronouncements

In June 2014, the FASB issued new guidance for repurchase-to-maturity transactions, repurchase financings and added disclosure requirements, which aligns the accounting for repurchase-to-maturity transactions and repurchase financing arrangements with the accounting for other typical repurchase agreements. The new guidance also requires additional disclosures about repurchase agreements and similar transactions. The accounting changes and disclosure requirements were effective for interim or annual periods beginning after December 15, 2014. Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

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The FASB issued new guidance that allows investors to elect to use the proportional amortization method to account for investments in qualified affordable housing projects if certain conditions are met. Under this method, which replaces the effective yield method, an investor amortizes the cost of its investment, in proportion to the tax credits and other tax benefits it receives, to income tax expense. The guidance also introduces disclosure requirements for all investments in qualified affordable housing projects, regardless of the accounting method used for those investments. The guidance was effective for annual periods beginning after December 15, 2014. Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.

Future Adoption of New Accounting Pronouncements

In May 2015, the FASB issued new guidance related to disclosures for investments in certain entities that calculate net asset value (“NAV”) per share (or its equivalent). Under the new guidance, investments measured at NAV, as a practical expedient for fair value, are excluded from the fair value hierarchy. Removing investments measured using the practical expedient from the fair value hierarchy is intended to eliminate the diversity in practice that currently exists with respect to the categorization of these investments. The only criterion for categorizing investments in the fair value hierarchy will be the observability of the inputs. The amendment is effective retrospectively for fiscal years (and interim periods within those years) beginning after December 15, 2015. Management does not expect implementation of this guidance will have a material impact on the Company’s consolidated financial statements.

In April 2015, the FASB issued new guidance, simplifying the presentation of debt issuance costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The new guidance is effective retrospectively for interim or annual periods beginning after December 15, 2015. Management does not expect implementation of this guidance will have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued new revenue recognition guidance that is intended to improve and converge the financial reporting requirements for revenue from contracts with customers with International Financial Reporting Standards (“IFRS”). The new guidance applies to contracts that deliver goods or services to a customer, except when those contracts are for: insurance, leases, rights and obligations that are in the scope of certain financial instruments (i.e., derivative contracts) and guarantees other than product or service warranties. The new guidance is effective for interim and annual periods, beginning after December 15, 2017. Management is currently evaluating the impact that adoption of this guidance will have on the Company’s consolidated financial statements.

Out of Period Adjustments

AXA Equitable recorded an out-of-period adjustment in its financial statements related to model refinements decreasing the gross GMDB and GMIB liabilities by $130 million and the ceded GMDB liabilities by $20 million, resulting in a net decrease to policyholders’ benefits of $110 million in the first six months ended June 30, 2014.

Reversion to the Mean and Lapse Assumption Updates

In the second quarter of 2015, based upon management’s current expectations of interest rates and future fund growth, the Company updated its reversion to the mean (“RTM”) assumption used to calculate GMDB/GMIB and variable and interest sensitive life (“VISL”) reserves and amortization DAC from 9.0% to 7.0%. The impact of this assumption update in the second quarter and first six months of 2015 was an increase in GMIB/GMDB reserves of $723 million, an increase in VISL reserves of $29 million and decrease in amortization of DAC of $67 million. In the second quarter and first six months of 2015, the after tax impacts of this assumption update increased the Net loss by approximately $445 million.

In the second quarter of 2015, expectations of long-term lapse rates for certain Accumulator® products at certain durations and moneyness levels were lowered based on emerging experience. This update increases expected future claim costs and the fair value of the GMIB reinsurance contract asset. The impact of this assumption update in the second quarter and first six months of 2015 was an increase in the fair value of the GMIB reinsurance contract asset of $216 million, an increase in the GMIB reserves of $65 million and a decrease in the amortization of DAC of $13 million. In the second quarter and first six months of 2015, the after tax impacts of this assumption update decreased the Net loss by approximately $107 million.

 

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3) INVESTMENTS

Fixed Maturities and Equity Securities

The following table provides information relating to fixed maturities and equity securities classified as AFS:

Available-for-Sale Securities by Classification

 

            Gross      Gross                
     Amortized      Unrealized      Unrealized      Fair      OTTI  
     Cost      Gains      Losses      Value      in AOCI (3)  
     (In Millions)  

June 30, 2015:

  

           

Fixed Maturity Securities:

              

Corporate

   $ 19,917         1,245         120       $      21,042       $   

U.S. Treasury, government and agency

     8,739         138         280         8,597           

States and political subdivisions

     441         62         1         502           

Foreign governments

     398         42         9         431           

Commercial mortgage-backed

     737         24         111         650         10   

Residential mortgage-backed(1)

     677         37                 714           

Asset-backed(2)

     77         13         1         89         3   

Redeemable preferred stock

     674         68         7         735           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Fixed Maturities

     31,660         1,629         529         32,760         13   

Equity securities

     38                         38           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total at June 30, 2015

   $ 31,698       $ 1,629       $ 529       $ 32,798       $ 13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014:

              

Fixed Maturity Securities:

              

Corporate

   $ 20,742       $ 1,549       $ 71       $ 22,220       $   

U.S. Treasury, government and agency

     6,685         672         26         7,331           

States and political subdivisions

     441         78                 519           

Foreign governments

     405         48         7         446           

Commercial mortgage-backed

     855         22         142         735         10   

Residential mortgage-backed(1)

     752         43                 795           

Asset-backed(2)

     86         14         1         99         3   

Redeemable preferred stock

     829         70         10         889           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Fixed Maturities

     30,795         2,496         257         33,034         13   

Equity securities

     36         2                 38           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total at December 31, 2014

   $ 30,831       $ 2,498       $ 257       $ 33,072       $ 13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes publicly traded agency pass-through securities and collateralized mortgage obligations.

(2) 

Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans.

(3) 

Amounts represent OTTI losses in AOCI, which were not included in earnings (loss) in accordance with current accounting guidance.

 

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The contractual maturities of AFS fixed maturities (excluding redeemable preferred stock) at June 30, 2015 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.

Available-for-Sale Fixed Maturities

Contractual Maturities at June 30, 2015

 

     Amortized Cost      Fair Value  
     (In Millions)  

Due in one year or less

   $ 1,596       $ 1,625   

Due in years two through five

     6,697         7,232   

Due in years six through ten

     10,666         10,916   

Due after ten years

     10,536         10,799   
  

 

 

    

 

 

 

Subtotal

     29,495         30,572   

Commercial mortgage-backed securities

     737         650   

Residential mortgage-backed securities

     677         714   

Asset-backed securities

     77         89   
  

 

 

    

 

 

 

Total

   $ 30,986       $ 32,025   
  

 

 

    

 

 

 

The following table shows proceeds from sales, gross gains (losses) from sales and OTTI for AFS fixed maturities during the second quarter and first six months of 2015 and 2014:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

Proceeds from sales

   $         265      $         599      $         625      $         647   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross gains on sales

   $ 2      $ 5      $ 7      $ 15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross losses on sales

   $ (1   $ (5   $ (5   $ (6
  

 

 

   

 

 

   

 

 

   

 

 

 

Total OTTI

   $ (16   $ (38   $ (18   $ (51

Non-credit losses recognized in OCI

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit losses recognized in earnings (loss)

   $ (16   $ (38   $ (18   $ (51
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth the amount of credit loss impairments on fixed maturity securities held by the Company at the dates indicated and the corresponding changes in such amounts.

Fixed Maturities - Credit Loss Impairments

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

Balances, beginning of period

   $ (238   $ (333   $ (254   $ (370

Previously recognized impairments on securities that matured, paid, prepaid or sold

     16        27        34        77   

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

                            

Impairments recognized this period on securities not previously impaired

     (16     (38     (18     (51

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 June 30,

   $ (238   $ (344   $ (238   $ (344
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 and equity securities classified as AFS are included in the consolidated balance sheets as a component of AOCI. The table below presents these amounts as of the dates indicated:

 

     June 30,      December 31,  
     2015      2014  
     (In Millions)  

AFS Securities:

     

Fixed maturities:

     

With OTTI loss

   $ 7       $ 10   

All other

     1,093         2,229   

Equity securities

             2   
  

 

 

    

 

 

 

Net Unrealized Gains (Losses)

   $     1,100       $     2,241   
  

 

 

    

 

 

 

 

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Changes in net unrealized investment gains (losses) recognized in AOCI include reclassification adjustments to reflect amounts realized in Net earnings (loss) for the current period that had been part of OCI in earlier periods. The tables that follow below present a roll-forward of net unrealized investment gains (losses) recognized in AOCI, split between amounts related to fixed maturity securities on which an OTTI loss has been recognized and all other amounts:

Net Unrealized Gains (Losses) on Fixed Maturities with OTTI Losses

 

                              AOCI Gain  
     Net                        (Loss) Related  
     Unrealized                  Deferred     to Net  
     Gains                  Income     Unrealized  
     (Losses) on            Policyholders’     Tax Asset     Investment  
     Investments     DAC      Liabilities     (Liability)     Gains (Losses)  
     (In Millions)  

Balance, April 1, 2015

   $ 6      $       $ 1      $ (3   $ 4   

Net investment gains (losses) arising during the period

     1                              1   

Reclassification adjustment:

           

Included in Net earnings (loss)

                                    

Excluded from Net earnings (loss)(1)

                                    

Impact of net unrealized investment gains (losses) on:

           

DAC

            1                       1   

Deferred income taxes

                                    

Policyholders’ liabilities

                    (2            (2
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $ 7      $ 1       $ (1   $ (3   $ 4   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, April 1, 2014

   $ (22   $ 1       $ 5      $ 5      $ (11

Net investment gains (losses) arising during the period

     (7                           (7

Reclassification adjustment:

           

Included in Net earnings (loss)

     27                              27   

Excluded from Net earnings (loss)(1)

                                    

Impact of net unrealized investment gains (losses) on:

           

DAC

                                    

Deferred income taxes

                           (6     (6

Policyholders’ liabilities

                    (3            (3
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ (2   $ 1       $ 2      $ (1   $   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

Represents “transfers in” related to the portion of OTTI losses recognized during the period that were not recognized in earnings (loss) for securities with no prior OTTI loss.

 

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                            AOCI Gain  
    Net                       (Loss) Related  
    Unrealized                 Deferred     to Net  
    Gains                 Income     Unrealized  
    (Losses) on           Policyholders’     Tax Asset     Investment  
    Investments     DAC     Liabilities     (Liability)     Gains (Losses)  
    (In Millions)  

Balance, January 1, 2015

  $ 10      $      $      $ (4   $ 6   

Net investment gains (losses) arising during the period

    (5                          (5

Reclassification adjustment for OTTI losses:

         

Included in Net earnings (loss)

    2                             2   

Excluded from Net earnings (loss)(1)

                                  

Impact of net unrealized investment gains (losses) on:

         

DAC

           1                      1   

Deferred income taxes

                         1        1   

Policyholders’ liabilities

                  (1            (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

  $ 7      $ 1      $ (1   $ (3   $ 4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2014

  $ (28   $ 2      $ 10      $ 5      $ (11

Net investment gains (losses) arising during the period

    (3                          (3

Reclassification adjustment for OTTI losses:

         

Included in Net earnings (loss)

    29                             29   

Impact of net unrealized investment gains (losses) on:

         

DAC

           (1                   (1

Deferred income taxes

                         (6     (6

Policyholders’ liabilities

                  (8            (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

  $ (2   $ 1      $ 2      $ (1   $   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Represents “transfers in” related to the portion of OTTI losses recognized during the period that were not recognized in earnings (loss) for securities with no prior OTTI loss.

 

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All Other Net Unrealized Investment Gains (Losses) in AOCI

 

                             AOCI Gain  
     Net                       (Loss) Related  
     Unrealized                 Deferred     to Net  
     Gains                 Income     Unrealized  
     (Losses) on           Policyholders’     Tax Asset     Investment  
     Investments     DAC     Liabilities     (Liability)     Gains (Losses)  
     (In Millions)  

Balance, April 1, 2015

   $ 2,827      $ (137   $ (430   $ (794   $ 1,466   

Net investment gains (losses) arising during the period

     (1,752                          (1,752

Reclassification adjustment:

          

Included in Net earnings (loss)

     18                             18   

Excluded from Net earnings (loss)(1)

                                   

Impact of net unrealized investment gains (losses) on:

          

DAC

            35                      35   

Deferred income taxes

                          551        551   

Policyholders’ liabilities

                   130               130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $ 1,093      $ (102   $ (300   $ (243   $ 448   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, April 1, 2014

   $ 1,197      $ (110   $ (291   $ (279   $ 517   

Net investment gains (losses) arising during the period

     549                             549   

Reclassification adjustment:

          

Included in Net earnings (loss)

     11                             11   

Excluded from Net earnings (loss)(1)

                                   

Impact of net unrealized investment gains (losses) on:

          

DAC

            (7                   (7

Deferred income taxes

                          (160     (160

Policyholders’ liabilities

                   (90            (90
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 1,757      $ (117   $ (381   $ (439   $ 820   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

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                             AOCI Gain  
     Net                       (Loss) Related  
     Unrealized                 Deferred     to Net  
     Gains                 Income     Unrealized  
     (Losses) on           Policyholders’     Tax Asset     Investment  
     Investments     DAC     Liabilities     (Liability)     Gains (Losses)  
     (In Millions)  

Balance, January 1, 2015

   $ 2,231      $ (122   $ (368   $ (610   $ 1,131   

Net investment gains (losses) arising during the period

     (1,152                          (1,152

Reclassification adjustment for OTTI losses:

          

Included in Net earnings (loss)

     14                             14   

Excluded from Net earnings (loss)(1)

                                   

Impact of net unrealized investment gains (losses) on:

          

DAC

            20                      20   

Deferred income taxes

                          367        367   

Policyholders’ liabilities

                   68               68   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $ 1,093      $ (102   $ (300   $ (243   $ 448   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2014

   $ 607      $ (107   $ (245   $ (90   $ 165   

Net investment gains (losses) arising during the period

     1,147                             1,147   

Reclassification adjustment for OTTI losses:

          

Included in Net earnings (loss)

     3                             3   

Impact of net unrealized investment gains (losses) on:

          

DAC

            (10                   (10

Deferred income taxes

                          (349     (349

Policyholders’ liabilities

                   (136            (136
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 1,757      $ (117   $ (381   $ (439   $ 820   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

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The following tables disclose the fair values and gross unrealized losses of the 655 issues at June 30, 2015 and the 601 issues at December 31, 2014 of fixed maturities that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position for the specified periods at the dates indicated:

 

     Less Than 12 Months     12 Months or Longer     Total  
     Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 
     (In Millions)  

June 30, 2015:

               

Fixed Maturity Securities:

               

Corporate

   $ 3,445       $ (94   $ 355       $ (26   $ 3,800       $ (120

U.S. Treasury, government and agency

     4,419         (280                    4,419         (280

States and political subdivisions

     19         (1                    19         (1

Foreign governments

     78         (2     42         (7     120         (9

Commercial mortgage-backed

     56         (5     321         (106     377         (111

Residential mortgage-backed

     38                32                70           

Asset-backed

     8                18         (1     26         (1

Redeemable preferred stock

     121         (3     112         (4     233         (7
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 8,184       $ (385   $ 880       $ (144   $ 9,064       $ (529
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2014:

               

Fixed Maturity Securities:

               

Corporate

   $ 1,314       $ (29   $ 1,048       $ (42   $ 2,362       $ (71

U.S. Treasury, government and agency

     280         (6     373         (20     653         (26

States and political subdivisions

     21                               21           

Foreign governments

     27         (1     65         (6     92         (7

Commercial mortgage-backed

     37         (2     355         (140     392         (142

Residential mortgage-backed

                    35                35           

Asset-backed

                    20         (1     20         (1

Redeemable preferred stock

     42                169         (10     211         (10
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,721       $ (38   $ 2,065       $ (219   $         3,786       $ (257
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s investments in fixed maturity securities do not include concentrations of credit risk of any single issuer greater than 10% of the consolidated equity of AXA Equitable, 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 0.3% of total investments. The largest exposures to a single issuer of corporate securities held at June 30, 2015 and December 31, 2014 were $151 million and $146 million, respectively. Corporate high yield securities, consisting primarily of public high yield bonds, are classified as other than investment grade by the various rating agencies, i.e., a rating below Baa3/BBB- or the NAIC designation of 3 (medium grade), 4 or 5 (below investment grade) or 6 (in or near default). At June 30, 2015 and December 31, 2014, respectively, approximately $1,558 million and $1,788 million, or 4.9% and 5.8%, of the $31,660 million and $30,795 million aggregate amortized cost of fixed maturities held by the Company were considered to be other than investment grade. These securities had net unrealized losses of $48 million and $85 million at June 30, 2015 and December 31, 2014, respectively. At June 30, 2015 and 2014, respectively, the $144 million and $219 million of gross unrealized losses of twelve months or more were concentrated in commercial mortgage-backed securities. In accordance with the policy described in Note 2, the Company concluded that an adjustment to earnings for OTTI for these securities was not warranted at either June 30, 2015 or 2014. As of June 30, 2015 and December 31, 2014, 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.

 

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Table of Contents

The Company does not originate, purchase or warehouse residential mortgages and is not in the mortgage servicing business. The Company’s fixed maturity investment portfolio includes RMBS backed by subprime and Alt-A residential mortgages, comprised of loans made by banks or mortgage lenders to residential borrowers with lower credit ratings. The criteria used to categorize such subprime borrowers include FICO scores, interest rates charged, debt-to-income ratios and loan-to-value ratios. Alt-A residential mortgages are mortgage loans where the risk profile falls between prime and subprime; borrowers typically have clean credit histories but the mortgage loan has an increased risk profile due to higher loan-to-value and debt-to-income ratios and/or inadequate documentation of the borrowers’ income. At June 30, 2015 and December 31, 2014, respectively, the Company owned $8 million and $8 million in RMBS backed by subprime residential mortgage loans and $7 million and $7 million in RMBS backed by Alt-A residential mortgage loans. RMBS backed by subprime and Alt-A residential mortgages are fixed income investments supporting General Account liabilities.

At June 30, 2015, the carrying value of fixed maturities that were non-income producing for the twelve months preceding that date was $20 million.

For second quarter and first six months of 2015 and 2014, investment income is shown net of investment expenses of $14 million, $26 million, $20 million and $37 million, respectively.

At June 30, 2015 and December 31, 2014, respectively, the amortized cost of the Company’s trading account securities was $6,031 million and $5,160 million with respective fair values of $6,030 million and $5,143 million. Also at June 30, 2015 and December 31, 2014, respectively, Other equity investments included the General Account’s investment in Separate Accounts which had carrying values of $93 million and $197 million and costs of $82 million and $185 million as well as other equity securities with carrying values of $37 million and $38 million and costs of $38 million and $36 million.

Net unrealized and realized holding gains (losses) on trading account equity securities are included in Net investment income (loss) in the consolidated statements of earnings (loss). The table below shows a breakdown of Net investment income from trading account securities during first six months of 2015 and 2014:

Net investment income (loss) from trading securities

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2015     2014      2015      2014  
     (In Millions)  

Net investment gains (losses) recognized during the period on securities held at the end of the period

   $ (31   $ 33       $ 7       $ 44   

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

     —          3         7         9   
  

 

 

   

 

 

    

 

 

    

 

 

 

Unrealized and realized gains (losses) on trading securities arising during the period

     (31     36         14         53   
  

 

 

   

 

 

    

 

 

    

 

 

 

Interest and dividend income from trading securities

     25        11         28         22   
  

 

 

   

 

 

    

 

 

    

 

 

 

Net investment income (loss) from trading securities

   $ (6   $ 47       $ 42       $ 75   
  

 

 

   

 

 

    

 

 

    

 

 

 

Mortgage Loans

Mortgage loans on real estate are placed on nonaccrual status once management determines the collection of accrued interest is doubtful. Once mortgage loans on real estate are classified as nonaccrual loans, interest income is recognized under the cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan on real estate has been restructured to where the collection of interest is considered likely. At June 30, 2015 and December 31, 2014, the carrying values of commercial mortgage loans on real estate that had been classified as nonaccrual loans were $89 million and $89 million, respectively.

 

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Table of Contents

Troubled Debt Restructurings

In 2011, the loan shown in the table below was modified to interest only payments. Since 2011, this loan has been modified two additional times to extend interest only payments through maturity. The maturity date was also extended from November 5, 2014 to December 5, 2015. Since the fair market value of the underlying real estate collateral is the primary factor in determining the allowance for credit losses, modifications of loan terms typically have no direct impact on the allowance for credit losses, and therefore, no impact on the financial statements.

Troubled Debt Restructuring - Modifications

 

     Number
of  Loans
     Outstanding Recorded Investment  
        Pre-Modification      Post - Modification  
            (In Millions)  

June 30, 2015

        

Troubled debt restructurings:

        

Commercial mortgage loans

     1         84         93   
  

 

 

    

 

 

    

 

 

 

Total

     1       $ 84       $ 93   
  

 

 

    

 

 

    

 

 

 

There were no default payments on the above loan during the first six months of 2015.

Valuation Allowances for Mortgage Loans:

Allowance for credit losses for commercial mortgage loans for the first six months of 2015 and 2014 was as follows:

 

     2015     2014  
Allowance for credit losses:    (In Millions)  

Beginning balance, January 1,

   $ 37      $ 42   

Charge-offs

     (1     (14

Recoveries

              

Provision

            6   
  

 

 

   

 

 

 

Ending balance, June 30,

   $ 36      $ 34   
  

 

 

   

 

 

 

Ending balance, June 30,:

    

Individually Evaluated for Impairment

   $  36      $   34   
  

 

 

   

 

 

 

There were no allowances for credit losses for agricultural mortgage loans for the first six months of 2015 and 2014.

 

 

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Table of Contents

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. The following tables provide information relating to the loan-to-value and debt service coverage ratio for commercial and agricultural mortgage loans at June 30, 2015 and December 31, 2014, before adjustments for valuation allowance.

Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios

June 30, 2015

 

                                                  
     Debt Service Coverage Ratio         
                                            Less          Total  
     Greater          1.8x to              1.5x to              1.2x to              1.0x to          than      Mortgage  
Loan-to-Value Ratio:(2)    than 2.0x      2.0x      1.8x      1.5x      1.2x      1.0x      Loans  
     (In Millions)  

Commercial Mortgage Loans(1)

  

                 

0% - 50%

   $ 377       $       $ 58       $ 23       $ 33       $       $ 491   

50% - 70%

     917         501         619         852         98                 2,987   

70% - 90%

     211                 84         265         64                 624   

90% plus

     156                                         47         203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial Mortgage Loans

   $ 1,661       $ 501       $ 761       $ 1,140       $ 195       $ 47       $ 4,305   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agricultural Mortgage Loans(1)

  

                 

0% - 50%

   $ 187       $ 111       $ 289       $ 408       $ 239       $ 53       $ 1,287   

50% - 70%

     139         89         188         245         198         44         903   

70% - 90%

                     2         18                         20   

90% plus

                                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Agricultural Mortgage Loans

   $ 326       $ 200       $ 479       $ 671       $ 437       $ 97       $ 2,210   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Mortgage Loans(1)

  

                 

0% - 50%

   $ 564       $ 111       $ 347       $ 431       $ 272       $ 53       $ 1,778   

50% - 70%

     1,056         590         807         1,097         296         44         3,890   

70% - 90%

     211                 86         283         64                 644   

90% plus

     156                                         47         203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Mortgage Loans

   $ 1,987       $ 701       $ 1,240       $ 1,811       $ 632       $ 144       $ 6,515   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The debt service coverage ratio is calculated using the most recently reported net operating income results from property operations divided by annual debt service.

(2) 

The loan-to-value ratio is derived from current loan balance divided by the fair market value of the property. The fair market value of the underlying commercial properties is updated annually.

 

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Table of Contents

Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios

December 31, 2014

 

     Debt Service Coverage Ratio         
                                            Less          Total  
     Greater          1.8x to              1.5x to              1.2x to              1.0x to          than      Mortgage  
Loan-to-Value Ratio:(2)    than 2.0x      2.0x      1.8x      1.5x      1.2x      1.0x      Loans  
     (In Millions)  

Commercial Mortgage Loans(1)

  

                 

0% - 50%

   $ 335       $       $       $ 59       $ 34       $       $ 428   

50% - 70%

     963         440         872         839         54                 3,168   

70% - 90%

     211                 61         265         79                 616   

90% plus

     156                                         47         203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Commercial Mortgage Loans

   $ 1,665       $ 440       $ 933       $ 1,163       $ 167       $ 47       $ 4,415   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Agricultural Mortgage Loans(1)

  

                 

0% - 50%

   $ 184       $ 100       $ 232       $ 408       $ 206       $ 50       $ 1,180   

50% - 70%

     143         87         201         223         204         47         905   

70% - 90%

                                                       

90% plus

                                                       
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Agricultural Mortgage Loans

   $ 327       $ 187       $ 433       $ 631       $ 410       $ 97       $ 2,085   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Mortgage Loans(1)

  

                 

0% - 50%

   $ 519       $ 100       $ 232       $ 467       $ 240       $ 50       $ 1,608   

50% - 70%

     1,106         527         1,073         1,062         258         47         4,073   

70% - 90%

     211                 61         265         79                 616   

90% plus

     156                                         47         203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Mortgage Loans

   $ 1,992       $ 627       $ 1,366       $ 1,794       $ 577       $ 144       $ 6,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The debt service coverage ratio is calculated using the most recently reported net operating income results from property operations divided by annual debt service.

(2) 

The loan-to-value ratio is derived from current loan balance divided by the fair market value of the property. The fair market value of the underlying commercial properties is updated annually.

 

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Table of Contents

The following table provides information relating to the aging analysis of past due mortgage loans at June 30, 2015 and December 31, 2014, respectively, before adjustments for valuation allowance.

Age Analysis of Past Due Mortgage Loans

 

     30-59
    Days    
     60-89
    Days    
     90
    Days    
or >
         Total              Current          Total
Financing
Receivables
     Recorded
Investment
> 90 Days
and
Accruing
 
                          (In Millions)                

June 30, 2015

                    

Commercial

   $       $       $       $       $ 4,305       $ 4,305       $   

Agricultural

     15         5                 20         2,190         2,210           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Mortgage Loans

   $ 15       $ 5       $       $ 20       $ 6,495       $ 6,515       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2014

                    

Commercial

   $       $       $       $       $ 4,415       $ 4,415       $   

Agricultural

     1         7         3         11         2,074         2,085         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Mortgage Loans

   $ 1       $ 7       $ 3       $ 11       $ 6,489       $ 6,500       $ 3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides information regarding impaired mortgage loans at June 30, 2015 and December 31, 2014, respectively.

Impaired Mortgage Loans

 

     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
    Average
Recorded
Investment(1)
     Interest
Income
Recognized
 
     (In Millions)  

June 30, 2015:

             

With related allowance recorded:

             

Commercial mortgage loans - other

   $ 156       $ 156       $ (36   $ 156       $ 2   

Agricultural mortgage loans

                                      
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 156       $ 156       $ (36   $ 156       $ 2   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2014:

             

With related allowance recorded:

             

Commercial mortgage loans - other

   $ 156       $ 156       $ (37   $ 148       $ 2   

Agricultural mortgage loans

                                      
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 156       $ 156       $ (37   $ 148       $ 2   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Represents a two-quarter average of recorded amortized cost

 

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Table of Contents

Derivatives and Offsetting Assets and Liabilities

The Company uses derivatives as part of its overall asset/liability risk management primarily to reduce exposures to equity market and interest rate risks. Derivative hedging strategies are designed to reduce these risks from an economic perspective and are all executed within the framework of a “Derivative Use Plan” approved by the NYSDFS. 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, 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 capital markets.

Derivatives utilized to hedge exposure to Variable Annuities with Guarantee Features

The Company has issued and continues to offer certain variable annuity products with GMDB, GMIB and GIB features. The Company had previously issued certain variable annuity products with GWBL, GMWB and GMAB features (collectively, “GWBL and Other 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 benefits, 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 the GIB and GWBL and Other Features is that under-performance of the financial markets could result in the GIB and GWBL and Other Features’ benefits being higher than what accumulated policyholders’ account balances would support.

For GMDB, GMIB, GIB and GWBL and Other Features, the Company retains certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected assumptions for mortality, lapse and surrender, withdrawal and contractholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMDB, GMIB, GIB and GWBL and Other 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, AXA Equitable is party to total return swaps for which the reference U.S. Treasury securities are contemporaneously purchased from the market and sold to the swap counterparty. As these transactions result in a transfer of control of the U.S. Treasury securities to the swap counterparty, AXA Equitable derecognizes these securities with consequent gain or loss from the sale. The Company has also purchased reinsurance contracts to mitigate the risks associated with GMDB features and the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts issued by the Company.

The Company has in place a hedge program 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 SCS variable annuity, SIO in the EQUI-VEST® variable annuity series MSO in the variable life insurance products and IUL insurance products. These products permit the contract owner to participate in the performance of an index, ETF or commodity price movement up to a cap for a set period of time. They also contain a protection feature, in which the Company will absorb, up to a certain percentage, the loss of value in an index, ETF or commodity price, which varies by product segment.

In order to support the returns associated with these features, the Company enters into derivative contracts whose payouts, in combination with fixed income investments, emulate those of the index, ETF or commodity price, subject to caps and buffers.

Derivatives utilized to hedge risks associated with interest margins on Interest Sensitive Life and Annuity Contracts

Margins or “spreads” on interest-sensitive life insurance and annuity contracts are affected by interest rate fluctuations as the yield on portfolio investments, primarily fixed maturities, is intended to support required payments under these contracts, including interest rates credited to their policy and contract holders. From time to time the Company uses interest rate swaptions and other instruments to reduce the risk associated with minimum guarantees on these interest-sensitive contracts. At June 30, 2015, there were no positions outstanding for these programs.

 

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Table of Contents

Derivatives utilized to hedge equity market risks associated with the General Account’s seed money investments in Separate Accounts, retail mutual funds and Separate Account fee revenue fluctuations

The Company’s General Account seed money investments in Separate Account equity funds and retail mutual funds exposes the Company to equity market risk, which is partially hedged through equity-index futures contracts to minimize such risk.

In second quarter 2015, the Company entered into futures on equity indices to mitigate the impact on net earnings from Separate Account fee revenue fluctuations due to movements in the equity markets. These positions partially cover fees expected to be earned through the current year from the Company’s Separate Account products.

Derivatives utilized for General Account Investment Portfolio

Beginning in the second quarter of 2013, the Company implemented a strategy in its General Account investment portfolio to replicate the credit exposure of fixed maturity securities otherwise permissible under its investment guidelines through the sale of 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 have remaining terms of five years or less and are recorded at fair value with changes in fair value, including the yield component that emerges from initial amounts paid or received, reported in Net investment income (loss). The Company manages its credit exposure taking into consideration both cash and derivatives based positions and selects the reference entities in its replicated credit exposures in a manner consistent with its selection of fixed maturities. In addition, the Company has transacted the sale of CDSs exclusively in single name reference entities of investment grade credit quality and with counterparties subject to collateral posting requirements. If there is an event of default by the reference entity or other such credit event as defined under the terms of the swap contract, the Company is obligated to perform under the credit derivative and, at the counterparty’s option, either pay the referenced amount of the contract less an auction-determined recovery amount or pay the referenced amount of the contract and receive in return the defaulted or similar security of the reference entity for recovery by sale at the contract settlement auction. To date, there have been no events of default or circumstances indicative of a deterioration in the credit quality of the named referenced entities to require or suggest that the Company will have to perform under these CDSs. The maximum potential amount of future payments the Company could be required to make under these credit derivatives is limited to the par value of the referenced securities which is the dollar-equivalent of the derivative notional amount. The Standard North American CDS Contract (“SNAC”) under which the Company executes these CDS sales transactions does not contain recourse provisions for recovery of amounts paid under the credit derivative.

Periodically, the Company purchases TIPS and other sovereign inflation bonds as General Account investments and enters into asset swaps, to result in payment of the variable principal at maturity and semi-annual coupons of the bonds to the swap counterparty (pay variable) in return for fixed amounts (receive fixed). These asset 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 third quarter of 2014, the Company implemented a strategy to hedge a portion of the credit exposure in its General Account investment portfolio by buying protection through a swap. These are swaps on the “super senior tranche” of the investment grade CDX index. Under the terms of these swaps, the Company pays quarterly fixed premiums that, together with any initial amount paid or received at trade inception, serve as premiums paid to hedge the risk arising from multiple defaults of bonds referenced in the CDX index. These credit derivatives have remaining terms of five years or less and are recorded at fair value with changes in fair value, including the yield component that emerges from initial amounts paid or received, reported in Net investment income (loss) from derivative instruments.

 

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Table of Contents

The tables below present quantitative disclosures about the Company’s derivative instruments, including those embedded in other contracts required to be accounted for as derivative instruments.

Derivative Instruments by Category

 

     At June 30, 2015      Gains (Losses)
Reported In Net

Earnings (Loss)
Six Months Ended
June 30, 2015
 
            Fair Value     
     Notional
Amount
     Asset
Derivatives
     Liability
Derivatives
    
     (In Millions)  

Freestanding derivatives:

           

Equity contracts:(1)

           

Futures

   $ 6,256       $ 2       $       $ (201

Swaps

     1,419         29         17         (75

Options

     7,362         1,228         709         103   

Interest rate contracts:(1)

           

Floors

     1,800         94                 11   

Swaps

     12,845         313         159         (376

Futures

     8,506                         (165

Swaptions

                             118   

Credit contracts:(1)

           

Credit default swaps

     1,938         7         17         5   

Other freestanding contracts:(1)

           

Foreign currency contracts

     256         4         4         2   
           

 

 

 

Net investment income (loss)

              (578
           

 

 

 

Embedded derivatives:

           

GMIB reinsurance contracts

             9,951                 (760

GIB and GWBL and Other Features(2)

                     109         (19

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

                     437         (125
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $     40,382       $ 11,628       $ 1,452       $ (1,482
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Reported in Other invested assets in the consolidated balance sheets.

(2) 

Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.

(3) 

SCS and SIO indexed features are reported in Policyholders’ account balances; MSO and IUL indexed features are reported in Future policyholders’ benefits and other policyholders’ liabilities in the consolidated balance sheets.

 

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                          Gains (Losses)  
     At December 31, 2014      Reported In Net  
            Fair Value      Earnings (Loss)  
     Notional      Asset      Liability      Six Months Ended  
     Amount      Derivatives      Derivatives      June 30, 2014  
     (In Millions)  

Freestanding derivatives:

           

Equity contracts:(1)

           

Futures

   $ 5,933       $ 1       $ 2       $ (316

Swaps

     1,169         22         15         (95

Options

     6,896         1,215         742         135   

Interest rate contracts:(1)

           

Floors

     2,100         120                 8   

Swaps

     11,608         605         15         698   

Futures

     10,647                         256   

Swaptions

     4,800         72                   

Credit contracts:(1)

           

Credit default swaps

     1,942         9         27         4   

Other freestanding contracts:(1)

           

Foreign currency contracts

     149         2                 (3
           

 

 

 

Net investment income (loss)

              687   
           

 

 

 

Embedded derivatives:

           

GMIB reinsurance contracts

             10,711                 1,516   

GIB and GWBL and Other Features(2)

                     128         (17

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

                     380         (157
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 45,244       $ 12,757       $ 1,309       $ 2,029   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Reported in Other invested assets in the consolidated balance sheets.

(2) 

Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.

(3) 

SCS and SIO indexed features are reported in Policyholders’ account balances; MSO and IUL indexed features are reported in Future policyholders’ benefits and other policyholders’ liabilities in the consolidated balance sheets

Equity-Based and Treasury Futures Contracts

All outstanding equity-based and treasury futures contracts at June 30, 2015 are exchange-traded and net settled daily in cash. At June 30, 2015, the Company had open exchange-traded futures positions on: (i) the S&P 500, Russell 2000, NASDAQ 100 and Emerging Market indices, having initial margin requirements of $227 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 $23 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 $41 million.

Credit Risk

Although notional amount is the most commonly used measure of volume in the derivatives market, it is not used as a measure of credit risk. A derivative with positive fair value (a derivative asset) indicates existence of credit risk because the counterparty would owe money to the Company if the contract were closed at the reporting date.

 

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Alternatively, a derivative contract with negative fair value (a derivative liability) indicates the Company would owe money to the counterparty if the contract were closed at the reporting date. To reduce credit exposures in OTC derivative transactions the Company generally enters into master agreements that provide for a netting of financial exposures with the counterparty and allow for collateral arrangements as further described below under “ISDA Master Agreements.” The Company further controls and minimizes its counterparty exposure through a credit appraisal and approval process.

ISDA Master Agreements

Netting Provisions. The standardized “ISDA Master Agreement” under which the Company conducts its OTC derivative transactions includes provisions for payment netting. In the normal course of business activities, if there is more than one derivative transaction with a single counterparty, the Company will set-off the cash flows of those derivatives into a single amount to be exchanged in settlement of the resulting net payable or receivable with that counterparty. In the event of default, insolvency, or other similar event pre-defined under the ISDA Master Agreement that would result in termination of OTC derivatives transactions before their maturity, netting procedures would be applied to calculate a single net payable or receivable with the counterparty.

Collateral Arrangements. The Company generally has executed a CSA under the ISDA Master Agreement it maintains with each of its 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. These CSAs are bilateral agreements that require collateral postings by the party “out-of-the-money” or in a net derivative liability position. Various thresholds for the amount and timing of collateralization of net liability positions are applicable. Consequently, the credit exposure of the Company’s OTC derivative contracts is limited to the net positive estimated fair value of those contracts at the reporting date after taking into consideration the existence of netting agreements and any collateral received pursuant to CSAs. Derivatives are recognized at fair value in the consolidated balance sheets and are reported either as assets in Other invested assets or as liabilities in Other liabilities, except for embedded insurance-related derivatives as described above and derivatives transacted with a related counterparty. The Company nets the fair value of all derivative financial instruments with counterparties for which an ISDA Master Agreement and related CSA have been executed.

At June 30, 2015 and December 31, 2014, respectively, the Company held $657 million and $1,225 million in cash and securities collateral delivered by trade counterparties, representing the fair value of the related derivative agreements. This unrestricted cash collateral is reported in Cash and cash equivalents, and the obligation to return it is reported in Other liabilities in the consolidated balance sheets. The aggregate fair value of all collateralized derivative transactions that were in a liability position with trade counterparties at June 30, 2015 and December 31, 2014, respectively, were $2 million and $28 million, for which the Company posted collateral of $2 million and $36 million at June 30, 2015 and December 31, 2014, respectively, in the normal operation of its collateral arrangements. Certain of the Company’s ISDA Master Agreements contain contingent provisions that permit the counterparty to terminate the ISDA Master Agreement if the Company’s credit rating falls below a specified threshold, however, the occurrence of such credit event would not impose additional collateral requirements.

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 specificities of each respective counterparty. These agreements generally provide detail as to the nature of the transaction, including provisions for payment netting, establish parameters concerning the ownership and custody of the collateral securities, including the right to substitute collateral during the term of the agreement, and provide for remedies in the event of default by either party. Amounts due to/from the same counterparty under these arrangements generally would be netted in the event of default and subject to rights of set-off in bankruptcy. 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 as Broker-dealer related payables or receivables. The Company obtains or posts collateral generally in the form of cash, U.S. Treasury, U.S. government and government agency securities and investment grade corporate bonds in an amount equal to 102%-105% of the fair value of the securities to be repurchased or resold and monitors their market values on a daily basis with additional collateral posted or obtained as necessary. Securities to be repurchased or resold are the same, or substantially the same, as those initially transacted under the arrangement. At June 30, 2015 and December 31, 2014, the balance outstanding under reverse repurchase transactions was $148 million and $0 million, respectively. At June 30, 2015 and December 31, 2014, the balance outstanding under securities repurchase transactions was $2,133 million and $950 million, respectively. The Company utilized the funds received

 

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from these repurchase agreements to extend the duration of the assets within General Account investment portfolio. For other instruments used to extend the duration of the General Account investment portfolio see “Obligation under funding agreements” included in Note 13.

The following table presents information about the Insurance Segment’s offsetting of financial assets and liabilities and derivative instruments at June 30, 2015.

Offsetting of Financial Assets and Liabilities and Derivative Instruments

At June 30, 2015

 

            Gross         
     Gross      Amounts      Net Amounts  
     Amounts      Offset in the      Presented in the  
     Recognized      Balance Sheets      Balance Sheets  
     (In Millions)  

ASSETS(1)

        

Description

        

Derivatives:

        

Equity contracts

   $ 1,255       $ 725       $ 530   

Interest rate contracts

     371         154         217   

Credit contracts

     6         17         (11
  

 

 

    

 

 

    

 

 

 

Total Derivatives, subject to an ISDA Master Agreement

     1,632         896         736   

Total Derivatives, not subject to an ISDA Master Agreement

     31                 31   
  

 

 

    

 

 

    

 

 

 

Total Derivatives

     1,663         896         767   

Other financial instruments

     1,016                 1,016   
  

 

 

    

 

 

    

 

 

 

Other invested assets(2)

   $ 2,679       $ 896       $ 1,783   
  

 

 

    

 

 

    

 

 

 

Reverse Repurchase agreements

     148                 148   

Other Broker-dealer receivables

     2,201                 2,201   
  

 

 

    

 

 

    

 

 

 

Broker-dealer related receivables

   $ 2,349       $       $ 2,349   
  

 

 

    

 

 

    

 

 

 

LIABILITIES(3)

        

Description

        

Derivatives:

        

Equity contracts

   $ 725       $ 725       $   

Interest rate contracts

     154         154           

Credit contracts

     17         17           
  

 

 

    

 

 

    

 

 

 

Total Derivatives, subject to an ISDA Master Agreement

     896         896           

Total Derivatives, not subject to an ISDA Master Agreement

                       
  

 

 

    

 

 

    

 

 

 

Total Derivatives

     896         896           

Other financial liabilities

     2,845                 2,845   
  

 

 

    

 

 

    

 

 

 

Other liabilities

   $ 3,741       $ 896       $ 2,845   
  

 

 

    

 

 

    

 

 

 

Repurchase agreements

   $ 2,133       $       $ 2,133   

Other financial liabilities

     594                 594   
  

 

 

    

 

 

    

 

 

 

Broker-dealer related payables

   $ 2,727       $       $ 2,727   
  

 

 

    

 

 

    

 

 

 

 

(1) 

Excludes Investment Management segment’s $14 million net derivative assets, $8 million long exchange traded options and $93 million of securities borrowed.

(2) 

Includes $145 million of accrued interest related to derivative instruments reported in other assets on the consolidated balance sheets.

(3) 

Excludes Investment Management segment’s $10 million net derivative liabilities, $2 million short exchange traded options and $7 million of securities loaned.

 

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The following table presents information about the Insurance segment’s gross collateral amounts that are not offset in the consolidated balance sheets at June 30, 2015.

Gross Collateral Amounts Not Offset in the Consolidated Balance Sheets

At June 30, 2015

 

     Net Amounts     Collateral (Received)/Held        
     Presented in the     Financial           Net  
     Balance Sheets     Instruments     Cash     Amounts  
     (In Millions)  

ASSETS:(1)

  

     

Counterparty A

   $ 56      $      $ (56   $   

Counterparty B

     11               12        23   

Counterparty C

     59               (29     30   

Counterparty D

     212               (202     10   

Counterparty E

     54               (50     4   

Counterparty F

     20               6        26   

Counterparty G

     175               (175       

Counterparty H

     44        (43            1   

Counterparty I

     11               28        39   

Counterparty J

     (2            2          

Counterparty K

     42               (42       

Counterparty L

     9               (9       

Counterparty M

     36               (1     35   

Counterparty N

     31                      31   

Counterparty Q

     4               (4       

Counterparty T

     4               (4       

Counterparty U

     1          2        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives

   $ 767      $ (43   $ (522   $ 202   

Other financial instruments

     1,016                      1,016   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets(2)

   $ 1,783      $ (43   $ (522   $ 1,218   
  

 

 

   

 

 

   

 

 

   

 

 

 

Counterparty M

   $ 148      $ (148   $      $   

Other Broker-dealer receivables

     2,201                      2,201   
  

 

 

   

 

 

   

 

 

   

 

 

 

Broker-dealer related receivables

   $ 2,349      $ (148   $      $ 2,201   
  

 

 

   

 

 

   

 

 

   

 

 

 

LIABILITIES:(3)

        

Counterparty D

   $ 992      $ (992   $      $   

Counterparty C

     252        (252              

Counterparty M

     889        (889              
  

 

 

   

 

 

   

 

 

   

 

 

 

Total repurchase agreements

   $ 2,133      $ (2,133   $      $   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Broker-dealer payables

     594                      594   
  

 

 

   

 

 

   

 

 

   

 

 

 

Broker-dealer related payables

   $ 2,727      $ (2,133   $      $ 594   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Excludes Investment Management segment’s cash collateral received of $2 million related to derivative assets and $93 million related to securities borrowed.

(2) 

Includes $145 million of accrued interest related to derivative instruments reported in other assets on the consolidated balance sheets.

(3) 

Excludes Investment Management segment’s cash collateral pledged of $6 million related to derivative liabilities and $7 million related to securities loaned.

 

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The following table presents information about repurchase agreements accounted for as secured borrowings in the consolidated balance sheets at June 30, 2015.

Repurchase Agreement Accounted for as Secured Borrowings(1)

 

     At June 30, 2015  
     Remaining Contractual Maturity of the Agreements  
     Overnight and
Continuous
     Up to 30
days
     30–90
days
     Greater Than
90 days
     Total  
     (In Millions)  

Repurchase agreements

              

U.S. Treasury and agency securities

   $       $ 2,108       $ 25       $       $ 2,133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $       $ 2,108       $ 25       $       $ 2,133   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Reverse repurchase agreements

              

Corporate securities

   $       $ 148       $       $       $ 148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $       $ 148       $       $       $ 148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Excludes Investment Management segment’s $93 million of securities borrowed.

 

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The following table presents information about the Insurance segment’s offsetting of financial assets and liabilities and derivative instruments at December 31, 2014.

Offsetting of Financial Assets and Liabilities and Derivative Instruments

At December 31, 2014

 

            Gross         
     Gross      Amounts      Net Amounts  
     Amounts      Offset in the      Presented in the  
     Recognized      Balance Sheets      Balance Sheets  
     (In Millions)  

ASSETS(1)

        

Description

        

Derivatives:

        

Equity contracts

   $ 1,236       $ 753       $ 483   

Interest rate contracts

     755         12         743   

Credit contracts

     7         27         (20
  

 

 

    

 

 

    

 

 

 

Total Derivatives, subject to an ISDA Master Agreement

     1,998         792         1,206   

Total Derivatives, not subject to an ISDA Master Agreement

     40                 40   
  

 

 

    

 

 

    

 

 

 

Total Derivatives

     2,038         792         1,246   

Other financial instruments

     852                 852   
  

 

 

    

 

 

    

 

 

 

Other invested assets(2)

   $ 2,890       $ 792       $ 2,098   
  

 

 

    

 

 

    

 

 

 

LIABILITIES(3)

        

Description

        

Derivatives:

        

Equity contracts

   $ 753       $ 753       $   

Interest rate contracts

     12         12           

Credit contracts

     27         27           
  

 

 

    

 

 

    

 

 

 

Total Derivatives, subject to an ISDA Master Agreement

     792         792           

Total Derivatives, not subject to an ISDA Master Agreement

                       
  

 

 

    

 

 

    

 

 

 

Total Derivatives

     792         792           

Other financial liabilities

     2,939                 2,939   
  

 

 

    

 

 

    

 

 

 

Other liabilities

   $ 3,731       $ 792       $ 2,939   
  

 

 

    

 

 

    

 

 

 

Repurchase agreements

     950                 950   

Other broker-dealer related payables

     551                 551   
  

 

 

    

 

 

    

 

 

 

Broker-dealer related payables

     1,501                 1,501   
  

 

 

    

 

 

    

 

 

 

 

(1) 

Excludes Investment Management segment’s $8 million net derivative assets, $22 million long exchange traded options and $158 million of securities borrowed.

(2) 

Includes $120 million related to accrued interest related to derivative instruments reported in other assets on the consolidated balance sheets.

(3) 

Excludes Investment Management segment’s $9 million net derivative liabilities, $7 million short exchange traded options and $34 million of securities loaned.

 

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The following table presents information about the Insurance segment’s gross collateral amounts that are not offset in the consolidated balance sheets at December 31, 2014.

Gross Collateral Amounts Not Offset in the Consolidated Balance Sheets

At December 31, 2014

 

     Net Amounts      Collateral (Received)/Held  
     Presented in the      Financial           Net  
     Balance Sheets      Instruments     Cash     Amounts  
ASSETS:(1)    (In Millions)  

Counterparty A

   $ 62       $      $ (62   $   

Counterparty B

     102                (95     7   

Counterparty C

     111                (110     1   

Counterparty D

     228                (224     4   

Counterparty E

     60                (59     1   

Counterparty F

     63                (60     3   

Counterparty G

     145         (145              

Counterparty H

     31         (31              

Counterparty I

     136                (134     2   

Counterparty J

     28                (22     6   

Counterparty K

     44                (44       

Counterparty L

     113         (113              

Counterparty M

     76                (68     8   

Counterparty N

     40                       40   

Counterparty Q

     4                (4       

Counterparty T

     3                (3       
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Derivatives

   $ 1,246       $ (289   $ (885   $ 72   

Other financial instruments

     852                       852   
  

 

 

    

 

 

   

 

 

   

 

 

 

Other invested assets(2)

   $ 2,098       $ (289   $ (885   $ 924   
  

 

 

    

 

 

   

 

 

   

 

 

 

LIABILITIES(3)

         

Counterparty D

   $ 450       $ (450   $      $   

Counterparty C

     500         (500              
  

 

 

    

 

 

   

 

 

   

 

 

 

Total repurchase agreements

   $ 950       $ (950   $      $   

Other Broker-dealer related payables

     551                       551   
  

 

 

    

 

 

   

 

 

   

 

 

 

Broker-dealer related payables

   $ 1,501       $ (950   $      $ 551   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

Excludes Investment Management segment’s cash collateral received of $1 million related to derivative assets and $158 million related to securities borrowed.

(2) 

Includes $120 million of accrued interest related to derivative instruments reported in other assets on the consolidated balance sheets.

(3) 

Excludes Investment Management segment’s cash collateral pledged of $10 million related to derivative liabilities and $34 million related to securities loaned.

 

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4) CLOSED BLOCK

The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in AOCI) represents the expected maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. As of January 1, 2001, AXA Equitable has developed an actuarial calculation of the expected timing of AXA Equitable’s Closed Block’s earnings.

If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.

Many expenses related to Closed Block operations, including amortization of DAC, are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block.

Summarized financial information for the Closed Block follows:

 

     June 30,      December 31,  
     2015      2014  
     (In Millions)  

CLOSED BLOCK LIABILITIES:

     

Future policy benefits, policyholders’ account balances and other

   $ 7,450       $ 7,537   

Policyholder dividend obligation

     140         201   

Other liabilities

     184         117   
  

 

 

    

 

 

 

Total Closed Block liabilities

     7,774         7,855   
  

 

 

    

 

 

 

ASSETS DESIGNATED TO THE CLOSED BLOCK:

     

Fixed maturities, available for sale, at fair value (amortized cost of $4,628 and $4,829)

     4,872         5,143   

Mortgage loans on real estate

     1,275         1,407   

Policy loans

     897         912   

Cash and other invested assets

     365         14   

Other assets

     185         176   
  

 

 

    

 

 

 

Total assets designated to the Closed Block

     7,594         7,652   
  

 

 

    

 

 

 

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

     180         203   

Amounts included in accumulated other comprehensive income (loss):

     

Net unrealized investment gains (losses), net of deferred income tax (expense) benefit of $(40) and $(43) and policyholder dividend obligation of $(140) and $(201)

     74         80   
  

 

 

    

 

 

 

Maximum Future Earnings To Be Recognized From Closed Block Assets and Liabilities

   $ 254       $ 283   
  

 

 

    

 

 

 

 

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Closed Block revenues and expenses were as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

REVENUES:

        

Premiums and other income

   $ 66      $ 69      $ 135      $ 141   

Net investment income (loss)

     99        94        191        190   

Net investment gains (losses)

     (2     (1     (1     1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     163        162        325        332   
  

 

 

   

 

 

   

 

 

   

 

 

 

BENEFITS AND OTHER DEDUCTIONS:

        

Policyholders’ benefits and dividends

     143        153        296        309   

Other operating costs and expenses

     1        1        1        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and other deductions

     144        154        297        310   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net revenues (loss) before income taxes

     19        8        28        22   

Income tax (expense) benefit

     4        (3     1        (8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Revenues (Losses)

   $ 23      $ 5      $ 29      $ 14   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of the policyholder dividend obligation follows:

 

     Six Months Ended  
     June 30,  
     2015     2014  
     (In Millions)  

Balances, beginning of year

   $ 201      $ 128   

Unrealized investment gains (losses), net of DAC

     (61     105   
  

 

 

   

 

 

 

Balances, End of Period

   $ 140      $ 233   
  

 

 

   

 

 

 

 

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5) GMDB, GMIB, GIB, GWBL AND OTHER FEATURES AND NO LAPSE GUARANTEE FEATURES

A) 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.

The following table summarizes the GMDB and GMIB liabilities, before reinsurance ceded, reflected in the General Account in future policy benefits and other policyholders’ liabilities:

 

         GMDB             GMIB             Total      
     (In Millions)  

Balance at January 1, 2015

   $ 1,729      $ 5,644      $ 7,373   

Paid guarantee benefits

     (139     (29     (168

Other changes in reserve

     290        360        650   
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $ 1,880      $ 5,975      $ 7,855   
  

 

 

   

 

 

   

 

 

 

Balance at January 1, 2014

   $ 1,626      $ 4,203      $ 5,829   

Paid guarantee benefits

     (116     (174     (290

Other changes in reserve

     108        626        734   
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ 1,618      $ 4,655      $ 6,273   
  

 

 

   

 

 

   

 

 

 

Related GMDB reinsurance ceded amounts were:

 

     Six Months Ended  
     June 30,  
     2015     2014  
     (In Millions)  

Balance, beginning of year

   $ 832      $ 791   

Paid guarantee benefits

     (66     (56

Other changes in reserve

     134        55   
  

 

 

   

 

 

 

Balance, End of Period

   $ 900      $ 790   
  

 

 

   

 

 

 

The GMIB reinsurance contracts are considered derivatives and are reported at fair value.

 

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The June 30, 2015 values for variable annuity contracts in-force on such date with GMDB and GMIB features are presented in the following table. For contracts with the GMDB feature, the net amount at risk in the event of death is the amount by which the GMDB benefits exceed related account values. For contracts with the GMIB feature, the net amount at risk in the event of annuitization is the amount by which the present value of the GMIB benefits exceeds 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 guarantees may also offer GMIB guarantees in the same contract, the GMDB and GMIB amounts listed are not mutually exclusive:

 

     Return of
Premium
    Ratchet     Roll-Up     Combo     Total  
     (Dollars In Millions)  

GMDB:

          

Account values invested in:

          

General Account

   $ 12,991      $ 153      $ 82      $ 273      $ 13,499   

Separate Accounts

   $ 39,675      $ 8,809      $ 3,775      $ 36,536      $ 88,795   

Net amount at risk, gross

   $ 240      $ 162      $ 2,201      $ 13,220      $ 15,823   

Net amount at risk, net of amounts reinsured

   $ 240      $ 113      $ 1,478      $ 5,260      $ 7,091   

Average attained age of contractholders

     51.1        65.2        71.3        66.1        55.0   

Percentage of contractholders over age 70

     8.9     34.7     56.9     37.3     16.5

Range of contractually specified interest rates

     N/A        N/A        3% - 6     3% - 6.5     3% - 6.5

GMIB:

          

Account values invested in:

          

General Account

     N/A        N/A      $ 149      $ 351      $ 500   

Separate Accounts

     N/A        N/A      $ 14,289      $ 44,588      $ 58,877   

Net amount at risk, gross

     N/A        N/A      $ 1,065      $ 4,293      $ 5,358   

Net amount at risk, net of amounts reinsured

     N/A        N/A      $ 325      $ 1,052      $ 1,377   

Weighted average years remaining until annuitization

     N/A        N/A        1.2        2.3        2.2   

Range of contractually specified interest rates

     N/A        N/A        3% - 6     3% - 6.5     3% - 6.5

The liability for SCS, SIO, MSO, IUL, GIB and GWBL and Other Features, not included above, was $546 million and $508 million at June 30, 2015 and December 31, 2014, respectively, which are accounted for as embedded derivatives. The liability for GIB, GWBL and Other Features reflects the present value of expected future payments (benefits) less the fees attributable to these features over a range of market consistent economic scenarios. The liability for SCS, SIO, MSO and IUL reflects the present value of expected future payments assuming the segments are held to maturity.

GMIB/GWBL Lump Sum Option

The Company continues to proactively manage the risks associated with its in-force business, particularly variable annuities with guarantee features. In first quarter 2015, the Company launched a lump sum payment option to certain contract holders with GMIB and GWBL benefits at the time their annuity account value (“AAV”) falls to zero. Prior to this option, if an eligible contract holder’s AAV fell to zero, either due to a withdrawal or surrender that is not an excess withdrawal or due to a deduction of charges, the contractholder would automatically receive a stream of payments over his or her lifetime. With this offer, contract holders will have an additional payout option to receive a percentage of the present value of those lifetime payments in a one-time lump sum payment. There is no obligation to accept the offer and it is entirely voluntary. The Company believes that this new contract feature is mutually beneficial to both the

 

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Company and the policyholder as it gives policyholders another benefit alternative and the Company reduces the uncertainty associated with future GMIB and GWBL costs. As a result of this offer, the Company updated its future reserve assumptions to incorporate the expectation that some policyholders will utilize this option.

Due to the difference in accounting recognition between the GMIB and GWBL reserves and the fair value of the GMIB reinsurance contract asset, the net impact of this offer is an after-tax loss of $135 million, which was recognized in first quarter 2015. For additional information, see “Accounting for VA Guarantee Features” in Note 2.

B) Separate Account Investments by Investment Category Underlying GMDB and GMIB Features

The total account values of variable annuity contracts with GMDB and GMIB features include amounts allocated to the guaranteed interest option, which is part of the General Account and variable investment options that invest through Separate Accounts in variable insurance trusts. The following table presents the aggregate fair value of assets, by major investment category, held by Separate Accounts that support variable annuity contracts with GMDB and GMIB benefits and guarantees. The investment performance of the assets impacts the related account values and, consequently, the net amount of risk associated with the GMDB and GMIB benefits and guarantees. Since variable annuity contracts with GMDB benefits and guarantees may also offer GMIB benefits and guarantees in each contract, the GMDB and GMIB amounts listed are not mutually exclusive:

Investment in Variable Insurance Trust Mutual Funds

 

     June 30,      December 31,  
     2015      2014  
     (In Millions)  

GMDB:

     

Equity

   $ 68,708       $ 67,108   

Fixed income

     2,934         3,031   

Balanced

     16,789         17,505   

Other

     364         404   
  

 

 

    

 

 

 

Total

   $ 88,795       $ 88,048   
  

 

 

    

 

 

 

GMIB:

     

Equity

   $ 45,140       $ 43,850   

Fixed income

     1,921         1,988   

Balanced

     11,650         12,060   

Other

     166         186   
  

 

 

    

 

 

 

Total

   $         58,877       $ 58,084   
  

 

 

    

 

 

 

C) Hedging Programs for GMDB and GMIB Features

Beginning in 2003, AXA Equitable established a program intended to hedge certain risks associated first with the GMDB feature and, beginning in 2004, with the GMIB feature of the Accumulator® series of variable annuity products. The program has also been extended to cover other guaranteed benefits as they have been made available. This program utilizes derivative contracts, such as exchange-traded equity, currency, and interest rate futures contracts, total return and/or equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options, that collectively are managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in the equity and fixed income markets. At the present time, this program hedges certain economic risks on products sold, to the extent such risks are not reinsured. At June 30, 2015, the total account value and net amount at risk of the hedged variable annuity contracts were $52,107 million and $5,967 million, respectively, with the GMDB feature and $33,141 million and $1,055 million, respectively, with the GMIB and GIB feature.

 

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These programs do not qualify for hedge accounting treatment. Therefore, gains (losses) on the derivatives contracts used in these programs, including current period changes in fair value, are recognized in net investment income (loss) in the period in which they occur, and may contribute to earnings (loss) volatility.

D) Variable and Interest-Sensitive Life Insurance Policies - No Lapse Guarantee

The no lapse guarantee 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 no lapse guarantee remains in effect so long as the policy meets a contractually specified premium funding test and certain other requirements.

The following table summarizes the no lapse guarantee liabilities reflected in the General Account in Future policy benefits and other policyholders’ liabilities and the related reinsurance ceded:

 

     Direct      Reinsurance        
     Liability      Ceded         Net      
     (In Millions)  

Balance at January 1, 2015

   $ 964       $ (555   $ 409   

Other changes in reserves

     115         (44     71   
  

 

 

    

 

 

   

 

 

 

Balance at June 30, 2015

   $ 1,079       $ (599   $ 480   
  

 

 

    

 

 

   

 

 

 

Balance at January 1, 2014

   $ 829       $ (441   $ 388   

Other changes in reserves

     39         (57     (18
  

 

 

    

 

 

   

 

 

 

Balance at June 30, 2014

   $ 868       $ (498   $ 370   
  

 

 

    

 

 

   

 

 

 

 

6) FAIR VALUE DISCLOSURES

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance established a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, and identifies three levels of inputs that may be used to measure fair value:

 

Level 1

  

Unadjusted quoted prices for identical instruments in active markets. Level 1 fair values generally are supported by market transactions that occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2

  

Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, and inputs to model-derived valuations that are directly observable or can be corroborated by observable market data.

Level 3

  

Unobservable inputs supported by little or no market activity and often requiring significant management judgment or estimation, such as an entity’s own assumptions about the cash flows or other significant components of value that market participants would use in pricing the asset or liability.

The Company defines fair value as the unadjusted quoted market prices 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.

 

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Management is responsible for the determination of the value of investments carried at fair value and the supporting methodologies and assumptions. Under the terms of various service agreements, the Company often utilizes independent valuation service providers to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual securities. These independent valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. As further described below with respect to specific asset classes, these inputs include, but are not limited to, market prices for recent trades and transactions in comparable securities, benchmark yields, interest rate yield curves, credit spreads, quoted prices for similar securities, and other market-observable information, as applicable. Specific attributes of the security being valued also are considered, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security- or issuer-specific information. When insufficient market observable information is available upon which to measure fair value, the Company either will request brokers knowledgeable about these securities to provide a non-binding quote or will employ internal valuation models. Fair values received from independent valuation service providers and brokers and those internally modeled or otherwise estimated are assessed for reasonableness.

 

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Assets and liabilities measured at fair value on a recurring basis are summarized below. Fair value measurements also are required on a non-recurring basis for certain assets, including goodwill, mortgage loans on real estate, equity real estate held for production of income, and equity real estate held for sale, only when an OTTI or other event occurs. When such fair value measurements are recorded, they must be classified and disclosed within the fair value hierarchy. At June 30, 2015 and December 31, 2014, no assets were required to be measured at fair value on a non-recurring basis.

Fair Value Measurements at June 30, 2015

 

     Level 1      Level 2     Level 3      Total  
     (In Millions)  

Assets:

          

Investments:

          

Fixed maturities, available-for-sale:

          

Corporate

   $       $ 20,669      $ 373       $ 21,042   

U.S. Treasury, government and agency

             8,597                8,597   

States and political subdivisions

             456        46         502   

Foreign governments

             431                431   

Commercial mortgage-backed

             23        627         650   

Residential mortgage-backed(1)

             713        1         714   

Asset-backed(2)

             41        48         89   

Redeemable preferred stock

     247         488                735   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     247         31,418        1,095         32,760   
  

 

 

    

 

 

   

 

 

    

 

 

 

Other equity investments

     114                51         165   

Trading securities

     763         5,267                6,030   

Other invested assets:

          

Short-term investments

             99                99   

Swaps

             166                166   

Credit Default Swaps

             (10             (10

Futures

     2                        2   

Options

             519                519   

Floors

             94                94   

Currency Contracts

                              
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     2         868                870   
  

 

 

    

 

 

   

 

 

    

 

 

 

Cash equivalents

     1,773                        1,773   

Segregated securities

             467                467   

GMIB reinsurance contract asset

                    9,951         9,951   

Separate Accounts’ assets

     108,881         2,855        283         112,019   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Assets

   $     111,780       $     40,875      $     11,380       $     164,035   
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities

          

GWBL and Other Features’ liability

   $       $      $ 109       $ 109   

SCS, SIO, MSO and IUL indexed features’ liability

             437                437   

Contingent payment arrangements

          42         42   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Liabilities

   $       $ 437      $ 151       $ 588   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Includes publicly traded agency pass-through securities and collateralized obligations.

(2) 

Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans.

 

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Fair Value Measurements at December 31, 2014

 

     Level 1     Level 2     Level 3      Total  
     (In Millions)  

Assets:

         

Investments:

         

Fixed maturities, available-for-sale:

         

Corporate

   $      $ 21,840      $ 380       $ 22,220   

U.S. Treasury, government and agency

            7,331                7,331   

States and political subdivisions

            472        47         519   

Foreign governments

            446                446   

Commercial mortgage-backed

            20        715         735   

Residential mortgage-backed(1)

            793        2         795   

Asset-backed(2)

            46        53         99   

Redeemable preferred stock

     254        635                889   
  

 

 

   

 

 

   

 

 

    

 

 

 

Subtotal

     254        31,583        1,197         33,034   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other equity investments

     217               61         278   

Trading securities

     710        4,433                5,143   

Other invested assets:

         

Short-term investments

            103                103   

Swaps

            597                597   

Credit Default Swaps

            (18             (18

Futures

     (2                    (2

Options

            473                473   

Floors

            120                120   

Currency Contracts

            1                1   

Swaptions

            72                72   
  

 

 

   

 

 

   

 

 

    

 

 

 

Subtotal

     (2     1,348                1,346   
  

 

 

   

 

 

   

 

 

    

 

 

 

Cash equivalents

     2,725                       2,725   

Segregated securities

            476                476   

GMIB reinsurance contract asset

                   10,711         10,711   

Separate Accounts’ assets

     107,539        3,072        260         110,871   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total Assets

   $ 111,443      $ 40,912      $ 12,229       $ 164,584   
  

 

 

   

 

 

   

 

 

    

 

 

 

Liabilities:

         

GWBL and Other Features’ liability

   $      $      $ 128       $ 128   

SCS, SIO, MSO and IUL indexed features’ liability

            380                380   

Contingent payment arrangements

         42         42   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total Liabilities

   $      $ 380      $ 170       $ 550   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) 

Includes publicly traded agency pass-through securities and collateralized obligations.

(2) 

Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans.

At June 30, 2015 and December 31, 2014, respectively, the fair value of public fixed maturities is approximately $25,033 million and $24,779 million or approximately 16.3% and 16.2% of the Company’s total assets measured at fair value on a recurring basis (excluding GMIB reinsurance contracts and segregated securities measured at fair value on a recurring basis). The fair values of the Company’s public fixed maturity securities 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

 

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directly observed recent market trades. Consistent with the fair value hierarchy, public fixed maturity securities validated in this manner generally are reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. If the pricing information received from independent valuation service providers is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process in accordance with the terms of the respective independent valuation service provider agreement. If as a result it is determined that the independent valuation service provider is able to reprice the security in a manner agreed as more consistent with current market observations, the security remains within Level 2. Alternatively, a Level 3 classification may result if the pricing information then is sourced from another vendor, non-binding broker quotes, or internally-developed valuations for which the Company’s own assumptions about market-participant inputs would be used in pricing the security.

At June 30, 2015 and December 31, 2014, respectively, the fair value of private fixed maturities is approximately $7,727 million and $8,255 million or approximately 5.0% and 5.4% of the Company’s total assets measured at fair value on a recurring basis. The fair values of the Company’s private fixed maturities are determined from prices obtained from independent valuation service providers. Prices not obtained from an independent valuation service provider are determined by using a discounted cash flow model or a market comparable company valuation technique. In certain cases, these models use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model or a market comparable company valuation technique may also incorporate unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the fair value measurement of a security, a Level 3 classification generally is made.

As disclosed in Note 3, at June 30, 2015 and December 31, 2014, respectively, the net fair value of freestanding derivative positions is approximately $771 million and $1,243 million or approximately 89% and 92.3% of Other invested assets measured at fair value on a recurring basis. The fair values of the Company’s derivative positions 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 OIS curves and volatility factors, which then are applied to value the positions. The predominance of market inputs is actively quoted and can be validated through external sources or reliably interpolated if less observable. If the pricing information received from independent valuation service providers is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process in accordance with the terms of the respective independent valuation service provider agreement. If, as a result, it is determined that the independent valuation service provider is able to reprice the derivative instrument in a manner agreed as more consistent with current market observations, the position remains within Level 2. Alternatively, a Level 3 classification may result if the pricing information then is sourced from another vendor, non-binding broker quotes, or internally-developed valuations for which the Company’s own assumptions about market-participant inputs would be used in pricing the security.

The credit risk of the counterparty and of the Company are considered in determining the fair values of all OTC derivative asset and liability positions, respectively, after taking into account the effects of master netting agreements and collateral arrangements. Each reporting period, the Company values its derivative positions using the standard swap curve and evaluates whether to adjust the embedded credit spread to reflect changes in counterparty or its own credit standing. As a result, the Company reduced the fair value of its OTC derivative asset exposures by $0.1 million and $0.1 million at June 30, 2015 and December 31, 2014, respectively, to recognize incremental counterparty non-performance risk. The unadjusted swap curve was determined to be reflective of the non-performance risk of the Company for purpose of determining the fair value of its OTC liability positions at June 30, 2015.

At June 30, 2015 and December 31, 2014, respectively, investments classified as Level 1 comprise approximately 72.8% and 72.7% of assets measured at fair value on a recurring basis and 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.

 

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Table of Contents

At June 30, 2015 and December 31, 2014, respectively, investments classified as Level 2 comprise approximately 26.3% and 26.4% of assets measured at fair value on a recurring basis and primarily include U.S. government and agency securities and certain corporate debt securities, such as public and private fixed maturities. As market quotes generally are not readily available or accessible for these securities, their fair value measures are determined utilizing relevant information generated by market transactions involving comparable securities and often are based on model pricing techniques that effectively discount prospective cash flows to present value using appropriate sector-adjusted credit spreads commensurate with the security’s duration, also taking into consideration issuer-specific credit quality and liquidity. Segregated securities classified as Level 2 are U.S. Treasury Bills segregated by AllianceBernstein in a special reserve bank custody account for the exclusive benefit of brokerage customers, as required by Rule 15c3-3 of the Exchange Act and for which fair values are based on quoted yields in secondary markets.

Observable inputs generally used to measure the fair value of securities classified as Level 2 include benchmark yields, reported secondary trades, issuer spreads, benchmark securities and other reference data. Additional observable inputs are used when available, and as may be appropriate, for certain security types, such as prepayment, default, and collateral information for the purpose of measuring the fair value of mortgage- and asset-backed securities. At June 30, 2015 and December 31, 2014, respectively, approximately $735 million and $821 million of 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.

The Company’s SCS and EQUI-VEST variable annuity products, the IUL product, and in the MSO fund available in some life contracts offer investment options which permit the contract owner to participate in the performance of an index, ETF or commodity price. These investment options, which depending on the product and on the index selected can currently have 1, 3, or 5 year terms, provide for participation in the performance of specified indices, ETFs or commodity price movement up to a segment-specific declared maximum rate. Under certain conditions that vary by product, e.g. holding these segments for the full term, these segments also shield policyholders from some or all negative investment performance associated with these indices, ETFs 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 prices obtained from independent valuation service providers.

At June 30, 2015 and December 31, 2014, respectively, investments classified as Level 3 comprise approximately 0.9% and 1.0% of assets measured at fair value on a recurring basis and primarily include CMBS and corporate debt securities, such as private fixed maturities. Determinations to classify fair value measures within Level 3 of the valuation hierarchy generally are based upon the significance of the unobservable factors to the overall fair value measurement. Included in the Level 3 classification at June 30, 2015 and December 31, 2014, respectively, were approximately $125 million and $135 million of fixed maturities with indicative pricing obtained from brokers that otherwise could not be corroborated to market observable data. The Company applies various due-diligence procedures, as considered appropriate, to validate these non-binding broker quotes for reasonableness, based on its understanding of the markets, including use of internally-developed assumptions about inputs a market participant would use to price the security. In addition, approximately $677 million and $770 million of mortgage- and asset-backed securities, including CMBS, are classified as Level 3 at June 30, 2015 and December 31, 2014, respectively. The Company utilizes prices obtained from an independent valuation service vendor to measure fair value of CMBS securities.

The Company also issues certain benefits on its variable annuity products that are accounted for as derivatives and are also considered Level 3. 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 asset which is accounted for as derivative contracts. The GMIB reinsurance contract asset’s fair value reflects the present value of reinsurance premiums and recoveries and risk margins over a range of market consistent economic scenarios while the GIB and GWBL and Other Features related liability reflects the present value of expected future payments (benefits) less fees, adjusted for risk margins, attributable

 

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Table of Contents

to the GIB and GWBL and Other Features over a range of market-consistent economic scenarios. The valuations of both the GMIB reinsurance contract asset and GIB and GWBL and Other Features’ liability incorporate significant non-observable assumptions related to policyholder behavior, risk margins and projections of equity Separate Account funds. The credit risks of the counterparty and of the Company are considered in determining the fair values of its GMIB reinsurance contract asset and GIB and GWBL and Other Features’ liability positions, respectively, after taking into account the effects of collateral arrangements. Incremental adjustment to the swap curve, adjusted for non-performance risk, is made to the resulting fair values of the GMIB reinsurance contract asset to reflect change in the claims-paying ratings of counterparties to the reinsurance treaties. After giving consideration to collateral arrangements, the Company reduced the fair value of its GMIB reinsurance contract asset by $165 million and $147 million at June 30, 2015 and December 31, 2014, respectively, to recognize incremental counterparty non-performance risk. The unadjusted swap curve was determined to reflect a level of general swap market counterparty risk; therefore, no adjustment was made for purpose of determining the fair value of the GIB and GWBL and Other Features’ liability embedded derivative at June 30, 2015. Equity and fixed income volatilities were modeled to reflect the current market volatility.

In second quarter 2014, the Company refined the fair value calculation of the GMIB reinsurance contract asset and GWBL, GIB and GMAB liabilities, utilizing scenarios that explicitly reflect risk free bond and equity components separately (previously aggregated and including counterparty risk premium embedded in swap rates) and stochastic interest rates for projecting and discounting cash flows (previously a single yield curve). The net impacts of these refinements were a $510 million increase to the GMIB reinsurance contract asset and a $37 million increase in the GWBL, GIB and GMAB liability which are reported in the Company’s consolidated statements of Earnings (Loss) as Increase (decrease) in the fair value of the reinsurance contract asset and Policyholders’ benefits, respectively.

The Company’s Level 3 liabilities include contingent payment arrangements associated with acquisitions in 2010, 2013 and 2014 by AllianceBernstein. At the acquisition date, AllianceBernstein estimated the fair values of the contingent consideration expected to be paid based upon probability-weighted AUM and revenue projections, using unobservable market data inputs.

In the first six months of 2015, AFS fixed maturities with fair values of $66 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 $40 million were transferred from Level 2 in to the Level 3 classification. These transfers in the aggregate represent approximately 0.6% of total equity at June 30, 2015.

In the first six months of 2014, AFS fixed maturities with fair values of $77 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. These transfers in the aggregate represent approximately 0.5% of total equity at June 30, 2014. In the second quarter and first six months of 2014, $4 million and $7 million, respectively, of other equity investments were transferred from Level 2 to Level 1 as a result of the lapse on the trading restriction of public securities.

 

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Table of Contents

The table below presents a reconciliation for all Level 3 assets and liabilities for the second quarter and first six months of 2015 and 2014, respectively:

Level 3 Instruments

Fair Value Measurements

 

     Corporate     State and
Political
Sub-
divisions
    Foreign
Govts
    Commercial
Mortgage-
backed
    Residential
Mortgage-
backed
    Asset-
backed
 
     (In Millions)  

Balance, April 1, 2015

   $ 399      $ 48        2        686      $ 2      $ 51   

Total gains (losses), realized and unrealized, included in:

            

Earnings (loss) as:

            

Net investment income (loss)

     1                      1                 

Investment gains (losses), net

     1                      (18              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     2                      (17              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (5     (2            21               1   

Purchases

     18                                      

Issues

                                          

Sales

     (32                   (48     (1     (4

Settlements

                                          

Transfers into Level 3(1)

     1                                      

Transfers out of Level 3(1)

     (10            (2     (15              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $ 373      $ 46               627      $ 1      $ 48   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, April 1, 2014

   $ 229      $ 47               722      $ 3      $ 61   

Total gains (losses), realized and unrealized, included in:

            

Earnings (loss) as:

            

Net investment income (loss)

     1                      1                 

Investment gains (losses), net

     3                      (41              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     4                      (40              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (5     1               49               1   

Purchases

     13                                      

Sales

     (19     (1            (1            (4

Transfers into Level 3(1)

                                          

Transfers out of Level 3(1)

     (1                   (6              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 221      $ 47               724      $ 3      $ 58   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Corporate     State and
Political
Sub-
divisions
    Foreign
Govts
     Commercial
Mortgage-
backed
    Residential
Mortgage-
backed
    Asset-
backed
 
     (In Millions)  

Balance, January 1, 2015

   $ 380      $ 47      $       $ 715      $ 2      $ 53   

Total gains (losses), realized and unrealized, included in:

             

Earnings (loss) as:

             

Net investment income (loss)

     1                       1                 

Investment gains (losses), net

     1                       (20              
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

     2                       (19              
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     (1     (1             34                 

Purchases

     33                                       

Issues

                                           

Sales

     (35                    (83     (1     (5

Settlements

                                           

Transfers into Level 3(1)

     40                                       

Transfers out of Level 3(1)

     (46                    (20              
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $ 373      $ 46      $  —       $ 627      $ 1      $ 48   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, January 1, 2014

   $ 291      $ 46      $       $ 700      $ 4      $ 83   

Total gains (losses), realized and unrealized, included in:

             

Earnings (loss) as:

             

Net investment income (loss)

     1                       1                 

Investment gains (losses), net

     3                       (57              
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Subtotal

     4                       (56              
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

     4        2                89               4   

Purchases

     13                                       

Sales

     (20     (1             (3     (1     (29

Transfers into Level 3(1)

                                           

Transfers out of Level 3(1)

     (71                    (6              
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 221      $ 47      $       $ 724      $ 3      $ 58   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Redeemable
Preferred
Stock
     Other
Equity
Investments(2)
    GMIB
Reinsurance
Asset
    Separate
Accounts
Assets
    GWBL
and  Other
Features’
Liability
    Contingent
Payment
Arrangement
 
     (In Millions)  

Balance, April 1, 2015

   $       $ 59      $ 11,401      $ 267      $ 167      $ (42

Total gains (losses), realized and unrealized, included in:

             

Earnings (loss) as:

             

Net investment income (loss)

                           9               1   

Investment gains (losses), net

             (8                            

Increase (decrease) in the fair value of the reinsurance contract asset

                    (1,496                     

Policyholders’ benefits

                                  (103       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

             (8     (1,496     9        (103     1   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

                                           

Purchases(3)

                    57        8        45          

Issues

                                           

Sales(4)

                    (11                     

Settlements(5)

                           (1            (1

Transfers into Level 3(1)

                                           

Transfers out of Level 3(1)

                                           
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $  —       $ 51      $ 9,951      $ 283      $ 109        (42
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, April 1, 2014

   $ 15       $ 48      $ 7,443      $ 240      $ 7        (38

Total gains (losses), realized and unrealized, included in:

             

Earnings (loss) as:

             

Net investment income (loss)

             5                               

Investment gains (losses), net

                           (2              

Increase (decrease) in the fair value of the reinsurance contract asset

                    770                        

Policyholders’ benefits

                                  (22       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

             5        770        (2     (22       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

                                           

Purchases(3)

                    56        4        32        (9

Issues

                    (6                

Sales(4)

                           (1              

Settlements(5)

                           (1              

Transfers into Level 3(1)

                                           

Transfers out of Level 3(1)

                           (2              
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 15       $ 53      $ 8,263      $ 238      $ 17        (47
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Redeemable
Preferred
Stock
     Other
Equity
Investments(2)
    GMIB
Reinsurance
Asset
    Separate
Accounts
Assets
    GWBL
and
Other

Features’
Liability
    Contingent
Payment
Arrangement
 
     (In Millions)  

Balance, January 1, 2015

   $       $ 61      $ 10,711      $ 260      $ 128      $ (42

Total gains (losses), realized and unrealized, included in:

             

Earnings (loss) as:

             

Net investment income (loss)

                           17               1   

Investment gains (losses), net

             (13                            

Increase (decrease) in the fair value of the reinsurance contracts

                    (851                     

Policyholders’ benefits

                                  (104       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

             (13     (851     17        (104     1   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

             3                               

Purchases(3)

                    113        11        85          

Issues

                                           

Sales(4)

                    (22     (1              

Settlements(5)

                           (2            (1

Transfers into Level 3(1)

                                           

Transfers out of Level 3(1)

                           (2              
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $  —       $ 51      $ 9,951      $ 283      $ 109      $ (42
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2014

   $ 15       $ 52      $ 6,747      $ 237      $      $ (38

Total gains (losses), realized and unrealized, included in:

             

Earnings (loss) as:

             

Net investment income (loss)

             1                             1   

Investment gains (losses), net

                           (3              

Increase (decrease) in the fair value of the reinsurance contracts

                    1,423                        

Policyholders’ benefits

                                  (43       
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

             1        1,423        (3     (43     1   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss)

                                           

Purchases(3)

                    111        8        60        (9

Issues

                    (18                     

Sales(4)

                           (2              

Settlements(5)

                           (2            (1

Transfers into Level 3(1)

                                           

Transfers out of Level 3(1)

                                           
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

   $ 15       $ 53      $ 8,263      $ 238      $ 17      $ (47
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Transfers into/out of Level 3 classification are reflected at beginning-of-period fair values.

(2) 

Includes Trading securities’ Level 3 amount.

(3) 

For the GMIB reinsurance contract asset and GWBL and other features reserves, represents premiums.

(4) 

For the GMIB reinsurance contract asset, represents recoveries from reinsurers and for GWBL and other features reserves represents benefits paid.

(5) 

For contingent payment arrangements, it represents payments under the arrangement.

 

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Table of Contents

The table below details changes in unrealized gains (losses) for the second quarter and first six months of 2015 and 2014 by category for Level 3 assets and liabilities still held at June 30, 2015 and 2014, respectively:

 

     Earnings (Loss)              
     Investment
Gains
(Losses),
Net
    Increase
(Decrease) in  the
Fair Value of  the
Reinsurance
Contract Asset
            OCI             Policy-
holders’
Benefits    
 
     (In Millions)  

Level 3 Instruments

        

Second Quarter 2015

        

Held at June 30, 2015:

        

Change in unrealized gains (losses):

        

Fixed maturities, available-for-sale:

        

Corporate

   $  —      $      $ (5   $   

State and political subdivisions

                   (2       

Commercial mortgage-backed

                   21          

Asset-backed

                            

Other fixed maturities,
available-for-sale

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   $      $      $ 14      $   
  

 

 

   

 

 

   

 

 

   

 

 

 

GMIB reinsurance contracts

            (1,450              

Separate Accounts’ assets

     9                        

GWBL and Other Features’ liability

                          (58
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 9      $ (1,450   $ 14      $ (58
  

 

 

   

 

 

   

 

 

   

 

 

 

Level 3 Instruments

        

Second Quarter 2014

        

Held at June 30, 2014:

        

Change in unrealized gains (losses):

        

Fixed maturities, available-for-sale:

        

Corporate

   $      $      $ (5   $   

State and political subdivisions

                   1          

Commercial mortgage-backed

                   50          

Asset-backed

                   2          
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   $      $      $ 48      $   
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities, available-for-sale

            820                 

GMIB reinsurance contracts

                            

Separate Accounts’ assets

     (2                     

GWBL and Other Features’ liability

                          10   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (2   $ 820      $ 48      $ 10   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Earnings (Loss)              
     Net
Investment
Income
(Loss)
     Investment
Gains
(Losses),
Net
    Increase
(Decrease)  in
Fair Value  of
Reinsurance
Contracts
            OCI              Policy-
holders’
    Benefits    
 
           
           
           
           
     (In Millions)  

Level 3 Instruments

           

First Six Months of 2015

           

Held at June 30, 2015:

           

Change in unrealized gains (losses):

           

Fixed maturities, available-for-sale:

           

Corporate

   $  —       $  —      $      $ (1   $   

Commercial mortgage-backed

                           33          

Asset-backed

                                    

State and Political Subs

                           (1       

Other fixed maturities, available-for-sale

                                    
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   $       $      $      $ 31      $   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

GMIB reinsurance contracts

                    (760              

Separate Accounts’ assets

             17                        

GWBL and other features’ liability

                                  (19
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $       $ 17      $ (760   $ 31      $ (19
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Level 3 Instruments

           

First Six Months of 2014

           

Held at June 30, 2014:

           

Change in unrealized gains (losses):

           

Fixed maturities, available-for-sale:

           

Corporate

   $       $      $      $ 4      $   

State and political subdivisions

                           89          

Commercial mortgage-backed

                           4          

Asset-backed

                           2          
Other fixed maturities, available-for-sale                                     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

   $       $      $      $ 99      $   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Other equity investments

                                    

GMIB reinsurance contracts

                    1,516                 

Separate Accounts’ assets

             (3                     

GWBL and other features’ liability

                                  17   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $       $ (3   $ 1,516      $ 99      $ 17   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Table of Contents

The following tables disclose quantitative information about Level 3 fair value measurements by category for assets and liabilities as of June 30, 2015 and December 31, 2014, respectively.

Quantitative Information about Level 3 Fair Value Measurements

June 30, 2015

 

     Fair
Value
    

Valuation

Technique

  

Significant

Unobservable Input

  

Range

     (In Millions)

Assets:

           

Investments:

           

Fixed maturities, available-for-sale:

           

Corporate

   $ 40      

Matrix pricing model

  

Spread over the industry-specific

benchmark yield curve

   175 bps - 565 bps
     150      

Market comparable companies

   Discount rate    7.5%- 14.7%

 

Asset-backed

     4       Matrix pricing model    Spread over U.S. Treasury curve    30 bps - 687 bps

 

Other equity investments

     12      

Market comparable companies

   Revenue multiple    1.8x - 2.7x
         Discount rate    30.0%

 

Separate Accounts’ assets

     251      

Third party appraisal

   Capitalization rate    5.0%
         Exit capitalization rate    6.1%
         Discount rate    7.0%
     8      

Discounted cash flow

   Spread over U.S. Treasury curve    245 bps - 392 bps
         Gross domestic product rate    0.0%- 2.7%
         Discount factor    1.5%- 5.8%

 

GMIB reinsurance contract asset

     9,951      

Discounted cash flow

   Lapse Rates    0.6%- 5.7%
         Withdrawal Rates    0.2%- 8.0%
         GMIB Utilization Rates    0.0%- 15.0%
         Non-performance risk    9 bps - 19 bps
         Volatility rates - Equity    9.0%- 36.0%

 

Liabilities:

           

GMWB/GWBL(1)

   $ 95      

Discounted Cash flow

   Lapse Rates    1.0%- 5.7%
         Withdrawal Rates    0.0%- 7.0%
         Volatility rates - Equity    9.0%- 36.0%

 

 

(1) 

Excludes GMAB and GIB liabilities.

 

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Table of Contents

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2014

 

     Fair
Value
    

Valuation

Technique

  

Significant

Unobservable Input

  

Range

     (In Millions)

Assets:

           

Investments:

           

Fixed maturities, available-for-sale:

           

Corporate

   $ 75      

Matrix pricing model

  

Spread over the industry-specific

benchmark yield curve

   0 bps - 590 bps
     132      

Market comparable companies

   Discount Rate    11.2% - 15.2%

 

Asset-backed

     5      

Matrix pricing model

   Spread over U.S. Treasury curve    30 bps - 687 bps

 

Other equity investments

     20      

Market comparable companies

   Revenue multiple    2.0x - 3.5x
         Discount rate    18.0%
         Discount years    2

 

Separate Accounts’ assets

     234      

Third party appraisal

   Capitalization rate    5.2%
         Exit capitalization rate    6.2%
         Discount rate    7.1%
     7      

Discounted cash flow

   Spread over U.S. Treasury curve    238 bps - 395 bps
         Inflation rate    0.0% - 2.4%
         Discount factor    1.3% - 5.4%

 

GMIB reinsurance contract asset

     10,711      

Discounted Cash flow

   Lapse Rates    1.0% - 8.0%
         Withdrawal Rates    0.2% - 8.0%
         GMIB Utilization Rates    0.0% - 15.0%
         Non-performance risk    5 bps - 16 bps
         Volatility rates - Equity    9.0%- 34.0%

 

Liabilities:

           

GMWB/GWBL(1)

   $ 107      

Discounted Cash flow

   Lapse Rates    1.0% - 8.0%
         Withdrawal Rates    0.0% - 7.0%
         Volatility rates - Equity    9.0% -34.0%

 

 

(1) 

Excludes GMAB and GIB liabilities.

Excluded from the tables above at June 30, 2015 and December 31, 2014, are approximately $964 million and $1,045 million, respectively, of Level 3 fair value measurements of investments for which the underlying quantitative inputs are not developed by the Company and are not reasonably available. The fair value measurements of these Level 3 investments comprise approximately 67.5% and 68.8% of total assets classified as Level 3 at June 30, 2015 and December 31, 2014, respectively, and represent only 0.6% and 0.7% of total assets measured at fair value on a recurring basis. These investments primarily consist of certain privately placed debt securities with limited trading activity, including commercial mortgage-, 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.

Included in the tables above at June 30, 2015 and December 31, 2014, respectively, are approximately $190 million and $207 million fair value of privately placed, available-for-sale corporate debt securities classified as Level 3. The fair value of private placement securities is determined by application of a matrix pricing model or a market comparable

 

55


Table of Contents

company value technique, representing approximately 50.9% and 54.5% of the total fair value of Level 3 securities in the corporate fixed maturities asset class. 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 June 30, 2015 and December 31, 2014, are approximately 0.0% and 0.0%, respectively, of the total fair value of these Level 3 securities that is determined by application of a matrix pricing model and for which the spread over the U.S. Treasury curve is the most significant unobservable input to the pricing result. Generally, a change in spreads would lead to directionally inverse movement in the fair value measurements of these securities.

Asset-backed securities classified as Level 3 primarily consist of non-agency mortgage loan trust certificates, including subprime and Alt-A paper, credit tenant loans, and equipment financings. Included in the tables above at June 30, 2015 and December 31, 2014, are approximately 8.3% and 9.4%, respectively, of the total fair value of these Level 3 securities that is 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. Significant increases (decreases) in spreads would result in significantly lower (higher) fair value measurements.

Other equity investments classified as Level 3 primarily consist of private venture capital fund investments of AllianceBernstein for which fair values are adjusted to reflect expected exit values as evidenced by financing and sale transactions with third parties or when consideration of other factors, such as current company performance and market conditions, is determined by management to require valuation adjustment. Significant increase (decrease) in isolation in the underlying enterprise value to revenue multiple and enterprise value to R&D investment multiple, if applicable, would result in significantly higher (lower) fair value measurement. Significant increase (decrease) in the discount rate would result in a significantly lower (higher) fair value measurement. Significant increase (decrease) in isolation in the discount factor ascribed for lack of marketability and various risk factors would result in significantly lower (higher) fair value measurement. Changes in the discount factor generally are not correlated to changes in the value multiples. Also classified as Level 3 at June 30, 2015 and December 31, 2014, respectively, are approximately $31 million and $31 million private venture capital fund-of-fund investments of AllianceBernstein for which fair value is estimated using the capital account balances provided by the partnerships. The interests in these partnerships cannot be redeemed. As of June 30, 2015 and December 31, 2014, AllianceBernstein’s aggregate unfunded commitments to these investments were approximately $3 million and $3 million, respectively.

Separate Accounts’ assets classified as Level 3 in the table at June 30, 2015 and December 31, 2014, primarily consist of a private real estate fund with a fair value of approximately $251 million and $234 million, a private equity investment with a fair value of approximately $3 million and $2 million and mortgage loans with fair value of approximately $5 million and $5 million, respectively. A third party appraisal valuation technique is used to measure the fair value of the private real estate investment fund, including consideration of observable replacement cost and sales comparisons for the underlying commercial properties, as well as the results from applying a discounted cash flow approach. Significant increase (decrease) in isolation in the capitalization rate and exit capitalization rate assumptions used in the discounted cash flow approach to the appraisal value would result in a higher (lower) measure of fair value. A discounted cash flow approach is applied to determine the private equity investment for which the significant unobservable assumptions are a gross domestic product rate formula and a discount factor that takes into account various risks, including the illiquid nature of the investment. A significant increase (decrease) in the gross domestic product rate would have a directionally inverse effect on the fair value of the security. 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. Treasuries would produce a lower (higher) fair value measurement. Changes in the discount rate or factor used in the valuation techniques to determine the fair values of these private equity investments and mortgage loans generally are not correlated to changes in the other significant unobservable inputs. Significant increase (decrease) in isolation in the discount rate or factor would result in significantly lower (higher) fair value measurements. The remaining Separate Accounts’ investments classified as Level 3 excluded from the table consist of mortgage- and asset-backed securities with fair values of approximately $18 million and $6 million at June 30, 2015 and $11 million and $8 million at December 31, 2014, respectively. 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.

 

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Table of Contents

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 Company data. Validations of unobservable inputs are performed to the extent the Company has experience. When an input is changed the model is updated and the results of each step of the model are analyzed for reasonableness.

The significant unobservable inputs used in the fair value measurement of the Company’s GMIB reinsurance contract asset are lapse rates, withdrawal rates and GMIB utilization rates. Significant increases in GMIB utilization rates or decreases in lapse or withdrawal rates in isolation would tend to increase the GMIB reinsurance contract asset.

Fair value measurement of the GMIB reinsurance contract asset 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.

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.

The three AllianceBernstein acquisition-related contingent consideration liabilities (with a combined fair value of $42 million at both June 30, 2015 and December 31, 2014) are currently valued using projected AUM growth rates with a weighted average of 46%, revenue growth rates with a weighted average of 71%, and discount rates ranging between 3% (when using a cost of debt assumption) and 18% (when using a cost of capital assumption).

The carrying values and fair values at June 30, 2015 and December 31, 2014 for financial instruments not otherwise disclosed in Note 3 are presented in the table below. 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.

 

     Carrying      Fair Value  
     Value      Level 1      Level 2      Level 3      Total  
     (In Millions)  

June 30, 2015:

  

           

Mortgage loans on real estate

   $ 6,479       $       $       $ 6,585       $ 6,585   

Policy loans

     3,400                         4,366         4,366   

Loans to affiliates

     1,087                 795         390         1,185   

Policyholders’ account balances: Investment contracts

     2,766                         2,868         2,868   

Short-term debt

     655         659                         659   

December 31, 2014:

              

Mortgage loans on real estate

   $ 6,463       $       $       $ 6,617       $ 6,617   

Policy loans

     3,408                         4,406         4,406   

Loans to affiliates

     1,087                 810         393         1,203   

Policyholders’ account balances: Investment contracts

     2,799                         2,941         2,941   

Short-term debt

     688         488         212                 700   

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 from taking the appropriate U.S. Treasury rate with a like term to the remaining term of the loan and adding a spread reflective of the risk premium associated with the specific loan. 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.

 

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Table of Contents

A portion of the Company’s short-term debt is a surplus note due in 2015 and its fair value is determined from quotations provided by brokers knowledgeable about these securities and internally assessed for reasonableness. The remainder of the Company’s short-term debt primarily includes commercial paper issued by AllianceBernstein with short term maturities and book value approximates fair value. The fair values of the Company’s borrowing and lending arrangements with AXA affiliated entities are determined in the same manner as for such transactions with third parties, including matrix pricing models for debt securities and discounted cash flow analysis for mortgage loans.

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 Policyholder’s account balances are estimated using projected cash flows discounted at rates reflecting current market rates. Significant unobservable inputs reflected in the cash flows include lapse rates and withdrawal rates. Incremental adjustments may be made to the fair value to reflect non-performance risk. Certain other products such as Access Accounts and FHLBNY funding agreements are held at book value.

 

7) EMPLOYEE BENEFIT PLANS

The funding policy of the Company for its qualified pension plans is to satisfy its funding obligations each year in an amount not less than the minimum required by the ERISA, as amended by the Pension Act, and not greater than the maximum it can deduct for Federal income tax purposes.

In the first six months of 2015, no cash contributions were made by AXA Equitable or AllianceBernstein to their respective qualified pension plans. Based on the funded status of the Company’s plans at June 30, 2015, no minimum contribution is required to be made in 2015 under ERISA, as amended by the Pension Act, but management is currently evaluating if it will make contributions for the remainder of 2015.

Components of net periodic pension expense for the Company’s qualified plans were as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

Net Periodic Pension Expense:

        

(Qualified Plans)

        

Service cost

   $ 2      $ 3      $ 4      $ 5   

Interest cost

     23        26        46        53   

Expected return on assets

     (39     (38     (78     (77

Net amortization

     30        28        60        57   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Periodic Pension Expense

   $ 16      $ 19      $ 32      $ 38   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
8)

SHARE-BASED COMPENSATION PROGRAMS

AXA and AXA Financial sponsor various share-based compensation plans for eligible employees and financial professionals of AXA Financial and its subsidiaries, including the Company. AllianceBernstein also sponsors its own unit option plans for certain of its employees.

Compensation costs for the second quarter and first six months of 2015 and 2014 for share-based payment arrangements as further described herein are as follows:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2015      2014      2015      2014  
     (In Thousands)  

Performance Units/Shares

   $ 10,164       $ 3,698       $ 11,026       $ 6,695   

Stock Options

     376         191         506         558   

Restricted Stock

                               

AXA Miles

                               

AllianceBernstein Stock Options

     4,500         100         6,400         (300

AllianceBernstein Restricted Units

             4,100                 7,400   

Other compensation plans(1)

     73         94         153         189   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Compensation Expenses

   $ 15,113       $ 8,183       $ 18,085       $ 14,542   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Other compensation plans include Restricted Stock, Performance Accelerated Restricted Stock and AXA Miles.

Performance Units and Performance Shares

2015 Grant. On June 19, 2015, under the terms of the Performance Share Plan, AXA awarded approximately 1.7 million unearned performance shares to employees of AXA Equitable. The extent to which 2015-2017 cumulative performance targets measuring the performance of AXA and the insurance related businesses of AXA Financial Group are achieved will determine the number of performance shares earned, which may vary in linear formula between 0% and 130% of the number of performance shares at stake. The performance shares earned during this performance period will vest and be settled on the fourth anniversary of the award date. The plan will settle in shares to all participants. In the first six months of 2015, the expense associated with the June 19, 2015 grant of performance shares was $6 million.

Settlement of 2012 Grant in 2015. On April 2, 2015, cash distributions of approximately $53 million were made to active and former AXA Equitable employees in settlement of 2,273,008 performance units earned under the terms of the AXA Performance Unit Plan 2012.

Stock Options

2015 Grant. On June 19, 2015, 442,885 options to purchase AXA ordinary shares were granted to employees of AXA Equitable under the terms of the Stock Option Plan at an exercise price of 22.90 euros. All of those options have a five-year graded vesting schedule, with one-third vesting on each of the third, fourth, and fifth anniversaries of the grant date. Of the total options awarded on June 19, 2015, 244,597 are further subject to conditional vesting terms that require the AXA ordinary share price to outperform the Euro Stoxx Insurance Index over a specified period. All of the options granted on June 19, 2015 have a ten-year term. The weighted average grant date fair value per option award was estimated at 1.58 euros using a Black-Scholes options pricing model with modification to measure the value of the conditional vesting feature. Key assumptions used in the valuation included expected volatility of 23.68%, a weighted average expected term of 8.2 years, an expected dividend yield of 6.29% and a risk-free interest rate of 0.92%. The total fair value of these options (net of expected forfeitures) of approximately $1 million is charged to expense over the shorter of the vesting term or the period up to the date at which the participant becomes retirement eligible. In the first six months of 2015, the Company recognized expenses associated with the June 19, 2015 grant of options of approximately $283,000.

 

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Table of Contents

AllianceBernstein Long-term Incentive Compensation Plans. During the second quarter and first six months of 2015, AllianceBernstein purchased 0.1 million and 0.8 million Holding units for $4 million and $21 million, respectively (on a trade date basis). These amounts reflect open-market purchases of 0.1 million and 0.7 million Holding Units for $4 million and $19 million, respectively, with the remainder relating to purchases of Holding units from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards. During the second quarter and first six months of 2014, AllianceBernstein purchased 15,000 and 0.2 million AB Holding Units for $400,000 and $4 million, respectively (on a trade date basis). These amounts reflect purchases from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards.

During the first six months of 2015 and 2014, AllianceBernstein granted to employees and eligible Directors 0.3 million and 0.4 million restricted Holding awards, respectively. In the first six months of 2015 and 2014, AllianceBernstein used Holding units repurchased during the period and newly issued Holding units to fund the restricted Holding unit awards.

 

9) INCOME TAXES

Income taxes for the interim periods ended June 30, 2015 and 2014 have been computed using an estimated annual effective tax rate. This rate is revised, if necessary, at the end of each successive interim period to reflect the current estimate of the annual effective tax rate. The tax benefit recognized year-to-date 2015 was limited to the amount that would have been recognized if the year-to-date loss was the anticipated loss for the full year.

During the second quarter of 2015, the Company reached a settlement with the IRS on the appeal of proposed adjustments to the Company’s 2004 and 2005 Federal corporate income tax returns. The impact of this settlement on the Company’s financial statements and unrecognized tax benefits in second quarter and first six months of 2015 was a tax benefit of $77 million.

During the second quarter of 2014, the IRS completed its examination of the Company’s 2006 and 2007 Federal corporate income tax returns and issued its Revenue Agent’s Report. The impact of these completed audits on the Company’s financial statements and unrecognized tax benefits in second quarter and first six months of 2014 was a tax benefit of $215 million.

 

10) LITIGATION

There have been no new material legal proceedings and no material developments in specific litigations or regulatory matters previously reported in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2014, except as set forth below:

Insurance Litigation

A lawsuit was filed in the United States District Court of the District of New Jersey in July 2011, entitled Mary Ann Sivolella v. AXA Equitable Life Insurance Company and AXA Equitable Funds Management Group, LLC (“FMG LLC”) (“Sivolella Litigation”). The lawsuit was filed derivatively on behalf of eight funds. The lawsuit seeks recovery under Section 36(b) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), for alleged excessive fees paid to AXA Equitable and FMG LLC for investment management services. In November 2011, plaintiff filed an amended complaint, adding claims under Sections 47(b) and 26(f) of the Investment Company Act, as well as a claim for unjust enrichment. In addition, plaintiff purports to file the lawsuit as a class action in addition to a derivative action. In the amended complaint, plaintiff seeks recovery of the alleged overpayments, rescission of the contracts, restitution of all fees paid, interest, costs, attorney fees, fees for expert witnesses and reserves the right to seek punitive damages where applicable. In December 2011, AXA Equitable and FMG LLC filed a motion to dismiss the amended complaint. In May 2012, the Plaintiff voluntarily dismissed her claim under Section 26(f) seeking restitution and rescission under Section 47(b) of the 1940 Act. In September 2012, the Court denied the defendants’ motion to dismiss as it related to the Section 36(b) claim and granted the defendants’ motion as it related to the unjust enrichment claim.

In January 2013, a second lawsuit was filed in the United States District Court of the District of New Jersey entitled Sanford et al. v. FMG LLC (“Sanford Litigation”). The lawsuit was filed derivatively on behalf of eight funds, four of which are named in the Sivolella lawsuit as well as four new funds, and seeks recovery under Section 36(b) of the Investment Company Act for alleged excessive fees paid to FMG LLC for investment management services. In light of the similarities of the allegations in the Sivolella and Sanford Litigations, the parties and the Court agreed to consolidate the two lawsuits.

In April 2013, the plaintiffs in the Sivolella and Sanford Litigations amended the complaints to add additional claims under Section 36(b) of the Investment Company Act for recovery of alleged excessive fees paid to FMG LLC in its capacity as administrator of EQ Advisors Trust. The Plaintiffs seek recovery of the alleged overpayments, or alternatively, rescission of the contract and restitution of the excessive fees paid, interest, costs and fees. In January 2015, defendants filed a motion for summary judgment as well as various motions to strike certain of the Plaintiffs’ experts in the Sivolella and Sanford Litigations. Also in January 2015, two Plaintiffs in the Sanford Litigation filed a motion for partial summary judgment relating to the EQ/Core Bond Index Portfolio as well as motions in limine to bar admission of certain documents and preclude the testimony of one of defendants’ experts. In August 2015, the Court denied Plaintiffs’ motions in limine and also denied both parties motions for summary judgment.

In April 2014, a lawsuit was filed in the United States District Court for the Southern District of New York, entitled Andrew Yale, on behalf of himself and all others similarly situated v. AXA Life Insurance Company F/K/A AXA Equitable Life Insurance Company. The lawsuit is a putative class action on behalf of all persons and entities that, between 2011 and March 11, 2014, directly or indirectly, purchased, renewed or paid premiums on life insurance policies issued by AXA Equitable (the “Policies”). The complaint alleges that AXA Equitable did not disclose in its New York statutory annual statements or elsewhere that the collateral for certain reinsurance transactions with affiliated reinsurance companies was supported by parental guarantees, an omission that allegedly caused AXA Equitable to misrepresent its “financial condition” and “legal reserve system.” The lawsuit seeks recovery under Section 4226 of the New York Insurance Law of all premiums paid by the class for the Policies during the relevant period. In June 2014, AXA Equitable filed a motion to dismiss the complaint on procedural grounds, which was denied in October 2014. In February 2015, plaintiffs substituted two new named plaintiffs for the current named plaintiff, Mr. Yale, who had determined that he could not serve as the named plaintiff and class representative in the case. In March 2015, AXA Equitable filed a motion to dismiss on substantive grounds, whereupon the court permitted plaintiffs to file an amended pleading, which they did in March 2015. In April 2015, AXA Equitable filed a motion to dismiss the amended complaint. In April 2015, plaintiffs filed a motion for class certification. In July 2015, the Court granted AXA Equitable’s motion to dismiss for lack of subject matter jurisdiction. As a result of that decision, the Court also denied plaintiffs motion for class certification as moot.

 

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In April 2015, the same plaintiffs’ law firm filed a second action in the United States District Court for the Southern District of New York on behalf of a putative class of variable annuity holders with “Guaranteed Benefits Insurance Riders,” entitled Calvin W. Yarbrough, on behalf of himself and all others similarly situated v. AXA Equitable Life Insurance Company. The new action covers the same class period, makes substantially the same allegations, and seeks the same relief (return of all premium paid by class members) as the first action on behalf of life insurance policyholders. AXA Equitable has notified the court of the decision in the first action and is requesting permission from the court to file a motion to dismiss.

In November 2014, a separate lawsuit entitled Arlene Shuster, on behalf of herself and all others similarly situated v. AXA Equitable Life Insurance Company was filed in the Superior Court of New Jersey, Camden County (“New Jersey state court”). The lawsuit is a putative class action on behalf of “all AXA [Equitable] variable life insurance policyholders who allocated funds from their Policy Accounts to investments in AXA’s Separate Accounts, which were subsequently subjected to volatility-management strategy, and who suffered injury as a result thereof.” Plaintiff asserts that volatility management techniques were implemented in certain variable investment funds offered to plaintiff under her variable life insurance contract and that use of volatility management in those funds “breached the terms of the variable life insurance policies held by plaintiff and the Class.” The lawsuit seeks unspecified damages. In December 2014, AXA Equitable filed a notice of removal to the United States District Court for the District of New Jersey. In January 2015, plaintiff filed a motion to remand the action to New Jersey state court. In July 2015, the New Jersey federal district court remanded the action to New Jersey state court.

 

 

Although the outcome of litigation and regulatory matters generally cannot be predicted with certainty, management intends to vigorously defend against the allegations made by the plaintiffs in the actions described above and believes that the ultimate resolution of the matters described therein involving AXA Equitable and/or its subsidiaries should not have a material adverse effect on the consolidated financial position of AXA Equitable. Management cannot make an estimate of loss, if any, or predict whether or not any of the litigations and regulatory matters described above will have a material adverse effect on AXA Equitable’s consolidated results of operations in any particular period.

In addition to the matters described above in the Company’s Notes to Consolidated Financial Statements for the year ended December 31, 2014, a number of lawsuits, claims, assessments and regulatory inquiries have been filed or commenced against life and health insurers and asset managers in the jurisdictions in which AXA Equitable and its respective subsidiaries do business. These actions and proceedings involve, among other things, insurers’ sales practices, alleged agent misconduct, alleged failure to properly supervise agents, contract administration, product design, features and accompanying disclosure, alleged breach of fiduciary duties, alleged mismanagement of client funds and other matters. Some of the matters have resulted in the award of substantial judgments and fines against other insurers and asset managers, including material amounts of punitive damages, or in substantial settlements. Courts, juries and regulators often have substantial discretion in awarding large damage awards and fines, including punitive damages. AXA Equitable and its subsidiaries from time to time are involved in such actions and proceedings. While the ultimate outcome of such matters cannot be predicted with certainty, in the opinion of management no such matter is likely to have a material adverse effect on AXA Equitable’s consolidated financial position or results of operations. However, it should be noted that the frequency of large damage awards and regulatory fines, including large punitive damage awards that bear little or no relation to actual economic damages incurred, continues to create the potential for an unpredictable judgment in any given matter.

 

11) RELATED PARTY TRANSACTIONS

AXA Equitable reimburses AXA Financial for expenses relating to the Excess Retirement Plan, Supplemental Executive Retirement Plan and certain other employee benefit plans that provide participants with medical, life insurance, and deferred compensation benefits. Such reimbursement was based on the cost to AXA Financial of the benefits provided which totaled $10 million, $21 million and $11 million, $17 million, respectively, for the second quarter and first six months of 2015 and 2014.

AXA Equitable paid $158 million, $303 million, $154 million and $308 million, respectively, of commissions and fees to AXA Distribution and its subsidiaries for sales of insurance products for the second quarter and first six months of

 

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2015 and 2014. AXA Equitable charged AXA Distribution’s subsidiaries $76 million, $158 million, $76 million and $168 million, respectively, for their applicable share of operating expenses for the second quarter and first six months of 2015 and 2014, pursuant to the Agreements for Services.

AXA Equitable provides personnel services, employee benefits, facilities, supplies and equipment under service agreements with certain AXA Financial subsidiaries and affiliates to conduct their business. The associated costs related to the service agreement are allocated based on methods that management believes are reasonable, including a review of the nature of such costs and activities performed to support each company. As a result of such allocations, AXA Equitable was reimbursed $28 million, $47 million, $18, million and $37 million for the second quarter and first six months of 2015 and 2014, respectively.

Both AXA Equitable and AllianceBernstein, along with other AXA affiliates, participate in certain intercompany cost sharing and service agreements including technology and professional development arrangements. AXA Equitable and AllianceBernstein incurred expenses under such agreements of approximately $43 million, $76 million, $40 million and $78 million for the second quarter and first six months of 2015 and 2014, respectively. Expense reimbursements by AXA and AXA affiliates to AXA Equitable under such agreements totaled approximately $4 million, $7 million, $4 million and $9 million for the second quarter and first six months of 2015 and 2014, respectively. The net receivable (payable) related to these contracts was approximately $(6) million and $3 million at June 30, 2015 and December 31, 2014, respectively.

At June 30, 2015 and December 31, 2014, the Company’s GMIB reinsurance contract asset with AXA Arizona had carrying values of $7,964 million and $8,560 million, respectively, and is reported in Guaranteed minimum income benefit reinsurance contract asset, at fair value in the consolidated balance sheets. Ceded premiums to AXA Arizona in the second quarter and first six months of 2015 and 2014 related to the UL and no lapse guarantee riders totaled approximately $113 million, $222 million, $113 million and $220 million, respectively. Ceded claims paid in the second quarter and first six months of 2015 and 2014 were $15 million, $30 million, $18 million and $48 million, respectively.

 

12) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

AOCI represents cumulative gains (losses) on items that are not reflected in earnings (loss). The balances as of June 30, 2015 and 2014 follow:

 

     June 30,  
     2015     2014  
     (In Millions)  

Unrealized gains (losses) on investments

   $     442      $ 815   

Foreign currency translation adjustments

     (42     (7

Defined benefit pension plans

     (741     (717
  

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     (341     91   
  

 

 

   

 

 

 

Less: Accumulated other comprehensive (income) loss attributable to noncontrolling interest

     47        9   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss) Attributable to AXA Equitable

   $ (294   $ 100   
  

 

 

   

 

 

 

 

 

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The components of OCI, net-of-taxes for the second quarter and first six months of 2015 and 2014 follow:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

Foreign currency translation adjustments:

        

Foreign currency translation gains (losses) arising during the period

   $ 5      $ 4      $ (7   $ 6   

(Gains) losses reclassified into net earnings (loss) during the period

     (1            (1       
  

 

 

   

 

 

   

 

 

   

 

 

 

Foreign currency translation adjustment

     4        4        (8     6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on investments:

        

Net unrealized gains (losses) arising during the period

     (1,138     352        (752     743   

(Gains) losses reclassified into net earnings (loss) during the period(1)

     11        25        10        21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses) on investments

     (1,127     377        (742     764   

Adjustments for policyholders’ liabilities, DAC, insurance liability loss recognition and other

     107        (67     61        (103
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in unrealized gains (losses), net of adjustments (net of deferred income tax expense (benefit) of $(548) million, $169 million,$(368) million and $354 million)

     (1,020     310        (681     661   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in defined benefit plans:

        

Less: reclassification adjustments to net earnings (loss) for:

        

Amortization of net actuarial (gains) losses included in

        

Amortization of net prior service cost included in net periodic cost

     20        21        39        40   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in defined benefit plans (net of deferred income tax expense

        

(benefit) of $10 million $10 million, $21 million and $21 million)

     20        21        39        40   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (996     335        (650     707   

Less: Other comprehensive (income) loss attributableto noncontrolling interest

     (4     (2     5        (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss) Attributable to AXA Equitable

   $ (1,000   $ 333      $ (645   $ 703   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

See “Reclassification adjustments” in Note 3. Reclassification amounts presented net of income tax expense (benefit) of $(6) million and $(6) million, $(13) million and $(11) million, for the second quarter and first six months of 2015 and 2014, respectively.

Investment gains and losses reclassified from AOCI to net earnings (loss) primarily consist of realized gains (losses) on sales and OTTI of AFS securities and are included in Total investment gains (losses), net on the consolidated statements of earnings (loss). Amounts reclassified from AOCI to net earnings (loss) as related to defined benefit plans primarily consist of amortizations of net (gains) losses and net prior service cost (credit) recognized as a component of net periodic cost and reported in Compensation and benefit expenses in the consolidated statements of earnings (loss). Amounts presented in the table above are net of tax.

 

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13) COMMITMENTS AND CONTINGENT LIABILITIES

Restructuring

As part of AXA Equitable’s on-going efforts to reduce costs and operate more efficiently, from time to time, management has approved and initiated plans to reduce headcount and relocate certain operations. In the first six months of 2014, AXA Equitable recorded pre-tax charges of $25 million related to the reduction in office space in the Company’s 1290 Avenue of the Americas, New York, New York headquarters.

Obligation under funding agreements

Funding agreements are reported in Policyholders’ account balances in the consolidated balance sheets. AXA Equitable as a member of the FHLBNY has access to borrowing facilities from the FHLBNY including collateralized borrowings and funding agreements, which would require AXA Equitable to pledge qualified mortgage-backed assets and/or government securities as collateral. AXA Equitable’s capacity with the FHLBNY was increased during second quarter 2014 from $1,000 million to $3,000 million. At both June 30, 2015 and December 31, 2014 the Company had $500 million of outstanding funding agreements with the FHLBNY. The funding agreements were used to extend the duration of the assets within the General Account investment portfolio. For other instruments used to extend the duration of the General Account investment portfolio see “Derivative and offsetting assets and liabilities” included in Note 3.

 

14) SEGMENT INFORMATION

The following tables reconcile segment revenues and earnings (loss) from continuing operations before income taxes to total revenues and earnings (loss) as reported on the consolidated statements of earnings (loss) and segment assets to total assets on the consolidated balance sheets, respectively.

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
         2015             2014             2015           2014      
     (In Millions)  

Segment revenues:

        

Insurance

   $ (562   $ 2,773      $ 2,248      $ 5,773   

Investment Management(1)

     790        759        1,553        1,471   

Consolidation/elimination

     (8     (8     (14     (14
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

   $ 220      $ 3,524      $ 3,787      $ 7,230   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes investment expenses charged by AllianceBernstein of approximately $10 million, $22 million, $7 million and $14 million for the second quarter and first six months of 2015 and 2014, respectively, for services provided to AXA Equitable’s insurance segment.

(2) 

Intersegment investment advisory and other fees of approximately $18 million, $36 million, $15 million and $28 million, for the second quarter and first six months of 2015 and 2014, respectively, are included in total revenues of the Investment Management segment.

 

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     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
         2015             2014              2015             2014      
     (In Millions)  

Segment earnings (loss) from continuing operations,

  

      

before income taxes:

         

Insurance

   $ (1,912   $ 1,038       $ (929   $ 2,423   

Investment Management(2)

     160        144         307        270   

Consolidation/elimination

     (1             (1       
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Earnings (Loss) from Continuing Operations, before income taxes

   $ (1,753   $ 1,182       $ (623   $ 2,693   
  

 

 

   

 

 

    

 

 

   

 

 

 

In accordance with SEC regulations, securities with a fair value of $430 million and $415 million have been segregated in a special reserve bank custody account at June 30, 2015 and December 31, 2014, respectively, for the exclusive benefit of securities broker-dealer or brokerage customers under the Exchange Act.

 

     June 30,     December 31,  
     2015     2014  
     (In Millions)  

Segment assets:

    

Insurance

   $ 184,707      $ 184,018   

Investment Management

     12,344        11,990   

Consolidation/elimination

     (4     (3
  

 

 

   

 

 

 

Total Assets

   $ 197,047      $ 196,005   
  

 

 

   

 

 

 

 

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations for the Company 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 “Forward-looking Statements” included elsewhere herein and Management’s Discussion and Analysis (“MD&A”) in Part II, Item 7 and “Risk Factors” in Part I, Item 1A included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 ( “2014 Form 10-K”).

BACKGROUND

Established in 1859, AXA Equitable is among the oldest and largest life insurance companies in the United States. As part of a diversified financial services organization, AXA Equitable and its subsidiaries offer a broad spectrum of insurance and investment management products and services. Together with its affiliates, including AllianceBernstein, AXA Equitable is a leading asset manager, with total assets under management of approximately $584.4 billion at June 30, 2015, of which approximately $485.1 billion were managed by AllianceBernstein. AXA Equitable is an indirect wholly owned subsidiary of AXA.

The Company conducts operations in two business segments, the Insurance segment and the Investment Management segment. The Insurance segment offers a variety of traditional, variable and universal life insurance products and variable and fixed-interest annuity products principally to individuals, small and medium-size businesses and professional and trade associations. The Investment Management segment is principally comprised of the investment management business of AllianceBernstein. AllianceBernstein provides research, diversified investment management and related services globally to a broad range of clients. This segment also includes institutional Separate Accounts principally managed by AllianceBernstein that provide various investment options for large group pension clients, primarily defined benefit and contribution plans, through pooled or single group accounts.

EXECUTIVE OVERVIEW

Earnings (loss). The Company’s business and consolidated results of operations are significantly affected by conditions in the capital markets and the economy. The accounting of reserves for GMDB and GMIB features do not fully and immediately reflect the impact of equity and interest market fluctuations. If the reserves were calculated on a basis that would fully and immediately reflect the impact of equity and interest market fluctuations, earnings would be higher than the $1.1 billion and $372 million consolidated net loss of the Company and the $1.2 billion and $431 million consolidated net loss of the Insurance segment in the second quarter and first six months of 2015, respectively. These net loss was largely due to the market driven decreases in the fair values of the GMIB reinsurance contract asset and derivative instruments used to hedge the variable annuity products with GMDB, GMIB and GWBL features (collectively, the “VA Guarantee Features”) which were not fully offset by the market driven decreases in VA Guarantee Features reserves. For additional information, see “Accounting For VA Guarantee Features” below.

Sales. The market for annuity and life insurance products of the types the Company issues continues to be dynamic. Over the past several years, the Company has modified its product portfolio with the objective of offering a balanced and diversified product portfolio that takes into account the macroeconomic environment and customer preferences and drives profitable growth while appropriately managing risk. These products have generally been well received in the marketplace, however variable annuity products continue to account for the majority of the Company’s sales.

In the second quarter of 2015, life insurance and annuities first year premiums and deposits increased by $6 million from the comparable 2014 period. The increase in first year premiums and deposits during the second quarter of 2015 was driven by $11 million higher annuity deposits partially offset by $5 million lower life insurance sales. In the first six months of 2015, life insurance and annuities first year premiums and deposits decreased by $152 million from the comparable 2014 period. The decrease in first year premiums and deposits during the first six months of 2015 was driven by $138 million and $14 million lower annuity and life insurance sales. For additional information on sales, see “Premiums and Deposits” below.

In-force management. The Company continues to proactively manage its in-force business, particularly variable annuities with guarantee features

 

   

GMDB Buyback. In July 2015, the Company initiated a program to purchase from certain policyholders the GMDB riders contained in their Accumulator® contracts. There is no obligation to accept the offer and it is entirely

 

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voluntary. The Company believes that this program is mutually beneficial to both the Company and policyholders, who no longer need or want the GMDB rider. Management does not expect this offer will have a material impact on the Company’s consolidated financial statements.

 

   

GMIB/GWBL Lump Sum Option. In first quarter 2015, the Company launched a lump sum payment option to certain contract holders with GMIB and GWBL benefits at the time their AAV falls to zero. Prior to this option, if an eligible contract holder’s AAV fell to zero, either due to a withdrawal or surrender that is not an excess withdrawal or due to a deduction of charges, the contractholder would automatically receive a stream of payments over his or her lifetime. With this offer, contract holders will have an additional payout option to receive a percentage of the present value of those lifetime payments in a one-time lump sum payment. There is no obligation to accept the offer and it is entirely voluntary. The Company believes that this new contract feature is mutually beneficial to both the Company and the policyholder as it gives policyholders another benefit alternative and the Company reduces the uncertainty associated with future GMIB and GWBL costs. As a result of this offer, the Company updated its future reserve assumptions to incorporate the expectation that some policyholders will utilize this option.

Due to the difference in accounting recognition between the GMIB and GWBL reserves and the fair value of the GMIB reinsurance contract asset, the net impact of this offer is an after-tax loss of $135 million, which was recognized in the first six months of 2015. For additional information, see “Accounting for VA Guarantee Features” in Note 2.

Products. In second quarter 2015, the Company introduced the Escrow Shield Plus Agreement (the “Contract”). The Contract is a funding agreement that offers an alternative to an escrow account used in a merger or acquisition transaction. Subject to the terms of the Contract, the Contract provides an acquiring entity and selling entities or persons with the ability to preserve the principal value of escrow payments while earning a competitive crediting rate. Also, the Company plans to enter the group employee benefits business during the third quarter of 2015. The Company will offer a suite of benefit products including group life insurance, dental and vision, short- and long-term disability, gap medical and hospital indemnity and critical illness to small and medium-size businesses.

Regulatory Developments. The U.S. Department of Labor (the “DOL”) issued a proposed rule in April 2015 that could, if adopted, substantially expand the range of activities that would be considered to be fiduciary investment advice under ERISA. Depending on the breadth of the final rule, the investment-related information and support that our affiliated advisors and our employees could provide to plan sponsors, participants, and IRA holders on a non-fiduciary basis could be substantially limited compared to what is allowed under current law. This could have an adverse impact on the level and type of services we can provide, as well as the nature and amount of compensation and fees that we and our affiliated advisors receive for investment-related services to plans and IRAs. Management believes that the DOL is likely to adopt a final rule in late third quarter 2015 with an effective date in the second half of 2016. The exact nature and scope of the impact under any new final rule is undeterminable at this time. For additional information on the DOL proposal see “Part II, Item 5 – Other Information” and for additional information on the potential impacts of regulation on the Company see “Item 1 – Business – Regulation” and “Item 1A – Risk Factors” in the 2014 Form 10-K.

AllianceBernstein AUM. At AllianceBernstein, total AUM as of June 30, 2015 were $485.1 billion, an increase of $11.1 billion, or 2.3%, compared to December 31, 2014, and up $4.9 billion, or 1.0%, compared to June 30, 2014. During the first six months of 2015, AUM increased as a result of net inflows of $8.2 billion, market appreciation of $2.7 billion and an adjustment of $200 million (beginning in third quarter 2014, AllianceBernstein began excluding assets for which it provides administrative services but not investment management services from AUM). During the twelve month period ended June 30, 2015, AUM increased as a result of net inflows of $9.4 billion partially offset by market appreciation of $3.1 billion and an adjustment of $1.4 billion for the exclusion mentioned above. For additional information, see “Fees and Assets Under Management” below.

ACCOUNTING FOR VA GUARANTEE FEATURES

The Company has offered and continues to offer certain variable annuity products with VA Guarantee Features. These products continue to account for over half of the Company’s Separate Accounts assets and have been a significant driver of its results. Because the future claims exposure on these products is sensitive to movements in the equity markets and interest rates, the Company has in place various hedging and reinsurance programs that are designed to mitigate the economic risks of movements in the equity markets and interest rates. Due to the accounting treatment, certain of these hedging and reinsurance programs contribute to earnings volatility. These programs generally include, among others, the following:

 

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Hedging programs. Hedging programs are used to mitigate certain risks associated with the VA Guarantee Features. These programs utilize various derivative instruments that are managed in an effort to reduce the economic impact of unfavorable changes in VA Guarantee Features’ exposures attributable to movements in the equity markets and interest rates. Although these programs are designed to provide a measure of economic protection against the impact adverse market conditions may have with respect to VA Guarantee Features, they do not qualify for hedge accounting treatment, meaning that changes in the value of the derivatives will be recognized in the period in which they occur while offsetting changes in reserves will be recognized over time.

 

   

GMIB reinsurance contracts. GMIB reinsurance contracts are used to cede to affiliated and non-affiliated reinsurers a portion of the exposure on variable annuity products that offer the GMIB feature. Additionally, the GMIB reinsurance contracts are accounted for as derivatives and are reported at fair value. Gross reserves for GMIB as noted above, on the other hand, are calculated on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts and therefore will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market and/or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts. Because the changes in the fair value of the GMIB reinsurance contracts are recorded in the period in which they occur while offsetting changes in gross reserves for GMIB will be recognized over time, earnings will tend to be more volatile as in the first six months of 2015, particularly during periods in which equity markets and/or interest rates change.

This contributes to earnings volatility as in the first six months of 2015, when the Company recognized approximately $786 million of loss on free standing derivatives and $760 million of loss on the change in fair value of the GMIB reinsurance contract asset and a $397 million increase in reserves for the VA Guarantee Features. The $397 million increase in GMDB and GMIB reserves includes $733 million related to 2015 assumption changes which were partially offset by the $336 million decrease in reserves as a result of market conditions. For additional information see “2015 assumption changes” below.

Changes in interest rates and equity markets have contributed to earnings volatility. The table below shows, for the first six months of 2015 and 2014 and the year ended December 31, 2014, the impact on Earnings (Loss) from continuing operations before income taxes of the items discussed above (prior to the impact of Amortization of deferred acquisition costs):

 

    Three Months Ended     Six Months Ended        
    June 30,     June 30,     Year Ended  
    2015     2014     2015     2014     December 31, 2014  
    (In Millions)  

Income (loss) on free-standing derivatives(1)

  $ (915   $ 87      $ (786   $ 546      $ 1,372   

Increase (decrease) in fair value of

         

GMIB reinsurance contracts(2)

    (1,450     820        (760     1,516        3,964   

(Increase) decrease in GMDB, GMIB and GWBL reserves, net of related GMDB reinsurance(3)

    (47     (244     (397     (493     (1,590
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ (2,412   $ 663      $ (1,943   $ 1,569      $ 3,746   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reported in Net investment income (loss) in the consolidated statements of earnings (loss)

(2) 

Reported in Increase (decrease) in fair value of reinsurance contracts in the consolidated statements of earnings (loss)

(3) 

Reported in Policyholders’ benefits in the consolidated statements of earnings (loss)

Reinsurance ceded – AXA Arizona. The Company has implemented capital management actions to mitigate statutory reserve strain for GMDB and GMIB riders on the Accumulator® products sold on or after January 1, 2006 and in-force at September 30, 2008 through reinsurance transactions with AXA Arizona. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under universal life insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. For AXA Equitable, these reinsurance transactions currently provide statutory capital relief and mitigate the volatility of capital requirements.

 

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The Company receives statutory reserve credits for reinsurance treaties with AXA Arizona to the extent AXA Arizona holds assets in an irrevocable trust ($8.2 billion at June 30, 2015) and/or letters of credit ($3.2 billion at June 30, 2015). These letters of credit are guaranteed by AXA. AXA Arizona is required to hold a combination of assets in the trust and/or letters of credit so that the Company can take credit for the reinsurance.

For further information regarding this transaction, see “Item 1A-Risk Factors” included in the 2014 Form 10-K.

2015 Assumption Changes. In the first quarter of 2015, the Company launched a lump sum payment option to certain contract holders with GMIB and GWBL benefits at the time their AAV falls to zero. As a result of this offer, the Company updated its future reserve assumptions to incorporate the expectation that some policyholders will utilize this option. The impact of this assumption update in the first six months of 2015 resulted in a decrease in the fair value of the GMIB reinsurance contract asset of $263 million and a decrease in the GMIB reserves of $55 million. In the first six months of 2015, the after tax impacts of this assumption update increased the Net loss by approximately $135 million.

In the second quarter of 2015, based upon management’s current expectations of interest rates and future fund growth, the Company updated its RTM assumption used to calculate GMDB/GMIB and VISL reserves and amortization DAC from 9.0% to 7.0%. The impact of this assumption update in the second quarter and first six months of 2015 was an increase in GMIB/GMDB reserves of $723 million, an increase in VISL reserves of $29 million and a decrease in amortization of DAC of $67 million. In the second quarter and first six months of 2015, the after tax impacts of this assumption update increased the Net loss by approximately $445 million.

In the second quarter of 2015, expectations of long-term lapse rates for certain accumulator products at certain durations and moneyness levels were lowered based on emerging experience. This update increases expected future claim costs and the fair value of the GMIB reinsurance contract asset. The impact of this assumption update in the second quarter and first six months of 2015 was an increase in the fair value of the GMIB reinsurance contract asset of $216 million and an increase in the GMIB reserves of $65 million and a decrease in the amortization of DAC of $13 million. In the second quarter and first six months of 2015, the after tax impacts of this assumption update decreased the Net loss by approximately $107 million.

2014 Refinements. In second quarter 2014, the Company refined the fair value calculation of the GMIB reinsurance contract asset and GWBL, GIB and GMAB liabilities, utilizing scenarios that explicitly reflect risk free bond and equity components separately (previously aggregated and including counterparty risk premium embedded in swap rates) and stochastic interest rates for projecting and discounting cash flows (previously a single yield curve). The net impacts of these refinements were a $510 million increase to the GMIB reinsurance contract asset and a $37 million increase to the GWBL, GIB and GMAB liability which are reported in the Company’s consolidated statements of Earnings (Loss) as Increase (decrease) in the fair value of the reinsurance contract asset and Policyholders’ benefits, respectively.

CRITICAL ACCOUNTING ESTIMATES

Application of Critical Accounting Estimates

The Company’s MD&A is based upon its consolidated financial statements that have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the application of accounting policies that often involve a significant degree of judgment, requiring management to make estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management, on an ongoing basis, reviews and evaluates the estimates and assumptions used in the preparation of the consolidated financial statements, including those related to investments, recognition of insurance income and related expenses, DAC, future policy benefits, recognition of Investment Management revenues and related expenses and benefit plan costs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of such factors form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the consolidated results of operations and financial position as reported in the consolidated financial statements could change significantly.

 

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Management believes the critical accounting policies relating to the following areas are most dependent on the application of estimates, assumptions and judgments:

 

   

Insurance Revenue Recognition

   

Insurance Reserves and Policyholder Benefits

   

DAC

   

Goodwill and Other Intangible Assets

   

Investment Management Revenue Recognition and Related Expenses

   

Share-based and Other Compensation Programs

   

Pension Plans

   

Investments – Impairments and Fair Value Measurements

   

Income Taxes

A discussion of each of the critical accounting estimates may be found in the Company’s 2014 Form 10-K, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Application of Critical Accounting Estimates.”

 

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CONSOLIDATED RESULTS OF OPERATIONS

AXA Equitable

Consolidated Results of Operations

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

Universal life and investment-type product policy fee income

   $ 924      $ 899      $ 1,810      $ 1,712   

Premiums

     121        117        261        268   

Net investment income (loss):

        

Investment income (loss) from derivative instruments

     (915     181        (578     687   

Other investment income (loss)

     532        557        1,063        1,152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net investment income (loss)

     (383     738        485        1,839   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment gains (losses), net:

        

Total other-than-temporary impairment losses

     (16     (38     (18     (51

Portion of loss recognized in other comprehensive income

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses recognized

     (16     (38     (18     (51

Other investment gains (losses), net

     5        4        4        19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment gains (losses), net

     (11     (34     (14     (32
  

 

 

   

 

 

   

 

 

   

 

 

 

Commissions, fees and other income

     1,019        984        2,005        1,927   

Increase (decrease) in the fair value of the reinsurance contract asset

     (1,450     820        (760     1,516   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     220        3,524        3,787        7,230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Policyholders’ benefits

     619        794        1,542        1,606   

Interest credited to policyholders’ account balances

     268        358        588        654   

Compensation and benefits

     486        466        933        896   

Commissions

     292        287        566        573   

Distribution related payments

     102        101        203        198   

Amortization of deferred sales commission

     13        9        25        18   

Interest expense

     5        17        10        35   

Amortization of deferred policy acquisition costs

     18        62        158        78   

Capitalization of deferred policy acquisition costs

     (157     (153     (301     (312

Rent expense

     41        40        80        83   

Amortization of other intangible assets

     7        6        14        13   

Other operating costs and expenses

     279        355        592        695   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and other deductions

     1,973        2,342        4,410        4,537   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) from continuing operations before income taxes

     (1,753     1,182        (623     2,693   

Income tax (expense) benefit

     728        (144     452        (599
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

     (1,025     1,038        (171     2,094   

Less: net (earnings) loss attributable to the noncontrolling interest

     (106     (93     (201     (172
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Earnings (Loss) Attributable to AXA Equitable

   $ (1,131   $ 945      $ (372   $ 1,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The consolidated earnings (loss) narrative that follows discusses the results for the second quarter and first six months ended June 30, 2015 compared to the comparable 2014 period’s results. For additional information, see “Accounting for VA Guarantee Features” above.

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Net loss attributable to the Company in second quarter 2015 was $1.1 billion, a decrease of $2.1 billion from the $945 million of net earnings attributable to the Company in second quarter 2014. The decrease is primarily attributable to a decrease in the fair value of the GMIB reinsurance contract asset, investment losses from derivative instruments and an increase in GMDB/GMIB reserves in the second quarter 2015 compared to an increase in the fair value of the GMIB reinsurance contract asset, investment income from derivative instruments which were only partially offset by an increase in GMDB/GMIB reserves in second quarter 2014. The second quarter 2015 decrease was partially offset by lower interest credited to policyholder’s account balances, lower amortization of DAC and the higher Universal life and investment-type product policy fee income and commissions, fees and other income in second quarter 2015 as compared to the comparable 2014 period.

Net earnings attributable to the noncontrolling interest were $106 million in second quarter 2015 as compared to $93 million for second quarter 2014. The increase was principally due to higher earnings from AllianceBernstein in second quarter 2015 as compared to second quarter 2014.

Net loss inclusive of earnings (losses) attributable to noncontrolling interest was $1.0 billion in second quarter 2015, a decrease of $2.0 billion from net earnings of $1.0 billion reported for second quarter 2014. The Insurance segment’s net loss in second quarter 2015 was $1.2 billion, a decrease of $2.1 billion from $916 million net earnings in second quarter 2014 and the net earnings for the Investment Management segment totaled $137 million, a $15 million increase from the $122 million in net earnings in second quarter 2014.

Income tax benefit in second quarter 2015 was $728 million, primarily due to the $1.9 billion pre-tax loss in the Insurance segment, compared to an income tax expense of $144 million in second quarter 2014, primarily due to the $1.0 billion pre-tax earnings in the Insurance segment. Income tax benefit in the second quarter 2015 was increased by a $77 million benefit related to a settlement with the IRS on the appeal of proposed adjustments to the Company’s 2004 and 2005 Federal corporate income tax returns. Income tax expense in the second quarter 2014 was reduced by a $215 million benefit related to the completion of the 2006 and 2007 IRS audit. Income taxes for second quarter 2015 and 2014 were computed using an estimated annual effective tax rate. In second quarter 2015 and 2014, Federal income taxes attributable to consolidated operations were different from the amounts determined by multiplying the earnings before income taxes and noncontrolling interest by the expected Federal income tax rate of 35%. The primary differences were dividend received deductions, nontaxable investment income and noncontrolling interest permanent differences. The Company does not provide Federal and state income taxes on the undistributed earnings of non-U.S. corporate subsidiaries as such earnings are permanently invested outside of the United States.

The loss from operations before income taxes was $1.8 billion in second quarter 2015, a decrease of $3.0 billion from the $1.2 billion in pre-tax earnings reported in second quarter 2014. The Insurance segment’s pre-tax loss from operations totaled $1.9 billion in second quarter 2015; $2.9 billion lower than the pre-tax earnings of $1.0 billion in second quarter 2014. The Insurance segment’s pre-tax loss in second quarter 2015 as compared to pre-tax earnings in second quarter 2014 was primarily due to a decrease in the fair value of the GMIB reinsurance contract asset, investment losses from derivative instruments and an increase in GMDB/GMIB reserves in the second quarter 2015 compared to an increase in the fair value of the GMIB reinsurance contract asset, investment income from derivative instruments which were only partially offset by an increase in GMDB/GMIB reserves in second quarter 2014. The second quarter 2015 decrease was partially offset by lower interest credited to policyholder’s account balances, lower amortization of DAC and the higher Universal life and investment-type product policy fee income and commissions, fees and other income in second quarter 2015 as compared to the comparable 2014 period.. The Investment Management segment’s earnings from operations were $160 million in second quarter 2015, $16 million higher than the $144 million reported in second quarter 2014. The higher earnings from operations in the Investment Management segment in the second quarter of 2015 were primarily due to higher commission fees and other income partially offset by higher compensation and benefits.

Total revenues were $220 million in second quarter 2015, a decrease of $3.3 billion from $3.5 billion reported in second quarter 2014. The Insurance segment reported a $3.3 billion decrease in its revenues and the Investment Management segment had a $31 million increase. The decrease in Insurance segment revenues to negative revenues of $562 million in second quarter 2015 from the revenues of $2.8 billion in second quarter 2014 was principally due to a $1.5 billion decrease in the fair value of the GMIB reinsurance contract asset and $918 million of investment losses from derivative instruments in

 

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second quarter 2015 as compared to an $820 million increase in the fair value of the GMIB reinsurance contract asset and $194 million of income from derivative instruments in the second quarter 2014. These decreases in revenues were partially offset by the $25 million higher Universal life and investment-type product policy fee income and $22 million lower investment losses, net. The increase in Investment Management segment’s revenues to $790 million in second quarter 2015 as compared to $759 million in second quarter 2014 was primarily due to $24 million higher investment advisory and services fees and a $16 million increase in investment income from derivative instruments partially offset by $14 million lower other investment income.

Total benefits and expenses were $2.0 billion in second quarter 2015, a decrease of $369 million from the $2.3 billion reported for second quarter 2014. The Insurance segment’s total benefits and expenses were $1.4 billion, a decrease of $385 million from the second quarter 2014 total of $1.7 billion. The Investment Management segment’s total expenses for second quarter 2015 were $630 million, $15 million higher than the $615 million in expenses in second quarter 2014. The Insurance segment’s decrease was principally due to $175 million lower policyholders’ benefits, $90 million lower interest credited to policyholder’s account balances, $78 million lower other operating expenses and $44 million lower DAC amortization. The increase in expenses for the Investment Management segment was principally due to $8 million higher compensation and benefit expenses and $4 million higher amortization of deferred sales commissions.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

Net loss attributable to the Company in the first six months of 2015 was $372 million, a decrease of $2.3 billion from the $1.9 billion of net earnings attributable to the Company in the first six months of 2014. The decrease is primarily attributable to a decrease in the fair value of the GMIB reinsurance contract asset, investment losses from derivative instruments and an increase in GMDB/GMIB reserves in the first six months of 2015 compared to an increase in the fair value of the GMIB reinsurance contract asset, investment income from derivative instruments which were only partially offset by an increase in GMDB/GMIB reserves in the first six months of 2014. The first six months of 2015 decrease was partially offset by lower interest credited to policyholder’s account balances and the higher Universal life and investment-type product policy fee income and higher commissions, fees and other income in first six months of 2015 as compared to the comparable 2014 period.

Net earnings attributable to the noncontrolling interest were $201 million in the first six months of 2015 as compared to $172 million for the first six months of 2014. The increase was principally due to higher earnings from AllianceBernstein in the first six months of 2015 as compared to the first six months of 2014.

Net loss inclusive of earnings (losses) attributable to noncontrolling interest was $171 million in the first six months of 2015, a decrease of $2.3 billion from net earnings of $2.1 billion reported for the first six months of 2014. The Insurance segment’s net loss in the first six months of 2015 was $431 million, a decrease of $2.3 billion from $1.9 billion net earnings in the first six months of 2014 and the net earnings for the Investment Management segment totaled $261 million, a $35 million increase from the $226 million in net earnings in the first six months of 2014.

Income tax benefit in the first six months of 2015 was $452 million, primarily due to the $929 million pre-tax loss in the Insurance segment, compared to income tax expense of $599 million in the first six months of 2014, primarily due to the $2.4 billion pre-tax earnings in the Insurance segment. Income tax benefit in the first six months of 2015 was increased by a $77 million benefit related to a settlement with the IRS on the appeal of proposed adjustments to the Company’s 2004 and 2005 Federal corporate income tax returns. Income tax expense in the second quarter 2014 was reduced by a $215 million benefit related to the completion of the 2006 and 2007 IRS audit. Income taxes for the first six months of 2015 and 2014 were computed using an estimated annual effective tax rate. In the first six months of 2015 and 2014, Federal income taxes attributable to consolidated operations were different from the amounts determined by multiplying the earnings before income taxes and noncontrolling interest by the expected Federal income tax rate of 35%. The primary differences were dividend received deductions, nontaxable investment income and noncontrolling interest permanent differences. The Company does not provide Federal and state income taxes on the undistributed earnings of non-U.S. corporate subsidiaries as such earnings are permanently invested outside of the United States.

The loss from operations before income taxes was $623 million in the first six months of 2015, a decrease of $3.3 billion from the $2.7 billion in pre-tax earnings reported in the first six months of 2014. The Insurance segment’s pre-tax loss from operations totaled $929 million in the first six months of 2015; $3.4 billion lower than the $2.4 billion pre-tax earnings in the first six months of 2014. The Insurance segment’s pre-tax loss in the first six months of 2015 as compared to the pre-tax earnings in the first six months of 2014 was primarily due to a decrease in the fair value of the GMIB reinsurance contract asset, investment losses from derivative instruments and an increase in GMDB/GMIB reserves in the first six months of 2015 compared to an increase in the fair value of the GMIB reinsurance contract asset, investment income from derivative

 

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instruments which were only partially offset by an increase in GMDB/GMIB reserves in second quarter 2014. The first six months of 2015 decrease was partially offset by lower interest credited to policyholder’s account balances, higher Universal life and investment-type product policy fee income and higher commissions, fees and other income in the first six months of 2015 as compared to the comparable 2014 period. The Investment Management segment’s pre-tax earnings were $307 million in the first six months of 2015, $37 million higher than the $270 million pre-tax earnings reported in the first six months of 2014. The higher pre-tax earnings from operations in the investment management segment in the first six months of 2015 were primarily due to higher commission fees and other income partially offset by higher compensation and benefits.

Total revenues were $3.8 billion in the first six months of 2015, a decrease of $3.4 billion from revenues of $7.2 billion in the first six months of 2014. The Insurance segment reported a $3.5 billion decrease in its revenues and the Investment Management segment had an $82 million increase. The decrease in Insurance segment revenues to $2.3 billion in the first six months of 2015 from the $5.8 billion in the first six months of 2014 was principally due to a $760 million decrease in the fair value of the GMIB reinsurance contract asset and $575 million of investment losses from derivative instruments in the first six months of 2015 as compared to a $1.5 billion increase in the fair value of the GMIB reinsurance contract asset and $706 million of income from derivative instruments in the first six months of 2014. These decreases in revenues were partially offset by the $98 million higher Universal life and investment-type product policy fee income and $20 million lower investment losses, net. The increase in Investment Management segment’s revenues to $1.6 billion in the first six months of 2015 as compared to $1.5 billion in the first six months of 2014 was primarily due to $63 million higher investment advisory and services fees and $16 million lower investment losses from derivative instruments partially offset by $3 million lower other investment income.

Total benefits and expenses were $4.4 billion in the first six months of 2015, a decrease of $127 million from the $4.5 billion reported for the first six months of 2014. The Insurance segment’s total benefits and expenses were $3.2 billion, a decrease of $173 million from the first six months of 2014 total of $3.4 billion. The Investment Management segment’s total expenses for the first six months of 2015 were $1.2 billion, $45 million higher than the $1.2 billion in expenses in the first six months of 2014. The Insurance segment’s decrease was principally due to $106 million lower other operating expenses, $64 million lower policyholders’ benefits, $66 million lower interest credited to policyholder’s account balances and a decrease of $26 million of interest expense partially offset by an $80 million increase in DAC amortization. The increase in expenses for the Investment Management segment was principally due to $30 million higher compensation and benefit expenses and $7 million higher amortization of deferred sales commissions.

 

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RESULTS OF OPERATIONS BY SEGMENT

Insurance.

Insurance Segment Results of Operations

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
         2015             2014             2015             2014      
     (In Millions)  

Universal life and investment-type product policy fee income

   $ 924      $ 899      $ 1,810      $ 1,712   

Premiums

     121        117        261        268   

Net investment income (loss):

        

Investment income (loss) from derivative instruments

     (918     194        (575     706   

Other investment income (loss)

     517        531        1,016        1,110   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net investment income (loss)

     (401     725        441        1,816   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment gains (losses), net:

        

Total other-than-temporary impairment losses

     (16     (38     (18     (51

Portion of losses recognized in other comprehensive income

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net impairment losses recognized

     (16     (38     (18     (51

Other investment gains (losses), net

     (1     (1     3        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investment gains (losses), net

     (17     (39     (15     (35
  

 

 

   

 

 

   

 

 

   

 

 

 

Commissions, fees and other income

     261        251        511        496   

Increase (decrease) in the fair value of the reinsurance contract asset

     (1,450     820        (760     1,516   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     (562     2,773        2,248        5,773   
  

 

 

   

 

 

   

 

 

   

 

 

 

Policyholders’ benefits

     619        794        1,542        1,606   

Interest credited to policyholders’ account balances

     268        358        588        654   

Compensation and benefits

     143        131        258        252   

Commissions

     292        287        566        573   

Amortization of deferred policy acquisition costs

     18        62        158        78   

Capitalization of deferred policy acquisition costs

     (157     (153     (301     (312

Rent expense

     9        7        16        17   

Interest expense

     4        17        9        35   

All other operating costs and expenses

     154        232        341        447   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and other deductions

     1,350        1,735        3,177        3,350   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (Loss) from Continuing Operations, before Income Taxes

   $ (1,912   $ 1,038      $ (929   $ 2,423   
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Revenues

In second quarter 2015, the Insurance segment’s revenues decreased $3.3 billion to negative revenues of $562 million from revenues of $2.8 billion in second quarter 2014. The decrease is primarily attributable to a $1.5 billion decrease in the fair value of the GMIB reinsurance contract asset and $918 million of investment losses from derivative instruments in second quarter 2015 as compared to an $820 million increase in the fair value of the GMIB reinsurance contract asset and $194 million of income from derivative instruments in the second quarter 2014.

 

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Universal life and investment-type product policy fee income increased $25 million to $924 million in second quarter 2015 from $899 million in second quarter 2014. The increase was principally due to higher policy fee income earned on variable annuity products partially offset by a higher increase in the initial fee liability (a $40 million increase in the second quarter of 2015 as compared to a $2 million decrease in the second quarter of 2014). The second quarter 2015 increase in initial fee liability included updates to the RTM assumption for VISL products, which increased the initial fee liability by $32 million.

Premiums totaled $121 million in second quarter 2015, $4 million higher than the $117 million in second quarter 2014. This increase primarily resulted from $2 million higher assumed premiums from affiliates and $1 million higher sales of supplementary contracts.

Net investment income (loss) decreased $1.1 billion to a loss of $401 million in second quarter 2015 from $725 million in second quarter 2014. The decrease resulted from a $1.1 billion decrease in investment income from derivative instruments and a $25 million decrease in investment income from trading account securities partially offset by $18 million higher investment income from mortgage loans on real estate and $10 million higher investment income from fixed maturities. The Insurance segment reported $918 million of losses from derivative instruments in second quarter 2015, including those related to hedging programs implemented to mitigate certain risks associated with the GMDB/GMIB/GWBL features of certain variable annuity contracts and those used to hedge risks associated with interest margins on interest sensitive life and annuity contracts as compared to $194 million of income from derivative instruments in second quarter 2014. The second quarter 2015 investment loss from derivatives was primarily driven by an increase in interest rates and relatively flat equity markets during second quarter 2015. The second quarter 2014 investment income from derivative instruments was primarily driven by a decrease in interest rates partially offset by improvements in equity markets during the second quarter of 2014.

Investment gains (losses), net was a loss of $17 million in second quarter 2015, as compared to a loss of $39 million in second quarter 2014. The Insurance segment’s investment loss, net in second quarter 2015 and 2014 were primarily due to $16 million and $38 million of writedowns of fixed maturities, respectively.

Commissions, fees and other income increased $10 million to $261 million in second quarter 2015 as compared to $251 million in second quarter 2014. This increase was primarily due to and an increase of $7 million in gross investment management and distribution fees from EQAT/VIP and $3 million higher fee income by AXA Distributors.

In second quarter 2015, there was a $1.4 billion decrease in the fair value of the GMIB reinsurance contract asset as compared to the $820 million increase in its fair value in second quarter 2014; both periods’ changes reflected existing capital market conditions. Included in second quarter 2015 were the impacts from increasing interest rates which decreased the fair value of the reinsurance contract asset by $1.6 billion, partially offsetting the decrease were the impacts of lapse assumption updates which increased the asset by $216 million and relatively flat equity markets in second quarter 2015 which increased the fair value of the GMIB reinsurance contract asset by $13 million. Included in second quarter 2014 was the impact from refinements to the fair value calculation of the GMIB reinsurance contract asset which increased the fair value of the reinsurance contract asset by $510 million, the impact from decreasing interest rates which increased the fair value of the reinsurance contract asset by $832 million and improvements in equity markets which decreased the fair value of the reinsurance contract asset by $313 million.

Benefits and Other Deductions

In second quarter 2015, total benefits and other deductions decreased $385 million to $1.3 billion from $1.7 billion in second quarter 2014. The Insurance segment’s decrease was principally due to $175 million lower policyholders’ benefits, $90 million lower interest credited to policyholder’s account balances, $78 million lower other operating expenses and $44 million lower amortization of DAC.

Policyholders’ benefits decreased $175 million to $619 million in second quarter 2015 from $794 million in second quarter 2014. The decrease was primarily due to the $197 million lower increase in GMDB/GMIB, GWBL and GMAB reserves ($63 million increase in GMDB/GMIB reserves and a $16 million decrease in GWBL and GMAB reserves in second quarter 2015 compared to a $245 million increase in GMDB/GMIB reserves and a $36 million decrease in GWBL and GMAB reserves in second quarter 2014); both periods reflecting changes in interest rates and equity markets.

The second quarter 2015 increase in GMIB an GMDB reserves includes a $723 million increase in reserves resulting from the Company’s update to the RTM assumption and a $64 million increase in reserves resulting from the Company’s lapse assumption update.

 

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In second quarter 2015, interest credited to policyholders’ account balances totaled $268 million, a decrease of $90 million from the $358 million reported in second quarter 2014 primarily due to lower interest credited on certain variable annuity contracts which is based upon performance of market indices subject to guarantees and lower amortization of sales inducements.

Total compensation and benefits totaled $143 million in second quarter 2015, a $12 million increase from $131 million in second quarter 2014. The increase is primarily a result of a $13 million increase in employee benefit costs and an increase of $7 million in stock benefit plans partially offset by $10 million lower employee salaries.

In second quarter 2015, commission expense totaled $292 million, an increase of $5 million compared to second quarter 2014, principally due to higher sales of certain annuity products.

In second quarter 2015, interest expense totaled $4 million; a decrease of $13 million from $17 million in second quarter 2014. The decrease is due to the repayment of a $500 million callable 7.1% surplus note to AXA Financial during second quarter 2014 and repayment of a $325 million surplus note with an interest rate of 6.0% in fourth quarter 2014.

DAC amortization was $18 million in second quarter 2015, a decrease of $44 million from $62 million of DAC amortization in second quarter 2014. The decrease in DAC amortization is primarily due to $101 million favorable changes in expected future margins on variable and interest-sensitive life products (partially offset in the initial fee liability) as a result of updates to the RTM and lapse assumptions in the second quarter of 2015 compared to $10 million unfavorable changes in expected future margins on variable and interest-sensitive life products (partially offset in the initial fee liability) in the comparable 2014 period. Partially offsetting the favorable unlockings in the second quarter of 2015 were the impacts of higher baseline amortization.

After the initial establishment of reserves, premium deficiency and loss recognition tests are performed each period end using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC would first be written off and thereafter, if required, a premium deficiency reserve would be established by a charge to earnings.

In accordance with the guidance for the accounting and reporting by insurance enterprises for certain long-duration contracts and participating contracts and for realized gains and losses from the sale of investments, current and expected future profit margins for products covered by this guidance are examined regularly in determining the amortization of DAC.

DAC associated with variable annuity products is amortized based on estimated assessments. DAC associated with universal life products and investment-type products, other than variable annuity products is amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Account fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated gross profits or assessments is reflected in earnings (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.

A significant assumption in the amortization of DAC on variable annuities and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future Separate Account performance. Management sets estimated future gross profit or assessment assumptions related to Separate Account performance using a long-term view of expected average market returns by applying a reversion to the mean approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.

In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. In second quarter 2015, based upon management’s current expectations of interest rates and future fund growth, the Company updated its RTM

 

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assumption from 9.0% to 7.0%. The average gross long term return measurement start date was also updated to December 31, 2014. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At June 30, 2015, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuities was 7.0% (4.66% net of product weighted average Separate Account fees), and the gross maximum and minimum short-term annual rate of return limitations were 15.0% (12.66% net of product weighted average Separate Account fees) and 0.0% (-2.34% net of product weighted average Separate Account fees), respectively. The maximum duration over which these rate limitations may be applied is 5 years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.

If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than 5 years in order to reach the average gross long-term return estimate, the application of the 5 - year maximum duration limitation would result in an acceleration of DAC amortization. Conversely, actual market returns resulting in assumed future market returns of 0.0% for more than 5 years would result in a required deceleration of DAC amortization. At June 30, 2015, current projections of future average gross market returns assume a 0.0% annualized return for the next two quarters, which is within the maximum and minimum limitations, grading to a RTM of 7.0% in two quarters. To demonstrate the sensitivity of variable annuity reserves and DAC amortization from a change in the assumption for future Separate Account rate of return see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates – Sensitivity of Future Rate of Return Assumptions on GMDB/GMIB Reserves and Sensitivity of DAC to Changes in Future Rate of Return Assumptions” in the Company’s 2014 Form 10-K.

Other significant assumptions underlying gross profit estimates for UL products and investment type products relate to contract persistency and General Account investment spread.

DAC capitalization totaled $157 million in second quarter 2015, an increase of $4 million from the $153 million reported in second quarter 2014. The increase was primarily due to a $3 million increase in first year commissions and a $1 million increase in deferrable operating expenses.

Other operating costs and expenses totaled $154 million in second quarter 2015, a decrease of $78 million from the $232 million reported in second quarter 2014. The decrease is primarily related to the $125 million decrease in amortization of reinsurance costs related to the deferred asset recorded from the Company’s reinsurance transaction with AXA Arizona partially offset by a $16 million increase in consulting fees, primarily in consulting projects invested to launch the Company’s new employee benefits business and $26 million higher legal expenses.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

Revenues

In the first six months of 2015, the Insurance segment’s revenues decreased $3.5 billion to $2.2 billion from $5.8 billion in the first six months of 2014. The decrease is primarily attributable to a $760 million decrease in the fair value of the GMIB reinsurance contract asset and $575 million of investment losses from derivative instruments in the first six months of 2015 as compared to a $1.5 billion increase in the fair value of the GMIB reinsurance contract asset and $706 million of income from derivative instruments in the first six month of 2014.

Universal life and investment-type product policy fee income increased $98 million to $1.8 billion in the first six months of 2015 from $1.7 billion in the first six months of 2014. The increase was principally due to higher policy fee income earned on variable annuity products partially offset by an $11 million higher increase in the initial fee liability (a $43 million increase in the first six months of 2015 as compared to $32 million in the first six months of 2014). The first six months of 2015 increase in initial fee liability included updates to the RTM assumption, which increased the initial fee liability by $32 million.

Premiums totaled $261 million in the first six months of 2015, $7 million lower than the $268 million in the first six months of 2014. This decrease primarily resulted from $7 million higher ceded premiums and lower traditional life insurance sales.

Net investment income decreased $1.4 billion to $441 million in the first six months of 2015 from $1.8 billion in the first six months of 2014. The decrease resulted from a decrease of $1.3 billion in investment income from derivative instruments, $91 million lower income from equity in limited partnerships and $6 million lower investment income from fixed maturities partially offset by $23 million higher investment income from mortgage loans on real estate. The Insurance segment reported $575 million of losses from derivative instruments including those related to hedging programs implemented to mitigate

 

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certain risks associated with the GMDB/GMIB/GWBL features of certain variable annuity contracts and those used to hedge risks associated with interest margins on interest sensitive life and annuity contracts as compared to $706 million of income from derivative instruments in the first six months of 2014. The first six months of 2015 investment losses from derivatives were primarily driven by an increase in interest rates and relatively flat equity markets. The first six months of 2014 investment income from derivative instruments was primarily driven by a decrease in interest rates partially offset by slight improvement in equity markets.

Investment gains (losses), net was a loss of $15 million in the first six months of 2015, as compared to a loss of $35 million in the first six months of 2014. The $20 million lower net loss in the first six months of 2015 was primarily due to $33 million lower writedowns of fixed maturity securities partially offset by $17 million lower realized gains from fixed maturity securities.

Commissions, fees and other income increased $15 million to $511 million in the first six months of 2015 as compared to $496 million in the first six months of 2014. This increase was primarily due to $6 million higher fee income by AXA Distributors and an increase of $9 million in gross investment management and distribution fees from EQAT/VIP.

In the first six months of 2015, there was a $760 million decrease in the fair value of the GMIB reinsurance contract asset as compared to the $1.5 billion increase in its fair value in the first six months of 2014; both periods’ changes reflected existing capital market conditions. Included in the first six months of 2015 were the impacts from increasing interest rates, the impacts of updated assumptions resulting from the Company’s lump sum option added to certain policyholder’s GMIB contracts and relatively flat equity markets which decreased the fair value of the reinsurance contract asset by $758 million, $263 million and $177 million, respectively. These decreases were partially offset by the impacts of lapse assumption updates which increased the fair value of the reinsurance contract asset by $216 million. Included in the first six months of 2014 was the impact from refinements to the fair value calculation of the GMIB reinsurance contract asset which increased the fair value of the reinsurance contract asset by $510 million, the impact from decreasing interest rates which increased the fair value of the reinsurance contract asset by $1.7 billion and improvements in equity markets which decreased the fair value of the reinsurance contract asset by $384 million.

Benefits and Other Deductions

In the first six months of 2015, total benefits and other deductions decreased $173 million to $3.2 billion from $3.3 billion in the first six months of 2014. The Insurance segment’s increase was principally due to $64 million lower policyholders’ benefits, $66 million lower interest credited to policyholder’s account balances and $106 million lower other operating expenses partially offset by an $80 million increase in amortization of DAC.

Policyholders’ benefits decreased $64 million to $1.5 billion in the first six months of 2015 from $1.6 billion in the first six months of 2014. The decrease was primarily due to the $96 million lower increase in GMDB/GMIB, GWBL and GMAB reserves ($409 million increase in GMDB/GMIB reserves and a $12 million decrease in GWBL and GMAB reserves in second quarter 2015 compared to a $485 million increase in GMDB/GMIB reserves and a $8 million increase in GWBL and GMAB reserves in second quarter 2014); both periods reflecting changes in interest rates and equity markets.

The first six months of 2015 increase in GMIB an GMDB reserves includes a $723 million increase in reserves resulting from the Company’s update to the RTM assumption and a $64 million increase in reserves resulting from the Company’s lapse assumption update. The increase in GMDB/GMIB reserves was partially offset by the impacts of updated assumptions resulting from the Company’s lump sum option added to certain policyholder’s GMIB and GWBL contracts in the first quarter of 2015 which decreased the GMIB and GWBL reserve by $55 million. The first six months of 2014 increase in GMDB/GMIB reserves was partially offset by a $110 million decrease in GMDB/GMIB reserves resulting from an out-of-period adjustment related to model refinements.

In the first six months of 2015, interest credited to policyholders’ account balances totaled $588 million, a decrease of $66 million from the $654 million reported in the first six months of 2014 primarily due to lower amortization of sales inducements and lower interest credited on certain variable annuity contracts which is based upon performance of market indices subject to guarantees.

Total compensation and benefits totaled $258 million in the first six months of 2015, a $6 million increase from $252 million in the first six months of 2014. The increase is primarily a result of a $7 million higher employee benefit costs, a $5 million increase in stock benefit plans partially offset by $2 million lower employee salaries.

 

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In the first six months of 2015, commission expense totaled $566 million, a decrease of $7 million compared to the first six months of 2014, principally due to a decrease in indexed universal life product sales.

In the first six months of 2015, interest expense totaled $9 million; a decrease of $26 million from $35 million in the first six months of 2014. The decrease is due to the repayment of a $500 million callable 7.1% surplus note during the second quarter of 2014 and repayment of a $325 million surplus note with an interest rate of 6.0% in fourth quarter 2014 to AXA Financial.

DAC amortization was $158 million in the first six months of 2015, an increase of $80 million from $78 million of DAC amortization in the first six months of 2014. The increase in DAC amortization is primarily due higher baseline amortization. Included in the amortization of DAC for the first six months of 2015 were $72 million of favorable changes in expected future margins on variable and interest-sensitive life products (partially offset in the initial fee liability) and updates to the RTM and lapse assumptions. Included in in the first six months of 2014 were $72 million of favorable changes in expected future margins on variable and interest-sensitive life products (partially offset in the initial fee liability).

DAC capitalization totaled $301 million in the first six months of 2015, a decrease of $11 million from the $312 million reported in the first six months of 2014. The decrease was primarily due to a $7 million decrease in first year commissions and a $4 million decrease in deferrable operating expenses.

Other operating costs and expenses totaled $341 million in the first six months of 2015, a decrease of $106 million from the $447 million reported in the first six months of 2014. The decrease is primarily related to the $124 million lower amortization of reinsurance costs related to the deferred asset recorded from the Company’s reinsurance transaction with AXA Arizona and the absence of a $26 million lease write-off in the first six months of 2014 for the NY headquarters partially offset by an $16 million increase in consulting fees, primarily in consulting projects invested to launch the Company new employee benefits business and $26 million higher legal expenses.

Premiums and Deposits.

Over the past several years, the Company has modified its product portfolio with the objective of offering a balanced and diversified product portfolio that takes into account the macroeconomic environment and customer preferences and drives profitable growth while appropriately managing risk.

 

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The following table lists sales for major insurance product lines for the second quarter and first six months of 2015 and 2014. Premiums and deposits are presented gross of internal conversions and are presented gross of reinsurance ceded.

Premiums and Deposits

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
         2015              2014              2015              2014      
     (In Millions)  

Retail:

           

Annuities

           

First year

   $ 963       $ 932       $ 1,805       $ 1,848   

Renewal

     598         567         1,156         1,115   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,561         1,499         2,961         2,963   

Life(1)

           

First year

     41         45         73         87   

Renewal

     440         416         865         851   
  

 

 

    

 

 

    

 

 

    

 

 

 
     481         461         938         938   

Other(2)

           

First year

                     1         1   

Renewal

     76         144         148         229   
  

 

 

    

 

 

    

 

 

    

 

 

 
     76         144         149         230   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total retail

     2,118         2,104         4,048         4,131   
  

 

 

    

 

 

    

 

 

    

 

 

 

Wholesale:

           

Annuities

           

First year

     1,077         1,097         1,999         2,094   

Renewal

     64         44         117         87   
  

 

 

    

 

 

    

 

 

    

 

 

 
     1,141         1,141         2,116         2,181   

Life(1)

           

First year

     6         7         16         16   

Renewal

     139         153         299         314   
  

 

 

    

 

 

    

 

 

    

 

 

 
     145         160         315         330   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total wholesale

     1,286         1,301         2,431         2,511   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Premiums and Deposits

   $ 3,404       $ 3,405       $ 6,479       $ 6,642   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes variable, interest-sensitive and traditional life products.

(2) 

Includes reinsurance assumed and health insurance.

Total premiums and deposits for insurance and annuity products for both second quarter 2015 and 2014 were $3.4 billion, while total first year premiums and deposits also remained relatively flat at $2.1 billion. The annuity line’s first year premiums and deposits increased $11 million to $2.0 billion principally due to the $31 million increase in the retail channel partially offset by the $20 million decrease in sales in the wholesale channel. The increase in first year annuity sales is primarily due to higher sales of the Company’s SCS, EQUI-VEST® and other variable annuity products partially offset by lower sales of Retirement Cornerstone® and Investment EdgeSM products. First year premiums and deposits for the life insurance products decreased $5 million, primarily due to lower sales of UL and term life products.

 

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Total premiums and deposits for insurance and annuity products for the first six months of 2015 were $6.5 billion, a $163 million decrease from $6.6 billion in the first six months of 2014 while total first year premiums and deposits decreased $152 million to $3.9 billion in the first six months of 2015 from $4.0 billion in the first six months of 2014. The annuity line’s first year premiums and deposits decreased $138 million to $3.8 billion principally due to the $95 million and $43 million decrease in sales in the wholesale and retail channels, respectively. The decrease in first year annuity sales is primarily due to lower sales of the Company’s Retirement Cornerstone®, Investment EdgeSM and SCS series of variable annuity products. First year premiums and deposits for the life insurance products decreased $14 million, primarily due to lower sales of UL and term life products in the retail channel.

Surrenders and Withdrawals.

The following table presents surrender and withdrawal amounts and rates for major insurance product lines. Annuity surrenders and withdrawals are presented net of internal replacements.

Surrenders and Withdrawals

 

     Three Months Ended      Six Months Ended    

Rates(1)

Six Months Ended

 
     June 30,      June 30,     June 30,  
     2015      2014      2015      2014     2015     2014  
     (Dollars in Millions)  

Annuities

   $ 1,840       $ 2,086       $ 3,664       $ 5,228        6.1     8.8

Variable and interest-sensitive life

     192         193         377         389        3.7     3.7

Traditional life

     47         50         92         101        2.5     2.6
  

 

 

    

 

 

    

 

 

    

 

 

     

Total

   $ 2,079       $ 2,329       $ 4,133       $ 5,718       
  

 

 

    

 

 

    

 

 

    

 

 

     

 

(1) 

Surrender rates are based on the average surrenderable future policy benefits and/or policyholders’ account balances for the related policies and contracts in force during each year.

Surrenders and withdrawals decreased $250 million, from $2.3 billion in the second quarter of 2014 to $2.1 billion in the second quarter of 2015. There was a decrease of $246 million, $3 million and $1 million, respectively, in individual annuities, traditional life and variable and interest sensitive life products surrenders and withdrawals. The decrease in individual annuities surrenders for the second quarter of 2015 is due to the absence of $300 million of surrenders related to the Company’s buyback program to purchase from certain policyholders the GMDB and GMIB riders contained in their Accumulator® contracts, which expired in the third quarter of 2014.

Surrenders and withdrawals decreased $1.6 billion, from $5.7 billion in the first quarter of 2014 to $4.1 billion in the first six months of 2015. There was a decrease of $1.6 billion, $12 million and $9 million, respectively, in individual annuities, variable and interest sensitive and traditional life products surrenders and withdrawals. The decrease in individual annuities surrenders for the first six months of 2015 is due to the absence of $1.5 billion of surrenders related to the Company’s buyback program to purchase from certain policyholders the GMDB and GMIB riders contained in their Accumulator® contracts, which expired in the third quarter of 2014.

 

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Investment Management.

The table that follows presents the operating results of the Investment Management segment, consisting principally of AllianceBernstein’s operations, for the second quarters and first six months of 2015 and 2014.

Investment Management - Results of Operations

 

     Three Months
Ended June 30,
    Six Months
Ended June  30,
 
     2015      2014     2015     2014  
     (In Millions)  

Revenues:

         

Investment advisory and services fees(1)

   $ 516       $ 492      $ 1,010      $ 947   

Bernstein research services

     122         119        248        242   

Distribution revenues

     112         110        221        216   

Other revenues(1)

     26         27        51        54   
  

 

 

    

 

 

   

 

 

   

 

 

 

Commissions, fees and other income

     776         748        1,530        1,459   

Investment income (loss)

     8         6        23        10   

Less: interest expense to finance trading activities

                    (1     (1
  

 

 

    

 

 

   

 

 

   

 

 

 

Net investment income (loss)

     8         6        22        9   

Investment gains (losses), net

     6         5        1        3   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     790         759        1,553        1,471   
  

 

 

    

 

 

   

 

 

   

 

 

 

Expenses:

         

Compensation and benefits

     343         335        675        645   

Distribution related payments

     102         101        203        198   

Amortization of deferred sales commissions

     13         9        25        18   

Real estate charge

             (2            1   

Interest expense

     1                1          

Rent expense

     32         33        64        66   

Amortization of other intangible assets, net

     7         6        14        13   

Other operating costs and expenses

     132         133        264        260   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total expenses

     630         615        1,246        1,201   
  

 

 

    

 

 

   

 

 

   

 

 

 

Earnings (Loss) from Operations before Income Taxes

   $     160       $     144      $ 307      $ 270   
  

 

 

    

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Revenues

Revenues totaled $790 million in second quarter 2015, an increase of $31 million from $759 million in second quarter 2014. The increase is primarily due to $24 million higher Investment advisory services fees and $16 million higher investment income from derivative instruments ($3 million of income in second quarter 2015 as compared to $13 million of losses in the comparable period of 2014) partially offset by $14 million lower other investment income.

Investment advisory and services fees include base fees and performance-based fees. The increase or decrease in base fees is primarily attributable to an increase or decrease in average AUM. In second quarter 2015, investment advisory and services fees totaled $516 million, an increase of $24 million from the $492 million in second quarter 2014. The increases include an increase of $29 million in base fees partially offset by $5 million in performance-based fees. Retail investment advisory and

 

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services fees, Private Wealth Management base and performance fees and Institutional investment advisory and services increased $8 million, $5 million and $11 million, respectively primarily due to an increase in average AUM during the second quarter of 2015, as compared to the second quarter 2014.

Bernstein research revenues increased $3 million in second quarter 2015 as compared to second quarter 2014 primarily due to growth in the U.S. and Asia.

Distribution revenues increased $2 million in the second quarter 2015 as compared to second quarter 2014, while the corresponding average AUM of these mutual funds increased.

Net investment income (loss) consisted principally of realized and unrealized gains (losses) on trading investments, income (losses) from derivative instruments and dividend and interest income, offset by interest expense related to interest accrued on cash balances in customers’ brokerage accounts. The $2 million increase in net investment income (loss) to $8 million in second quarter 2015 as compared to $6 million was principally due to investment income from derivative instruments ($3 million of income in second quarter 2015 as compared to $13 million of losses in the comparable period of 2014) partially offset by a $13 million decrease in unrealized gains from equity trading securities ($1 million unrealized losses in second quarter 2015 as compared to $12 million of unrealized gains in second quarter of 2014).

The $6 million of investment gains in second quarter 2015 was related to gains on investments held by AllianceBernstein’s consolidated private equity fund.

Expenses

The Investment Management segment’s total expenses were $630 million in second quarter 2015, an increase of $15 million from the $615 million in second quarter 2014 primarily due to higher compensation and benefits.

For second quarter 2015, employee compensation and benefits expenses for the Investment Management segment were $343 million as compared to $335 million in second quarter 2014. The increase was primarily attributable to higher base compensation of $5 million and higher incentive compensation of $3 million.

The distribution related payments increased $1million to $102 million in second quarter 2015 from $101 million in the second quarter 2014 primarily as a result of higher distribution revenues.

The $1 million increase in other operating costs and expenses to $132 million for second quarter 2015 as compared to $131 million in second quarter 2014 was primarily due to higher portfolio services expense, higher technology expenses and lower real estate credits.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

Revenues

Revenues totaled $1.6 billion in the first six months of 2015, an increase of $82 million from $1.5 billion in the first six months of 2014. The increase is primarily due to $63 million higher Investment advisory services fees and $13 million higher net investment income ($22 million in the first six months of 2015 as compared to $9 million in the comparable period of 2014).

Investment advisory and services fees include base fees and performance-based fees. The increase or decrease in base fees is primarily attributable to an increase or decrease in average AUM. In the first six months of 2015, investment advisory and services fees totaled $1.0 billion, an increase of $63 million from the $947 million in the first six months of 2014. The increases include an increase in base fees partially offset by performance-based fees of $67 million and $4 million, respectively. Retail investment advisory and services fees, Private Wealth Management base and performance fees and Institutional investment advisory and services increased $26 million, $18 million and $19 million, respectively primarily due to an increase in average AUM during the first six months of 2015, as compared to the first six months of 2014.

Bernstein research revenues increased $6 million in the first six months of 2015 as compared to the first six months of 2014 primarily due to growth in the U.S. and Asia.

Distribution revenues increased $5 million in the first six months of 2015 as compared to the first six months of 2014, while the corresponding average AUM of these mutual funds increased.

 

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Net investment income (loss) consisted principally of realized and unrealized gains (losses) on trading investments, income (losses) from derivative instruments and dividend and interest income, offset by interest expense related to interest accrued on cash balances in customers’ brokerage accounts. The $13 million increase in net investment income (loss) to $22 million in the first six months of 2015 as compared to $9 million was principally due to $7 million of investment gains from mark-to-market income on investments held by AllianceBernstein’s consolidated private equity fund in the second quarter of 2015 compared to $4 million of investment losses in second quarter 2014 and lower investment losses from derivative instruments ($3 million of losses in second quarter 2015 as compared to $19 million of losses in the comparable period of 2014) partially offset by a $16 million decrease in unrealized gains from equity trading securities ($8 million unrealized gains in the first six months of 2015 as compared to $24 million of unrealized gains in the comparable 2014 period).

Expenses

The Investment Management segment’s total expenses were $1.2 billion in the first six months of 2015, an increase of $45 million from the $1.2 billion in the first six months of 2014 due to higher compensation and benefits.

For the first six months of 2015, employee compensation and benefits expenses for the Investment Management segment were $675 million as compared to $645 million in the first six months of 2014. The increase was primarily attributable to higher incentive compensation of $23 million and higher base compensation of $10 million partially offset by lower commissions of $6 million.

The distribution related payments increased $5 million to $203 million in the first six months of 2015 from $198 million in the first six months of 2014 primarily as a result of higher distribution revenues.

The $4 million increase in other operating costs and expenses to $264 million for the first six months of 2015 as compared to $260 million in the first six months of 2014 was primarily due to higher portfolio services expense of $6 million and higher technology expenses of $2 million partially offset by lower office related expenses, lower professional fees and lower real estate charges of $3 million, $2 million and $2 million, respectively.

 

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FEES AND ASSETS UNDER MANAGEMENT

A breakdown of fees and AUM follows:

Fees and Assets Under Management

 

                   At or For the  
     Three Months
Ended June  30,
     Six Months
Ended June 30,
 
     2015      2014      2015      2014  
     (In Millions)  

FEES

           

Third party

   $ 497       $ 479       $ 974       $ 916   

General Account and other

     12         7         22         17   

Insurance Group Separate Accounts

     7         7         14         14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Fees

   $ 516       $ 493       $ 1,010       $ 947   
  

 

 

    

 

 

    

 

 

    

 

 

 

ASSETS UNDER MANAGEMENT

           

Assets by Manager

           

AllianceBernstein

           

Third party

         $ 396,661       $ 404,053   

General Account and other

           55,682         42,673   

Insurance Group Separate Accounts

           32,757         33,469   
        

 

 

    

 

 

 

Total AllianceBernstein

           485,100         480,195   
        

 

 

    

 

 

 

Insurance Group

           

General Account and other(2)

           17,963         22,974   

Insurance Group Separate Accounts

           81,330         81,770   
        

 

 

    

 

 

 

Total Insurance Group

           99,293         104,744   
        

 

 

    

 

 

 

Total by Account:

           

Third party(1)

           396,661         404,053   

General Account and other(2)

           73,645         65,647   

Insurance Group Separate Accounts

           114,087         115,239   
        

 

 

    

 

 

 

Total Assets Under Management

         $ 584,393       $ 584,939   
        

 

 

    

 

 

 

 

(1) 

Includes $40.4 billion and $44.1 billion of assets managed on behalf of AXA affiliates at June 30, 2015 and 2014, respectively. Third party AUM includes 100% of the estimated fair value of real estate owned by joint ventures in which third party clients own an interest.

(2) 

Includes invested assets of the Company not managed by AllianceBernstein, principally cash and short-term investments and policy loans, totaling approximately $11.0 billion and $16.4 billion at June 30, 2015 and 2014, respectively, as well as mortgages and equity real estate totaling $7.0 billion and $6.5 billion at June 30, 2015 and 2014, respectively.

Fees for assets under management increased 6.62% for the six months of 2015 from the comparable period of 2014, in line with the change in average assets under management for third parties and the Separate Accounts.

Total assets under management at June 30, 2015 decreased $0.5 billion to $584.4 billion. The $0.5 billion decrease at June 30, 2015 as compared to June 30, 2014 resulted from market depreciation and lower fees from EQAT and VIP.

 

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Changes in assets under management at AllianceBernstein for the three and six months ended June 30, 2015 was as follows:

 

    Investment Service  
                      Fixed                    
                Fixed     Income                    
                Income     Actively     Fixed              
    Equity     Equity     Actively     Managed     Income              
    Actively     Passively     Managed-     -Tax-     Passively              
    Managed     Managed(1)     Taxable     Exempt     Managed(1)     Other(2)     Total  
    (In billions)  

Balance as of March 31, 2015

  $ 115.4      $ 50.9      $ 225.5      $ 32.6      $ 9.8      $ 51.7      $ 485.9   

Long-term flows:

             

Sales/new accounts

    4.0        0.1        8.7        1.2        0.1        10.7        24.8   

Redemptions/terminations

    (3.4            (14.5     (0.8     (0.1     (0.6     (19.4

Cash flow/unreinvested dividends

    (2.1     (0.5     (0.7     (0.4     0.3        0.2        (3.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net long-term (outflows) inflows

    (1.5     (0.4     (6.5            0.3        10.3        2.2   

AUM adjustment (3)

    0.1                      0.1                      0.2   

Market appreciation (depreciation)

    1.4        (0.2     (3.9     (0.2     (0.1     (0.2     (3.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

           (0.6     (10.4     (0.1     0.2        10.1        (0.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2015

  $ 115.4      $ 50.3      $ 215.1      $ 32.5      $ 10.0      $ 61.8      $ 485.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2014

  $ 112.5      $ 50.4      $ 219.4      $ 31.6      $ 10.1      $ 50.0      $ 474.0   

Long-term flows:

             

Sales/new accounts

    8.1        0.3        21.4        2.7        0.2        11.6        44.3   

Redemptions/terminations

    (7.3     (0.2     (21.0     (1.5     (0.3     (1.2     (31.5

Cash flow/unreinvested dividends

    (3.5     (0.8     (0.5     (0.5     0.1        0.6        (4.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net long-term (outflows) inflows

    (2.7     (0.7     (0.1     0.7               11.0        8.2   

AUM adjustment (3)

    0.1                      0.1                      0.2   

Market appreciation (depreciation)

    5.5        0.6        (4.2     0.1        (0.1     0.8        2.7   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

    2.9        (0.1     (4.3     0.9        (0.1     11.8        11.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2015

  $     115.4      $     50.3      $     215.1      $     32.5      $     10.0      $     61.8      $     485.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes index and enhanced index services.

(2) 

Includes multi-asset solutions and services, and certain alternative investments.

(3) 

Excludes assets for which Alliance Bernstein provides administrative services but not investment management services from AUM.

 

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Average assets under management at Alliance Bernstein by distribution channel and investment services were as follows:

 

    Three Months Ended
June 30,
                Six Months Ended
June 30,
             
    2015     2014     $    Change     Change    %     2015     2014     $    Change     Change    %  
    (In Billions)  

Distribution Channel:

               

Institutions

  $ 249.9      $ 232.0      $ 17.9        7.7   $ 246.0      $ 230.1      $ 15.9        6.9

Retail

    164.5        158.8        5.7        3.6        163.6        156.1        7.5        4.8   

Private Wealth Management

    78.2        73.4        4.8        6.5        77.4        72.5        4.9        6.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 492.6      $ 464.2      $ 28.4        6.1   $ 487.0      $ 458.7      $ 28.3        6.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment Service:

               

Equity Actively Managed

  $ 116.3      $ 110.7      $ 5.6        5.0   $ 115.0      $ 109.1      $ 5.9        5.4

Equity Passively Managed(1)

    51.0        49.4        1.6        3.3        50.8        48.9        1.9        3.9   

Fixed Income Actively Managed – Taxable

    223.3        218.7        4.6        2.1        223.2        216.1        7.1        3.3   

Fixed Income Actively Managed – Tax-exempt

    32.5        30.2        2.3        7.6        32.4        29.9        2.5        8.4   

Fixed Income Passively

               

Managed(1)

    9.9        9.5        0.4        4.6        10.0        9.5        0.5        5.3   

Other(2)

    59.6        45.7        13.9        30.5        55.6        45.2        10.4        22.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 492.6      $ 464.2      $ 28.4        6.1   $ 487.0      $ 458.7      $ 28.3        6.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Includes index and enhanced index services.

(2)

Includes multi-asset solutions and services, and certain alternative investments.

 

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GENERAL ACCOUNT INVESTMENT PORTFOLIO

The General Account Investment Assets (“GAIA”) portfolio consists of a well-diversified portfolio of public and private fixed maturities, commercial and agricultural mortgages and other loans, equity securities and other invested assets.

The General Accounts’ portfolios and investment results support the insurance and annuity liabilities of the Insurance segment’s business operations. The following table reconciles the consolidated balance sheet asset amounts to GAIA.

The Company has asset/liability management (“ALM”) with separate investment objectives for specific classes of product liabilities. The Company establishes investment strategies to manage each product class’ investment return, duration and liquidity requirements, consistent with management’s overall investment objectives for the General Account investment portfolio.

Net General Account Investment Assets

June 30, 2015

 

     Balance
Sheet  Total
    Other(1)     GAIA  
     (In Millions)  

Balance Sheet Captions:

      

Fixed maturities, available for sale, at fair value

   $ 32,760      $ 163      $ 32,597   

Mortgage loans on real estate

     6,479        (328     6,807   

Equity real estate, held for the production of income

     (1     (1       

Policy Loans

     3,400        (99     3,499   

Other equity investments

     1,551        140        1,411   

Trading securities

     6,030        550        5,480   

Other invested assets

     1,638        1,638          
  

 

 

   

 

 

   

 

 

 

Total investments

     51,857        2,063        49,794   

Cash and cash equivalents

     2,620        2,614        6   

Short-term debt

     (655     (454     (201
  

 

 

   

 

 

   

 

 

 

Total

   $     53,822      $     4,223      $     49,599   
  

 

 

   

 

 

   

 

 

 

 

(1) 

Assets listed in the “Other” category principally consist of the Company’s loans to affiliates and other miscellaneous assets and other miscellaneous liabilities related to GAIA that are reclassified from various balance sheet lines held in portfolios other than the General Account which are not managed as part of GAIA, including related accrued income or expense, certain reclassifications and intercompany adjustments and, for fixed maturities, the reversal of net unrealized gains (losses). The “Other” category is deducted in arriving at GAIA.

 

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Investment Results of General Account Investment Assets

The following table summarizes investment results by asset category for the periods indicated.

 

     Three Months Ended June 30,  
     2015     2014  
         Yield             Amount             Yield             Amount      
     (Dollars in Millions)  

Fixed Maturities:

        

Investment grade

        

Income (loss)

     4.39   $ 338        4.65   $ 334   

Ending assets

       31,024          29,576   

Below investment grade

        

Income

     7.19     29        5.68     26   

Ending assets

       1,573          1,804   

Mortgages:

        

Income (loss)

     5.82     99        5.41     85   

Ending assets

       6,807          6,379   

Equity Real Estate:

        

Income (loss)

                      

Ending assets

                (2

Other Equity Investments:

        

Income (loss)

     5.86     22        8.62     36   

Ending assets

       1,411          1,658   

Policy Loans:

        

Income

     6.07     53        6.03     53   

Ending assets

       3,499          3,527   

Cash and Short-term Investments:

        

Income

                  (1     0.05       

Ending assets

       6          1,019   

Trading Securities:

        

Income

         (1     2.33     23   

Ending assets

       5,480          4,154   

Total Invested Assets:

        
    

 

 

     

 

 

 

Income

     4.16     539        4.67     557   

Ending Assets

       49,800          48,115   

Short-term and long-term debt:

        

Interest expense and other

     11.80     (6     2.95     (3

Ending assets (liabilities)

       (201       (701

Total:

        
    

 

 

     

 

 

 

Investment income

     4.27     533        4.68     554   

Less: investment fees

     (0.10 )%      (13     (0.11 )%      (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment Income, Net

     4.17   $ 520        4.57   $ 541   
    

 

 

     

 

 

 

Ending Net Assets

     $ 49,599        $ 47,414   
    

 

 

     

 

 

 

 

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     Six Months Ended June 30,     Year Ended  
     2015     2014     December 31,  
         Yield             Amount             Yield             Amount         2014  
     (Dollars in Millions)  

Fixed Maturities:

          

Investment grade

          

Income (loss)

     4.25   $ 649        4.56   $ 644      $ 1,329   

Ending assets

       31,024          29,576        29,908   

Below investment grade

          

Income

     7.14     60        7.39     69        121   

Ending assets

       1,573          1,804        1,847   

Mortgages:

          

Income (loss)

     5.31     181        5.36     166        336   

Ending assets

       6,807          6,379        6,794   

Other Equity Investments:

          

Income (loss)

     5.00     39        16.41     138        203   

Ending assets

       1,411          1,656        1,634   

Policy Loans:

          

Income

     6.02     105        6.05     107        216   

Ending assets

       3,499          3,527        3,515   

Cash and Short-term Investments:

          

Income

         (1     0.04              

Ending assets

       6          1,019        1,045   

Trading Securities:

          

Income

     1.35     34        1.94     38        38   

Ending assets

       5,480          4,154        4,513   

Total Invested Assets:

          
    

 

 

     

 

 

   

 

 

 

Income

     4.26     1,067        4.86     1,162        2,243   

Ending Assets

       49,800          48,115        49,256   

Short-term debt:

          

Interest expense and other

       (10       (7     (15

Ending assets (liabilities)

       (201       (701     (201

Total:

          
    

 

 

     

 

 

   

 

 

 

Investment Income

     4.25     1,057        4.90     1,155        2,228   

Less: investment fees

     (0.10 )%      (25     (0.11 )%      (26     (52
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment Income, Net

     4.14   $ 1,032        4.79   $ 1,129      $ 2,176   
    

 

 

     

 

 

   

 

 

 

Ending Net Assets

     $ 49,599        $ 47,414      $ 49,055   
    

 

 

     

 

 

   

 

 

 

Fixed Maturities

The fixed maturity portfolio consists largely of investment grade corporate debt securities and includes significant amounts of U.S. government and agency obligations. At June 30, 2015, 74.8% of the fixed maturity portfolio was publicly traded. At June 30, 2015, GAIA held commercial mortgage backed securities (“CMBS”) with an amortized cost of $737 million. The General Account had a $2 million exposure to the sovereign debt of Italy and no exposure to the sovereign debt of Greece, Portugal, Spain and the Republic of Ireland. The decline in the book yield for the six months ended June 30, 2015 when compared to the comparable 2014 period was accompanied by an increase in the credit quality of the portfolio.

Fixed Maturities by Industry

The General Accounts’ fixed maturities portfolios include publicly-traded and privately-placed corporate debt securities across an array of industry categories.

 

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The following table sets forth these fixed maturities by industry category as of the dates indicated along with their associated gross unrealized gains and losses.

Fixed Maturities by Industry(1)

 

            Gross      Gross         
       Amortized          Unrealized          Unrealized           
     Cost      Gains      Losses        Fair Value    
     (In Millions)  

At June 30, 2015:

           

Corporate Securities:

           

Finance

   $ 5,002       $ 230       $ 15       $ 5,217   

Manufacturing

     5,893         364         41         6,216   

Utilities

     3,251         263         16         3,498   

Services

     2,871         160         19         3,012   

Energy

     1,656         101         18         1,739   

Retail and wholesale

     1,084         61         5         1,140   

Transportation

     761         61         6         816   

Other

     75         3                 78   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate securities

     20,593         1,243         120         21,716   
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. government and agency

     8,721         139         281         8,579   

Commercial mortgage-backed

     737         24         112         649   

Residential mortgage-backed(2)

     676         37                 713   

Preferred stock

     675         68         7         736   

State & municipal

     441         62         1         502   

Foreign governments

     398         42         9         431   

Asset-backed securities

     76         13         1         88   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,317       $ 1,628       $ 531       $ 33,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014:

           

Corporate Securities:

           

Finance

   $ 5,519       $ 296       $ 7       $ 5,808   

Manufacturing

     5,982         426         20         6,388   

Utilities

     3,327         330         8         3,649   

Services

     2,969         231         13         3,187   

Energy

     1,660         113         17         1,756   

Retail and wholesale

     1,108         73         3         1,178   

Transportation

     774         75         2         847   

Other

     78         3                 81   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate securities

     21,417         1,547         70         22,894   
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. government and agency

     6,668         672         26         7,314   

Commercial mortgage-backed

     855         22         142         735   

Residential mortgage-backed(2)

     752         42                 794   

Preferred stock

     829         69         10         888   

State & municipal

     441         78                 519   

Foreign governments

     405         48         7         446   

Asset-backed securities

     86         15         1         100   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 31,453       $ 2,493       $ 256       $ 33,690   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings.

(2) 

Includes publicly traded agency pass-through securities and collateralized mortgage obligations.

Fixed Maturities Credit Quality

The Securities Valuation Office (“SVO”) of the NAIC evaluates the investments of insurers for regulatory reporting purposes and assigns fixed maturity securities to one of six categories (“NAIC Designations”). NAIC Designations of “1” or “2”

 

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include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s or BBB- or higher by Standard & Poor’s. NAIC Designations of “3” through “6” are referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by Standard & Poor’s. As a result of time lags between the funding of investments, the finalization of legal documents and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date. Pending receipt of SVO ratings, the categorization of these securities by NAIC Designation is based on the expected ratings indicated by internal analysis.

The amortized cost of the General Accounts’ public and private below investment grade fixed maturities totaled $1.2 billion, or 3.8%, of the total fixed maturities at June 30, 2015 and $1.4 billion, or 4.4%, of the total fixed maturities at December 31, 2014. Gross unrealized losses on public and private fixed maturities increased from $257 million at December 31, 2014 to $531 million at June 30, 2015. Below investment grade fixed maturities represented 16.8% and 41.6% of the gross unrealized losses at June 30, 2015 and December 31, 2014, respectively. For public, private and corporate fixed maturity categories, gross unrealized gains were lower and gross unrealized losses were higher in second quarter 2015 than in the prior period.

Public Fixed Maturities Credit Quality. The following table sets forth the General Accounts’ public fixed maturities portfolios by NAIC rating at the dates indicated.

Public Fixed Maturities

 

                 Gross      Gross         
NAIC           Amortized        Unrealized      Unrealized         

Designation(1)

  

Rating Agency Equivalent

   Cost      Gains      Losses      Fair Value  
          (In Millions)  

At June 30, 2015:

              

1

   Aaa, Aa, A    $ 16,640       $ 747       $ 330       $ 17,057   

2

   Baa      6,822         429         51         7,200   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Investment grade      23,462         1,176         381         24,257   
     

 

 

    

 

 

    

 

 

    

 

 

 

3

   Ba      568         36         5         599   

4

   B      116         1         9         108   

5

   C and lower      16         1                 17   

6

   In or near default      2                         2   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Below investment grade      702         38         14         726   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total Public Fixed Maturities

   $ 24,164       $ 1,214       $ 395       $ 24,983   
     

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014:

              

1

   Aaa, Aa, A    $ 15,068       $ 1,429       $ 71       $ 16,426   

2

   Baa      6,979         534         36         7,477   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Investment grade      22,047         1,963         107         23,903   
     

 

 

    

 

 

    

 

 

    

 

 

 

3

   Ba      668         31         8         691   

4

   B      107         5         1         111   

5

   C and lower      13         1         1         13   

6

   In or near default      16                 5         11   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Below investment grade      804         37         15         826   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total Public Fixed Maturities

   $ 22,851       $ 2,000       $ 122       $ 24,729   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

At June 30, 2015 and 2014, no securities had been categorized based on expected NAIC Designation pending receipt of SVO ratings.

 

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Private Fixed Maturities Credit Quality. The following table sets forth the General Accounts’ private fixed maturities portfolios by NAIC rating at the dates indicated.

Private Fixed Maturities

 

                 Gross      Gross         
NAIC         Amortized      Unrealized      Unrealized         

Designation(1)

  

Rating Agency Equivalent

   Cost      Gains      Losses      Fair Value  
          (In Millions)  

At June 30, 2015:

              

1

   Aaa, Aa, A    $ 4,113       $ 219       $ 32       $ 4,300   

2

   Baa      3,526         184         29         3,681   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Investment grade      7,639         403         61         7,981   
     

 

 

    

 

 

    

 

 

    

 

 

 

3

   Ba      271         4         5         270   

4

   B      55                 11         44   

5

   C and lower      91         1         18         74   

6

   In or near default      97         6         41         62   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Below investment grade      514         11         75         450   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total Private Fixed Maturities

   $ 8,153       $ 414       $ 136       $ 8,431   
     

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014:

              

1

   Aaa, Aa, A    $ 4,370       $ 257       $ 28       $ 4,599   

2

   Baa      3,667         225         15         3,877   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Investment grade      8,037         482         43         8,476   
     

 

 

    

 

 

    

 

 

    

 

 

 

3

   Ba      280         4         10         274   

4

   B      73                 9         64   

5

   C and lower      98                 21         77   

6

   In or near default      114         7         52         69   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Below investment grade      565         11         92         484   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total Private Fixed Maturities

      $ 8,602       $ 493       $ 135       $ 8,960   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes, as of June 30, 2015 and December 31, 2014, respectively, 42 securities with amortized cost of $495 million (fair value, $795 million) and 38 securities with amortized cost of $447 million (fair value, $452 million) that have been categorized based on expected NAIC designation pending receipt of SVO ratings.

 

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Corporate Fixed Maturities Credit Quality. The following table sets forth the General Accounts’ public and private holdings of corporate fixed maturities by NAIC rating at the dates indicated.

Corporate Fixed Maturities

 

                 Gross      Gross         
NAIC         Amortized      Unrealized      Unrealized         

Designation

  

Rating Agency Equivalent

   Cost      Gains      Losses      Fair Value  
          (In Millions)  

At June 30, 2015:

              

1

   Aaa, Aa, A    $ 10,070       $ 654       $ 39       $ 10,685   

2

   Baa      9,792         565         72         10,285   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Investment grade      19,862         1,219         111         20,970   
     

 

 

    

 

 

    

 

 

    

 

 

 

3

   Ba      623         18         8         633   

4

   B      78         1         1         78   

5

   C and lower      29         1                 30   

6

   In or near default      1         4                 5   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Below investment grade      731         24         9         746   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total Corporate Fixed Maturities

   $ 20,593       $ 1,243       $ 120       $ 21,716   
     

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2014:

              

1

   Aaa, Aa, A    $ 10,548       $ 813       $ 20       $ 11,341   

2

   Baa      10,072         706         39         10,739   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Investment grade      20,620         1,519         59         22,080   
     

 

 

    

 

 

    

 

 

    

 

 

 

3

   Ba      681         21         9         693   

4

   B      85                 2         83   

5

   C and lower      30         1                 31   

6

   In or near default      1         6                 7   
     

 

 

    

 

 

    

 

 

    

 

 

 
   Below investment grade      797         28         11         814   
     

 

 

    

 

 

    

 

 

    

 

 

 

Total Corporate Fixed Maturities

   $ 21,417       $ 1,547       $ 70       $ 22,894   
     

 

 

    

 

 

    

 

 

    

 

 

 

Asset-backed Securities

At June 30, 2015, the amortized cost and fair value of asset backed securities held were $76 million and $88 million, respectively; at December 31, 2014, those amounts were $86 million and $100 million, respectively. At June 30, 2015, the amortized cost and fair value of asset backed securities collateralized by sub-prime mortgages were $8 million and $7 million, respectively. At that same date, the amortized cost and fair value of asset backed securities collateralized by non-sub-prime mortgages were $27 million and $27 million, respectively.

 

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Commercial Mortgage-backed Securities

The following table sets forth the amortized cost and fair value of the Insurance Group’s commercial mortgage-backed securities at the dates indicated by credit quality and by year of issuance (vintage).

Commercial Mortgage-Backed Securities

June 30, 2015

 

     Moody’s Agency Rating      Total      Total
December  31,
2014
 
Vintage    Aaa      Aa      A      Baa      Ba  and
Below
       
                    
     (In Millions)  

At amortized cost:

                    

2004 and Prior Years

   $ 12       $ 15       $ 2       $ 3       $ 96       $ 128       $ 150   

2005

     15         5         16         20         266         322         410   

2006

                             1         209         210         217   

2007

                                     76         76         78   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total CMBS

   $ 27       $ 20       $ 18       $ 24       $ 647       $ 736       $ 855   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At fair value:

                    

2004 and Prior Years

   $ 13       $ 16       $ 2       $ 3       $ 89       $ 123       $ 138   

2005

     15         5         16         20         250         306         380   

2006

                             1         157         158         154   

2007

                                     63         63         63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total CMBS

   $ 28       $ 21       $ 18       $ 24       $ 559       $ 650       $ 735   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgages

Investment Mix

At June 30, 2015 and December 31, 2014, respectively, approximately 13.7% and 14.0%, respectively, of GAIA were in commercial and agricultural mortgage loans. The table below shows the composition of the commercial and agricultural mortgage loan portfolio, before the loss allowance, as of the dates indicated.

 

     June 30, 2015      December 31, 2014  
     (In Millions)      

Commercial mortgage loans

   $ 4,688       $ 4,797   

Agricultural mortgage loans

     2,210       $ 2,085   
  

 

 

    

 

 

 

Total Mortgage Loans

   $ 6,898       $ 6,882   
  

 

 

    

 

 

 

 

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The investment strategy for the mortgage loan portfolio emphasizes diversification by property type and geographic location with a primary focus on asset quality. The tables below show the breakdown of the amortized cost of the General Accounts investments in mortgage loans by geographic region and property type as of the dates indicated.

Mortgage Loans by Region and Property Type

 

     June 30, 2015     December 31, 2014  
     Amortized Cost      % of Total     Amortized Cost      % of Total  
     (Dollars in Millions)  

By Region:

          

U.S. Regions:

          

Middle Atlantic

   $ 1,854         26.9   $ 1,957         28.4 

Pacific

     1,773         25.7        1,736         25.2   

South Atlantic

     774         11.2        875         12.7   

East North Central

     572         8.3        551         8.0   

Mountain

     570         8.3        544         7.9   

West North Central

     568         8.2        497         7.3   

West South Central

     406         5.9        412         6.0   

New England

     213         3.1        187         2.7   

East South Central

     168         2.4        123         1.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Mortgage Loans

   $ 6,898         100.0    $ 6,882         100.0 
  

 

 

    

 

 

   

 

 

    

 

 

 

By Property Type:

          

Agricultural properties

   $ 2,210         32.0   $ 2,085         30.3 

Office buildings

     1,913         27.7        1,902         27.6   

Apartment complexes

     1,368         19.8        1,418         20.6   

Retail stores

     541         7.9        522         7.6   

Industrial buildings

     379         5.5        405         5.9   

Hospitality

     377         5.5        439         6.4   

Other

     110         1.6        111         1.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Mortgage Loans

   $ 6,898         100.0    $ 6,882         100.0 
  

 

 

    

 

 

   

 

 

    

 

 

 

At June 30, 2015, the General Account investments in commercial mortgage loans had a weighted average loan-to-value ratio of 62.0% while the agricultural mortgage loans weighted average loan-to-value ratio was 46.0%.

 

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The values used in these ratio calculations were developed as part of the periodic review of the commercial and agricultural mortgage loan portfolio, which includes an evaluation of the underlying collateral value.

Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios

June 30, 2015

 

     Debt Service Coverage Ratio(1)         
Loan-to-Value Ratio    Greater
than  2.0x
     1.8x  to
2.0x
     1.5x  to
1.8x
     1.2x  to
1.5x
     1.0x  to
1.2x
     Less
than
1.0x
     Total
Mortgage
Loans
 
                    
                    
     (In Millions)  

0% - 50%

   $ 947       $ 111       $ 347       $ 431       $ 272       $ 53       $ 2,161   

50% - 70%

     1,056         590         807         1,097         296         44         3,890   

70% - 90%

     211                 86         283         64                 644   

90% plus

     156                                         47         203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                    
                    

Total Commercial and Agricultural Mortgage Loans

   $ 2,370       $ 701       $ 1,240       $ 1,811       $ 632       $ 144       $ 6,898   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

The debt service coverage ratio is calculated using actual results from property operations.

The tables below show the breakdown of the commercial and agricultural mortgage loans by year of origination at June 30, 2015.

Mortgage Loans by Year of Origination

 

     June 30, 2015  
Year of Origination    Amortized Cost      % of Total  
         (Dollars In Millions)  

2015

   $ 427         6.2 

2014

     1,695         24.5   

2013

     1,701         24.7   

2012

     1,178         17.1   

2011

     827         12.0   

2010 and prior

     1,070         15.5   
  

 

 

    

 

 

 

Total Mortgage Loans

   $ 6,898         100.0 
  

 

 

    

 

 

 

 

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In 2011, the loan shown in the table below was modified to interest only payments. Since 2011 this loan has been modified two additional times to extend interest only payments through maturity. The maturity date was also extended from November 5, 2014 to December 5, 2015. Since the fair market value of the underlying real estate collateral is the primary factor in determining the allowance for credit losses, modifications of loan terms typically have no direct impact on the allowance for credit losses, and therefore, no impact on the financial statements.

Troubled Debt Restructuring - Modifications

June 30, 2015

 

    Number     Outstanding Recorded Investment  
    of Loans     Pre-Modification     Post - Modification  
          (In Millions)  

Troubled debt restructurings:

     

Commercial mortgage loans

    1        84        93   
 

 

 

   

 

 

   

 

 

 

Total

    1      $ 84      $ 93   
 

 

 

   

 

 

   

 

 

 

There were no default payments on the above loan during the first six months of 2015.

Valuation allowances for the commercial mortgage loan portfolio were related to loan specific reserves. The following table sets forth the change in valuation allowances for the commercial mortgage loan portfolio as of the dates indicated. There were no valuation allowances for agricultural mortgages at June 30, 2015 and 2014.

 

     2015     2014  
Allowance for credit losses:    (In Millions)  

Beginning Balance, January 1,

   $ 37      $ 42   

Charge-offs

     (1     (14

Recoveries

              

Provision

            6   
  

 

 

   

 

 

 

Ending Balance, June 30,

   $ 36      $ 34   
  

 

 

   

 

 

 

Ending Balance, June 30,:

    

Individually Evaluated for Impairment

   $ 36      $ 34   
  

 

 

   

 

 

 

Other Equity Investments

At June 30, 2015, private equity partnerships, hedge funds and real-estate related partnerships were 91.8% of total other equity investments. These interests, which represent 2.9% of GAIA, consist of a diversified portfolio of LBO, mezzanine, venture capital and other alternative limited partnerships, diversified by sponsor, fund and vintage year. The portfolio is actively managed to control risk and generate investment returns over the long term. Portfolio returns are sensitive to overall market developments.

Other Equity Investments - Classifications

 

     June 30, 2015      December 31, 2014  
     (In Millions)      

Common stock

   $ 116       $ 261   

Joint ventures and limited partnerships:

     

Private equity

     921         995   

Hedge funds

     269         279   

Real estate related

     109         105   
  

 

 

    

 

 

 

Total Other Equity Investments

   $ 1,415       $ 1,640   
  

 

 

    

 

 

 

 

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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 the NYSDFS. 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, 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.

Derivatives utilized to hedge exposure to Variable Annuities with Guarantee Features

The Company has issued and continues to offer certain variable annuity products with GMDB, GMIB and GIB features. The Company had previously issued certain variable annuity products with GWBL and Other 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 benefits, 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 the GIB and GWBL and Other Features is that under-performance of the financial markets could result in the GIB and GWBL and Other Features’ benefits being higher than what accumulated policyholders’ account balances would support.

For GMDB, GMIB, GIB and GWBL and Other Features, the Company retains certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected assumptions for mortality, lapse and surrender, withdrawal and contractholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMDB, GMIB, GIB and GWBL and Other 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, AXA Equitable is party to total return swaps for which the reference U.S. Treasury securities are contemporaneously purchased from the market and sold to the swap counterparty. As these transactions result in a transfer of control of the U.S. Treasury securities to the swap counterparty, AXA Equitable derecognizes these securities with consequent gain or loss from the sale. The Company has also purchased reinsurance contracts to mitigate the risks associated with GMDB features and the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts issued by the Company.

The Company has in place a hedge program 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 SCS variable annuity, SIO in the EQUI-VEST® variable annuity series, MSO in the variable life insurance products and IUL insurance products. These products permit the contract owner to participate in the performance of an index, ETFs 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, of 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.

Derivatives utilized to hedge risks associated with interest margins on Interest Sensitive Life and Annuity Contracts

Margins or “spreads” on interest-sensitive life insurance and annuity contracts are affected by interest rate fluctuations as the yield on portfolio investments, primarily fixed maturities, is intended to support required payments under these contracts, including interest rates credited to their policy and contract holders. From time to time the Company uses interest rate swaptions and other instruments to reduce the risk associated with minimum guarantees on these interest-sensitive contracts. At March 31, 2015, there were no positions outstanding for these programs.

 

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Derivatives utilized to hedge equity market risks associated with the General Account’s seed money investments in Separate Accounts, retail mutual funds and Separate Account fee revenue fluctuations

The Company’s General Account seed money investments in Separate Account equity funds and retail mutual funds exposes the Company to equity market risk which is partially hedged through equity-index futures contracts to minimize such risk.

In second quarter 2015, the Company entered into futures on equity indices to mitigate the impact on net earnings from Separate Account fee revenue fluctuations due to movements in the equity markets. These positions partially cover fees expected to be earned through the current year from the Company’s Separate Account products.

Derivatives utilized for General Account Investment Portfolio

Beginning in the second quarter of 2013, the Company implemented a strategy in its General Account investment portfolio to replicate the credit exposure of fixed maturity securities otherwise permissible under its investment guidelines through the sale of 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 have remaining terms of five years or less and are recorded at fair value with changes in fair value, including the yield component that emerges from initial amounts paid or received, reported in Net investment income (loss). The Company manages its credit exposure taking into consideration both cash and derivatives based positions and selects the reference entities in its replicated credit exposures in a manner consistent with its selection of fixed maturities. In addition, the Company has transacted the sale of CDSs exclusively in single name reference entities of investment grade credit quality and with counterparties subject to collateral posting requirements. If there is an event of default by the reference entity or other such credit event as defined under the terms of the swap contract, the Company is obligated to perform under the credit derivative and, at the counterparty’s option, either pay the referenced amount of the contract less an auction-determined recovery amount or pay the referenced amount of the contract and receive in return the defaulted or similar security of the reference entity for recovery by sale at the contract settlement auction. To date, there have been no events of default or circumstances indicative of a deterioration in the credit quality of the named referenced entities to require or suggest that the Company will have to perform under these CDSs. The maximum potential amount of future payments the Company could be required to make under these credit derivatives is limited to the par value of the referenced securities which is the dollar-equivalent of the derivative notional amount. The SNAC under which the Company executes these CDS sales transactions does not contain recourse provisions for recovery of amounts paid under the credit derivative.

Periodically, the Company purchases TIPS and other sovereign inflation bonds as General Account investments and enters into asset swaps, to result in payment of the variable principal at maturity and semi-annual coupons of the bonds to the swap counterparty (pay variable) in return for fixed amounts (receive fixed). These asset 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 third quarter of 2014, the Company implemented a strategy to hedge a portion of the credit exposure in its General Account investment portfolio by buying protection through a swap. These are swaps on the “super senior tranche” of the investment grade CDX index. Under the terms of these swaps, the Company pays quarterly fixed premiums that, together with any initial amount paid or received at trade inception, serve as premiums paid to hedge the risk arising from multiple defaults of bonds referenced in the CDX index. These credit derivatives have remaining terms of five years or less and are recorded at fair value with changes in fair value, including the yield component that emerges from initial amounts paid or received, reported in Net investment income (loss) from derivative instruments.

 

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The tables below present quantitative disclosures about the Company’s derivative instruments, including those embedded in other contracts required to be accounted for as derivative instruments.

Derivative Instruments by Category

 

    At June 30, 2015     Gains (Losses) Reported  
          Fair Value     in Net Earnings (Loss)  
    Notional     Asset     Liability     Six Months Ended  
      Amount         Derivatives         Derivatives       June 30, 2015  
    (In Millions)  

Freestanding derivatives

       

Equity contracts:(1)

       

Futures

  $ 6,109      $      $      $ (198

Swaps

    1,315        27        16        (73

Options

    7,362        1,228        709        103   

Interest rate contracts:(1)

       

Floors

    1,800        94               11   

Swaps

    12,769        309        154        (376

Futures

    8,506                      (165

Swaptions

                         118   

Credit contracts:(1)

       

Credit default swaps

    1,911        6        17        5   
       

 

 

 

Net investment income (loss)

          (575
       

 

 

 

Embedded derivatives:

       

GMIB reinsurance contracts

           9,951               (760

GWBL and Other Features(2)

                  109        (19

SCS, SIO MSO and IUL indexed features(3)

                  437        (125
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 39,772      $ 11,615      $ 1,442      $ (1,479
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reported in Other invested assets in the consolidated balance sheets.

(2) 

Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.

(3) 

SCS and SIO indexed features are reported in Policyholders’ account balances; MSO and IUL indexed features are reported in Future policyholders’ benefits and other policyholders’ liabilities in the consolidated balance sheets.

 

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Derivative Instruments by Category

 

    At December 31, 2014     Gains (Losses) Reported  
          Fair Value     in Net Earnings (Loss)  
    Notional     Asset     Liability     Six Months Ended  
      Amount         Derivatives         Derivatives       June 30, 2014  
        (In Millions)  

Freestanding derivatives

       

Equity contracts:(1)

       

Futures

  $ 5,821      $      $      $ (312

Swaps

    1,051        21        11        (85

Options

    6,896        1,215        742        135   

Interest rate contracts:(1)

       

Floors

    2,100        120               8   

Swaps

    11,558        603        12        701   

Futures

    10,647                      255   

Swaptions

    4,800        72                 

Credit contracts:(1)

       

Credit default swaps

    1,911        7        27        4   
       

 

 

 

Net investment income

          706   
       

 

 

 

Embedded derivatives:

       

GMIB reinsurance contracts

           10,711               1,516   

GWBL and Other Features(2)

                  128        (17

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

                  380        (157
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 44,784      $ 12,749      $ 1,300      $ 2,048   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Reported in Other invested assets in the consolidated balance sheets.

(2) 

Reported in Future policy benefits and other policyholders’ liabilities in the consolidated balance sheets.

(3) 

SCS and SIO indexed features are reported in Policyholders’ account balances; MSO and IUL indexed features are reported in Future policyholders’ benefits and other policyholders’ liabilities in the consolidated balance sheets.

Dodd-Frank Wall Street Reform and Consumer Protection Act

Since June 2013, various new derivative regulations under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act have become effective, requiring financial entities, including U.S. life insurers, to clear certain types of newly executed OTC derivatives with central clearing houses, and to post larger sums of higher quality collateral, among other provisions. Counterparties subject to these regulations are required to post initial margin to the clearing house as well as variation margin to cover any daily negative mark-to-market movements in the value of OTC derivatives covered by these regulations. Centrally cleared OTC derivatives, protected by initial margin requirements and higher quality collateral are expected to reduce the risk of loss in the event of counterparty default. The Company has counterparty exposure to the clearing house and its clearing broker for futures and cleared OTC derivative contracts. Further regulations are expected to increase the amount and quality of collateral required to be posted for non-cleared OTC derivatives by requiring initial and cash-only variation margin for uncleared swaps. Additional regulations are being and will be proposed that are expected to reduce various risks, including the risk of a “run on the bank” scenario in the event of the insolvency of a dealer.

 

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Realized Investment Gains (Losses)

Realized investment gains (losses) are generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for OTTI. Realized investment gains (losses) are also generated from prepayment premiums received on private fixed maturity securities, recoveries of principal on previously impaired securities, provisions for losses on commercial mortgage and other loans, fair value changes on commercial mortgage loans carried at fair value, and fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment.

The following table sets forth “Realized investment gains (losses), net,” for the periods indicated:

Realized Investment Gains (Losses), Net

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

Fixed maturities

   $ (18   $ (39   $ (16   $ (33

Other equity investments

            (1            (3

Other

     1               1          
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (17   $ (40   $ (15   $ (36
  

 

 

   

 

 

   

 

 

   

 

 

 

The following table further describes realized gains (losses), net for Fixed maturities:

Fixed Maturities

Realized Investment Gains (Losses)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

Gross realized investment gains:

        

Gross gains on sales and maturities

   $ 4      $ 9      $ 14      $ 32   

Other

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross realized investment gains

     4        9        14        32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross realized investment losses:

        

Other-than-temporary impairments recognized in earnings (loss)

     (16     (39     (18     (52

Gross losses on sales and maturities

     (6     (9     (12     (13
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gross realized investment losses

     (22     (48     (30     (65
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (18   $ (39   $ (16   $ (33
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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The following table sets forth, for the periods indicated, the composition of other-than-temporary impairments recorded in Earnings (loss) by asset type.

Other-Than-Temporary Impairments Recorded in Earnings (Loss)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2015     2014     2015     2014  
     (In Millions)  

Fixed Maturities:

        

Public fixed maturities

   $ (5   $ (19   $ (7   $ (19

Private fixed maturities

     (11     (20     (11     (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturities securities

     (16     (39     (18     (52
  

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

            (1            (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (16   $ (40   $ (18   $ (55
  

 

 

   

 

 

   

 

 

   

 

 

 

For the second quarter and first six months of 2015, OTTI on fixed maturities recorded in net earnings (loss) were due to credit events or adverse conditions of the respective issuer. In these situations, management believes such circumstances have caused, or will lead to, a deficiency in the contractual cash flows related to the investment. The amount of the impairment recorded in earnings (loss) is the difference between the amortized cost of the debt security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment.

 

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LIQUIDITY AND CAPITAL RESOURCES

The following discussion supplements that found in the 2014 Form 10-K’s MD&A section under the caption “Liquidity and Capital Resources.”

Overview

Liquidity management is focused around a centralized funds management process. This centralized process includes the monitoring and control of cash flow associated with policyholder receipts and disbursements and General Account portfolio principal, interest and investment activity. Funds are managed through a banking system designed to reduce float and maximize funds availability. The derivative transactions used to hedge the Company’s variable annuity products are integrated into AXA Equitable’s overall liquidity process; forecast of potential payments and collateral calls during the life of and at the settlement of each derivative transaction are included in the cash flow forecast. Information regarding liquidity needs and availability is reported by various departments and investment managers. The information is used to produce forecasts of available funds and cash flow. Significant market volatility can affect daily cash requirements due to the settlement and collateral calls of derivative transactions.

In addition to gathering and analyzing information on funding needs, the Company has a centralized process for both investing short-term cash and borrowing funds to meet cash needs. In general, the short-term investment positions have a maturity profile of 1-7 days with considerable flexibility as to availability.

In managing the liquidity of the Insurance segment’s business, management also considers the risk of policyholder and contractholder withdrawals of funds earlier than assumed when selecting assets to support these contractual obligations. Surrender charges and other contract provisions are used to mitigate the extent, timing and profitability impact of withdrawals of funds by customers from annuity contracts and deposit liabilities. The following table sets forth withdrawal characteristics of the Company’s General Account annuity reserves and deposit liabilities (based on statutory liability values) as of the dates indicated.

General Accounts Annuity Reserves and Deposit Liabilities

 

     June 30, 2015     December 31, 2014  
     Amount      % of Total     Amount      % of Total  
     (Dollars in Millions)  

Not subject to discretionary withdrawal provisions

   $ 3,005         15.2   $ 3,137         15.5

Subject to discretionary withdrawal, with adjustment:

          

With market value adjustment

     31         0.2        32         0.2   

At contract value, less surrender charge of 5% or more

     1,471         7.5        1,678         8.3   
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     1,502         7.7        1,710         8.5   

Subject to discretionary withdrawal at contract value with no surrender charge or surrender charge of less than 5%

     15,216         77.1        15,315         76.0   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Annuity Reserves And Deposit Liabilities

   $     19,723         100.0   $     20,162         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Analysis of Statement of Cash Flows

Cash and cash equivalents of $2.6 billion at June 30, 2015 decreased $99 million from $2.7 billion at December 31, 2014.

Net cash used in operating activities was $22 million in the first six months of 2015 as compared to net cash used in operating activities of $267 million in the first six months of 2014. Cash flows from operating activities include such sources as premiums, investment management and advisory fees and investment income offset by such uses as life insurance benefit payments, policyholder dividends, compensation payments, other cash expenditures and tax payments.

Net cash used in investing activities was $1.6 billion; $542 million lower than the $2.2 billion net cash used by investing activities in the first six of 2014. The decrease was principally due to $1.2 billion net purchase of investments and $538 million higher net purchases of trading account securities partially offset by $437 million higher cash outflows related to derivatives in first six months of 2015 as compared to six months of 2014.

 

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Cash flows provided by financing activities decreased $357 million from $1.9 billion in the first six months of 2014 to $1.6 billion in the first six months of 2015. The impact of the net deposits to policyholders’ account balances was $1.8 billion and $1.8 billion in the first six months of 2015 and 2014, respectively. During the first six months of 2015, the Company entered into $1.0 billion of net repurchase and reverse repurchase agreements. Change in short term borrowings decreased $34 million in the first six months of 2015 compared to an increase of $556 million in the first six months of 2014, which primarily reflect AllianceBernstein’s commercial paper program activity. Change in collateralized pledged assets and liabilities decreased $461 million in the first six months of 2015, $711 million less than the $250 million increase in the first six months of 2014. In the first six months of 2015 AXA Equitable paid $517 million of shareholder dividends to AXA Financial and in the first six months of 2014 repaid $500 million of surplus notes to AXA Financial.

AXA Equitable

Liquidity Requirements. AXA Equitable’s liquidity requirements principally relate to the liabilities associated with its various life insurance, annuity and group pension products; the active management of various economic hedging programs; shareholder dividends to AXA Financial; and operating expenses, including debt service. AXA Equitable’s liabilities include, among other things, the payment of benefits under life insurance, annuity and group pension products, as well as cash payments in connection with policy surrenders, withdrawals and loans.

The Company’s liquidity needs are affected by: fluctuations in mortality; other benefit payments; policyholder directed transfers from General Account to Separate Account investment options; and the level of surrenders and withdrawals previously discussed in “Results of Continuing Operations by Segment - Insurance,” as well as by cash settlements of its derivative hedging programs, debt service requirements and dividends to its shareholder.

Sources of Liquidity. The principal sources of AXA Equitable’s cash flows are premiums, deposits and charges on policies and contracts, investment income, repayments of principal and sales proceeds from its fixed maturity portfolios, sales of other General Account Investment Assets, borrowings from third parties and affiliates and dividends and distributions from subsidiaries.

AXA Equitable’s primary source of short-term liquidity to support its insurance operations is a pool of liquid, high quality short-term instruments structured to provide liquidity in excess of the expected cash requirements. In addition, a substantial portfolio of public bonds including U.S. Treasury and agency securities and other investment grade fixed maturities is available to meet AXA Equitable’s liquidity needs. Other liquidity sources include the Company’s credit facility provided by the FHLBNY and dividends and distributions from AllianceBernstein and other subsidiaries.

Funding and repurchase agreements. AXA Equitable as a member of the FHLBNY has access to borrowing facilities from the FHLBNY including collateralized borrowings and funding agreements, which would require AXA Equitable to pledge qualified mortgage-backed assets and/or government securities as collateral. AXA Equitable’s capacity with the FHLBNY was increased during second quarter 2014 from $1.0 billion to $3.0 billion. At June 30, 2015 and December 31, 2014, the Company had $500 million of outstanding funding agreements with the FHLBNY. In addition in fourth quarter 2014 AXA Equitable entered into $950 million of repurchase agreements and expanded the program in second quarter 2015. At June 30, 2015 the total outstanding balance of repurchase agreements was $2.1 billion. The funding and repurchase agreements were used to extend the duration of the assets within the General Account investment portfolio.

Third-party borrowings. In December 1995, AXA Equitable issued a $200 million callable 7.7% surplus note in exchange for cash to third parties. The note pays interest semi-annually and matures on December 1, 2015. AXA Equitable will make the principal payment on this debt subject to NYDFS approval. At June 30, 2015, AXA Equitable had no other short-term debt outstanding.

Off-Balance Sheet Transactions. At June 30, 2015 and December 31, 2014, AXA Equitable was not a party to any off -balance sheet transactions other than those guarantees and commitments described in Notes 10 and 16 of Notes to Consolidated Financial Statements in the 2014 Form 10-K.

Guarantees and Other Commitments. AXA Equitable had approximately $18 million of letters of credit primarily related to reinsurance, $2 million of which was outstanding at June 30, 2015 as well as $555 million and $1.0 billion of commitments under equity financing arrangements to certain limited partnership and existing mortgage loan agreements, respectively, at June 30, 2015. For further information on guarantees and commitments, see the “Supplementary Information” section in Item 7 – Management Discussion and Analysis of Financial Condition and Results of Operations in the 2014 Form 10-K.

 

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Statutory Regulation, Capital and Dividends. AXA Equitable is subject to the regulatory capital requirements of its place of domicile, which are designed to monitor capital adequacy. The level of an insurer’s required capital is impacted by many factors including, but not limited to, business mix, product design, sales volume, invested assets, liabilities, reserves and movements in the capital markets, including interest rates and equity markets. At June 30, 2015, the total adjusted capital was in excess of its regulatory capital requirements and management believes that AXA Equitable has (or has the ability to meet) the necessary capital resources to support its business.

The Company currently reinsures to AXA Arizona a 100% quota share of all liabilities for variable annuity with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under UL insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. The reinsurance arrangements with AXA Arizona provide important capital management benefits to AXA Equitable. AXA Equitable receives statutory reserve credits for reinsurance treaties with AXA Arizona to the extent AXA Arizona holds assets in an irrevocable trust ($8.2 billion at June 30, 2015) and/or letters of credit ($3.2 billion at June 30, 2015). These letters of credit are guaranteed by AXA. Under the reinsurance contracts, AXA Arizona is required to transfer assets into and is permitted to transfer assets from the Trust under certain circumstances. The level of statutory reserves held by AXA Arizona fluctuate based on market movements, mortality experience and policyholder behavior. Increasing reserve requirements may necessitate that additional assets be placed in trust and/or securing additional letters of credit, which could adversely impact AXA Arizona’s liquidity.

AXA Equitable monitors its regulatory capital requirements on an ongoing basis taking into account the prevailing conditions in the capital markets. Interest rates and/or equity market performance, impact the reserve requirements and capital needed to support the variable annuity guarantee business. While management believes that AXA Equitable currently has the necessary capital to support its business, future capital requirements will depend on future market conditions and regulations and there can be no assurance that sufficient additional required capital could be secured.

Several states, including New York, regulate transactions between an insurer and its affiliates under insurance holding company acts. These acts contain certain reporting requirements and restrictions on provision of services and on transactions, such as intercompany service agreements, asset transfers, reinsurance, loans and shareholder dividend payments by insurers. Depending on their size, such transactions and payments may be subject to prior notice to, or approval by, the insurance department of the applicable state.

AXA Equitable is restricted as to the amounts it may pay as dividends to AXA Financial. Under New York insurance law, a domestic life insurer may, without prior approval of the Superintendent of the NYSDFS, pay a dividend to its shareholders not exceeding an amount calculated based on a statutory formula. This formula would permit AXA Equitable to pay shareholder dividends not greater than $517 million during 2015. Payment of dividends exceeding this amount requires the insurer to file notice of its intent to declare such dividends with the Superintendent of the NYSDFS, who then has 30 days to disapprove the distribution. In second quarter 2015, AXA Equitable paid $517 million in shareholder dividends. AXA Equitable did not pay any shareholder dividends during the first six months of 2014.

For the second quarter and first six months of 2015 and 2014, respectively, AXA Equitable’s statutory net income (loss) totaled $238 million, $991 million, $671 million and $1.8 billion. Statutory surplus, capital stock and Asset Valuation Reserve totaled $6.0 billion and $5.8 billion at June 30, 2015 and December 31, 2014, respectively.

For additional information, see “Item 1 – Business – Regulation” and “Item 1A – Risk Factors” in the 2014 Form 10-K.

AllianceBernstein

During the first six months of 2015, net cash provided by operating activities was $436 million, compared to $338 million during the corresponding 2014 period. The change primarily is due to an increase in accrued compensation and benefits of $59 million, lower seed capital purchases, offset by lower broker-dealer related redemptions of $50 million and higher cash provided by net income of $39 million, offset by increases in broker-dealer related receivables (net of payables and segregated U.S. Treasury Bills activity) of $61 million.

During the first six months of 2015, net cash used in investing activities was $12 million, compared to $75 million during the corresponding 2014 period. The decrease primarily resulted from the purchases of a new business, net of cash acquired, during 2014 of $61 million.

 

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During the first six months of 2015, net cash used in financing activities was $330 million, compared to $257 million during the corresponding 2014 period. The change reflects net repayments of commercial paper of $85 million in 2015 compared to net issuances of $56 million in 2014, higher repurchases of AB Holding Units of $16 million and higher distributions to the General Partner and unitholders of $16 million as a result of higher earnings (distributions on earnings are paid one quarter in arrears), offset by proceeds from bank loans of $50 million and an increase in overdrafts payable of $39 million.

As of June 30, 2015, AllianceBernstein had $645 million of cash and cash equivalents, all of which is available for liquidity, but consists primarily of cash on deposit for AllianceBernstein’s broker-dealers to comply with various customer clearing activities and cash held by foreign subsidiaries for which a permanent investment election for U.S. tax purposes is taken. If the cash held at AllianceBernstein’s foreign subsidiaries of $476 million, which includes cash on deposit for our foreign broker-dealers, was to be repatriated to the U.S., AllianceBernstein would be required to accrue and pay U.S. income taxes on these funds, based on the unremitted amount. AllianceBernstein currently intends to permanently reinvest these earnings outside the U.S.

At June 30, 2015 and December 31, 2014, respectively, AllianceBernstein had $405 million and $489 million, outstanding under its commercial paper program.

AllianceBernstein has a $1.0 billion committed, unsecured senior revolving credit facility (the “AB Credit Facility”) with a group of commercial banks. The AB Credit Facility provides for possible increases in the principal amount by up to an aggregate incremental amount of $250 million, any such increase being subject to the consent of the affected lenders. The AB Credit Facility is available for AllianceBernstein’s and SCB LLC’s business purposes, including the support of AllianceBernstein’s $1.0 billion commercial paper program. Both AllianceBernstein and SCB LLC can draw directly under the AB Credit Facility and AllianceBernstein’s management expects to draw on the AB Credit Facility from time to time. As of June 30, 2015 and December 31, 2014, AllianceBernstein had no amounts outstanding under the AB Credit Facility.

On October 22, 2014, as part of an amendment and restatement, the maturity date of the AB Credit Facility was extended from January 17, 2017 to October 22, 2019. There were no other significant changes included in the amendment.

As of June 30, 2015 and December 31, 2014, AllianceBernstein had no amounts outstanding under the AB Credit Facility. During the first six months of 2015 and the full year 2014, AllianceBersntein did not draw upon the AB Credit Facility.

In addition, SCB LLC has five uncommitted lines of credit with four financial institutions. Two of these lines of credit permit AllianceBernstein to borrow up to an aggregate of approximately $200 million while three lines have no stated limit. As of June 30, 2015 and December 31, 2014, SCB LLC had $50 million in loans outstanding at an average rate of 1.4%.

SUPPLEMENTARY INFORMATION

The Company is involved in a number of ventures and transactions with AXA and certain of its affiliates. See Note 11, included herein and AXA Equitable’s 2014 Form 10-K as well as AllianceBernstein’s Report on Form 10-K for the year ended December 31, 2014 for information on related party transactions.

Contractual Obligations

The Company’s consolidated contractual agreements include policyholder obligations, long-term debt, commercial paper, loans from affiliates, employee benefits, operating leases and various funding commitments. See the “Supplementary Information – Contractual Obligation” section in Item 7 – Management Discussion and Analysis of Financial Condition and Results of Operations in AXA Equitable’s 2014 Form 10-K for additional information.

ADOPTION AND FUTURE ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

See Note 2 to the Consolidated Financial Statements included herein.

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to the quantitative and qualitative disclosures about market risk described in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” included in the 2014 Form 10-K.

 

Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2015. Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2015.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the quarter ended June 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

See Note 10 of Notes to Consolidated Financial Statements contained herein. Except as disclosed in Note 10 of Notes to Consolidated Financial Statements, there have been no new material legal proceedings and no new material developments in legal proceedings previously reported in the 2014 Form 10-K.

 

Item 1A. Risk Factors

You should carefully consider the risks described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014. These risks could materially affect our business, consolidated results of operations or financial condition. These risks are not exclusive, and additional risks to which we are subject include, but are not limited to, the factors mentioned under “Forward-Looking Statements” 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

NONE.

 

Item 3. Defaults Upon Senior Securities

NONE.

 

Item 4. Mine Safety Disclosures

NONE.

 

Item 5. Other Information

Iran Threat Reduction and Syria Human Rights Act

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“Iran Act”), which added Section 13(r) to the Exchange Act, an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure generally is required even where the activities, transactions or dealings were conducted in compliance with applicable law. AXA Financial, AXA Equitable and their global subsidiaries had no transactions or activities requiring disclosure under the Iran Act, nor were they involved in the AXA Group matters described immediately below.

The non-U.S. based subsidiaries of AXA operate in compliance with applicable laws and regulations of the various jurisdictions in which they operate, including applicable international (United Nations and European Union) laws and regulations. While AXA Group companies based and operating outside the United States generally are not subject to U.S. law, as an international group, AXA has in place policies and standards (including the AXA Group International Sanctions Policy) that apply to all AXA Group companies worldwide and often impose requirements that go well beyond local law.

AXA has informed us that AXA Konzern AG provides car insurance to the Iranian embassy in Berlin, Germany and some of their staff. The total annual premium of these policies is approximately $13,000 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $6,500. These policies were underwritten by a broker who specializes in providing insurance coverage for diplomats. Provision of motor vehicle insurance is mandatory in Germany and cannot be cancelled until the policies expire.

In addition, AXA has informed us that AXA Ireland, an AXA insurance subsidiary, provides statutorily required car insurance under three 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 prior to their expiration unless another insurer is willing to assume the coverage. The total annual premium for these policies is approximately $3,650 and the annual net profit arising from these policies, which is difficult to calculate with precision, is estimated to be $1,825.

 

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Also, AXA has informed us that AXA Sigorta, a subsidiary of AXA organized under the laws of Turkey, provides car insurance coverage for the vehicle pools of the Iranian General Consulate and the Iranian embassy in Istanbul, Turkey. Motor liability insurance coverage is mandatory in Turkey and cannot be cancelled 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 $1,575.

Lastly, AXA has informed us about a pension contract in place between a subsidiary in Hong Kong, AXA China Region Trustees Limited (“AXA CRT”), and an entity that OFAC has designated an SDN with the identifier [IRAN]. The pension contract was entered into in May 2012 and the individual enrolled in the pension contract was designated an SDN with the identifier [IRAN] in May 2013. Local authorities have informed AXA CRT that the pension contract cannot be cancelled; however, in May 2015, the individual permanently departed from Hong Kong and, as a result, claimed withdrawal of any accrued pension benefits. The annual pension contributions received under this pension contract had totaled approximately $7,800 and the related net profit, which was difficult to calculate with precision, was estimated to be $3,900.

The aggregate annual premiums for the above-referenced insurance policies and pension contracts are approximately $27,600, representing approximately 0.00003% of AXA’s 2014 consolidated revenues, which are approximately $100 billion. The related net profit, which is difficult to calculate with precision, is estimated to be $13,800, representing approximately 0.0002% of AXA’s 2014 aggregate net profit.

AXA Department of Labor Disclosure

AXA, our ultimate parent company, included the following disclosure about the DOL proposed rule in its June 30, 2015 Half Year Financial Report:

The U.S. Department of Labor issued a proposed rule in April 2015 that could, if adopted, substantially expand the range of activities that would be considered to be fiduciary investment advice under ERISA. Depending on the breadth of the final rule, the investment-related information and support that AXA US affiliated advisors and employees could provide to plan sponsors, participants, and IRA holders on a non-fiduciary basis could be substantially limited compared to what is allowed under current law. This could have an adverse impact on the level and type of services AXA US can provide, as well as the nature and amount of compensation and fees that AXA US and its affiliated advisors receive for investment-related services to plans and IRAs. The exact nature and scope of the impact under any new final rule is undeterminable at this time. Consequently, management is not in a position at this time to quantify the potential impact of these rules on the new sales of AXA US with any degree of precision, however, based on the information currently available to it, management estimates that the range of potential impacts on the new sales of AXA US could be from 10% to 30% of APE (which would have represented 2% to 7% of the Group’s consolidated APE for the half year ended June 30th, 2015). This estimate does not reflect any potential mitigating actions such as reducing expenses and expanding sales of products unaffected by these rules.

The reference to AXA US includes the operations of AXA Equitable. The term APE refers to Annual Premium Equivalent which AXA uses to measure the annualized impact of new business premiums. APE represents 100% of new business regular premiums + 10% of new business single premiums. APE is not a measure calculated and presented in accordance with U.S. GAAP. First year premiums and deposits is the most directly comparable financial measure to APE that is calculated and presented in accordance with U.S. GAAP. The reference to 10% to 30% of AXA US’s APE would include approximately 25% to 75% of AXA Equitable’s first year premiums and deposits for the six months ended June 30, 2015.

 

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Item 6. Exhibits

 

    

Number

    

Description and Method of Filing

 

  31.1

     Certification of the Registrant’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 

  31.2

     Certification of the Registrant’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 

  32.1

     Certification of the Registrant’s Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 

  32.2

     Certification of the Registrant’s Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 

101.INS

     XBRL Instance Document
 

101.SCH

     XBRL Taxonomy Extension Schema Document
 

101.CAL

     XBRL Taxonomy Extension Calculation Linkbase Document
 

101.LAB

     XBRL Taxonomy Extension Label Linkbase Document
 

101.PRE

     XBRL Taxonomy Extension Presentation Linkbase Document
 

101.DEF

     XBRL Taxonomy Extension Definition Linkbase Document

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, AXA Equitable Life Insurance Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: August 10, 2015

 

AXA EQUITABLE LIFE INSURANCE COMPANY

   

By:

 

/s/ Anders Malmstrom

     

Name:

 

Anders Malmstrom

     

Title:

 

Senior Executive Director

       

and Chief Financial Officer

Date: August 10, 2015

     

/s/ Andrea Nitzan

     

Name:

 

Andrea Nitzan

     

Title:

 

Executive Director

       

Chief Accounting Officer and Controller

 

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