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Edited Transcript of EQH.N earnings conference call or presentation 13-Nov-18 1:00pm GMT

Q3 2018 Axa Equitable Holdings Inc Earnings Call

Nov 15, 2018 (Thomson StreetEvents) -- Edited Transcript of Axa Equitable Holdings Inc earnings conference call or presentation Tuesday, November 13, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Bjorn Malmström

AXA Equitable Holdings, Inc. - Senior EVP & CFO

* Kevin Molloy

AXA Equitable Holdings, Inc. - Head of IR

* Mark Pearson

AXA Equitable Holdings, Inc. - President, CEO & Director

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Conference Call Participants

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* Andrew Scott Kligerman

Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst

* Erik James Bass

Autonomous Research LLP - Partner of US Life Insurance

* Jamminder Singh Bhullar

JP Morgan Chase & Co, Research Division - Senior Analyst

* Taylor Alexander Scott

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Thomas George Gallagher

Evercore ISI Institutional Equities, Research Division - Senior MD

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Presentation

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Operator [1]

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Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the AXA Equitable Holdings' Third Quarter 2018 Earnings Call. (Operator Instructions)

Mr. Kevin Molloy, Head of Investor Relations, you may begin your conference.

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Kevin Molloy, AXA Equitable Holdings, Inc. - Head of IR [2]

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Thank you. Good morning, and welcome to AXA Equitable Holdings' Third Quarter 2018 Earnings Call. Materials for today's call can be found on our website at ir.axaequitableholdings.com.

Before we begin, I'd like to note that some of the information we present today is forward-looking and subject to certain SEC rules and regulations regarding disclosure. Our results may materially differ from those expressed in or indicated by such forward-looking statements. So I'd like to point out the safe harbor language on Slide 2 of our presentation. You can also find our safe harbor language in our third quarter 10-Q.

Joining me on today's call is Mark Pearson, President and Chief Executive Officer of AXA Equitable Holdings; and Anders Malmström, our Chief Financial Officer. Also, on the line is John Weisenseel, AllianceBernstein's Chief Financial Officer.

During this call, we will be discussing certain financial measures that are not based on generally accepted accounting principles, also known as non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and related definitions may be found on the Investor Relations portion of our website, in our earnings release, slide presentation and financial supplement.

I would like to now turn the call over to Mark and Anders for their prepared remarks. Mark?

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Mark Pearson, AXA Equitable Holdings, Inc. - President, CEO & Director [3]

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Thank you, Kevin, and good morning, everyone. This morning, we'll discuss our third quarter financial performance, provide an update on our strategic priorities and share progress against our key financial targets.

Before jumping into the results, I'd like to spend a moment highlighting some of the key factors influencing our performance for the third quarter. Firstly, capital markets were favorable. The S&P rose 7% in the quarter and the 10-year treasury increased 20 bps, both helping operating earnings and our cash generation capability. Our hedging program is working as intended and the balance sheet remains strong. In the third quarter, we started to execute our capital management program. We have returned $130 million to shareholders, $73 million in dividends and $57 million in open market share buybacks. This means, we have $443 million remaining from our initial repurchase authorization we announced in August. In addition, I'm pleased to announce today that our board has authorized increasing our share purchase program by an additional $300 million. Our capital management program allows us to continue to optimize the capital we hold in our company and the new $300 million authorization increase is another example of the confidence we have in the earnings power and financial strength of this company. And finally, in line with most of our peers, we've completed our first actuarial assumption update as a public company. Anders will review this in detail shortly.

Turning to Slide 4 and our third quarter financial highlights. Total assets under management grew 3% to $668 billion over the past year, supported by equity markets. Non-GAAP operating earnings grew to $693 million for the quarter, including a onetime favorable impact of $169 million relating to the outcome of the annual assumption update. Excluding this onetime update, operating earnings increased 38% to $524 million or $0.93 per share. These strong results reflect continued execution against our productivity targets, good progress on the general account optimization initiatives and lower tax rates.

I am pleased to also report that all 4 of our business segments returned double-digit earnings growth. In Individual Retirement, new first-year premiums increased 18% to $1.9 billion when compared to Q3 2017. As previously reported, comparisons to 2017 must be looked at with caution as the anticipated but not implemented DOL Fiduciary Rule distorted normal sales patterns. Nevertheless, according to the last Q2 industry statistics, we've increased our market share of new VA sales from 10% to 10.7%. In fact, August was our third highest sales month in 3 years, reflecting our ability to deepen relationships with our distribution partners and innovation around low capital-intensity products.

In Group Retirement, operating earnings increased to $134 million or up 20% excluding the favorable impact from assumption updates. Client engagement initiatives continue to yield positive results with solid year-over-year growth in both first-year and renewal premiums.

For AllianceBernstein, adjusted operating margin improved to 29.7% driven by higher fees and lower noncompensation expenses. Overall, AB continues to generate strong growth in sales, revenue and fee trends in targeted areas, such as active equities and alternatives where we have worked to evolve, develop and scale our operations.

Lastly, our Protection Solutions segment delivered operating earnings of $137 million, and we are no longer subject to the accounting implications of loss recognition. Earnings benefited from a favorable impact from the annual assumption update and improved margins during the quarter. In this segment, we remain selective in the markets in which we play, focusing on capital-light accumulation products and targeting double-digit IRRs.

Overall, I am pleased with our third quarter performance. We continue to build a strong foundation for meeting our financial commitments to shareholders, including our 40% to 60% target payout ratio and a mid-teens ROE target.

Turning to Slide 5 and our strategic priorities. These Q3 results place us firmly on track to deliver on our 3 core strategic initiatives. For our GA optimization being the rebalance from treasuries to longer-duration corporates. We have completed over 50% of the initiatives and achieved $62 million towards the $160 million goal. From a productivity standpoint, we have adjust net cost on our insurance business and have high conviction that we are on track to deliver $75 million pretax target net of any reinvestment by 2020. And on sales growth, as I mentioned earlier, it is pleasing to report that all 4 of our business segments are growing strongly.

I will now turn the call over to Anders to go through our quarterly results in more detail. Anders?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [4]

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Thank you, Mark, and good morning, everyone. On Slide 6, I will review our consolidated results for the third quarter before providing more detail on the outcome of the actuarial assumption update, segment results and capital position.

As Mark noted, excluding impacts from the assumption updates, non-GAAP operating earnings increased 38% year-over-year to $524 million. This growth was driven by higher AUM across all business segments, stable operating expenses in our insurance segments and lower taxes. On a per share basis, non-GAAP operating earnings, excluding the impact of the assumption update, was $0.93 also up 38% year-over-year. The GAAP net loss for the quarter was $496 million. Driving the variance between operating earnings and net income was the combination of primarily noneconomic factors, including our hedging program and nonperformance risk adjustment as well as the outcome of our annual actuarial assumption updates, which I will review in detail on the following 2 pages. Total AUM, an important driver of our fee-based business, grew 3% year-over-year to approximately $668 billion, driven predominantly by market depreciation. And sequentially, our pro forma non-GAAP operating ROE increased 200 basis points to 15.6% driven by higher non-GAAP operating earnings in the current quarter. This level of ROE includes a benefit from our assumption update that remains in line with our mid-teens ROE objectives.

Turning to Slide 7, I'd like to provide additional detail on the outcome of our annual actuarial assumptions update. For background, we moved to an annual assumptions and model update process in the third quarter, during which we completed our first comprehensive updates as a U.S.-listed company. We reviewed all material assumptions making updates where warranted. First, non-GAAP operating earnings of $693 million for the quarter includes a favorable impact of $169 million related to assumption updates. Included in this table are the pretax operating impacts for each of our insurance segments. In Individual Retirement, update to certain policyholder behavior assumptions, including lower annuitization resulted in a favorable impact of $59 million. In Group Retirement, updates to reflect higher persistency had a favorable impact of $43 million. For the Protection Solutions segment, results primarily reflect a favorable $107 million impact from updates to surrender rates, expenses and interest margin assumptions, partially offset by strengthening of mortalities.

On a GAAP basis, consolidated net income for the quarter includes an unfavorable impact of $131 million primarily reflecting unfavorable updates to policyholder behavior in our Individual Retirement segment, primarily annuitization assumptions, partially offset by favorable updates to economic assumptions. For net income, the annuitization assumption updates were magnified as VA policies assumed to enter annuitization are valued within our fair value reserve at a higher rate than under the SOP framework.

Finally, the assumptions update was favorable for our statutory capitalization due to higher persistency, improved spreads and diversification. Statutory capital is the primary driver of our capital management program and provides confidence in our capital return outlook going into 2019.

Turning to Slide 8. I'd like to take a moment to review the net income versus non-GAAP operating earnings walk. Reconciling from a net loss of $496 million, the most significant below-the-line items are included in adjustments related to VA product features, including the outcome of the annual actuarial assumptions update and model changes, as well as other noneconomic impact driven by hedging and nonperformance risk. I'll take each of these items as well as other adjustments in turn. First, the actuarial assumption updates resulted in a unfavorable pretax below-the-line impact of $435 million. This bar represents the difference between the favorable operating result and unfavorable net income impact. Next, primarily noneconomic adjustments related to our GMxB hedging program includes several items, resulting in the below-the-line impact of $968 million, including $657 million related to the GAAP accounting treatment of our economically based hedge program. Static hedge cash option costs of $14 million. The mark-to-market on our short duration VA investments for our SCS product portfolio, which had no impact this quarter and $317 million related to nonperformance risk due to our own credit spreads tightening during the quarter. This spread is an important input into the fair value component of our VA liability. We have provided guidance on VA product features of $700 million impact per annum on average assuming our base case scenario of 6% annual equity returns and the 10-year treasury increasing 10 basis points per year until 2020. Given the 7-plus percent equity market increase in just the third quarter and rates reaching multi-year highs, the impact reflected in VA product features for the third quarter was magnified, but expected. For additional context, if you assume the third quarter resulted in equity markets down 10% and all else equal, the impact reflected in VA product features would have been approximately positive $1 billion.

We are encouraged that the FASB has undertaken steps to correct this structure asymmetry under the targeted improvements for long-dated insurance contract. We believe, when implemented in 2021, it will substantially improve the alignment between accounting and our economically based hedging program. For example, the fair value of VA liabilities will much more closely match our economic liability for the product, significantly reducing the GAAP. And in addition, the treatment of NPR will move from the P&L to OCI reducing earnings volatility.

Finally, included in the all other adjustments item are our recurring noncash pension amortization expense of $24 million, separation costs, which were $66 million in the third quarter and are expected to total $200 million for full year 2018, and $84 million in a nonrecurring tax release.

Now turning to segment performance. I will begin with Individual Retirement on Slide 9. Excluding the impact of assumption updates in the current and prior year quarter, operating earnings increased 26% to $386 million primarily driven by higher net investment income and fees on higher account values. Pretax revenue increased by $41 million due to higher separate account AUM, while net investment income increased $36 million versus the prior year period due to higher asset balances in our SCS product and the GA optimization initiative. Account values grew $4.8 billion since the prior year quarter, largely driven by market appreciation. While total net flows decreased compared to the third quarter of 2017, we experienced strong net inflows in our current product offering $749 million during the quarter, offset by ongoing net outflows from our mature fixed GMxB block. This dynamic continues to derisk our portfolio towards our new, less capital-intensive products. Our VA in-force portfolio is now more than 50% without living benefit guarantees. We continue to see strong momentum and improving trends in VA sales with first-year premiums improving both sequentially and year-over-year, driven primarily by deepening relationships with existing distributors, particularly with SCS.

Turning to our Group Retirement segment on Slide 10. Excluding the impact of assumption updates in the current and prior year quarter, operating earnings grew 18% to $99 million primarily due to growth in fee income on higher separate account assets. Account values also increased 8% or $2.7 billion year-over-year, due to market depreciation, that were partially offset by net outflows of $100 million. As a reminder, the third quarter is seasonally low quarter for flows in the 403(b) market as renewals slow and surrenders increase due to the summertime school break. With that said, gross premiums increased a strong 9% on a year-over-year basis to $737 million, driven primarily by growth in renewal contributions and new sales momentum. The strength in new business and renewals are supported by our continued efforts to engage and advise existing clients while increasing our adviser base to attract new clients.

Now turning to Investment Management and Research, which is AllianceBernstein, on Slide 11. As a reminder, operating results reflect the company's increased economic interest in AllianceBernstein from 46.7% in third quarter of 2017 to 65.1% as of September 30. For the quarter, operating earnings grew from $45 million to $96 million due to the higher ownership, higher average AUM and higher fee rate realization, reflecting a continued mixed shift from lower to higher fee products. Driven by strong revenue growth and disciplined expense management, AB's operating margin improved to 29.7%, a 470 basis point increase compared to the third quarter of 2017.

Net inflows of $1.3 billion during the quarter were primarily led by inflows to higher fee strategies, including $2.9 billion into a broad array of active equities. Ending AUM increased to $550.4 billion primarily due to market appreciation of $20.2 billion over the last 12 months, while average AUM increased 3.8% and the portfolio fee rate grew 1.7% to 41.5 basis points.

And finally, we'll turn to Protection Solutions on Slide 12. Operating earnings grew to $50 million, excluding the impact of assumption updates in the current and prior year quarter and was primarily driven by higher net investment income from the GA optimization initiative and stable operating expenses. The outcome of the actuarial assumptions update and margins generated during the quarter also enabled us to exit loss recognition. As a result, we expect lower operating earnings volatility for the segment going forward.

Compared to prior year period, annualized premiums increased 2% to $56 million, primarily driven by the continued ramp-up of our employee benefit business. As Mark mentioned earlier, we've began execution of our capital management program in the third quarter and remain committed to returning capital to shareholders in line with our goal of 40% to 60% of non-GAAP operating earnings on a annualized basis.

On August 30, we delivered our first quarterly cash dividend of $0.13 per share, resulting in a total of $73 million in dividends paid. And throughout the quarter, we repurchased $57 million of common shares in the open market. In total, this resulted in $130 million returned to shareholders during the quarter. In addition, our Board of Directors has declared $0.13 per share dividend based on our third quarter results. For our 2018 capital management plan, we have $743 million of our combined $800 million share repurchase authorization remaining, and we will aim to primarily repurchase shares from AXA going forward as it executes on its stated intention to sell down. The $300 million authorization increase was enabled by a onetime benefit related to the release of a tax escrow no longer required at the holding company following the 2017 tax reform. At the company's current valuation, we felt it was in the best interest of shareholders to utilize these funds for an incremental share repurchase authorization. Backing our capital management program and commitment to return 40% to 60% of operating earnings is our strong operating earnings generation. Favorable statutory assumption update and robust capital position protected our hedging program. All of these components support sustainable operating cash flows and provide confidence for our 2019 capital return program. Through the first 9 months of 2018, we've upstreamed $1.3 billion of cash from our operating subsidiaries, while maintaining a stable debt-to-capital ratio of 26% in line with targets.

With that, I will turn the call back to Mark for some concluding remarks. Mark?

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Mark Pearson, AXA Equitable Holdings, Inc. - President, CEO & Director [5]

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Thanks, Anders. Before breaking for questions, I'd like to reiterate this quarter's performance in the context of our long-term financial targets.

On Slide 14, we show a familiar snapshot of our key financial targets. Three quarters of the way through the year, I'm very pleased with our results. We are well positioned to continue to grow earnings, while maintaining financial stability through market cycles and generating attractive returns and strong cash flows for our shareholders.

And to reiterate our commitments, we hold ourselves accountable to deliver 5% to 7% compound annual growth in non-GAAP operating earnings through 2020, supported in part by the 30% adjusted operating margin target that AB has publicly reported. With a target payout ratio of 40% to 60%, this should result in an operating ROE in the mid-teens by 2020. And finally, we expect to maintain strong capitalization of CTE98 for the variable annuity business and 350% to 400% RBC for the other insurance businesses.

With that, we'll open the call now to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Erik Bass from Autonomous Research.

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Erik James Bass, Autonomous Research LLP - Partner of US Life Insurance [2]

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Now that you've exited loss recognition in the Protection business, how should we think about the run rate earnings power for that segment?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [3]

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Erik, this is Anders speaking. Look, I think as we now exited loss recognition testing, as I said, the earnings volatility should come down, and you can expect a run rate at about $50 million per quarter.

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Erik James Bass, Autonomous Research LLP - Partner of US Life Insurance [4]

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And I'm assuming with some seasonality in terms of mortality experience?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [5]

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Yes, absolutely, correct. I mean, there is seasonality to mortality, but because we exited loss recognition testing, all the other volatility should really be muted now.

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Erik James Bass, Autonomous Research LLP - Partner of US Life Insurance [6]

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And then given the rise in interest rates since initially you gave your target of $160 million of higher net investment income from the general account optimization, do you see any potential for upside if rates remain at or above current levels?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [7]

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Yes. Look, I think that there are multiple factors that play into the GA rebalancing. I would say from an interest rate perspective because the higher -- there is upside there, but at the same time keep in mind that the curve is much flatter than in the past. And then I think because of that we're little bit more cautious on duration when it comes to corporate in order to make sure that we don't lose an opportunity and go too long and then the curve flattens. So I would, at this point of time, stick to the $160 million, but obviously, if rates rise further, that would help, and in particular, if it would steepen that would help as well.

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Operator [8]

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Your next question comes from the line of Andrew Kligerman from Crédit Suisse.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [9]

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Can you hear me?

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Mark Pearson, AXA Equitable Holdings, Inc. - President, CEO & Director [10]

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Yes, now we can hear you.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [11]

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Can you hear me? Hello?

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Mark Pearson, AXA Equitable Holdings, Inc. - President, CEO & Director [12]

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Yes, we can hear you.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [13]

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Okay, great. Okay. In line with your comment that you'd like to be in line with CTE98 or you are in line with CTE98, I look at one of your competitors, Brighthouse Financial, and they complied with it and found that after factoring in tax reform and NAIC reform that they were short about $1 billion, and they input certain capital and got above it. So my question to you is, with NAIC reform, with tax reform, would you be in line with CTE98? And if not, how much capital might you need to put in?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [14]

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Yes. So I mean, that's -- it's a really good question. When we think about the NAIC reform, it has multiple components and as you mentioned, I mean, I think tax and -- it's an important one. Now we still go through the details, but what I can tell you today is that we don't think that we have any shortfall from a capital perspective. And we actually believe right now that it will have no impact on our dividend capacity going forward, which means we're going to stick to the same target to be at CTE98 in almost all scenarios going forward. But as I said, I mean, there are a couple of open points there and the committees haven't finalized everything, but we feel very confident.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [15]

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So from what you said, Anders, no need to dividend down capital to the life operations from the parent?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [16]

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Absolutely, absolutely. I think our dividend plan still sticks.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [17]

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Perfect. And then with regard to robust sales that you saw in the variable annuity area, what's interesting is, both Equitable and your competitors seem to have done extremely well this quarter, and I kind of benchmarked it against numbers thinking that annuity sales this year would be up maybe high single-digit, low double-digit depending on the product. And I'm wondering is it the DOL going -- regulation going away? Is it a -- was it a robust equity market in the third quarter? And looking forward over the next 12 months, do you think you could sustain this type of growth?

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Mark Pearson, AXA Equitable Holdings, Inc. - President, CEO & Director [18]

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Andrew, it's Mark. Thanks for the question. Yes, very pleased to see our top line growth on the Individual Retirement business. It was a very good quarter for us. We're seeing good momentum since the quarter as well. I think in addition to the point you made about the DOL, and it was definitely an impact on the pattern of sales in 2017, in anticipation of a rule that didn't come in that distorted the pattern, so be careful looking at quarter-on-quarter. But the growth has come back for us. I think a couple of things there for us. Firstly, the product innovation side, we were the pioneers and the leader on the SCS product and that's helped us very much. And the other thing, I think, to take into account is our distribution strength. The partnerships we've got through AXA Advisors, third parties and into some insurance carriers is really helping buoy these sales for us.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [19]

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So Mark, the growth potential still exists to consider -- to continue?

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Mark Pearson, AXA Equitable Holdings, Inc. - President, CEO & Director [20]

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Yes, we like the market, and we like our position in the (technical difficulty).

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Operator [21]

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Your next question comes from the line of Jimmy Bhullar from JPMorgan.

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Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division - Senior Analyst [22]

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Could you talk about -- you mentioned annuity sales, just following up on. Have you seen an increase in competition or any changes in demand for the SCS buffer annuity as other companies have come out with some similar products?

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Mark Pearson, AXA Equitable Holdings, Inc. - President, CEO & Director [23]

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Yes, Jimmy, you're right. There is increased competition, particularly on that SCS, a number of competitors have followed us into that market. We'd still categorize the competition as (technical difficulty). It has -- there is no return to the pre-2007 pricing problems. So it's rational competition in there. I think there's 2 things. It's way we compete and how we distribute as well as the products we have. So you'll remember me telling you that we're currently, for example, #3 in the market, #12 in the warehouses. So we get a lot of our business where it's less ratcheting, less margin pressure. So we think we're in a good position notwithstanding the increased competition.

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Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division - Senior Analyst [24]

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Okay. And then also could you remind us what your expectations are for free cash flow over the next couple of years, either dollar amount or as a percentage of earnings?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [25]

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Yes. So I think -- this is Anders speaking. I think what I can confirm is that we stick to the 40% to 60% payout of our operating earnings. I think as you saw before, I think, for 2018, we already showed that we're well within this range, and you can expect that to continue over the next couple of years.

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Jamminder Singh Bhullar, JP Morgan Chase & Co, Research Division - Senior Analyst [26]

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And then just lastly on the share buybacks. I think, you mentioned this briefly in your comments, but I missed your point. Do you intend to just do open-market purchases? Or could you do sort of an accelerated buyback in terms of participating in any offering if AXA were to sell stock?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [27]

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Yes. So I think what I said and I can repeat that is, I would say, if and when AXA sells down, we use the majority with AXA, but we will also be in the open market.

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Operator [28]

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Your next question comes from the line of Tom Gallagher from Evercore.

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Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division - Senior MD [29]

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Anders, I know you mentioned you think the FASB change will better align economics in variable annuities for you. So you think it'll be positive from that perspective. Can you provide any other perspective on initial estimates, even broader impressions you have on what the standard might mean for your company in terms of book value impact or any other impacts we should be thinking about?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [30]

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Yes, Tom. So I think the -- look, I think, overall, as I said, I think the FASB reform really goes into the right direction. As you know, we manage our business to economics, and right now, the biggest disconnect is that the accounting is not economic, so the FASB reform will really make it more economic. And with that, in the future, once this is implemented, you can actually look at book value and book value really gives you a good indication of how the business is performing going forward. And I think to give a quantitative impact, it's way too early. We need to do also a little bit more work. But generally, it goes exactly in the right direction. It is how we want to manage the business on an economic basis and -- which will help all of you in the end to actually look at all the indicators in the right way because today this is not possible.

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Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division - Senior MD [31]

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Got it. And just the -- on the accounting asymmetry on the GMxB of $700 million a year, should I take that to mean when we look at your actuarial review of $496 million negative net income loss or net loss for the quarter, if the economics today were better or if the accounting was better aligned with the economics, there would have been a $700 million reserve release related to VA, which would have more than offset the net loss, is that kind of the high level point you're trying to make there?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [32]

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Yes. I think there's a couple of points there. I mean, in my slide -- it is Slide 8, we basically show the 3 components that we look at when we go from operating earnings to net income. It's the assumption update and then it's the hedging piece, which is basically the $700 million guidance we gave you based on the management case and then it's the NPR. The assumption update actually was amplified by the accounting mismatch because we updated annuitization. So -- and there is -- I mean, it was impacted by the asymmetry, so it would be smaller under the new FASB rule. The hedging piece should principally go away in a perfect world and then the NPR goes through OCI in the future. So you see all this 3 items would be much easier for all of us to actually talk about.

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Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division - Senior MD [33]

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Okay. And then final question. The fact that you're now out of loss recognition testing for Protection, what does that effectively mean? Do you now have a thin margin? Or is there a big enough buffer within that business where you wouldn't expect it to become -- to be an issue from a volatility standpoint for several years? Can you provide a little more perspective there?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [34]

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Yes. Look, I think the good thing is we're out of the loss recognition. And as you said, it's multiple reasons. One, that we have high interest rates right now, which are reflected there. I would say, if everything stays equal, we're in a good position. If interest rates will go back to where they where a couple of years ago, we would probably be same again or negative. So with that, I mean, we have margin, but we don't have margin to withstand 100 bp reduction in interest rate.

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Operator [35]

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(Operator Instructions) Your next question comes from the line of Alex Scott from Goldman Sachs.

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Taylor Alexander Scott, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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First question I had was just a follow-up on one of Tom's questions. When I think about the economic liability, I think, you mentioned in your prepared remarks that the economic liability is more consistent with where the liability would be once some of the accounting is updated. And I appreciate it's early days to kind of give an impact from the accounting. But could give you us a way to think about what level the economic liability is at now for the GMIB relative to, I think, the reserves that you guys disclose currently?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [37]

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I mean -- I would say maybe as the best proxy take the CTE framework because the CTE is an economic framework because I think, as I said, it's really way too early to give you a quantitative impact on the accounting based on many factors that's going to impact that number. But why don't you just take the CTE as the first good proxy for the economic liability.

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Taylor Alexander Scott, Goldman Sachs Group Inc., Research Division - Equity Analyst [38]

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Got it, okay. And then the other question I had is on the AB stake. As you guys are kind of getting closer to year-end, do you have any update on just sort of discussions with regulators and potential strategies to bring the AB stake that's in the life insurance subsidiary up to the holding company?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior EVP & CFO [39]

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Yes. I mean, as I told you, look, I think, it's in our interest to change the ownership structure. I think it's still too early to give you kind of a date and where we are, but we're making good progress there.

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Operator [40]

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There are no further questions at this time. Ladies and gentlemen, thank you for joining. This concludes today's conference call. You may now disconnect.