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Edited Transcript of EQH.N earnings conference call or presentation 1-Mar-19 1:00pm GMT

Q4 2018 Axa Equitable Holdings Inc Earnings Call

Mar 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Axa Equitable Holdings Inc earnings conference call or presentation Friday, March 1, 2019 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 Executive VP & 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

* Elyse Beth Greenspan

Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst

* Joshua David Shanker

Deutsche Bank AG, Research Division - Research Analyst

* Ryan Joel Krueger

Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research

* Suneet Laxman L. Kamath

Citigroup Inc, Research Division - MD

* 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 day. My name is Jack, and I'll be your conference operator today. At this time, I would like to welcome everyone to the AXA Equitable Holdings Fourth Quarter Earnings Call. (Operator Instructions)

Thank you. 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 Full Year and Fourth Quarter 2018 Earnings Call. Materials for today's call can be found on our website at ir.axaequitableholdings.com.

Before we begin, I would 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 10-K.

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 maybe found on the Investor Relations portion of our website, in our earnings release, slide presentation and financial supplement.

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

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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. Today, we present our 2018 earnings and fourth quarter performance. I will also provide an update and progress against our strategic priorities and key financial targets.

Before giving the numbers, I thought it would be helpful to provide a few highlights. Obviously, the fourth quarter of 2018 saw a significant correction in equity markets, with the S&P 500 falling 14%. We have a hedge program in place to protect against situations like this. This program offsets movements in the economic liability of our living benefits due to changes in the market and interest rates and protects asset levels at CTE98 for our VA business. We have over a decade of experience running this hedge program. However, this was the first occasion since our listing in May 2018 that we have seen equity markets fall in the quarter.

With the market fall, CTE98 requirements increased by $3 billion in the quarter. Our hedging program worked as expected and funded this increase. As a result, we end the year with VA capitalizing level in excess of CTE98 and a combined RBC ratio of approximately 670%. Anders will go into more detail later in the presentation, but I'm pleased that we were able to demonstrate our financial strength in volatile markets. Having said that, and as I fully expected, our hedge program worked in the falling market. And I'm even more encouraged that the S&P has since risen by over 10% this year.

Turning to the business. We continue to see strong operating earnings and delivery against our key financial targets. We remain confident that we will deliver the 3-year aspirational targets we set at the time of our IPO, that is non-GAAP operating earnings growing 5% to 7% annually through 2020.

As a result of our balance sheet strength and our performance in 2018, we have more than met our capital return commitments. Since the IPO, we have returned over $1 billion in the forms of dividend and share repurchases to shareholders. Looking forward to 2019, we remain confident in our ability to generate operating cash flows and return capital to shareholders. We believe that this is a unique part of our value proposition. Yesterday, our board authorized a new $800 million share repurchase program for 2019. In addition, subject to board approval, we intend to increase our quarterly dividend by 15% from $0.13 per share to $0.15 per share payable in the second quarter.

Following the AB reorganization where we moved all AB units held by the AXA Equitable Life to Holdings, we have improved capital flexibility and cash flow into EQH. And we are also announcing an upward revision to our target payout range to 50% to 60% of operating earnings.

And a final highlight. In addition to executing against our strategic priorities, our transition continues to run smoothly, and we have exited nearly 20% of the services covered under our transition service agreement with flexibility to exit the remaining services over time.

Turning now to Slide 4 and a summary of our performance in 2018. 2018 non-GAAP operating earnings increased 28% to $2 billion, excluding favorable actuarial assumption updates in both periods, reflecting higher average AUM, execution against our goals and the benefit from tax reform. In rounding out the year, we continued our momentum and delivered operating earnings per share of $0.93 in a volatile fourth quarter.

Each of our business segments have contributed to our strong 2018 results. In Individual Retirement, we reported an operating earnings increase of 24% from 2017, as we increase sales and distribution reach to help even more individuals to cure their financial futures.

In Group Retirement, 2018 marked the sixth consecutive year of positive flows as we continue to deliver value to more customers and solidify our leadership position, particularly in the 403(b) K-12 education market.

For AllianceBernstein, adjusted operating margin for the full year improved by 140 basis points to 29.1% driven by equity and alternatives inflows into our diverse set of services and disciplined expense management.

Lastly, our Protection Solutions segment reported growth in annualized premiums of 8% driven by strong capital-light variable universal life sales and new capabilities to better engage with current and prospective clients.

All in, on a pro forma basis, we generated an attractive operating ROE of 14.9% for the year. Total assets under management, including AB third-party general account and separate account assets, stood at $619 billion as of December 31, 2018.

In conclusion, it was a strong debut year for AXA Equitable Holdings. We continue to create value in keeping with our long history of providing advice, protection and investment expertise backed by our financial strength to the millions of clients we serve.

Turning to Slide 5 and our strategic priorities. We are on track to deliver our 2020 strategic objectives. With a 5% to 7% operating earnings CAGR and our share buyback program, delivery of these objectives should return double-digit earnings per share growth. In terms of our efforts to optimize our general account, our plan to move a portion of our U.S. treasuries to high-grade corporates is already more than 2/3 complete, with an earnings uplift of $73 million delivered in 2018. Our investment portfolio remains high quality with an average A1 rating and less than 2% or below investment grade holdings.

Our productivity initiatives remain well on track. We achieved a savings run rate of $18 million at the end of 2018 towards our goal of $75 million by 2020. We expect to accelerate through 2019 as we implement savings initiatives across our real estate footprint and technology systems.

As highlighted in the previous slide, we remain on track for our growth target, and we remain confident to achieve this goal because of the strength we have in our business segments. Our Investment Management and Group Retirement fee-based businesses are leaders in their respective markets and generate high returns on capital. Our Individual Retirement business has been significantly derisked over the past decade with just 44% of the account value carrying fixed rate GMxB living benefits, down from 77% in 2008.

Strong sales of our capital-light products, such SCS, have enabled this transition, and today, over 70% of our Individual Retirement sales do not offer long-term living benefits. And of course, our Protection Solutions business has been protecting families for almost 160 years against a variety of unexpected events, yielding a steady stream of core earnings and cash. While macro environment conditions have undoubtedly pressured the industry, we remain confident that the strength of our teams, diversified business profile and execution against our 3 strategic priorities will enable us to achieve our 2020 earnings objective.

I will now turn the call over to Anders to go through our results for the full year and quarter in more detail. Anders?

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

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Thank you, Mark, and good morning, everyone. We delivered solid financial performance during our first year, particularly in light of some of the macro headwinds Mark mentioned earlier. We have good momentum in all of our businesses and our results keep us firmly on pace to deliver on our 5% to 7% growth target and maintain the highest level of capitalization in the industry.

On Slide 6, I will review our consolidated results for the full year before providing more detail on the fourth quarter, including our hedging program performance, [DAC] results and capital position. Overall, we reported strong full year results with non-GAAP operating earnings of $2.2 billion, up 6% from 2017. Excluding significant favorable assumption update in both periods, operating earnings increased 28% to $2 billion or $3.59 per share. This growth was primarily attributable to an increase in fee-type revenue reflecting higher average assets under management. Lower income tax expense is driven by the impact of tax reform and higher net investment income, mainly due to the general account optimization and higher asset balances.

GAAP net income was $1.8 billion for the year. Contributing to this figure is the impact of our hedging program, which generated a large positive benefit to net income in the fourth quarter as a result of the decline in equity markets at year-end. This result was both in line with expectations underlined with experience in previous quarters. As a reminder, the full variance between operating earnings and net income is a combination of primarily noneconomic factors, including hedging results and nonperformance risk adjustment, which I will review in a moment.

As a result of our performance and this hedging impact on net income, we saw a 13% year-over-year increase in book value, excluding AOCI, slightly depressing our pro forma non-GAAP operating ROE, which finished the year at 14.9%, up 290 basis points from the prior year.

And finally, total AUM declined 8% year-over-year to approximately $619 billion, driven predominantly by adverse market performance. Average AUM, however, was higher on a full year basis, which was the primary driver for our higher fee revenues.

Moving to the quarterly view on Slide 7. We reported non-GAAP operating earnings of $504 million. This represents a decrease from the prior year quarter, which included a large favorable onetime impact of pre-IPO assumption updates, which increased operating earnings during the fourth quarter of 2017 in our Protection Solutions segment. Also contributing to the year-over-year variance was lower fee-type revenue due to adverse market performance, higher DAC amortization, which I will review in the context of our Individual Retirement business, partially offset by a positive impact from tax reform and higher net investment income. On a per share basis, operating earnings increased year-over-year from $0.92 to $0.93 excluding assumption updates, reflecting the benefit of share repurchases in the second half of 2018.

Net income was $1.9 billion for the quarter driven primarily by the aforementioned impact of markets on our hedging program. From a capital perspective, during the fourth quarter, we improved cash flexibility through our previously announced upstream of AB units to the holding company. Through 2018, approximately 18% of cash flows received at the holding company came from AB units held outside of our life company and thus not subject to regulatory approval. Accounting for the recent upstream of AB units previously held at the life company, nonregulated cash flow on a pro forma basis for 2018 would have increased to 35% of the $1.4 billion total.

In addition to improving capital flexibility, we also continued to execute on our capital management program in the quarter. Concurrent with our secondary offering in November, we completed the repurchase of $592 million of shares from AXA SA, reducing common shares outstanding by over 5% in the fourth quarter and bringing AXA's ownership level to below 60% at year-end. I will discuss our capital return in greater detail shortly.

Turning to Slide 8, I'd like to review the walk from net income to non-GAAP operating earnings. Included in the fourth quarter net income of $1.9 billion were significant noneconomic items related to VA product features driven by hedging and nonperformance risk. Specifically, these adjustments include a $1.2 billion gain related to the difference between the market-based movements in our GAAP reserve due to fourth quarter market impact and a larger movement in the value of our hedge assets backing our economically-based hedge program.

Static hedge cash option costs of $12 million during the quarter and consistent with guidance. The mark-to-market impact of $144 million on our short duration VA investments for our SCS product portfolio, which drove a timing-related acceleration of DAC in our Individual Retirement business, which I will touch on momentarily, and a $554 million related to nonperformance risk due to our own credit spreads widening 70 basis points during the quarter. For additional context, our spreads have tightened in the current quarter, so if the quarter were to end today, we would expect the opposite impact.

To reiterate, this impact during the quarter helped to illustrate precisely why we believe operating earnings is the best proxy for analyzing our performance. If you recall following strong equity markets and rising rates in the third quarter of 2018, VA product features drove a negative noneconomic adjustment to net income. Conversely, an equities -- as equities sharply corrected and rates fell in the fourth quarter, the adjustment turned largely positive in line with our expectations and previously culminated guidance.

Finally, other adjustments to net income include separation costs of $54 million investment gains, noncash pension, amortization and tax-related items.

Moving to Page 9, I'd like to highlight the performance of our hedge program given the market environment in the fourth quarter. While we would not define the fourth quarter as an extreme event, posting a 14% decline in equity markets and a 36 basis point drop in 10-year treasury yield, nevertheless, our proven hedging program protected our capital position at or above our CTE98 target and performed as expected, delivering 95% hedge effectiveness. As a reminder, our hedging program is comprised of 2 components, the dynamic hedging strategy and the static strategy. The most significant part of our program, the dynamic strategy, is a true economic hedge, where we hedge from the first dollar and forego the upside and protect on the downside using futures and swaps to offset the market impact. The fine-tuning element of the program, the static hedge, is used to maintain our target CTE level currently at CTE98 and remaining at CTE95 under extreme scenarios.

The dynamic program operates in close cooperation between the equitable hedging team and AB's capital markets desk. We evaluate our economic exposure on a daily basis, and hedge positions are rebalanced accordingly with AB providing the execution. In addition to our dynamic program, the static hedge is used to mitigate the adverse impact of market conditions on our statutory capital. The cash cost of this options based program was $12 million in the fourth quarter or $76 million for the full year of 2018. We expect the cost of this program to be between $100 million and $150 million per year. The combination of these 2 programs performed as expected during the fourth quarter with hedge effectiveness improving to 95%. As a result of this strategy, the hedge program effectively funded an approximate $3 billion change in our CTE98 liability, enabling us to maintain our target asset level for VAs at CTE98 and importantly, remain protected against further downside.

Now I will review the fourth quarter financial performance of our segments, beginning with Individual Retirement on Slide 10. Operating earnings decreased to $348 million from $408 million in the prior year quarter, primarily driven by higher DAC amortization and lower account values due to a decrease in interest rates and a double-digit fourth quarter equity market decline, respectively. Approximately $30 million of this DAC amortization is due to a timing-related impact from the mark-to-market asset portfolio backing our SCS product. We expect this portfolio of trading securities to decline over the next 18 to 24 months as we classify future investments backing our SCS product as available for sale, thus eventually eliminating the impact DAC amortization timing differences.

Sales momentum of our derisk variable annuity product remained strong with first year premiums increasing for the third straight quarter and registering 15% growth since the prior year quarter. From a mix standpoint, over 70% of sales of product without living benefit consistent with our overarching objective to drive disciplined growth in a balanced portfolio of capital-light product emphasizing value over volume.

Account values over the last 12 months declined by $8.8 billion, primarily due to adverse equity markets. Our flows, dynamic, remain stable, with strong net flows into our current product offering of $718 million offset by ongoing net outflows from our mature fixed GMxB block. This trend continues to derisk our portfolio towards less capital intensive product. Evidenced by the fixed rate GMxB block now representing just 44% of our total VA account values, down from 48% at year-end '17 and from 77% a decade ago. A less capital intensive block of business will increase our returns on capital over time.

Turning to our Group Retirement segment on Slide 11. We reported operating earnings of $102 million, up 13% from the prior year quarter, primarily due to higher net investment income from our GA optimization initiative. Account values in this segment declined year-over-year due to market performance that were partially offset by the sixth straight calendar year of positive net flows. We are very encouraged by the steady results delivered by this business of engaging customers with our work-side advice model and continuing those relationships for many years often through retirement.

Fourth quarter outflows of $56 million were primarily driven by a single corporate plan surrender and were partially offset by another strong quarter in the tax exempt market where we remained the #1 retirement provider for K-12 educators through the end of the third quarter.

Gross premiums were up 7% on a year-over-year basis to $917 million, driven by a strong 15% increase in renewal contributions in our tax exempt business and supported by our continued efforts to deepen penetration across the 9,100 public school plans we serve and increased contributions through our successful client engagement program in the 403(b) market.

Now turning to Investment Management and Research, which is AllianceBernstein on Slide 12. As a reminder, operating results reflect the company's increased economic interest in AllianceBernstein from 46.7% in fourth quarter of 2017 to 65.2% as of year-end 2018. For the fourth quarter, operating earnings grew from $74 million to $107 million, primarily due to this higher ownership levels, while improved expense management at AB was offset by declining revenues on lower average AUM and strong performance fees in the year ago quarter. While AB's adjusted operating margin was strong at 29.3%, the market decline was experienced in the fourth quarter of 2018 as it impacted our ability to achieve the 30% target by 2020. However, we are not giving up on what we believe is an attainable long-term objective and are taking expense actions to partially offset this impact.

Despite these volatile markets, net flows were positive at approximately $800 million for the quarter, notably with continued growth in equities and alternatives. And finally, throughout the year, AB has continued to demonstrate its success in diversifying and growing its business as illustrated by 25 retail funds across asset classes, generating net flows of $100 million or more. Gross sales in institutional active equity at multiyear highs and flows in the private wealth channel reaching their highest levels in more than a decade.

And finally, we'll turn to Protection Solutions on Slide 13, where we reported operating earnings of $37 million for the quarter. As you know, earnings in this segment has been volatile over the past several quarters. We recorded substantial favorable assumption updates ahead of the IPO in the fourth quarter of 2017. And subsequently, earnings declined to $37 million in the current quarter. If you recall, the exited loss recognition in the third quarter of 2018 and are starting to see a more stable earnings trend around the $50 million run rate we expect. For the current quarter, operating earnings continued to trend closer to this expectation with increases in fee-type revenue and net investment income, driven by higher asset balances and the GA optimization partially offset by $10 million of nonrecurring legal-related expenses.

Going forward, this segment should continue to benefit from the GA optimization initiatives and our productivity improvements. And finally, sales growth closed out the year strong with annualized premiums up 10% year-over-year.

Turning to our capital discussion on Page 14. We emerged financially strong from the fourth quarter maintaining our CTE98 target for our VA business and 350% to 400% RBC for our non-VA business resulting in an RBC ratio of approximately 670%. Notably, the strength of our capital base allowed us to absorb the impact of the change in tax factors and retain our existing capitalization target. In addition, our debt-to-capital ratio of 24.5% was within our target mid-20s range.

During the quarter, we completed the transfer of AB units from AXA Equitable Life to our holding company, which helped simplify our corporate structure and most importantly, provides increased unregulated cash flows and additional capital flexibility directly at the holding company level. This transaction also contributed to the company's decision to increase the lower end of our target payout range from 40% to 50% bringing our new payout ratio target to 50% to 60% of non-GAAP operating earnings.

Before turning the call back to Mark for his closing remarks, I would like to provide an update on our capital management program outlined on Slide 15. Since the IPO, we returned over $1 billion to shareholders in the form of quarterly cash dividends and share repurchases, including a $150 million as part of an accelerated share repurchase agreement, executed in January. This completed our previous repurchase authorization of $800 million. Yesterday, our board announced a new authorization program of $800 million. And earlier in February, we declared a $0.13 per share dividend payable in the first quarter. Looking ahead, we intend to increase the dividend by 15% to $0.15 per share payable in the second quarter subject to the board approval. This demonstrates the financial strength and operating earnings power of this company following one of the more volatile markets in recent memory.

Our financial strength remains one of the cornerstones of our company's differentiated story with capital return supported by our solid recurring operating earnings and our robust capital position. These components support our long-term goals and continue to give us confidence as we begin 2019.

With that, I will turn the call back to Mark for closing remarks.

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

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Thanks, Anders. Before we turn to taking your questions, I'd like to close by reiterating our strong results, our progress and our momentum as we step into 2019. 2018 was a remarkable year for our company with a successful IPO and a well-received secondary offering. We demonstrated our ability to deliver on our commitments, reported solid financial results and make meaningful progress against our strategic initiatives. We have returned $1 billion since our IPO and are announcing today a new share repurchase program of $800 million.

Taken together, our performance, financial strength, momentum and positioning for growth give us confidence to announce an increased payout ratio target of 50% to 60% starting in 2019.

With that, we'll open it up for 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 Elyse Greenspan with Wells Fargo.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [2]

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My first question, you guys -- hedging program performed pretty well in the fourth quarter with obviously the sharp decline in equity markets. Could you guys give us a sense how much would equity markets really need to drop for you guys to fall below that CTE98 target for your VA business?

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

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Yes. This is Anders. Look, I think, as we talked before, our hedging strategy is really to stay at the CTE98 for almost all scenarios. I think if we have a very severe scenario, we would like to just go down to 95%, so think about the minus 40% equity shock, that's when we would basically go down to 95 CTE. But in most scenarios, we actually stay at the CTE98.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [4]

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Okay, that's helpful. And then in terms of the portfolio optimization, as we think about 2019, can you give us a sense of what could flow-through earnings in '19 as you continue to kind of shift your investment portfolio?

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

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Yes, sure. So -- I mean, you recall, the overall kind of outcome of the full program will be $160 million additional earnings coming out of the general account. We're about 2/3 through. The impact this year was, I think, $73 million. The program itself will be finished by the end of this year. So you can think about -- if you make it a linear approach, I think you will be the -- I would say, in the -- between $120 million and $140 million, somewhere there.

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Elyse Beth Greenspan, Wells Fargo Securities, LLC, Research Division - VP and Senior Analyst [6]

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Okay, that's helpful. And then last question. The tax rate was a little bit lower in the fourth quarter. I'm assuming that was just kind of onetime and you would expect it to kind of go back to your normal kind of 18% target in 2019?

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

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Yes. So look, I mean, in taxes always, I mean, you have sometimes true-ups later in the year. So we had some true-ups on DRD and then state taxes. But I would say guidance, again, is, we're going to see an effective tax rate of about 18% for the insurance segment and about 27% for the AB segment.

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Operator [8]

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

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Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division - Senior MD [9]

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First question is the $800 million new buyback authorization. Do you have the ability to accelerate that to the earlier part of the year if you get opportunity with AXA secondary? Would you be able to participate in a meaningful way, again? That's my first question.

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [10]

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Yes. So I think as we said in the call, we have the authorization for $800 million. And yes, we have the ability to take a meaningful piece of that in case AXA goes out this secondary offering, yes.

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Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division - Senior MD [11]

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Do you -- would that be based on existing Holdco resources? Or would you have to use leverage or be willing to use leverage temporarily to do it? And can you talk a little bit about the timing of when you expect to get cash flows throughout the year from -- in terms of dividends from subs?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [12]

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Yes. So I think, first of all, I mean, we have right now cash above our target level of $500 million at the holding company. So I think we have their ability to use some of that in -- earlier in the year. We have the availability also during the year. We will not have to wait for second half of the year to take money out of the operating entity. So we have a plan that we have continued cash coming into the holding company. And then just don't forget with the upstream of the AB units to the holding company, we now have a meaningful cash coming out of AB on a quarterly basis. So we don't have to use any leverage to your question to participate.

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Thomas George Gallagher, Evercore ISI Institutional Equities, Research Division - Senior MD [13]

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Got you. And then my final question. So Brighthouse had some new disclosure on cash flows that showed a reduction from updated policyholder behavior assumptions from the new VA standard. There was also -- part of their cash flow reduction was based on a drag from its hybrid product which is similar to your SCS product. Just question for you. I know when you had put out your S-1, you had the year-end 2017 updated estimates for NPV of cash flows for variable annuities. Are you going to provide an update for 2018 on those same cash flow estimates? And if so, would you expect to see a similar reduction as Brighthouse saw?

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

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Yes. So first of all, I think, remember, we had this cash flows end of last year. We decided to wait for the final NAIC rule to come in, which, I think, we expect to be somewhere in April. Based on that, we're going update our cash flows going forward because I don't think, in our case, it makes sense to do that before the NAIC rule is finished. Based on what I've seen today, I don't think it's going to have a material impact to the cash flows we provided a year ago. In particular, I mean, you saw during the year, we were actually able to take out cash out of the operating entity up to the holding company. And also I think we have -- we feel very confident also for this year, that's why we changed the range from 40% to 60% to 50% to 60%. So I think we feel very comfortable with the cash flows. And I think there is one point, obviously, that's the market, and we gave you sensitivities to the market, so you have that. But other than that, I don't think there is a material change. One thing I want to highlight here is our hedging program is really hedging first dollar. So I don't think we should see an impact from hedging to the cash flows because it'll really take away the impact on the [write-off] coming from the market.

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Operator [15]

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

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [16]

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Question on the Individual Retirement segment. You reported a nice non-GAAP return on capital of 22.5%. So I'm curious, as the legacy business rolls off the GMxBs, what's the return on capital for that business versus your SCS products?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [17]

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Yes. So -- Mark?

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

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Yes. So I don't think we'd splitted down for you. But what we can tell you is, as the legacy book runs off, remember, we gave you that figure of $4 billion a year, that will throw off capital because that's capital-intensive business. We're adding business which is much lower in capital intensity. So it wouldn't surprise us to see the ROC improve as a result of those 2 dynamics.

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

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Pretty sure, I believe, Mark, several hundred basis points you think?

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

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No. I don't think pretty sharply. The momentum will be that way, but not sharp.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [21]

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Okay. And then looking over to the group business, it looks like you had a negative flow in the quarter, not the year, of course. And it was a corporate account. Could you talk a bit about how your 401(k) business is performing? Are there any pressures there?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [22]

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So I think, you rightly recall, in Q4, we had this negative outflow from 401(k), which has much lower fees. I think overall, the 403(b) business is performing very well. But just keep in mind, from a flow perspective, it's usually the case that first half of the year that's where you have the strongest flows. Third quarter, you have usually negative because teachers make no -- don't get any salaries. And then fourth quarter is in usually mixed. This time, we had this small outflow. But one thing, if you go back over the last 6 years, we actually had a positive, positive flow on an annual basis and this gives us confidence that we are on the right path year going forward.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [23]

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Great. And then just real quickly. Just following up on Tom's question about the buybacks. Maybe I'm fishing a little bit, but could you give us a little color on discussions with AXA? How they're looking at timing? And then importantly, are you going to kind of hold off on any material buybacks until such time that they want to offer shares in a secondary?

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Mark Pearson, AXA Equitable Holdings, Inc. - President, CEO & Director [24]

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Yes. It's Mark here. Obviously, AXA don't talk to us too much about something like this because we would have to disclose it to you, and so we don't know. I think, as you know, the period at which they gave undertakings not to come back to the market, that's about to lift or has just lifted. So it is in AXA's hands now as to whether they would like to make a third offering or not. That's about all we know at this stage.

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Andrew Scott Kligerman, Crédit Suisse AG, Research Division - MD & Senior Life Insurance Analyst [25]

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And you want to just take it slow until you find out if they do, I would assume, right? You're not going to...

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Mark Pearson, AXA Equitable Holdings, Inc. - President, CEO & Director [26]

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Yes. We've always said that we would use the majority of that buyback to support AXA. Because obviously, if we go into the market with it, we're actually increasing AXA share, which is counter to what they want. So we've always said that the majority will be to support a buy down if when one happens. And I think as Anders said to -- answering Tom's question, the money is there, so we can move without having to increase leverage.

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Operator [27]

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Your next question comes from line of Ryan Krueger with KBW.

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Ryan Joel Krueger, Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research [28]

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Following the adoption of NAIC VA reform, do you still anticipate talking about your VA capital target based on CTE level? Or would be potentially switch more to an unRBC ratio after the new methodology, I guess, makes a bit sense for RBC?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [29]

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Yes. Ryan, as you know, I think the -- one of the objectives of the VA reform is actually to harmonize also the way we can talk about the RBC. And remember, the way they set it up is that the CTE98 corresponds to an RBC of 400%. So our intent is, once the rule is adopted that we actually then talk about an RBC target in the -- on a combined basis.

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Ryan Joel Krueger, Keefe, Bruyette, & Woods, Inc., Research Division - MD of Equity Research [30]

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Got it. And then on Group Retirement, in the last couple of quarters, excluding items, your earnings have been in the $100 million range, which is a decent step up from where it had been previously. Is there anything in the results that would suggest the $100 million type run rate isn't good to go forward with?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [31]

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No. So I think the run rates, I think, you see here is a steady growth. I think the Group Retirement business is one business that will actually benefit from the GA rebalancing. So I think you should see there a nice uplift coming there as well. Just recall, it's about half of that -- half and half of the revenues are coming from separate account and general account, so the uplift help Group Retirement nicely.

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Operator [32]

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Your next question comes from the line of Josh Shanker with Deutsche Bank.

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Joshua David Shanker, Deutsche Bank AG, Research Division - Research Analyst [33]

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Two unrelated questions. The first is on the net investment income optimization. It came through nicely in the quarter, but we didn't really see it in the Individual Retirement segment where most of your investable assets are. Is there something different going on in that segment versus the other 2 segments? Have you -- did you complete that first? Why is that growth rate stagnant on NII, but the other ones are going growing quite swiftly?

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

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Yes. I mean, look, I think, the core general account, and that's really where the program is focusing on, is really benefiting Protection Solutions and Group Retirement. That's where we have core business in the general account and that's where you see the benefits. It's less so at least today on the Individual Retirement because I mean, the VA -- the traditional VAs are really in the separate account and then SCS has a separate -- it's a separate program, completely distinctive from the general account for the other segment.

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Joshua David Shanker, Deutsche Bank AG, Research Division - Research Analyst [35]

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Okay. And given the new way in the transfer of the ownership stake in AB, are there any tax implications for how you're holding that possession?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [36]

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Yes. So I think, you recall, we updated the -- we moved them up to the holding company. There is a small impact on the state taxes and that's actually included in the guidance I gave you about 27% tax rate for the AB segment.

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Operator [37]

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Your next question comes from the line of Suneet Kamath with Citi.

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Suneet Laxman L. Kamath, Citigroup Inc, Research Division - MD [38]

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I wanted to start with the capital return target of 50% to 60%. Just to unpack that a little bit. Can you give us a sense of what the free cash flow is out of each of your businesses? I'm assuming that AB is pretty high, close to maybe 90%, 100%, which would imply sort of a 40% to 50% for everything else. I just want to understand maybe what that is at the segment level if you could provide it?

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

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Yes. Look, I think, this -- it's an interesting question. We don't give the details by segments. I think what I can tell you is, clearly, on AB, I think they pay out 100%. As you know, they're a limited partnership, that's what they have to do. I think for the other businesses, we don't give the breakdown. But you recall, when we think back to the VA cash flows, I think, gave you a good indications on how we think about the cash coming out of the segments.

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Suneet Laxman L. Kamath, Citigroup Inc, Research Division - MD [40]

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Okay. And then a follow-up on the VA cash flows for a second. I mean, I think at the IPO you talked about being already at peak reserves for the VA business. Obviously, the market's been moving around a bit. So just want to get a sense if that's still the case? And is there any reserve release steady or inflection-wise that we should think about being embedded in your cash flows over the next couple of years?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [41]

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Yes. So I think one of the key points that we've mentioned at the IPO is really the peak [TAR], and I can tell you we're still at peak TAR , I think, for the core business. Obviously, whenever you bring a new business, the new business in itself is not at peak TAR . But for the core business that is [enforced], we are at peak TAR .

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Suneet Laxman L. Kamath, Citigroup Inc, Research Division - MD [42]

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Got it. And then just the last one related, I think when you disclose your update in the spring for your VA cash flows, have you or would you consider separating out the Group Retirement VAs from the Individual Retirement VAs just so we get a better sense of the risk profile of the individual business?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [43]

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Look, I think that's a question we get from time to time. The way I would -- the way I look at it is because we manage the business together, we cannot really separate the cash flows between the segments. What we can tell you, and I think we told you that the majority of the CTE requirement is coming from the old accumulated business. So that newer business and the other segments have much less contribution to the CTE, but we will -- I don't think we're going to give a breakdown of that business. But when it comes to the cash flow outside of the CTE, you can really go and split it by the asset base because that's how the fees flow into this cash flow.

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Operator [44]

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

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Taylor Alexander Scott, Goldman Sachs Group Inc., Research Division - Equity Analyst [45]

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First question I had was just if you could provide any more color on sort of what elements of VA capital reform are already sort of included in the way you calculate CTE98 versus some of the elements that you may still need to implement?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [46]

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Yes. So the way right now we are using the old way to calculate CTE98. Obviously, we're working on the new one, but we're still basically using what is right now the right way or let's say the official way to calculate CTE98, and that's when I talk about CTE98. But then I think as we said before, we don't think that it's going to have a material impact, however, our cash capacity on a going-forward basis. So otherwise, we wouldn't have updated our cash projections today.

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Taylor Alexander Scott, Goldman Sachs Group Inc., Research Division - Equity Analyst [47]

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Okay. And then my second question is just around the expense efficiency. It looks like there was a pretty nice step down in expenses. Just would be interested to hear any update on how you would expect the target expense efficiencies to earn in over the next couple of years? And also, I think there were some higher cost associated with AXA SA coming down below a certain percentage, that maybe were below line. Could you just remind us about what those costs are? And how they all come in?

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Anders Bjorn Malmström, AXA Equitable Holdings, Inc. - Senior Executive VP & CFO [48]

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Yes. So I think, first of all, I think, as we can imagine the biggest, let's say, the benefit will really come in, in '19 and '20. That's when you basically earned a benefit of division initiatives we undertook already, and we are undertaking. I think that's clear. As you correctly mentioned, the separation costs they go below the line, they're really onetime. And -- but then I think the way we look at it, it's not just the separation, we also want to make sure that we actually put ourselves in the best position going forward. That's why you might see a slightly uptick there relative to the guidance we gave, but this should help in the future to actually be more efficient.

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Operator [49]

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There are no further questions at this time. This concludes the AXA Equitable Holdings fourth quarter earnings call. We thank you for your participation. You may now disconnect.