AXA Equitable Holdings Inc. is reporting strong growth in buffer annuity sales and operating earnings for the third quarter.
But the value of derivative contracts the company uses to hedge benefits guarantees fell sharply, and the change in the recorded value of those contracts led the company to post a big net loss for the quarter.
AXA Equitable is reporting a $496 million net loss for the quarter on $1.1 billion in revenue, compared with $10 million in net income on $2.8 billion in revenue for the third quarter of 2017.
Operating income increased to $693 million, from $400 million.
Operating income increased to $434 million, from $326 million, at the individual retirement unit, which is the unit that sells annuities.
Operating income increased to $137 million, from a loss of $3 million, at the protection solutions unit, which sells life insurance.
Spending on commission payments and other distribution-related expenses increased 15% for individual annuities, to $166 million, and 1.5% for protection products, to $66 million.
Sales of the company’s SCS family annuities, or annuities designed to buffer holders against some investment-market-related losses in a downturn, increased 28%, to $1.1 billion. Overall annuity sales increased 18%, to $1.9 billion.
But the recorded value of the derivative contracts fell to negative $2 billion, from negative $316 million a year earlier.
A derivative contract is an arrangement that’s designed to pay off when some investment market value, such as a stock market index, performs in such a way that it triggers a payment provision included in the derivative contract.
AXA Equitable’s derivative contracts protect the company’s economic value and statutory capital, but, when presented using U.S. Generally Accepted Accounting Principles accounting rules, they are more sensitive to changes in market conditions than the underlying annuity product liabilities, AXA Equitable said in a discussion of its results included in the earnings announcement.
“This is a large source of volatility in net income,” the company said.
The company said in its 10-Q report — the official quarterly report it files with the U.S. Securities and Exchange Commission — that it uses several forms of hedging: one hedging strategy for guaranteed minimum income benefits; a second, well-established, dynamic hedging strategy for its variable annuity benefits guarantees; and a new, static hedging strategy, to protect the company’s statutory capital against stress scenarios.
“The implementation of this new program in addition to our dynamic hedge program is expected to increase the size of our derivative positions, resulting in an increase in net income volatility,” the company said in the 10-Q. “The impacts are most pronounced for variable annuity products in our individual retirement segment.”
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