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AB's Shakeup Is a Reason to Pause, Not Panic

We maintain a Parent rating of Neutral.

Emory Zink, 05/18/2017

Executive Summary
On May 1, 2017, French insurance conglomerate AXA Financial, AllianceBernstein's AB majority shareholder, abruptly replaced CEO Peter Kraus as well as most of the firm's independent board members. The changes were significant, as Kraus was largely credited with helping the firm attain stability following the financial crisis. Moreover, the board housecleaning suggested a rupture between AXA and the firm's management over its future leadership and strategic direction. This raised questions about whether AXA would remain at arm's length or whether it would play a much more hands-on role in managing AB's affairs going forward.

Separately, on May 11, 2017, AXA announced that it would divest a portion of its stake in the firm's U.S. insurance operation in an initial public offering. As part of that transaction, AB would become a wholly owned subsidiary of the newly created public firm, reporting to the leader of that business.

Having evaluated the facts and circumstances surrounding these events and after holding discussions with senior leaders of both AXA and AB, we have opted to leave AB's Parent Pillar rating unchanged at Neutral. In short, while these changes are troubling on the surface, we do not believe they signal a wholesale shift in AB's strategy or the role AXA will play in overseeing the firm. That said, we will be closely monitoring future events for signs of personnel turnover, client upheaval, or leadership and strategic flux, evidence of which would likely trigger a downgrade.

Background
On May 1, AXA replaced Kraus as CEO with 30-year JPMorgan veteran Seth Bernstein and added former World Bank president Robert Zoellick as chairman. Simultaneously, AXA ousted six independent directors and replaced them with four AXA-affiliated members. Two holdover members of the board, Mark Pearson and Denis Duverne, serve as executives within AXA. The result of these adjustments is an AB leadership slate that is clearly stacked to AXA's benefit.

AXA has been AB's majority shareholder since 2000 but has been largely hands-off, more or less leaving AB to its own devices. It did step in on a few occasions, most notably in replacing former CEO Lewis Sanders with Kraus in December 2008 following AB's dismal performance through the financial crisis. But by all indications Kraus and his leadership team had a free hand to manage AB's day-to-day operations.

In the eight years that Kraus served as chairman and CEO, he made operational streamlining, team-building, and cross-pollination of ideas a priority, so as to facilitate management of the firm's allocation strategies. In our opinion, he largely succeeded in stabilizing and cohering the firm while instilling it with a more-defining identity (including presiding over the rebranding from AllianceBernstein to AB) and set of values.

That said, assets never recovered to their precrisis levels, and with the exception of the fixed-income investment lineup, the equity and allocation funds didn't establish a performance edge versus competitors. Kraus' relationship with certain board members also reportedly deteriorated over time. Taken together, these factors appear to have informed AXA's decision to replace Kraus and unseat most of the board.

Impact of Changes
In our discussions with newly appointed CEO Bernstein, he has been adamant that he believes the firm's strategy is not broken and intends to continue the efforts begun under Kraus. Bernstein indicated there are no plans to reallocate resources, replace investment management personnel, or abandon previously announced initiatives, such as the forthcoming introduction of AB's "performance" series of funds.

Emory Zink is an analyst covering fixed-income strategies on Morningstar’s manager research team.

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