UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-20501
AXA EQUITABLE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
| | |
| New York | | 13-5570651 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
| 1290 Avenue of the Americas, New York, New York | | 10104 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code(212) 554-1234
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | | Name of each exchange on which registered |
| None | | None |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | | | | | |
Large accelerated filer | | ¨ | | Accelerated filer | | ¨ |
| | | |
Non-accelerated filer | | x (do not check if a smaller reporting company) | | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
No voting or non-voting common equity of the registrant is held by non-affiliates of the registrant as of June 30, 2012.
As of March 11, 2013, 2,000,000 shares of the registrant’s Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of AllianceBernstein L.P.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 are incorporated by reference into Part I hereof.
TABLE OF CONTENTS
i
FORWARD-LOOKING STATEMENTS
Certain of the statements included or incorporated by reference in this Annual Report on Form 10-K, including but not limited to those in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “expects,” “believes,” “anticipates,” “includes,” “plans,” “assumes,” “estimates,” “projects,” “intends,” “should,” “will,” “shall” or variations of such words are generally part of forward-looking statements. Forward-looking statements are made based on management’s current expectations and beliefs concerning future developments and their potential effects upon AXA Equitable Life Insurance Company and its subsidiaries (“AXA Equitable”). There can be no assurance that future developments affecting AXA Equitable will be those anticipated by management. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties, and there are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including, among others: (i) difficult conditions in the global capital markets and economy; (ii) equity market declines and volatility causing, among other things, a reduction in the demand for our products, a reduction in the revenue derived from asset-based fees, a reduction in the value of securities held for investment, including the investment in AllianceBernstein, an acceleration in DAC amortization and an increase in the liabilities related to annuity contracts offering enhanced guarantee features, which may lead to changes in the fair value of our GMIB reinsurance contracts, causing our earnings to be volatile; (iii) interest rate fluctuations or prolonged periods of low interest rates causing, among other things, a reduction in our portfolio earnings, a reduction in the margins on interest sensitive annuity and life insurance contracts and an increase in the reserve requirements for such products, and a reduction in the demand for the types of products we offer; (iv) ineffectiveness of our reinsurance and hedging programs to protect against the full extent of the exposure or loss we seek to mitigate; (v) changes in policyholder assumptions, the performance of AXA Arizona’s hedge program, its liquidity needs and changes in regulatory requirements could adversely impact our reinsurance arrangements with AXA RE Arizona Company; (vi) regulatory or legislative changes, including government actions in response to the stress experienced by the global financial markets; (vii) changes to statutory capital requirements; (viii) our requirements to pledge collateral or make payments related to declines in estimated fair value of certain assets may impact our liquidity or expose us to counterparty credit risk; (ix) counterparty non-performance; (x) changes in statutory reserve requirements; (xi) differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates or market returns and the assumptions used in pricing products, establishing liabilities and reserves or for other purposes; (xii) changes in assumptions related to deferred policy acquisition costs; (xiii) our use of numerous financial models, which rely on estimates, assumptions and projections that are inherently uncertain and involve the exercise of significant judgment; (xiv) market conditions could adversely affect our goodwill; (xv) investment losses and defaults, and changes to investment valuations; (xvi) liquidity of certain investments; (xvii) changes in claims-paying or credit ratings; (xviii) adverse determinations in litigation or regulatory matters; (xix) changes in tax law; (xx) heightened competition, including with respect to pricing, entry of new competitors, consolidation of distributors, the development of new products by new and existing competitors and for personnel; (xxi) our inability to recruit, motivate and retain experienced and productive financial professionals and key employees and the ability of our financial professionals to sell competitors’ products; (xxii) changes in accounting standards, practices and/or policies; (xxiii) the effects of business disruption or economic contraction due to terrorism, other hostilities, pandemics, or natural or man-made catastrophes; (xxiv) ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks; (xxv) the perception of our brand and reputation in the marketplace; (xxvi) the impact on our business resulting from changes in the demographics of our client base, as baby-boomers move from the asset-accumulation to the asset-distribution stage of life; (xxvii) the impact of acquisitions and divestitures, restructurings, product withdrawals and other unusual items, including our ability to integrate acquisitions and to obtain the anticipated results and synergies from acquisitions; (xxviii) significant changes in securities market valuations affecting fee income, poor investment performance resulting in a loss of clients or other factors affecting the performance of AllianceBernstein; and (xxix) other risks and uncertainties described from time to time in AXA Equitable’s filings with the SEC.
AXA Equitable does not intend, and is under no obligation, to update any particular forward-looking statement included in this document. See “Risk Factors” included elsewhere herein for discussion of certain risks relating to its businesses.
ii
Part I, Item 1.
BUSINESS1
GENERAL
AXA Equitable, established in the State of New York in 1859, is among the largest life insurance companies in the United States, with approximately 3.3 million insurance and annuity policies in force as of December 31, 2012. We are part of a diversified financial services organization offering a broad spectrum of financial advisory, insurance and investment management services. Together with our subsidiaries, including AllianceBernstein, we are a leading asset manager, with total assets under management of approximately $519.5 billion at December 31, 2012, of which approximately $430.0 billion were managed by AllianceBernstein. We are an indirect wholly owned subsidiary of AXA Financial, which is an indirect wholly owned subsidiary of AXA S.A. (“AXA”), a French holding company for an international group of insurance and related financial services companies. For additional information regarding AXA, see “Business – Parent Company.”
SEGMENT INFORMATION
We conduct our operations in two business segments, the Insurance segment and the Investment Management segment.
Insurance. The insurance business conducted principally by AXA Equitable and its subsidiary, AXA Distributors, is reported in the Insurance Segment. We seek to be a recognized industry leader for providing advice and solutions to our clients. Our strategy is to develop an expansive and diversified product portfolio that serves the needs of existing and new markets, build distribution to effectively deliver these products to a wide array of clients, and effectively manage our in-force business. In order to help us execute on our strategy, over the course of the next several years, we will pursue the following objectives:
| | • | | Diversify our product portfolio |
| | • | | Be a leader in developing new and innovative products |
| | • | | Actively grow in select markets |
| | • | | Leverage our broad and diverse distribution capabilities |
| | • | | Grow our retail sales force |
| | • | | Enhance our digital capabilities for both efficiency and sales force productivity |
| | • | | Actively manage product mix with our third party distributors |
1 | As used in this Form 10-K, the terms “AXA Equitable”, “we”, “our” and/or “us” refers to AXA Equitable Life Insurance Company, a New York stock life insurance corporation, “AXA Financial” refers to AXA Financial, Inc., a Delaware corporation incorporated in 1991, “AXA Financial Group” refers to AXA Financial and its consolidated subsidiaries, and the “Company” refers to AXA Equitable and its consolidated subsidiaries. The term “AXA Distributors” refers to AXA Distributors, LLC, “AXA Advisors” refers to AXA Advisors, LLC, a Delaware limited liability company, “AXA Network” refers to AXA Network, LLC, a Delaware limited liability company and its subsidiary, and “AXA Equitable FMG” refers to AXA Equitable Funds Management Group, LLC, a Delaware limited liability company. The term “AllianceBernstein” refers to AllianceBernstein L.P., a Delaware limited partnership, and its subsidiaries. The term “General Account” refers to the assets held in the general account of AXA Equitable and all of the investment assets held in certain of AXA Equitable’s Separate Accounts on which AXA Equitable bears the investment risk. The term “Separate Accounts” refers to the Separate Account investment assets of AXA Equitable excluding the assets held in those Separate Accounts on which AXA Equitable bears the investment risk. The term “General Account Investment Assets” refers to assets held in the General Account (which includes the Closed Block described below). |
1-1
| | • | | Effectively manage our in-force business |
| | • | | Enhance the value of our in-force business |
| | • | | Reduce the risks associated with our in-force business, particularly variable annuities with guarantee features |
| | • | | Become more customer centric |
| | • | | Actively explore capital management opportunities |
The Insurance segment, which also includes Separate Accounts for individual and group life insurance and annuity products, accounted for approximately $6.4 billion of total revenues, after intersegment eliminations, for the year ended December 31, 2012.
Investment Management. The Investment Management segment is principally comprised of the investment management business of AllianceBernstein, a leading global investment management firm. AllianceBernstein seeks to be the most trusted investment firm in the world by placing its clients’ interests first and foremost, utilizing its research capabilities to have more knowledge than any other investment firm, and using and sharing knowledge better than its competitors to help AllianceBernstein’s clients achieve financial peace of mind and investment success. For additional information about AllianceBernstein, see AllianceBernstein’s Annual Report on Form 10-K for the year-ended December 31, 2012 filed with the Securities and Exchange Commission (the “SEC”) on February 12, 2013 (the “AllianceBernstein 10-K”).
At December 31, 2012, our economic interest in AllianceBernstein was 39.5%. At December 31, 2012, AXA and its subsidiaries’ economic interest in AllianceBernstein was approximately 65.5%.
The Investment Management segment accounted for approximately $2.7 billion of total revenues, after intersegment eliminations, for the year ended December 31, 2012.
For additional information on business segments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results Of Continuing Operations By Segment” and Note 19 of Notes to Consolidated Financial Statements.
Insurance
General
We offer a variety of term, variable and universal life insurance products, variable and fixed-interest annuity products principally to individuals, small and medium-size businesses and professional and trade associations. We are a leading issuer of variable annuity and variable life insurance products. Variable annuity and variable life insurance products offer policyholders the opportunity to invest some or all of their account values in various Separate Account investment options. The growth of Separate Account assets under management remains a strategic objective, as we seek to increase fee-based revenues derived from managing funds for our clients.
The market for annuity and life insurance products of the types we issue continues to be dynamic as the global economy and capital markets slowly recover from the significant stress experienced in recent years. The financial market turbulence has led many companies to re-examine the pricing and features of certain products that they offer or to discontinue offering such products altogether. As part of our continuing efforts to mitigate the impacts of the challenging conditions in the capital markets and economy on our business, we have modified our product portfolio by developing new and innovative products with the objective of offering a more balanced and diversified product portfolio that drives profitable growth while appropriately managing risk. We have made solid progress in executing this strategy over the past few years, as we have introduced several new life insurance and annuity products to the marketplace. These products have been well received by the marketplace and, in 2012, sales of these products continued to account for a significant portion of our first year premiums and deposits. We have also taken and expect to continue to take steps to manage the risks associated with our in-force business. For example, in 2012, in furtherance of our initiative to reduce the risks associated with the in-force variable annuity business with guarantee features, we suspended the acceptance of contributions into certain Accumulator® contracts issued prior to June 2009 and initiated a limited program to offer to purchase from certain policyholders the GMDB rider contained in their Accumulator® contracts. We also limited and/or suspended the acceptance of contributions to other annuity products. For additional information, see “Business – Products”, “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Continuing Operations by Segment – Insurance.”
1-2
Products
Life Insurance Products. We offer a broad range of life insurance products and services, which are aimed at serving the financial needs of our customers throughout their lives. Our primary life insurance product offerings include:
Term Life. Term life is a simple form of life insurance. Term life products provide a guaranteed benefit upon the death of the insured for a specific time period (the term) in return for the periodic payment of premiums. Some of our term products include, within certain policy limits, a conversion feature that allows the policyholder to convert the policy into permanent life insurance coverage.
Universal Life. Universal life is a form of permanent life insurance that provides protection in case of death, as well as a savings or cash value component. The cash value of a universal life policy is based on the amount of premiums paid, the declared interest crediting rate and the policy charges. Unlike term life or whole life insurance, flexible premium universal life policies permit flexibility in the amount and timing of premium payments (within limits) and they generally offer the policyholder the ability to choose one of two death benefit options: level benefit equal to the policy’s original face amount or a variable benefit equal to the original face amount plus any existing policy account value.
We also offer an indexed universal life product. Indexed universal life insurance combines life insurance with equity-linked accumulation potential. The equity linked option(s) provide upside potential for cash value accumulation up to certain growth cap rates and downside protection through a floor for certain investment periods. This floor will limit the impact of decreases over the investment period in the values of the indices selected.
Variable Universal Life. Variable universal life is a form of permanent life insurance that combines the premium and death benefit flexibility of universal life insurance with investment opportunity. A policyholder can invest premiums in one or more underlying portfolios offering different levels of risk and growth potential. The investment portfolios provide long-term growth potential, tax deferred earnings and the ability to make tax free transfers among the investment portfolios. A policyholder can choose one of two death benefit options: level benefit equal to the policy’s original face amount or a variable benefit equal to the original face amount plus any existing policy account value. Variable universal life insurance products offered by us include single-life products, second-to-die policies (which pay death benefits following the death of both insureds) and products for the corporate-owned life insurance (“COLI”) market.
We offer the Market Stabilizer Option®, an investment option, on our variable universal life product. The Market Stabilizer Option® offers a policyholder growth potential (up to a cap) and downside protection through a buffer. Through the use of the upside caps and a downside buffer, the Market Stabilizer Option® helps a policyholder manage volatility in their variable universal life policy, which may reduce or potentially eliminate losses.
Term, Universal Life and Variable Universal Life insurance products accounted for 10.1%, 9.1% and 8.6% of our total premiums and deposits in 2012, respectively.
Annuity Products. We offer a variety of variable and fixed annuities which are primarily marketed and sold to individuals saving for retirement or seeking retirement income and employers seeking to offer retirement savings programs such as 401(k) or 403(b) plans. Our primary annuity product offerings include:
Variable Annuities. Variable annuities provide for both asset accumulation and asset distribution needs. Variable annuities allow the policyholder to make deposits into various investment accounts, as determined by the policyholder. The investment accounts are separate accounts and risks associated with such investments are borne entirely by the policyholder, except where enhanced guarantee features have been elected in certain variable annuities, for which additional fees are charged. Additionally certain variable annuity products permit policyholders to allocate a portion of their account to the General Account and are credited with interest rates that we determine, subject to certain limitations
Variable annuity products continue to account for a substantial portion of our sales, with 67.7% of our total premiums and deposits in 2012 attributable to variable annuities. Variable annuity products offered by us principally include individual and group deferred variable annuities sold in the non-qualified and qualified markets. A significant portion of the variable annuities sold by us offer one or more enhanced guarantee features in addition to the standard return of principal death benefit guarantee. Such enhanced guarantee features may include guaranteed minimum living benefits and/or an enhanced guaranteed minimum death benefit (“GMDB”). Guaranteed minimum living benefits principally include guaranteed minimum income benefits (“GMIB”) and guaranteed income benefits (“GIB”). We have issued variable annuities with a guaranteed minimum accumulation benefit and guaranteed withdrawal benefit for life (“GWBL”) rider. For additional information regarding these guaranteed minimum benefit features, see Notes 2, 8 and 9 of Notes to Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates.
1-3
In furtherance of our strategy of developing an innovative and diversified variable annuity product offering, we have introduced several new and/or enhanced variable annuities in recent years. For example, Structured Capital Strategies®, an investment only variable annuity designed for investors seeking equity and commodity index-linked, tax-deferred growth potential with levels of downside protection. This product allows investors to realize returns based on the growth of certain indices up to specified caps, while being protected against loss down to specified floors. Investors select the index, the term (1, 3 or 5 years generally) and the level of downside protection they wish (within the choices offered).
Fixed Annuities. Fixed annuities also provide for both asset accumulation and asset distribution needs. Fixed annuities do not allow the same investment flexibility provided by variable annuities, but do provide guarantees related to the preservation of principal and interest credited. Fixed annuity contracts are general account obligations.
We issue or have issued a variety of fixed annuity products, including individual single premium deferred annuities, which credit an initial and subsequent annually declared interest rate, and payout annuity products, including traditional immediate annuities. Fixed annuity products have not been a significant product for us in recent years, accounting for 0.9% of our total premium and deposits in 2012.
Separate Account Assets
As noted above, variable annuity and variable life products offer purchasers the opportunity to direct the investment of their account values into various Separate Account investment options. Over the past five years, Separate Account assets for individual variable annuities and variable life insurance policies have increased by $25.5 million to $89.6 billion at December 31, 2012. Of the 2012 year-end amount, approximately $86.8 billion was invested in EQ Advisors Trust (“EQAT”) and AXA Premier VIP Trust (“VIP Trust”), each of which are mutual funds for which our subsidiary, AXA Equitable FMG, serves as the investment manager (and, in certain instances provides day-to-day portfolio management services as the investment adviser) and administrator. The balance of such Separate Account assets is invested through various other mutual funds for which third parties serve as investment manager.
EQAT is a mutual fund offering variable life and annuity policyholders a choice of single or multi-advised equity, bond and money market investment portfolios, “hybrid” portfolios whose assets are allocated among multiple subadvisers, and twelve asset allocation portfolios that invest exclusively in other portfolios of EQAT and/or VIP Trust. Certain EQAT equity portfolios employ an investment strategy that seeks to reduce equity exposure during periods in which market volatility has increased to levels that are meaningfully higher than long-term historic averages. VIP Trust is a mutual fund offering variable life and annuity policyholders a choice of multi-advised equity and bond investment portfolios, as well as nine asset allocation portfolios that invest exclusively in other portfolios of EQAT and/or VIP Trust. Certain VIP portfolios also employ an investment strategy that seeks to reduce equity exposure during periods in which market volatility has increased to levels that are meaningfully higher than long-term historic averages.
As of December 31, 2012, policyholders allocated $37.7 billion to the allocation portfolios of EQAT and VIP Trust and $49.1 billion to the individual portfolios of EQAT and/or VIP. Of the $86.8 billion invested in EQAT and VIP Trust, approximately 65% of these assets are passively managed and seek to replicate the returns of an applicable index and approximately 35% of these assets are actively managed by one or more sub-advisers.
Markets
We primarily target affluent and emerging affluent individuals such as professionals and business owners, as well as employees of public school systems, universities, not-for-profit entities and certain other tax-exempt organizations, and existing clients. Variable annuity products are primarily targeted at individuals saving for retirement or seeking retirement income (using either qualified programs, such as individual retirement annuities, or non-qualified investments), as well as employers (including, among others, educational and not-for-profit entities, and small and medium-sized businesses) seeking to offer retirement savings programs such as 401(k) or 403(b) plans. Variable and universal life insurance is targeted at individuals for protection and estate planning purposes, and at business owners to assist in, among other things, business continuation planning and funding for executive benefits. Mutual funds and other investment products are intended for a broad spectrum of clients to meet a variety of asset accumulation and investment needs. Mutual funds and other investment products add breadth and depth to the range of needs-based services and products we are able to provide.
1-4
Distribution
We distribute our products through retail and wholesale distribution channels.
Retail Distribution. Our products are offered on a retail basis in all 50 states, the District of Columbia and Puerto Rico by financial professionals associated with AXA Advisors, an affiliated broker-dealer, and AXA Network, an affiliated insurance general agency. These financial professionals also have access to and can offer a broad array of annuity, life insurance and investment products and services from unaffiliated insurers and other financial service providers. As of December 31, 2012, approximately 5,242 financial professionals were associated with AXA Advisors and AXA Network.
We have entered into agreements pursuant to which we compensate AXA Advisors and AXA Network for distributing and servicing our products. The agreements provide that compensation will not exceed any limitations imposed by applicable law. Under separate agreements, we also provide to each of AXA Advisors and AXA Network personnel, property and services reasonably necessary for their operations. AXA Advisors and AXA Network reimburse us for their actual costs (direct and indirect) and expenses under the respective agreements.
Annuities and life insurance distributed by the Retail channel accounted for 66.4% and 74.2% of our total annuity and life insurance premiums and deposits in 2012 and 2011, respectively. Annuities distributed by the Retail channel accounted for 51.6% and 62.5% of our total first year annuity premiums and deposits in 2012 and 2011, respectively, and 45.0% and 49.6% of our total annuity premiums and deposits in 2012 and 2011, respectively. Life insurance products distributed by the Retail channel accounted for 4.4% and 5.5% of our total first year life insurance premiums and deposits in 2012 and 2011, respectively, and 21.4% and 24.6% of our total life insurance premiums and deposits in 2012 and 2011, respectively. For additional information on premiums and deposits, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Premiums and Deposits.”
Wholesale Distribution. AXA Distributors, our broker-dealer and insurance general agency subsidiary, distributes our annuity products on a wholesale basis in all 50 states, the District of Columbia and Puerto Rico through national and regional securities firms, independent financial planning and other broker-dealers, banks and brokerage general agencies. AXA Distributors, primarily through its AXA Partners division, also distributes our life insurance products on a wholesale basis principally through brokerage general agencies.
Reinsurance and Hedging
We have in place reinsurance and hedging programs to reduce our exposure to mortality, equity market fluctuations, interest rate fluctuations and certain other product features.
Reinsurance. In 2012, we generally retained up to $25 million of mortality risk on single-life policies and $30 million of mortality risk on second-to-die policies. For amounts issued in excess of those limits, and often for lower amounts, we typically obtained reinsurance from unaffiliated third parties. The reinsurance arrangements obligate the reinsurer to pay a portion of any death claim in excess of the amount retained by us in exchange for an agreed-upon premium.
We also have reinsured to non-affiliated reinsurers a portion of our exposure on variable annuity products that offer a GMIB and/or GMDB feature issued through February 2005. At December 31, 2012, we had reinsured to non-affiliated reinsurers, subject to certain maximum amounts or caps in any one period, approximately 21.3% of our net amount at risk resulting from the GMIB feature and approximately 5.1% of our net amount at risk to the GMDB obligation on annuity contracts in force as of December 31, 2012.
A contingent liability exists with respect to reinsurance should the reinsurers be unable to meet their obligations. We evaluate the financial condition of our reinsurers in an effort to minimize our exposure to significant losses from reinsurer insolvencies. We are not a party to any risk reinsurance arrangement with any non-affiliated reinsurer pursuant to which the amount of reserves on reinsurance ceded to such reinsurer equals more than 1.22% of our total policy reserves (including Separate Accounts).
In addition to non-affiliated reinsurance, we have ceded to our affiliate, AXA RE Arizona Company (formerly AXA Financial (Bermuda), Ltd.), a captive reinsurance company established by AXA Financial in 2003 (“AXA Arizona”), a 100% quota share of all liabilities for variable annuity with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. The GMDB/GMIB reinsurance transaction currently allows for a more efficient use of our capital. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under universal life insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. For additional information on reinsurance, see Notes 9 and 11 of Notes to Consolidated Financial Statements.
1-5
Hedging. We have adopted certain hedging programs that are designed to mitigate certain risks associated with the GMDB, GMIB, GWBL, and GIB liabilities that have not been reinsured. These programs utilize derivative contracts, such as exchange-traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options that collectively are managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in the equity and fixed income markets. For GMDB, GMIB, GWBL and GIB, we retain certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected assumptions for mortality, lapse and surrender, withdrawal rates and amounts and policyholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMDB, GMIB, GWBL and GIB features that result from financial markets movements. A portion of exposure to realized equity volatility is hedged using equity options and variance swaps.
We also use derivatives for other asset and liability management purposes. This includes the management of interest rate risks in the general account, the hedging of interest rate risks in anticipated sales of variable annuities and the hedging of equity linked and commodity indexed crediting rates in life and annuity products.
For additional information about reinsurance and hedging strategies, see “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Derivatives – Liquidity and Capital Resources”, “Quantitative and Qualitative Disclosures about Market Risk” and Notes 2, 8, and 9 of Notes to Consolidated Financial Statements.
Reinsurance Assumed. We also act as a retrocessionaire by assuming life reinsurance from non-affiliated reinsurers. Mortality risk through reinsurance assumed is managed using the same corporate retention limits noted above (i.e., $25 million on single-life policies and $30 million on second-to-die policies), although in practice, we currently use lower internal retention limits for life reinsurance assumed. We have also assumed accident, health, aviation and space risks by participating in or reinsuring various reinsurance pools and arrangements. We generally discontinued our participation in new accident, health, aviation and space reinsurance pools and arrangements for years following 2000, but continue to be exposed to claims in connection with pools we participated in prior to that time. We audit or otherwise review the records of many of these reinsurance pools and arrangements as part of our ongoing efforts to manage our claims risk.
Policyholder Liabilities and Reserves
We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet our policy obligations when a policy matures or is surrendered, an insured dies or becomes disabled or upon the occurrence of other covered events, or to provide for future annuity payments. Our reserve requirements are calculated based on a number of estimates and assumptions, including estimates and assumptions related to future mortality, morbidity, interest rates, future equity performance, reinvestment rates, persistency, claims experience and policyholder elections (i.e., lapses and surrenders, withdrawals and amounts of withdrawals, contributions and the allocation thereof etc.) which we modify to reflect our actual experience and/or refined assumptions when appropriate.
Pursuant to state insurance laws, we establish statutory reserves, reported as liabilities, to meet our obligations on our policies. These statutory reserves are established in amounts sufficient to meet policy and contract obligations, when taken together with expected future premiums and interest at assumed rates. Statutory reserves generally differ from actuarial liabilities for future policy benefits determined using U.S. GAAP.
State insurance laws and regulations require that we submit to state insurance departments, with each annual report, an opinion and memorandum of a “qualified actuary” that the statutory reserves and related actuarial amounts recorded in support of specified policies and contracts, and the assets supporting such statutory reserves and related actuarial amounts, make adequate provision for its statutory liabilities with respect to these obligations.
For additional information on Policyholder Liabilities, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Continuing Operations by Segment – Insurance” and “Risk Factors.”
1-6
Underwriting and Pricing
Underwriting. We employ detailed underwriting policies, guidelines and procedures designed to align mortality results with the assumptions used in product pricing while providing for competitive risk selection. The risk selection process is carried out by underwriters who evaluate policy applications based on information provided by the applicant and other sources. Specific tests, such as blood analysis, are used to evaluate policy applications based on the size of the policy, the age of the applicant and other factors. The purpose of this process is to determine the type and amount of risk that we are willing to accept. In addition, we are piloting alternative underwriting methods that rely on predictive modeling.
We have senior level oversight of the underwriting process in order to facilitate quality sales and serve the needs of our customers, while supporting our financial strength and business objectives. The application of our underwriting guidelines is periodically reviewed through internal underwriting audits in order to maintain high standards of underwriting and consistency.
Pricing. Pricing for our products is designed to allow us to make an appropriate profit after paying benefits to customers, and taking account of all the risks we assume. Product pricing is calculated through the use of estimates and assumptions for mortality, morbidity, withdrawal rates and amounts, expenses, persistency, policyholder elections and investment returns, as well as certain macroeconomic factors. Assumptions used are determined in light of our underwriting standards and practices. Investment-oriented products are priced based on various factors, which may include investment return, expenses, persistency and optionality.
Our life insurance products are highly regulated by the individual state regulators where such products are sold. Variable and fixed annuity products are also highly regulated and approved by the individual state regulators where the product is sold. Such products generally include penalties for early withdrawals and policyholder benefit elections to tailor the form of the product’s benefits to the needs of the opting policyholder. From time to time, we reevaluate the type and level of guarantee and other features currently being offered and may change the nature and/or pricing of such features for new sales.
We continually review our underwriting and pricing guidelines with a view to maintaining competitive offerings that are consistent with maintaining our financial strength and meeting profitability goals.
General Account Investment Portfolio
The General Account consists of a diversified portfolio of principally fixed-income investments.
The following table summarizes our General Account Investment Assets by asset category at December 31, 2012:
AXA Equitable
General Account Investment Assets(1)
(Dollars in Millions)
| | | | | | | | |
| | | Amount | | | % of Total | |
| | | (Dollars in Millions) | |
| | |
Fixed maturities | | $ | 31,644 | | | | 69.6 | % |
Mortgages | | | 5,427 | | | | 11.9 | |
Equity real estate | | | 3 | | | | — | |
Other equity investments | | | 1,407 | | | | 3.1 | |
Policy Loans | | | 3,624 | | | | 8.0 | |
Cash and short-term investments | | | 1,281 | | | | 2.8 | |
Trading securities | | | 1,839 | | | | 4.0 | |
Other invested assets | | | 236 | | | | 0.6 | |
| | | | | | | | |
Total | | $ | 45,461 | | | | 100.0 | % |
| | | | | | | | |
(1) | See “General Account Investment Portfolio – Investment Results of General Account Investment Assets” in Item 7 for further information on these investment assets and their results. |
We have an asset/liability management approach with separate investment objectives for specific classes of product liabilities, such as life insurance, annuity and group pension. We have investment strategies to manage each product line’s investment return and liquidity requirements, consistent with management’s overall investment objectives for the General Account investment portfolio. Investments frequently meet the investment objectives of more than one class of product liabilities.
1-7
Investment Surveillance. As part of our investment management process, management, with the assistance of its investment advisors, continuously monitors General Account investment performance. This internal review process culminates with a quarterly review of assets by our Investment Under Surveillance (“IUS”) Committee. The IUS Committee, among other things, evaluates whether any investments are other than temporarily impaired and, therefore, must be written down to their fair value and whether specific investments should be put on an interest non-accrual basis.
For additional information on the General Account Investment Portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General Account Investment Portfolio.”
Investment Management
General
The Investment Management segment is principally comprised of the investment management business of AllianceBernstein. Our consolidated economic interest in AllianceBernstein as of December 31, 2012 was approximately 39.5%, including the general partnership interests held indirectly by AXA Equitable as the sole shareholder of AllianceBernstein Corporation, the general partner (“AB General Partner”) of AllianceBernstein Holding L.P. (“AllianceBernstein Holding”) and AllianceBernstein. For additional information about AllianceBernstein, see the AllianceBernstein 10-K.
Clients
AllianceBernstein provides research, diversified investment management and related services globally to a broad range of clients, including: (a) institutional clients, including unaffiliated corporate and public employee pension funds, endowment funds, domestic and foreign institutions and governments, and various affiliates; (b) retail clients, including U.S. and offshore mutual funds, variable annuities, insurance products and sub-advisory relationships; (c) private clients, including high-net-worth individuals, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities; and (d) institutional investors seeking high-quality research, portfolio strategy advice and brokerage related services.
AllianceBernstein also provides distribution, shareholder servicing and administrative services to its sponsored mutual funds.
Research
AllianceBernstein’s high-quality, in-depth research is the foundation of its business. AllianceBernstein believes that its global team of research professionals gives it a competitive advantage in achieving investment success for its clients. AllianceBernstein’s research disciplines include fundamental, quantitative and economic research and currency forecasting. In addition, AllianceBernstein has several specialized research initiatives, including research examining global strategic developments that can affect multiple industries and geographies.
Products and Services
AllianceBernstein offers a broad range of investment products and services to its clients, including: (a) to its institutional clients, AllianceBernstein offers separately managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, hedge funds and other investment vehicles, (b) to its retail clients, AllianceBernstein offers retail mutual funds sponsored by AllianceBernstein and its subsidiaries, sub-advisory services to mutual funds sponsored by third parties, separately managed account programs that are sponsored by financial intermediaries worldwide and other investment vehicles, (c) to its private clients, AllianceBernstein offers diversified investment management services through separately managed accounts, hedge funds, mutual funds and other investment vehicles and (d) to institutional investors, AllianceBernstein offers research, portfolio strategy advice.
AllianceBernstein’s portfolio managers oversee a number of different types of investment services within various vehicles and strategies. AllianceBernstein’s services include: (a) value equities, generally targeting stocks that are out of favor and considered undervalued; (b) growth equities, generally targeting stocks with under-appreciated growth potential; (c) fixed income securities, including taxable and tax-exempt securities; (d) blend strategies, combining style-pure investment components with systematic rebalancing; (e) passive management, including index and enhanced index strategies; (f) alternative investments, including hedge funds, funds of funds, currency management strategies and private capital (e.g., direct real estate investing); and (g) asset allocation services, including dynamic asset allocation, customized target date funds, target risk funds and other strategies tailored to help clients meet their investment goals.
1-8
Sub-advisory client mandates span AllianceBernstein’s investment strategies, including value, growth, fixed income and blend. AllianceBernstein serves as sub-advisor to retail mutual funds, insurance products, retirement platforms and institutional investment products.
AllianceBernstein provides its services using various investment disciplines, including market capitalization (e.g., large-, mid- and small-cap equities), term (e.g., long-, intermediate- and short-duration debt securities), and geographic location (e.g., U.S., international, global and emerging markets), as well as local and regional disciplines in major markets around the world.
AllianceBernstein markets and distributes alternative investment products globally to high-net-worth clients and institutional investors. Alternative product assets under management totaled $11.6 billion as of December 31, 2012, $9.7 billion of which was institutional assets under management, $1.5 billion of which was private client assets under management and $0.4 billion of which was retail assets under management.
In 2008, AllianceBernstein created a unit called AllianceBernstein Defined Contribution Investments (“ABDC”) focused on expanding AllianceBernstein’s capabilities in the defined contribution (“DC”) market. ABDC seeks to provide the most effective DC investment solutions in the industry, as measured by product features, reliability, cost and flexibility, to meet specialized client needs by integrating research and investment design, product strategy, strategic partnerships (e.g.,record-keeper partnerships and operations collaboration), and client implementation and service. In November 2010, AllianceBernstein introduced Lifetime Income Strategies (formerly known as Secure Retirement Strategies, “SRS”), a multi-manager target-date solution. LIS provides guaranteed lifetime retirement income backed by multiple insurers to participants of large DC plans. AllianceBernstein had its first LIS client funding during the second quarter of 2012 and is in discussions with additional plan sponsors to introduce LIS in their plans in 2013.
As of December 31, 2012, AllianceBernstein’s DC assets under management, which are distributed in all three of AllianceBernstein’s distribution channels, totaled approximately $26.0 billion.
Revenues
AllianceBernstein earns revenues primarily by charging fees for managing the investment assets of, and providing research to, its clients.
AllianceBernstein generally calculates investment advisory fees as a percentage of the value of assets under management at a specific date or as a percentage of the value of average assets under management for the applicable billing period, with these percentages varying by type of investment service, size of account and total amount of assets AllianceBernstein manages for a particular client. Accordingly, fee income generally increases or decreases as assets under management increases or decreases. Increases in assets under management generally result from market appreciation, positive investment performance for clients, net asset inflows from new and existing clients or acquisitions. Similarly, decreases in assets under management generally result from market depreciation, negative investment performance for clients, or net asset outflows due to client redemptions, account terminations or asset withdrawals.
AllianceBernstein is eligible to earn performance-based fees on some alternative investments, including hedge fund services, as well as some long-only services provided to its institutional clients. For these services, AllianceBernstein charges a base advisory fee and is eligible to earn an additional performance-based fee or incentive allocation that is calculated as either a percentage of absolute investment results or a percentage of investment results in excess of a stated benchmark over a specified period of time. Some performance-based fees include a high-watermark provision, which generally provides that if a client account underperforms relative to its performance target (whether absolute or relative to a specified benchmark), it must gain back such underperformance before AllianceBernstein can collect future performance-based fees. Therefore, if AllianceBernstein fails to achieve its performance target for a particular period, AllianceBernstein will not earn a performance-based fee for that period and, for accounts with a high-watermark provision, its ability to earn future performance-based fees will be impaired. If the percentage of AllianceBernstein’s assets under management subject to performance-based fees grows, seasonality and volatility of revenue and earnings are likely to become more significant. AllianceBernstein’s performance-based fees in 2012, 2011 and 2010 were $67 million (including $40 million pertaining to winding up of the Public-Private Investment Program fund), $17 million and $21 million, respectively. For additional information on AllianceBernstein’s performance-based fees, see the AllianceBernstein Risk Factors in Exhibit 13.1 hereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
AllianceBernstein sometimes experiences periods when the number of new accounts or the amount of assets under management increases or decreases significantly. These changes result from wide-ranging factors, including conditions of financial markets, AllianceBernstein’s investment performance for clients, the experience of the portfolio manager (both with AllianceBernstein and in the industry generally), the client’s overall relationship with AllianceBernstein, consultant recommendations and changes in its clients’ investment preferences, risk tolerances and liquidity needs.
1-9
AllianceBernstein also generates revenues from clients to whom it provides research, portfolio strategy advice and brokerage-related services, primarily in the form of transaction fees calculated as either “cents per share” (generally in the U.S. market) or a percentage of the value of the securities traded (generally outside of the U.S.) for these clients.
AllianceBernstein’s revenues may fluctuate for a number of reasons. For additional information on AllianceBernstein’s revenues, see the AllianceBernstein Risk Factors in Exhibit 13.1 hereto, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Assets Under Management
As of December 31, 2012, AllianceBernstein had approximately $430.0 billion in assets under management, including approximately $219.8 billion from institutional services, approximately $144.4 billion from retail services and approximately $65.8 billion from private client services. As of December 31, 2012, assets of AXA, AXA Financial and AXA Equitable, including investments in EQAT and VIP Trust represented approximately 25.0% of AllianceBernstein’s total assets under management, and fees and other charges for the management of those assets accounted for approximately 4.0% of AllianceBernstein’s total revenues. The Investment Management segment continues to provide asset management services to AXA Equitable.
For additional information about AllianceBernstein, including its results of operations, see “Business – Regulation” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Continuing Operations by Segment – Investment Management” and Note 1 of Notes to Consolidated Financial Statements and the AllianceBernstein 10-K.
EMPLOYEES
As of December 31, 2012, we had approximately 4,140 full-time employees and AllianceBernstein had approximately 3,318 full-time employees.
COMPETITION
Insurance. There is strong competition among insurers, banks, brokerage firms and other financial institutions and providers seeking clients for the types of products and services we provide, including insurance, annuity and other investment products and services. Competition is intense among a broad range of financial institutions and other financial service providers for retirement and other savings dollars. For additional information regarding competition, see “Risk Factors.”
The principal competitive factors affecting our business are our financial strength as evidenced, in part, by our financial and claims-paying ratings; access to capital; access to diversified sources of distribution; size and scale; product quality, range, features/functionality and price; our ability to bring customized products to the market quickly; our ability to explain complicated products and features to our distribution channels and customers; crediting rates on fixed products; visibility, recognition and understanding of our brands in the marketplace; reputation and quality of service; and (with respect to variable insurance and annuity products, mutual funds and other investment products) investment options, flexibility and investment management performance.
The turbulence in the financial markets over the past few years, its impact on the capital position and product offerings of many competitors, and subsequent actions by regulators and rating agencies has altered the competitive landscape. This has led many companies, including us, to re-examine the pricing and features of certain products offered and/or to discontinue offering such products altogether. As a result, pricing, product features and financial strength have taken on greater significance in the eyes of some customers and certain distributors. For additional information on the products we offer, see “Business – General” and “Business – Products.”
We and our affiliated distributors must attract and retain productive sales representatives to sell our products. Strong competition continues among financial institutions for sales representatives with demonstrated ability. We compete with other financial institutions for sales representatives primarily on the basis of financial position, product breadth and features, support services and compensation policies. For additional information, see “Risk Factors.”
1-10
Legislative and other changes affecting the regulatory environment can affect our competitive position within the life insurance industry and within the broader financial services industry. For additional information, see “Business – Regulation” and “Risk Factors.”
Investment Management. The financial services industry is intensely competitive and new entrants are continually attracted to it. No single or small group of competitors is dominant in the industry.
AllianceBernstein competes in all aspects of its business with numerous investment management firms, mutual fund sponsors, brokerage and investment banking firms, insurance companies, banks, savings and loan associations and other financial institutions that often provide investment products that have similar features and objectives as those AllianceBernstein offers. AllianceBernstein’s competitors offer a wide range of financial services to the same customers that AllianceBernstein seeks to serve. Some of AllianceBernstein’s competitors are larger, have a broader range of product choices and investment capabilities, conduct business in more markets, and have substantially greater resources than AllianceBernstein. These factors may place AllianceBernstein at a competitive disadvantage, and AllianceBernstein can give no assurance that its strategies and efforts to maintain and enhance its current client relationships, and create new ones, will be successful.
AXA, AXA Equitable and certain of their direct and indirect subsidiaries offer financial services, some of which compete with those offered by AllianceBernstein. AllianceBernstein’s partnership agreement specifically allows AXA Financial and its subsidiaries (other than the AB General Partner) to compete with AllianceBernstein and to exploit opportunities that may be available to AllianceBernstein. AXA, AXA Financial, AXA Equitable and certain of their respective subsidiaries have substantially greater resources than AllianceBernstein does and are not obligated to provide resources to AllianceBernstein.
To grow its business, AllianceBernstein must be able to compete effectively for assets under management. Key competitive factors include (i) AllianceBernstein’s investment performance for its clients; (ii) AllianceBernstein’s commitment to place the interests of its clients first; (iii) the quality of AllianceBernstein’s research; (iv) AllianceBernstein’s ability to attract, retain and motivate highly skilled, and often highly specialized, personnel; (v) the array of investment products AllianceBernstein offers; (vi) the fees AllianceBernstein charges; (vii) Morningstar/Lipper rankings for the AllianceBernstein Funds; (viii) AllianceBernstein’s operational effectiveness; (ix) AllianceBernstein’s ability to further develop and market its brand; and (x) AllianceBernstein’s global presence.
Increased competition could reduce the demand for AllianceBernstein’s products and services, which could have a material adverse effect on its financial condition, results of operations and business prospects.
REGULATION
Insurance Regulation
We are licensed to transact insurance business, and are subject to extensive regulation and supervision by insurance regulators, in all 50 states of the United States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands and nine of Canada’s twelve provinces and territories. We are domiciled in New York and are primarily regulated by the Superintendent (the “Superintendent”) of the New York State Department of Financial Services (the “NYSDFS”). The extent of regulation by jurisdiction varies, but most jurisdictions have laws and regulations governing sales practices, standards of solvency, adequacy of reserves, reinsurance and hedging, risk-based capital, permitted types and concentrations of investments and business conduct to be maintained by insurance companies as well as agent licensing, approval of policy forms and, for certain lines of insurance, approval or filing of rates. Insurance regulators have the discretionary authority to limit or prohibit new issuances of business to policyholders within their jurisdictions when, in their judgment, such regulators determine that the issuing company is not maintaining adequate statutory surplus or capital. Additionally, the New York Insurance Law limits sales commissions and certain other marketing expenses that we may incur. For additional information on Insurance Supervision, see “Risk Factors.”
We are required to file detailed annual financial statements, prepared on a statutory accounting basis, with supervisory agencies in each of the jurisdictions in which we do business. Such agencies may conduct regular or targeted examinations of our operations and accounts, and make requests for particular information from us. In addition to oversight by state insurance regulators in recent years, the insurance industry has seen an increase in inquiries from state attorneys general and other state officials regarding compliance with certain state insurance, securities and other applicable laws. We have received and responded to such inquiries from time to time. For example, AXA Equitable, along with other life insurance industry companies, has been the subject of various inquiries regarding its death claim, escheatment, and unclaimed property procedures and is cooperating with these inquiries. In June 2011, the New York State Attorney General’s office issued a
1-11
subpoena to AXA Equitable in connection with its investigation of industry escheatment and unclaimed property procedures. AXA Equitable is also under audit by a third party auditor acting on behalf of a number of U.S. state jurisdictions reviewing compliance with unclaimed property laws of those jurisdictions. In July 2011, AXA Equitable received a request from the NYSDFS to use data available on the U.S. Social Security Administration’s Death Master File (“DMF”) or similar database to identify instances where death benefits under life insurance policies, annuities and retained asset accounts are payable, to locate and pay beneficiaries under such contracts, and to report the results of the use of the data. AXA Equitable has filed several reports with the NYSDFS related to its request. A number of life insurance industry companies have received a multistate targeted market conduct examination notice issued on behalf of various U.S. state insurance departments reviewing use of the DMF, claims processing and payments to beneficiaries. In December 2012, AXA Equitable received an examination notice on behalf of at least six insurance departments. The audits and related inquiries have resulted in the payment of death benefits and changes to AXA Equitable’s relevant procedures. AXA Equitable expects it will also result in the reporting and escheatment of unclaimed death benefits, including potential interest on such payments, and the payment of examination costs. In addition, AXA Equitable, along with other life insurance companies, are subject to lawsuits that may be filed by regulatory agencies or other litigants.
In July 2012, as part of an industry-wide inquiry, we received and responded to a request from the NYSDFS to provide information regarding the use of affiliated captive reinsurers or off-shore entities to reinsure insurance risks. The NAIC is also studying the use of captive reinsurers. Like many life insurance companies, we utilize a captive reinsurer, AXA Arizona, as part of our capital management strategy. If the NYSFS or other state insurance regulators determine to restrict the use of such captive reinsurance on a prospective basis, it would adversely impact the capital management benefits we receive under this reinsurance arrangement.
Holding Company and Shareholder Dividend Regulation. Most states, including New York, regulate transactions between an insurer and its affiliates under insurance holding company acts. The insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require a controlled insurance company (insurers that are subsidiaries of insurance holding companies) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning its capital structure, ownership, financial condition, certain intercompany transactions and general business operations.
State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, as well as on transactions between an insurer and its affiliates.
In 2012, we paid an aggregate of $362 million in shareholder dividends to AXA Financial. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
Guaranty Associations and Similar Arrangements.Each of the states in which we are admitted to transact business require life insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay certain contractual insurance benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets.
During each of the past five years, the assessments levied against us have not been material.
Risk Based Capital (“RBC”). We are subject to RBC requirements and report our RBC based on a formula calculated by applying factors to various asset, premium and statutory reserve items, as well as taking into account the risk characteristics of the insurer. The major categories of risk involved are asset risk, insurance risk, interest rate risk, market risk and business risk. The formula is used as a regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose RBC ratio does not meet or exceed certain RBC levels. As of the date of the most recent annual statutory financial statements filed with insurance regulators, our RBC was in excess of each of those RBC levels. For additional information on RBC, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
1-12
Dodd-Frank Wall Street Reform and Consumer Protection Act
Currently, the U.S. federal government does not directly regulate the business of insurance. While the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) does not remove primary responsibility for the supervision and regulation of insurance from the states, Title V of the Act establishes a Federal Insurance Office (“FIO”) within the U.S. Treasury Department and reforms the regulation of the non-admitted property and casualty insurance market and the reinsurance market. The FIO has authority that extends to all lines of insurance except health insurance, crop insurance and (unless included with life or annuity components) long-term care insurance. Under the Dodd-Frank Act, the FIO is charged with monitoring all aspects of the insurance industry (including identifying gaps in regulation that could contribute to a systemic crisis), recommending to the newly established Financial Stability Oversight Council (“FSOC”) the designation of any insurer and its affiliates (potentially including AXA and its affiliates) as a non-bank financial company subject to oversight by the Board of Governors of the Federal Reserve System (including the administration of stress testing on capital), assisting the Treasury Secretary in negotiating “covered agreements” with non-US governments or regulatory authorities, and, with respect to state insurance laws and regulation, determining whether such state insurance measures are pre-empted by such covered agreements. In addition, the FIO will be empowered to request and collect data (including financial data) on and from the insurance industry and insurers (including reinsurers) and their affiliates. In such capacity, the FIO may require an insurer or an affiliate of an insurer to submit such data or information as the FIO may reasonably require. In addition, the FIO’s approval will be required to subject an insurer or a company whose largest U.S. subsidiary is an insurer to the special orderly liquidation process outside the federal bankruptcy code, administered by the Federal Deposit Insurance Corporation pursuant to the Dodd-Frank Act. The Dodd-Frank Act also reforms the regulation of the non-admitted property/casualty insurance market (commonly referred to as excess and surplus lines) and the reinsurance markets, including the ability of non-domiciliary state insurance regulators to deny credit for reinsurance when recognized by the ceding insurer’s domiciliary state regulator.
Other aspects of our operations could also be affected by the Dodd-Frank Act. These include:
Heightened Standards and Safeguards. The FSOC may recommend that state insurance regulators or other regulators apply new or heightened standards and safeguards for activities or practices we and other insurers or other financial services companies engage in if the FSOC determines that those activities or practices could create or increase the risk that significant liquidity, credit or other problems spread among financial companies. We cannot predict whether any such recommendations will be made or their effect on our business, consolidated results of operations or financial condition.
Over-The-Counter Derivatives Regulation. The Dodd-Frank Act creates a new framework for regulating Over-The Counter (“OTC”) derivatives, which may increase the costs of hedging and other permitted derivatives trading activity undertaken by us. Under the new regulatory regime and subject to certain exceptions, certain standardized OTC derivatives will be cleared through a centralized clearinghouse and executed on a centralized exchange. In addition, new margin and capital requirements on market participants contained in final regulations to be adopted by the SEC and the U.S. Commodity Futures Trading Commission (“CFTC”) could substantially increase the cost of hedging and related operations, affect the profitability of our products or their attractiveness to our customers, or cause us to alter our hedging strategy or change the composition of the risks we do not hedge.
Broker-Dealer Regulation. The Dodd-Frank Act provides that the SEC may promulgate rules to provide that the standard of conduct for all broker-dealers, when providing personalized investment advice about securities to retail customers (and any other customers as the SEC may by rule provide) will be the same as the standard of conduct applicable to an investment adviser under the Investment Advisers Act of 1940. Although the full impact of such a provision can only be measured when the implementing regulations are adopted, the intent of this provision is to authorize the SEC to impose on broker-dealers fiduciary duties to their customers, as applies to investment advisers under existing law. At the same time that the SEC is considering rulemaking as directed by the Dodd-Frank Act, FINRA has recently proposed and, in some cases, finalized significant additional rules of conduct affecting broker-dealers in a number of areas. The Department of Labor (“DOL”) has also been active in rulemaking activities which may potentially affect broker-dealer and investment advisory business, including the provision of increased compensation disclosure to qualified plans and possible expansion of the definition of a “fiduciary” under the Employment Retirement Income Security Act (“ERISA”).
Federal Tax Legislation
There are a number of existing, expiring, newly enacted and previously or currently proposed Federal tax initiatives that may also significantly affect us including, among others, the following.
Estate and Related Taxes. Under Federal tax legislation enacted on January 2, 2013, exemption amounts for estate, gift and generation skipping transfer (“GST”) taxes in the United States on estates, gifts or GST transfers exceeding $5 million per
1-13
individual (to be indexed for inflation) will be subject to tax at a top rate of 40%. The permanence of the estate tax as enacted in 2013 with an inflation indexed exemption amount of $5 million, a top tax rate of 40% and “portability” which allows a surviving spouse to use a deceased spouse’s unused $5 million exemption could be expected to have an adverse impact on life insurance sales as a significant portion of our life insurance sales are made in conjunction with estate planning. At the same time, the higher gift tax exemption may encourage certain gifting techniques involving life insurance in larger estates.
Income, Capital Gains and Dividend Tax Rates. Federal tax legislation enacted on January 2, 2013 made permanent reduced income tax rates for individuals except those with taxable income of over $400,000 per year ($450,000 for a married couple on a joint tax return) who will now be subject to a top income tax rate of 39.6% (an increase from 35%); a top long-term capital gains and dividend tax rate of 20% (an increase from 15%). Such changes may increase the tax appeal of cash value life insurance and annuity products for individuals in the higher tax bracket. The tax advantages of cash value life insurance and annuity products should increase favourably in the event of higher income and capital gains tax rates and the application of a newly enacted 3.8% net investment income tax on investment type income for higher earning taxpayers beginning in 2013.
Dividends Received Deduction.The Treasury Department and the Internal Revenue Service have indicated that they intend to address through guidance the methodology to be followed in determining the dividends received deduction (“DRD”) related to variable life insurance and annuity contracts. The DRD reduces the amount of dividend income subject to tax and is a significant component of the difference between our actual tax expense and expected amount determined using the federal statutory tax rate of 35%. A change in the DRD, including the possible retroactive or prospective elimination of this deduction through regulations or legislation, could increase our actual tax expense and reduce our consolidated net income.
In February 2012, the Obama Administration released the “General Explanations of the Administration’s Revenue Proposals” (the “Green Book”). The Green Book included proposals, which if enacted, would affect the taxation of life insurance companies and certain life insurance products. In particular, the proposals would change the method used to determine the amount of dividend income received by a life insurance company on assets held in separate accounts established to support variable life insurance and variable annuity contracts that is eligible for the DRD. The proposal is similar to proposals included in both the 2010 and 2011 Green Book that were not enacted.
Corporate Owned Life Insurance. The 2012 Green Book also contained a proposal, similar to 2010 and 2011 proposals which, if enacted, would affect the treatment of certain corporate owned life insurance policies (“COLIs”). The proposal would limit a portion of a business entity’s interest deductions unless the insured person was a 20% or more owner of the business. If a proposal of this type were enacted, our sale of new COLIs, could be adversely affected. In its current form, the proposal would generally not affect in-force previously purchased COLI policies.
Other Proposals. The U.S. Congress may also consider proposals for, among other things, the comprehensive overhaul of the Federal tax law and/or tax incentives targeted particularly to lower and middle-income taxpayers. For example, as part of deficit reduction ideas being discussed, there may be renewed interest in tax reform options, which could present sweeping changes to many longstanding tax rules. One possible change includes the creation of new tax-favoured savings accounts that would replace many existing qualified plan arrangements or new limits on the tax benefits available under existing qualified plan arrangements. Others would eliminate or limit certain tax benefits currently available to cash value life insurance and deferred annuity products. Enactment of these changes or similar alternatives would likely adversely affect new sales, and possibly funding and persistency of existing cash value life insurance and deferred annuity products. Finally, current legislative proposals may introduce significant increases on the taxation of financial institutions, including, taxes on certain financial institutions to compensate for the funds dispersed during the financial crisis, taxes on financial transactions, and taxes on executive compensation, including bonuses.
Recent tax rulings indicate lifetime annuity guarantees can be placed upon mutual fund type investment portfolios outside the annuity contract. Such portfolios would not be tax-deferred but would be eligible to pass capital gain or loss and dividend treatment to the policyholders. Development of such new annuity designs could impact the attractiveness or pricing of current annuity guarantee designs but expand the market for such guarantees.
The current, rapidly changing economic environment and projections relating to government budget deficits may increase the likelihood of substantial changes to Federal tax law. Management cannot predict what, if any, legislation will actually be proposed or enacted based on these proposals or what other proposals or legislation, if any, may be introduced or enacted relating to our business or what the effect of any such legislation might be.
1-14
Broker-Dealer and Securities Regulation
We and certain policies and contracts offered by us are subject to regulation under the Federal securities laws administered by the SEC, self-regulatory organizations and under certain state securities laws. These regulators may conduct examinations of our operations, and from time to time make requests for particular information from us.
AXA Advisors, AXA Distributors, AllianceBernstein Investments, Inc., and Sanford C. Bernstein & Co., LLC are registered as broker-dealers (collectively, the “Broker-Dealers”) under the Exchange Act. The Broker-Dealers are subject to extensive regulation by the SEC and are members of, and subject to regulation by, the Financial Industry Regulatory Authority, Inc. (“FINRA”), a self-regulatory organization subject to SEC oversight. The Broker-Dealers are subject to the capital requirements of the SEC and/or FINRA, which specify minimum levels of capital (“net capital”) that the Broker-Dealers are required to maintain and also limit the amount of leverage that the Broker-Dealers are able to employ in their businesses. The SEC and FINRA also regulate the sales practices of the Broker-Dealers. In recent years, the SEC and FINRA have intensified their scrutiny of sales practices relating to variable annuities, variable life insurance and alternative investments, among other products. In addition, the Broker-Dealers are also subject to regulation by state securities administrators in those states in which they conduct business, who may also conduct examinations and direct inquiries to the Broker-Dealers.
The SEC, FINRA and other governmental regulatory authorities, including state securities administrators, may institute administrative or judicial proceedings that may result in censure, fines, the issuance of cease-and-desist orders, the suspension or expulsion of a broker-dealer or member, its officers or employees or other similar sanctions.
Certain of our Separate Accounts are registered as investment companies under the Investment Company Act of 1940, as amended (the “Investment Company Act”). Separate Account interests under certain annuity contracts and insurance policies issued by us are also registered under the Securities Act of 1933, as amended (the “Securities Act”). EQAT and VIP Trust are registered as investment companies under the Investment Company Act and shares offered by these investment companies are also registered under the Securities Act. Many of the investment companies managed by AllianceBernstein, including a variety of mutual funds and other pooled investment vehicles, are registered with the SEC under the Investment Company Act, and, if appropriate, shares of these entities are registered under the Securities Act.
Certain subsidiaries and affiliates of AXA Equitable including, AXA Equitable FMG, and AXA Advisors and AllianceBernstein and certain of its affiliates are registered as investment advisors under the Investment Advisers Act of 1940, as amended (the “Investment Advisers Act”). The investment advisory activities of such registered investment advisors are subject to various Federal and state laws and regulations and to the laws in those foreign countries in which they conduct business. These laws and regulations generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. In case of such an event, the possible sanctions that may be imposed include the suspension of individual employees, limitations on engaging in business for specific periods, revocation of registration as an investment advisor, censures and fines.
As a result of regulatory changes recently enacted by the CFTC, effective January 1, 2013, AXA Equitable FMG is registered with the CFTC as a “commodity pool operator” and is also a member of the National Futures Association (“NFA”). AllianceBernstein and certain of its subsidiaries are also separately registered with the CFTC. The CFTC is a federal independent agency that is responsible for, among other things, the regulation of commodity interests and enforcement of the Commodity Exchange Act (“CEA”). The NFA is a self-regulatory organization to which the CFTC has delegated, among other things, the administration and enforcement of commodity regulatory registration requirements and the regulation of its members. As such, AXA Equitable FMG will be subject to regulation by the NFA and CFTC and will be subject to certain legal requirements and restrictions in the CEA and in the rules and regulations of the CFTC and the rules and by-laws of the NFA on behalf of itself and any commodity pools that it operates, including investor protection requirements and antifraud prohibitions, and will be subject to periodic inspections and audits by the CFTC and NFA. AXA Equitable FMG will also be subject to certain CFTC-mandated disclosure, reporting and recordkeeping obligations once the CFTC proposal seeking to harmonize CFTC requirements for investment companies that are also registered with the SEC are finalized. Violations of the rules of the CFTC or NFA could result in remedial actions including censures, fines, registration restrictions, trading prohibitions, limitations on engaging in business for specific periods or the revocations of CFTC registration or NFA membership.
Regulators, including the SEC, FINRA, CFTC, NFA and state attorneys general, continue to focus attention on various practices in or affecting the investment management and/or mutual fund industries, including portfolio management, valuation and the use of fund assets for distribution. We and certain of our subsidiaries have provided, and in certain cases continue to provide, information and documents to the SEC, FINRA, CFTC, NFA, state attorneys general, state insurance regulators and other regulators on a wide range of issues. Ongoing or future regulatory investigations could potentially result in fines, other sanctions and/or other costs.
1-15
ERISA Considerations
We provide certain products and services to employee benefit plans that are subject to ERISA and certain provisions of the Internal Revenue Code. As such, our activities are subject to the restrictions imposed by ERISA and the Internal Revenue Code, including the requirement that fiduciaries must perform their duties solely in the interests of plan participants and beneficiaries, and fiduciaries may not cause or permit a covered plan to engage in certain prohibited transactions with persons (parties-in-interest) who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Internal Revenue Code are subject to enforcement by the U.S. Department of Labor, the Internal Revenue Service (“IRS”) and the Pension Benefit Guaranty Corporation.
Privacy of Customer Information
We have adopted a privacy policy outlining procedures and practices to be followed by members of the AXA Financial Group relating to the collection, disclosure and protection of customer information. Customer information may only be used to conduct company business. We may not disclose customer information to third parties except as required or permitted by law. Customer information may not be sold or rented to third parties. A copy of the privacy policy is mailed to customers on an annual basis. Federal and state laws and regulations require financial institutions to protect the security and confidentiality of customer information and report breaches in which customer information is intentionally or accidentally disclosed to third parties. Violation of these laws and regulations may result in significant fines and remediation costs. Legislation currently under consideration in the U.S. Congress and state legislatures could create additional obligations relating to the use and protection of customer information.
Environmental Considerations
Federal, state and local environmental laws and regulations apply to our ownership and operation of real property. Inherent in owning and operating real property are the risk of hidden environmental liabilities and the costs of any required clean-up. Under the laws of certain states, contamination of a property may give rise to a lien on the property to secure recovery of the costs of clean-up, which could adversely affect our mortgage lending business. In some states, this lien may have priority over the lien of an existing mortgage against such property. In addition, in some states and under the federal Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA, we may be liable, in certain circumstances, as an “owner” or “operator,” for costs of cleaning-up releases or threatened releases of hazardous substances at a property mortgaged to us. We also risk environmental liability when we foreclose on a property mortgaged to us. However, Federal legislation provides for a safe harbor from CERCLA liability for secured lenders, provided that certain requirements are met. Application of various other federal and state environmental laws could also result in the imposition of liability on us for costs associated with environmental hazards.
We routinely conduct environmental assessments prior to making a mortgage loan or taking title to real estate, whether through acquisition for investment, or through foreclosure on real estate collateralizing mortgages that it holds. Although unexpected environmental liabilities can always arise, we seek to minimize this risk by undertaking these environmental assessments consistent with regulatory guidance and complying with our internal procedures. As a result, we believe that any costs associated with compliance with environmental laws and regulations or any clean-up of properties would not have a material adverse effect on our consolidated results of operations.
Intellectual Property
We rely on a combination of copyright, trademark, patent and trade secret laws to establish and protect our intellectual property rights. AXA Financial has entered into a licensing arrangement with AXA concerning the use by AXA Financial Group of the “AXA” name. We also have an extensive portfolio of trademarks and service marks that we consider important in the marketing of our product and services. We regard our intellectual property as valuable assets and protect them against infringement.
AllianceBernstein has also registered a number of service marks with the U.S. Patent and Trademark Office and various foreign trademark offices, including the combination of an “AB” design logo with the mark “AllianceBernstein.” AllianceBernstein has acquired all of the rights and title in, and to, the Bernstein service marks, including the mark “Bernstein.”
1-16
Iran Threat Reduction and Syria Human Rights Act
AXA Financial, AXA Equitable and their global subsidiaries had no transactions or activities requiring disclosure under the Iran Threat Reduction and Syria Human Rights Act (“Iran Act”), nor were they involved in the AXA Group insurance policies described immediately below.
The non-U.S. based subsidiaries of AXA, our parent company, operate in compliance with applicable laws and regulations of the various jurisdictions where they operate, including applicable international (United Nations and European Union) laws and regulations. While AXA Group companies based and operating outside the United States generally are not subject to U.S. law, as an international group, AXA has in place policies and standards (including the AXA Group International Sanctions Policy) that apply to all AXA Group companies worldwide and often impose requirements that go well beyond local law. For additional information regarding AXA, see “Business – Parent Company.”
AXA has reported to us that 16 insurance policies underwritten by two of AXA’s European insurance subsidiaries, AXA France IARD and AXA Winterthur, that were in-force during 2012 potentially come within the scope of the disclosure requirements of the Iran Act. Of these insurance policies, 15 policies were written by AXA France IARD and relate to property and casualty insurance (homeowners, auto, accident, liability and/or fraud policies) covering property located in France where the insured is a company or other entity that may have, direct or indirect, ties to the Government of Iran (the “French Policies”), including Iranian entities designated under Executive Orders 13224 and 13382. AXA France IARD is a French company, based in Paris, which is licensed to operate in France. The other policy, described below, was written by AXA Winterthur and provides global coverage to a Swiss-based non-governmental organization based in Geneva that was initially established by the United Nations to facilitate international transport (the “Swiss Policy”). AXA Winterthur is a Swiss company, based in Winterthur, Switzerland, which is licensed to operate in Switzerland.
With respect to these policies, as of the date of this report: (1) AXA France IARD has taken actions necessary to terminate coverage under all 15 of the French Policies; and (2) AXA Winterthur has restructured coverage under the Swiss Policy to specifically exclude Iran. The aggregate premium for these 16 policies was less than $1 million (approximately $105,000 for the 15 French Policies and approximately $884,000 for the relevant premium amount under the Swiss Policy), representing less than 0.001% of AXA’s consolidated revenues, which are in excess of $100 billion. The net profit attributable to these 16 insurance policies is difficult to calculate with precision, but AXA estimates its net profit attributable to all 16 of these policies, in the aggregate, was less than $300,000, representing less than 0.006% of AXA’s aggregate net profit.
The Swiss Policy relates to insurance provided to the International Road Transport Union (“IRU”), a nongovernmental organization based in Geneva which, among other things, acts as the implementing partner of the Transports Internationaux Routiers Customs Transit System (“TIR System”) under mandate of the United Nations. The TIR System is an international harmonized system of customs control that facilitates trade and transport by TIR Carnets, which are customs transit documents used to prove the existence of the international guarantee for duties and taxes for the goods transported under the TIR System, with the IRU guaranteeing payment to the contracting countries. The TIR Convention includes more than 70 contracting countries, including the United States, each member of the European Union and many other countries, including Iran.
During 2012, AXA Winterthur provided global cover to the IRU insuring it against financial losses that the IRU may incur if a carrier fails to pay the duty charges under the terms of a TIR Carnet. Under this policy, AXA Winterthur guaranteed duty payments on behalf of the IRU to the TIR national transport associations in each of the more than 70 participating countries, which includes Iran’s TIR System national transport association (the Iran Chamber of Commerce Industry Mines and Agriculture).
As noted above, AXA Winterthur has restructured coverage under the Swiss Policy to specifically exclude Iran and notified the IRU accordingly.
1-17
PARENT COMPANY
AXA, our ultimate parent company, is the holding company for an international group of insurance and related financial services companies engaged in the financial protection and wealth management business. AXA is one of the world’s largest insurance groups, operating primarily in Europe, North America, the Asia/Pacific region and, to a lesser extent, in other regions including the Middle East, Africa and Latin America. AXA has five operating business segments: life and savings, property and casualty, international insurance, asset management and banking.
Neither AXA nor any affiliate of AXA has any obligation to provide additional capital or credit support to AXA Financial, AXA Equitable or any of its subsidiaries.
Voting Trust. In connection with AXA’s application to the Superintendent for approval of its acquisition of the capital stock of AXA Financial, AXA and the initial Trustees of the Voting Trust entered into a Voting Trust Agreement dated as of May 12, 1992 (as amended by the First Amendment, dated January 22, 1997, and as amended and restated by the Second Amended and Restated Voting Trust Agreement, dated April 29, 2011, the “Voting Trust Agreement”). Pursuant to the Voting Trust Agreement, AXA and its affiliates (“AXA Parties”) have deposited the shares of AXA Financial’s Common Stock held by them in the Voting Trust. The purpose of the Voting Trust is to ensure for insurance regulatory purposes that certain indirect minority shareholders of AXA will not be able to exercise control over AXA Financial or AXA Equitable.
AXA and any other holder of voting trust certificates will remain the beneficial owner of the shares deposited by it, except that the Trustees will be entitled to exercise all voting rights attached to the deposited shares so long as such shares remain subject to the Voting Trust. In voting the deposited shares, the Trustees must act to protect the legitimate economic interests of AXA and any other holders of voting trust certificates (but with a view to ensuring that certain indirect minority shareholders of AXA do not exercise control over AXA Financial or AXA Equitable). All dividends and distributions (other than those that are paid in the form of shares required to be deposited in the Voting Trust) in respect of deposited shares will be paid directly to the holders of voting trust certificates. If a holder of voting trust certificates sells or transfers deposited shares to a person who is not an AXA Party and is not (and does not, in connection with such sale or transfer, become) a holder of voting trust certificates, the shares sold or transferred will be released from the Voting Trust. The initial term of the Voting Trust ended in 2002 and the term of the Voting Trust has been extended, with the prior approval of the Superintendent, until April 29, 2021. Future extensions of the term of the Voting Trust remain subject to the prior approval of the Superintendent.
1-18
Part I, Item 1A.
RISK FACTORS
In the course of conducting our business operations, we could be exposed to a variety of risks. This “Risk Factors” section provides a summary of some of the significant risks that have affected and could affect our business, consolidated results of operations or financial condition. In this section, the terms “we,” “us” and “our” refer to AXA Equitable. As noted below, risk factors relating to AllianceBernstein’s business, reported in the Investment Management segment, are specifically incorporated by reference herein.
Continued difficult conditions in the global capital markets and the economy have affected and may continue to materially adversely affect our business, consolidated results of operations and financial condition and these conditions may not improve in the near term.
Our business, consolidated results of operations and financial condition are materially affected by conditions in the global capital markets and the economy generally. Concerns over the pace of the economic recovery, the level of U.S. national debt, the European sovereign debt crisis, unemployment, the availability and cost of credit, the U.S. housing market, inflation levels, and geopolitical issues have contributed to increased volatility and diminished confidence for the economy and the capital markets going forward. Given our interest rate and equity market exposure, these events have had and may continue to have an adverse effect on us. Our revenues may decline, our profit margins could erode and we could incur significant losses.
Factors such as consumer spending, business investment, government spending, the volatility and strength of the equity markets, interest rates, deflation and inflation all affect the business and economic environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending, the demand for our financial and insurance products could be adversely affected. In addition, the levels of surrenders and withdrawals of our variable life and annuity contracts we face may be adversely impacted. Our policyholders may choose to defer paying insurance premiums or stop paying insurance premiums altogether. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on our business, consolidated results of operations and financial condition. See “Business – Products” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Continuing Operations by Segment.”
Prolonged periods of low interest rates and interest rate fluctuations have negatively impacted and should they persist would continue to negatively impact our business and consolidated results of operations and financial condition.
Some of our life insurance and annuities products and certain of our investment products, and our investment returns, are sensitive to interest rate fluctuations, and changes in interest rates may adversely affect our investment returns and results of operations, including in the following respects:
| | • | | changes in interest rates may reduce the spread on some of our products between the amounts that we are required to pay under the contracts and the rate of return we are able to earn on our general account investments supporting the contracts. When interest rates decline, we have to reinvest the cash income from our investments in lower yielding instruments, potentially reducing net investment income. Since many of our policies and contracts have guaranteed minimum interest or crediting rates or limit the resetting of interest rates, the spreads could decrease and potentially become negative. When interest rates rise, we may not be able to replace the assets in our general account as quickly with the higher yielding assets needed to fund the higher crediting rates necessary to keep these products and contracts competitive, which may result in higher lapse rates; |
| | • | | when interest rates rise, policy loans and surrenders and withdrawals of life insurance policies and annuity contracts may increase as policyholders seek to buy products with perceived higher returns, requiring us to sell investment assets potentially resulting in realized investment losses, or requiring us to accelerate the amortization of DAC; |
| | • | | a decline in interest rates accompanied by unexpected prepayments of certain investments may result in reduced investment income and a decline in our profitability. An increase in interest rates accompanied by unexpected extensions of certain lower yielding investments may result in a decline in our profitability; |
| | • | | changes in the relationship between long-term and short-term interest rates may adversely affect the profitability of some of our products; |
1A-1
| | • | | changes in interest rates may adversely impact our liquidity and increase our costs of financing; |
| | • | | our mitigation efforts with respect to interest rate risk are primarily focused on maintaining an investment portfolio with diversified maturities that has a weighted average duration that is approximately equal to the duration of our estimated liability cash flow profile. However, our estimate of the liability cash flow profile may turn out to be inaccurate. In addition, there are practical and capital market limitations on our ability to accomplish this matching. Due to these and other factors we may need to liquidate investments prior to maturity at a loss in order to satisfy liabilities or be forced to reinvest funds in a lower rate environment; |
| | • | | although we take measures, including hedging strategies utilizing derivative instruments to manage the economic risks of investing in a changing interest rate environment, we may not be able to effectively mitigate, and we may sometimes choose based on economic considerations and other factors not to fully mitigate or increase, the interest rate risk of our assets relative to our liabilities; and |
| | • | | for certain of our products, a delay between the time we make changes in interest rate and other assumptions used for product pricing and the time we are able to reflect these assumptions in products available for sale may negatively impact the long-term profitability of products sold during the intervening period. |
Recent periods have been characterized by low interest rates and the Federal Reserve Board has committed to keeping interest rates low until unemployment falls below 6.5%. A prolonged period during which interest rates remain at levels lower than those anticipated may result in greater costs associated with certain of our product features which guarantee death benefits or income streams for stated periods or for life; higher costs for derivative instruments used to hedge certain of our product risks; or shortfalls in investment income on assets supporting policy obligations as our portfolio earnings decline over time, each of which may require us to record charges to increase reserves. In addition to compressing spreads and reducing net investment income, such an environment may cause policies to remain in force for longer periods than we anticipated in our pricing, potentially resulting in greater claims costs than we expected and resulting in lower overall returns on business in force.
Equity market declines and volatility may adversely affect our business and consolidated results of operations and financial condition.
Declines or volatility in the equity markets can negatively impact our investment returns as well as our business and profitability. For example, equity market declines and/or volatility may, among other things:
| | • | | decrease the account values of our variable life and annuity contracts which, in turn, reduces the amount of revenue we derive from fees charged on those account and asset values. At the same time, for annuity contracts that provide enhanced guarantee features, equity market declines and/or volatility increases the amount of our potential obligations related to such enhanced guarantee features and may increase the cost of executing product guarantee related hedges beyond what was anticipated in the pricing of the products being hedged. This could result in an increase in claims and reserves related to those contracts, net of any reinsurance reimbursements or proceeds from our hedging programs; |
| | • | | can influence policyholder behavior, which may adversely impact the levels of surrenders, withdrawals and amounts of withdrawals of our variable life and annuity contracts or cause policyholders to reallocate a portion of their account balances to more conservative investment options (which may have lower fees), which could negatively impact our future profitability and/or increase our benefit obligations particularly if they were to remain in such options during an equity market increase; |
| | • | | negatively impact the value of equity securities we hold for investment, including our investment in AllianceBernstein, thereby reducing our statutory capital; |
| | • | | reduce demand for variable products relative to fixed products; |
| | • | | lead to changes in estimates underlying our calculations of deferred acquisition costs (“DAC”) that, in turn, could accelerate our DAC amortization and reduce our current earnings; |
| | • | | result in changes to the fair value of our GMIB reinsurance contracts, which could increase the volatility of our earnings; and |
| | • | | decrease the value of assets held to fund payments to employees from our qualified pension plan, which could result in increased pension plan costs. |
1A-2
Our reinsurance and hedging programs may be inadequate to protect us against the full extent of the exposure or losses we seek to mitigate.
Certain of our products, including especially our variable annuity products, include guarantees of income streams for stated periods or for life. Downturns in equity markets, increased equity volatility, or reduced interest rates could result in an increase in the valuation of liabilities associated with such products, resulting in increases in reserves and reductions in net income. In the normal course of business, we seek to mitigate some of these risks to which our business is subject through our reinsurance and hedging programs. However, these programs cannot eliminate all of the risks and no assurance can be given as to the extent to which such programs will be effective in reducing such risks.
Reinsurance. We utilize reinsurance to mitigate a portion of the risks that we face, principally in certain of our in-force life insurance and annuity products with regard to mortality, and in certain of our annuity products with regard to a portion of the enhanced guarantee features. Under our reinsurance arrangements, other insurers assume a portion of the obligation to pay claims and related expenses to which we are subject. However, we remain liable as the direct insurer on all risks we reinsure and, therefore, are subject to the risk that our reinsurer is unable or unwilling to pay or reimburse claims at the time demand is made. Although we evaluate periodically the financial condition (including the applicable capital requirements) of our reinsurers, the inability or unwillingness of a reinsurer to meet its obligations to us (or the inability to collect under our reinsurance treaties for any other reason) could have a material adverse impact on our consolidated results of operations and financial condition. See “Business – Reinsurance and Hedging” and Notes 8 and 9 of Notes to Consolidated Financial Statements.
We are continuing to utilize reinsurance to mitigate a portion of our risk on certain new life insurance sales. Prolonged or severe adverse mortality or morbidity experience could result in increased reinsurance costs, and ultimately may reduce the availability of reinsurance for future life insurance sales. If, for new sales, we are unable to maintain our current level of reinsurance or purchase new reinsurance protection in amounts that we consider sufficient, we would either have to be willing to accept an increase in our net exposures, revise our pricing to reflect higher reinsurance premiums or limit the amount of new business written on any individual life. If this were to occur, we may be exposed to reduced profitability and cash flow strain or we may not be able to price new business at competitive rates.
Hedging Programs. We utilize a hedging program to mitigate a portion of the unreinsured risks we face in, among other areas, the enhanced guarantee features of our annuity products and minimum crediting rates on our life and annuity products from unfavorable changes in benefit exposures due to movements in the equity markets and interest rates. In certain cases, however, we may not be able to apply these techniques to effectively hedge these risks because the derivative market(s) in question may not be of sufficient size or liquidity or there could be an operational error in the application of our hedging strategy or for other reasons. The operation of our hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates and amounts of withdrawals, election rates, market volatility, interest rates and correlation among various market movements. There can be no assurance that ultimate actual experience will not differ materially from our assumptions, particularly (but not only) during periods of high market volatility, which could adversely impact consolidated results of operations and financial condition. For example, in the past, due to, among other things, levels of volatility in the equity and interest rate markets above our assumptions as well as deviations between actual and assumed surrender and withdrawal rates, gains from our hedging programs did not fully offset the economic effect of the increase in the potential net benefits payable under the guarantees offered in certain of our products. If these circumstances were to reoccur in the future or if, for other reasons, results from our hedging programs in the future do not correlate with the economic effect of changes in benefit exposures to customers, we could experience economic losses which could have a material adverse impact on our consolidated results of operations and financial condition.
Our hedging programs do not fully hedge our statutory capital position. Additionally, we may choose to hedge these risks on a basis that does not correspond to their anticipated or actual impact upon our results of operations or financial position under U.S. GAAP, which may decrease our earnings or increase the volatility of our results of operations or financial position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results Of Continuing Operations By Segment.”
See “Business – Reinsurance and Hedging” and Notes 2,8 and 9 of Notes to Consolidated Financial Statements.
1A-3
Our reinsurance arrangements with AXA Arizona, which are an important element of our capital management strategy, may be adversely impacted by changes to policyholder behavior assumptions under the reinsured contracts, the performance of AXA Arizona’s hedge program, its liquidity needs, its overall financial results and changes in regulatory requirements.
We currently reinsure to AXA Arizona, an indirect, wholly-owned subsidiary of AXA Financial, a 100% quota share of all liabilities for variable annuity with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under universal life insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. The reinsurance arrangements with AXA Arizona provide important capital management benefits to AXA Equitable. Under applicable statutory accounting rules, we are entitled to a credit in its calculation of reserves for amounts reinsured to AXA Arizona to the extent AXA Arizona holds assets in an irrevocable trust and/or letters of credit. Under the reinsurance transactions, AXA Arizona is permitted to transfer assets from the trusts under certain circumstances. The level of assets required to be maintained in the trust fluctuates based on market and interest rate movements, mortality experience and policyholder behavior (i.e., the exercise or non-exercise of rights by policyholders under the contracts including, but not limited to, lapses and surrenders, withdrawal rates and amounts and contributions). Increasing reserve requirements may necessitate that additional assets be placed in trust and/or securing additional letters of credit, which could impact AXA Arizona’s liquidity.
In addition, like AXA Equitable, AXA Arizona employs a dynamic hedging strategy which utilizes derivative instruments as well as repurchase agreement transactions that are collectively managed to help reduce the economic impact of unfavorable changes to GMDB and GMIB reserves. The terms of these instruments in many cases require AXA Arizona to post collateral for the benefit of counterparties or cash settle hedges when there is a decline in the estimated fair value of specified instruments. This would occur, for example, as interest rates and/or equity markets rise and AXA Arizona may not be permitted to transfer assets from the trust under the terms of the reinsurance treaty.
While management believes that AXA Arizona has adequate liquidity and credit facilities to deal with a range of market scenarios and increasing reserve requirements, larger market movements, including but not limited to a significant increase in interest rates, could require AXA Arizona to post more collateral or cash settle more hedges than its own resources would permit. While AXA Arizona’s management intends to take all reasonable steps to maintain adequate sources of liquidity to meet AXA Arizona’s obligations, there can be no assurance that such sources will be available in all market scenarios. The potential inability of AXA Arizona to post such collateral or cash settle such hedges could cause AXA Arizona to reduce the size of its hedging programs, which could ultimately adversely impact AXA Arizona’s ability to perform under the reinsurance arrangements and our ability to receive full statutory reserve credit for the reinsurance arrangements.
In July 2012, as part of an industry-wide inquiry, we received and responded to a request from the NYSDFS to provide information regarding the use of affiliated captive reinsurers or off-shore entities to reinsure insurance risks. The NAIC is also studying the use of captive reinsurers. Like many life insurance companies, we utilize a captive reinsurer, AXA Arizona, as part of our capital management strategy. If the NYSFS or other state insurance regulators determine to restrict the use of such captive reinsurance on a prospective basis, it would adversely impact the capital management benefits we receive under this reinsurance arrangement.
The inability to secure additional required capital and/or liquidity in the circumstances described above could have a material adverse effect on our business, consolidated results of operations and/or financial condition.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources and Note 11 of Notes to Consolidated Financial Statements.
We are heavily regulated, and changes in regulation may reduce our profitability and limit our growth.
Insurance Regulation: We are subject to a wide variety of insurance and other laws and regulations. State insurance laws regulate most aspects of our insurance business. We are domiciled in New York and are primarily regulated by New York State Department of Financial Services, Life Bureau (the “NYSDFS”) and by the states in which we are licensed.
State laws in the United States grant insurance regulatory authorities broad administrative powers with respect to, among other things:
| | • | | licensing companies and agents to transact business; |
1A-4
| | • | | calculating the value of assets to determine compliance with statutory requirements; |
| | • | | regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements; |
| | • | | establishing statutory capital and reserve requirements and solvency standards; |
| | • | | fixing maximum interest rates on insurance policy loans and minimum rates for guaranteed crediting rates on life insurance policies and annuity contracts; |
| | • | | restricting the payment of dividends and other transactions between insurance subsidiaries and affiliates; and |
| | • | | regulating the types, amounts, concentrations and valuation of investments. |
From time to time, regulators raise issues during examinations or audits that could, if determined adversely, have a material impact on us. We cannot predict whether or when regulatory actions may be taken that could adversely affect our operations. In addition, the interpretations of regulations by regulators may change and statutes may be enacted with retroactive impact, particularly in areas such as accounting or statutory reserve requirements.
State insurance guaranty associations have the right to assess insurance companies doing business in their state for funds to help pay the obligations of insolvent insurance companies to policyholders and claimants. Because the amount and timing of an assessment is beyond our control, the liabilities that we have currently established for these potential liabilities may not be adequate. See “Business – Insurance Regulation.”
State insurance regulators and the National Association of Insurance Commissioners (“NAIC”) regularly reexamine existing laws and regulations applicable to insurance companies and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer at the expense of the insurer and, thus, could have a material adverse effect on our financial condition and consolidated results of operations. For example, in October 2011, the NAIC established a subgroup to study insurers’ use of captives and special purpose vehicles to transfer insurance risk in relation to existing state laws and regulations, and to establish appropriate regulatory requirements to address concerns identified in the study. We cannot predict what actions and regulatory change will result from this study and what impacts such changes will have on our financial conditions and consolidated results of operations.
In addition, state insurance regulators are becoming more active in adopting and enforcing suitability standards with respect to sales of certain insurance products such as fixed, indexed and variable annuities. In particular, the NAIC has adopted a revised Suitability in Annuity Transactions Model Regulation (“SAT”), which will, if enacted by the states, place new responsibilities upon issuing insurance companies with respect to the suitability of annuity sales, including responsibilities for training agents. Several states, including New York, have already enacted laws based on the SAT. See “Business – Regulation – Insurance Regulation”.
U.S. Federal Regulation Affecting Insurance:Currently, the U.S. federal government does not directly regulate the business of insurance. While the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) does not remove primary responsibility for the supervision and regulation of insurance from the states, Title V of the Act establishes a Federal Insurance Office (“FIO”) within the U.S. Treasury Department and reforms the regulation of the non-admitted property and casualty insurance market and the reinsurance market. The FIO has authority that extends to all lines of insurance except health insurance, crop insurance and (unless included with life or annuity components) long-term care insurance. Under the Dodd-Frank Act, the FIO is charged with monitoring all aspects of the insurance industry (including identifying gaps in regulation that could contribute to a systemic crisis), recommending to the newly established Financial Stability Oversight Council the designation of any insurer and its affiliates (potentially including AXA and its affiliates) as a non-bank financial company subject to oversight by the Board of Governors of the Federal Reserve System (including the administration of stress testing on capital), assisting the Treasury Secretary in negotiating “covered agreements” with non-US governments or regulatory authorities, and, with respect to state insurance laws and regulation, determining whether such state insurance measures are pre-empted by such covered agreements. In addition, the FIO will be empowered to request and collect data (including financial data) on and from the insurance industry and insurers (including reinsurers) and their affiliates. In such capacity, the FIO may require an insurer or an affiliate of an insurer to submit such data or information as the FIO may reasonably require. In addition, the FIO’s approval will be required to subject an insurer or a company whose largest U.S. subsidiary is an insurer to the special orderly liquidation process administered by the FDIC pursuant to the Dodd-Frank Act. The Dodd-Frank Act also reforms the regulation of the non-admitted property/casualty insurance market (commonly referred to as excess and surplus lines) and the reinsurance markets, including the ability of non-domiciliary state insurance regulators to deny credit for reinsurance when recognized by the ceding insurer’s domiciliary state regulator.
1A-5
Other aspects of our operations could also be affected by the Dodd-Frank Act. For example, the Dodd-Frank Act creates a new framework for regulating Over-The Counter (“OTC”) derivatives, which may increase the costs of hedging and other permitted derivatives trading activity undertaken by us. Under the new regulatory regime and subject to certain exceptions, certain standardized OTC derivatives will be cleared through a centralized clearinghouse and executed on a centralized exchange. In addition, new margin and capital requirements on market participants contained in final regulations to be adopted by the SEC and the U.S. Commodity Futures Trading Commission (“CFTC”) could substantially increase the cost of hedging and related operations, affect the profitability of our products or their attractiveness to our customers, or cause us to alter our hedging strategy or change the composition of the risks we do not hedge.
Although the full impact of the Dodd-Frank Act cannot be determined until the various mandated studies are conducted and implementing regulations are enacted, many of the legislation’s requirements could have profound and/or adverse consequences for the financial services industry, including the Company. The Dodd-Frank Act could make it more expensive for us to conduct our business; require us to make changes to our business model or satisfy increased capital requirements; subject us to greater regulatory scrutiny; and have a material effect on our consolidated results of operations or financial condition.
The sales of insurance products could also be adversely affected to the extent that some or all of the third-party firms that distribute our products or unaffiliated insurance companies face heightened regulatory scrutiny and/or increased regulation that causes them to de-emphasize sales of the types of products we issue.
Regulation of Brokers and Dealers: In addition, the Dodd-Frank Act provides that the SEC may promulgate rules to provide that the standard of conduct for all broker-dealers, when providing personalized investment advice about securities to retail customers (and any other customers as the SEC may by rule provide) will be the same as the standard of conduct applicable to an investment adviser under the Investment Advisers Act of 1940. Although the full impact of such a provision can only be measured when the implementing regulations are adopted, the intent of this provision is to authorize the SEC to impose on broker-dealers fiduciary duties to their customers, as applies to investment advisers under existing law. See “Business – Regulation – Dodd-Frank Wall Street Reform and Consumer Protection Act”.
International Regulation: In addition, regulators and lawmakers in non-U.S. jurisdictions are engaged in addressing the causes of the financial crisis and means of avoiding such crises in the future. For example, in May 2012, the International Association of Insurance Supervisors (“IAIS”) published a proposed assessment methodology for designating global systemically important insurers (“G-SIIs”), as part of the global initiative to identify global systemically important financial institutions (“G-SIFIs”). The proposed methodology is intended to identify those insurers whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity. Management of AXA believes that the AXA Group is likely to be among the insurance groups so designated and expects final designations to be made and publicized during the second quarter of 2013. The precise implications of being designated a G-SII are not yet clear, however, management of AXA believes that the draft policy measures for G-SIIs published by the IAIS in October 2012 provides insights into the likely consequences which include (i) additional capital buffers for business deemed non-traditional / non-insurance, (ii) greater regulatory authority over holding companies, (iii) various measures to promote “structural self-sufficiency” of group companies and reduce group interdependencies, and (iv) in general, a greater level of regulatory scrutiny for G-SIIs (including a requirement to prepare recovery and resolutions plans which will entail significant new reporting and compliance burdens and costs). These measures, if implemented, could have far reaching regulatory and competitive implications for the AXA Group and adversely impact AXA’s capital requirements, profitability, the fungibility of AXA’s capital and ability to provide capital / financial support for AXA Group companies, including potentially AXA Equitable, AXA’s ability to grow through future acquisitions and AXA’s overall competitive position in relation to insurance groups that are not designated G-SIIs. Based on the information obtained from the IAIS, the Financial Stability Board (“FSB”) will make final recommendations in consultation with national supervisory authorities. An initial list of G-SIIs is expected to be published by the FSB in the second quarter of 2013, with annual updates thereafter. While the precise implications of being designated a G-SII on the AXA Group are not yet clear, the negative impacts could be potentially significant. All of these possibilities, if they occurred, could affect the way we conduct our business and manage capital, and may require us to satisfy increased capital requirements, any of which in turn could materially affect our consolidated results of operations, financial condition and liquidity.
The amount of statutory capital that we have and the amount of statutory capital we must hold to meet our statutory capital requirements and our financial strength and credit ratings can vary significantly from time to time.
Statutory accounting standards and capital and reserve requirements for AXA Equitable are prescribed by the applicable state insurance regulators and the NAIC. State insurance regulators have established regulations that govern reserving requirements and provide minimum capitalization requirements based on risk-based capital (“RBC”) ratios for life insurance companies. This RBC formula establishes capital requirements relating to insurance, business, asset and interest rate risks,
1A-6
including equity, interest rate and expense recovery risks associated with variable annuities and group annuities that contain death benefits or certain living benefits. In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors, including but not limited to the amount of statutory income or losses we generate (which itself is sensitive to equity market and credit market conditions), changes in reserves, the amount of additional capital we must hold to support business growth, changes in equity market levels, the value of certain fixed-income and equity securities in our investment portfolio (including the value of AllianceBernstein units), changes in interest rates, as well as changes to existing RBC formulas. Additionally, state insurance regulators have significant leeway in how to interpret existing regulations, which could further impact the amount of statutory capital or reserves that we must maintain. We are primarily regulated by the NYSDFS, which from time to time has taken more stringent positions than other state insurance regulators on matters affecting, among other things, statutory capital and/or reserves. In certain circumstances, particularly those involving significant market declines, the effect of these more stringent positions may be that our financial condition appears to be worse than competitors who are not subject to the same stringent standards, which could have a material adverse impact on our competitiveness, results of operations and/or financial condition. Moreover, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of capital we must hold in order to maintain our current ratings. To the extent that our statutory capital resources are deemed to be insufficient to maintain a particular rating by one or more rating agencies, our financial strength and credit ratings might be downgraded by one or more rating agencies. There can be no assurance that we will be able to maintain our current RBC ratio in the future or that our RBC ratio will not fall to a level that could have a material adverse effect on our business and consolidated results of operations or financial condition.
Our requirements to pledge collateral or make payments related to declines in estimated fair value of specified assets may adversely affect our liquidity and expose us to counterparty credit risk.
Some of our transactions with financial and other institutions specify the circumstances under which the parties are required to pledge collateral related to any decline in the market value of the specified assets. In addition, under the terms of some of our transactions, we may be required to make payments to our counterparties related to any decline in the market value of the specified assets. The amount of collateral we may be required to pledge and the payments we may be required to make under these agreements may increase under certain circumstances, which could adversely affect our liquidity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
If the counterparties to the derivative instruments we use to hedge our business risks default or fail to perform, we may be exposed to risks we had sought to mitigate, which could materially adversely affect our financial condition and results of operations.
We use derivative instruments to hedge various business risks. We enter into a variety of derivative instruments, including exchanged traded futures contracts, over the counter derivative contracts and repurchase agreement transactions, with a number of counterparties. The vast majority of our over the counter derivative positions are subject to collateral agreements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Derivatives.” If our counterparties fail or refuse to honor their obligations under these derivative instruments, we could face significant losses to the extent collateral agreements do not fully offset our exposures. This is a more pronounced risk to us in view of the stresses suffered by financial institutions over the past several years. Such failure could have a material adverse effect on our consolidated financial condition and results of operations.
Changes in statutory reserve or other requirements and/or the impact of adverse market conditions could result in changes to our product offerings that could negatively impact our business.
Changes in statutory reserve or other requirements, increased costs of hedging, other risk mitigation techniques and financing and other adverse market conditions could result in certain products becoming less profitable or unprofitable. These circumstances have already caused us to modify and/or eliminate certain features of various products, including our variable annuity and universal life products among others, and could cause further modifications and/or the suspension or cessation of sales of certain products in the future. Modifications to products that we have made (or make in the future) may result in certain of our products being less attractive and/or competitive. This has impacted and may continue to adversely impact sales which could negatively impact our ability to retain our sales personnel and maintain our distribution relationships. This, in turn, may negatively impact our business and consolidated results of operations and financial condition.
Our reserves could be inadequate due to differences between our actual experience and management’s estimates and assumptions.
We establish and carry reserves to pay future policyholder benefits and claims. Our reserve requirements for our direct and reinsurance assumed business are calculated based on a number of estimates and assumptions, including estimates and
1A-7
assumptions related to future mortality, morbidity, interest rates, future equity performance, reinvestment rates, persistency, claims experience, and policyholder elections (i.e., the exercise or non-exercise of rights by policyholders under the contracts). Examples of policyholder elections include, but are not limited to, lapses and surrenders, withdrawals and amounts of withdrawals, and contributions and the allocation thereof. The assumptions and estimates used in connection with the reserve estimation process are inherently uncertain and involve the exercise of significant judgment. We periodically review the adequacy of reserves and the underlying assumptions and make adjustments when appropriate. We cannot, however, determine with precision the amounts that we will pay for, or the timing of payment of, actual benefits and claims or whether the assets supporting the policy liabilities will grow to the level assumed prior to payment of benefits or claims. Our claim costs could increase significantly and our reserves could be inadequate if actual results differ significantly from our estimates and assumptions. If so, we will be required to increase reserves or reduce DAC, which could adversely impact our earnings and/or capital. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Critical Accounting Estimates.”
Our profitability may decline if mortality rates or persistency rates differ significantly from our pricing expectations.
We set prices for many of our insurance and annuity products based upon expected claims and payment patterns, using assumptions for mortality rates of our policyholders. In addition to the potential effect of natural or man-made disasters, significant changes in mortality could emerge gradually over time, due to changes in the natural environment, the health habits of the insured population, the economic environment, or other factors. Pricing of our insurance and annuity products are also based in part upon expected persistency of these products, which is the probability that a policy or contract will remain in force from one period to the next. Persistency within our annuities products may be significantly impacted by the value of guaranteed minimum benefits contained in many of our variable annuity products being higher than current account values in light of poor equity market performance or extended periods of low interest rates as well as other factors. Results may also vary based on differences between actual and expected premium deposits and withdrawals for these products. Persistency within our life products may be significantly impacted by, among other things, conditions in the capital markets, the changing needs of our policyholders, the manner in which a product is marketed or illustrated, and competition, including the availability of new products. The development of a secondary market for life insurance, including life settlements or “viaticals” and investor owned life insurance, and to a lesser extent third party investor strategies in the annuities market, could adversely affect the profitability of existing business and our pricing assumptions for new business. Significant deviations in actual experience from our pricing assumptions could have an adverse effect on the profitability of our products. Although some of our products permit us to increase premiums or adjust other charges and credits during the life of the policy or contract, the adjustments permitted under the terms of the policies or contracts may not be sufficient to maintain profitability. Many of our products do not permit us to increase premiums or adjust other charges and credits or limit those adjustments during the life of the policy or contract.
Our earnings are impacted by DAC estimates that are subject to change.
Our earnings for any period depend in part on the amount of our life insurance and annuity product acquisition costs (including commissions, underwriting, agency and policy issue expenses) that can be deferred and amortized rather than expensed immediately. They also depend in part on the pattern of DAC amortization and the recoverability of DAC which is based on models involving numerous estimates and subjective judgments, including those regarding investment results including, hedging costs, Separate Account performance, Separate Account fees, mortality and expense margins, expected market rates of return, lapse rates and anticipated surrender charges. These estimates and judgments are required to be revised periodically and adjusted as appropriate. Revisions to our estimates may result in a change in DAC amortization, which could negatively impact our earnings.
We use financial models that rely on a number of estimates, assumptions and projections that are inherently uncertain and which may contain errors.
We use models in our hedging programs and many other aspects of our operations, including but not limited to product development and pricing, capital management, the estimation of actuarial reserves, the amortization of deferred acquisition costs and the valuation of certain other assets and liabilities. These models rely on estimates, assumptions and projections that are inherently uncertain and involve the exercise of significant judgment. Due to the complexity of such models, it is possible that errors in the models could exist and our controls could fail to detect such errors. Failure to detect such errors could result in a negative impact to our consolidated results of operations and financial position.
1A-8
Market conditions and other factors could adversely affect our goodwill and negatively impact our consolidated results of operations and financial condition.
Business and market conditions may impact the amount of goodwill related to the Investment Management segment we carry in our consolidated balance sheet. As the value of certain of our businesses is significantly impacted by such factors as the state of the financial markets and ongoing operating performance, significant deterioration or prolonged weakness in the financial markets or economy generally, or our failure to meet operating targets which in some respects are ambitious, could adversely impact goodwill impairment testing and also may require more frequent testing for impairment. Any impairment would reduce the recorded goodwill amount with a corresponding charge to earnings, which could be material. See “Management’s Discussion and Analysis of Financial Condition – Critical Accounting Estimates” and Note 4 of Notes to Consolidated Financial Statements.
The determination of the amount of allowances and impairments taken on our investments is subjective and could materially impact our consolidated results of operations and financial condition.
The determination of the amount of allowances and impairments vary by investment type and is based upon our evaluation and assessment of known and inherent risks associated with the respective asset class. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in allowances and impairments in operations as such evaluations are revised. There can be no assurance that management’s judgments, as reflected in our financial statements, will ultimately prove to be an accurate estimate of the actual and eventual diminution in realized value. Furthermore, additional impairments may need to be taken or allowances provided for in the future.
Some of our investments are relatively illiquid.
We hold certain investments that may lack liquidity, such as privately placed fixed maturity securities, mortgage loans, commercial mortgage backed securities, equity real estate and limited partnership interests. These asset classes represented approximately 29% of the carrying value of our total cash and invested assets as of December 31, 2012. Although we seek to adjust our cash and short-term investment positions to minimize the likelihood that we would need to sell illiquid investments, if we were required to liquidate these investments on short notice, we may have difficulty doing so and be forced to sell them for less than we otherwise would have been able to realize.
Gross unrealized losses on fixed maturity and equity securities may be realized or result in future impairments, resulting in a reduction in our net income.
Fixed maturity and equity securities classified as available-for-sale are reported at fair value. Unrealized gains or losses on available-for-sale securities are recognized as a component of other comprehensive income (loss) and are, therefore, excluded from net income. Our gross unrealized losses on fixed maturity and equity securities at December 31, 2012 were approximately $300 million. The accumulated change in estimated fair value of these available-for-sale securities is recognized in net income when the gain or loss is realized upon the sale of the security or in the event that the decline in estimated fair value is determined to be other-than-temporary and an impairment charge to earnings is taken. Realized losses or impairments may have a material adverse effect on our net income in a particular quarterly or annual period. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – General Accounts Investment Portfolio.”
A downgrade in our financial strength and claims-paying ratings could adversely affect our business and consolidated results of operations and financial condition.
Claims-paying and financial strength ratings are important factors in establishing the competitive position of insurance companies. A downgrade of our ratings or those of AXA and/or AXA Financial could adversely affect our business and results of operations by, among other things, reducing new sales of our products, increasing surrenders and withdrawals from our existing contracts, possibly requiring us to reduce prices or take other actions for many of our products and services to remain competitive, or adversely affecting our ability to obtain reinsurance or obtain reasonable pricing on reinsurance. A downgrade in our ratings may also adversely affect our cost of raising capital or limit our access to sources of capital.
As a result of the difficulties recently experienced by many insurance companies, we believe that it is possible that the ratings agencies will continue to heighten the level of scrutiny they apply to insurance companies, will continue to increase the frequency and scope of their credit reviews, will continue to request additional information from the companies that they rate, and may adjust upward the capital and other requirements employed in their ratings models for maintenance of certain ratings levels.
1A-9
Legal and regulatory actions could have a material adverse effect on our business and consolidated results of operations and financial condition.
A number of lawsuits have been filed against life and health insurers and affiliated distribution companies involving insurers’ sales practices, alleged agent misconduct, failure to properly supervise agents and other matters. Some of these lawsuits have resulted in the award of substantial judgments against other insurers, including material amounts of punitive damages, or in substantial settlements. In some states, juries have substantial discretion in awarding punitive damages.
Our subsidiaries and related companies, like other life and health insurers, are involved in such litigation and our consolidated results of operations and financial position could be affected by defense and settlement costs and any unexpected material adverse outcomes in such litigations as well as in other material litigations pending against them. The frequency of large damage awards, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given matter.
In addition, examinations by Federal and state regulators and other governmental and self-regulatory agencies including, among others, the SEC, state attorneys general, insurance and securities regulators and FINRA could result in adverse publicity, sanctions, fines and other costs. We have provided and, in certain cases, continue to provide information and documents to the SEC, FINRA, state attorneys general, state insurance departments and other regulators on a wide range of issues. For example, AXA Equitable, along with other life insurance industry companies, has been the subject of various inquiries regarding its death claim, escheatment, and unclaimed property procedures and is cooperating with these inquiries. In June 2011, the New York State Attorney General’s office issued a subpoena to AXA Equitable in connection with its investigation of industry escheatment and unclaimed property procedures. AXA Equitable is also under audit by a third party auditor acting on behalf of a number of U.S. state jurisdictions reviewing compliance with unclaimed property laws of those jurisdictions. In July 2011, AXA Equitable received a request from the NYDFS to use data available on the U.S. Social Security Administration’s Death Master File (“DMF”) or similar database to identify instances where death benefits under life insurance policies, annuities and retained asset accounts are payable, to locate and pay beneficiaries under such contracts, and to report the results of the use of the data. AXA Equitable has filed several reports with the NYDFS related to its request. A number of life insurance industry companies have received a multistate targeted market conduct examination notice issued on behalf of various U.S. state insurance departments reviewing use of the DMF, claims processing and payments to beneficiaries. In December 2012, AXA Equitable received an examination notice on behalf of at least six insurance departments. At this time, management cannot predict what actions the SEC, FINRA and/or other regulators may take or what the impact of such actions might be. See “Business – Regulation.”
Changes in U.S. tax laws and regulations may adversely affect sales of our products and our profitability.
Currently, U.S. tax law provisions afford certain benefits to life insurance and annuity products. The nature and extent of competition and the markets for our life insurance and annuity products and our profitability may be materially affected by changes in tax laws and regulations, including changes relating to savings and retirement funding. Adverse changes could include, among many other things, the introduction of current taxation of increases in the account value of life insurance and annuity products, improved tax treatment of mutual funds or other investments as compared to insurance products or repeal of the Federal estate tax. Management cannot predict what proposals may be made, what legislation, if any, may be introduced or enacted or what the effect of any such legislation might be. See “Business – Regulation – Federal Tax Legislation.”
We face competition from other insurance companies, banks and other financial institutions, which may adversely impact our market share and profitability.
There is strong competition among insurers, banks, brokerage firms and other financial institutions and providers seeking clients for the types of products and services we provide, including insurance, annuity and other investment products and services. Competition is intense among a broad range of financial institutions and other financial service providers for retirement and other savings dollars. This competition makes it especially difficult to provide unique insurance products since, once such products are made available to the public, they often are reproduced and offered by our competitors. Also, this competition may adversely impact our market share and profitability.
Our ability to compete is dependent on numerous factors including, among others, the successful implementation of our strategy; our financial strength as evidenced, in part, by our financial and claims-paying ratings; our access to diversified sources of distribution; our size and scale; our product quality, range, features/functionality and price; our ability to bring customized products to the market quickly; our ability to explain complicated products and features to our distribution channels and customers; crediting rates on our fixed products; the visibility, recognition and understanding of our brands in
1A-10
the marketplace; our reputation and quality of service; and (with respect to variable insurance and annuity products, mutual funds and other investment products) investment options, flexibility and investment management performance. See “Business – Competition.”
Consolidation of distributors of insurance products may adversely affect the insurance industry and the profitability of our business.
The insurance industry distributes many of its products through other financial institutions such as banks and broker-dealers. The trend toward consolidation in the financial services industry has been significantly accelerating as a result of the recent financial crisis with substantial consolidation particularly between and among banks and other financial services companies. An increase in bank and other financial services companies consolidation activity may create firms with even stronger competitive positions, negatively impact the industry’s sales, and such consolidation could increase competition for access to distributors, result in greater distribution expenses and impair our ability to market insurance products to our current customer base or expand our customer base. Consolidation of distributors and/or other industry changes may also increase the likelihood that distributors will try to renegotiate the terms of any existing selling agreements to terms less favorable to us.
An inability to recruit, motivate and retain experienced and productive financial professionals and key employees may adversely affect our business.
Our proprietary sales force and key employees are key factors driving our sales. Intense competition exists among insurers and other financial services companies for financial professionals and key employees. We compete principally with respect to compensation policies, products and support provided to financial professionals. Competition is particularly intense in the hiring and retention of experienced financial professionals. Our recent expense reduction measures and any additional measures we may take in view of current economic conditions could have a significant effect on our ability to hire and retain key personnel. Although we believe that we offer financial professionals and employees a strong value proposition, we cannot provide assurances that we will be successful in our efforts to recruit, motivate and retain top financial professionals and key employees.
The ability of our financial professionals to sell our competitors’ products could result in reduced sales of our products and revenues.
Most of our financial professionals can sell annuity and life insurance products of competing unaffiliated insurance companies. To the extent our financial professionals sell our competitors’ products rather than our products, we will experience reduced sales and revenues.
Changes in accounting standards could have a material adverse effect on our consolidated results of operations and/or financial condition.
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America that are revised from time to time. Accordingly, from time to time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the Financial Accounting Standards Board (“FASB”). For example, the adoption of the provisions of Accounting Standards Update (“ASU”) 2010-26, Financial Services: Insurance (Accounting Standards Codification™(“ASC”) Topic 944): “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts” decreased our December 31, 2011 Total equity by $721 million. In the future, new accounting pronouncements, as well as new interpretations of existing accounting pronouncements, may have material adverse effects on our consolidated results of operations and/or financial condition. See Note 2 of Notes to Consolidated Financial Statements.
We may not be able to protect our intellectual property and may be subject to infringement claims by a third party.
We rely on a combination of contractual rights, copyright, trademark, and trade secret laws to establish and protect our intellectual property. Although we use a broad range of measures to protect our intellectual property rights, third parties may infringe or misappropriate our intellectual property. The loss of intellectual property protection or the inability to secure or enforce the protection of our intellectual property assets could have a material adverse effect on our business and our ability to compete.
Third parties may have, or may eventually be issued, patents or other protections that could be infringed by our products, methods, processes or services or could limit our ability to offer certain product features. In recent years, there has been increasing intellectual property litigation in the financial services industry challenging, among other things, product designs
1A-11
and business processes. If a third party were to successfully assert an intellectual property infringement claim against us, or if we were otherwise precluded from offering certain features or designs, or utilizing certain processes, it could have a material adverse effect on our business, consolidated results of operations and financial condition. See “Business – Intellectual Property.”
Losses due to defaults, errors or omissions by third parties, including outsourcing relationships, could materially adversely impact our business and consolidated results of operations and financial condition.
We depend on third parties that owe us money, securities or other assets to pay or perform under their obligations. These parties include the issuers whose securities we hold in our investment portfolios, borrowers under the mortgage loans we make, customers, trading counterparties, counterparties under swap and other derivative contracts, clearing agents, exchanges, clearing houses and other financial intermediaries. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, downturns in the economy or real estate values, operational failure or other reasons.
We also depend on third parties in other contexts. For example, in establishing the amount of the liabilities and reserves associated with the risks assumed in connection with reinsurance pools and arrangements, we rely on the accuracy and timely delivery of data and other information from ceding companies. In addition, as investment manager and administrator of several mutual funds, we rely on various affiliated and unaffiliated subadvisors to provide day-to-day portfolio management services for each investment portfolio.
We also rely on third parties to whom we outsource certain technology platforms, information systems and administrative functions, including records retention. If we do not effectively implement and manage our outsourcing strategy, third party vendor providers do not perform as anticipated, such vendors’ internal controls fail or are inadequate, or we experience technological or other problems associated with outsourcing transitions, we may not realize anticipated productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and reputational damage.
Losses associated with defaults or other failures by these third parties and outsourcing partners upon whom we rely could materially adversely impact our business, and consolidated results of operations and financial condition.
We could experience significant difficulties with respect to our proprietary technology and information systems as well as those provided by vendors.
We utilize numerous technology and information systems in our businesses, some of which are proprietary and some of which are provided by outside vendors pursuant to outsourcing arrangements. These systems are central to, among other things, designing and pricing products, underwriting and reserving decisions, our reinsurance and hedging programs, marketing and selling products and services, processing policyholder and investor transactions, client recordkeeping, communicating with retail sales associates, employees and clients, and recording information for accounting and management purposes in a secure and timely manner. The systems are maintained to provide customer privacy and, although they are periodically tested to ensure the viability of business resumption plans, these systems are subject to attack by viruses, spam, spyware, worms and other malicious software programs, which could jeopardize the security of information stored in a user’s computer or in our computer systems and networks.
We commit significant resources to maintain and enhance our existing information systems that, in some cases, are advanced in age, and to develop and introduce new systems and software applications. Any significant difficulty associated with the operation of our systems, or any material delay, disruption or inability to develop needed system capabilities could have a material adverse effect on our consolidated results of operations and, ultimately, our ability to achieve our strategic goals. We are unable to predict with certainty all of the material adverse effects that could result from our failure, or the failure of an outside vendor, to address these problems. The material adverse effects could include the inability to perform or prolonged delays in performing critical business operational functions or failure to comply with regulatory requirements, which could lead to loss of client confidence, harm to reputation or exposure to disciplinary action.
1A-12
Our business could be adversely affected by the occurrence of a catastrophe, including natural or man-made disasters.
Any catastrophic event, such as pandemic diseases, terrorist attacks, floods, severe storms or hurricanes or computer cyber-terrorism, could have an adverse effect on our business in several respects:
| | • | | we could experience long-term interruptions in our service due to the vulnerability of our information and operation systems and those of our significant vendors to the effects of catastrophic events. We depend heavily on computer systems to provide reliable service. Despite our implementation of a variety of security measures, our computer systems could be subject to physical and electronic break-ins, cyber-attacks and similar disruptions from unauthorized tampering, including threats that may come from external factors, such as governments, organized crime, hackers and third parties to whom we outsource certain functions, or may originate internally from within the Company. Some of our operational systems are not fully redundant, and our disaster recovery and business continuity planning cannot account for all eventualities. Additionally, unanticipated problems with our disaster recovery systems could further impede our ability to conduct business, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval systems and destroy valuable data; |
| | • | | the occurrence of a pandemic disease could have a material adverse effect on our liquidity and the operating results of the Insurance Segment due to increased mortality and, in certain cases, morbidity rates; |
| | • | | the occurrence of any pandemic disease, natural disaster, terrorist attacks or any other catastrophic event that results in our workforce being unable to be physically located at one of our facilities could result in lengthy interruptions in our service; |
| | • | | a localized catastrophic event that affects the location of one or more of our COLI and/or employer sponsored life insurance customers could cause a significant loss due to the corresponding mortality claims; and |
| | • | | another terrorist attack in the United States could have long-term economic impacts that may have severe negative effects on our investment portfolio and disrupt our business operations. Any continuous and heightened threat of terrorist attacks could also result in increased costs of reinsurance. |
Our risk management policies and procedures may not be adequate, which may leave us exposed to unidentified or unanticipated risk, which could negatively affect our businesses or result in losses.
Our policies and procedures to identify, monitor and manage risks may not be adequate or fully effective. Many of our methods of managing risk and exposures are based upon our use of historical market behavior or statistics based on historical models. As a result, these methods may not predict future exposures, which could be significantly greater than the historical measures indicate, such as the risk of pandemics causing a large number of deaths or terrorism. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that is publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated.
Our consolidated results of operations and financial condition depend in significant part on the performance of AllianceBernstein’s business.
AllianceBernstein L.P. is a principal subsidiary of AXA Equitable. Consequently, the results of operations and financial condition of AXA Equitable depend in significant part on the performance of AllianceBernstein’s business. For information regarding risk factors associated with AllianceBernstein and its business, see “Item 1A – Risk Factors” included in AllianceBernstein L.P.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, which item is incorporated into this section by reference to Exhibit 13.1 filed with this Report.
1A-13
Part I, Item 1B.
UNRESOLVED STAFF COMMENTS
None.
1B-1
Part I, Item 2
PROPERTIES
Insurance
AXA Equitable’s principal executive offices at 1290 Avenue of the Americas, New York, NY are occupied pursuant to a lease that extends to 2023. At this location, AXA Equitable currently leases approximately 423,174 square feet of space, within which AXA Equitable currently occupies 336,297 square feet of space and has sub-let (or is currently seeking to sub-let) 86,877 square feet. During 2013, as part of AXA Equitable’s on-going efforts to reduce cost and operate more efficiently, AXA Equitable will significantly reduce its occupancy in its 1290 Avenue of the Americas headquarters. By the close of 2013, most employees currently housed at this location will be relocated to more cost efficient space in Jersey City, NJ. AXA Equitable expects that approximately 253,711 additional square feet will be made available for sub-let during 2013.
AXA Equitable also has the following significant office space leases: 316,332 square feet in Syracuse, NY, under a lease that expires in 2023, for use as an annuity operations and service center; 244,957 square feet in Jersey City, NJ, under a lease that expires in 2023, for use as general office space; 185,366 square feet in Charlotte, NC, under a lease that expires in May 2013, for use as a life insurance operations and service center; and 100,993 square feet in Secaucus, NJ, under a lease that expires in 2018 for use as an annuity operations and service center, within which AXA Equitable occupies 90,331 and is seeking to sub-let 10,662 square feet. AXA Equitable has entered into a new lease, beginning in April 2013 and expiring in 2028, for 144,647 square feet of space in Charlotte, NC to replace the office space from the expiring Charlotte, NC lease.
Investment Management
AllianceBernstein’s principal executive offices at 1345 Avenue of the Americas, New York, NY are occupied pursuant to a lease expiring in 2019 with options to extend to 2029. At this location, AllianceBernstein currently leases 1,033,984 square feet of space, within which AllianceBernstein currently occupies approximately 629,742 square feet of space and has sub-let (or is seeking to sub-let) 404,512 square feet of space.
AllianceBernstein also leases approximately 312,301 square feet of space at 135 West 50th Street, New York, NY under a lease expiring in 2019 with options to extend to 2029. Within AllianceBernstein’s leased space at 135 West 50th Street, AllianceBernstein currently occupies approximately 4,132 square feet of space and has sub-let (or is seeking to sub-let) 308,169 square feet of space. In addition, AllianceBernstein leases approximately 263,083 square feet of space at One North Lexington, White Plains, NY under a lease expiring in 2021 with options to extend to 2031. At this location, AllianceBernstein currently occupies approximately 138,687 square feet of space and has sub-let (or is seeking to sub-let) approximately 126,396 square feet of space. Certain subsidiaries of AllianceBernstein also lease 92,067 square feet of space in San Antonio, TX under a lease expiring in 2019 with options to extend to 2029. At this location, these subsidiaries currently occupy approximately 59,004 square feet of space and have sub-let (or are seeking to sub-let) approximately 33,063 square feet of space.
AllianceBernstein also leases other property both domestically and abroad for its operations.
2-1
Part I, Item 3.
LEGAL PROCEEDINGS
The matters set forth in Note 17 of Notes to Consolidated Financial Statements for the year ended December 31, 2012 (Part II, Item 8 of this report) are incorporated herein by reference.
3-1
Part I, Item 4.
MINE SAFETY DISCLOSURES
Not Applicable.
4-1
Part II, Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
At December 31, 2012, all of AXA Equitable’s common equity was owned by AXA Equitable Financial Services, LLC, a wholly owned direct subsidiary of AXA Financial, Inc., which is an indirect wholly owned subsidiary of AXA. Consequently, there is no established public market for AXA Equitable’s common equity. In 2012, 2011 and 2010, AXA Equitable paid $362 million, $379 million and $300 million, respectively, in shareholder dividends. For information on AXA Equitable’s present and future ability to pay dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” (Part II, Item 7 of this report) and Note 18 of Notes to Consolidated Financial Statements.
5-1
Part II, Item 6.
SELECTED FINANCIAL DATA
The following selected financial data have been derived from the Company’s audited consolidated financial statements. The consolidated statements of earnings (loss) for the years ended December 31, 2012, 2011 and 2010, and the consolidated balance sheet data at December 31, 2012 and 2011 have been derived from the Company’s audited financial statements included elsewhere herein. The consolidated statements of earnings (loss) for the years ended December 31, 2009 and 2008, and the consolidated balance sheet data at December 31, 2010, 2009 and 2008 have been derived from the Company’s previously reported audited financial statements not included herein. This selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere herein.
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
| | | (In Millions) | |
| | | | | |
Statements of Earnings (Loss) Data: | | | | | | | | | | | | | | | | | | | | |
REVENUES | | | | | | | | | | | | | | | | | | | | |
Universal life and investment-type product policy fee income | | $ | 3,334 | | | $ | 3,312 | | | $ | 3,067 | | | $ | 2,918 | | | $ | 2,952 | |
Premiums | | | 514 | | | | 533 | | | | 530 | | | | 431 | | | | 759 | |
Net investment income (loss): | | | | | | | | | | | | | | | | | | | | |
Investment income (loss) from derivative instruments | | | (978 | ) | | | 2,374 | | | | (284 | ) | | | (3,079 | ) | | | 7,302 | |
Other investment income | | | 2,316 | | | | 2,128 | | | | 2,260 | | | | 2,099 | | | | 1,752 | |
| | | | | | | | | | | | | | | | | | | | |
Total net investment income (loss) | | | 1,338 | | | | 4,502 | | | | 1,976 | | | | (980 | ) | | | 9,054 | |
| | | | | | | | | | | | | | | | | | | | |
Investment gains (losses), net: | | | | | | | | | | | | | | | | | | | | |
Total other-than-temporary impairment losses | | | (96 | ) | | | (36 | ) | | | (300 | ) | | | (169 | ) | | | (286 | ) |
Portion of loss recognized in other comprehensive income (loss) | | | 2 | | | | 4 | | | | 18 | | | | 6 | | | | — | |
Net impairment losses recognized | | | (94 | ) | | | (32 | ) | | | (282 | ) | | | (163 | ) | | | (286 | ) |
Other investment gains (losses), net | | | (3 | ) | | | (15 | ) | | | 98 | | | | 217 | | | | (53 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total investment gains (losses), net | | | (97 | ) | | | (47 | ) | | | (184 | ) | | | 54 | | | | (339 | ) |
| | | | | | | | | | | | | | | | | | | | |
Commissions, fees and other income | | | 3,574 | | | | 3,631 | | | | 3,702 | | | | 3,385 | | | | 4,549 | |
Increase (decrease) in fair value of the reinsurance contract asset | | | 497 | | | | 5,941 | | | | 2,350 | | | | (2,566 | ) | | | 1,567 | |
| | | | | | | | | | | | | | | | | | | | |
Total revenues | | | 9,160 | | | | 17,872 | | | | 11,441 | | | | 3,242 | | | | 18,542 | |
| | | | | | | | | | | | | | | | | | | | |
6-1
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
| | | (In Millions) | |
| | | | | |
Statements of Earnings (Loss) Data continued: | | | | | | | | | | | | | | | | | | | | |
BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | | | | | | | | | | | |
Policyholders’ benefits | | $ | 2,989 | | | $ | 4,360 | | | $ | 3,082 | | | $ | 1,298 | | | $ | 4,702 | |
Interest credited to policyholders’ account balances | | | 1,166 | | | | 999 | | | | 950 | | | | 1,004 | | | | 1,065 | |
Compensation and benefits | | | 1,672 | | | | 2,263 | | | | 1,953 | | | | 1,859 | | | | 1,990 | |
Commissions | | | 1,248 | | | | 1,195 | | | | 1,044 | | | | 1,033 | | | | 1,437 | |
Distribution related payments | | | 367 | | | | 303 | | | | 287 | | | | 234 | | | | 308 | |
Amortization of deferred sales commissions | | | 40 | | | | 38 | | | | 47 | | | | 55 | | | | 79 | |
Interest expense | | | 108 | | | | 106 | | | | 106 | | | | 107 | | | | 52 | |
Amortization of deferred policy acquisition costs | | | 576 | | | | 3,620 | | | | (326 | ) | | | 41 | | | | 2,723 | |
Capitalization of deferred policy acquisition costs | | | (718 | ) | | | (759 | ) | | | (655 | ) | | | (687 | ) | | | (1,076 | ) |
Rent expense | | | 201 | | | | 240 | | | | 244 | | | | 258 | | | | 247 | |
Amortization of other intangible assets | | | 24 | | | | 24 | | | | 23 | | | | 24 | | | | 24 | |
Other operating costs and expenses | | | 1,429 | | | | 1,359 | | | | 1,438 | | | | 1,309 | | | | 1,161 | |
| | | | | | | | | | | | | | | | | | | | |
Total benefits and other deductions | | | 9,102 | | | | 13,748 | | | | 8,193 | | | | 6,535 | | | | 12,712 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Earnings (loss) from continuing operations, before income taxes | | | 58 | | | | 4,124 | | | | 3,248 | | | | (3,293 | ) | | | 5,830 | |
Income tax (expense) benefit | | | 158 | | | | (1,298 | ) | | | (789 | ) | | | 1,347 | | | | (1,846 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Earnings (loss) from continuing operations, net of income taxes | | | 216 | | | | 2,826 | | | | 2,459 | | | | (1,946 | ) | | | 3,984 | |
Income (losses) from discontinued operations, net of income taxes | | | — | | | | — | | | | — | | | | 3 | | | | (5 | ) |
Gains (losses) on disposal of discontinued operations, net of income taxes | | | — | | | | — | | | | — | | | | — | | | | 6 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net earnings (loss) | | | 216 | | | | 2,826 | | | | 2,459 | | | | (1,943 | ) | | | 3,985 | |
Less: net (earnings) loss attributable to the noncontrolling interest | | | (121 | ) | | | 101 | | | | (235 | ) | | | (359 | ) | | | (470 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Net Earnings (Loss) Attributable to AXA Equitable | | $ | 95 | | | $ | 2,927 | | | $ | 2,224 | | | $ | (2,302 | ) | | $ | 3,515 | |
| | | | | | | | | | | | | | | | | | | | |
6-2
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | | | 2008 | |
| | | (In Millions) | |
| | | | | |
Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Total investments | | $ | 47,962 | | | $ | 44,943 | | | $ | 39,886 | | | $ | 38,270 | | | $ | 34,732 | |
Separate Accounts assets | | | 94,139 | | | | 86,419 | | | | 92,014 | | | | 84,016 | | | | 67,627 | |
Total Assets | | | 176,843 | | | | 164,908 | | | | 161,276 | | | | 147,760 | | | | 134,291 | |
Policyholders’ account balances | | | 28,263 | | | | 26,033 | | | | 24,654 | | | | 24,107 | | | | 24,743 | |
Future policy benefits and other policyholders’ liabilities | | | 22,687 | | | | 21,595 | | | | 18,965 | | | | 17,727 | | | | 17,733 | |
Short-term and long-term debt | | | 523 | | | | 645 | | | | 425 | | | | 449 | | | | 485 | |
Loans from affiliates | | | 1,325 | | | | 1,325 | | | | 1,325 | | | | 1,325 | | | | 1,325 | |
Separate Accounts liabilities | | | 94,139 | | | | 86,419 | | | | 92,014 | | | | 84,016 | | | | 67,627 | |
Total liabilities | | | 158,913 | | | | 147,365 | | | | 146,329 | | | | 135,022 | | | | 121,178 | |
Total AXA Equitable’s equity | | | 15,436 | | | | 14,840 | | | | 11,829 | | | | 9,469 | | | | 10,081 | |
Noncontrolling interest | | | 2,494 | | | | 2,703 | | | | 3,118 | | | | 3,269 | | | | 3,032 | |
Total equity | | | 17,930 | | | | 17,543 | | | | 14,947 | | | | 12,738 | | | | 13,113 | |
The following table presents the effects of the retrospective application of the adoption of new accounting guidance related to DAC to the Company’s previously reported consolidated statements of earnings (loss) for the years ended December 31, 2009 and 2008 not included herein:
| | | | | | | | | | | | |
| | | As Previously
Reported | | | Adjustment | | | As Adjusted | |
| | | (In Millions) | |
Year Ended December 31, 2009 | | | | | | | | | | | | |
Benefits and Other Deductions: | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | $ | 115 | | | $ | (74 | ) | | $ | 41 | |
Capitalization of deferred policy acquisition costs | | | (975 | ) | | | 288 | | | | (687 | ) |
Earnings (loss) from continuing operations, before income taxes | | | (3,079 | ) | | | (214 | ) | | | (3,293 | ) |
Income tax (expense) benefit | | | 1,272 | | | | 75 | | | | 1,347 | |
Net earnings (loss) | | | (1,804 | ) | | | (139 | ) | | | (1,943 | ) |
Net Earnings (Loss) Attributable to AXA Equitable | | | (2,163 | ) | | | (139 | ) | | | (2,302 | ) |
| | | |
Year Ended December 31, 2008 | | | | | | | | | | | | |
Benefits and Other Deductions: | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | $ | 3,485 | | | $ | (762 | ) | | $ | 2,723 | |
Capitalization of deferred policy acquisition costs | | | (1,394 | ) | | | 318 | | | | (1,076 | ) |
Earnings (loss) from continuing operations, before income taxes | | | 5,386 | | | | 444 | | | | 5,830 | |
Income tax (expense) benefit | | | (1,691 | ) | | | (155 | ) | | | (1,846 | ) |
Net earnings (loss) | | | 3,696 | | | | 289 | | | | 3,985 | |
Net Earnings (Loss) Attributable to AXA Equitable | | | 3,226 | | | | 289 | | | | 3,515 | |
6-3
The following table presents the effects of the retrospective application of the adoption of new accounting guidance related to DAC to the Company’s previously reported consolidated balance sheets for the years ended December 31, 2010, 2009 and 2008 not included herein:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | As Previously Reported | | | Adjustment | | | As Adjusted | |
| | | December 31, | | | December 31, | | | December 31, | |
| | | 2010 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | 2008 | | | 2010 | | | 2009 | | | 2008 | |
| | | (In Millions) | |
Total Assets | | $ | 163,156 | | | $ | 149,904 | | | $ | 136,266 | | | $ | (1,880 | ) | | $ | (2,144 | ) | | $ | (1,975 | ) | | $ | 161,276 | | | $ | 147,760 | | | $ | 134,291 | |
Total Liabilities | | | 146,987 | | | | 135,774 | | | | 121,871 | | | | (658 | ) | | | (752 | ) | | | (693 | ) | | | 146,329 | | | | 135,022 | | | | 121,178 | |
Total AXA Equitable’s equity | | | 13,051 | | | | 10,861 | | | | 11,363 | | | | (1,222 | ) | | | (1,392 | ) | | | (1,282 | ) | | | 11,829 | | | | 9,469 | | | | 10,081 | |
Total equity | | | 16,169 | | | | 14,130 | | | | 14,395 | | | | (1,222 | ) | | | (1,392 | ) | | | (1,282 | ) | | | 14,947 | | | | 12,738 | | | | 13,113 | |
6-4
Part II, Item 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) for the Company should be read in conjunction with “Forward-looking Statements,” “Risk Factors,” “Selected Financial Data” and the consolidated financial statements and related notes to consolidated financial statements included elsewhere in this Form 10-K. In the first quarter of 2012, the Company adopted new accounting guidance for Deferred Acquisition Costs (“DAC”). See Note 2 of Notes to the Consolidated Financial Statements for further information. As a result, prior period results have been retrospectively recast for the retrospective application of the first quarter 2012 adoption of new accounting guidance for DAC.
BACKGROUND
Established in 1859, AXA Equitable is among the oldest and largest life insurance companies in the United States. As part of a diversified financial services organization, AXA Equitable offers a broad spectrum of insurance and investment management products and services. Together with its affiliates, including AllianceBernstein, AXA Equitable is a leading asset manager, with total assets under management of approximately $519.5 billion at December 31, 2012, of which approximately $430.0 billion were managed by AllianceBernstein. AXA Equitable is an indirect wholly owned subsidiary of AXA Financial, which is itself an indirect wholly owned subsidiary of AXA S.A. (“AXA”), a French holding company for an international group of insurance and related financial services companies.
The Company conducts operations in two business segments, the Insurance segment and the Investment Management segment. The Insurance segment offers a variety of traditional, variable and universal life insurance products, variable and fixed-interest annuity products and asset management principally to individuals, small and medium-size businesses and professional and trade associations. The Investment Management segment is principally comprised of the investment management business of AllianceBernstein. AllianceBernstein provides research, diversified investment management and related services globally to a broad range of clients. This segment also includes institutional Separate Accounts principally managed by AllianceBernstein that provide various investment options for large group pension clients, primarily defined benefit and contribution plans, through pooled or single group accounts.
CURRENT MARKET CONDITIONS AND OVERVIEW
The Company’s business and consolidated results of operations are materially affected by conditions in the global capital markets and the economy, generally. In recent years, stressed conditions in the economy, volatility and disruptions in the capital markets and/or particular asset classes and continued low interest rates have had an adverse effect on the Company’s business, consolidated results of operations and financial condition. While an economic recovery in the U.S. is underway, concerns over the pace of the recovery continue due to, among other things, the level of U.S. national debt, the European sovereign debt crisis, unemployment, the availability and cost of credit and geopolitical issues. Moreover, recent actions by the United States Federal Reserve to provide further support to the U.S. economy including, but not limited to, keeping interest rates low until the unemployment rate falls below 6.5%, contributed to a continuation of low interest rates during the year-ended 2012. As a result, the ten year U.S. Treasury yield ranged from a low of 1.5% (the lowest in five decades) to a high of 2.2% during 2012, ultimately ending the year at 1.8% on December 31, 2012.
As part of the Company’s efforts to mitigate the impacts of the challenging conditions in the economy and capital markets on its business, the Company has modified its product portfolio by developing new and innovative products with the objective of offering a more balanced and diversified product portfolio that drives profitable growth while appropriately managing risk. The Company has made solid progress in executing this strategy over the past few years, as the Company has introduced several new life insurance and annuity products to the marketplace. These products have been well received and, in 2012, sales of these products continued to account for a significant portion of first year premiums and deposits. The Company has also taken and expects to continue to take steps to manage the risks associated with the in-force business, particularly variable annuities with guarantee features. For example, in 2012, the Company suspended the acceptance of contributions into certain Accumulator® contracts issued prior to June 2009 and initiated a limited program to offer to purchase from certain policyholders the Guaranteed Minimum Death Benefit (“GMDB”) rider contained in their Accumulator® contracts. The Company also took steps to limit and/or suspend the acceptance of contributions to other annuity products.
7-1
In addition, AXA Equitable continues to make solid progress in its on-going efforts to reduce costs, manage expenses and operate more efficiently. In 2012, AXA Equitable further reduced headcount by approximately 10.0% from 4,603 full-time employees at December 31, 2011 to 4,140 full-time employees at December 31, 2012, and has and may continue to reduce headcount further in 2013. Moreover, as a result of management’s comprehensive study of AXA Equitable’s real estate footprint and related lease obligations, an announcement was made in fourth quarter 2012 of AXA Equitable’s intention to significantly reduce its remaining occupancy in its 1290 Avenue of the Americas, New York, NY headquarters. By the close of 2013, most of the employees currently housed at this location will be relocated to more cost-efficient currently leased space in Jersey City, NJ. These actions are expected to begin in first quarter 2013 and continue throughout the remainder of the year. The space being vacated is being actively marketed for sublease.
The Company’s business, consolidated results of operations and financial condition have been negatively impacted and may continue to be negatively impacted by the sluggish economic conditions, equity market declines and volatility, interest rate fluctuations and the prolonged period of low interest rates. Some of the more significant effects include, but are not limited to the following:
| | • | | the decreases in the consolidated net earnings of the Company and the Insurance segment were largely due to the substantial decreases in 2012 in the market driven fair values of derivative instruments used to hedge the variable annuity products with GMDB, Guaranteed Minimum Income Benefit (“GMIB”) and Guaranteed Withdrawal Benefit for Life (“GWBL”) features (collectively, the “VA Guarantee Features”) that are reported at fair value. Under accounting principles generally accepted in the United States of America (“U.S. GAAP”), reserves for GMDB and GMIB features do not fully and immediately reflect the impact of equity and interest market fluctuations. If the reserves were calculated on a basis that would fully and immediately reflect the impact of equity and interest market fluctuations, U.S. GAAP earnings would be significantly lower than those being reported. For additional information, see “Accounting For Variable Annuity Guarantee Features” below. |
| | • | | the amount of benefits potentially payable by the Company under VA Guarantee Features offered in certain products, particularly the Accumulator® series of variable annuity products, has increased substantially, while the U.S. GAAP reserves do not fully and immediately reflect the impact of equity and interest market fluctuations. Additionally, the Company’s risk management program, which principally utilizes reinsurance and hedging, mitigated, but did not fully offset, the economic effect of these potential benefit increases. |
Despite the challenging economic environment, the Company’s annuity sales improved in 2012 as compared to 2011. In 2012, annuities first year premiums and deposits by the Company increased by $1.6 billion or 33.4% from 2011, primarily due to increased premiums and deposits from recently introduced variable annuity products. The Company’s first year life insurance premiums and deposits in 2012 decreased by $49 million or 10.2% from 2011, primarily due to decreased sales of the Company’s universal life insurance products.
At AllianceBernstein, total assets under management (“AUM”) as of December 31, 2012 were $430.0 billion, an increase of $24.1 billion, or 5.9%, compared to December 31, 2011. During 2012, AUM increased as a result of market appreciation of $38.5 billion (primarily in the Institutions channel), partially offset by net outflows of $14.4 billion.
ACCOUNTING FOR VA GUARANTEE FEATURES
In recent years, variable annuity products with VA Guarantee Features have been the predominant products issued by the Company. These products account for over half of the Company’s Separate Accounts assets and have been a significant driver of its results. Because the future claims exposure on these products is sensitive to movements in the equity markets and interest rates, the Company has in place various hedging and reinsurance programs that are designed to mitigate the impact of movements in the equity markets and interest rates. Due to the accounting treatment under U.S. GAAP, certain of these hedging and reinsurance programs contribute to earnings volatility. These programs generally include, among others, the following:
| | • | | Hedging programs.Hedging programs are used to mitigate certain risks associated with the VA Guarantee Features. These programs utilize various derivative instruments that are managed in an effort to reduce the economic impact of unfavorable changes in VA Guarantee Features’ exposures attributable to movements in the equity markets and interest rates. Although these programs are designed to provide a measure of economic protection against the impact adverse market conditions may have with respect to VA Guarantee Features, they do not qualify for hedge accounting treatment under U.S. GAAP, meaning that changes in the value of the derivatives will be recognized in the period in which they occur while offsetting changes in reserves will be recognized over time, which will contribute to earnings volatility as in 2012 when the Company recognized approximately $(851) million of losses on free standing derivatives and $497 |
7-2
| | million of income on the change in the fair value of the GMIB reinsurance contract asset which did not offset the $472 million increase in reserves for the VA Guarantee Features. The impact of declines in interest rates and equity markets on future claims exposure can negatively impact expected future period results, which, under the U.S. GAAP GMDB and GMIB reserving methodology, is only partially reflected in the current reserve balance. The resulting reduction in projected estimated gross profits resulted in $246 million of additional amortization in 2012 to reduce the DAC related to variable annuity products, as the DAC would have been in excess of the present value of estimated future profits. |
| | • | | GMIB reinsurance contracts.GMIB reinsurance contracts are used to cede to affiliated and non-affiliated reinsurers a portion of the exposure on variable annuity products that offer the GMIB feature. Additionally, under U.S. GAAP, the GMIB reinsurance contracts are accounted for as derivatives and are reported at fair value. Gross reserves for GMIB as noted above, on the other hand, are calculated under U.S. GAAP on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts and therefore will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market and/or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts. Because the changes in the fair value of the GMIB reinsurance contracts are recorded in the period in which they occur while offsetting changes in gross reserves for GMIB will be recognized over time, earnings will tend to be more volatile, particularly during periods in which equity markets and/or interest rates change significantly. |
Higher equity markets and relatively flat interest rates in 2012 contributed to investment losses from derivatives. Decreasing interest rates and significant declines in equity markets, during 2011, contributed to earnings volatility. In 2010, the recovery of the equity markets along with the decrease in long-term interest rates and the change in actuarial assumptions, as described below, contributed to the increase in the fair value of the reinsurance contracts, which are accounted for as derivatives, and to lower investment loss from derivative instruments. The increases in the fair value of the reinsurance contract asset in 2012, 2011 and 2010 were only partially offset by the increase in U.S. GAAP reserves. The table below shows, for 2012, 2011 and 2010, the impact on Earnings (Loss) from continuing operations before income taxes of the items discussed above (prior to the impact of Amortization of deferred acquisition costs):
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Income (loss) on free-standing derivatives(1) | | $ | (851 | ) | | $ | 1,750 | | | $ | (245 | ) |
Increase (decrease) in fair value of GMIB reinsurance contracts(2) | | | 497 | | | | 5,941 | | | | 2,350 | |
(Increase) decrease in GMDB, GMIB and GWBL and other features reserves, net of related GMDB reinsurance(3) | | | (472 | ) | | | (2,153 | ) | | | (787 | ) |
| | | | | | | | | | | | |
Total | | $ | (826 | ) | | $ | 5,538 | | | $ | 1,318 | |
| | | | | | | | | | | | |
(1) | Reported in Net investment income (loss) in the consolidated statements of earnings (loss) |
(2) | Reported in Increase (decrease) increase in fair value of reinsurance contracts in the consolidated statements of earnings (loss) |
(3) | Reported in Policyholders’ benefits in the consolidated statements of earnings (loss) |
Reinsurance ceded – AXA Arizona.The Company has implemented capital management actions to mitigate statutory reserve strain for GMDB and GMIB riders on the Accumulator® products sold on or after January 1, 2006 and in-force at September 30, 2008 through reinsurance transactions with AXA RE Arizona Company (formerly AXA Financial (Bermuda), Ltd.), a captive reinsurance company established by AXA Financial in 2003 (“AXA Arizona”). AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under universal life insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. For AXA Equitable, these reinsurance transactions currently provide statutory capital relief and mitigate the volatility of capital requirements.
The Company receives statutory reserve credits for reinsurance treaties with AXA Arizona to the extent AXA Arizona holds assets in an irrevocable trust ($9.6 billion at December 31, 2012) and/or letters of credit ($2.6 billion at December 31, 2012). AXA Arizona intends to hold a combination of assets in the trust and/or letters of credit so that the Company will continue to be permitted to take credit for the reinsurance.
For further information regarding this transaction, see “Item 1A-Risk Factors” and Note 11 of Notes to Consolidated Financial Statements included elsewhere herein.
7-3
2012, 2011 and 2010 Assumption Changes.In 2012, expectations of long-term lapse and partial withdrawal rates for variable annuities with GMDB and GMIB guarantees were updated based on emerging experience. This update increases expected future claim costs and the fair value of the GMIB reinsurance contract asset. Also in 2012, expectations of GMIB election rates were lowered for certain ages based on emerging experience. This decreases the expected future GMIB claim cost and the fair value of the GMIB reinsurance contract asset, while increasing the expected future GMDB claim cost. Additionally the Company updated the projection of future interest rates used to value GMIB claims at the time of GMIB election which decreases expected future claim costs and the fair value of the GMIB reinsurance contract asset. In 2011, expectations of long-term surrender rates for variable annuities with GMDB and GMIB guarantees were lowered at certain policy durations based upon emerging experience. Also reflected in the models which project future claims were refined assumptions for long-term lapse rates. In 2010, included in the models which project future claims were refined assumptions for partial withdrawals, dynamic policyholder surrender behavior and discount rates. These changes resulted in a net increase to the GMDB and GMIB reserves, an increase to the GMIB reinsurance asset and lower baseline DAC amortization. The after DAC and after tax impacts of these updated assumptions and refinements were an increase to Net earnings of approximately $382 million, $1.2 billion and $2.5 billion in 2012, 2011 and 2010, respectively.
CRITICAL ACCOUNTING ESTIMATES
Application of Critical Accounting Estimates
The Company’s MD&A is based upon its consolidated financial statements that have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires the application of accounting policies that often involve a significant degree of judgment, requiring management to make estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management, on an ongoing basis, reviews and evaluates the estimates and assumptions used in the preparation of the consolidated financial statements, including those related to investments, recognition of insurance income and related expenses, DAC, future policy benefits, recognition of Investment Management revenues and related expenses and benefit plan costs. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of such factors form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If management determines that modifications in assumptions and estimates are appropriate given current facts and circumstances, the consolidated results of operations and financial position as reported in the Consolidated Financial Statements could change significantly.
Management believes the critical accounting policies relating to the following areas are most dependent on the application of estimates, assumptions and judgments:
| | • | | Insurance Revenue Recognition |
| | • | | Insurance Reserves and Policyholder Benefits |
| | • | | Goodwill and Other Intangible Assets |
| | • | | Investment Management Revenue Recognition and Related Expenses |
| | • | | Share-based and Other Compensation Programs |
| | • | | Investments – Impairments and Fair Value Measurements |
Insurance Revenue Recognition
Profits on non-participating traditional life policies and annuity contracts with life contingencies emerge from the matching of benefits and other expenses against the related premiums. Profits on participating traditional life, universal life-type and investment-type contracts emerge from the matching of benefits and other expenses against the related contract margins. This matching is accomplished by means of the provision for liabilities for future policy benefits and the deferral, and subsequent amortization, of policy acquisition costs. Trends in the general population and the Company’s own mortality, morbidity, persistency and claims experience have a direct impact on the benefits and expenses reported in any given period.
7-4
Insurance Reserves and Policyholder Benefits
Participating Traditional Life Insurance Policies
For participating traditional life policies, substantially all of which are in the Closed Block, future policy benefit liabilities are calculated using a net level premium method accrued as a level proportion of the premium paid by the policyholder. The net level premium method reflects actuarial assumptions equal to guaranteed mortality and dividend fund interest rates. The liability for annual dividends represents the accrual of the annual dividends earned. Terminal dividends are accrued in proportion to gross margins over the life of the contract. Gains and losses related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization. If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below zero). If over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.
Non-participating Traditional Life Policies
The future policy benefit reserves for non-participating traditional life insurance policies relate primarily to non-participating term life products and are calculated using a net level premium method equal to the present value of expected future benefits plus the present value of future maintenance expenses less the present value of future net premiums. The expected future benefits and expenses are determined using actuarial assumptions as to mortality, persistency and interest established at policy issue. Reserve assumptions established at policy issue reflect best estimate assumptions based on the Company’s experience that, together with interest and expense assumptions, includes a margin for adverse deviation. Mortality assumptions are reviewed annually and are generally based on the Company’s historical experience or standard industry tables, as applicable; expense assumptions are based on current levels of maintenance costs, adjusted for the effects of inflation; and interest rate assumptions are based on current and expected net investment returns.
Universal Life and Investment-type Contracts
Policyholders’ account balances for universal life (“UL”) and investment-type contracts are equal to the policy account values. The policy account values represent an accumulation of gross premium payments plus credited interest, including interest linked to market indices for certain products, less expense and mortality charges and withdrawals.
The Company has issued and continues to offer certain variable annuity products with GMDB, GMIB and Guaranteed Income Benefit (“GIB”) features. The GMDB feature provides that in the event of an insured’s death, the beneficiary will receive the higher of the current contract account balance or another amount defined in the contract. The GMIB feature, if elected by the policyholder after a stipulated waiting period from contract issuance, guarantees a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of what the contract account value can purchase at then-current annuity purchase rates. This minimum lifetime annuity is based on predetermined annuity purchase rates applied to a GMIB base. The GIB feature provides a lifetime annuity based on predetermined annuity purchase rates if and when the contract account value is depleted. This lifetime annuity is based on predetermined annuity purchase rates applied to a GIB base.
The Company previously issued certain variable annuity products with GWBL, guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) features (collectively, “GWBL and other features”). The GWBL feature allows the policyholder to withdraw, each year for the life of the contract, a specified annual percentage of an amount based on the contract’s benefit base. The GMWB feature allows the policyholder to withdraw at minimum, over the life of the contract, an amount based on the contract’s benefit base. The GMAB feature increases the contract account value at the end of a specified period to a GMAB base.
Reserves for GMDB and GMIB obligations are calculated on the basis of actuarial assumptions related to projected benefits and related contract charges generally over the lives of the contracts using assumptions consistent with those used in
7-5
estimating gross profits for purposes of amortizing DAC. The determination of this estimated liability is based on models that involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, contract surrender and withdrawal rates and amounts of withdrawals, mortality experience, and, for contracts with the GMIB feature, GMIB election rates. Assumptions related to contractholder behavior and mortality are updated when a material change in behavior or mortality experience is observed in an interim period.
GIB and GWBL and other features are accounted for as embedded derivatives, with fair values calculated as the present value of future expected benefit payments to customers less the present value of assessed rider fees attributable to the embedded derivative feature. The determination of the fair value for the GIB and GWBL and other features is based upon models involving numerous estimates and subjective judgments.
Sensitivity of Future Rate of Return Assumptions on GMDB/GMIB Reserves
The future rate of return assumptions used in establishing reserves for GMDB and GMIB features regarding Separate Account performance used for purposes of this calculation are set using a long-term view of expected average market returns by applying a reversion to the mean approach, consistent with that used for DAC amortization. For additional information regarding the future expected rate of return assumptions and the reversion to the mean approach, see, “ – DAC”.
The GMDB/GMIB reserve balance before reinsurance ceded was $6.3 billion at December 31, 2012. The following table provides the sensitivity of the reserves for GMDB and GMIB features related to variable annuity policies relative to the future rate of return assumptions by quantifying the adjustments to these reserves that would be required assuming both a 100 basis point (“BP”) increase and decrease in the future rate of return. This sensitivity considers only the direct effect of changes in the future rate of return on operating results due to the change in the reserve balance before reinsurance ceded and not changes in any other assumptions such as persistency, mortality, or expenses included in the evaluation of the reserves, or any changes on DAC or other balances including hedging derivatives and the GMIB reinsurance asset.
GMDB/GMIB Reserves
Sensitivity – Rate of Return
December 31, 2012
| | | | |
| | | Increase/(Reduction) in
GMDB/GMIB Reserves | |
| | | (In Millions) | |
100 BP decrease in future rate of return | | $ | 1,332 | |
100 BP increase in future rate of return | | | (1,305 | ) |
Traditional Annuities
The reserves for future policy benefits for annuities include group pension and payout annuities, and, during the accumulation period, are equal to accumulated contractholders’ fund balances and, after annuitization, are equal to the present value of expected future payments based on assumptions as to mortality, retirement, maintenance expense, and interest rates. Interest rates used in establishing such liabilities range from 1.57% to 11.25%. If reserves determined based on these assumptions are greater than the existing reserves, the existing reserves are adjusted to the greater amount.
Reinsurance
For reinsurance contracts other than those covering GMIB exposure, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities. GMIB reinsurance contracts are used to cede affiliated and non-affiliated reinsurers a portion of the exposure on variable annuity products that offer the GMIB feature. Under U.S. GAAP, the GMIB reinsurance contracts are accounted for as derivatives and are reported at fair value. Gross reserves for GMIB, on the other hand, are calculated under U.S. GAAP on the basis of assumptions related to projected benefits and related contract charges over the lives of the contracts, therefore, will not immediately reflect the offsetting impact on future claims exposure resulting from the same capital market and/or interest rate fluctuations that cause gains or losses on the fair value of the GMIB reinsurance contracts.
7-6
Health
Individual health benefit liabilities for active lives are estimated using the net level premium method and assumptions as to future morbidity, withdrawals and interest. Benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest.
DAC
Acquisition costs that vary with and are primarily related to the acquisition of new and renewal insurance business, reflecting incremental direct costs of contract acquisition with independent third parties or employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts including commissions, underwriting, agency and policy issue expenses, are deferred. Depending on the type of contract, DAC is amortized over the expected total life of the contract group, based on the Company’s estimates of the level and timing of gross margins, gross profits or assessments, or anticipated premiums. In calculating DAC amortization, management is required to make assumptions about investment results including hedging costs, Separate Account performance, Separate Account fees, mortality and expense margins, lapse rates and anticipated surrender charges that impact the estimates of the level and timing of estimated gross profits or assessments, margins and anticipated future experience. DAC is subject to loss recognition testing at the end of each accounting period. Due primarily to the significant decline in Separate Accounts balances during 2008 and a change in the estimate of average gross short-term annual return on Separate Accounts balances to 9.0%, future estimated gross profits at December 31, 2008 for certain issue years for the Accumulator® products were expected to be negative as the increases in the fair values of derivatives used to hedge certain risks related to these products would be recognized in current earnings while the related reserves do not fully and immediately reflect the impact of equity and interest market fluctuations. As required under U.S. GAAP, for those issue years with future estimated negative gross profits, the DAC amortization method was permanently changed in fourth quarter 2008 from one based on estimated gross profits to one based on estimated assessments for the Accumulator® products, subject to loss recognition testing. In third quarter 2011, the DAC amortization method was changed to one based on estimated assessments for all issue years for the Accumulator® products due to continued volatility of margins and the continued emergence of periods of negative margins.
Participating Traditional Life Policies
For participating traditional life policies (substantially all of which are in the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield.
At December 31, 2012, the average rate of assumed investment yields, excluding policy loans, was 5.15% grading to 5.0% over 10 years. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to accumulated other comprehensive income (loss) (“AOCI”) in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
Non-participating Traditional Life Insurance Policies
DAC associated with non-participating traditional life policies is amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earnings (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy.
Universal Life and Investment-type Contracts
DAC associated with UL and investment-type products, other than Accumulator® products is amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Account fees, mortality and expense margins and surrender charges based on historical and anticipated future
7-7
experience, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated gross profits or assessments is reflected in earnings (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
Quarterly adjustments to the DAC balance are made for current period experience and market performance related adjustments, and the impact of reviews of estimated total gross profits. The quarterly adjustments for current period experience reflect the impact of differences between actual and previously estimated expected gross profits for a given period. Total estimated gross profits include both actual experience and estimates of gross profits for future periods. To the extent each period’s actual experience differs from the previous estimate for that period, the assumed level of total gross profits may change. In these cases, cumulative adjustment to all previous periods’ costs is recognized.
During each accounting period, the DAC balances are evaluated and adjusted with a corresponding charge or credit to current period earnings for the effects of the Company’s actual gross profits and changes in the assumptions regarding estimated future gross profits. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
For the variable and UL policies a significant portion of the gross profits is derived from mortality margins and therefore, are significantly influenced by the mortality assumptions used. Mortality assumptions represent the Company’s expected claims experience over the life of these policies and are based on a long-term average of actual company experience. This assumption is updated quarterly to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization. Generally, life mortality experience has been improving in recent years. However, changes to the mortality assumptions in future periods could have a significant adverse or favorable effect on the results of operations.
Premium Deficiency Reserves and Loss Recognition Tests
After the initial establishment of reserves, premium deficiency and loss recognition tests are performed using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC would first be written off and thereafter, if required, a premium deficiency reserve would be established by a charge to earnings.
Sensitivity of DAC to Changes in Future Mortality Assumptions
The variable and UL policies DAC balance was $2.6 billion at December 31, 2012. The following table demonstrates the sensitivity of the DAC balance relative to future mortality assumptions by quantifying the adjustments that would be required, assuming an increase and decrease in the future mortality rate by 1%. This information considers only the direct effect of changes in the mortality assumptions on the DAC balance and not changes in any other assumptions used in the measurement of the DAC balance and does not assume changes in reserves.
DAC Sensitivity – Mortality
December 31, 2012
| | | | |
| | | Increase/(Reduction)
in DAC | |
| | | (In Millions) | |
Decrease in future mortality by 1% | | $ | 44 | |
Increase in future mortality by 1% | | | (44 | ) |
7-8
Sensitivity of DAC to Changes in Future Rate of Return Assumptions
A significant assumption in the amortization of DAC on variable annuities and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future Separate Account performance. Management sets estimated future gross profit or assessment assumptions related to Separate Account performance using a long-term view of expected average market returns by applying a reversion to the mean approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. Currently, the average gross long-term return estimate is measured from December 31, 2008. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At December 31, 2012, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuities was 9.0% (6.71% net of product weighted average Separate Account fees), and the gross maximum and minimum short-term annual rate of return limitations were 15.0% (12.71% net of product weighted average Separate Account fees) and 0.0% (–2.29% net of product weighted average Separate Account fees), respectively. The maximum duration over which these rate limitations may be applied is 5 years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than 5 years in order to reach the average gross long-term return estimate, the application of the 5 year maximum duration limitation would result in an acceleration of DAC amortization. Conversely, actual market returns resulting in assumed future market returns of 0.0% for more than 5 years would result in a required deceleration of DAC amortization. At December 31, 2012, current projections of future average gross market returns assume a 0.0% annualized return for the next two quarters, which is within the maximum and minimum limitations, grading to a reversion to the mean of 9.0% in eight quarters.
Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
The variable annuity contracts DAC balance was $1.1 billion at December 31, 2012. The following table provides an example of the sensitivity of that DAC balance relative to future return assumptions by quantifying the adjustments to the DAC balance that would be required assuming both an increase and decrease in the future rate of return by 1%. This information considers only the effect of changes in the future Separate Account rate of return and not changes in any other assumptions used in the measurement of the DAC balance.
DAC Sensitivity – Rate of Return
December 31, 2012
| | | | |
| | | Increase/(Reduction)
in DAC | |
| | | (In Millions) | |
Decrease in future rate of return by 1% | | $ | (11 | ) |
Increase in future rate of return by 1% | | | 10 | |
Goodwill and Other Intangible Assets
Goodwill recognized in the Company’s consolidated balance sheet at December 31, 2012 was $3.5 billion, solely related to the Investment Management segment and arising primarily from the Bernstein Acquisition and purchases of AllianceBernstein Units. The Company tests goodwill for recoverability on an annual basis as of December 31 each year and at interim periods if events occur or circumstances change that would indicate the potential for impairment. The test requires a comparison of the fair value of the Investment Management segment to its carrying amount, including goodwill. If this comparison results in a shortfall of fair value, the impairment loss would be calculated as the excess of recorded goodwill over its implied fair value, the latter measure requiring application of business combination purchase accounting guidance to determine the fair value of all individual assets and liabilities of the reporting unit. Any impairment loss would reduce the recorded amount of goodwill with a corresponding charge to earnings.
7-9
The remaining useful lives of intangible assets being amortized are evaluated each period to determine whether events and circumstances warrant their revision. All intangible assets are periodically reviewed for impairment if events or circumstances indicate that the carrying value may not be recoverable. If the carrying value exceeds fair value, additional impairment tests are performed to measure the amount of the impairment loss, if any, to be charged to earnings with a corresponding reduction of the carrying value of the intangible asset.
Investment Management
The Company primarily uses a discounted cash flow valuation technique to measure the fair value of its Investment Management reporting unit for purpose of goodwill impairment testing. Market transactions and metrics, including the market capitalization of AllianceBernstein and implied pricing of comparable companies, are used to corroborate the resulting fair value measure. Cash flow projections used by the Company in the discounted cash flow valuation technique are based on AllianceBernstein’s current four-year business plan, which factors in current market conditions and all material events that have impacted, or that management believes at the time could potentially impact, future expected cash flows, and a declining annual growth rate thereafter. The resulting present value amount, net of noncontrolling interest, is tax-effected to reflect taxes incurred at the Company level.
Key assumptions and judgments applied by management in the context of the Company’s goodwill impairment testing are particularly sensitive to equity market levels, including AllianceBernstein’s assets under management, revenues and profitability. Other risks to which the business of AllianceBernstein is subject, including, but not limited to, retention of investment management contracts, selling and distribution agreements, and existing relationships with clients and various financial intermediaries, could negatively impact future cash flow projections used in the discounted cash flow technique. Significant or prolonged weakness in the financial markets and the economy generally would adversely impact the goodwill impairment testing for the Company’s Investment Management reporting unit. Similarly, significant or prolonged downward pressure on the market capitalization of AllianceBernstein relative to its carrying value likely would increase the frequency of goodwill impairment testing by AXA Equitable for its Investment Management reporting unit.
AllianceBernstein annually tests its goodwill for recoverability at September 30 using both an income approach and a market approach to measure its fair value. The income approach used by AllianceBernstein is a discounted cash flow valuation technique substantially similar to that applied by the Company to assess the recoverability of goodwill related to its Investment Management reporting unit. Under the market approach, the fair value of AllianceBernstein is based on the current trading price of a Holding unit as adjusted for consideration of market metrics, such as control premiums for relevant recent acquisitions.
Intangible assets related to the Investment Management segment principally relate to the Bernstein Acquisition and purchases of AllianceBernstein Units and include values assigned to investment management contracts acquired based on their estimated fair values at the time of purchase, less accumulated amortization generally recognized on a straight-line basis over their estimated useful life of approximately 20 years. The gross carrying amount and accumulated amortization of these intangible assets were $561 million and $360 million, respectively, at December 31, 2012 and $561 million and $336 million, respectively, at December 31, 2011. Amortization expense related to these intangible assets totaled $24 million, $23 million and $24 million for the years ended December 31, 2012, 2011 and 2010, respectively, and estimated amortization expense for each of the next 5 years is expected to be approximately $24 million.
Investment Management Revenue Recognition and Related Expenses
The Investment Management segment’s revenues are largely dependent on the total value and composition of AUM. The most significant factors that could affect this segment’s results include, but are not limited to, the performance of the financial markets and the investment performance and composition of sponsored investment products and separately managed accounts.
Investment advisory and services fees, generally calculated as a percentage of AUM are recorded as the related services are performed. Certain investment advisory contracts, including those associated with hedge funds, provide for a performance-based fee, in addition to or in lieu of a base fee. Performance fees are calculated as either a percentage of absolute investment results or a percentage of investment results in excess of a stated benchmark over a specified period of time. Performance-based fees are recorded as revenue at the end of the specified period and will generally be higher in favorable markets and lower in unfavorable markets, which may increase the volatility of the segment’s revenues and earnings.
Commissions paid to financial intermediaries in connection with the sale of shares of open-end mutual funds sold without a front-end sales charge are capitalized as deferred sales commissions and are amortized over periods not exceeding five and one-half years, the periods of time during which the deferred sales commissions are generally recovered from distribution
7-10
fees received from those funds and from contingent deferred sales commissions received from shareholders of those funds upon redemption of their shares. The recoverability of these commissions is estimated based on management’s assessment of these future revenue flows.
Pension Plans
The Company (other than AllianceBernstein) sponsors qualified defined benefit plans covering substantially all employees (including certain qualified part-time employees), managers and financial professionals. These pension plans are non-contributory and their benefits are generally based on a cash balance formula and/or, for certain participants, years of service and average earnings over a specified period in the plans. AllianceBernstein maintains a qualified, non-contributory, defined benefit retirement plan (“Retirement Plan”) covering current and former employees who were employed by AllianceBernstein in the United States prior to October 2, 2000. AllianceBernstein benefits are based on years of credited service and average final base salary. The Company uses a December 31 measurement date for its pension plans.
For 2012, 2011 and 2010, respectively, the Company recognized net periodic cost of $168 million, $188 million and $189 million related to its qualified pension plans. Each component of net periodic pension benefits cost is based on the Company’s best estimate of long-term actuarial and investment return assumptions and consider, as appropriate, an assumed discount rate, an expected rate of return on plan assets, inflation costs, expected increases in compensation levels and trends in health care costs. Of these assumptions, the discount rate and expected rate of return assumptions generally have the most significant impact on the resulting net periodic cost associated with these plans. Actual experience different from that assumed generally is recognized prospectively over future periods; however, significant variances could result in immediate recognition of net periodic cost or benefit if they exceed certain prescribed thresholds or in conjunction with a reconsideration of the related assumptions.
The discount rate assumptions used by the Company to measure its pension benefits obligations reflect the rates at which those benefits could be effectively settled. Projected nominal cash outflows to fund expected annual benefits payments under the Company’s pension benefits plans are discounted using a published high-quality bond yield curve. A discount rate assumption of 3.50% was used by the Company to measure each of these benefits obligations at December 31, 2012 and to estimate 2013 net periodic cost. A rate of 4.25% was used to measure each of these benefits obligations at December 31, 2011 and to estimate 2012 net periodic cost. A 100 BP change in the discount rate assumption would have impacted the Company’s 2012 net periodic cost as shown in the table below; the information provided in the table considers only changes in the assumed discount rate without consideration of possible changes in any other assumptions described above that could ultimately accompany any changes in the assumed discount rate.
Net Periodic Pension Cost
Sensitivity – Discount Rate
Year Ended December 31, 2012
| | | | |
| | | Increase/(Decrease) in Net
Periodic Pension Cost | |
| | | (In Millions) | |
100 BP increase in discount rate | | $ | (14 | ) |
100 BP decrease in discount rate | | | 16 | |
Guidelines regarding the allocation of plan assets are formalized by the respective Investment Committees established by the funded benefit plans of the Company and are designed with a long-term investment horizon. Since January 2009, the asset allocation strategy of the qualified defined benefit pension plans has targeted 30%-40% in equities, 50%-60% in high quality bonds, and 0%-15% in equity real estate and other investments. Certain qualified pension plans of the Company have developed hedging strategies to lessen downside equity risk. In developing the expected long-term rate of return assumption on plan assets, management considered the historical returns and future expectations for returns for each asset category, the target asset allocation of the plan portfolio, and hedging programs executed by the plans. At January 1, 2012, the beginning of the 2012 measurement year, the fair value of the Company plan assets was $2.1 billion. Given that level of plan assets, as adjusted for expected amounts and timing of contributions and benefits payments, a 100 BP change in the 6.75% expected long-term rate of return assumption would have impacted the Company’s net periodic cost for 2012 as shown in the table below; the information provided in the table considers only changes in the assumed long-term rate of return without consideration of possible changes in any other assumptions described above that could ultimately accompany any changes in the assumed long-term rate of return.
7-11
Net Periodic Pension Cost
Sensitivity – Rate of Return
Year Ended December 31, 2012
| | | | |
| | | Increase/(Decrease) in Net
Periodic Pension Cost | |
| | | (In Millions) | |
100 BP increase in expected rate of return | | $ | (21 | ) |
100 BP decrease in expected rate of return | | | 21 | |
Note 12 of Notes to Consolidated Financial Statements, included elsewhere herein, describes the respective funding policies of the Company (excluding AllianceBernstein) and of AllianceBernstein to their qualified pension plans, including amounts expected to be contributed for 2012. Contribution estimates, which are subject to change, are based on regulatory requirements, future market conditions, and assumptions used for actuarial computations of the plans’ obligations and assets.
Share-based Compensation Programs
As further described in Note 13 of Notes to Consolidated Financial Statements, included elsewhere herein, AXA and AXA Financial sponsor various share-based compensation plans for eligible employees and financial professionals of AXA Financial and its subsidiaries, including the Company. AllianceBernstein also sponsors its own unit option plans for certain of its employees. For 2012, 2011, and 2010, respectively, the Company recognized compensation costs of $194 million, $416 million and $199 million for share-based payment arrangements. Compensation expense related to these awards is measured based on the estimated fair value of the equity instruments issued or the liabilities incurred. The Company uses the Black-Scholes option valuation model to determine the grant-date fair values of equity share/unit option awards and similar instruments, requiring assumptions with respect to the expected term of the award, expected price volatility of the underlying share/unit, and expected dividends. These assumptions are significant factors in the resulting measure of fair value recognized over the vesting period and require use of management judgment as to likely future conditions, including employee exercise behavior, as well as consideration of historical and market observable data.
Investments – Impairments and Valuation Allowances and Fair Value Measurements
The Company’s investment portfolio principally consists of public and private fixed maturities, mortgage loans, equity securities, and derivative financial instruments, including swaps, forwards, futures, option contracts, swaptions and floors used to manage various risks relating to its business operations. In applying the Company’s accounting policies with respect to these investments, estimates, assumptions, and judgments are required about matters that are inherently uncertain, particularly in the identification and recognition of other-than-temporary-impairments (“OTTI”), determination of the valuation allowance for losses on mortgage loans, and measurements of fair value.
Impairments and Valuation Allowances
The assessment of whether OTTIs have occurred is performed quarterly by the Company’s Investment Under Surveillance (“IUS”) Committee, with the assistance of its investment advisors, on a security-by-security basis for each available-for-sale fixed maturity and equity security that has experienced a decline in fair value for purpose of evaluating the underlying reasons. The analysis begins with a review of gross unrealized losses by the following categories of securities: (i) all investment grade and below investment grade fixed maturities for which fair value has declined and remained below amortized cost by 20% or more; (ii) below-investment-grade fixed maturities for which fair value has declined and remained below amortized cost for a period greater than 12 months; and (iii) equity securities for which fair value has declined and remained below cost by 20% or greater or remained below cost for a period of 6 months or greater. Integral to the analysis is an assessment of various indicators of credit deterioration to determine whether the investment security is expected to recover, including, but not limited to, consideration of the duration and severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity, and continued viability of the issuer and, for equity securities only, the intent and ability to hold the investment until recovery, resulting in identification of specific securities for which OTTI is recognized.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting OTTI is recognized in earnings and the remainder of the fair value loss is recognized in other comprehensive income (loss) (“OCI”). The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by
7-12
discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage- and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Mortgage loans also are reviewed quarterly by the IUS Committee for impairment on a loan-by-loan basis, including an assessment of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages also is identified, consisting of mortgage loans not currently classified as problems but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
For problem mortgage loans a valuation allowance is established to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for loans determined to be non-performing as a result of the loan review process. A non-performing loan is defined as a loan for which it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan specific portion of the loss allowance is based on the Company’s assessment as to ultimate collectability of loan principal and interest. Valuation allowances for a non-performing loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The valuation allowance for mortgage loans can increase or decrease from period to period based on such factors.
Fair Value Measurements
Investments reported at fair value in the consolidated balance sheets of the Company include fixed maturity and equity securities classified as available-for-sale, trading securities, and certain other invested assets, such as freestanding derivatives. In addition, reinsurance contracts covering GMIB exposure and the GWBL feature in certain variable annuity products issued by the Company are considered embedded derivatives and reported at fair value.
When available, the estimated fair value of securities is based on quoted prices in active markets that are readily and regularly obtainable; these generally are the most liquid holdings and their valuation does not involve management judgment. When quoted prices in active markets are not available, the Company estimates fair value based on market standard valuation methodologies, including discounted cash flow methodologies, matrix pricing, or other similar techniques. For securities with reasonable price transparency, the significant inputs to these valuation methodologies either are observable in the market or can be derived principally from or corroborated by observable market data. When the volume or level of activity results in little or no price transparency, significant inputs no longer can be supported by reference to market observable data but instead must be based on management’s estimation and judgment. Substantially the same approach is used by the Company to measure the fair values of freestanding and embedded derivatives with exception for consideration of the effects of master netting agreements and collateral arrangements as well as incremental value or risk ascribed to changes in own or counterparty credit risk.
As required by the accounting guidance, the Company categorizes its assets and liabilities measured at fair value into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique, giving the highest priority to quoted prices in active markets for identical assets and liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). For additional information regarding the key estimates and assumptions surrounding the determinations of fair value measurements, see Note 7 to the Consolidated Financial Statements – Fair Value Disclosures.
7-13
Income Taxes
Income taxes represent the net amount of income taxes that the Company expects to pay to or receive from various taxing jurisdictions in connection with its operations. The Company provides for Federal and state income taxes currently payable, as well as those deferred due to temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured at the balance sheet date using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. The realization of deferred tax assets depends upon the existence of sufficient taxable income within the carryforward periods under the tax law in the applicable jurisdiction. Valuation allowances are established when management determines, based on available information, that it is more likely than not that deferred tax assets will not be realized. Management considers all available evidence including past operating results, the existence of cumulative losses in the most recent years, forecasted earnings, future taxable income and prudent and feasible tax planning strategies. The Company’s accounting for income taxes represents management’s best estimate of the tax consequences of various events and transactions.
Significant management judgment is required in determining the provision for income taxes and deferred tax assets and liabilities, and in evaluating the Company’s tax positions including evaluating uncertainties under the guidance for Accounting for Uncertainty in Income taxes. Under the guidance, the Company determines whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authorities before any part of the benefit can be recorded in the financial statements. Tax positions are then measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement.
The Company’s tax positions are reviewed quarterly and the balances are adjusted as new information becomes available.
7-14
CONSOLIDATED RESULTS OF OPERATIONS
The consolidated earnings narratives that follow discuss the results for 2012 compared to 2011’s results, followed by the results for 2011 compared to 2010’s results. For additional information, see “Accounting for VA Guarantee Features” at page 7-2.
AXA Equitable
Consolidated Results of Operations
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
REVENUES | | | | | | | | | | | | |
Universal life and investment-type product policy fee income | | $ | 3,334 | | | $ | 3,312 | | | $ | 3,067 | |
Premiums | | | 514 | | | | 533 | | | | 530 | |
Net investment income (loss): | | | | | | | | | | | | |
Investment income (loss) from derivative instruments | | | (978 | ) | | | 2,374 | | | | (284 | ) |
Other investment income (loss) | | | 2,316 | | | | 2,128 | | | | 2,260 | |
| | | | | | | | | | | | |
Total net investment income (loss) | | | 1,338 | | | | 4,502 | | | | 1,976 | |
Investment gains (losses), net: | | | | | | | | | | | | |
Total other-than-temporary impairment losses | | | (96 | ) | | | (36 | ) | | | (300 | ) |
Portion of loss recognized in other comprehensive income | | | 2 | | | | 4 | | | | 18 | |
| | | | | | | | | | | | |
Net impairment losses recognized | | | (94 | ) | | | (32 | ) | | | (282 | ) |
Other investment gains (losses), net | | | (3 | ) | | | (15 | ) | | | 98 | |
| | | | | | | | | | | | |
Total investment gains (losses), net | | | (97 | ) | | | (47 | ) | | | (184 | ) |
Commissions, fees and other income | | | 3,574 | | | | 3,631 | | | | 3,702 | |
Increase (decrease) in the fair value of the reinsurance contract asset | | | 497 | | | | 5,941 | | | | 2,350 | |
| | | | | | | | | | | | |
Total revenues | | | 9,160 | | | | 17,872 | | | | 11,441 | |
| | | | | | | | | | | | |
| | | |
BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | | | |
Policyholders’ benefits | | | 2,989 | | | | 4,360 | | | | 3,082 | |
Interest credited to policyholders’ account balances | | | 1,166 | | | | 999 | | | | 950 | |
Compensation and benefits | | | 1,672 | | | | 2,263 | | | | 1,953 | |
Commissions | | | 1,248 | | | | 1,195 | | | | 1,044 | |
Distribution related payments | | | 367 | | | | 303 | | | | 287 | |
Amortization of deferred sales commission | | | 40 | | | | 38 | | | | 47 | |
Interest expense | | | 108 | | | | 106 | | | | 106 | |
Amortization of deferred policy acquisition costs | | | 576 | | | | 3,620 | | | | (326 | ) |
Capitalization of deferred policy acquisition costs | | | (718 | ) | | | (759 | ) | | | (655 | ) |
Rent expense | | | 201 | | | | 240 | | | | 244 | |
Amortization of other intangible assets | | | 24 | | | | 24 | | | | 23 | |
Other operating costs and expenses | | | 1,429 | | | | 1,359 | | | | 1,438 | |
| | | | | | | | | | | | |
Total benefits and other deductions | | | 9,102 | | | | 13,748 | | | | 8,193 | |
| | | | | | | | | | | | |
| | | |
Earnings (loss) from continuing operations before income taxes | | | 58 | | | | 4,124 | | | | 3,248 | |
Income tax (expense) benefit | | | 158 | | | | (1,298 | ) | | | (789 | ) |
| | | | | | | | | | | | |
| | | |
Net earnings (loss) | | | 216 | | | | 2,826 | | | | 2,459 | |
Less: net (earnings) loss attributable to the noncontrolling interest | | | (121 | ) | | | 101 | | | | (235 | ) |
| | | | | | | | | | | | |
Net Earnings (Loss) Attributable to AXA Equitable | | $ | 95 | | | $ | 2,927 | | | $ | 2,224 | |
| | | | | | | | | | | | |
Year ended December 31, 2012 Compared to the Year Ended December 31, 2011
Net earnings (loss) attributable to the Company in 2012 were $95 million, a decrease of $2.8 billion from the $2.9 billion of net earnings attributable to the Company during 2011. The decrease is attributable to a lower increase in the fair value of the reinsurance contract asset for 2012 as compared to 2011, investment losses from derivative instruments as compared to investment income in the prior year, higher other operating costs and expenses (including AllianceBernstein higher real estate
7-15
charges) and lower investment advisory and service fees partially offset by lower DAC amortization, lower policyholder benefits (including lower increases in GMDB/GMIB/GWBL/GMAB reserves) and a tax benefit in 2012 as compared to tax expense in 2011.
Net earnings attributable to the noncontrolling interest were $121 million in 2012 as compared to $101 million net loss during 2011. The increase was principally due to earnings from AllianceBernstein in 2012 compared to losses in 2011.
Net earnings (loss) inclusive of earnings attributable to noncontrolling interest was $216 million in 2012, a decrease of $2.6 billion from the $2.8 billion net earnings reported for 2011. The Insurance segment’s net earnings in 2012 were $37 million, a decrease of $2.9 billion from $3.0 billion net earnings in 2011, while the net earnings for the Investment Management segment totaled $179 million, a $319 million increase from the $140 million in net loss in 2011.
Income tax benefit in 2012 was $158 million compared to income tax expense of $1.3 billion in 2011. The change was primarily due to the decrease in pre-tax results of the Insurance segment from earnings in 2011 to a loss in 2012. In 2012 and 2011, Federal income taxes attributable to consolidated operations were different from the amounts determined by multiplying the earnings before income taxes and noncontrolling interest by the expected Federal income tax rate of 35%, primarily due to dividend received deductions, nontaxable investment income and noncontrolling interest permanent differences. In addition, the 2012 income tax benefit was increased by $14 million in the Insurance segment and $14 million in the Investment Management segment due to releases of liabilities for interest, state income taxes and deferred taxes on foreign earnings. The income tax expense in the Insurance segment in 2011 was reduced by an $84 million tax benefit related to the completion of the 2004 and 2005 IRS audit.
Earnings (loss) from continuing operations before income taxes were $58 million in 2012, a decrease of $4.1 billion from the $4.1 billion in pre-tax earnings in 2011. The Insurance segment’s losses from continuing operations before income taxes totaled $132 million in 2012, $4.4 billion lower than 2011’s pre-tax earnings of $4.3 billion; the decrease is attributable to a lower increase in the fair value of the reinsurance contract asset in 2012 as compared to 2011, investment losses from derivative instruments in 2012 as compared to investment income in 2011, and higher writedowns of fixed maturities partially offset by lower DAC amortization, lower policyholder benefits (including lower increases in GMDB/GMIB/GWBL/GMAB reserves) and lower other operating costs and expenses. The Investment Management segment’s earnings from continuing operations were $190 million in 2012, an increase of $354 million from losses of $164 million in 2011, principally due to lower compensation and benefit expenses and higher investment income partially offset by lower investment advisory and service fees, higher real estate charges, higher distribution related payments and lower Bernstein research services.
Total revenues were $9.2 billion in 2012, a decrease of $8.7 billion from the $17.9 billion reported in 2011. The Insurance segment reported an $8.7 billion decrease in its revenues while the Investment Management segment had a decrease of $12 million. The decrease of Insurance segment revenues to $6.4 billion in 2012 as compared to $15.1 billion in 2011 was principally due to a lower increase in the fair value of the reinsurance contract asset accounted for as derivatives of $497 million as compared to $5.9 billion in 2011, $942 million of investment losses from derivatives as compared to investment income of $2.3 billion in 2011 and $62 million higher writedowns of fixed maturities. The Investment Management segment’s $2.7 billion in revenues in 2012 as compared to $2.8 billion in 2011 was primarily due to a $144 million decrease in investment advisory and services fees and a $23 million decrease in Bernstein research revenues partially offset by a $123 million increase in net investment income.
Total benefits and expenses were $9.1 billion in 2012, a decrease of $4.6 billion from the $13.7 billion for 2011. The Insurance segment’s total benefits and expenses were $6.6 billion, a decrease of $4.3 billion from 2011’s total of $10.9 billion. The Investment Management segment’s total expenses for 2012 were $2.5 billion, $366 million lower than the $2.9 billion in expenses in 2011. The Insurance segment’s decrease was principally due to lower DAC amortization ($576 million in 2012 as compared to $3.6 billion in 2011), a $1.4 billion decrease in policyholders’ benefits and a $139 million decrease in other operating costs and expenses partially offset by a $167 million increase in interest credited to policyholders’ account balances and a $53 million increase in commissions. The decrease in expenses for the Investment Management segment was principally due to $612 million lower compensation and benefits at AllianceBernstein partially offset by $216 million higher real estate charges and $64 million higher distribution related payments.
Year ended December 31, 2011 Compared to the Year Ended December 31, 2010
Net earnings (loss) attributable to the Company for 2011 were $2.9 billion, an increase of $703 million from the $2.2 billion of net earnings attributable to the Company for 2010. The increase is attributable to an increase in the fair value of the reinsurance contract asset, higher investment income from derivative instruments and lower impairment losses on fixed maturities partially offset by increases in DAC amortization, higher policyholders’ benefits, higher compensation and benefits and higher commission expenses.
7-16
Net loss attributable to the noncontrolling interest was $101 million in 2011 as compared to earnings of $235 million for 2010. The decrease was principally due to losses from AllianceBernstein in 2011 compared to earnings in 2010.
Net earnings (loss) inclusive of earnings attributable to noncontrolling interest were $2.8 billion in 2011, an increase of $367 million from the $2.5 billion reported for 2010. The Insurance segment’s net earnings in 2011 were $3.0 billion, an increase of $957 million from $2.0 billion in net earnings in 2010, while the net losses for the Investment Management segment totaled $140 million, a $359 million decrease from the $219 million in net earnings in 2010. There were no results from discontinued operations in 2011 and 2010.
Income tax expense in 2011 was $1.3 billion compared to $789 million in 2010. The increase in income tax expense was primarily due to the increase in pre-tax earnings in the Insurance segment. The income tax expense in the Insurance segment in 2011 was reduced by an $84 million tax benefit related to the completion of the 2004 and 2005 IRS audit and in 2010, the income tax expense in the Insurance segment was reduced by $99 million related to the settlement with the Appeals Office of the IRS of issues for the 1997–2003 tax years. The income tax expense in 2010 was also impacted by a tax benefit of $135 million in first quarter 2010 related to the release of state deferred taxes held in the Investment Management segment resulting from the conversion of an AXA Equitable subsidiary from a corporation to a limited liability company, ACMC LLC (“ACMC”). As a limited liability company, ACMC’s income is subject to state income taxes at the rate of its sole owner, AXA Equitable; that rate is substantially less than the rate previously applicable to ACMC as a corporation. ACMC’s principal asset is its holdings of AllianceBernstein Units. There will continue to be a reduction of related taxes in future periods, but to a far lesser degree. The Company provides Federal and state income taxes on the undistributed earnings of non-U.S. corporate subsidiaries except to the extent such earnings are permanently invested outside of the United States.
Earnings (loss) from continuing operations before income taxes were $4.1 billion in 2011, an increase of $876 million from the $3.2 billion in pre-tax earnings in 2010. The Insurance segment’s earnings from continuing operations totaled $4.3 billion in 2011, $1.4 billion higher than 2010’s earnings of $2.8 billion; the increase was primarily due to an increase in the fair value of the reinsurance contract asset, higher investment income from derivative instruments, lower impairments on fixed maturities and lower compensation and benefit expenses partially offset by higher DAC amortization, higher policyholders’ benefits and higher commission expenses. The Investment Management segment’s losses from continuing operations were $164 million in 2011, a decrease of $564 million from earnings of $400 million in 2010, principally due to higher compensation and benefits, lower investment advisory and service fees and by lower net investment income (loss) in 2011 as compared to 2010 partially offset by lower real estate charges and higher Bernstein research services and distribution revenues.
Total revenues were $17.9 billion in 2011, an increase of $6.5 billion from the $11.4 billion reported in 2010. The Insurance segment reported a $6.6 billion increase in its revenues while the Investment Management segment had a decrease of $209 million. The increase of Insurance segment revenues to $15.1 billion in 2011 as compared to $8.5 billion in 2010 was principally due to an increase in the fair value of the reinsurance contract asset accounted for as derivatives of $5.9 billion as compared to $2.4 billion in 2010, $2.4 billion of investment income from derivatives as compared to losses from derivatives of $269 million in 2010 and $245 million higher policy fee income. The Investment Management segment’s $2.8 billion in revenues in 2011 as compared to $3.0 billion in 2010 primarily was due to a $136 million decrease in investment advisory and services fees and $60 million higher net investment losses partially offset by a $13 million increase in distribution revenues and a $6 million increase in Bernstein research revenues.
Total benefits and expenses were $13.7 billion in 2011, an increase of $5.6 billion from the $8.2 billion total for 2010. The Insurance segment’s total benefits and expenses were $10.9 billion, an increase of $5.2 billion from the 2010 total of $5.7 billion. The Investment Management segment’s total expenses for 2011 were $2.9 billion, $355 million higher than the $2.6 billion in expenses in 2010. The Insurance segment’s increase was principally due to DAC amortization of $3.6 billion in 2011 as compared to negative DAC amortization of $326 million in 2010, a $1.3 billion increase in policyholders’ benefits, a $151 million increase in commissions and a $16 million increase in other operating costs and expenses (including a $55 million charge for severance costs) partially offset by a $104 million increase in DAC capitalization and a $144 million reduction in compensation and benefits. The increase in expenses for the Investment Management segment was principally due to $398 million higher compensation and benefits at AllianceBernstein (including a $472 million charge related to the immediate expense recognition of all unamortized deferred compensation awards related to prior years) partially offset by a $95 million decrease in real estate charges.
7-17
RESULTS OF CONTINUING OPERATIONS BY SEGMENT
Insurance.
Insurance – Results of Operations
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
REVENUES | | | | | | | | | | | | |
Universal life and investment-type product policy fee income | | $ | 3,334 | | | $ | 3,312 | | | $ | 3,067 | |
Premiums | | | 514 | | | | 533 | | | | 530 | |
Net investment income (loss): | | | | | | | | | | | | |
Investment income (loss) from derivative instruments | | | (942 | ) | | | 2,370 | | | | (269 | ) |
Other investment income | | | 2,184 | | | | 2,156 | | | | 2,212 | |
| | | | | | | | | | | | |
Total net investment income (loss) | | | 1,242 | | | | 4,526 | | | | 1,943 | |
| | | | | | | | | | | | |
Investment gains (losses), net: | | | | | | | | | | | | |
Total other-than-temporary impairment losses | | | (96 | ) | | | (36 | ) | | | (300 | ) |
Portion of loss recognized in other comprehensive income | | | 2 | | | | 4 | | | | 18 | |
| | | | | | | | | | | | |
Net impairment losses recognized | | | (94 | ) | | | (32 | ) | | | (282 | ) |
Other investment gains (losses), net | | | 14 | | | | (10 | ) | | | 75 | |
| | | | | | | | | | | | |
Total investment gains (losses), net | | | (80 | ) | | | (42 | ) | | | (207 | ) |
| | | | | | | | | | | | |
Commissions, fees and other income | | | 936 | | | | 870 | | | | 828 | |
Increase (decrease) in the fair value of the reinsurance contract asset | | | 497 | | | | 5,941 | | | | 2,350 | |
| | | | | | | | | | | | |
Total revenues | | | 6,443 | | | | 15,140 | | | | 8,511 | |
| | | | | | | | | | | | |
| | | |
BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | | | |
Policyholders’ benefits | | | 2,989 | | | | 4,360 | | | | 3,082 | |
Interest credited to policyholders’ account balances | | | 1,166 | | | | 999 | | | | 950 | |
Compensation and benefits | | | 481 | | | | 459 | | | | 546 | |
Commissions | | | 1,248 | | | | 1,195 | | | | 1,044 | |
Amortization of deferred policy acquisition costs | | | 576 | | | | 3,620 | | | | (326 | ) |
Capitalization of deferred policy acquisition costs | | | (718 | ) | | | (759 | ) | | | (655 | ) |
Rent expense | | | 40 | | | | 51 | | | | 61 | |
Interest expense | | | 106 | | | | 105 | | | | 106 | |
All other operating costs and expenses | | | 687 | | | | 826 | | | | 857 | |
| | | | | | | | | | | | |
Total benefits and other deductions | | | 6,575 | | | | 10,856 | | | | 5,665 | |
| | | | | | | | | | | | |
| | | |
Earnings (Loss) from Continuing Operations, Before Income Taxes | | $ | (132 | ) | | $ | 4,284 | | | $ | 2,846 | |
| | | | | | | | | | | | |
Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011 – Insurance
Revenues
In 2012, the Insurance segment’s revenues decreased $8.7 billion to $6.4 billion from $15.1 billion in 2011. The decrease was principally due to the lower increase in the fair value of the reinsurance contract asset accounted for as derivatives of $497 million as compared to an increase of $5.9 billion in 2011, the $942 million net investment loss from derivative instruments in 2012 as compared to investment income of $2.4 billion in 2011 and by $38 million higher investment losses, net.
Policy fee income totaled $3.3 billion in 2012, $22 million higher than the $3.3 billion in 2011. The Insurance segment’s increase was primarily due to higher fees earned on higher General Account policyholder account balances while fees earned on Separate Account balances remained flat year over year. Partially offsetting the increase was a lower decrease in the initial fee liability (2011 included an increase in policy fee income resulting from the projection of lower future costs of insurance charges more than offset in 2011 by DAC amortization).
7-18
Premiums totaled $514 million in 2012, $19 million lower than the $533 million in 2011. The decrease was primarily due to $37 million lower premiums for traditional life policies in the Closed Block partially offset by higher term life insurance premiums.
Net investment income (loss) decreased $3.3 billion to $1.2 billion of income in 2012 from $4.5 billion of income in 2011. The decrease resulted from the $3.3 billion decrease in investment income from derivative instruments partially offset by the $28 million increase in other investment income. The Insurance segment reported $942 million of losses from derivative instruments including those related to hedging programs implemented to mitigate certain risks associated with the GMDB/GMIB/GWBL features of certain variable annuity contracts as compared to a gain of $2.4 billion in 2011. The 2012 loss from derivative instruments was primarily driven by the impact of higher equity markets and relatively flat interest rates.2011 income from derivative instruments was primarily driven by the impact of lower interest rates partially offset by the improvement of higher equity markets. Other investment income increased $28 million to $2.2 billion in 2012 primarily due to the increase in investment income from mortgage loans on real estate, higher equity income from limited partnerships and higher investment income from trading account securities and short-term investments partially offset by lower investment income from fixed maturities.
Investment losses, net totaled $80 million in 2012, as compared to $42 million in 2011. The Insurance segment’s net losses in 2012 were primarily due to writedowns on fixed maturities of $94 million as compared to $32 million of writedowns in 2011, substantially all of which related to commercial mortgage-backed securities (“CMBS”) and $4 million of additions to valuation allowances for mortgage loans on real estate ($26 million 2012 as compared to $22 million in 2011) partially offset by a $12 million gain recorded from a charitable art donation (offset by a $14 million charitable donation expense recorded in other operating costs and expenses) and $19 million from gains on sales and maturities of mortgage loans on real estate in 2012 as compared to $8 million in 2011.
Commissions, fees and other income increased $66 million to $936 million in 2012 as compared to $870 million in 2011. The increase primarily resulted from $34 million of income recorded as a result of the termination of a reinsurance treaty and $30 million higher gross investment management and distribution fees received from EQAT and VIP Trust due to a higher average asset base primarily due to market appreciation.
In 2012, there was a $497 million increase in the fair value of the GMIB reinsurance contract asset (including the reinsurance contract with AXA Arizona), which is accounted for as derivatives, as compared to the $5.9 billion increase in the fair value in 2011, both periods’ changes reflected existing capital market conditions. The increase in 2012 included the impact of updated assumptions of long-term lapse and partial withdrawal rates partially offset by the impacts of the updated assumptions of GMIB election rates which were lowered for certain ages and the updated projection of future interest rates used to value GMIB claims at the time of GMIB election for a total increase of $574 million. Additionally, the impact of the decline in interest rates during 2012 increased the fair value of the GMIB reinsurance contract asset by $454 million. Offsetting these increases was a decrease of $531 million primarily related to lower volatility in equity markets in 2012. In 2011, expectations of long-term surrender rates for variable annuities with GMDB and GMIB guarantees were lowered at certain policy durations based on emerging experience. This change resulted in a $794 million increase to the fair value of the GMIB reinsurance contract asset.
Benefits and Other Deductions
In 2012, total benefits and other deductions decreased $4.3 billion to $6.6 billion from $10.9 billion in 2011 principally due to the Insurance segment’s reported $3.0 billion decrease in DAC amortization, $1.4 billion decrease in policyholders’ benefits and $139 million decrease in other operating costs and expenses partially offset by the $167 million increase in interest credited to policyholders’ account balances and the $53 million increase in commission expense.
Policyholders’ benefits decreased $1.4 billion to $3.0 billion in 2012 from $4.4 billion in 2011. The decrease was primarily due to the $1.6 billion lower increase in the GMDB/GMIB reserves (an increase of $433 million in 2012 as compared to $2.0 billion in 2011), the $87 million lower increase in the GWBL and GMAB reserves ($39 million increase in 2012 as compared to $126 million increase in 2011 due to market changes) and the $40 million decrease in policyholders’ dividends partially offset by a $226 million premium deficiency reserve recorded for Non-Par Wind-ups representing the estimated future loss of investment income resulting from the sale of the Company’s 50% interest in a real estate joint venture to an AXA Financial subsidiary. The 2012 increase in the GMDB/GMIB reserves included a $239 million increase related to the impact of the updated assumptions of long-term lapse and partial withdrawal rates based on emerging experience partially offset by the impacts of the expectation of GMIB election rates, which were lowered for certain ages based on emerging experience and the updated projection of future interest rates used to value GMIB claims at the time of GMIB election. In 2011, updated assumptions related to long-term lapse rates were lowered at certain policy durations based upon emerging experience which resulted in an increase in the GMDB/GMIB reserves of $297 million.
7-19
In 2012, interest credited to policyholders’ account balances totaled $1.2 billion, an increase of $167 million from the $999 million reported in 2011 primarily due to higher average general account policyholders’ account balances partially offset by lower crediting rates.
Total compensation and benefits increased $22 million to $481 million in 2012 from $459 million in 2011. The compensation and benefits increase for the Insurance segment was principally due to a $31 million increase in share-based compensation expense and a $27 million increase in expenses related to COLI partially offset by a $36 million decrease in salaries and postretirement and other benefit expenses, both of which resulted from Management’s 2011 and continuing into 2012 expense reduction initiatives.
In 2012, commissions totaled $1.3 billion; an increase of $53 million from $1.2 billion in 2011 principally due to higher asset based compensation reflecting higher asset values and increased variable annuity product sales partially offset by lower universal life product sales.
DAC amortization was $576 million in 2012, a decrease of $3.0 billion from $3.6 billion of amortization in 2011. In 2011, equity market declines and particularly interest rate reductions significantly increased projected GMDB and GMIB costs, which under the U.S. GAAP GMDB and GMIB reserving methodology are only partially reflected in the current reserve balance. The resulting reduction in projected estimated gross profits resulted in $3.2 billion of additional amortization to reduce the DAC related to variable annuity products as the DAC would have been in excess of the present value of estimated future profits in 2011, which led to lower baseline amortization in 2012 as compared to 2011. In addition, in 2012, the continuing low interest rate environment and updated expectations of policyholder behavior and model assumptions and refinements significantly increased projected GMDB and GMIB costs. The resulting reduction in projected estimated gross profits resulted in $246 million of additional amortization to reduce the DAC related to variable annuity products, as the DAC would have been in excess of the present value of estimated future profits. In 2011, updated lapse assumptions related to the Accumulator® product increased DAC amortization by $176 million.
In 2012, DAC amortization on variable and interest-sensitive life products was reduced by $118 million due to a favorable change in expected future margins (partially offset in the initial fee liability), whereas in 2011, DAC amortization on variable and interest sensitive life products was reduced by $54 million due to a favorable change in expected mortality margins and higher future margins in later policy years, partially offset by lower projected cost of insurance charges (partially offset in the initial fee liability).
DAC capitalization totaled $718 million in 2012, a decrease of $41 million from the $759 million reported in 2011. The decrease was primarily due to a $26 million decrease in deferrable operating expenses and by a $15 million decrease in first year commissions, including a $24 million reduction related to the recalculation of the deferability of marketing allowances.
Rent expense totaled $40 million in 2012, a decrease of $11 million from the $51 million reported in 2011. The decrease reflects the impact of the relocation and consolidation of office space as part of the Insurance segment’s 2011 expense reduction initiatives. In 2012, as a result of management’s comprehensive study of the Company’s real estate footprint and related lease obligations, an announcement was made in fourth quarter 2012 of the Company’s intention to significantly reduce its remaining occupancy in its New York headquarters by the close of 2013 and relocate employees to more cost-efficient space. These actions are expected to begin in first quarter 2013 and result in projected non-cash pre-tax charges in full-year 2013 of $110 million to $135 million, primarily representing the present value of the expected loss on the continuing contractual operating lease.
Other operating costs and expenses totaled $687 million in 2012, a decrease of $139 million from the $826 million reported in 2011. The decrease in the Insurance segment of $139 million is primarily due to a $164 million decrease in the amortization of reinsurance costs related to the deferred asset recorded from the Company’s reinsurance transaction with AXA Arizona and a $25 million decrease in severance costs partially offset by an increase in litigation related costs of $21 million, a $14 million expense related to the donation of the Benton Mural to the Metropolitan Museum of Art and a $4 million increase in telephone and postage expenses.
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010 – Insurance
Revenues
In 2011, the Insurance segment’s revenues increased $6.6 billion to $15.1 billion from $8.5 billion in 2010. The increase was principally due to an increase in the fair value of reinsurance contracts accounted for as derivatives of $5.9 billion as compared to $2.4 billion in 2010, $2.4 billion investment income from derivatives as compared to a loss of $269 million in 2010, $245 million higher policy fee income and $32 million of impairment losses in 2011 as compared to $282 million in impairment losses in 2010.
7-20
Policy fee income totaled $3.3 billion in 2011, $245 million higher than the $3.1 billion in 2010. This increase was primarily due to higher fees earned on higher average Separate Account balances due primarily to market appreciation and a decrease in the initial fee liability resulting from the projection of lower future costs of insurance charges (more than offset in DAC amortization).
Net investment income (loss) increased $2.6 billion to $4.5 billion of income in 2011 from $1.9 billion in 2010. The increase resulted from the $2.6 billion increase in investment income from derivative instruments offset by the $56 million decrease in other investment income. The Insurance segment reported $2.4 billion of income from derivative instruments including those related to hedging programs implemented to mitigate certain risks associated with the GMDB/GMIB/GWBL features of certain variable annuity contracts as compared to a loss of $269 million in 2010 driven by the impact of lower interest rates partially offset by the improvements in equity markets. Other investment income decreased $56 million to $2.2 billion in 2011 primarily due to the decrease of $61 million of investment income from fixed maturities due to lower yields from the portfolio.
Investment losses, net totaled $42 million in 2011, as compared to losses of $207 million in 2010. The Insurance segment’s net losses in 2011 was due to the $32 million of writedowns on fixed maturities in 2011 as compared to $282 million in 2010 (substantially all of which related to CMBS securities) partially offset by $3 million of gains from the sale of General Account fixed maturities, down from $82 million in the year earlier period. In addition, there were $22 million in additions to valuation allowances on mortgage loans in 2011 as compared to $18 million in 2010.
Commissions, fees and other income increased $42 million to $870 million in 2011 from $828 million in 2010. The Insurance segment’s increase was principally due to $44 million higher gross investment management and distribution fees received from EQAT and VIP Trust due to a higher average asset base primarily due to market appreciation.
In 2011, there was a $5.9 billion increase in the fair value of the GMIB reinsurance contract asset (including the reinsurance contract with AXA Bermuda, an affiliate), which are accounted for as derivatives, as compared to the $2.4 billion increase in their fair value in 2010; both periods’ changes reflected existing capital market conditions.
Benefits and Other Deductions
In 2011, total benefits and other deductions increased $5.2 billion to $10.9 billion from $5.7 billion in 2010 principally due to the Insurance segment’s reported increase of $3.9 billion in DAC amortization, the $1.3 billion increase in policyholders’ benefits and the $151 million higher commission expenses partially offset by the $144 million decline in compensation and benefits expense.
Policyholders’ benefits increased $1.3 billion to $4.4 billion in 2011 from $3.1 billion in 2010. The increase was primarily due to the $1.2 billion increase in the GMDB/GMIB reserves ($2.0 billion in 2011 as compared to $917 million in 2010), the $120 million increase in the GWBL reserve ($126 million increase in 2011 as compared to the $6 million increase in 2010 due to market changes) and a $70 million charge for unreported death claims partially offset by the $63 million decrease to $1.8 billion in benefits paid in 2011. In 2011, expectations of long-term surrender rates for variable annuities with GMDB/GMIB guarantees were lowered at certain policy durations based upon emerging experience. In 2010, updated assumptions related to long-term surrender rates, based upon emerging experience, and refined assumptions for partial withdrawals, dynamic policyholder surrender behavior and discount rates resulted in an increase in the GMDB/GMIB reserves. In 2011 and 2010, these changes resulted in an increase to the GMDB and GMIB reserves of $297 million and $1.0 billion, respectively.
In 2011, interest credited to policyholders’ account balances totaled $999 million, an increase of $49 million from the $950 million reported in 2010 primarily due to higher average policyholders’ account balances partially offset by lower crediting rates.
Total compensation and benefits decreased $87 million to $459 million in 2011 from $546 million in 2010. The compensation and benefits decrease for the Insurance segment was principally due to a $30 million decrease in salary expense (including $17 million related to agent compensation and $12 million lower incentive compensation), a $30 million decrease in employee benefit costs (including $38 million related to the elimination of certain retiree medical and retiree life benefits) and a $28 million decrease in share-based and other compensation programs.
In 2011, commissions totaled $1.2 billion; an increase of $151 million from $1.0 billion in 2010 principally due to higher asset based compensation reflecting higher asset values and increased variable annuity and universal life product sales.
7-21
DAC amortization was $3.6 billion in 2011, an increase of $3.9 billion from the $326 million of negative amortization in 2010. In 2011, equity market declines and particularly interest rate reductions significantly increased projected GMDB and GMIB costs, which under the U.S. GAAP GMDB and GMIB reserving methodology is only partially reflected in the current reserve balance. The resulting reduction in projected estimated gross profits resulted in $3.2 billion of additional amortization to reduce the DAC related to variable annuity products as the DAC would have been in excess of the present value of estimated future profits. In addition, in 2011 and 2010, respectively, updated lapse assumptions related to the Accumulator® product decreased DAC amortization by $176 million and $157 million. In 2011, DAC amortization on variable and interest-sensitive life products was reduced due to a favorable change in expected mortality margins and higher future margins in later policy years, partially offset by lower projected cost of insurance charges in variable and interest sensitive life products (partially offset in the initial fee liability). In addition, updated assumptions related to long-term surrender rates, based upon emerging experience, and refined assumptions for partial withdrawals, for products other than Accumulator®, as well as future general account earned rate assumptions, decreased amortization by $54 million in 2011 and increased amortization by $17 million in 2010.
In accordance with the guidance for the accounting and reporting by insurance enterprises for certain long-duration contracts and participating contracts and for realized gains and losses from the sale of investments, current and expected future profit margins for products covered by this guidance are examined regularly in determining the amortization of DAC. Due primarily to the significant decline in Separate Accounts balances during 2008 and a change in the estimate of average gross short-term annual return on Separate Accounts balances to 9.0%, future estimated gross profits at December 31, 2008 for certain issue years for the Accumulator® products were expected to be negative as the increases in the fair values of derivatives used to hedge certain risks related to these products would be recognized in current earnings while the related reserves do not fully and immediately reflect the impact of equity and interest market fluctuations. As required under U.S. GAAP, for those issue years with future estimated negative gross profits, the DAC amortization method was permanently changed in fourth quarter 2008 from one based on estimated gross profits to one based on estimated assessments for the Accumulator® products, subject to loss recognition testing. In 2011, the DAC amortization method was changed to one based on estimated account balances for all issue years for the Accumulator® products due to continued volatility of margins and the continued emergence of periods of negative margins.
DAC capitalization totaled $759 million in 2011, an increase of $104 million from the $655 million reported in 2010. The increase was primarily due to a $139 million increase in first year commissions, partially offset by a $35 million decrease in deferrable operating expenses.
Other operating costs and expenses totaled $826 million in 2011, a decrease of $31 million from the $857 reported in 2010. The decrease is primarily related to a $63 million decrease in the amortization of reinsurance costs related to the deferred asset recorded from the Company’s reinsurance transaction with AXA Bermuda partially offset by increases of $55 million related to severance and lease costs, increases of $13 million in consulting expenses and an increase of $9 million in sub-advisory fees.
Premiums and Deposits.
The market for annuity and life insurance products of the types issued by the Company continues to be dynamic as the global economy and capital markets slowly recover from the significant stress experienced in recent years. Among other things:
| | • | | features and pricing of various products, including but not limited to variable annuity products, continue to change rapidly, in response to changing customer preferences, company risk appetites, capital utilization and other factors, and |
| | • | | The Company has also taken and expects to continue to take steps to manage the risks associated with the in-force business, particularly variable annuities with guarantee features. For example, in 2012, the Company suspended the acceptance of contributions into certain Accumulator® contracts issued prior to June 2009 and initiated a limited program to offer to purchase from certain policyholders the GMDB rider contained in their Accumulator® contracts. The Company also took steps to limit and/or suspend the acceptance of contributions to other annuity products. |
7-22
The following table lists sales for major insurance product lines and mutual funds for 2012, 2011 and 2010. Premiums and deposits are presented net of internal conversions and are presented gross of reinsurance ceded.
Premiums and Deposits
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
Retail: | | | | | | | | | | | | |
Annuities | | | | | | | | | | | | |
First year | | $ | 3,583 | | | $ | 3,356 | | | $ | 3,064 | |
Renewal | | | 2,116 | | | | 2,173 | | | | 2,233 | |
| | | | | | | | | | | | |
| | | 5,699 | | | | 5,529 | | | | 5,297 | |
Life(1) | | | | | | | | | | | | |
First year | | | 231 | | | | 256 | | | | 255 | |
Renewal | | | 1,770 | | | | 1,782 | | | | 1,965 | |
| | | | | | | | | | | | |
| | | 2,001 | | | | 2,038 | | | | 2,220 | |
Other(2) | | | | | | | | | | | | |
First year | | | 11 | | | | 11 | | | | 10 | |
Renewal | | | 235 | | | | 228 | | | | 236 | |
| | | | | | | | | | | | |
| | | 246 | | | | 239 | | | | 246 | |
| | | | | | | | | | | | |
Total retail | | | 7,946 | | | | 7,806 | | | | 7,763 | |
| | | | | | | | | | | | |
| | | |
Wholesale: | | | | | | | | | | | | |
Annuities | | | | | | | | | | | | |
First year | | | 2,840 | | | | 1,460 | | | | 1,408 | |
Renewal | | | 384 | | | | 384 | | | | 449 | |
| | | | | | | | | | | | |
| | | 3,224 | | | | 1,844 | | | | 1,857 | |
Life(1) | | | | | | | | | | | | |
First year | | | 200 | | | | 224 | | | | 153 | |
Renewal | | | 553 | | | | 496 | | | | 408 | |
| | | | | | | | | | | | |
| | | 753 | | | | 720 | | | | 561 | |
| | | | | | | | | | | | |
| | | |
Total wholesale | | | 3,977 | | | | 2,564 | | | | 2,418 | |
| | | | | | | | | | | | |
| | | |
Total Premiums and Deposits | | $ | 11,923 | | | $ | 10,370 | | | $ | 10,181 | |
| | | | | | | | | | | | |
(1) | Includes variable, interest-sensitive and traditional life products. |
(2) | Includes reinsurance assumed and health insurance. |
2012 Compared to 2011.Total premiums and deposits for insurance and annuity products for 2012 were $11.9 billion, a $1.5 billion increase from $10.4 billion in 2011 while total first year premiums and deposits increased $1.6 billion to $6.9 billion in 2012 from $5.3 billion in 2011 partially due to sales of recently introduced variable annuity products. The annuity line’s first year premiums and deposits increased $1.6 billion to $6.4 billion principally due to the $1.6 billion increase in variable annuities’ sales ($1.4 million in the wholesale and $245 million in the retail channel) partially offset by lower sales of fixed annuity premiums of $19 million. First year premiums and deposits for the life insurance products decreased $49 million, primarily due to the $34 million and $17 million decrease in sales of UL insurance products in the retail and wholesale channels and a $5 million decrease in first year term life insurance sales in the wholesale and retail channels. In 2012, the Company lowered its renewal premium assumptions on certain series of UL products sold in 2011 based on emerging experience which will result in lower future policy fee income.
2011 Compared to 2010.Total premiums and deposits for insurance and annuity products for 2011 were $10.4 billion, a $189 million increase from $10.2 billion in 2010 while total first year premiums and deposits increased $417 million to $5.3 billion in 2011 from $4.9 billion in 2010 partially due to sales of recently introduced insurance products. The annuity line’s first year premiums and deposits increased $344 million to $5.3 billion principally due to the $398 million increase in variable annuities’ sales ($307 million in the retail and $91 million in the wholesale channel) partially offset by lower sales of fixed annuity premiums of $54 million. First year premiums and deposits for the life insurance products increased $72
7-23
million, primarily due to the $81 million and $7 million respective increase in sales of universal life insurance products in the wholesale and retail channels partially offset by the $14 million and $5 million respective decreases in first year term life insurance sales in the wholesale and retail channels.
Surrenders and Withdrawals.
The following table presents surrender and withdrawal amounts and rates for major insurance product lines. Annuity surrenders and withdrawals are presented net of internal replacements.
Surrenders and Withdrawals
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | Rates(1) | |
| | | 2012 | | | 2011 | | | 2010 | | | 2012 | | | 2011 | | | 2010 | |
| | | (Dollars in Millions) | | | | | | | | | | |
| | | | | | |
Annuities | | $ | 6,103 | | | $ | 6,083 | | | $ | 5,645 | | | | 6.3 | % | | | 6.4 | % | | | 6.4 | % |
Variable and interest-sensitive life | | | 965 | | | | 943 | | | | 885 | | | | 5.1 | % | | | 5.0 | % | | | 4.9 | % |
Traditional life | | | 238 | | | | 249 | | | | 261 | | | | 3.0 | % | | | 3.1 | % | | | 3.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 7,306 | | | $ | 7,275 | | | $ | 6,791 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Surrender rates are based on the average surrenderable future policy benefits and/or policyholders’ account balances for the related policies and contracts in force during each year. |
2012 Compared to 2011.Surrenders and withdrawals remained relatively flat year over year with an increase of $31 million during 2012, surrenders and withdrawals totaled $7.3 billion in both 2012 and 2011. There were increases of $22 million and $20 million, respectively, in variable and interest sensitive life products and individual annuities surrenders and withdrawals with a decrease of $11 million reported for traditional life products. The annualized annuities surrender rate decreased to 6.3% in 2012 from 6.4% in 2011. In 2012, expectations of partial withdrawal and long term lapse rates for variable annuities with GMDB and GMIB guarantees were updated based upon emerging experience. In 2011 and 2010, expectations of long-term surrender rates for variable annuities with GMDB and GMIB guarantees were lowered at certain policy durations based upon emerging experience. The individual life insurance products’ annualized surrender rate increased to 4.5% in 2012 from 4.4% in 2011. The 2012 surrender rate included the impact of the surrender of a single large corporate-owned life insurance (“COLI”) policy.
2011 Compared to 2010.Surrenders and withdrawals increased $484 million, from $6.8 billion in 2010 to $7.3 billion for 2011. There were increases of $438 million and $58 million, respectively, in individual annuities and variable and interest sensitive life product surrenders and withdrawals with a decrease of $12 million reported for traditional life insurance lines. The annualized annuities surrender rate was 6.4% for both 2011 and 2010. The individual life insurance products’ annualized surrender rate remained relatively consistent for both 2011 and 2010.
7-24
Investment Management.
The table that follows presents the operating results of the Investment Management segment, consisting principally of AllianceBernstein’s operations, for 2012, 2011 and 2010.
Investment Management – Results of Operations
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Revenues: | | | | | | | | | | | | |
Investment advisory and service fees(1) | | $ | 1,772 | | | $ | 1,916 | | | $ | 2,052 | |
Distribution revenues | | | 402 | | | | 352 | | | | 339 | |
Bernstein research services | | | 414 | | | | 437 | | | | 431 | |
Other revenues | | | 102 | | | | 108 | | | | 112 | |
| | | | | | | | | | | | |
Commissions, fees and other income | | | 2,690 | | | | 2,813 | | | | 2,934 | |
| | | |
Investment income (losses) | | | 68 | | | | (55 | ) | | | 6 | |
Less: interest expense to finance trading activities | | | (3 | ) | | | (3 | ) | | | (4 | ) |
| | | | | | | | | | | | |
Net investment income (losses) | | | 65 | | | | (58 | ) | | | 2 | |
| | | |
Investment gains (losses), net | | | (17 | ) | | | (5 | ) | | | 23 | |
| | | | | | | | | | | | |
Total revenues | | | 2,738 | | | | 2,750 | | | | 2,959 | |
| | | | | | | | | | | | |
| | | |
Expenses: | | | | | | | | | | | | |
Compensation and benefits | | | 1,193 | | | | 1,805 | | | | 1,407 | |
Distribution related payments | | | 367 | | | | 303 | | | | 287 | |
Amortization of deferred sales commissions | | | 40 | | | | 38 | | | | 47 | |
Interest expense | | | 2 | | | | 1 | | | | — | |
Real estate charges | | | 223 | | | | 7 | | | | 102 | |
Rent expense | | | 161 | | | | 189 | | | | 183 | |
Amortization of other intangible assets, net | | | 24 | | | | 24 | | | | 23 | |
Other operating costs and expenses | | | 538 | | | | 547 | | | | 510 | |
| | | | | | | | | | | | |
Total expenses | | | 2,548 | | | | 2,914 | | | | 2,559 | |
| | | | | | | | | | | | |
| | | |
Earnings (losses) from Continuing Operations before Income Taxes | | $ | 190 | | | $ | (164 | ) | | $ | 400 | |
| | | | | | | | | | | | |
(1) | Included fees earned by AllianceBernstein totaling $32 million, $32 million and $30 million in 2012, 2011 and 2010, respectively, for services provided to the Company. |
Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011 – Investment Management
Revenues
The Investment Management segment’s pre-tax earnings from continuing operations for 2012 were $190 million, an increase of $354 million from pre-tax losses of $164 million in 2011.
Revenues totaled $2.7 billion in 2012, a decrease of $12 million from $2.8 billion in 2011, primarily due to lower investment advisory and service fees and lower Bernstein research services revenues partially offset by higher net investment income and distribution revenues.
Investment advisory and services fees include base fees and performance-based fees. In 2012, investment advisory and services fees totaled $1.8 billion, a decrease of $144 million from the $1.9 billion in 2011. The $194 million decrease in base investment advisory and services fees was primarily due to the decrease in average assets under management and a continued shift in product mix from equities to fixed income and other products in Institutional AUM partially offset by a $50 million increase in performance-based fees. In 2012, AllianceBernstein recorded a $40 million performance fee from winding up the Public-Private Investment Program fund. Institutional investment and advisory base and performance fees decreased $131 million and Private client fees decreased $66 million. Retail base and performance fees increased $53 million.
7-25
Distribution revenues increased $50 million in 2012 as compared to prior year as the average AUM of certain of AllianceBernstein company-sponsored mutual funds increased. AllianceBernstein receives distribution service fees from these funds as partial reimbursement of the distribution expenses incurred.
Bernstein research revenues decreased $23 million in 2012 as compared to prior year primarily due to a significant decline in market trading volumes partially offset by market share gains.
Net investment income (loss) consisted principally of realized and unrealized gains (losses) on trading investments (primarily to support employee long-term deferred compensation plans), income (losses) from derivative instruments and dividend and interest income, offset by interest expense related to interest accrued on cash balances on customers’ brokerage accounts. The $123 million increase in net investment income to $65 million of income in 2012 as compared to a loss of $58 million in 2011 was primarily due to $57 million higher unrealized gains on consolidated private equity fund investments, $37 million of investment income from realized and unrealized gains on deferred compensation related investments ($17 million of gains in 2012 as compared to $20 million of losses in 2011), $28 million higher investment income on seed money investments and $6 million higher investment income on brokerage related investments partially offset by investment losses on derivative instruments ($36 million of losses in 2012 as compared to $4 million of income in 2011).
Investment gains (losses) were a $17 million loss in 2012 as compared to $5 million loss in 2011. The increase of $12 million of investment gains (losses) was related to losses on investments held by AllianceBernstein’s consolidated private equity fund.
Expenses
The Investment Management segment’s total expenses were $2.5 billion in 2012, an decrease of $366 million from the $2.9 billion in 2011 as lower compensation and benefits were partially offset by higher real estate charges and higher distribution related payments.
For 2012, employee compensation and benefits expenses for the segment were $1.2 billion as compared to $1.8 billion in 2011. The $612 million decrease was primarily attributable to the absence of a one-time charge of $472 million related to AllianceBernstein’s 2011 one-time deferred compensation charge related to the immediate expense recognition of all unamortized deferred compensation awards from prior years, a $90 million decrease in commission expense and decreases in salary and other employment costs of $50 million including short-term and long-term incentive compensation expense due to lower headcount and lower adjusted revenues used to calculate incentive compensation.
The distribution related payments increased $64 million to $367 million in 2012 from $303 million in 2011 primarily as a result of higher average Retail Services assets under management.
Real estate charges increased $216 million ($223 million in 2012 as compared to $7 million in 2011). In 2012, AllianceBernstein completed a comprehensive review of its worldwide locations and began to implement a global space consolidation plan. This plan to vacate and market space for sublease will result in projected non-cash real estate charges of $225 million to $250 million, substantially all of which was recorded in third and fourth quarters of 2012.
The $9 million decrease in other operating costs and expenses to $538 million for 2012 as compared to $547 million in 2011 was primarily due to lower technology expenses of $14 million, lower travel and entertainment of $11 million, lower trade execution and transfer fees of $10 million and a cash receipt of $7 million in the first quarter of 2012 relating to the finalization of a claim originally recorded in 2006 partially offset by higher portfolio services expenses of $19 million and higher legal expenses of $16 million.
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010 – Investment Management
Revenues
The Investment Management segment’s pre-tax loss from continuing operations for 2011 were $164 million, a decrease of $564 million from pre-tax earnings of $400 million in 2010.
Revenues totaled $2.8 billion in 2011, a decrease of $209 million from $3.0 billion in 2010, primarily due to lower investment advisory and service fees and higher net investment losses partially offset by higher Bernstein research and distribution revenues.
Investment advisory and services fees include base fees and performance fees. In 2011, investment advisory and services fees totaled $1.9 billion, a decrease of $136 million from the $2.1 billion in 2010. The $136 million decrease in base
7-26
investment advisory and services fees was primarily due to the decrease in average assets under management. Institutional investment and advisory base and performance fees decreased $148 million due to a decrease in average assets under management as well as a shift in product mix from equities to fixed income products. The decrease in the Institutions channel were offset by the $12 million increase in the Retail and Private Client base fees.
The distribution revenues for 2011 increased $13 million as compared to the prior year due to higher Retail average mutual fund AUM.
Bernstein research revenues increased $6 million in 2011 as compared to prior year primarily due to higher trading commissions in Europe and Asia partially offset by lower trading volumes in the United States.
Net investment income (loss) consisted principally of dividend and interest income, income (losses) from derivative instruments and realized and unrealized gains (losses) on trading and other investments, offset by interest expense related to interest accrued on cash balances on customers’ brokerage accounts. The $60 million increase in net investment loss to $58 million in 2011 as compared to $2 million of net investment income in 2010 was primarily due to $20 million of investment loss from deferred compensation related investments in 2011 as compared to $27 million of investment income in the comparable prior period, $22 million higher investment loss from mark-to-market losses on investments held by AllianceBernstein’s consolidated private equity fund ($40 million in 2011 as compared to $18 million in 2010) and $9 million higher investment losses on seed money investments ($20 million of losses in 2011 as compared to $11 million of losses in 2010). Partially offsetting these losses were an increase of $19 million of investment income from derivative instruments ($4 million of income in 2011 as compared to $15 million of losses in 2010).
The $28 million decline from $23 million in investment gains, net in 2010 to $5 million in investment losses in 2011 resulted from losses in 2011 from sales of investments.
Expenses
The Investment Management segment’s total expenses were $2.9 billion in 2011, an increase of $355 million from the $2.6 billion in 2011 as higher compensation and benefits and distribution related payments were partially offset by a decrease in other operating costs and expenses.
For 2011, employee compensation and benefits expenses for the segment were $1.8 billion as compared to $1.4 billion in 2010. In fourth quarter 2011, AllianceBernstein implemented changes to its employee long-term incentive compensation award program. As a result of this change, the Investment Management segment recorded a one-time charge of $472 million related to AllianceBernstein’s immediate expense recognition of all unamortized deferred compensation awards from prior years. Excluding this charge compensation and benefits decreased $74 million, which was primarily attributable to a decrease in compensation expenses of $178 million reflecting lower cash incentive compensation partially offset by increases in base compensation, fringe benefits and other employment costs of $29 million due to higher salaries resulting from annual merit increases and offset by lower recruitment and severance costs and higher commission expenses. Commission expense for 2011 increased by $75 million due to higher sales volumes across all channels primarily due to higher retail sales volume.
The distribution related payments increased $16 million to $303 million in 2011 from $287 million in the prior year primarily as a result of higher average Retail Services assets under management; the payment increase was generally in line with the increase in distribution revenues.
Real estate charges decreased $95 million ($7 million in 2011 as compared to $102 million in 2010). In 2010, AllianceBernstein performed a comprehensive review of its real estate requirements in New York in connection with its workforce reductions commencing in 2008. During 2010, AllianceBernstein decided to sub-lease its New York space and consolidate its New York employees from three office locations into two. As a result, AllianceBernstein recorded a $102 million pre-tax charge in 2010.
The $37 million increase in other operating costs and expenses to $547 million for 2011 as compared to $510 million in 2010 was primarily due to the $10 million higher portfolio services, $8 million higher travel and entertainment expenses, $8 million higher trade and execution fees and $6 million higher transfer fees.
7-27
FEES AND ASSETS UNDER MANAGEMENT
A breakdown of fees and AUM follows:
Fees and Assets Under Management
| | | | | | | | | | | | |
| | | At or For the Years Ended December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
FEES | | | | | | | | | | | | |
Third party | | $ | 1,712 | | | $ | 1,857 | | | $ | 1,989 | |
General Account and other | | | 36 | | | | 33 | | | | 31 | |
Insurance Group Separate Accounts | | | 24 | | | | 26 | | | | 32 | |
| | | | | | | | | | | | |
Total Fees | | $ | 1,772 | | | $ | 1,916 | | | $ | 2,052 | |
| | | | | | | | | | | | |
| | | |
ASSETS UNDER MANAGEMENT | | | | | | | | | | | | |
Assets by Manager | | | | | | | | | | | | |
AllianceBernstein | | | | | | | | | | | | |
Third party | | $ | 370,693 | | | $ | 351,867 | | | | | |
General Account and other | | | 33,341 | | | | 31,628 | | | | | |
Insurance Group Separate Accounts | | | 25,983 | | | | 22,402 | | | | | |
| | | | | | | | | | | | |
Total AllianceBernstein | | | 430,017 | | | | 405,897 | | | | | |
| | | | | | | | | | | | |
| | | |
Insurance Group | | | | | | | | | | | | |
General Account and other(2) | | | 19,474 | | | | 17,556 | | | | | |
Insurance Group Separate Accounts | | | 70,000 | | | | 65,840 | | | | | |
| | | | | | | | | | | | |
Total Insurance Group | | | 89,474 | | | | 83,396 | | | | | |
| | | | | | | | | | | | |
| | | |
Total by Account: | | | | | | | | | | | | |
Third party(1) | | | 370,693 | | | | 351,867 | | | | | |
General Account and other(2) | | | 52,815 | | | | 49,184 | | | | | |
Insurance Group Separate Accounts | | | 95,983 | | | | 88,242 | | | | | |
| | | | | | | | | | | | |
Total Assets Under Management | | $ | 519,491 | | | $ | 489,293 | | | | | |
| | | | | | | | | | | | |
(1) | Includes $46.8 billion and $37.6 billion of assets managed on behalf of AXA affiliates at December 31, 2012 and 2011, respectively. Third party AUM includes 100% of the estimated fair value of real estate owned by joint ventures in which third party clients own an interest. |
(2) | Includes invested assets of the Company not managed by AllianceBernstein, principally cash and short-term investments and policy loans, totaling approximately $13.9 billion and $12.8 billion at December 31, 2012 and 2011, respectively, as well as mortgages and equity real estate totaling $5.5 billion and $4.8 billion at December 31, 2012 and 2011, respectively. |
Fees for assets under management decreased 7.5% from 2011 to 2012 and 6.6% from 2010 to 2011, in line with the change in average assets under management for third parties and the Separate Accounts.
Total assets under management increased $30.2 billion, primarily due to higher Third Party AUM at AllianceBernstein, higher Insurance Group Separate Accounts AUM and higher General Account and other AUM. AllianceBernstein’s increase in AUM at December 31, 2012 resulted from market appreciation partially offset by net outflows. Third Party AUM at AllianceBernstein increased $18.8 billion primarily from market appreciation offset by net cash outflows. The $7.8 billion increase in Insurance Group Separate Accounts AUM at December 31, 2012 as compared to December 31, 2011 resulted from increases in EQAT’s, VIP’s and other Separate Accounts’ AUM due to market appreciation partially offset by net outflows. General Account and other assets under management increased $3.6 billion from 2011 primarily due to market appreciation and net cash inflows.
7-28
AllianceBernstein assets under management at December 31, 2012 totaled $430.0 billion as compared to $405.9 billion at December 31, 2011 due to market appreciation of $38.5 billion partially offset by net outflows of $14.4 billion. The gross outflows of $42.9 billion, $40.1 billion and $13.3 billion in Institutional Investment, Retail and Private Client channels, respectively, more than offset the inflows of $21.3 billion, $56.3 billion and $4.3 billion, respectively. At December 31, 2012, non-US clients accounted for 36.0% of the total AUM.
AllianceBernstein also classifies its assets under management by its four investment services categories: Value Equity, Fixed Income, Growth Equity and Other. AUM in Fixed Income products increased $38.0 billion to $255.6 billion at December 31, 2012 as $62.4 billion in new investments and $15.4 billion in market appreciation were partially offset by $39.8 billion in net outflows. The $14.6 billion increase in Other assets under management to $77.9 billion resulted from $9.3 billion new investments and $8.2 billion in market appreciation partially offset by $2.9 billion in net outflows. There was a $23.7 billion decrease in Value Equity to $57.1 billion at December 31, 2012, as the $37.7 billion of net long-term outflows were partially offset by $8.8 billion in market appreciation and $5.2 billion in new investments. Growth Equity assets under management totaled $39.4 billion, $4.8 billion lower than its December 31, 2011 balance due to $15.9 billion in net outflows partially offset by $6.1 billion in market appreciation and $5.0 billion of new investments. AllianceBernstein may experience periods when the number of new accounts or the amount of AUM increases or decreases significantly. Contributing factors impacting changes in AUM include financial market conditions, AllianceBernstein’s investment performance for clients, the experience of the portfolio manager, the client’s overall relationship with AllianceBernstein, recommendations of consultants, and changes in clients’ investment preferences, risk tolerances and liquidity needs.
Average assets under management totaled $461.0 billion for December 31, 2012 as compared to $451.9 billion for December 31, 2011. The respective decreases for Institutional and Private Client were $33.7 billion and $6.4 billion partially offset by an increase of $4.2 billion for the Retail channel while the average AUM decreases for the Value Equity and Growth Equity services were $47.7 billion and $19.9 billion offset by increases in the Fixed Income and Other categories of $21.2 billion and $10.5 billion, respectively.
AllianceBernstein’s U.S. and global value services outperformed their benchmarks for the three month period ending December 31, 2012, but mostly lagged for the full year. In contrast, the U.S large and small cap growth services lagged somewhat in the fourth quarter but finished ahead of their benchmarks for the full year.
7-29
GENERAL ACCOUNTS INVESTMENT PORTFOLIO
The General Account Investment Assets (“GAIA”) portfolio consists of a well-diversified portfolio of public and private fixed maturities, commercial and agricultural mortgages and other loans, equity securities and other invested assets.
The General Accounts’ portfolios and investment results support the insurance and annuity liabilities of the Insurance segment’s business operations. The following table reconciles the consolidated balance sheet asset amounts to GAIA.
General Account Investment Assets
December 31, 2012
| | | | | | | | | | | | |
Balance Sheet Captions: | | Balance
Sheet Total | | | Other(1) | | | GAIA | |
| | | (In Millions) | |
| | | |
Fixed maturities, available for sale, at fair value | | $ | 33,607 | | | $ | 1,963 | | | $ | 31,644 | |
Mortgage loans on real estate | | | 5,059 | | | | (368 | ) | | | 5,427 | |
Equity real estate, held for the production of income | | | 4 | | | | 1 | | | | 3 | |
Policy Loans | | | 3,512 | | | | (112 | ) | | | 3,624 | |
Other equity investments | | | 1,643 | | | | 236 | | | | 1,407 | |
Trading securities | | | 2,309 | | | | 470 | | | | 1,839 | |
Other invested assets | | | 1,828 | | | | 1,592 | | | | 236 | |
| | | | | | | | | | | | |
Total investments | | | 47,962 | | | | 3,782 | | | | 44,180 | |
Cash and cash equivalents | | | 3,162 | | | | 1,881 | | | | 1,281 | |
Short-term and long-term debt | | | (523 | ) | | | (314 | ) | | | (209 | ) |
| | | | | | | | | | | | |
Total | | $ | 50,601 | | | $ | 5,349 | | | $ | 45,252 | |
| | | | | | | | | | | | |
(1) | Assets listed in the “Other” category principally consist of the Company’s loans to affiliates and other miscellaneous assets and loans from affiliates and other miscellaneous liabilities related to GAIA that are reclassified from various balance sheet lines held in portfolios other than the General Account which are not managed as part of GAIA, including related accrued income or expense, certain reclassifications and intercompany adjustments and, for fixed maturities, the reversal of net unrealized gains (losses). The “Other” category is deducted in arriving at GAIA. |
7-30
Investment Results of General Account Investment Assets
The following table summarizes investment results by asset category for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | Yield | | | Amount | | | Yield | | | Amount | | | Yield | | | Amount | |
| | | (Dollars in Millions) | |
| | | | | | |
Fixed Maturities: | | | | | | | | | | | | | | | | | | | | | | | | |
Investment grade | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) | | | 4.71 | % | | $ | 1,381 | | | | 5.21 | % | | $ | 1,387 | | | | 6.19 | % | | $ | 1,606 | |
Ending assets | | | | | | | 29,526 | | | | | | | | 28,948 | | | | | | | | 27,354 | |
Below investment grade | | | | | | | | | | | | | | | | | | | | | | | | |
Income | | | 6.50 | % | | | 146 | | | | 7.53 | % | | | 166 | | | | 7.14 | % | | | 174 | |
Ending assets | | | | | | | 2,118 | | | | | | | | 2,206 | | | | | | | | 2,355 | |
Mortgages: | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) | | | 5.91 | % | | | 296 | | | | 6.57 | % | | | 273 | | | | 6.87 | % | | | 263 | |
Ending assets | | | | | | | 5,427 | | | | | | | | 4,658 | | | | | | | | 3,956 | |
Equity Real Estate: | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) | | | 15.07 | % | | | 14 | | | | 16.46 | % | | | 18 | | | | 20.09 | % | | | 20 | |
Ending assets | | | | | | | 3 | | | | | | | | 98 | | | | | | | | 141 | |
Other Equity Investments: | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) | | | 11.57 | % | | | 166 | | | | 11.20 | % | | | 154 | | | | 15.48 | % | | | 187 | |
Ending assets | | | | | | | 1,407 | | | | | | | | 1,433 | | | | | | | | 1,359 | |
Policy Loans: | | | | | | | | | | | | | | | | | | | | | | | | |
Income | | | 6.21 | % | | | 226 | | | | 6.45 | % | | | 229 | | | | 6.64 | % | | | 239 | |
Ending assets | | | | | | | 3,624 | | | | | | | | 3,656 | | | | | | | | 3,695 | |
Cash and Short-term Investments: | | | | | | | | | | | | | | | | | | | | | | | | |
Income | | | 0.09 | % | | | 14 | | | | 0.31 | % | | | 4 | | | | 0.84 | % | | | 10 | |
Ending assets | | | | | | | 1,281 | | | | | | | | 1,044 | | | | | | | | 1,056 | |
Trading Securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Income | | | 1.38 | % | | | 15 | | | | 13.17 | % | | | 8 | | | | | | | | — | |
Ending assets | | | | | | | 1,839 | | | | | | | | 472 | | | | | | | | — | |
Other Invested Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Income | | | | | | | 118 | | | | | | | | 2 | | | | | | | | — | |
Ending assets | | | | | | | 236 | | | | | | | | 11 | | | | | | | | 8 | |
| | | | | | |
Total Invested Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income | | | 4.78 | % | | | 2,376 | | | | 4.26 | % | | | 2,241 | | | | 4.11 | % | | | 2,499 | |
Ending Assets | | | | | | | 45,461 | | | | | | | | 42,526 | | | | | | | | 39,924 | |
| | | | | | |
Debt and Other: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense and other | | | | | | | (12 | ) | | | | | | | (16 | ) | | | | | | | (16 | ) |
Ending assets (liabilities) | | | | | | | (209 | ) | | | | | | | (200 | ) | | | | | | | (209 | ) |
| | | | | | |
Total: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Investment income | | | 5.27 | % | | | 2,364 | | | | 5.53 | % | | | 2,225 | | | | 6.55 | % | | | 2,483 | |
Less: investment fees | | | (0.11 | )% | | | (49 | ) | | | (0.13 | )% | | | (52 | ) | | | (0.12 | )% | | | (45 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Investment Income, Net | | | 5.16 | % | | $ | 2,315 | | | | 5.40 | % | | $ | 2,173 | | | | 6.43 | % | | $ | 2,438 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Ending Net Assets | | | | | | $ | 45,252 | | | | | | | $ | 42,326 | | | | | | | $ | 39,715 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Maturities
The fixed maturity portfolio consists largely of investment grade corporate debt securities and includes significant amounts of US government and agency obligations. At December 31, 2012, 74.0% of the fixed maturity portfolio was publicly traded. At December 31, 2012, GAIA held CMBS with an amortized cost of $1.2 billion. The General Account had a $2 million exposure to the direct sovereign debt of Italy and no exposure to the sovereign debt of Greece, Portugal, Spain and the Republic of Ireland at December 31, 2012.
7-31
Fixed Maturities by Industry
The General Accounts’ fixed maturities portfolios include publicly-traded and privately-placed corporate debt securities across an array of industry categories.
The following table sets forth these fixed maturities by industry category as of the dates indicated along with their associated gross unrealized gains and losses.
Fixed Maturities by Industry(1)
| | | | | | | | | | | | | | | | |
| | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair Value | |
| | | (In Millions) | |
| | | | |
At December 31, 2012: | | | | | | | | | | | | | | | | |
Corporate Securities: | | | | | | | | | | | | | | | | |
Finance | | $ | 6,364 | | | $ | 495 | | | $ | 3 | | | $ | 6,856 | |
Manufacturing | | | 5,720 | | | | 676 | | | | 7 | | | | 6,389 | |
Utilities | | | 3,212 | | | | 420 | | | | 3 | | | | 3,629 | |
Services | | | 3,028 | | | | 358 | | | | 5 | | | | 3,381 | |
Energy | | | 1,338 | | | | 198 | | | | — | | | | 1,536 | |
Retail and wholesale | | | 1,063 | | | | 113 | | | | 1 | | | | 1,175 | |
Transportation | | | 708 | | | | 96 | | | | 2 | | | | 802 | |
Other | | | 30 | | | | 3 | | | | — | | | | 33 | |
| | | | | | | | | | | | | | | | |
Total corporate securities | | | 21,463 | | | | 2,359 | | | | 21 | | | | 23,801 | |
| | | | | | | | | | | | | | | | |
U.S. government | | | 4,642 | | | | 519 | | | | 1 | | | | 5,160 | |
Commercial mortgage-backed | | | 1,175 | | | | 16 | | | | 291 | | | | 900 | |
Residential mortgage-backed(2) | | | 1,863 | | | | 85 | | | | — | | | | 1,948 | |
Preferred stock | | | 1,089 | | | | 59 | | | | 11 | | | | 1,137 | |
State & municipal | | | 445 | | | | 85 | | | | — | | | | 530 | |
Foreign governments | | | 454 | | | | 76 | | | | — | | | | 530 | |
Asset-backed securities | | | 175 | | | | 12 | | | | 5 | | | | 182 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 31,306 | | | $ | 3,211 | | | $ | 329 | | | $ | 34,188 | |
| | | | | | | | | | | | | | | | |
At December 31, 2011: | | | | | | | | | | | | | | | | |
Corporate Securities: | | | | | | | | | | | | | | | | |
Finance | | $ | 6,738 | | | $ | 270 | | | $ | 87 | | | $ | 6,921 | |
Manufacturing | | | 5,605 | | | | 561 | | | | 22 | | | | 6,144 | |
Utilities | | | 3,415 | | | | 375 | | | | 20 | | | | 3,770 | |
Services | | | 3,069 | | | | 280 | | | | 10 | | | | 3,339 | |
Energy | | | 1,321 | | | | 159 | | | | — | | | | 1,480 | |
Retail and wholesale | | | 1,101 | | | | 96 | | | | 1 | | | | 1,196 | |
Transportation | | | 766 | | | | 91 | | | | 6 | | | | 851 | |
Other | | | 33 | | | | 3 | | | | — | | | | 36 | |
| | | | | | | | | | | | | | | | |
Total corporate securities | | | 22,048 | | | | 1,835 | | | | 146 | | | | 23,737 | |
| | | | | | | | | | | | | | | | |
U.S. government | | | 3,580 | | | | 352 | | | | 3 | | | | 3,929 | |
Commercial mortgage-backed | | | 1,306 | | | | 7 | | | | 411 | | | | 902 | |
Residential mortgage-backed(2) | | | 1,555 | | | | 89 | | | | — | | | | 1,644 | |
Preferred stock | | | 1,106 | | | | 38 | | | | 114 | | | | 1,030 | |
State & municipal | | | 478 | | | | 64 | | | | 2 | | | | 540 | |
Foreign governments | | | 461 | | | | 65 | | | | 1 | | | | 525 | |
Asset-backed securities | | | 260 | | | | 14 | | | | 10 | | | | 264 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 30,794 | | | $ | 2,464 | | | $ | 687 | | | $ | 32,571 | |
| | | | | | | | | | | | | | | | |
(1) | Investment data has been classified based on standard industry categorizations for domestic public holdings and similar classifications by industry for all other holdings. |
(2) | Includes publicly traded agency pass-through securities and collateralized mortgage obligations. |
7-32
Fixed Maturities Credit Quality
The Securities Valuation Office (“SVO”) of the National Association of Insurance Commissioners (“NAIC”), evaluates the investments of insurers for regulatory reporting purposes and assigns fixed maturity securities to one of six categories (“NAIC Designations”). NAIC designations of “1” or “2” include fixed maturities considered investment grade, which include securities rated Baa3 or higher by Moody’s or BBB- or higher by Standard & Poor’s. NAIC Designations of “3” through “6” are referred to as below investment grade, which include securities rated Ba1 or lower by Moody’s and BB+ or lower by Standard & Poor’s. As a result of time lags between the funding of investments, the finalization of legal documents and the completion of the SVO filing process, the fixed maturity portfolio generally includes securities that have not yet been rated by the SVO as of each balance sheet date. Pending receipt of SVO ratings, the categorization of these securities by NAIC designation is based on the expected ratings indicated by internal analysis.
The amortized cost of the General Accounts’ public and private below investment grade fixed maturities totaled $1.7 billion, or 5.4%, of the total fixed maturities at December 31, 2012 and $1.9 billion, or 6.3%, of the total fixed maturities at December 31, 2011. Gross unrealized losses on public and private fixed maturities decreased from $687 million in 2011 to $329 million in 2012. Below investment grade fixed maturities represented 46.5% and 55.6% of the gross unrealized losses at December 31, 2012 and 2011, respectively. For public, private and corporate fixed maturity categories, gross unrealized gains were higher and gross unrealized losses were lower in 2012 than in the prior year.
Public Fixed Maturities Credit Quality. The following table sets forth the General Accounts’ public fixed maturities portfolios by NAIC rating at the dates indicated.
Public Fixed Maturities
| | | | | | | | | | | | | | | | | | |
NAIC Designation(1) | | Rating Agency Equivalent | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair Value | |
| | | | | (In Millions) | |
| | | | |
At December 31, 2012: | | | | | | | | | | | | | | | | |
1 | | Aaa, Aa, A | | $ | 14,697 | | | $ | 1,656 | | | $ | 53 | | | $ | 16,300 | |
2 | | Baa | | | 7,365 | | | | 801 | | | | 10 | | | | 8,156 | |
| | | | | | | | | | | | | | | | | | |
| | Investment grade | | | 22,062 | | | | 2,457 | | | | 63 | | | | 24,456 | |
| | | | | | | | | | | | | | | | | | |
| | | | | |
3 | | Ba | | | 770 | | | | 45 | | | | 6 | | | | 809 | |
4 | | B | | | 158 | | | | 4 | | | | 4 | | | | 158 | |
5 | | C and lower | | | 93 | | | | 1 | | | | 19 | | | | 75 | |
6 | | In or near default | | | 37 | | | | — | | | | 12 | | | | 25 | |
| | | | | | | | | | | | | | | | | | |
| | Below investment grade | | | 1,058 | | | | 50 | | | | 41 | | | | 1,067 | |
| | | | | | | | | | | | | | | | | | |
Total Public Fixed Maturities | | $ | 23,120 | | | $ | 2,507 | | | $ | 104 | | | $ | 25,523 | |
| | | | | | | | | | | | | | | | | | |
| | | | |
At December 31, 2011: | | | | | | | | | | | | | | | | |
1 | | Aaa, Aa, A | | $ | 14,774 | | | $ | 1,383 | | | $ | 48 | | | $ | 16,109 | |
2 | | Baa | | | 6,858 | | | | 554 | | | | 87 | | | | 7,325 | |
| | | | | | | | | | | | | | | | | | |
| | Investment grade | | | 21,632 | | | | 1,937 | | | | 135 | | | | 23,434 | |
| | | | | | | | | | | | | | | | | | |
| | | | | |
3 | | Ba | | | 745 | | | | 16 | | | | 36 | | | | 725 | |
4 | | B | | | 249 | | | | 3 | | | | 47 | | | | 205 | |
5 | | C and lower | | | 98 | | | | — | | | | 36 | | | | 62 | |
6 | | In or near default | | | 60 | | | | — | | | | 24 | | | | 36 | |
| | | | | | | | | | | | | | | | | | |
| | Below investment grade | | | 1,152 | | | | 19 | | | | 143 | | | | 1,028 | |
| | | | | | | | | | | | | | | | | | |
Total Public Fixed Maturities | | $ | 22,784 | | | $ | 1,956 | | | $ | 278 | | | $ | 24,462 | |
| | | | | | | | | | | | | | | | | | |
(1) | At December 31, 2012 and 2011, no securities had been categorized based on expected NAIC designation pending receipt of SVO ratings. |
7-33
Private Fixed Maturities Credit Quality. The following table sets forth the General Accounts’ private fixed maturities portfolios by NAIC rating at the dates indicated.
Private Fixed Maturities
| | | | | | | | | | | | | | | | | | |
NAIC Designation(1) | | Rating Agency Equivalent | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair Value | |
| | | | | (In Millions) | |
| | | | |
At December 31, 2012: | | | | | | | | | | | | | | | | |
1 | | Aaa, Aa, A | | $ | 4,303 | | | $ | 365 | | | $ | 100 | | | $ | 4,568 | |
2 | | Baa | | | 3,235 | | | | 324 | | | | 13 | | | | 3,546 | |
| | | | | | | | | | | | | | | | | | |
| | Investment grade | | | 7,538 | | | | 689 | | | | 113 | | | | 8,114 | |
| | | | | | | | | | | | | | | | | | |
| | | | | |
3 | | Ba | | | 226 | | | | 3 | | | | 23 | | | | 206 | |
4 | | B | | | 149 | | | | 1 | | | | 15 | | | | 135 | |
5 | | C and lower | | | 50 | | | | — | | | | 15 | | | | 35 | |
6 | | In or near default | | | 223 | | | | 11 | | | | 59 | | | | 175 | |
| | | | | | | | | | | | | | | | | | |
| | Below investment grade | | | 648 | | | | 15 | | | | 112 | | | | 551 | |
| | | | | | | | | | | | | | | | | | |
Total Private Fixed Maturities | | $ | 8,186 | | | $ | 704 | | | $ | 225 | | | $ | 8,665 | |
| | | | | | | | | | | | | | | | | | |
| | | | |
At December 31, 2011: | | | | | | | | | | | | | | | | |
1 | | Aaa, Aa, A | | $ | 4,146 | | | $ | 258 | | | $ | 137 | | | $ | 4,267 | |
2 | | Baa | | | 3,089 | | | | 241 | | | | 33 | | | | 3,297 | |
| | | | | | | | | | | | | | | | | | |
| | Investment grade | | | 7,235 | | | | 499 | | | | 170 | | | | 7,564 | |
| | | | | | | | | | | | | | | | | | |
| | | | | |
3 | | Ba | | | 315 | | | | 6 | | | | 71 | | | | 250 | |
4 | | B | | | 124 | | | | — | | | | 24 | | | | 100 | |
5 | | C and lower | | | 128 | | | | — | | | | 41 | | | | 87 | |
6 | | In or near default | | | 208 | | | | 3 | | | | 103 | | | | 108 | |
| | | | | | | | | | | | | | | | | | |
| | Below investment grade | | | 775 | | | | 9 | | | | 239 | | | | 545 | |
| | | | | | | | | | | | | | | | | | |
Total Private Fixed Maturities | | $ | 8,010 | | | $ | 508 | | | $ | 409 | | | $ | 8,109 | |
| | | | | | | | | | | | | | | | | | |
(1) | Includes, as of December 31, 2012 and 2011, respectively, 12 securities with amortized cost of $109 million (fair value, $109 million) and 20 securities with amortized cost of $281 million (fair value, $283 million) that have been categorized based on expected NAIC designation pending receipt of SVO ratings. |
7-34
Corporate Fixed Maturities Credit Quality. The following table sets forth the General Accounts’ public and private holdings of corporate fixed maturities by NAIC rating at the dates indicated.
Corporate Fixed Maturities
| | | | | | | | | | | | | | | | | | |
NAIC Designation | | Rating Agency Equivalent | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair Value | |
| | | | | (In Millions) | |
| | | | |
At December 31, 2012: | | | | | | | | | | | | | | | | |
1 | | Aaa, Aa, A | | $ | 10,871 | | | $ | 1,236 | | | $ | 5 | | | $ | 12,102 | |
2 | | Baa | | | 9,764 | | | | 1,066 | | | | 4 | | | | 10,826 | |
| | | | | | | | | | | | | | | | | | |
| | Investment grade | | | 20,635 | | | | 2,302 | | | | 9 | | | | 22,928 | |
| | | | | | | | | | | | | | | | | | |
| | | | | |
3 | | Ba | | | 699 | | | | 47 | | | | 6 | | | | 740 | |
4 | | B | | | 114 | | | | 2 | | | | 5 | | | | 111 | |
5 | | C and lower | | | 12 | | | | — | | | | 1 | | | | 11 | |
6 | | In or near default | | | 3 | | | | 8 | | | | — | | | | 11 | |
| | | | | | | | | | | | | | | | | | |
| | Below investment grade | | | 828 | | | | 57 | | | | 12 | | | | 873 | |
| | | | | | | | | | | | | | | | | | |
Total Corporate Fixed Maturities | | $ | 21,463 | | | $ | 2,359 | | | $ | 21 | | | $ | 23,801 | |
| | | | | | | | | | | | | | | | | | |
| | | | |
At December 31, 2011: | | | | | | | | | | | | | | | | |
1 | | Aaa, Aa, A | | $ | 12,042 | | | $ | 1,050 | | | $ | 53 | | | $ | 13,039 | |
2 | | Baa | | | 9,220 | | | | 761 | | | | 63 | | | | 9,918 | |
| | | | | | | | | | | | | | | | | | |
| | Investment grade | | | 21,262 | | | | 1,811 | | | | 116 | | | | 22,957 | |
| | | | | | | | | | | | | | | | | | |
| | | | | |
3 | | Ba | | | 677 | | | | 18 | | | | 25 | | | | 670 | |
4 | | B | | | 86 | | | | 3 | | | | 2 | | | | 87 | |
5 | | C and lower | | | 20 | | | | — | | | | 3 | | | | 17 | |
6 | | In or near default | | | 3 | | | | 3 | | | | — | | | | 6 | |
| | | | | | | | | | | | | | | | | | |
| | Below investment grade | | | 786 | | | | 24 | | | | 30 | | | | 780 | |
| | | | | | | | | | | | | | | | | | |
Total Corporate Fixed Maturities | | $ | 22,048 | | | $ | 1,835 | | | $ | 146 | | | $ | 23,737 | |
| | | | | | | | | | | | | | | | | | |
Asset-backed Securities
At December 31, 2012, the amortized cost and fair value of asset backed securities held were $175 million and $182 million, respectively; at December 31, 2011, those amounts were $260 million and $264 million, respectively. At December 31, 2012, the amortized cost and fair value of asset backed securities collateralized by sub-prime mortgages were $17 million and $15 million, respectively. At that same date, the amortized cost and fair value of asset backed securities collateralized by non-sub-prime mortgages were $41 million and $41 million, respectively.
Commercial Mortgage-backed Securities
In recent years, weakness in commercial real estate fundamentals, along with an overall decrease in liquidity and availability of capital, led to a very difficult refinancing environment and an increase in overall delinquency rates on commercial mortgages on properties, except for highly desirable properties in select markets.
7-35
The following table sets forth the amortized cost and fair value of the Insurance Group’s commercial mortgage-backed securities at the dates indicated by credit quality and by year of issuance (vintage).
Commercial Mortgage-Backed Securities
December 31, 2012
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Moody’s Agency Rating | | | Total
December 31,
2012 | | | Total
December 31,
2011 | |
| | | | | | | | | | | | | | | Ba and | | | |
Vintage | | Aaa | | | Aa | | | A | | | Baa | | | Below | | | |
| | | (In Millions) | |
| | | | | | | |
At amortized cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2004 and Prior Years | | $ | — | | | $ | 10 | | | $ | 31 | | | $ | 100 | | | $ | 157 | | | $ | 298 | | | $ | 335 | |
2005 | | | 15 | | | | 5 | | | | 34 | | | | 102 | | | | 321 | | | | 477 | | | | 482 | |
2006 | | | — | | | | — | | | | — | | | | — | | | | 302 | | | | 302 | | | | 351 | |
2007 | | | 1 | | | | — | | | | — | | | | — | | | | 97 | | | | 98 | | | | 138 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total CMBS | | $ | 16 | | | $ | 15 | | | $ | 65 | | | $ | 202 | | | $ | 877 | | | $ | 1,175 | | | $ | 1,306 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
At fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2004 and Prior Years | | $ | — | | | $ | 10 | | | $ | 30 | | | $ | 97 | | | $ | 136 | | | $ | 273 | | | $ | 298 | |
2005 | | | 15 | | | | 5 | | | | 32 | | | | 95 | | | | 264 | | | | 411 | | | | 378 | |
2006 | | | — | | | | — | | | | — | | | | — | | | | 154 | | | | 154 | | | | 168 | |
2007 | | | 1 | | | | — | | | | — | | | | — | | | | 61 | | | | 62 | | | | 58 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total CMBS | | $ | 16 | | | $ | 15 | | | $ | 62 | | | $ | 192 | | | $ | 615 | | | $ | 900 | | | $ | 902 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgages
Investment Mix
At December 31, 2012 and 2011, respectively, approximately 12.1% and 11.1%, respectively, of GAIA were in commercial and agricultural mortgage loans. The table below shows the composition of the commercial and agricultural mortgage loan portfolio, before the loss allowance, as of the dates indicated.
| | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | (In Millions) | |
| | |
Commercial mortgage loans | | $ | 3,822 | | | $ | 3,367 | |
Agricultural mortgage loans | | | 1,658 | | | $ | 1,337 | |
| | | | | | | | |
| | |
Total Mortgage Loans | | $ | 5,480 | | | $ | 4,704 | |
| | | | | | | | |
7-36
The investment strategy for the mortgage loan portfolio emphasizes diversification by property type and geographic location with a primary focus on asset quality. The tables below show the breakdown of the amortized cost of the General Accounts investments in mortgage loans by geographic region and property type as of the dates indicated.
Mortgage Loans by Region and Property Type
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | Amortized Cost | | | % of Total | | | Amortized Cost | | | % of Total | |
| | | (Dollars in Millions) | |
By Region: | | | | | | | | | | | | | | | | |
U.S. Regions: | | | | | | | | | | | | | | | | |
Pacific | | $ | 1,688 | | | | 30.8 | % | | $ | 1,418 | | | | 30.1 | % |
Middle Atlantic | | | 1,314 | | | | 24.0 | | | | 1,214 | | | | 25.8 | |
South Atlantic | | | 630 | | | | 11.5 | | | | 583 | | | | 12.4 | |
East North Central | | | 574 | | | | 10.5 | | | | 503 | | | | 10.7 | |
Mountain | | | 397 | | | | 7.2 | | | | 348 | | | | 7.4 | |
West North Central | | | 354 | | | | 6.5 | | | | 309 | | | | 6.6 | |
West South Central | | | 346 | | | | 6.3 | | | | 239 | | | | 5.1 | |
New England | | | 104 | | | | 1.9 | | | | 28 | | | | 0.6 | |
East South Central | | | 73 | | | | 1.3 | | | | 62 | | | | 1.3 | |
| | | | | | | | | | | | | | | | |
| | | | |
Total Mortgage Loans | | $ | 5,480 | | | | 100.0 | % | | $ | 4,704 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
| | | | |
By Property Type: | | | | | | | | | | | | | | | | |
Office buildings | | $ | 1,828 | | | | 33.3 | % | | $ | 1,665 | | | | 35.4 | % |
Agricultural properties | | | 1,658 | | | | 30.2 | | | | 1,337 | | | | 28.4 | |
Apartment complexes | | | 924 | | | | 16.9 | | | | 818 | | | | 17.4 | |
Industrial buildings | | | 454 | | | | 8.3 | | | | 396 | | | | 8.4 | |
Retail Stores | | | 267 | | | | 4.9 | | | | 255 | | | | 5.4 | |
Hospitality | | | 245 | | | | 4.5 | | | | 164 | | | | 3.5 | |
Other | | | 104 | | | | 1.9 | | | | 69 | | | | 1.5 | |
| | | | | | | | | | | | | | | | |
| | | | |
Total Mortgage Loans | | $ | 5,480 | | | | 100.0 | % | | $ | 4,704 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
At December 31, 2012, the General Account investments in commercial mortgage loans had a weighted average loan-to-value ratio of 67.0% while the agricultural mortgage loans weighted average loan-to-value ratio was 44.0%.
7-37
The values used in these ratio calculations were developed as part of the periodic review of the commercial and agricultural mortgage loan portfolio, which includes an evaluation of the underlying collateral value.
Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios
December 31, 2012
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Debt Service Coverage Ratio(1) | | | | |
| | | | | | | | | | | | | | | | | | Less | | | Total | |
| | | Greater | | | 1.8x to | | | 1.5x to | | | 1.2x to | | | 1.0x to | | | than | | | Mortgage | |
Loan-to-Value Ratio | | than 2.0x | | | 2.0x | | | 1.8x | | | 1.5x | | | 1.2x | | | 1.0x | | | Loans | |
| | | (In Millions) | |
| | | | | | | |
0% - 50% | | $ | 448 | | | $ | 105 | | | $ | 211 | | | $ | 695 | | | $ | 204 | | | $ | 49 | | | $ | 1,712 | |
50% - 70% | | | 492 | | | | 104 | | | | 755 | | | | 843 | | | | 116 | | | | 50 | | | | 2,360 | |
70% - 90% | | | 61 | | | | 102 | | | | 235 | | | | 446 | | | | 131 | | | | 23 | | | | 998 | |
90% plus | | | — | | | | — | | | | — | | | | 156 | | | | 89 | | | | 165 | | | | 410 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Commercial and Agricultural Mortgage Loans | | $ | 1,001 | | | $ | 311 | | | $ | 1,201 | | | $ | 2,140 | | | $ | 540 | | | $ | 287 | | | $ | 5,480 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | The debt service coverage ratio is calculated using actual results from property operations. |
The tables below show the breakdown of the commercial and agricultural mortgage loans by year of origination at December 31, 2012.
Mortgage Loans by Year of Origination
| | | | | | | | |
| | | December 31, 2012 | |
Year of Origination | | Amortized Cost | | | % of Total | |
| | | (Dollars In Millions) | |
| | |
2012 | | $ | 1,428 | | | | 26.1 | % |
2011 | | | 1,149 | | | | 21.0 | |
2010 | | | 353 | | | | 6.4 | |
2009 | | | 519 | | | | 9.5 | |
2008 | | | 182 | | | | 3.3 | |
2007 and prior | | | 1,849 | | | | 33.7 | |
| | | | | | | | |
| | |
Total Mortgage Loans | | $ | 5,480 | | | | 100.0 | % |
| | | | | | | | |
At December 31, 2012 and 2011, respectively, $2 million and $7 million of mortgage loans were classified as problem loans while $61 million and $102 million were classified as potential problem loans and $126 million and $141 million were classified as restructured loans.
7-38
In 2011, one of the 2 loans shown in the table below was modified to interest only payments until October 1, 2013, at which time the loan reverts to its normal amortizing payment. In 2012, the second loan was modified retroactive to the July 1, 2012 payment and was converted to interest only payments through maturity in August 2014. Due to the nature of the modifications, short-term principal amortization relief, the modifications have no financial impact. The fair market value of the underlying real estate collateral is the primary factor in determining the allowance for credit losses and as such, modifications of loan terms typically have no direct impact on the allowance for credit losses.
Troubled Debt Restructuring – Modifications
December 31, 2012
| | | | | | | | | | | | |
| | | Number
of Loans | | | Outstanding Recorded Investment | |
| | | | Pre-Modification | | | Post-Modification | |
| | | | | | (Dollars In Millions) | |
| | | |
Troubled debt restructurings: | | | | | | | | | | | | |
Agricultural mortgage loans | | | — | | | $ | — | | | $ | — | |
Commercial mortgage loans | | | 2 | | | | 126 | | | | 126 | |
| | | | | | | | | | | | |
Total | | | 2 | | | $ | 126 | | | $ | 126 | |
| | | | | | | | | | | | |
There were no default payments on the above loan during 2012.
Valuation allowances for the commercial mortgage loan portfolio were related to loan specific reserves. The following table sets forth the change in valuation allowances for the commercial mortgage loan portfolio as of the dates indicated. There were no valuation allowances for agricultural mortgages at December 31, 2012 and 2011.
| | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | (In Millions) | |
| | |
Balances, beginning of year | | $ | 32 | | | $ | 18 | |
Provisions | | | 26 | | | | 22 | |
Recoveries | | | (24 | ) | | | (8 | ) |
| | | | | | | | |
| | |
Balances, End of Year | | $ | 34 | | | $ | 32 | |
| | | | | | | | |
Other Equity Investments
At December 31, 2012, private equity partnerships, hedge funds and real-estate related partnerships were 95.2% of total other equity investments. These interests, which represent 2.9% of GAIA, consist of a diversified portfolio of Leveraged Buyout (“LBO”), mezzanine, venture capital and other alternative limited partnerships, diversified by sponsor, fund and vintage year. The portfolio is actively managed to control risk and generate investment returns over the long term. Portfolio returns are sensitive to overall market developments.
Other Equity Investments – Classifications
| | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | (In Millions) | |
| | |
Common stock | | $ | 67 | | | $ | 53 | |
Joint ventures and limited partnerships: | | | | | | | | |
Private equity | | | 1,048 | | | | 1,074 | |
Hedge funds | | | 156 | | | | 201 | |
Real estate related | | | 120 | | | | 105 | |
| | | | | | | | |
| | |
Total Other Equity Investments | | $ | 1,391 | | | $ | 1,433 | |
| | | | | | | | |
7-39
Derivatives
The Company has issued and continues to offer certain variable annuity products with GMDB, GMIB, and GIB features. The Company had previously issued certain variable annuity products with GWBL, GMWB and GMAB features (collectively, “GWBL and other features”). The risk associated with the GMDB feature is that under-performance of the financial markets could result in GMDB benefits, in the event of death, being higher than what accumulated policyholders’ account balances would support. The risk associated with the GWBL and other features is that under-performance of the financial markets could result in GWBL and other features’ benefits being higher than what accumulated policyholders’ account balances would support. The Company uses derivatives for asset/liability risk management primarily to reduce exposures to equity market and interest rate fluctuations. Derivative hedging strategies are designed to reduce these risks from an economic perspective while also considering their impacts on accounting results. Operation of these hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates, election rates, market volatility and interest rates.
A wide range of derivative contracts are used in these hedging programs, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options, that collectively are managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in the equity and fixed income markets. For GMDB, GMIB, GIB and GWBL and other features, the Company retains certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected assumptions for mortality, lapse and surrender, withdrawal and contractholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMDB, GMIB, GIB and GWBL and other features that result from financial markets movements. A portion of exposure to realized interest rate volatility was hedged through December 31, 2012 using swaptions and a portion of exposure to realized equity volatility is hedged using equity options and variance swaps. The Company has purchased reinsurance contracts to mitigate the risks associated with GMDB features and the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts issued by the Company.
At the end of 2012, AXA Equitable adjusted its long term view of interest rates and persistency and proceeded to reduce the size of its GMIB and GMDB interest rate hedges, changed their maturity and began to fully unwind its swaption position hedging exposure to interest rate volatility. AXA Equitable completed the full unwind in early 2013.
GIB and GWBL and other features and the reinsurance contract asset covering GMIB exposure are considered derivatives for accounting purposes and, therefore, are reported in the balance sheet at their fair value. None of the derivatives used in these programs were designated as qualifying hedges under U.S. GAAP accounting guidance for derivatives and hedging. All gains (losses) on derivatives are reported in Net investment income (loss) in the consolidated statements of earnings (loss) except those resulting from changes in the fair values of the GIB and GWBL and other features which are reported in Policyholder’s benefits and the GMIB reinsurance contract asset which is reported on a separate line in the consolidated statement of earnings.
In addition to the Company’s existing programs, in first quarter 2012, the Company entered into interest rate swaps related to the Company’s GMDB and GMIB block of business issued prior to 2001 to manage exposure to interest rate fluctuations.
The Company periodically, including during 2012, has had in place a hedge program to partially protect against declining interest rates with respect to a part of its projected variable annuity sales.
The Company also uses equity and commodity index options to hedge its exposure to equity linked and commodity indexed crediting rates on annuity and life products.
Margins or “spreads” on interest-sensitive life insurance and annuity contracts are affected by interest rate fluctuations as the yield on portfolio investments, primarily fixed maturities, are intended to support required payments under these contracts, including interest rates credited to their policy and contract holders. The Company currently uses swaptions to reduce the risk associated with minimum crediting rate guarantees on these interest-sensitive contracts.
The Company is exposed to equity market fluctuations through investments in Separate Accounts and has equity future derivative contracts specifically to minimize such risk.
In second quarter 2012, the Company entered into futures and total return swaps on equity indices to mitigate the impact on net earnings from Separate Account fee revenue fluctuations due to movements in the equity markets. These positions covered fees expected to be earned through December 31, 2012 of the current year from the Company’s Separate Account products. All positions matured on December 31, 2012.
7-40
The tables below present quantitative disclosures about the Company derivative instruments, including those embedded in other contracts though required to be accounted for as derivative instruments.
Derivative Instruments by Category
At or For the Year Ended December 31, 2012
| | | | | | | | | | | | | | | | |
| | | Notional
Amount | | | Fair Value | | | Gains (Losses)
Reported in
Net Earnings
(Loss) | |
| | | | Asset
Derivatives | | | Liability
Derivatives | | |
| | | (In Millions) | |
| | | | |
Freestanding derivatives | | | | | | | | | | | | | | | | |
Equity contracts:(1) | | | | | | | | | | | | | | | | |
Futures | | $ | 6,098 | | | $ | — | | | $ | — | | | $ | (1,039 | ) |
Swaps | | | 875 | | | | 1 | | | | 52 | | | | (313 | ) |
Options | | | 3,492 | | | | 443 | | | | 219 | | | | 66 | |
| | | | |
Interest rate contracts:(1) | | | | | | | | | | | | | | | | |
Floors | | | 2,700 | | | | 291 | | | | — | | | | 68 | |
Swaps | | | 18,130 | | | | 554 | | | | 352 | | | | 412 | |
Futures | | | 14,033 | | | | — | | | | — | | | | 84 | |
Swaptions | | | 7,608 | | | | 502 | | | | — | | | | (220 | ) |
| | | | | | | | | | | | | | | | |
Net investment income | | | | | | | | | | | | | | | (942 | ) |
| | | | | | | | | | | | | | | | |
| | | | |
Embedded derivatives: | | | | | | | | | | | | | | | | |
GMIB reinsurance contracts | | | — | | | | 11,044 | | | | — | | | | 497 | |
| | | | |
GWBL and other features(2) | | | — | | | | — | | | | 265 | | | | 26 | |
| | | | | | | | | | | | | | | | |
Balances, December 31, 2012 | | $ | 52,936 | | | $ | 12,835 | | | $ | 888 | | | $ | (419 | ) |
| | | | | | | | | | | | | | | | |
(1) | Reported in Other invested assets in the consolidated balance sheets. |
(2) | Reported in Future policy benefits and other policyholder liabilities. |
7-41
Derivative Instruments by Category
At or For the Year Ended December 31, 2011
| | | | | | | | | | | | | | | | |
| | | Notional
Amount | | | Fair Value | | | Gains (Losses)
Reported in
Net Earnings
(Loss) | |
| | | | Asset
Derivatives | | | Liability
Derivatives | | |
| | | (In Millions) | |
| | | | |
Freestanding derivatives | | | | | | | | | | | | | | | | |
Equity contracts:(1) | | | | | | | | | | | | | | | | |
Futures | | $ | 6,332 | | | $ | — | | | $ | — | | | $ | (43 | ) |
Swaps | | | 745 | | | | 9 | | | | 20 | | | | 33 | |
Options | | | 1,211 | | | | 91 | | | | 85 | | | | (21 | ) |
| | | | |
Interest rate contracts:(1) | | | | | | | | | | | | | | | | |
Floors | | | 3,000 | | | | 327 | | | | — | | | | 139 | |
Swaps | | | 9,695 | | | | 500 | | | | 313 | | | | 594 | |
Futures | | | 11,983 | | | | — | | | | — | | | | 850 | |
Swaptions | | | 7,353 | | | | 1,029 | | | | — | | | | 817 | |
| | | | | | | | | | | | | | | | |
Net investment income | | | | | | | | | | | | | | | 2,369 | |
| | | | | | | | | | | | | | | | |
| | | | |
Embedded derivatives: | | | | | | | | | | | | | | | | |
GMIB reinsurance contracts | | | — | | | | 10,547 | | | | — | | | | 5,941 | |
| | | | |
GWBL and other features(2) | | | — | | | | — | | | | 291 | | | | (197 | ) |
| | | | | | | | | | | | | | | | |
Balances, December 31, 2011 | | $ | 40,319 | | | $ | 12,503 | | | $ | 709 | | | $ | 8,113 | |
| | | | | | | | | | | | | | | | |
(1) | Reported in Other invested assets in the consolidated balance sheets. |
(2) | Reported in Future policy benefits and other policyholder liabilities. |
7-42
Derivative Instruments by Category
At or For the Year Ended December 31, 2010
| | | | | | | | | | | | | | | | |
| | | Notional
Amount | | | Fair Value | | | Gains (Losses)
Reported in
Net Earnings
(Loss) | |
| | | | Asset
Derivatives | | | Liability
Derivatives | | |
| | | (In Millions) | |
| | | | |
Freestanding derivatives | | | | | | | | | | | | | | | | |
Equity contracts:(1) | | | | | | | | | | | | | | | | |
Futures | | $ | 3,755 | | | $ | — | | | $ | — | | | $ | (810 | ) |
Swaps | | | 705 | | | | — | | | | 26 | | | | (71 | ) |
Options | | | 1,070 | | | | 5 | | | | 1 | | | | (49 | ) |
| | | | |
Interest rate contracts:(1) | | | | | | | | | | | | | | | | |
Floors | | | 9,000 | | | | 326 | | | | — | | | | 157 | |
Swaps | | | 5,234 | | | | 200 | | | | 132 | | | | 252 | |
Futures | | | 5,151 | | | | — | | | | — | | | | 289 | |
Swaptions | | | 4,479 | | | | 171 | | | | — | | | | (38 | ) |
| | | | | | | | | | | | | | | | |
Net investment income | | | | | | | | | | | | | | | (270 | ) |
| | | | | | | | | | | | | | | | |
| | | | |
Embedded derivatives: | | | | | | | | | | | | | | | | |
GMIB reinsurance contracts | | | — | | | | 4,606 | | | | — | | | | 2,350 | |
| | | | |
GWBL and other features(2) | | | — | | | | — | | | | 94 | | | | (14 | ) |
| | | | | | | | | | | | | | | | |
Balances, December 31, 2010 | | $ | 29,394 | | | $ | 5,308 | | | $ | 253 | | | $ | 2,066 | |
| | | | | | | | | | | | | | | | |
(1) | Reported in Other invested assets in the consolidated balance sheets. |
(2) | Reported in Future policy benefits and other policyholder liabilities. |
Realized Investment Gains (Losses)
Realized investment gains (losses) are generated from numerous sources, including the sale of fixed maturity securities, equity securities, investments in limited partnerships and other types of investments, as well as adjustments to the cost basis of investments for OTTI. Realized investment gains (losses) are also generated from prepayment premiums received on private fixed maturity securities, recoveries of principal on previously impaired securities, provisions for losses on commercial mortgage and other loans, fair value changes on commercial mortgage loans carried at fair value, and fair value changes on embedded derivatives and free-standing derivatives that do not qualify for hedge accounting treatment.
The following table sets forth “Realized investment gains (losses), net,” for the periods indicated:
Realized Investment Gains (Losses), Net
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Fixed maturities | | $ | (90 | ) | | $ | (28 | ) | | $ | (200 | ) |
Other equity investments | | | 5 | | | | 1 | | | | 11 | |
Other | | | (7 | ) | | | (14 | ) | | | (18 | ) |
| | | | | | | | | | | | |
Total | | $ | (92 | ) | | $ | (41 | ) | | $ | (207 | ) |
| | | | | | | | | | | | |
7-43
The following table further describes realized gains (losses), net for Fixed maturities:
Fixed Maturities
Realized Investment Gains (Losses), Net
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Gross realized investment gains: | | | | | | | | | | | | |
Gross gains on sales and maturities | | $ | 30 | | | $ | 23 | | | $ | 100 | |
| | | | | | | | | | | | |
Total gross realized investment gains | | | 30 | | | | 23 | | | | 100 | |
| | | | | | | | | | | | |
Gross realized investment losses: | | | | | | | | | | | | |
Other-than-temporary impairments recognized in earnings (loss) | | | (94 | ) | | | (32 | ) | | | (282 | ) |
Gross losses on sales and maturities | | | (26 | ) | | | (19 | ) | | | (18 | ) |
| | | | | | | | | | | | |
Total gross realized investment losses | | | (120 | ) | | | (51 | ) | | | (300 | ) |
| | | | | | | | | | | | |
Total | | $ | (90 | ) | | $ | (28 | ) | | $ | (200 | ) |
| | | | | | | | | | | | |
The following table sets forth, for the periods indicated, the composition of other-than-temporary impairments recorded in Earnings (loss) by asset type.
Other-Than-Temporary Impairments Recorded in Earnings (Loss)(1)
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Fixed Maturities: | | | | | | | | | | | | |
Public fixed maturities | | $ | (18 | ) | | $ | (18 | ) | | $ | (12 | ) |
Private fixed maturities | | | (76 | ) | | | (14 | ) | | | (270 | ) |
| | | | | | | | | | | | |
Total fixed maturities securities | | | (94 | ) | | | (32 | ) | | | (282 | ) |
| | | | | | | | | | | | |
Equity securities | | | — | | | | — | | | | — | |
| | | | | | | | | | | | |
Total | | $ | (94 | ) | | $ | (32 | ) | | $ | (282 | ) |
| | | | | | | | | | | | |
(1) | For 2012, 2011 and 2010, respectively, excludes $2 million, $4 million and $18 million of OTTI recorded in OCI, representing any difference between the fair value of the impaired debt security and the net present value of its projected future cash flows at the time of impairment. |
At December 31, 2012 and 2011, respectively, the $(94) million and $(32) million in OTTI on fixed maturities recorded in income were due to credit events or adverse conditions of the respective issuer. In these situations, management believes such circumstances have caused, or will lead to, a deficiency in the contractual cash flows related to the investment. The amount of the impairment recorded in earnings (loss) is the difference between the amortized cost of the debt security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment.
7-44
LIQUIDITY AND CAPITAL RESOURCES
Overview
Liquidity management is focused around a centralized funds management process. This centralized process includes the monitoring and control of cash flow associated with policyholder receipts and disbursements and General Account portfolio principal, interest and investment activity. Funds are managed through a banking system designed to reduce float and maximize funds availability. The derivative transactions used to hedge the Company’s variable annuity products are integrated into AXA Equitable’s overall liquidity process; forecast of potential payments and collateral calls during the life of and at the settlement of each derivative transaction are included in the cash flow forecast. Information regarding liquidity needs and availability is reported by various departments and investment managers. The information is used to produce forecasts of available funds and cash flow. Significant market volatility can affect daily cash requirements due to the settlement and collateral calls of derivative transactions.
In addition to gathering and analyzing information on funding needs, the Company has a centralized process for both investing short-term cash and borrowing funds to meet cash needs. In general, the short-term investment positions have a maturity profile of 1-7 days with considerable flexibility as to availability.
In managing the liquidity of the Insurance segment’s business, management also considers the risk of policyholder and contractholder withdrawals of funds earlier than assumed when selecting assets to support these contractual obligations. Surrender charges and other contract provisions are used to mitigate the extent, timing and profitability impact of withdrawals of funds by customers from annuity contracts and deposit liabilities. The following table sets forth withdrawal characteristics of the Company’s General Account annuity reserves and deposit liabilities (based on statutory liability values) as of the dates indicated.
General Accounts Annuity Reserves and Deposit Liabilities
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | Amount | | | % of Total | | | Amount | | | % of Total | |
| | | (Dollars in Millions) | |
| | | | |
Not subject to discretionary withdrawal provisions | | $ | 4,253 | | | | 20.4 | % | | $ | 3,102 | | | | 15.2 | % |
| | | | |
Subject to discretionary withdrawal, with adjustment: | | | | | | | | | | | | | | | | |
With market value adjustment | | | 30 | | | | 0.1 | | | | 45 | | | | 0.2 | |
At contract value, less surrender charge of 5% or more | | | 1,230 | | | | 5.9 | | | | 1,355 | | | | 6.6 | |
| | | | | | | | | | | | | | | | |
Subtotal | | | 1,260 | | | | 6.0 | | | | 1,400 | | | | 6.8 | |
| | | | |
Subject to discretionary withdrawal at contract value with no surrender charge or surrender charge of less than 5% | | | 15,373 | | | | 73.6 | | | | 15,930 | | | | 78.0 | |
| | | | | | | | | | | | | | | | |
| | | | |
Total Annuity Reserves And Deposit Liabilities | | $ | 20,886 | | | | 100.0 | % | | $ | 20,432 | | | | 100.0 | % |
| | | | | | | | | | | | | | | | |
Analysis of Statement of Cash Flows
Years Ended December 31, 2012 and 2011
Cash and cash equivalents were $3.2 billion at December 31, 2012 and 2011.
Net cash used in operating activities was $780 million in 2012 as compared to the $938 million in 2011. Cash flows from operating activities include such sources as premiums, investment management and advisory fees and investment income offset by such uses as life insurance benefit payments, policyholder dividends, compensation payments and contributions to benefit plans, other cash expenditures and tax payments.
Net cash used in investing activities was $2.7 billion in 2012, $664 million higher than the $2.0 billion in 2011. The change was principally due to cash outflows related to derivatives of $287 million in 2012 as compared to cash inflows of $1.4 billion in 2011. There were net purchases of $2.4 billion in 2012 as compared to $3.4 billion in 2011.
7-45
Cash flows provided by financing activities decreased $631 million from $4.0 billion in 2011 to $3.4 billion in 2012. There was a decrease in the change in collateralized assets and liabilities of $293 million in 2012 as compared to an increase of $1.1 billion in 2011. The impact of the net deposits to policyholders’ account balances was $4.5 billion and $3.6 billion in 2012 and 2011, respectively. Additional AllianceBernstein Holding units were purchased for $238 million and $221 million in 2012 and 2011, respectively. In 2012, a capital contribution of $195 million was recorded from the sale of AXA Equitable’s 50% interest in a real estate joint venture to an AXA Financial subsidiary.
Years Ended December 31, 2011 and 2010
Cash and cash equivalents of $3.2 billion at December 31, 2011 increased $1.0 billion from $2.2 billion at December 31, 2010.
Net cash provided by (used in) operating activities was $(938) million in 2011 as compared to the $6 million in 2010. Cash flows from operating activities include such sources as premiums, investment management and advisory fees and investment income offset by such uses as life insurance benefit payments, policyholder dividends, compensation payments and contributions to benefit plans, other cash expenditures and tax payments.
Net cash used in investing activities was $2.0 billion, $323 million higher than the $1.7 billion in 2010. The change was principally due to net purchases of $3.4 billion in 2011 as compared to $917 million in 2010 partially offset by cash inflows related to derivatives of $1.4 billion as compared to cash outflows of $651 million in 2010.
Cash flows provided by financing activities increased $2.0 billion from $2.1 billion in 2010 to $4.0 billion in 2011. The impact of the net deposits to policyholders’ account balances was $3.6 billion and $2.7 billion in 2011 and 2010, respectively. Additional AllianceBernstein Holding units were purchased for $221 million and $235 million in 2011 and 2010, respectively.
AXA Equitable
Liquidity Requirements. AXA Equitable’s liquidity requirements principally relate to the liabilities associated with its various life insurance, annuity and group pension products; the active management of various economic hedging programs; shareholder dividends to AXA Financial; and operating expenses, including debt service. AXA Equitable’s liabilities include, among other things, the payment of benefits under life insurance, annuity and group pension products, as well as cash payments in connection with policy surrenders, withdrawals and loans.
The Company’s liquidity needs are affected by: fluctuations in mortality; other benefit payments; policyholder directed transfers from General Account to Separate Account investment options; and the level of surrenders and withdrawals previously discussed in “Results of Continuing Operations by Segment – Insurance,” as well as by cash settlements of its derivative hedging programs, debt service requirements and dividends to its shareholder. AXA Equitable paid $362 million and $379 million in dividends to its parent in 2012 and 2011, respectively.
Sources of Liquidity.The principal sources of AXA Equitable’s cash flows are premiums, deposits and charges on policies and contracts, investment income, repayments of principal and sales proceeds from its fixed maturity portfolios, sales of other General Account Investment Assets, borrowings from third parties and affiliates and dividends and distributions from subsidiaries.
AXA Equitable’s primary source of short-term liquidity to support its insurance operations is a pool of liquid, high quality short-term instruments structured to provide liquidity in excess of the expected cash requirements. At December 31, 2012, this asset pool included an aggregate of $2.5 billion in highly liquid short-term investments, as compared to $2.5 billion at December 31, 2011. In addition, a substantial portfolio of public bonds including U.S. Treasury and agency securities and other investment grade fixed maturities is available to meet AXA Equitable’s liquidity needs.
Other liquidity sources include dividends and distributions from AllianceBernstein and other subsidiaries. In 2012, the Company received cash distributions from AllianceBernstein and AllianceBernstein Holding of $114 million as compared to $169 million in 2011. In 2012 the Company received cash distributions from AXA Equitable Funds Management Group LLC (“FMG”) of $278 million as compared to $187 million in 2011 as FMG began operations as a separate legal entity on May 1, 2011.
Third-party borrowings.Since July 2008, AXA Equitable has been a member of the Federal Home Loan Bank of New York (“FHLBNY”) which provides AXA Equitable with access to collateralized borrowings and other FHLBNY products. As membership requires the ownership of member stock, AXA Equitable purchased stock to meet its membership requirement
7-46
($12 million as of December 31, 2012). The credit facility provided by FHLBNY supplements other liquidity sources and provides a diverse and reliable source of funds. Any borrowings from the FHLBNY require the purchase of FHLBNY activity-based stock equal to 4.5% of the borrowings. AXA Equitable’s borrowing capacity with FHLBNY is $1.0 billion. As a member of FHLBNY, AXA Equitable can receive advances for which it would be required to pledge qualified mortgage-backed assets and government securities as collateral. At December 31, 2012, there were no outstanding borrowings from FHLBNY.
In December 1995, AXA Equitable issued a $200 million callable 7.7% surplus note in exchange for cash to third parties. The note pays interest semi-annually and matures on December 1, 2015.
At December 31, 2012, AXA Equitable had no short-term debt outstanding.
Affiliated borrowings.In November 2008, AXA Financial purchased a $500 million callable 7.1% surplus note from AXA Equitable. The note pays interest semi-annually and matures on December 1, 2018.
In December 2008, AXA Financial purchased a $500 million callable 7.1% surplus note from AXA Equitable. The note pays interest semi-annually and matures on December 1, 2018.
In 2005, AXA Equitable issued a note to AXA Financial in the amount of $325 million with an interest rate of 6.0% and a maturity date of December 1, 2035. Interest on this note is payable semi-annually.
Affiliated loans.In June 2009, AXA Equitable sold a real estate property valued at $1.1 billion to a non-insurance subsidiary of AXA Financial in exchange for $700 million in cash and $400 million in 8.0% ten year term mortgage notes on the property. The $439 million after-tax excess of the real estate property fair value over its carrying value was accounted for as a capital contribution to AXA Equitable.
In September 2007, AXA issued a $650 million 5.4% Senior Unsecured Note to AXA Equitable. The note pays interest semi-annually and was scheduled to mature on September 30, 2012. In March 2011, the maturity date of the note was extended to December 30, 2020 and the interest rate was increased to 5.7%.
Off Balance Sheet Transactions.At December 31, 2012 and 2011, AXA Equitable was not a party to any off balance sheet transactions other than those guarantees and commitments described in Notes 10 and 16 of Notes to Consolidated Financial Statements.
Guarantees and Other Commitments.AXA Equitable had approximately $18 million of undrawn letters of credit related to reinsurance as well as $355 million and $328 million of commitments under equity financing arrangements to certain limited partnership and existing mortgage loan agreements, respectively, at December 31, 2012.
Statutory Regulation, Capital and Dividends. AXA Equitable is subject to the regulatory capital requirements of its place of domicile, which are designed to monitor capital adequacy. The level of an insurer’s required capital is impacted by many factors including, but not limited to, business mix, product design, sales volume, invested assets, liabilities, reserves and movements in the capital markets, including interest rates and equity markets. At December 31, 2012, the total adjusted capital was in excess of its regulatory capital requirements and management believes that AXA Equitable has (or has the ability to meet) the necessary capital resources to support its business.
The Company currently reinsures to AXA Arizona a 100% quota share of all liabilities for variable annuity with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under UL insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. The reinsurance arrangements with AXA Arizona provide important capital management benefits to AXA Equitable. AXA Equitable receives statutory reserve credits for reinsurance treaties with AXA Arizona to the extent AXA Arizona holds assets in an irrevocable trust ($9.6 billion at December 31, 2012) and/or letters of credit ($2.6 billion at December 31, 2012). Under the reinsurance transactions, AXA Arizona is permitted to transfer assets from the Trust under certain circumstances. The level of statutory reserves held by AXA Arizona fluctuate based on market movements, mortality experience and policyholder behavior. Increasing reserve requirements may necessitate that additional assets be placed in trust and/or securing additional letters of credit, which could adversely impact AXA Arizona’s liquidity.
7-47
AXA Equitable monitors its regulatory capital requirements on an ongoing basis taking into account the prevailing conditions in the capital markets. Lower interest rates and/or poor equity market performance, both of which have been experienced recently, increase the reserve requirements and capital needed to support the variable annuity guarantee business. While future capital requirements will depend on future market conditions, including regulations related to AXA Arizona, management believes that AXA Equitable will continue to have the ability to meet the capital requirements necessary to support its business. For additional information, see “Item 1A – Risk Factors”.
Several states, including New York, regulate transactions between an insurer and its affiliates under insurance holding company acts. These acts contain certain reporting requirements and restrictions on provision of services and on transactions, such as intercompany service agreements, asset transfers, reinsurance, loans and shareholder dividend payments by insurers. Depending on their size, such transactions and payments may be subject to prior notice to, or approval by, the insurance department of the applicable state.
AXA Equitable is restricted as to the amounts it may pay as dividends to AXA Financial. Under the applicable states’ insurance law, a domestic life insurer may, without prior approval of the Superintendent, pay a dividend to its shareholders not exceeding an amount calculated based on a statutory formula. This formula would permit AXA Equitable to pay shareholder dividends not greater than $463 million during 2013. Payment of dividends exceeding this amount requires the insurer to file notice of its intent to declare such dividends with the Superintendent who then has 30 days to disapprove the distribution. AXA Equitable paid $362 million of shareholder dividends during 2012.
For 2012, 2011 and 2010, respectively, AXA Equitable’s statutory net income (loss) totaled $667 million, $967 million and $(510) million. Statutory surplus, capital stock and Asset Valuation Reserve totaled $5.2 billion and $4.8 billion at December 31, 2012 and 2011, respectively.
For additional information, see “Item 1 – Business – Regulation” and “Item 1A – Risk Factors”.
AllianceBernstein
AllianceBernstein’s primary sources of liquidity have been cash flows from operations, the issuance of commercial paper and proceeds from sales of investments. AllianceBernstein requires financial resources to fund distributions to its General Partner and Unitholders, capital expenditures, repayments of commercial paper and purchases of Holding Units to fund deferred compensation plans.
Debt and Credit Facilities
At December 31, 2012 and 2011, AllianceBernstein had $323 million and $445 million, respectively, in commercial paper outstanding with weighted average interest rates of approximately 0.5% and 0.2%, respectively. The commercial paper is short term in nature, and as such, recorded value is estimated to approximate fair value. Average daily borrowings of commercial paper during 2012 and 2011 were $405 million and $274 million, respectively, with weighted average interest rates of approximately 0.4% and 0.2%, respectively.
AllianceBernstein has a $1.0 billion committed, unsecured senior revolving credit facility (the “AB Credit Facility”) with a group of commercial banks and other lenders, which matures on January 17, 2017. The AB Credit Facility provides for possible increases in the principal amount by up to an aggregate incremental amount of $250 million, any such increase being subject to the consent of the affected lenders. The AB Credit Facility is available for AllianceBernstein’s and SCB LLC’s business purposes, including the support of AllianceBernstein’s $1.0 billion commercial paper program. Both AllianceBernstein and SCB LLC can draw directly under the AB Credit Facility and AllianceBernstein management expects to draw on the AB Credit Facility from time to time. AllianceBernstein has agreed to guarantee the obligations of SCB LLC under the AB Credit Facility.
The AB Credit Facility contains affirmative, negative and financial covenants, which are customary for facilities of this type, including, among other things, restrictions on dispositions of assets, restrictions on liens, a minimum interest coverage ratio and a maximum leverage ratio. We are in compliance with these covenants. The AB Credit Facility also includes customary events of default (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or lender’s commitments may be terminated. Also, under such provisions, upon the occurrence of certain insolvency- or bankruptcy-related events of default, all amounts payable under the AB Credit Facility would automatically become immediately due and payable, and the lender’s commitments would automatically terminate.
7-48
Amounts under the AB Credit Facility may be borrowed, repaid and re-borrowed by us from time to time until the maturity of the facility. Voluntary prepayments and commitment reductions requested by us are permitted at any time without fee (other than customary breakage costs relating to the prepayment of any drawn loans) upon proper notice and subject to a minimum dollar requirement. Borrowings under the AB Credit Facility bear interest at a rate per annum, which will be, at our option, a rate equal to an applicable margin, which is subject to adjustment based on the credit ratings of AllianceBernstein, plus one of the following indexes: London Interbank Offered Rate; a floating base rate; or the Federal Funds rate. As of December 31, 2012 and 2011, we had no amounts outstanding under the AB Credit Facility. During 2012, we did not draw upon the AB Credit Facility. During 2011, $40 million was outstanding for one day in February (with an interest rate of 1.3%) resulting in average daily borrowings of $0 million under the Credit Facility.
In addition, SCB LLC has five uncommitted lines of credit with four financial institutions. Two of these lines of credit permit us to borrow up to an aggregate of approximately $200 million while three lines have no stated limit.
As of December 31, 2012 and 2011, we had no uncommitted bank loans outstanding. Average daily borrowings of uncommitted bank loans during 2012 and 2011 were $18 million and $6 million, respectively, with weighted average interest rates of approximately 1.3% for both years. In May 2012, AllianceBernstein was named an additional borrower under a $100 million SCB uncommitted line of credit. As of December 31, 2012, AllianceBernstein had no loans outstanding. During 2012, $5 million was outstanding for one day with an interest rate of 1.4%. In January 2013, AllianceBernstein was named an additional borrower on a second $100 million SCB uncommitted line of credit.
AllianceBernstein’s financial condition and access to public and private debt markets should provide adequate liquidity for AllianceBernstein’s general business needs. AllianceBernstein’s Management believes that cash flow from operations and the issuance of debt and AllianceBernstein Units or Holding Units will provide AllianceBernstein with the resources necessary to meet its financial obligations. For further information, see AllianceBernstein’s Annual Report on Form 10-K for the year ended December 31, 2011.
Other AllianceBernstein Transactions
AllianceBernstein engages in open-market purchases of AllianceBernstein Holding L.P. (“AB Holding”) units (“Holding units”) to help fund anticipated obligations under its incentive compensation award program, for purchases of Holding units from employees and other corporate purposes. During 2012 and 2011, AllianceBernstein purchased 15.7 million and 13.5 million Holding units for $238 million and $221 million respectively. These amounts reflect open-market purchases of 12.3 million and 11.1 million Holding units for $182 million and $192 million, respectively, with the remainder relating to purchases of Holding units from employees to allow them to fulfill statutory tax requirements at the time of distribution of long-term incentive compensation awards, offset by Holding units purchased by employees as part of a distribution reinvestment election.
AllianceBernstein granted to employees and Eligible Directors 12.1 million (including 8.7 million restricted Holding units granted in January 2012 for 2011 year-end awards) and 1.7 million restricted Holding awards during 2012 and 2011, respectively. To fund these awards, AllianceBernstein allocated previously repurchased Holding units that had been held in the consolidated rabbi trust.
The 2012 and 2011 long-term incentive compensation awards allowed most employees to allocate their award between restricted Holding units and deferred cash. As a result, 6.5 million restricted Holding unit awards for the December 2012 awards and 8.7 million restricted Holding unit awards for the December 2011 awards were awarded and allocated as such within the consolidated rabbi trust in January 2013 and 2012, respectively. There were approximately 17.9 million and 12.0 million unallocated Holding units remaining in the consolidated rabbi trust as of December 31, 2012 and January 31, 2013, respectively. The purchases and issuances of Holding units resulted in an increase of $60 million and $54 million in Capital in excess of par value during 2012 and 2011, respectively, with a corresponding decrease of $60 million and $54 million in Noncontrolling interest.
7-49
Off-Balance Sheet Arrangements
AllianceBernstein had no off-balance sheet arrangements other than the guarantees that are discussed below.
Guarantees
Under various circumstances, AllianceBernstein guarantees the obligations of its consolidated subsidiaries.
AllianceBernstein maintains a guarantee in connection with the $1.0 billion AB Credit Facility. If SCB LLC is unable to meet its obligations, AllianceBernstein will pay the obligations when due or on demand. In addition, AllianceBernstein maintains guarantees totaling $400 million for three of SCB LLC’s uncommitted lines of credit.
AllianceBernstein maintains a guarantee with a commercial bank, under which it guarantees the obligations in the ordinary course of business of SCBL. AllianceBernstein also maintains three additional guarantees with other commercial banks, under which it guarantees approximately $430 million of obligations for SCBL. In the event SCBL is unable to meet its obligations, AllianceBernstein will pay the obligations when due or on demand.
AllianceBernstein also has three smaller guarantees with a commercial bank totaling approximately $3 million, under which it guarantees certain obligations in the ordinary course of business of two foreign subsidiaries.
AllianceBernstein has not been required to perform under any of the above agreements and currently has no liability in connection with these agreements.
7-50
SUPPLEMENTARY INFORMATION
The Company is involved in a number of ventures and transactions with AXA and certain of its affiliates:
| | • | | At December 31, 2012, AXA Equitable had outstanding $650 million of 5.7% senior unsecured notes issued by AXA affiliates and a $400 million 8.0% mortgage note from a non-insurance subsidiary of AXA Financial. |
| | • | | AllianceBernstein provides investment management and related services to AXA, AXA Financial and AXA Equitable and certain of their subsidiaries and affiliates. During first quarter 2011 AXA sold its 50% interest in its consolidated Australian joint venture to an unaffiliated third party as part of a larger transaction. On March 31, 2011 AllianceBernstein purchased that 50% interest from an unaffiliated third party making the Australian entity an indirect wholly-owned subsidiary of AllianceBernstein. Investment advisory and service fees earned by this joint venture were approximately $9 million and $37 million in 2011 and 2010, respectively, of which approximately $3 million and $13 million, respectively, were from AXA affiliates and $1 million and $4 million, respectively, were attributed to noncontrolling interest. |
| | • | | AXA Financial, AXA Equitable and AllianceBernstein, along with other AXA affiliates, participate in certain cost sharing and servicing agreements, which include technology and professional development arrangements. Payments by AXA Equitable and AllianceBernstein to AXA under such agreements totaled approximately $50 million, $47 million and $52 million in 2012, 2011 and 2010, respectively. Payments by AXA and AXA affiliates to the Company under such agreements totaled approximately $26 million, $22 million and $60 million in 2012, 2011 and 2010, respectively. Included in the payments by AXA and AXA affiliates to the Company were $17 million, $13 million and $46 million from AXA Technology Services America, Inc. (“AXA Tech”) for 2012, 2011 and 2010, respectively. The Company provided and paid for certain services at cost on behalf of AXA Tech; these costs which totaled $111 million, $105 million and $108 million for 2012, 2011 and 2010, respectively, offset the amounts AXA Financial Group were charged in those years for services provided by AXA Tech. |
See Notes 10, 11, 12 and 16 of Notes to the Consolidated Financial Statements contained elsewhere herein and AllianceBernstein’s Report on Form 10-K for the year ended December 31, 2012 for information on related party transactions.
A schedule of future payments under certain of the Company’s consolidated contractual obligations follows:
Contractual Obligations – December 31, 2012
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Payments Due by Period | |
| | | Total | | | Less than
1 year | | | 1 – 3 years | | | 4 – 5 years | | | Over
5 years | |
| | | (In Millions) | |
Contractual obligations: | | | | | | | | | | | | | | | | | | | | |
Policyholders liabilities - policyholders’ account balances, future policy benefits and other policyholders liabilities(1) | | $ | 106,475 | | | $ | 1,513 | | | $ | 3,979 | | | $ | 5,554 | | | $ | 95,429 | |
Long-term debt | | | 200 | | | | — | | | | 200 | | | | — | | | | — | |
Interest on long-term debt | | | 46 | | | | 15 | | | | 31 | | | | — | | | | — | |
Loans from affiliates | | | 1,325 | | | | — | | | | — | | | | — | | | | 1,325 | |
Interest on loans from affiliates | | | 874 | | | | 91 | | | | 181 | | | | 181 | | | | 421 | |
Operating leases, net of subleases | | | 2,175 | | | | 192 | | | | 364 | | | | 347 | | | | 1,272 | |
AllianceBernstein Funding commitments | | | 29 | | | | 6 | | | | 23 | | | | — | | | | — | |
Employee benefits | | | 1,931 | | | | 193 | | | | 405 | | | | 397 | | | | 936 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Total Contractual Obligations | | $ | 113,055 | | | $ | 2,010 | | | $ | 5,183 | | | $ | 6,479 | | | $ | 99,383 | |
| | | | | | | | | | | | | | | | | | | | |
(1) | Policyholders liabilities represent estimated cash flows out of the General Account related to the payment of death and disability claims, policy surrenders and withdrawals, annuity payments, minimum guarantees on Separate Account funded contracts, matured endowments, benefits under accident and health contracts, policyholder dividends and future renewal premium-based and fund-based commissions offset by contractual future premiums and deposits on in-force contracts. These estimated cash flows are based on mortality, morbidity and lapse assumptions comparable with the Company’s experience and assume market growth and interest crediting consistent with assumptions used in amortizing |
7-51
| | DAC. These amounts are undiscounted and, therefore, exceed the Policyholders’ account balances and Future policy benefits and other policyholder liabilities included in the consolidated balance sheet included elsewhere herein. They do not reflect projected recoveries from reinsurance agreements. Due to the use of assumptions, actual cash flows will differ from these estimates (see “Critical Accounting Estimates – Future Policy Benefits”). Separate Accounts liabilities have been excluded as they are legally insulated from General Account obligations and will be funded by cash flows from Separate Accounts assets. |
Unrecognized tax benefits of $678 million including $4 million related to AllianceBernstein were not included in the above table because it is not possible to make reasonably reliable estimates of the occurrence or timing of cash settlements with the respective taxing authorities.
During 2009, AllianceBernstein entered into a subscription agreement under which it committed to invest up to $35 million, as amended in 2011, in a venture capital fund over a six-year period. As of December 31, 2012, AllianceBernstein had funded $23 million of this commitment.
During 2010, as general partner of the AllianceBernstein U.S. Real Estate L.P. Fund, AllianceBernstein committed to invest $25 million in the Real Estate Fund. As of December 31, 2012, AllianceBernstein had funded $9 million of this commitment.
During 2012, AllianceBernstein entered into an investment agreement under which it committed to invest up to $8 million in an oil and gas fund over a three-year period. As of December 31, 2012, AllianceBernstein had funded $8 million of this commitment.
At year-end 2012, AllianceBernstein had a $449 million accrual for compensation and benefits, of which $207 million is expected to be paid in 2013, $182 million in 2014 and 2015, $31 million in 2016-2017 and the rest thereafter. Further, AllianceBernstein expects to make contributions to its qualified profit sharing plan of approximately $14 million in each of the next four years. AllianceBernstein currently estimates it will make a contribution of $4 million to its qualified pension plan during 2013.
In addition, the Company has obligations under contingent commitments at December 31, 2012, including: AllianceBernstein’s revolving credit facility and commercial paper program; AXA Equitable had $18 million undrawn letters of credit; as well as the Company’s $355 million and $328 million commitments under equity financing arrangements to certain limited partnership and existing mortgage loan agreements, respectively. Information on these contingent commitments can be found in Notes 10, 16 and 17 of Notes to Consolidated Financial Statements.
7-52
Part II, Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company’s businesses are subject to financial, market, political and economic risks, as well as to risks inherent in its business operations. The discussion that follows provides additional information on market risks arising from its insurance asset/liability management and asset management activities. Such risks are evaluated and managed by each business on a decentralized basis. Primary market risk exposure results from interest rate fluctuations, equity price movements and changes in credit quality.
Insurance Group
Insurance Group results significantly depend on profit margins or “spreads” between investment results from assets held in the General Account (“General Account Investment Assets”) and interest credited on individual insurance and annuity products. Management believes its fixed rate liabilities should be supported by a portfolio principally composed of fixed rate investments that generate predictable, steady rates of return. Although these assets are purchased for long-term investment, the portfolio management strategy considers them available for sale in response to changes in market interest rates, changes in prepayment risk, changes in relative values of asset sectors and individual securities and loans, changes in credit quality outlook and other relevant factors. See the “Investments” section of Note 2 of Notes to Consolidated Financial Statements for the accounting policies for the investment portfolios. The objective of portfolio management is to maximize returns, taking into account interest rate and credit risks. Insurance asset/liability management includes strategies to minimize exposure to loss as interest rates and economic and market conditions change. As a result, the fixed maturity portfolio has modest exposure to call and prepayment risk and the vast majority of mortgage holdings are fixed rate mortgages that carry yield maintenance and prepayment provisions.
Investments with Interest Rate Risk – Fair Value. Insurance Group assets with interest rate risk include fixed maturities and mortgage loans that make up 81.9% of the carrying value of General Account Investment Assets at December 31, 2012. As part of its asset/liability management, quantitative analyses are used to model the impact various changes in interest rates have on assets with interest rate risk. The table that follows shows the impact an immediate 100 BP increase in interest rates at December 31, 2012 and 2011 would have on the fair value of fixed maturities and mortgage loans:
Interest Rate Risk Exposure
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | Fair
Value | | | Balance After
+100 BP
Change | | | Fair
Value | | | Balance After
+100 BP
Change | |
| | | (In Millions) | |
Insurance Group: | | | | | | | | | | | | | | | | |
Fixed maturities: | | | | | | | | | | | | | | | | |
Fixed rate | | $ | 35,463 | | | $ | 33,223 | | | $ | 32,661 | | | $ | 30,722 | |
Floating rate | | | 754 | | | | 750 | | | | 383 | | | | 382 | |
Mortgage loans | | | 5,651 | | | | 5,461 | | | | 4,839 | | | | 4,683 | |
A 100 BP increase in interest rates is a hypothetical rate scenario used to demonstrate potential risk; it does not represent management’s view of future market changes. While these fair value measurements provide a representation of interest rate sensitivity of fixed maturities and mortgage loans, they are based on various portfolio exposures at a particular point in time and may not be representative of future market results. These exposures will change as a result of ongoing portfolio activities in response to management’s assessment of changing market conditions and available investment opportunities.
7A-1
Investments with Equity Price Risk – Fair Value. The investment portfolios also have direct holdings of public and private equity securities. The following table shows the potential exposure from those equity security investments, measured in terms of fair value, to an immediate 10% drop in equity prices from those prevailing at December 31, 2012 and 2011:
Equity Price Risk Exposure
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | Fair
Value | | | Balance After
–10% Equity
Price Change | | | Fair
Value | | | Balance After
–10% Equity
Price Change | |
| | | (In Millions) | |
| | | | |
Insurance Group | | $ | 67 | | | $ | 61 | | | $ | 53 | | | $ | 47 | |
A 10% decrease in equity prices is a hypothetical scenario used to calibrate potential risk and does not represent management’s view of future market changes. The fair value measurements shown are based on the equity securities portfolio exposures at a particular point in time and these exposures will change as a result of ongoing portfolio activities in response to management’s assessment of changing market conditions and available investment opportunities.
Liabilities with Interest Rate Risk – Fair Value. At December 31, 2012 and 2011, respectively, the aggregate carrying values of policyholders’ liabilities were $50.9 billion and $47.6 billion, approximately $44.1 billion and $43.2 billion of which liabilities are reactive to interest rate fluctuations. The aggregate fair value of such liabilities at years end 2012 and 2011 were $60.9 billion and $60.4 billion, respectively. The impact of a relative 1% decrease in interest rates would be an increase in the fair value of those liabilities of $7.2 billion and $6.1 billion, respectively. While these fair value measurements provide a representation of the interest rate sensitivity of policyholders’ liabilities, they are based on the composition of such liabilities at a particular point in time and may not be representative of future results.
Asset/liability management is integrated into many aspects of the Insurance Group’s operations, including investment decisions, product development and determination of crediting rates. As part of its risk management process, numerous economic scenarios are modeled, including cash flow testing required for insurance regulatory purposes, to determine if existing assets would be sufficient to meet projected liability cash flows. Key variables include policyholder behavior, such as persistency, under differing crediting rate strategies.
At December 31, 2012 and 2011, the aggregate fair value of long-term debt issued by AXA Equitable was $236 million and $220 million, respectively. The table below shows the potential fair value exposure to an immediate 100 BP decrease in interest rates from those prevailing at the end of 2012 and of 2011.
Interest Rate Risk Exposure
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | Fair
Value | | | Balance After
–100 BP
Change | | | Fair
Value | | | Balance After
–100 BP
Change | |
| | | (In Millions) | |
Continuing Operations: | | | | | | | | | | | | | | | | |
Fixed rate | | $ | 236 | | | $ | 243 | | | $ | 220 | | | $ | 228 | |
7A-2
Derivatives and Interest Rate and Equity Risks – Fair Value. The Company primarily uses derivative contracts for asset/liability risk management, to mitigate the Company’s exposure to equity market decline and interest rate fluctuations and for hedging individual securities. In addition, the Company periodically enters into forward, exchange-traded futures and interest rate swap, swaption and floor contracts to reduce the economic impact of movements in the equity and fixed income markets, including the program to hedge certain risks associated with the GMDB and GMIB features of the Accumulator® series of annuity products. As more fully described in Notes 2 and 3 of Notes to Consolidated Financial Statements, various traditional derivative financial instruments are used to achieve these objectives, including interest rate floors to hedge crediting rates on interest-sensitive individual annuity contracts, interest rate futures to protect against declines in interest rates between receipt of funds and purchase of appropriate assets, interest rate swaps to modify the duration and cash flows of fixed maturity investments and long-term debt and open exchange-traded options to mitigate the adverse effects of equity market declines on the Company’s statutory reserves. In addition, the Company periodically enters into forward, exchange-traded futures and interest rate swap, swaption and floor contracts to reduce the economic impact of movements in the equity and fixed income markets, including the program to hedge certain risks associated with the GMDB and GMIB features of the Accumulator® series of annuity products. To minimize credit risk exposure associated with its derivative transactions, each counterparty’s credit is appraised and approved and risk control limits and monitoring procedures are applied. Credit limits are established and monitored on the basis of potential exposures that take into consideration current market values and estimates of potential future movements in market values given potential fluctuations in market interest rates. In addition, beginning in 2008, the Company executed various collateral arrangements with counterparties to over-the-counter derivative transactions that require both the pledging and accepting of collateral either in the form of cash or high-quality Treasury or government agency securities.
Mark to market exposure is a point-in-time measure of the value of a derivative contract in the open market. A positive value indicates existence of credit risk for the Company because the counterparty would owe money to the Company if the contract were closed. Alternatively, a negative value indicates the Company would owe money to the counterparty if the contract were closed. If there is more than one derivative transaction outstanding with a counterparty, a master netting arrangement exists with the counterparty. In that case, the market risk represents the net of the positive and negative exposures with the single counterparty. In management’s view, the net potential exposure is the better measure of credit risk.
7A-3
At December 31, 2012 and 2011, the net fair values of the Company’s derivatives were $1,168 million and $1,539 million, respectively. The table that follows shows the interest rate or equity sensitivities of those derivatives, measured in terms of fair value. These exposures will change as a result of ongoing portfolio and risk management activities.
Insurance Group – Derivative Financial Instruments
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Interest Rate Sensitivity | |
| | | Notional
Amount | | | Weighted
Average
Term
(Years) | | | Balance After
–100 BP
Change | | | Fair
Value | | | Balance After
+100 BP
Change | |
| | | (In Millions, Except for Weighted Average Term) | |
| | | | | |
December 31, 2012 | | | | | | | | | | | | | | | | | | | | |
Floors | | $ | 2,700 | | | | 4.2 | | | $ | 327 | | | $ | 291 | | | $ | 216 | |
Swaps | | | 18,130 | | | | 8.0 | | | | 1,069 | | | | 203 | | | | (551 | ) |
Futures | | | 14,033 | | | | 0.3 | | | | 634 | | | | — | | | | (503 | ) |
Swaptions | | | 7,608 | | | | 2.7 | | | | 1,507 | | | | 502 | | | | 125 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 42,471 | | | | | | | $ | 3,537 | | | $ | 996 | | | $ | (713 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
December 31, 2011 | | | | | | | | | | | | | | | | | | | | |
Floors | | $ | 3,000 | | | | 5.3 | | | $ | 416 | | | $ | 327 | | | $ | 248 | |
Swaps | | | 9,695 | | | | 7.9 | | | | 613 | | | | 187 | | | | (182 | ) |
Futures | | | 11,983 | | | | 0.2 | | | | 842 | | | | — | | | | (732 | ) |
Swaptions | | | 7,353 | | | | 2.4 | | | | 2,012 | | | | 1,029 | | | | 523 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 32,031 | | | | | | | $ | 3,883 | | | $ | 1,543 | | | $ | (143 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | |
| | | | | | | | | | | | Equity Sensitivity | |
| | | | | | | | | | | | Fair
Value | | | Balance after
–10% Equity
Price Shift | |
| | | | | |
December 31, 2012 | | | | | | | | | | | | | | | | | | | | |
Futures | | $ | 6,098 | | | | | | | | | | | $ | — | | | $ | 574 | |
Swaps | | | 875 | | | | | | | | | | | | (52 | ) | | | 49 | |
Options | | | 3,492 | | | | | | | | | | | | 224 | | | | 124 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 10,465 | | | | | | | | | | | $ | 172 | | | $ | 747 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
December 31, 2011 | | | | | | | | | | | | | | | | | | | | |
Futures | | $ | 6,332 | | | | | | | | | | | $ | — | | | $ | 588 | |
Swaps | | | 745 | | | | | | | | | | | | (10 | ) | | | 65 | |
Options | | | 1,211 | | | | | | | | | | | | 6 | | | | (24 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 8,288 | | | | | | | | | | | $ | (4 | ) | | $ | 629 | |
| | | | | | | | | | | | | | | | | | | | |
In addition to the freestanding derivatives discussed above, the Company has entered into reinsurance contracts to mitigate the risk associated with the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts. These reinsurance contracts are considered derivatives under the guidance on derivatives and hedging and were reported at their fair values of $11.0 billion and $10.5 billion at December 31, 2012 and 2011, respectively. The potential fair value exposure to an immediate 10% drop in equity prices from those prevailing at December 31, 2012 and 2011, respectively, would increase the balances of the reinsurance contract asset to $11.9 billion and $11.4 billion. Also, the GWBL and other feature’s liability associated with certain annuity contracts is similarly considered to be a derivative for accounting purposes and was reported at its fair value of $265 million and $291 million at December 31, 2012 and 2011, respectively. The potential fair value exposure to an immediate 10% drop in equity prices from those prevailing at December 31, 2012 and 2011, respectively, would be to increase the liability balance to $342 million and $353 million.
7A-4
Investment Management
AllianceBernstein’s investments consist of trading and available-for-sale investments and other investments. AllianceBernstein’s trading and available-for-sale investments include U.S. Treasury bills and equity and fixed income mutual funds investments. Trading investments are purchased for short-term investment, principally to fund liabilities related to deferred compensation plans and to seed new investment services. Although available-for-sale investments are purchased for long-term investment, the portfolio strategy considers them available-for-sale from time to time due to changes in market interest rates, equity prices and other relevant factors. Other investments include investments in hedge funds sponsored by AllianceBernstein and other private investment vehicles.
Investments with Interest Rate Risk – Fair Value. The table below provides AllianceBernstein’s potential exposure with respect to its fixed income investments, measured in terms of fair value, to an immediate 100 BP increase in interest rates at all maturities from the levels prevailing at December 31, 2012 and 2011:
Interest Rate Risk Exposure
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | Fair
Value | | | Balance After
+100 BP
Point | | | Fair
Value | | | Balance After
+100 BP
Change | |
| | | (In Millions) | |
Fixed Income Investments: | | | | | | | | | | | | | | | | |
Trading | | $ | 207 | | | $ | 197 | | | $ | 172 | | | $ | 163 | |
Available-for-sale and other investments | | | 6 | | | | 6 | | | | 7 | | | | 7 | |
Such a fluctuation in interest rates is a hypothetical rate scenario used to calibrate potential risk and does not represent AllianceBernstein management’s view of future market changes. While these fair value measurements provide a representation of interest rate sensitivity of its investments in fixed income mutual funds and fixed income hedge funds, they are based on AllianceBernstein’s exposures at a particular point in time and may not be representative of future market results. These exposures will change as a result of ongoing changes in investments in response to AllianceBernstein management’s assessment of changing market conditions and available investment opportunities.
Investments with Equity Price Risk – Fair Value. AllianceBernstein’s investments include investments in equity mutual funds and equity hedge funds. The following table presents AllianceBernstein’s potential exposure from its equity investments, measured in terms of fair value, to an immediate 10% drop in equity prices from those prevailing at December 31, 2012 and 2011:
Equity Price Risk Exposure
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | Fair
Value | | | Balance After
–10% Equity
Price Change | | | Fair
Value | | | Balance After
–10% Equity
Price Change | |
| | | (In Millions) | |
Equity Investments: | | | | | | | | | | | | | | | | |
Trading | | $ | 269 | | | $ | 242 | | | $ | 339 | | | $ | 305 | |
Available-for-sale and other investments | | | 251 | | | | 226 | | | | 277 | | | | 250 | |
A 10% decrease in equity prices is a hypothetical scenario used to calibrate potential risk and does not represent AllianceBernstein management’s view of future market changes. While these fair value measurements provide a representation of equity price sensitivity of AllianceBernstein’s investments in equity mutual funds and equity hedge funds, they are based on AllianceBernstein’s exposure at a particular point in time and may not be representative of future market results. These exposures will change as a result of ongoing portfolio activities in response to AllianceBernstein management’s assessment of changing market conditions and available investment opportunities.
For further information on AllianceBernstein’s market risk, see AllianceBernstein L.P. and AllianceBernstein Holding’s Annual Reports on Form 10-K for the year ended December 31, 2012.
7A-5
Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
AXA EQUITABLE LIFE INSURANCE COMPANY
| | | | |
Report of Independent Registered Public Accounting Firm | | | F-1 | |
| |
Consolidated Financial Statements: | | | | |
Consolidated Balance Sheets, December 31, 2012 and 2011 | | | F-2 | |
Consolidated Statements of Earnings (Loss), Years Ended December 31, 2012, 2011 and 2010 | | | F-4 | |
Consolidated Statements of Comprehensive Income (Loss), Years Ended December 31, 2012, 2011 and 2010 | | | F-5 | |
Consolidated Statements of Equity, Years Ended December 31, 2012, 2011 and 2010 | | | F-6 | |
Consolidated Statements of Cash Flows, Years Ended December 31, 2012, 2011 and 2010 | | | F-7 | |
Notes to Consolidated Financial Statements | | | F-9 | |
| |
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules | | | F-87 | |
| |
Consolidated Financial Statement Schedules: | | | | |
Schedule I - Summary of Investments - Other than Investments in Related Parties, December 31, 2012 | | | F-88 | |
Schedule II - Balance Sheets (Parent Company), December 31, 2012 and 2011 | | | F-89 | |
Schedule II - Statements of Earnings (Loss) (Parent Company), Years Ended December 31, 2012, 2011 and 2010 | | | F-90 | |
Schedule II - Statements of Cash Flows (Parent Company), Years Ended December 31, 2012, 2011 and 2010 | | | F-91 | |
Schedule III - Supplementary Insurance Information, Years Ended December 31, 2012, 2011 and 2010 | | | F-93 | |
Schedule IV - Reinsurance, Years Ended December 31, 2012, 2011 and 2010 | | | F-96 | |
FS-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of
AXA Equitable Life Insurance Company
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings (loss), of comprehensive income (loss), of equity and of cash flows present fairly, in all material respects, the financial position of AXA Equitable Life Insurance Company and its subsidiaries (“the Company”) at December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 of the notes to Consolidated Financial Statements, as of January 1, 2012, the Company retrospectively adopted a new accounting standard that amends the accounting for costs associated with acquiring or renewing insurance contracts.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 8, 2013
F-1
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2012 AND 2011
| | | | | | | | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
ASSETS | | | | |
Investments: | | | | | | | | |
Fixed maturities available for sale, at fair value | | $ | 33,607 | | | $ | 31,992 | |
Mortgage loans on real estate | | | 5,059 | | | | 4,281 | |
Equity real estate, held for the production of income | | | 4 | | | | 99 | |
Policy loans | | | 3,512 | | | | 3,542 | |
Other equity investments | | | 1,643 | | | | 1,707 | |
Trading securities | | | 2,309 | | | | 982 | |
Other invested assets | | | 1,828 | | | | 2,340 | |
| | | | | | | | |
Total investments | | | 47,962 | | | | 44,943 | |
Cash and cash equivalents | | | 3,162 | | | | 3,227 | |
Cash and securities segregated, at fair value | | | 1,551 | | | | 1,280 | |
Broker-dealer related receivables | | | 1,605 | | | | 1,327 | |
Deferred policy acquisition costs | | | 3,728 | | | | 3,545 | |
Goodwill and other intangible assets, net | | | 3,673 | | | | 3,697 | |
Amounts due from reinsurers | | | 3,847 | | | | 3,542 | |
Loans to affiliates | | | 1,037 | | | | 1,041 | |
Guaranteed minimum income benefit reinsurance asset, at fair value | | | 11,044 | | | | 10,547 | |
Other assets | | | 5,095 | | | | 5,340 | |
Separate Accounts’ assets | | | 94,139 | | | | 86,419 | |
| | | | | | | | |
| | |
Total Assets | | $ | 176,843 | | | $ | 164,908 | |
| | | | | | | | |
| | |
LIABILITIES | | | | | | | | |
Policyholders’ account balances | | $ | 28,263 | | | $ | 26,033 | |
Future policy benefits and other policyholders liabilities | | | 22,687 | | | | 21,595 | |
Broker-dealer related payables | | | 664 | | | | 466 | |
Customers related payables | | | 2,562 | | | | 1,889 | |
Amounts due to reinsurers | | | 75 | | | | 74 | |
Short-term and long-term debt | | | 523 | | | | 645 | |
Loans from affiliates | | | 1,325 | | | | 1,325 | |
Current and deferred income taxes | | | 5,172 | | | | 5,104 | |
Other liabilities | | | 3,503 | | | | 3,815 | |
Separate Accounts’ liabilities | | | 94,139 | | | | 86,419 | |
| | | | | | | | |
Total liabilities | | | 158,913 | | | | 147,365 | |
| | | | | | | | |
| | |
Commitments and contingent liabilities (Notes 2, 7, 10, 11, 12, 13, 16 and 17) | | | | | | | | |
F-2
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2012 AND 2011
(CONTINUED)
| | | | | | | | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
EQUITY | | | | |
AXA Equitable’s equity: | | | | | | | | |
Common stock, $1.25 par value, 2 million shares authorized, issued and outstanding | | $ | 2 | | | $ | 2 | |
Capital in excess of par value | | | 5,992 | | | | 5,743 | |
Retained earnings | | | 9,125 | | | | 9,392 | |
Accumulated other comprehensive income (loss) | | | 317 | | | | (297 | ) |
| | | | | | | | |
Total AXA Equitable’s equity | | | 15,436 | | | | 14,840 | |
| | | | | | | | |
Noncontrolling interest | | | 2,494 | | | | 2,703 | |
| | | | | | | | |
Total equity | | | 17,930 | | | | 17,543 | |
| | | | | | | | |
Total Liabilities and Equity | | $ | 176,843 | | | $ | 164,908 | |
| | | | | | | | |
See Notes to Consolidated Financial Statements.
F-3
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
REVENUES | | | | | | | | | | | | |
Universal life and investment-type product policy fee income | | $ | 3,334 | | | $ | 3,312 | | | $ | 3,067 | |
Premiums | | | 514 | | | | 533 | | | | 530 | |
Net investment income (loss): | | | | | | | | | | | | |
Investment income (loss) from derivative instruments | | | (978 | ) | | | 2,374 | | | | (284 | ) |
Other investment income (loss) | | | 2,316 | | | | 2,128 | | | | 2,260 | |
| | | | | | | | | | | | |
Total net investment income (loss) | | | 1,338 | | | | 4,502 | | | | 1,976 | |
| | | | | | | | | | | | |
Investment gains (losses), net: | | | | | | | | | | | | |
Total other-than-temporary impairment losses | | | (96 | ) | | | (36 | ) | | | (300 | ) |
Portion of loss recognized in other comprehensive income (loss) | | | 2 | | | | 4 | | | | 18 | |
| | | | | | | | | | | | |
Net impairment losses recognized | | | (94 | ) | | | (32 | ) | | | (282 | ) |
Other investment gains (losses), net | | | (3 | ) | | | (15 | ) | | | 98 | |
| | | | | | | | | | | | |
Total investment gains (losses), net | | | (97 | ) | | | (47 | ) | | | (184 | ) |
| | | | | | | | | | | | |
Commissions, fees and other income | | | 3,574 | | | | 3,631 | | | | 3,702 | |
Increase (decrease) in the fair value of the reinsurance contract asset | | | 497 | | | | 5,941 | | | | 2,350 | |
| | | | | | | | | | | | |
Total revenues | | | 9,160 | | | | 17,872 | | | | 11,441 | |
| | | | | | | | | | | | |
| | | |
BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | | | |
Policyholders’ benefits | | | 2,989 | | | | 4,360 | | | | 3,082 | |
Interest credited to policyholders’ account balances | | | 1,166 | | | | 999 | | | | 950 | |
Compensation and benefits | | | 1,672 | | | | 2,263 | | | | 1,953 | |
Commissions | | | 1,248 | | | | 1,195 | | | | 1,044 | |
Distribution related payments | | | 367 | | | | 303 | | | | 287 | |
Amortization of deferred sales commissions | | | 40 | | | | 38 | | | | 47 | |
Interest expense | | | 108 | | | | 106 | | | | 106 | |
Amortization of deferred policy acquisition costs | | | 576 | | | | 3,620 | | | | (326 | ) |
Capitalization of deferred policy acquisition costs | | | (718 | ) | | | (759 | ) | | | (655 | ) |
Rent expense | | | 201 | | | | 240 | | | | 244 | |
Amortization of other intangible assets | | | 24 | | | | 24 | | | | 23 | |
Other operating costs and expenses | | | 1,429 | | | | 1,359 | | | | 1,438 | |
| | | | | | | | | | | | |
Total benefits and other deductions | | | 9,102 | | | | 13,748 | | | | 8,193 | |
| | | | | | | | | | | | |
| | | |
Earnings (loss) from continuing operations, before income taxes | | $ | 58 | | | $ | 4,124 | | | $ | 3,248 | |
Income tax (expense) benefit | | | 158 | | | | (1,298 | ) | | | (789 | ) |
| | | | | | | | | | | | |
| | | |
Net earnings (loss) | | | 216 | | | | 2,826 | | | | 2,459 | |
Less: net (earnings) loss attributable to the noncontrolling interest | | | (121 | ) | | | 101 | | | | (235 | ) |
| | | | | | | | | | | | |
| | | |
Net Earnings (Loss) Attributable to AXA Equitable | | $ | 95 | | | $ | 2,927 | | | $ | 2,224 | |
| | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
F-4
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
COMPREHENSIVE INCOME (LOSS) | | | | | | | | | | | | |
Net earnings (loss) | | $ | 216 | | | $ | 2,826 | | | $ | 2,459 | |
| | | | | | | | | | | | |
Other comprehensive income (loss) net of income taxes: | | | | | | | | | | | | |
Change in unrealized gains (losses), net of reclassification adjustment | | | 580 | | | | 366 | | | | 459 | |
Defined benefit plans: | | | | | | | | | | | | |
Net gain (loss) arising during year | | | (82 | ) | | | (169 | ) | | | (121 | ) |
Prior service cost arising during year | | | 1 | | | | — | | | | — | |
Less: reclassification adjustment for: | | | | | | | | | | | | |
Amortization of net (gains) losses included in net periodic cost | | | 106 | | | | 94 | | | | 82 | |
Amortization of net prior service credit included in net periodic cost | | | 1 | | | | 1 | | | | (1 | ) |
| | | | | | | | | | | | |
Other comprehensive income (loss) - defined benefit plans | | | 26 | | | | (74 | ) | | | (40 | ) |
| | | | | | | | | | | | |
| | | |
Total other comprehensive income (loss), net of income taxes | | | 606 | | | | 292 | | | | 419 | |
| | | | | | | | | | | | |
| | | |
Comprehensive income (loss) | | | 822 | | | | 3,118 | | | | 2,878 | |
| | | |
Less: Comprehensive (income) loss attributable to noncontrolling interest | | | (113 | ) | | | 122 | | | | (228 | ) |
| | | | | | | | | | | | |
| | | |
Comprehensive Income (Loss) Attributable to AXA Equitable | | $ | 709 | | | $ | 3,240 | | | $ | 2,650 | |
| | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
F-5
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
EQUITY | | | | | | | | | | | | |
AXA Equitable’s Equity: | | | | | | | | | | | | |
Common stock, at par value, beginning and end of year | | $ | 2 | | | $ | 2 | | | $ | 2 | |
| | | | | | | | | | | | |
| | | |
Capital in excess of par value, beginning of year | | | 5,743 | | | | 5,593 | | | | 5,583 | |
Changes in capital in excess of par value | | | 249 | | | | 150 | | | | 10 | |
| | | | | | | | | | | | |
Capital in excess of par value, end of year | | | 5,992 | | | | 5,743 | | | | 5,593 | |
| | | | | | | | | | | | |
| | | |
Retained earnings, beginning of year | | | 9,392 | | | | 6,844 | | | | 4,920 | |
Net earnings (loss) | | | 95 | | | | 2,927 | | | | 2,224 | |
Stockholder dividends | | | (362 | ) | | | (379 | ) | | | (300 | ) |
| | | | | | | | | | | | |
Retained earnings, end of year | | | 9,125 | | | | 9,392 | | | | 6,844 | |
| | | | | | | | | | | | |
| | | |
Accumulated other comprehensive income (loss), beginning of year | | | (297 | ) | | | (610 | ) | | | (1,036 | ) |
Other comprehensive income (loss) | | | 614 | | | | 313 | | | | 426 | |
| | | | | | | | | | | | |
Accumulated other comprehensive income (loss), end of year | | | 317 | | | | (297 | ) | | | (610 | ) |
| | | | | | | | | | | | |
| | | |
Total AXA Equitable’s equity, end of year | | | 15,436 | | | | 14,840 | | | | 11,829 | |
| | | | | | | | | | | | |
| | | |
Noncontrolling interest, beginning of year | | | 2,703 | | | | 3,118 | | | | 3,269 | |
Purchase of AllianceBernstein Units by noncontrolling interest | | | — | | | | 1 | | | | 5 | |
Purchase of noncontrolling interest in consolidated entity | | | — | | | | (31 | ) | | | (5 | ) |
Repurchase of AllianceBernstein Holding units | | | (145 | ) | | | (140 | ) | | | (148 | ) |
Net earnings (loss) attributable to noncontrolling interest | | | 121 | | | | (101 | ) | | | 235 | |
Dividends paid to noncontrolling interest | | | (219 | ) | | | (312 | ) | | | (357 | ) |
Other comprehensive income (loss) attributable to noncontrolling interest | | | (8 | ) | | | (21 | ) | | | (7 | ) |
Other changes in noncontrolling interest | | | 42 | | | | 189 | | | | 126 | |
| | | | | | | | | | | | |
| | | |
Noncontrolling interest, end of year | | | 2,494 | | | | 2,703 | | | | 3,118 | |
| | | | | | | | | | | | |
| | | |
Total Equity, End of Year | | $ | 17,930 | | | $ | 17,543 | | | $ | 14,947 | |
| | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
F-6
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Net earnings (loss) | | $ | 216 | | | $ | 2,826 | | | $ | 2,459 | |
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
Interest credited to policyholders’ account balances | | | 1,166 | | | | 999 | | | | 950 | |
Universal life and investment-type product policy fee income | | | (3,334 | ) | | | (3,312 | ) | | | (3,067 | ) |
Net change in broker-dealer and customer related receivables/payables | | | 383 | | | | 266 | | | | 125 | |
(Income) loss related to derivative instruments | | | 978 | | | | (2,374 | ) | | | 284 | |
Change in reinsurance recoverable with affiliate | | | (207 | ) | | | (242 | ) | | | (233 | ) |
Investment (gains) losses, net | | | 97 | | | | 47 | | | | 184 | |
Change in segregated cash and securities, net | | | (272 | ) | | | (170 | ) | | | (124 | ) |
Change in deferred policy acquisition costs | | | (142 | ) | | | 2,861 | | | | (981 | ) |
Change in future policy benefits | | | 876 | | | | 2,110 | | | | 1,136 | |
Change in current and deferred income taxes | | | (254 | ) | | | 1,226 | | | | 803 | |
Real estate asset write-off charge | | | 42 | | | | 5 | | | | 26 | |
Change in the fair value of the reinsurance contract asset | | | (497 | ) | | | (5,941 | ) | | | (2,350 | ) |
Amortization of deferred compensation | | | 22 | | | | 418 | | | | 178 | |
Amortization of deferred sales commission | | | 40 | | | | 38 | | | | 47 | |
Amortization of reinsurance cost | | | 47 | | | | 211 | | | | 274 | |
Other depreciation and amortization | | | 157 | | | | 146 | | | | 161 | |
Amortization of other intangibles | | | 24 | | | | 24 | | | | 23 | |
Other, net | | | (122 | ) | | | (76 | ) | | | 111 | |
| | | | | | | | | | | | |
| | | |
Net cash provided by (used in) operating activities | | | (780 | ) | | | (938 | ) | | | 6 | |
| | | | | | | | | | | | |
| | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Maturities and repayments of fixed maturities and mortgage loans on real estate | | | 3,551 | | | | 3,435 | | | | 2,753 | |
Sales of investments | | | 1,951 | | | | 1,141 | | | | 3,398 | |
Purchases of investments | | | (7,893 | ) | | | (7,970 | ) | | | (7,068 | ) |
Cash settlements related to derivative instruments | | | (287 | ) | | | 1,429 | | | | (651 | ) |
Change in short-term investments | | | 34 | | | | 16 | | | | (53 | ) |
Decrease in loans to affiliates | | | 4 | | | | — | | | | 3 | |
Investment in capitalized software, leasehold improvements and EDP equipment | | | (66 | ) | | | (104 | ) | | | (62 | ) |
Other, net | | | 14 | | | | 25 | | | | (25 | ) |
| | | | | | | | | | | | |
| | | |
Net cash provided by (used in) investing activities | | | (2,692 | ) | | | (2,028 | ) | | | (1,705 | ) |
| | | | | | | | | | | | |
F-7
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
(CONTINUED)
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Policyholders’ account balances: | | | | | | | | | | | | |
Deposits | | $ | 5,437 | | | $ | 4,461 | | | $ | 3,187 | |
Withdrawals and transfers to Separate Accounts | | | (982 | ) | | | (821 | ) | | | (483 | ) |
Change in short-term financings | | | (122 | ) | | | 220 | | | | (24 | ) |
Change in collateralized pledged liabilities | | | (288 | ) | | | 989 | | | | (270 | ) |
Change in collateralized pledged assets | | | (5 | ) | | | 99 | | | | 533 | |
Capital contribution | | | 195 | | | | — | | | | — | |
Shareholder dividends paid | | | (362 | ) | | | (379 | ) | | | (300 | ) |
Repurchase of AllianceBernstein Holding units | | | (238 | ) | | | (221 | ) | | | (235 | ) |
Distribution to noncontrolling interest in consolidated subsidiaries | | | (219 | ) | | | (312 | ) | | | (357 | ) |
Other, net | | | (9 | ) | | | 2 | | | | 11 | |
| | | | | | | | | | | | |
| | | |
Net cash provided by (used in) financing activities | | | 3,407 | | | | 4,038 | | | | 2,062 | |
| | | | | | | | | | | | |
| | | |
Change in cash and cash equivalents | | | (65 | ) | | | 1,072 | | | | 363 | |
Cash and cash equivalents, beginning of year | | | 3,227 | | | | 2,155 | | | | 1,792 | |
| | | | | | | | | | | | |
| | | |
Cash and Cash Equivalents, End of Year | | $ | 3,162 | | | $ | 3,227 | | | $ | 2,155 | |
| | | | | | | | | | | | |
| | | |
Supplemental cash flow information: | | | | | | | | | | | | |
Interest Paid | | $ | 107 | | | $ | 107 | | | $ | 110 | |
| | | | | | | | | | | | |
Income Taxes (Refunded) Paid | | $ | 271 | | | $ | 36 | | | $ | (27 | ) |
| | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
F-8
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AXA Equitable Life Insurance Company (“AXA Equitable,” and collectively with its consolidated subsidiaries the “Company”) is an indirect, wholly owned subsidiary of AXA Financial, Inc. (“AXA Financial,” and collectively with its consolidated subsidiaries, “AXA Financial Group”). AXA Financial is an indirect wholly owned subsidiary of AXA, a French holding company for an international group of insurance and related financial services companies.
The Company conducts operations in two business segments: the Insurance and Investment Management segments. The Company’s management evaluates the performance of each of these segments independently and allocates resources based on current and future requirements of each segment.
Insurance
The Insurance segment offers a variety of traditional, variable and interest-sensitive life insurance products, variable and fixed-interest annuity products and asset management principally to individuals and small and medium size businesses and professional and trade associations. This segment also includes Separate Accounts for individual insurance and annuity products.
The Company’s insurance business is conducted principally by AXA Equitable.
Investment Management
The Investment Management segment is principally comprised of the investment management business of AllianceBernstein L.P., a Delaware limited partnership (together with its consolidated subsidiaries “AllianceBernstein”). AllianceBernstein provides research, diversified investment management and related services globally to a broad range of clients. This segment also includes institutional Separate Accounts principally managed by AllianceBernstein that provide various investment options for large group pension clients, primarily defined benefit and contribution plans, through pooled or single group accounts.
AllianceBernstein is a private partnership for Federal income tax purposes and, accordingly, is not subject to Federal and state corporate income taxes. However, AllianceBernstein is subject to a 4.0% New York City unincorporated business tax (“UBT”). Domestic corporate subsidiaries of AllianceBernstein are subject to Federal, state and local income taxes. Foreign corporate subsidiaries are generally subject to taxes in the foreign jurisdictions where they are located. The Company provides Federal and state income taxes on the undistributed earnings of non-U.S. corporate subsidiaries except to the extent that such earnings are permanently invested outside the United States.
At December 31, 2012 and 2011, the Company’s economic interest in AllianceBernstein was 39.5% and 37.3%, respectively. At December 31, 2012 and 2011, respectively, AXA and its subsidiaries’ economic interest in AllianceBernstein (including AXA Financial Group) was approximately 65.5% and 64.6%. AXA Equitable as the General Partner of the limited partnership consolidates AllianceBernstein in the Company’s consolidated financial statements.
In the first quarter of 2011, AXA sold its 50% interest in AllianceBernstein’s consolidated Australian joint venture to an unaffiliated third party as part of a larger transaction. On March 31, 2011, AllianceBernstein purchased that 50% interest from the unaffiliated third party, making this Australian entity an indirect wholly-owned subsidiary. AllianceBernstein purchased the remaining 50% interest for $21 million. As a result, the Company’s Noncontrolling interest decreased $27 million and AXA Equitable’s equity increased $6 million.
F-9
2) | SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation and Principles of Consolidation
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. The accompanying consolidated financial statements reflect all adjustments necessary in the opinion of management for a fair presentation of the consolidated financial position of the Company and its consolidated results of operations and cash flows for the periods presented.
The accompanying consolidated financial statements include the accounts of AXA Equitable and its subsidiary engaged in insurance related businesses (collectively, the “Insurance Group”); other subsidiaries, principally AllianceBernstein; and those investment companies, partnerships and joint ventures in which AXA Equitable or its subsidiaries has control and a majority economic interest as well as those variable interest entities (“VIEs”) that meet the requirements for consolidation.
At December 31, 2012 and 2011, respectively, the Insurance Group’s General Account held $1 million and $1 million of investment assets issued by VIEs and determined to be significant variable interests under Financial Accounting Standards Board (“FASB”) guidance Consolidation of Variable Interest Entities – Revised. At December 31, 2012 and 2011, respectively, as reported in the consolidated balance sheet, these investments included $1 million and $1 million of other equity investments (principally investment limited partnership interests) and are subject to ongoing review for impairment in value. These VIEs do not require consolidation because management has determined that the Insurance Group is not the primary beneficiary. These variable interests at December 31, 2012 represent the Insurance Group’s maximum exposure to loss from its direct involvement with the VIEs. The Insurance Group has no further economic interest in these VIEs in the form of related guarantees, commitments, derivatives, credit enhancements or similar instruments and obligations.
Management of AllianceBernstein reviews quarterly its investment management agreements and its investments in, and other financial arrangements with, certain entities that hold client assets under management (“AUM”) to determine the entities that AllianceBernstein is required to consolidate under this guidance. These entities include certain mutual fund products, hedge funds, structured products, group trusts, collective investment trusts and limited partnerships.
AllianceBernstein earned investment management fees on client AUM of these entities but derived no other benefit from those assets and cannot utilize those assets in its operations.
At December 31, 2012, AllianceBernstein had significant variable interests in certain other structured products and hedge funds with approximately $22 million in client AUM. However, these VIEs do not require consolidation because management has determined that AllianceBernstein is not the primary beneficiary of the expected losses or expected residual returns of these entities. AllianceBernstein’s maximum exposure to loss in these entities is limited to its investments of $100,000 in and prospective investment management fees earned from these entities.
All significant intercompany transactions and balances have been eliminated in consolidation. The years “2012,” “2011” and “2010” refer to the years ended December 31, 2012, 2011 and 2010, respectively. Certain reclassifications have been made in the amounts presented for prior periods to conform those periods to the current presentation.
Retrospective Adoption of Accounting Pronouncements
In October 2010, the FASB issued authoritative guidance to address diversity in practice regarding the interpretation of which costs relating to the acquisition of new or renewal insurance contracts qualify for deferral. Under the amended guidance, an entity may defer incremental direct costs of contract acquisition with independent third parties or employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts. This amended guidance was effective for fiscal
F-10
years, and interim periods within those years, beginning after December 15, 2011 and permits, but does not require, retrospective application. The Company adopted this guidance effective January 1, 2012, and applied the retrospective method of adoption.
The following table presents the effects of the retrospective application of the adoption of such new accounting guidance to the Company’s previously reported consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | As Previously Reported | | | Adjustment | | | As Adjusted | |
| | | December 31, | | | December 31, | | | December 31, | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred policy acquisition costs | | $ | 4,653 | | | $ | 8,383 | | | $ | (1,108 | ) | | $ | (1,880 | ) | | $ | 3,545 | | | $ | 6,503 | |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Current and deferred income taxes | | | 5,491 | | | | 4,315 | | | | (387 | ) | | | (658 | ) | | | 5,104 | | | | 3,657 | |
Equity: | | | | | | | | | | | | | | | | | | | | | | | | |
Retained earnings | | | 10,120 | | | | 8,085 | | | | (728 | ) | | | (1,241 | ) | | | 9,392 | | | | 6,844 | |
Accumulated other comprehensive income (loss) | | | (304 | ) | | | (629 | ) | | | 7 | | | | 19 | | | | (297 | ) | | | (610 | ) |
Total AXA Equitable’s equity | | | 15,561 | | | | 13,051 | | | | (721 | ) | | | (1,222 | ) | | | 14,840 | | | | 11,829 | |
Total equity | | | 18,264 | | | | 16,169 | | | | (721 | ) | | | (1,222 | ) | | | 17,543 | | | | 14,947 | |
The following table presents the effects of the retrospective application of the adoption of such new accounting guidance to the Company’s previously reported consolidated statements of earnings (loss):
| | | | | | | | | | | | |
| | | As Previously
Reported | | | Adjustment | | | As Adjusted | |
| | | (In Millions) | |
Year Ended December 31, 2011 | | | | | | | | | | | | |
Benefits and Other Deductions: | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | $ | 4,680 | | | $ | (1,060 | ) | | $ | 3,620 | |
Capitalization of deferred policy acquisition costs | | | (1,030 | ) | | | 271 | | | | (759 | ) |
Earnings (loss) from continuing operations, before income taxes | | | 3,335 | | | | 789 | | | | 4,124 | |
Income tax (expense) benefit | | | (1,022 | ) | | | (276 | ) | | | (1,298 | ) |
Net earnings (loss) | | | 2,313 | | | | 513 | | | | 2,826 | |
Net Earnings (Loss) Attributable to AXA Equitable | | | 2,414 | | | | 513 | | | | 2,927 | |
| | | |
Year Ended December 31, 2010 | | | | | | | | | | | | |
Benefits and Other Deductions: | | | | | | | | | | | | |
Amortization of deferred policy acquisition costs | | $ | 168 | | | $ | (494 | ) | | $ | (326 | ) |
Capitalization of deferred policy acquisition costs | | | (916 | ) | | | 261 | | | | (655 | ) |
Earnings (loss) from continuing operations, before income taxes | | | 3,015 | | | | 233 | | | | 3,248 | |
Income tax (expense) benefit | | | (707 | ) | | | (82 | ) | | | (789 | ) |
Net earnings (loss) | | | 2,308 | | | | 151 | | | | 2,459 | |
Net Earnings (Loss) Attributable to AXA Equitable | | | 2,073 | | | | 151 | | | | 2,224 | |
F-11
The following table presents the effects of the retrospective application of the adoption of such new accounting guidance to the Company’s previously reported consolidated statements of cash flows:
| | | | | | | | | | | | |
| | | As Previously
Reported | | | Adjustment | | | As Adjusted | |
| | | (In Millions) | |
Year Ended December 31, 2011 | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net earnings | | $ | 2,313 | | | $ | 513 | | | $ | 2,826 | |
Change in deferred policy acquisition costs | | | 3,650 | | | | (789 | ) | | | 2,861 | |
Change in current and deferred income taxes | | | 950 | | | | 276 | | | | 1,226 | |
| | | |
Year Ended December 31, 2010 | | | | | | | | | | | | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net earnings | | $ | 2,308 | | | $ | 151 | | | $ | 2,459 | |
Change in deferred policy acquisition costs | | | (748 | ) | | | (233 | ) | | | (981 | ) |
Change in current and deferred income taxes | | | 721 | | | | 82 | | | | 803 | |
Adoption of New Accounting Pronouncements
In September 2011, the FASB issued new guidance on testing goodwill for impairment. The guidance is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities with the option of performing a “qualitative” assessment to determine whether further impairment testing is necessary. The guidance was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.
In June 2011, the FASB issued new guidance to amend the existing alternatives for presenting Other comprehensive income (loss) (“OCI”) and its components in financial statements. The amendments eliminate the current option to report OCI and its components in the statement of changes in equity. An entity can elect to present items of net earnings (loss) and OCI in one continuous statement or in two separate, but consecutive statements. This guidance will not change the items that constitute net earnings (loss) and OCI, when an item of OCI must be reclassified to net earnings (loss). The new guidance also called for reclassification adjustments from OCI to be measured and presented by income statement line item in net earnings (loss) and in OCI. This guidance was effective for interim and annual periods beginning after December 15, 2011. Consistent with this guidance, the Company currently presents items of net earnings (loss) and OCI in two consecutive statements. In December 2011, the FASB issued new guidance to defer the portion of the guidance to present components of OCI on the face of the Consolidated statement of earnings (loss).
In May 2011, the FASB amended its guidance on fair value measurements and disclosure requirements to enhance comparability between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The changes to the existing guidance include how and when the valuation premise of highest and best use applies, the application of premiums and discounts, as well as new required disclosures. This guidance was effective for reporting periods beginning after December 15, 2011. Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.
In April 2011, the FASB issued new guidance for a creditor’s determination of whether a restructuring is a troubled debt restructuring (“TDR”). The new guidance provided additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a TDR. The new guidance required creditors to evaluate modifications and restructurings of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered TDR. The financial reporting implications of being classified as a TDR are that the creditor is required to:
| | • | | Consider the receivable impaired when calculating the allowance for credit losses; and |
| | • | | Provide additional disclosures about its troubled debt restructuring activities in accordance with the requirements of recently issued guidance on disclosures about the credit quality of financing receivables and the allowance for credit losses. |
F-12
The new guidance was effective for the first interim or annual period beginning on or after June 15, 2011. Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements.
In July 2010, the FASB issued new and enhanced disclosure requirements about the credit quality of financing receivables and the allowance for credit losses with the objective of providing greater transparency of credit risk exposures from lending arrangements in the form of loans and receivables and of accounting policies and methodology used to estimate the allowance for credit losses. These disclosure requirements include both qualitative information about credit risk assessment and monitoring and quantitative information about credit quality during and at the end of the reporting period, including current credit indicators, agings of past-due amounts, and carrying amounts of modified, impaired, and non-accrual loans. Several new terms critical to the application of these disclosures, such as “portfolio segments” and “classes”, were defined by the FASB to provide guidance with respect to the appropriate level of disaggregation for the purpose of reporting this information. Except for disclosures of reporting period activity, or, more specifically, the credit loss allowance rollforward and the disclosures about troubled debt restructurings, all other disclosures required by this standard are to be presented for the annual period ending after December 15, 2010. Disclosures of reporting period activity or, more specifically, the credit loss allowance rollforward, which are effective in the first interim reporting period beginning after December 15, 2010 have been adopted. Comparative disclosures are not required for earlier periods presented for comparative purposes at initial adoption. Implementation of the effective guidance did not have a material impact on the Company’s consolidated financial statements.
In April 2010, the FASB issued new guidance on stock compensation. This guidance provides clarification that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades and that may be different from the functional currency of the issuer, the functional currency of the subsidiary-employer, or the payroll currency of the employee-recipient, should be considered an equity award assuming all other criteria for equity classification are met. This guidance was effective for the first quarter of 2011. Implementation of this guidance did not have a material impact on the Company’s consolidated financial statements as it is consistent with the policies and practices currently applied by the Company in accounting for share-based-payment awards.
In January 2010, the FASB issued new guidance for improving disclosures about fair value measurements. This guidance requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, for Level 3 fair value measurements, a reporting entity should present separately information about purchases, sales, issuances and settlements. This guidance was effective for interim and annual reporting periods ending on or after December 15, 2009 except for disclosures for Level 3 fair value measurements which was effective for the first quarter of 2011. These new disclosures have been included in the Notes to the Company’s consolidated financial statements, as appropriate.
Future Adoption of New Accounting Pronouncements
In February 2013, the FASB issued new guidance to improve the reporting of reclassifications out of accumulated other comprehensive income (loss) (“AOCI”). The amendments in this guidance require an entity to report the effect of significant reclassifications out of AOCI on the respective line items in the statement of earnings (loss) if the amount being reclassified is required to be reclassified in its entirety to net earnings (loss). For other amounts that are not required to be reclassified in their entirety to net earnings in the same reporting period, an entity is required to cross-reference other disclosures that provide additional detail about those amounts. The guidance requires disclosure of reclassification information either in the notes or the face of the financial statements provided the information is presented in one location. This guidance is effective for interim and annual periods beginning after December 31, 2012. Management does not expect that implementation of this guidance will have a material impact on the Company’s consolidated financial statements.
In July 2012, the FASB issued new guidance on testing indefinite-lived intangible assets for impairment. The guidance is intended to reduce the cost and complexity of the annual indefinite-lived intangible assets impairment test by
F-13
providing entities with the option of performing a “qualitative” assessment to determine whether further impairment testing is necessary. The guidance is effective for annual and interim indefinite-lived intangible assets impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted for certain companies. Management does not expect that implementation of this guidance will have a material impact on the Company’s consolidated financial statements.
In December 2011, the FASB issued new and enhanced disclosures about offsetting (netting) of financial instruments and derivatives, including repurchase/reverse repurchase agreements and securities lending/borrowing arrangements, to converge with those required by IFRS. The disclosures require presentation in tabular format of gross and net information about assets and liabilities that either are offset (presented net) on the balance sheet or are subject to master netting agreements or similar arrangements providing rights of setoff, such as global master repurchase, securities lending, and derivative clearing agreements, irrespective of whether the assets and liabilities are offset. Financial instruments subject only to collateral agreements are excluded from the scope of these requirements, however, the tabular disclosures are required to include the fair values of financial collateral, including cash, related to master netting agreements or similar arrangements.In January 2013, the FASB issued new guidance limiting the scope of the new balance sheet offsetting disclosures to derivatives, repurchase agreements, and securities lending transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement. This guidance is effective for interim and annual periods beginning after January 1, 2013 and is to be applied retrospectively to all comparative prior periods presented. Management does not expect that implementation of this guidance will have a material impact on the Company’s consolidated financial statements.
Closed Block
As a result of demutualization, the Closed Block was established in 1992 for the benefit of certain individual participating policies that were in force on that date. Assets, liabilities and earnings of the Closed Block are specifically identified to support its participating policyholders.
Assets allocated to the Closed Block inure solely to the benefit of the Closed Block policyholders and will not revert to the benefit of AXA Equitable. No reallocation, transfer, borrowing or lending of assets can be made between the Closed Block and other portions of AXA Equitable’s General Account, any of its Separate Accounts or any affiliate of AXA Equitable without the approval of the Superintendent of The New York State Department of Financial Services, Life Bureau (the “NYSDFS”), formerly the New York State Insurance Department. Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the General Account.
The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in AOCI) represents the expected maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. As of January 1, 2001, the Company has developed an actuarial calculation of the expected timing of the Closed Block’s earnings.
If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.
Many expenses related to Closed Block operations, including amortization of deferred policy acquisition costs (“DAC”), are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block.
F-14
Investments
The carrying values of fixed maturities classified as available-for-sale (“AFS”) are reported at fair value. Changes in fair value are reported in comprehensive income. The amortized cost of fixed maturities is adjusted for impairments in value deemed to be other than temporary which are recognized in Investment gains (losses), net. The redeemable preferred stock investments that are reported in fixed maturities include real estate investment trusts (“REIT”), perpetual preferred stock, and redeemable preferred stock. These securities may not have a stated maturity, may not be cumulative and do not provide for mandatory redemption by the issuer.
The Company determines the fair values of fixed maturities and equity securities based upon quoted prices in active markets, when available, or through the use of alternative approaches when market quotes are not readily accessible or available. These alternative approaches include matrix or model pricing and use of independent pricing services, each supported by reference to principal market trades or other observable market assumptions for similar securities. More specifically, the matrix pricing approach to fair value is a discounted cash flow methodology that incorporates market interest rates commensurate with the credit quality and duration of the investment.
The Company’s management, with the assistance of its investment advisors, monitors the investment performance of its portfolio and reviews AFS securities with unrealized losses for other-than-temporary impairments (“OTTI”). Integral to this review is an assessment made each quarter, on a security-by-security basis, by the Company’s Investments Under Surveillance (“IUS”) Committee, of various indicators of credit deterioration to determine whether the investment security is expected to recover. This assessment includes, but is not limited to, consideration of the duration and severity of the unrealized loss, failure, if any, of the issuer of the security to make scheduled payments, actions taken by rating agencies, adverse conditions specifically related to the security or sector, the financial strength, liquidity, and continued viability of the issuer and, for equity securities only, the intent and ability to hold the investment until recovery, and results in identification of specific securities for which OTTI is recognized.
If there is no intent to sell or likely requirement to dispose of the fixed maturity security before its recovery, only the credit loss component of any resulting OTTI is recognized in earnings (loss) and the remainder of the fair value loss is recognized in OCI. The amount of credit loss is the shortfall of the present value of the cash flows expected to be collected as compared to the amortized cost basis of the security. The present value is calculated by discounting management’s best estimate of projected future cash flows at the effective interest rate implicit in the debt security prior to impairment. Projections of future cash flows are based on assumptions regarding probability of default and estimates regarding the amount and timing of recoveries. These assumptions and estimates require use of management judgment and consider internal credit analyses as well as market observable data relevant to the collectability of the security. For mortgage- and asset-backed securities, projected future cash flows also include assumptions regarding prepayments and underlying collateral value.
Real estate held for the production of income, including real estate acquired in satisfaction of debt, is stated at depreciated cost less valuation allowances. At the date of foreclosure (including in-substance foreclosure), real estate acquired in satisfaction of debt is valued at estimated fair value. Impaired real estate is written down to fair value with the impairment loss being included in Investment gains (losses), net.
Depreciation of real estate held for production of income is computed using the straight-line method over the estimated useful lives of the properties, which generally range from 40 to 50 years.
Policy loans are stated at unpaid principal balances.
Partnerships, investment companies and joint venture interests that the Company has control of and has a majority economic interest in (that is, greater than 50% of the economic return generated by the entity) or those that meet the requirements for consolidation under accounting guidance for consolidation of VIEs are consolidated. Those that the Company does not have control of and does not have a majority economic interest in and those that do not meet the VIE requirements for consolidation are reported on the equity basis of accounting and are reported either with equity real estate or other equity investments, as appropriate. The Company records its interests in certain of these partnerships on a one quarter lag.
F-15
Equity securities, which include common stock, and non-redeemable preferred stock classified as AFS securities, are carried at fair value and are included in other equity investments with changes in fair value reported in OCI.
Trading securities, which include equity securities and fixed maturities, are carried at fair value based on quoted market prices, with unrealized gains (losses) reported in Net earnings (loss).
Corporate owned life insurance (“COLI”) has been purchased by the Company on the lives of certain key employees; certain subsidiaries of the Company are named as beneficiaries under these policies. COLI is carried at the cash surrender value of the policies. At December 31, 2012 and 2011, the carrying value of COLI was $715 million and $737 million, respectively, and is reported in Other invested assets in the consolidated balance sheets.
Short-term investments are reported at amortized cost that approximates fair value and are included in Other invested assets.
Cash and cash equivalents includes cash on hand, demand deposits, money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less. Due to the short-term nature of these investments, the recorded value is deemed to approximate fair value.
All securities owned, including United States government and agency securities, mortgage-backed securities and futures and forwards transactions, are reported in the consolidated financial statements on a trade date basis.
Valuation Allowances for Mortgage Loans:
For commercial and agricultural loans, an allowance for credit loss is typically recommended when management believes it is probable that principal and interest will not be collected according to the contractual terms. Factors that influence management’s judgment in determining allowance for credit losses include the following:
| | • | | Loan-to-value ratio – Derived from current loan balance divided by the fair market value of the property. An allowance for credit loss is typically recommended when the loan-to-value ratio is in excess of 100%. In the case where the loan-to-value is in excess of 100%, the allowance for credit loss is derived by taking the difference between the fair market value (less cost of sale) and the current loan balance. |
| | • | | Debt service coverage ratio – Derived from actual net operating income divided by annual debt service. If the ratio is below 1.0x, then the income from the property does not support the debt. |
| | • | | Occupancy – Criteria varies by property type but low or below market occupancy is an indicator of sub-par property performance. |
| | • | | Lease expirations – The percentage of leases expiring in the upcoming 12 to 36 months are monitored as a decline in rent and/or occupancy may negatively impact the debt service coverage ratio. In the case of single-tenant properties or properties with large tenant exposure, the lease expiration is a material risk factor. |
| | • | | Maturity – Loans that are not fully amortizing and have upcoming maturities within the next 12 to 24 months are monitored in conjunction with the capital markets to determine the borrower’s ability to refinance the debt and/or pay off the balloon balance. |
| | • | | Borrower/tenant related issues – Financial concerns, potential bankruptcy, or words or actions that indicate imminent default or abandonment of property. |
| | • | | Payment status – current vs. delinquent – A history of delinquent payments may be a cause for concern. |
| | • | | Property condition – Significant deferred maintenance observed during Lender’s annual site inspections. |
| | • | | Other – Any other factors such as current economic conditions may call into question the performance of the loan. |
F-16
Mortgage loans on real estate are stated at unpaid principal balances, net of unamortized discounts and valuation allowances. Valuation allowances are based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or on its collateral value if the loan is collateral dependent. However, if foreclosure is or becomes probable, the collateral value measurement method is used.
Mortgage loans also are individually evaluated quarterly by the IUS Committee for impairment, including an assessment of related collateral value. Commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, are identified as problem mortgages. Based on its monthly monitoring of mortgages, a class of potential problem mortgages are also identified, consisting of mortgage loans not currently classified as problems but for which management has doubts as to the ability of the borrower to comply with the present loan payment terms and which may result in the loan becoming a problem or being restructured. The decision whether to classify a performing mortgage loan as a potential problem involves significant subjective judgments by management as to likely future industry conditions and developments with respect to the borrower or the individual mortgaged property.
For problem mortgage loans a valuation allowance is established to provide for the risk of credit losses inherent in the lending process. The allowance includes loan specific reserves for loans determined to be non-performing as a result of the loan review process. A non-performing loan is defined as a loan for which it is probable that amounts due according to the contractual terms of the loan agreement will not be collected. The loan specific portion of the loss allowance is based on AXA Financial Group’s assessment as to ultimate collectability of loan principal and interest. Valuation allowances for a non-performing loan are recorded based on the present value of expected future cash flows discounted at the loan’s effective interest rate or based on the fair value of the collateral if the loan is collateral dependent. The valuation allowance for mortgage loans can increase or decrease from period to period based on such factors.
Impaired mortgage loans without provision for losses are loans where the fair value of the collateral or the net present value of the expected future cash flows related to the loan equals or exceeds the recorded investment. Interest income earned on loans where the collateral value is used to measure impairment is recorded on a cash basis. Interest income on loans where the present value method is used to measure impairment is accrued on the net carrying value amount of the loan at the interest rate used to discount the cash flows. Changes in the present value attributable to changes in the amount or timing of expected cash flows are reported as investment gains or losses.
Mortgage loans on real estate are placed on nonaccrual status once management believes the collection of accrued interest is doubtful. Once mortgage loans on real estate are classified as nonaccrual loans, interest income is recognized under the cash basis of accounting and the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan on real estate has been restructured to where the collection of interest is considered likely. At December 31, 2012 and 2011, the carrying values of commercial and agricultural mortgage loans on real estate that had been classified as nonaccrual loans were $0 million and $52 million for commercial and $2 million and $5 million for agricultural, respectively.
Troubled Debt Restructuring
When a loan modification is determined to be a troubled debt restructuring, the impairment of the loan is re-measured by discounting the expected cash flows to be received based on the modified terms using the loan’s original effective yield, and the allowance for loss is adjusted accordingly. Subsequent to the modification, income is recognized prospectively based on the modified terms of the loans. Additionally, the loan continues to be subject to the credit review process noted above.
Derivatives
The Company has issued and continues to offer certain variable annuity products with guaranteed minimum death benefit (“GMDB”), guaranteed minimum income benefit (“GMIB”) and guaranteed income benefit (“GIB”) features. The Company previously issued certain variable annuity products with guaranteed withdrawal benefit for life (“GWBL”), guaranteed minimum withdrawal benefit (“GMWB”) and guaranteed minimum accumulation benefit (“GMAB”) features (collectively, “GWBL and other features”). The risk associated with the GMDB feature is that under-performance of the financial markets could result in GMDB benefits, in the event of death, being higher than
F-17
what accumulated policyholders’ account balances would support. The risk associated with the GWBL and other features is that under-performance of the financial markets could result in GWBL and other features’ benefits being higher than what accumulated policyholders’ account balances would support. The Company uses derivatives for asset/liability risk management primarily to reduce exposures to equity market and interest rate fluctuations. Derivative hedging strategies are designed to reduce these risks from an economic perspective while also considering their impacts on accounting results. Operation of these hedging programs is based on models involving numerous estimates and assumptions, including, among others, mortality, lapse, surrender and withdrawal rates, election rates, market volatility and interest rates.
A wide range of derivative contracts are used in these hedging programs, including exchange traded equity, currency and interest rate futures contracts, total return and/or other equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options, that collectively are managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in the equity and fixed income markets. For GMDB, GMIB, GIB and GWBL and other features, the Company retains certain risks including basis, credit spread and some volatility risk and risk associated with actual versus expected assumptions for mortality, lapse and surrender, withdrawal and contractholder election rates, among other things. The derivative contracts are managed to correlate with changes in the value of the GMDB, GMIB, GIB and GWBL and other features that result from financial markets movements. A portion of exposure to realized interest rate volatility was hedged through December 31, 2012 using swaptions and a portion of exposure to realized equity volatility is hedged using equity options and variance swaps. The Company has purchased reinsurance contracts to mitigate the risks associated with GMDB features and the impact of potential market fluctuations on future policyholder elections of GMIB features contained in certain annuity contracts issued by the Company.
At the end of 2012, AXA Equitable adjusted its long term view of interest rates and persistency and proceeded to reduce the size of its GMIB and GMDB interest rate hedges, changed their maturity and began to fully unwind its swaption position hedging exposure to interest rate volatility. AXA Equitable completed the full unwind in early 2013.
GIB and GWBL and other features and reinsurance contract asset covering GMIB exposure are considered derivatives for accounting purposes and, therefore, are reported in the balance sheet at their fair value. None of the derivatives used in these programs were designated as qualifying hedges under U.S. GAAP accounting guidance for derivatives and hedging. All gains (losses) on derivatives are reported in Net investment income (loss) in the consolidated statements of earnings (loss) except those resulting from changes in the fair values of the GIB and GWBL and other features which are reported in Policyholder’s benefits and the GMIB reinsurance contract asset are reported on a separate line in the consolidated statement of earnings, respectively.
In addition to the Company’s existing programs, in first quarter 2012, the Company entered into interest rate swaps related to the Company’s GMDB and GMIB block of business issued prior to 2001 to manage exposure to interest rate fluctuations.
The Company periodically, including during 2012, has had in place a hedge program to partially protect against declining interest rates with respect to a part of its projected variable annuity sales.
The Company also uses equity and commodity index options to hedge its exposure to equity linked and commodity indexed crediting rates on annuity and life products.
Margins or “spreads” on interest-sensitive life insurance and annuity contracts are affected by interest rate fluctuations as the yield on portfolio investments, primarily fixed maturities, are intended to support required payments under these contracts, including interest rates credited to their policy and contract holders. The Company currently uses swaptions to reduce the risk associated with minimum crediting rate guarantees on these interest-sensitive contracts.
The Company is exposed to equity market fluctuations through investments in Separate Accounts and has equity future derivative contracts specifically to minimize such risk.
In second quarter 2012, the Company entered into futures and total return swaps on equity indices to mitigate the impact on net earnings from Separate Account fee revenue fluctuations due to movements in the equity markets. These positions covered fees expected to be earned through December 31, 2012 of the current year from the Company’s Separate Account products. As of December 31, 2012, all positions had matured.
F-18
At December 31, 2012, the Company had open exchange-traded futures positions on the S&P 500, Russell 1000, NASDAQ 100 and Emerging Market indices, having initial margin requirements of $270 million. At December 31, 2012, the Company had open exchange-traded futures positions on the 2-year, 5-year, 10-year, 30-year U.S. Treasury Notes and Eurodollars having initial margin requirements of $100 million. At that same date, the Company had open exchange-traded future positions on the Euro Stoxx, FTSE 100, European, Australasia, Far East (“EAFE”) and Topix indices as well as corresponding currency futures on the Euro/U.S. dollar, Yen/U.S. dollar and Pound/U.S. dollar, having initial margin requirements of $7 million. All exchange-traded futures contracts are net cash settled daily. All outstanding equity-based and treasury futures contracts at December 31, 2012 are exchange-traded and net settled daily in cash.
Although notional amount is the most commonly used measure of volume in the derivatives market, it is not used as a measure of credit risk. Generally, the current credit exposure of the Company’s derivative contracts is limited to the net positive estimated fair value of derivative contracts at the reporting date after taking into consideration the existence of netting agreements and any collateral received pursuant to credit support annexes. A derivative with positive value (a derivative asset) indicates existence of credit risk because the counterparty would owe money to the Company if the contract were closed. Alternatively, a derivative contract with negative value (a derivative liability) indicates the Company would owe money to the counterparty if the contract were closed. However, generally if there is more than one derivative transaction with a single counterparty, a master netting arrangement exists with respect to derivative transactions with that counterparty to provide for net settlement.
The Company may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. The Company controls and minimizes its counterparty exposure through a credit appraisal and approval process. In addition, the Company has executed various collateral arrangements with counterparties to over-the-counter derivative transactions that require both pledging and accepting collateral either in the form of cash or high-quality securities, such as U.S. Treasury securities or those issued by government agencies. At December 31, 2012 and December 31, 2011, respectively, the Company held $1,165 million and $1,438 million in cash and securities collateral delivered by trade counterparties, representing the fair value of the related derivative agreements. This unrestricted cash collateral is reported in Cash and cash equivalents, and the obligation to return it is reported in Other liabilities in the consolidated balance sheets.
Certain of the Company’s standardized contracts for over-the-counter derivative transactions (“ISDA Master Agreements”) contain credit risk related contingent provisions related to its credit rating. In some ISDA Master Agreements, if the credit rating falls below a specified threshold, either a default or a termination event permitting the counterparty to terminate the ISDA Master Agreement would be triggered. In all agreements that provide for collateralization, various levels of collateralization of net liability positions are applicable, depending upon the credit rating of the counterparty. The aggregate fair value of all collateralized derivative transactions that were in a liability position at December 31, 2012, and 2011, respectively, were $5 million and $4 million, for which the Company posted collateral of $5 million in 2012, and held collateral of $3 million in 2011 in the normal operation of its collateral arrangements. If the investment grade related contingent features had been triggered on December 31, 2012, the Company would not have been required to post material collateral to its counterparties.
Net Investment Income (Loss), Investment Gains (Losses), Net and Unrealized Investment Gains (Losses)
Net investment income (loss) and realized investment gains (losses), net (together “investment results”) related to certain participating group annuity contracts which are passed through to the contractholders are offset by amounts reflected as interest credited to policyholders’ account balances.
Realized investment gains (losses) are determined by identification with the specific asset and are presented as a component of revenue. Changes in the valuation allowances are included in Investment gains (losses), net.
Realized and unrealized holding gains (losses) on trading securities are reflected in Net investment income (loss).
F-19
Unrealized investment gains (losses) on fixed maturities and equity securities designated as AFS held by the Company are accounted for as a separate component of AOCI, net of related deferred income taxes, amounts attributable to certain pension operations, Closed Blocks’ policyholders dividend obligation, DAC related to universal life (“UL”) policies, investment-type products and participating traditional life policies.
Changes in unrealized gains (losses) reflect changes in fair value of only those fixed maturities and equity securities classified as AFS and do not reflect any change in fair value of policyholders’ account balances and future policy benefits.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance established a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, and identifies three levels of inputs that may be used to measure fair value:
| | |
Level 1 | | Unadjusted quoted prices for identical instruments in active markets. Level 1 fair values generally are supported by market transactions that occur with sufficient frequency and volume to provide pricing information on an ongoing basis. |
| |
Level 2 | | Observable inputs other than Level 1 prices, such as quoted prices for similar instruments, quoted prices in markets that are not active, and inputs to model-derived valuations that are directly observable or can be corroborated by observable market data. |
| |
Level 3 | | Unobservable inputs supported by little or no market activity and often requiring significant management judgment or estimation, such as an entity’s own assumptions about the cash flows or other significant components of value that market participants would use in pricing the asset or liability. |
The Company defines fair value as the unadjusted quoted market prices for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are measured using present value or other valuation techniques. The fair value determinations are made at a specific point in time, based on available market information and judgments about the financial instrument, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such adjustments do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value cannot be substantiated by direct comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument.
Management is responsible for the determination of the value of investments carried at fair value and the supporting methodologies and assumptions. Under the terms of various service agreements, the Company often utilizes independent valuation service providers to gather, analyze, and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual securities. These independent valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested. As further described below with respect to specific asset classes, these inputs include, but are not limited to, market prices for recent trades and transactions in comparable securities, benchmark yields, interest rate yield curves, credit spreads, quoted prices for similar securities, and other market-observable information, as applicable. Specific attributes of the security being valued also are considered, including its term, interest rate, credit rating, industry sector, and when applicable, collateral quality and other security- or issuer-specific information. When insufficient market observable information is available upon which to measure fair value, the Company either will request brokers knowledgeable about these securities to provide a non-binding quote or will employ internal valuation models. Fair values received from independent valuation service providers and brokers and those internally modeled or otherwise estimated are assessed for reasonableness.
F-20
At December 31, 2012 and 2011, respectively, the fair value of public fixed maturities is approximately $25,591 million and $24,534 million or approximately 19.2% and 19.8% of the Company’s total assets measured at fair value on a recurring basis (excluding GMIB reinsurance contracts and segregated securities measured at fair value on a recurring basis). The fair values of the Company’s public fixed maturity securities are generally based on prices obtained from independent valuation service providers and for which the Company maintains a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. Although each security generally is priced by multiple independent valuation service providers, the Company ultimately uses the price received from the independent valuation service provider highest in the vendor hierarchy based on the respective asset type, with limited exception. To validate reasonableness, prices also are internally reviewed by those with relevant expertise through comparison with directly observed recent market trades. Consistent with the fair value hierarchy, public fixed maturity securities validated in this manner generally are reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. If the pricing information received from independent valuation service providers is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process in accordance with the terms of the respective independent valuation service provider agreement. If as a result it is determined that the independent valuation service provider is able to reprice the security in a manner agreed as more consistent with current market observations, the security remains within Level 2. Alternatively, a Level 3 classification may result if the pricing information then is sourced from another vendor, non-binding broker quotes, or internally-developed valuations for which the Company’s own assumptions about market-participant inputs would be used in pricing the security.
At December 31, 2012 and 2011, respectively, the fair value of private fixed maturities is approximately $8,016 million and $7,459 million or approximately 6.0% and 6.0% of the Company’s total assets measured at fair value on a recurring basis. The fair values of the Company’s private fixed maturities, which primarily are comprised of investments in private placement securities generally are determined using a discounted cash flow model. In certain cases, these models use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may also incorporate unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the asset. To the extent management determines that such unobservable inputs are significant to the fair value measurement of a security, a Level 3 classification generally is made.
As disclosed in Note 3, at December 31, 2012 and 2011, respectively, the net fair value of freestanding derivative positions is approximately $1,163 million and $1,536 million or approximately 92.2% and 92.1% of Other invested assets measured at fair value on a recurring basis. The fair values of the Company’s derivative positions are generally based on prices obtained either from independent valuation service providers or derived by applying market inputs from recognized vendors into industry standard pricing models. The majority of these derivative contracts are traded in the Over-The-Counter (“OTC”) derivative market and are classified in Level 2. The fair values of derivative assets and liabilities traded in the OTC market are determined using quantitative models that require use of the contractual terms of the derivative instruments and multiple market inputs, including interest rates, prices, and indices to generate continuous yield or pricing curves and volatility factors, which then are applied to value the positions. The predominance of market inputs is actively quoted and can be validated through external sources or reliably interpolated if less observable. If the pricing information received from independent valuation service providers is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process in accordance with the terms of the respective independent valuation service provider agreement. If as a result it is determined that the independent valuation service provider is able to reprice the derivative instrument in a manner agreed as more consistent with current market observations, the position remains within Level 2.
The credit risk of the counterparty and of the Company are considered in determining the fair values of all OTC derivative asset and liability positions, respectively, after taking into account the effects of master netting agreements and collateral arrangements. Each reporting period, the Company values its derivative positions using the standard swap curve and evaluates whether to adjust the embedded credit spread to reflect changes in counterparty or its own credit standing. As a result, the Company reduced the fair value of its OTC derivative asset exposures by $2 million at December 31, 2012 to recognize incremental counterparty non-performance risk. The unadjusted swap curve was determined to be reflective of the non-performance risk of the Company for purpose of determining the fair value of its OTC liability positions at December 31, 2012.
F-21
At December 31, 2012 and 2011, respectively, investments classified as Level 1 comprise approximately 70.3% and 70.2% of assets measured at fair value on a recurring basis and primarily include redeemable preferred stock, trading securities, cash equivalents and Separate Accounts assets. Fair value measurements classified as Level 1 include exchange-traded prices of fixed maturities, equity securities and derivative contracts, and net asset values for transacting subscriptions and redemptions of mutual fund shares held by Separate Accounts. Cash equivalents classified as Level 1 include money market accounts, overnight commercial paper and highly liquid debt instruments purchased with an original maturity of three months or less, and are carried at cost as a proxy for fair value measurement due to their short-term nature.
At December 31, 2012 and 2011, respectively, investments classified as Level 2 comprise approximately 28.4% and 28.2% of assets measured at fair value on a recurring basis and primarily include U.S. government and agency securities and certain corporate debt securities, such as public and private fixed maturities. As market quotes generally are not readily available or accessible for these securities, their fair value measures are determined utilizing relevant information generated by market transactions involving comparable securities and often are based on model pricing techniques that effectively discount prospective cash flows to present value using appropriate sector-adjusted credit spreads commensurate with the security’s duration, also taking into consideration issuer-specific credit quality and liquidity. Segregated securities classified as Level 2 are U.S. Treasury Bills segregated by AllianceBernstein in a special reserve bank custody account for the exclusive benefit of brokerage customers, as required by Rule 15c3-3 of the Exchange Act and for which fair values are based on quoted yields in secondary markets.
Observable inputs generally used to measure the fair value of securities classified as Level 2 include benchmark yields, reported secondary trades, issuer spreads, benchmark securities and other reference data. Additional observable inputs are used when available, and as may be appropriate, for certain security types, such as prepayment, default, and collateral information for the purpose of measuring the fair value of mortgage- and asset-backed securities. At December 31, 2012 and 2011, respectively, approximately $1,966 million and $1,718 million of AAA-rated mortgage- and asset-backed securities are classified as Level 2 for which the observability of market inputs to their pricing models is supported by sufficient, albeit more recently contracted, market activity in these sectors.
At December 31, 2012 and 2011, respectively, investments classified as Level 3 comprise approximately 1.3% and 1.6% of assets measured at fair value on a recurring basis and primarily include corporate debt securities, such as private fixed maturities. Determinations to classify fair value measures within Level 3 of the valuation hierarchy generally are based upon the significance of the unobservable factors to the overall fair value measurement. Included in the Level 3 classification at December 31, 2012 and 2011, respectively, were approximately $222 million and $347 million of fixed maturities with indicative pricing obtained from brokers that otherwise could not be corroborated to market observable data. The Company applies various due-diligence procedures, as considered appropriate, to validate these non-binding broker quotes for reasonableness, based on its understanding of the markets, including use of internally-developed assumptions about inputs a market participant would use to price the security. In addition, approximately $1,021 million and $1,088 million of mortgage- and asset-backed securities, including commercial mortgage-backed securities (“CMBS”), are classified as Level 3 at December 31, 2012 and 2011, respectively. At December 31, 2012, the Company continued to apply a risk-adjusted present value technique to estimate the fair value of CMBS securities below the senior AAA tranche due to ongoing insufficient frequency and volume of observable trading activity in these securities. In applying this valuation methodology, the Company adjusted the projected cash flows of these securities for origination year, default metrics, and level of subordination, with the objective of maximizing observable inputs, and weighted the result with a 10% attribution to pricing sourced from a third party service whose process placed significant reliance on market trading activity.
The Company also issues certain benefits on its variable annuity products that are accounted for as derivatives and are also considered Level 3. The GMWB feature allows the policyholder to withdraw at minimum, over the life of the contract, an amount based on the contract’s benefit base. The GWBL feature allows the policyholder to withdraw, each year for the life of the contract, a specified annual percentage of an amount based on the contract’s benefit base. The GMAB feature increases the contract account value at the end of a specified period to a GMAB base. The GIB feature provides a lifetime annuity based on predetermined annuity purchase rates if and when the contract account value is depleted. This lifetime annuity is based on predetermined annuity purchase rates applied to a GIB base.
Level 3 also includes the GMIB reinsurance contract asset which is accounted for as derivative contracts. The GMIB reinsurance contract asset’s fair value reflects the present value of reinsurance premiums and recoveries and risk
F-22
margins over a range of market consistent economic scenarios while the GIB and GWBL and other features related liability reflects the present value of expected future payments (benefits) less fees, adjusted for risk margins, attributable to the GIB and GWBL and other features over a range of market-consistent economic scenarios. The valuations of both the GMIB reinsurance contract asset and GIB and GWBL and other feature’s liability incorporate significant non-observable assumptions related to policyholder behavior, risk margins and projections of equity Separate Account funds consistent with the S&P 500 Index. The credit risks of the counterparty and of the Company are considered in determining the fair values of its GMIB reinsurance contract asset and GIB and GWBL and other features’ liability positions, respectively, after taking into account the effects of collateral arrangements. Incremental adjustment to the swap curve, adjusted for non-performance risk, is made to the resulting fair values of the GMIB reinsurance contract asset to reflect change in the claims-paying ratings of counterparties to the reinsurance treaties. After giving consideration to collateral arrangements, the Company reduced the fair value of its GMIB reinsurance contract asset by $447 million and $688 million at December 31, 2012 and 2011, respectively, to recognize incremental counterparty non-performance risk. The unadjusted swap curve was determined to be reflective of the AA quality claims-paying rating of AXA Equitable, therefore, no incremental adjustment was made for non-performance risk for purpose of determining the fair value of the GIB and GWBL and other features’ liability embedded derivative at December 31, 2012. Equity and fixed income volatilities are combined, with weighting based on the current fund distribution, to produce an overall volatility assumption. Scenarios are developed that value an at the money option at a price consistent with the overall volatility.
Fair values for commercial and agricultural mortgage loans on real estate are measured by discounting future contractual cash flows to be received on the mortgage loan using interest rates at which loans with similar characteristics and credit quality would be made. The discount rate is derived from taking the appropriate U.S. Treasury rate with a like term to the remaining term of the loan and adding a spread reflective of the risk premium associated with the specific loan. Fair values for mortgage loans anticipated to be foreclosed and problem mortgage loans are limited to the fair value of the underlying collateral, if lower.
Other limited partnership interests and other equity investments, including interests in investment companies, are accounted for under the equity method and for which the carrying value provides a reasonable estimate of fair value as the underlying investments of these partnerships are valued at estimated fair value.
Fair values for the Company’s long-term debt are determined from quotations provided by brokers knowledgeable about these securities and internally assessed for reasonableness. The fair values of the Company’s borrowing and lending arrangements with AXA affiliated entities are determined in the same manner as for such transactions with third parties, including matrix pricing models for debt securities and discounted cash flow analysis for mortgage loans.
The fair values for the Company’s association plans contracts, supplementary contracts not involving life contingencies (“SCNILC”), deferred annuities and certain annuities, which are included in Policyholder’s account balances are estimated using projected cash flows discounted at rates reflecting current market rates. Significant unobservable inputs reflected in the cash flows include lapse rates and withdrawal rates. Certain other products such as Access Accounts are held at book value.
Recognition of Insurance Income and Related Expenses
Premiums from UL and investment-type contracts are reported as deposits to policyholders’ account balances. Revenues from these contracts consist of fees assessed during the period against policyholders’ account balances for mortality charges, policy administration charges and surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policyholders’ account balances.
Premiums from participating and non-participating traditional life and annuity policies with life contingencies generally are recognized in income when due. Benefits and expenses are matched with such income so as to result in the recognition of profits over the life of the contracts. This match is accomplished by means of the provision for liabilities for future policy benefits and the deferral and subsequent amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium payments due over a significantly shorter period than the total period over which benefits are provided, premiums are recorded as revenue when due with any excess profit deferred and recognized in income in a constant relationship to insurance in-force or, for annuities, the amount of expected future benefit payments.
F-23
Premiums from individual health contracts are recognized as income over the period to which the premiums relate in proportion to the amount of insurance protection provided.
DAC
Acquisition costs that vary with and are primarily related to the acquisition of new and renewal insurance business, reflecting incremental direct costs of contract acquisition with independent third parties or employees that are essential to the contract transaction, as well as the portion of employee compensation, including payroll fringe benefits and other costs directly related to underwriting, policy issuance and processing, medical inspection, and contract selling for successfully negotiated contracts including commissions, underwriting, agency and policy issue expenses, are deferred. DAC is subject to recoverability testing at the time of policy issue and loss recognition testing at the end of each accounting period.
After the initial establishment of reserves, premium deficiency and loss recognition tests are performed each period end using best estimate assumptions as of the testing date without provisions for adverse deviation. When the liabilities for future policy benefits plus the present value of expected future gross premiums for the aggregate product group are insufficient to provide for expected future policy benefits and expenses for that line of business (i.e., reserves net of any DAC asset), DAC would first be written off and thereafter, if required, a premium deficiency reserve would be established by a charge to earnings.
In accordance with the guidance for the accounting and reporting by insurance enterprises for certain long-duration contracts and participating contracts and for realized gains and losses from the sale of investments, current and expected future profit margins for products covered by this guidance are examined regularly in determining the amortization of DAC. Due primarily to the significant decline in Separate Accounts balances during 2008 and a change in the estimate of average gross short-term annual return on Separate Accounts balances to 9.0%, future estimated gross profits at December 31, 2008 for certain issue years for the Accumulator® products were expected to be negative as the increases in the fair values of derivatives used to hedge certain risks related to these products would be recognized in current earnings while the related reserves do not fully and immediately reflect the impact of equity and interest market fluctuations. As required under U.S. GAAP, for those issue years with future estimated negative gross profits, the DAC amortization method was permanently changed in fourth quarter 2008 from one based on estimated gross profits to one based on estimated assessments for the Accumulator® products, subject to loss recognition testing. In second quarter 2011, the DAC amortization method was changed to one based on estimated assessments for all issue years for the Accumulator® products due to continued volatility of margins and the continued emergence of periods of negative margins.
DAC associated with UL products and investment-type products, other than Accumulator® products is amortized over the expected total life of the contract group as a constant percentage of estimated gross profits arising principally from investment results, Separate Account fees, mortality and expense margins and surrender charges based on historical and anticipated future experience, updated at the end of each accounting period. When estimated gross profits are expected to be negative for multiple years of a contract life, DAC is amortized using the present value of estimated assessments. The effect on the amortization of DAC of revisions to estimated gross profits or assessments is reflected in earnings (loss) in the period such estimated gross profits or assessments are revised. A decrease in expected gross profits or assessments would accelerate DAC amortization. Conversely, an increase in expected gross profits or assessments would slow DAC amortization. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date.
A significant assumption in the amortization of DAC on variable annuities and, to a lesser extent, on variable and interest-sensitive life insurance relates to projected future Separate Account performance. Management sets estimated future gross profit or assessment assumptions related to Separate Account performance using a long-term view of expected average market returns by applying a reversion to the mean approach, a commonly used industry practice. This future return approach influences the projection of fees earned, as well as other sources of estimated gross profits. Returns that are higher than expectations for a given period produce higher than expected account balances, increase the fees earned resulting in higher expected future gross profits and lower DAC amortization for the period. The opposite occurs when returns are lower than expected.
F-24
In applying this approach to develop estimates of future returns, it is assumed that the market will return to an average gross long-term return estimate, developed with reference to historical long-term equity market performance. Currently, the average gross long-term return estimate is measured from December 31, 2008. Management has set limitations as to maximum and minimum future rate of return assumptions, as well as a limitation on the duration of use of these maximum or minimum rates of return. At December 31, 2012, the average gross short-term and long-term annual return estimate on variable and interest-sensitive life insurance and variable annuities was 9.0% (6.71% net of product weighted average Separate Account fees), and the gross maximum and minimum short-term annual rate of return limitations were 15.0% (12.71% net of product weighted average Separate Account fees) and 0.0% (-2.29% net of product weighted average Separate Account fees), respectively. The maximum duration over which these rate limitations may be applied is 5 years. This approach will continue to be applied in future periods. These assumptions of long-term growth are subject to assessment of the reasonableness of resulting estimates of future return assumptions.
If actual market returns continue at levels that would result in assuming future market returns of 15.0% for more than 5 years in order to reach the average gross long-term return estimate, the application of the 5 year maximum duration limitation would result in an acceleration of DAC amortization. Conversely, actual market returns resulting in assumed future market returns of 0.0% for more than 5 years would result in a required deceleration of DAC amortization. At December 31, 2012, current projections of future average gross market returns assume a 0.0% annualized return for the next two quarters, which is within the maximum and minimum limitations, grading to a reversion to the mean of 9.0% in eight quarters.
In addition, projections of future mortality assumptions related to variable and interest-sensitive life products are based on a long-term average of actual experience. This assumption is updated quarterly to reflect recent experience as it emerges. Improvement of life mortality in future periods from that currently projected would result in future deceleration of DAC amortization. Conversely, deterioration of life mortality in future periods from that currently projected would result in future acceleration of DAC amortization. Generally, life mortality experience has been improving in recent years.
Other significant assumptions underlying gross profit estimates for UL and investment type products relate to contract persistency and General Account investment spread.
For participating traditional life policies (substantially all of which are in the Closed Block), DAC is amortized over the expected total life of the contract group as a constant percentage based on the present value of the estimated gross margin amounts expected to be realized over the life of the contracts using the expected investment yield. At December 31, 2012, the average rate of assumed investment yields, excluding policy loans, was 5.15% grading to 5.0% over 10 years. Estimated gross margins include anticipated premiums and investment results less claims and administrative expenses, changes in the net level premium reserve and expected annual policyholder dividends. The effect on the accumulated amortization of DAC of revisions to estimated gross margins is reflected in earnings in the period such estimated gross margins are revised. The effect on the DAC assets that would result from realization of unrealized gains (losses) is recognized with an offset to AOCI in consolidated equity as of the balance sheet date. Many of the factors that affect gross margins are included in the determination of the Company’s dividends to these policyholders. DAC adjustments related to participating traditional life policies do not create significant volatility in results of operations as the Closed Block recognizes a cumulative policyholder dividend obligation expense in “Policyholders’ dividends,” for the excess of actual cumulative earnings over expected cumulative earnings as determined at the time of demutualization.
DAC associated with non-participating traditional life policies is amortized in proportion to anticipated premiums. Assumptions as to anticipated premiums are estimated at the date of policy issue and are consistently applied during the life of the contracts. Deviations from estimated experience are reflected in earnings (loss) in the period such deviations occur. For these contracts, the amortization periods generally are for the total life of the policy. DAC related to these policies is subject to recoverability testing as part of AXA Financial Group’s premium deficiency testing. If a premium deficiency exists, DAC is reduced by the amount of the deficiency or to zero through a charge to current period earnings (loss). If the deficiency exceeds the DAC balance, the reserve for future policy benefits is increased by the excess, reflected in earnings (loss) in the period such deficiency occurs.
F-25
Contractholder Bonus Interest Credits
Contractholder bonus interest credits are offered on certain deferred annuity products in the form of either immediate bonus interest credited or enhanced interest crediting rates for a period of time. The interest crediting expense associated with these contractholder bonus interest credits is deferred and amortized over the lives of the underlying contracts in a manner consistent with the amortization of DAC. Unamortized balances are included in Other assets.
Policyholders’ Account Balances and Future Policy Benefits
Policyholders’ account balances for UL and investment-type contracts are equal to the policy account values. The policy account values represent an accumulation of gross premium payments plus credited interest less expense and mortality charges and withdrawals.
The Company has issued and continues to offer certain variable annuity products with GMDB and GIB features. The Company previously issued certain variable annuity products with GWBL and other features. The Company also issues certain variable annuity products that contain a GMIB feature which, if elected by the policyholder after a stipulated waiting period from contract issuance, guarantees a minimum lifetime annuity based on predetermined annuity purchase rates that may be in excess of what the contract account value can purchase at then-current annuity purchase rates. This minimum lifetime annuity is based on predetermined annuity purchase rates applied to a GMIB base. Reserves for GMDB and GMIB obligations are calculated on the basis of actuarial assumptions related to projected benefits and related contract charges generally over the lives of the contracts using assumptions consistent with those used in estimating gross profits for purposes of amortizing DAC. The determination of this estimated liability is based on models that involve numerous estimates and subjective judgments, including those regarding expected market rates of return and volatility, contract surrender and withdrawal rates, mortality experience, and, for contracts with the GMIB feature, GMIB election rates. Assumptions regarding Separate Account performance used for purposes of this calculation are set using a long-term view of expected average market returns by applying a reversion to the mean approach, consistent with that used for DAC amortization. There can be no assurance that actual experience will be consistent with management’s estimates.
For reinsurance contracts other than those covering GMIB exposure, reinsurance recoverable balances are calculated using methodologies and assumptions that are consistent with those used to calculate the direct liabilities.
For participating traditional life policies, future policy benefit liabilities are calculated using a net level premium method on the basis of actuarial assumptions equal to guaranteed mortality and dividend fund interest rates. The liability for annual dividends represents the accrual of annual dividends earned. Terminal dividends are accrued in proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy benefit liabilities are estimated using a net level premium method on the basis of actuarial assumptions as to mortality, persistency and interest established at policy issue. Assumptions established at policy issue as to mortality and persistency are based on the Insurance Group’s experience that, together with interest and expense assumptions, includes a margin for adverse deviation. Benefit liabilities for traditional annuities during the accumulation period are equal to accumulated contractholders’ fund balances and, after annuitization, are equal to the present value of expected future payments. Interest rates used in establishing such liabilities range from 2.25% to 10.90% for life insurance liabilities and from 1.57% to 11.25% for annuity liabilities.
Individual health benefit liabilities for active lives are estimated using the net level premium method and assumptions as to future morbidity, withdrawals and interest. Benefit liabilities for disabled lives are estimated using the present value of benefits method and experience assumptions as to claim terminations, expenses and interest. While management believes its disability income (“DI”) reserves have been calculated on a reasonable basis and are adequate, there can be no assurance reserves will be sufficient to provide for future liabilities.
When the liabilities for future policy benefits plus the present value of expected future gross premiums for a product are insufficient to provide for expected future policy benefits and expenses for that product, DAC is written off and thereafter, if required, a premium deficiency reserve is established by a charge to earnings.
F-26
Policyholders’ Dividends
The amount of policyholders’ dividends to be paid (including dividends on policies included in the Closed Block) is determined annually by AXA Equitable’s board of directors. The aggregate amount of policyholders’ dividends is related to actual interest, mortality, morbidity and expense experience for the year and judgment as to the appropriate level of statutory surplus to be retained by AXA Equitable.
At December 31, 2012, participating policies, including those in the Closed Block, represent approximately 6.2% ($22,418 million) of directly written life insurance in-force, net of amounts ceded.
Separate Accounts
Generally, Separate Accounts established under New York State Insurance Law are not chargeable with liabilities that arise from any other business of the Insurance Group. Separate Accounts assets are subject to General Account claims only to the extent Separate Accounts assets exceed Separate Accounts liabilities. Assets and liabilities of the Separate Accounts represent the net deposits and accumulated net investment earnings (loss) less fees, held primarily for the benefit of contractholders, and for which the Insurance Group does not bear the investment risk. Separate Accounts’ assets and liabilities are shown on separate lines in the consolidated balance sheets. Assets held in Separate Accounts are reported at quoted market values or, where quoted values are not readily available or accessible for these securities, their fair value measures most often are determined through the use of model pricing that effectively discounts prospective cash flows to present value using appropriate sector-adjusted credit spreads commensurate with the security’s duration, also taking into consideration issuer-specific credit quality and liquidity. The assets and liabilities of six Separate Accounts are presented and accounted for as General Account assets and liabilities due to the fact that not all of the investment performance in those Separate Accounts is passed through to policyholders. Investment assets in these Separate Accounts principally consist of fixed maturities that are classified as available for sale in the accompanying consolidated financial statements.
The investment results of Separate Accounts, including unrealized gains (losses), on which the Insurance Group does not bear the investment risk are reflected directly in Separate Accounts liabilities and are not reported in revenues in the consolidated statements of earnings (loss). For 2012, 2011 and 2010, investment results of such Separate Accounts were gains (losses) of $10,110 million, $(2,928) million and $10,117 million, respectively.
Deposits to Separate Accounts are reported as increases in Separate Accounts liabilities and are not reported in revenues. Mortality, policy administration and surrender charges on all policies including those funded by Separate Accounts are included in revenues.
The Company reports the General Account’s interests in Separate Accounts as Other equity investments in the consolidated balance sheets.
Recognition of Investment Management Revenues and Related Expenses
Commissions, fees and other income principally include the Investment Management segment’s investment advisory and service fees, distribution revenues and institutional research services revenue. Investment advisory and service base fees, generally calculated as a percentage, referred to as basis points (“BPs”), of assets under management, are recorded as revenue as the related services are performed; they include brokerage transactions charges received by Sanford C. Bernstein & Co. LLC (“SCB LLC”) for certain retail, private client and institutional investment client transactions. Certain investment advisory contracts, including those associated with hedge funds, provide for a performance-based fee, in addition to or in lieu of a base fee which is calculated as either a percentage of absolute investment results or a percentage of the investment results in excess of a stated benchmark over a specified period of time. Performance-based fees are recorded as a component of revenue at the end of each contract’s measurement period. Institutional research services revenue consists of brokerage transaction charges received by SCB LLC and Sanford C. Bernstein Limited (“SCBL”) for independent research and brokerage-related services provided to institutional investors. Brokerage transaction charges earned and related expenses are recorded on a trade date basis. Distribution revenues and shareholder servicing fees are accrued as earned.
F-27
Commissions paid to financial intermediaries in connection with the sale of shares of open-end AllianceBernstein sponsored mutual funds sold without a front-end sales charge (“back-end load shares”) are capitalized as deferred sales commissions and amortized over periods not exceeding five and one-half years for U.S. fund shares and four years for non-U.S. fund shares, the periods of time during which the deferred sales commissions are generally recovered. These commissions are recovered from distribution services fees received from those funds and from contingent deferred sales commissions (“CDSC”) received from shareholders of those funds upon the redemption of their shares. CDSC cash recoveries are recorded as reductions of unamortized deferred sales commissions when received. Effective January 31, 2009, back-end load shares are no longer offered to new investors by AllianceBernstein’s U.S. funds. Management tests the deferred sales commission asset for recoverability quarterly and determined that the balance as of December 31, 2012 was not impaired.
AllianceBernstein’s management determines recoverability by estimating undiscounted future cash flows to be realized from this asset, as compared to its recorded amount, as well as the estimated remaining life of the deferred sales commission asset over which undiscounted future cash flows are expected to be received. Undiscounted future cash flows consist of ongoing distribution services fees and CDSC. Distribution services fees are calculated as a percentage of average assets under management related to back-end load shares. CDSC are based on the lower of cost or current value, at the time of redemption, of back-end load shares redeemed and the point at which redeemed during the applicable minimum holding period under the mutual fund distribution system.
Significant assumptions utilized to estimate future average assets under management and undiscounted future cash flows from back-end load shares include expected future market levels and redemption rates. Market assumptions are selected using a long-term view of expected average market returns based on historical returns of broad market indices. Future redemption rate assumptions are determined by reference to actual redemption experience over the five-year, three-year and one-year periods and current quarterly periods ended December 31, 2012. These assumptions are updated periodically. Estimates of undiscounted future cash flows and the remaining life of the deferred sales commission asset are made from these assumptions and the aggregate undiscounted cash flows are compared to the recorded value of the deferred sales commission asset. If AllianceBernstein’s management determines in the future that the deferred sales commission asset is not recoverable, an impairment condition would exist and a loss would be measured as the amount by which the recorded amount of the asset exceeds its estimated fair value. Estimated fair value is determined using AllianceBernstein’s management’s best estimate of future cash flows discounted to a present value amount.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of acquired companies, and relates principally to the Bernstein Acquisition and purchases of AllianceBernstein units. In accordance with the guidance for Goodwill and Other Intangible Assets, goodwill is tested annually for impairment and at interim periods if events or circumstances indicate an impairment could have occurred.
Intangible assets related to the Bernstein Acquisition and purchases of AllianceBernstein Units include values assigned to contracts of businesses acquired based on their estimated fair value at the time of acquisition, less accumulated amortization. These intangible assets are generally amortized on a straight-line basis over their estimated useful life of approximately 20 years. All intangible assets are periodically reviewed for impairment as events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value exceeds fair value, additional impairment tests are performed to measure the amount of the impairment loss, if any.
Other Accounting Policies
Capitalized internal-use software is amortized on a straight-line basis over the estimated useful life of the software that ranges between one and nine years.
AXA Financial and certain of its consolidated subsidiaries and affiliates, including the Company, file a consolidated Federal income tax return. Current Federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws.
F-28
Fixed Maturities and Equity Securities
The following table provides information relating to fixed maturities and equity securities classified as AFS:
Available-for-Sale Securities by Classification
| | | | | | | | | | | | | | | | | | | | |
| | | Amortized
Cost | | | Gross
Unrealized
Gains | | | Gross
Unrealized
Losses | | | Fair
Value | | | OTTI
in AOCI(3) | |
| | | (In Millions) | |
| | | | | |
December 31, 2012: | | | | | | | | | | | | | | | | | | | | |
Fixed Maturities: | | | | | | | | | | | | | | | | | | | | |
Corporate | | $ | 20,854 | | | $ | 2,364 | | | $ | 20 | | | $ | 23,198 | | | $ | — | |
U.S. Treasury, government and agency | | | 4,664 | | | | 517 | | | | 1 | | | | 5,180 | | | | — | |
States and political subdivisions | | | 445 | | | | 85 | | | | — | | | | 530 | | | | — | |
Foreign governments | | | 454 | | | | 76 | | | | — | | | | 530 | | | | — | |
Commercial mortgage-backed | | | 1,175 | | | | 16 | | | | 291 | | | | 900 | | | | 13 | |
Residential mortgage-backed(1) | | | 1,864 | | | | 85 | | | | — | | | | 1,949 | | | | — | |
Asset-backed(2) | | | 175 | | | | 12 | | | | 5 | | | | 182 | | | | 5 | |
Redeemable preferred stock | | | 1,089 | | | | 60 | | | | 11 | | | | 1,138 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Fixed Maturities | | | 30,720 | | | | 3,215 | | | | 328 | | | | 33,607 | | | | 18 | |
| | | | | |
Equity securities | | | 23 | | | | 1 | | | | — | | | | 24 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Total at December 31, 2012 | | $ | 30,743 | | | $ | 3,216 | | | $ | 328 | | | $ | 33,631 | | | $ | 18 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
December 31, 2011: | | | | | | | | | | | | | | | | | | | | |
Fixed Maturities: | | | | | | | | | | | | | | | | | | | | |
Corporate | | $ | 21,444 | | | $ | 1,840 | | | $ | 147 | | | $ | 23,137 | | | $ | — | |
U.S. Treasury, government and agency | | | 3,598 | | | | 350 | | | | — | | | | 3,948 | | | | — | |
States and political subdivisions | | | 478 | | | | 64 | | | | 2 | | | | 540 | | | | — | |
Foreign governments | | | 461 | | | | 65 | | | | 1 | | | | 525 | | | | — | |
Commercial mortgage-backed | | | 1,306 | | | | 7 | | | | 411 | | | | 902 | | | | 22 | |
Residential mortgage-backed(1) | | | 1,556 | | | | 90 | | | | — | | | | 1,646 | | | | — | |
Asset-backed(2) | | | 260 | | | | 15 | | | | 11 | | | | 264 | | | | 6 | |
Redeemable preferred stock | | | 1,106 | | | | 38 | | | | 114 | | | | 1,030 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Fixed Maturities | | | 30,209 | | | | 2,469 | | | | 686 | | | | 31,992 | | | | 28 | |
| | | | | |
Equity securities | | | 18 | | | | 1 | | | | — | | | | 19 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Total at December 31, 2011 | | $ | 30,227 | | | $ | 2,470 | | | $ | 686 | | | $ | 32,011 | | | $ | 28 | |
| | | | | | | | | | | | | | | | | | | | |
(1) | Includes publicly traded agency pass-through securities and collateralized mortgage obligations. |
(2) | Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans. |
(3) | Amounts represent OTTI losses in AOCI, which were not included in earnings (loss) in accordance with current accounting guidance. |
F-29
At December 31, 2012 and 2011, respectively, the Company had trading fixed maturities with an amortized cost of $194 million and $172 million and carrying values of $202 million and $172 million. Gross unrealized gains on trading fixed maturities were $12 million and $4 million and gross unrealized losses were $4 million and $4 million for 2012 and 2011, respectively.
The contractual maturities of AFS fixed maturities (excluding redeemable preferred stock) at December 31, 2012 are shown in the table below. Bonds not due at a single maturity date have been included in the table in the final year of maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale Fixed Maturities
Contractual Maturities at December 31, 2012
| | | | | | | | |
| | | Amortized Cost | | | Fair Value | |
| | | (In Millions) | |
| | |
Due in one year or less | | $ | 3,018 | | | $ | 3,088 | |
Due in years two through five | | | 5,801 | | | | 6,333 | |
Due in years six through ten | | | 9,877 | | | | 11,140 | |
Due after ten years | | | 7,721 | | | | 8,877 | |
| | | | | | | | |
Subtotal | | | 26,417 | | | | 29,438 | |
Commercial mortgage-backed securities | | | 1,175 | | | | 900 | |
Residential mortgage-backed securities | | | 1,864 | | | | 1,949 | |
Asset-backed securities | | | 175 | | | | 182 | |
| | | | | | | | |
Total | | $ | 29,631 | | | $ | 32,469 | |
| | | | | | | | |
The following table shows proceeds from sales, gross gains (losses) from sales and OTTI for AFS fixed maturities during 2012, 2011 and 2010:
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Proceeds from sales | | $ | 139 | | | $ | 340 | | | $ | 840 | |
| | | | | | | | | | | | |
| | | |
Gross gains on sales | | $ | 13 | | | $ | 6 | | | $ | 28 | |
| | | | | | | | | | | | |
Gross losses on sales | | $ | (12 | ) | | $ | (9 | ) | | $ | (16 | ) |
| | | | | | | | | | | | |
| | | |
Total OTTI | | $ | (96 | ) | | $ | (36 | ) | | $ | (300 | ) |
Non-credit losses recognized in OCI | | | 2 | | | | 4 | | | | 18 | |
| | | | | | | | | | | | |
Credit losses recognized in earnings (loss) | | $ | (94 | ) | | $ | (32 | ) | | $ | (282 | ) |
| | | | | | | | | | | | |
F-30
The following table sets forth the amount of credit loss impairments on fixed maturity securities held by the Company at the dates indicated and the corresponding changes in such amounts.
Fixed Maturities – Credit Loss Impairments
| | | | | | | | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
Balances at January 1, | | $ | (332 | ) | | $ | (329 | ) |
Previously recognized impairments on securities that matured, paid, prepaid or sold | | | 54 | | | | 29 | |
Recognized impairments on securities impaired to fair value this period(1) | | | — | | | | — | |
Impairments recognized this period on securities not previously impaired | | | (62 | ) | | | (27 | ) |
Additional impairments this period on securities previously impaired | | | (32 | ) | | | (5 | ) |
Increases due to passage of time on previously recorded credit losses | | | — | | | | — | |
Accretion of previously recognized impairments due to increases in expected cash flows | | | — | | | | — | |
| | | | | | | | |
Balances at December 31, | | $ | (372 | ) | | $ | (332 | ) |
| | | | | | | | |
(1) | Represents circumstances where the Company determined in the current period that it intends to sell the security or it is more likely than not that it will be required to sell the security before recovery of the security’s amortized cost. |
Net unrealized investment gains (losses) on fixed maturities and equity securities classified as AFS are included in the consolidated balance sheets as a component of AOCI. The table below presents these amounts as of the dates indicated:
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
AFS Securities: | | | | | | | | |
Fixed maturities: | | | | | | | | |
With OTTI loss | | $ | (12 | ) | | $ | (47 | ) |
All other | | | 2,899 | | | | 1,830 | |
Equity securities | | | 1 | | | | 1 | |
| | | | | | | | |
Net Unrealized Gains (Losses) | | $ | 2,888 | | | $ | 1,784 | |
| | | | | | | | |
F-31
Changes in net unrealized investment gains (losses) recognized in AOCI include reclassification adjustments to reflect amounts realized in Net earnings (loss) for the current period that had been part of OCI in earlier periods. The tables that follow below present a rollforward of net unrealized investment gains (losses) recognized in AOCI, split between amounts related to fixed maturity securities on which an OTTI loss has been recognized, and all other:
Net Unrealized Gains (Losses) on Fixed Maturities with OTTI Losses
| | | | | | | | | | | | | | | | | | | | |
| | | Net
Unrealized
Gains
(Losses) on
Investments | | | DAC | | | Policyholders
Liabilities | | | Deferred
Income
Tax Asset
(Liability) | | | AOCI Gain
(Loss) Related
to Net
Unrealized
Investment
Gains (Losses) | |
| | | (In Millions) | |
| | | | | |
Balance, January 1, 2012 | | $ | (47 | ) | | $ | 5 | | | $ | 6 | | | $ | 12 | | | $ | (24 | ) |
Net investment gains (losses) arising during the period | | | 5 | | | | — | | | | — | | | | — | | | | 5 | |
Reclassification adjustment for OTTI losses: | | | | | | | | | | | | | | | | | | | | |
Included in Net earnings (loss) | | | 32 | | | | — | | | | — | | | | — | | | | 32 | |
Excluded from Net earnings (loss)(1) | | | (2 | ) | | | — | | | | — | | | | — | | | | (2 | ) |
Impact of net unrealized investment gains (losses) on: | | | | | | | | | | | | | | | | | | | | |
DAC | | | — | | | | (4 | ) | | | — | | | | — | | | | (4 | ) |
Deferred income taxes | | | — | | | | — | | | | — | | | | (10 | ) | | | (10 | ) |
Policyholders liabilities | | | — | | | | — | | | | (2 | ) | | | — | | | | (2 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2012 | | $ | (12 | ) | | $ | 1 | | | $ | 4 | | | $ | 2 | | | $ | (5 | ) |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Balance, January 1, 2011 | | $ | (16 | ) | | $ | 3 | | | $ | 2 | | | $ | 4 | | | $ | (7 | ) |
Net investment gains (losses) arising during the period | | | (32 | ) | | | — | | | | — | | | | — | | | | (32 | ) |
Reclassification adjustment for OTTI losses: | | | | | | | | | | | | | | | | | | | | |
Included in Net earnings (loss) | | | 5 | | | | — | | | | — | | | | — | | | | 5 | |
Excluded from Net earnings (loss)(1) | | | (4 | ) | | | — | | | | — | | | | — | | | | (4 | ) |
Impact of net unrealized investment gains (losses) on: | | | | | | | | | | | | | | | | | | | | |
DAC | | | — | | | | 2 | | | | — | | | | — | | | | 2 | |
Deferred income taxes | | | — | | | | — | | | | — | | | | 8 | | | | 8 | |
Policyholders liabilities | | | — | | | | — | | | | 4 | | | | — | | | | 4 | |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2011 | | $ | (47 | ) | | $ | 5 | | | $ | 6 | | | $ | 12 | | | $ | (24 | ) |
| | | | | | | | | | | | | | | | | | | | |
(1) | Represents “transfers in” related to the portion of OTTI losses recognized during the period that were not recognized in earnings (loss) for securities with no prior OTTI loss. |
F-32
All Other Net Unrealized Investment Gains (Losses) in AOCI
| | | | | | | | | | | | | | | | | | | | |
| | | Net
Unrealized
Gains
(Losses) on
Investments | | | DAC | | | Policyholders
Liabilities | | | Deferred
Income
Tax Asset
(Liability) | | | AOCI Gain
(Loss) Related
to Net
Unrealized
Investment
Gains (Losses) | |
| | | (In Millions) | |
| | | | | |
Balance, January 1, 2012 | | $ | 1,831 | | | $ | (207 | ) | | $ | (385 | ) | | $ | (433 | ) | | $ | 806 | |
Net investment gains (losses) arising during the period | | | 1,008 | | | | — | | | | — | | | | — | | | | 1,008 | |
Reclassification adjustment for OTTI losses: | | | | | | | | | | | | | | | | | | | | |
Included in Net earnings (loss) | | | 59 | | | | — | | | | — | | | | — | | | | 59 | |
Excluded from Net earnings (loss)(1) | | | 2 | | | | — | | | | — | | | | — | | | | 2 | |
Impact of net unrealized investment gains (losses) on: | | | | | | | | | | | | | | | | | | | | |
DAC | | | — | | | | 28 | | | | — | | | | — | | | | 28 | |
Deferred income taxes | | | — | | | | — | | | | — | | | | (308 | ) | | | (308 | ) |
Policyholders liabilities | | | — | | | | — | | | | (218 | ) | | | — | | | | (218 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2012 | | $ | 2,900 | | | $ | (179 | ) | | $ | (603 | ) | | $ | (741 | ) | | $ | 1,377 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Balance, January 1, 2011 | | $ | 889 | | | $ | (108 | ) | | $ | (121 | ) | | $ | (232 | ) | | $ | 428 | |
Net investment gains (losses) arising during the period | | | 915 | | | | — | | | | — | | | | — | | | | 915 | |
Reclassification adjustment for OTTI losses: | | | | | | | | | | | | | | | | | | | | |
Included in Net earnings (loss) | | | 23 | | | | — | | | | — | | | | — | | | | 23 | |
Excluded from Net earnings (loss)(1) | | | 4 | | | | — | | | | — | | | | — | | | | 4 | |
Impact of net unrealized investment gains (losses) on: | | | | | | | | | | | | | | | | | | | | |
DAC | | | — | | | | (99 | ) | | | — | | | | — | | | | (99 | ) |
Deferred income taxes | | | — | | | | — | | | | — | | | | (201 | ) | | | (201 | ) |
Policyholders liabilities | | | — | | | | — | | | | (264 | ) | | | — | | | | (264 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2011 | | $ | 1,831 | | | $ | (207 | ) | | $ | (385 | ) | | $ | (433 | ) | | $ | 806 | |
| | | | | | | | | | | | | | | | | | | | |
(1) | Represents “transfers out” related to the portion of OTTI losses during the period that were not recognized in earnings (loss) for securities with no prior OTTI loss. |
F-33
The following tables disclose the fair values and gross unrealized losses of the 402 issues at December 31, 2012 and the 535 issues at December 31, 2011 of fixed maturities that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position for the specified periods at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Less Than 12 Months | | | 12 Months or Longer | | | Total | |
| | | Fair Value | | | Gross
Unrealized
Losses | | | Fair Value | | | Gross
Unrealized
Losses | | | Fair Value | | | Gross
Unrealized
Losses | |
| | | (In Millions) | |
December 31, 2012: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Maturities: | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate | | $ | 562 | | | $ | (5 | ) | | $ | 208 | | | $ | (15 | ) | | $ | 770 | | | $ | (20 | ) |
U.S. Treasury, government and agency | | | 513 | | | | (1 | ) | | | — | | | | — | | | | 513 | | | | (1 | ) |
States and political subdivisions | | | 20 | | | | — | | | | — | | | | — | | | | 20 | | | | — | |
Foreign governments | | | 6 | | | | — | | | | 2 | | | | — | | | | 8 | | | | — | |
Commercial mortgage-backed | | | 7 | | | | (3 | ) | | | 805 | | | | (288 | ) | | | 812 | | | | (291 | ) |
Residential mortgage-backed | | | 27 | | | | — | | | | 1 | | | | — | | | | 28 | | | | — | |
Asset-backed | | | 8 | | | | — | | | | 36 | | | | (5 | ) | | | 44 | | | | (5 | ) |
Redeemable preferred stock | | | 143 | | | | (1 | ) | | | 327 | | | | (10 | ) | | | 470 | | | | (11 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Total | | $ | 1,286 | | | $ | (10 | ) | | $ | 1,379 | | | $ | (318 | ) | | $ | 2,665 | | | $ | (328 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
December 31, 2011: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed Maturities: | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate | | $ | 1,910 | | | $ | (96 | ) | | $ | 389 | | | $ | (51 | ) | | $ | 2,299 | | | $ | (147 | ) |
U.S. Treasury, government and agency | | | 149 | | | | — | | | | — | | | | — | | | | 149 | | | | — | |
States and political subdivisions | | | — | | | | — | | | | 18 | | | | (2 | ) | | | 18 | | | | (2 | ) |
Foreign governments | | | 30 | | | | (1 | ) | | | 5 | | | | — | | | | 35 | | | | (1 | ) |
Commercial mortgage-backed | | | 79 | | | | (27 | ) | | | 781 | | | | (384 | ) | | | 860 | | | | (411 | ) |
Residential mortgage-backed | | | — | | | | — | | | | 1 | | | | — | | | | 1 | | | | — | |
Asset-backed | | | 49 | | | | — | | | | 44 | | | | (11 | ) | | | 93 | | | | (11 | ) |
Redeemable preferred stock | | | 341 | | | | (28 | ) | | | 325 | | | | (86 | ) | | | 666 | | | | (114 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Total | | $ | 2,558 | | | $ | (152 | ) | | $ | 1,563 | | | $ | (534 | ) | | $ | 4,121 | | | $ | (686 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
The Company’s investments in fixed maturity securities do not include concentrations of credit risk of any single issuer greater than 10% of the consolidated equity of AXA Equitable, other than securities of the U.S. government, U.S. government agencies, and certain securities guaranteed by the U.S. government. The Company maintains a diversified portfolio of corporate securities across industries and issuers and does not have exposure to any single issuer in excess of 0.3% of total investments. The largest exposures to a single issuer of corporate securities held at December 31, 2012 and 2011 were $138 million and $139 million, respectively. Corporate high yield securities, consisting primarily of public high yield bonds, are classified as other than investment grade by the various rating agencies, i.e., a rating below Baa3/BBB- or the National Association of Insurance Commissioners (“NAIC”) designation of 3 (medium grade), 4 or 5 (below investment grade) or 6 (in or near default). At December 31, 2012 and 2011, respectively, approximately $2,095 million and $2,179 million, or 6.8% and 7.2%, of the $30,720 million and $30,209 million aggregate amortized cost of fixed maturities held by the Company were considered to be other than investment grade. These securities had net unrealized losses of $224 million and $455 million at December 31, 2012 and 2011, respectively.
F-34
The Company does not originate, purchase or warehouse residential mortgages and is not in the mortgage servicing business. The Company’s fixed maturity investment portfolio includes residential mortgage backed securities (“RMBS”) backed by subprime and Alt-A residential mortgages, comprised of loans made by banks or mortgage lenders to residential borrowers with lower credit ratings. The criteria used to categorize such subprime borrowers include Fair Isaac Credit Organization (“FICO”) scores, interest rates charged, debt-to-income ratios and loan-to-value ratios. Alt-A residential mortgages are mortgage loans where the risk profile falls between prime and subprime; borrowers typically have clean credit histories but the mortgage loan has an increased risk profile due to higher loan-to-value and debt-to-income ratios and/or inadequate documentation of the borrowers’ income. At December 31, 2012 and 2011, respectively, the Company owned $17 million and $23 million in RMBS backed by subprime residential mortgage loans, and $11 million and $13 million in RMBS backed by Alt-A residential mortgage loans. RMBS backed by subprime and Alt-A residential mortgages are fixed income investments supporting General Account liabilities.
At December 31, 2012, the carrying value of fixed maturities that were non-income producing for the twelve months preceding that date was $17 million.
At December 31, 2012 and 2011, respectively, the amortized cost of the Company’s trading account securities was $2,265 million and $1,014 million with respective fair values of $2,309 million and $982 million. Also at December 31, 2012 and 2011, respectively, Other equity investments included the General Account’s investment in Separate Accounts which had carrying values of $58 million and $48 million and costs of $57 million and $50 million as well as other equity securities with carrying values of $24 million and $19 million and costs of $23 million and $18 million.
In 2012, 2011 and 2010, respectively, net unrealized and realized holding gains (losses) on trading account equity securities, including earnings (losses) on the General Account’s investment in Separate Accounts, of $69 million, $(42) million and $39 million, respectively, were included in Net investment income (loss) in the consolidated statements of earnings (loss).
Mortgage Loans
The payment terms of mortgage loans on real estate may from time to time be restructured or modified. The investment in restructured mortgage loans on real estate, based on amortized cost, amounted to $126 million and $141 million at December 31, 2012 and 2011, respectively. Gross interest income on these loans included in net investment income (loss) totaled $7 million, $7 million and $0 million in 2012, 2011 and 2010, respectively. Gross interest income on restructured mortgage loans on real estate that would have been recorded in accordance with the original terms of such loans amounted to $8 million, $7 million and $0 million in 2012, 2011 and 2010, respectively.
F-35
Troubled Debt Restructurings
In 2011, one of the 2 loans shown in the table below was modified to interest only payments until October 1, 2013, at which time the loan reverts to its normal amortizing payment. In 2012, the second loan was modified retroactive to the July 1, 2012 payment and was converted to interest only payments through maturity in August 2014. Due to the nature of the modifications, short-term principal amortization relief, the modifications have no financial impact. The fair market value of the underlying real estate collateral is the primary factor in determining the allowance for credit losses and as such, modifications of loan terms typically have no direct impact on the allowance for credit losses.
Troubled Debt Restructuring – Modifications
December 31, 2012
| | | | | | | | | | | | |
| | | Number | | | Outstanding Recorded Investment | |
| | | of Loans | | | Pre-Modification | | | Post-Modification | |
| | | | | | (Dollars In Millions) | |
Troubled debt restructurings: | | | | | | | | | | | | |
Agricultural mortgage loans | | | — | | | $ | — | | | $ | — | |
Commercial mortgage loans | | | 2 | | | | 126 | | | | 126 | |
| | | | | | | | | | | | |
Total | | | 2 | | | $ | 126 | | | $ | 126 | |
| | | | | | | | | | | | |
There were no default payments on the above loans during 2012.
Valuation Allowances for Mortgage Loans:
Allowance for credit losses for mortgage loans for 2012, 2011 and 2010 are as follows:
| | | | | | | | | | | | |
| | | Commercial Mortgage Loans | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
Allowance for credit losses: | | | | |
| | | |
Beginning Balance, January 1, | | $ | 32 | | | $ | 18 | | | $ | — | |
Charge-offs | | | — | | | | — | | | | — | |
Recoveries | | | (24 | ) | | | (8 | ) | | | — | |
Provision | | | 26 | | | | 22 | | | | 18 | |
| | | | | | | | | | | | |
Ending Balance, December 31, | | $ | 34 | | | $ | 32 | | | $ | 18 | |
| | | | | | | | | | | | |
| | | |
Ending Balance, December 31,: | | | | | | | | | | | | |
Individually Evaluated for Impairment | | $ | 34 | | | $ | 32 | | | $ | 18 | |
| | | | | | | | | | | | |
| | | |
Collectively Evaluated for Impairment | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
| | | |
Loans Acquired with Deteriorated Credit Quality | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | |
There were no allowances for credit losses for agricultural mortgage loans in 2012, 2011 and 2010.
F-36
The values used in these ratio calculations were developed as part of the periodic review of the commercial and agricultural mortgage loan portfolio, which includes an evaluation of the underlying collateral value. The following tables provide information relating to the debt service coverage ratio for commercial and agricultural mortgage loans at December 31, 2012 and 2011, respectively.
Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios
December 31, 2012
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Debt Service Coverage Ratio | | | | |
Loan-to-Value Ratio:(2) | | Greater
than 2.0x | | | 1.8x to
2.0x | | | 1.5x to
1.8x | | | 1.2x to
1.5x | | | 1.0x to
1.2x | | | Less
than
1.0x | | | Total
Mortgage
Loans | |
| | | (In Millions) | |
Commercial Mortgage Loans(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
0% - 50% | | $ | 269 | | | $ | 21 | | | $ | — | | | $ | — | | | $ | 27 | | | $ | — | | | $ | 317 | |
50% - 70% | | | 370 | | | | 75 | | | | 619 | | | | 655 | | | | — | | | | — | | | | 1,719 | |
70% - 90% | | | 61 | | | | 102 | | | | 235 | | | | 445 | | | | 131 | | | | 15 | | | | 989 | |
90% plus | | | — | | | | — | | | | — | | | | 156 | | | | 89 | | | | 165 | | | | 410 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Loans | | $ | 700 | | | $ | 198 | | | $ | 854 | | | $ | 1,256 | | | $ | 247 | | | $ | 180 | | | $ | 3,435 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Agricultural Mortgage Loans(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
0% - 50% | | $ | 179 | | | $ | 84 | | | $ | 211 | | | $ | 308 | | | $ | 177 | | | $ | 49 | | | $ | 1,008 | |
50% - 70% | | | 122 | | | | 29 | | | | 136 | | | | 188 | | | | 116 | | | | 50 | | | | 641 | |
70% - 90% | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 8 | | | | 9 | |
90% plus | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Agricultural | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Loans | | $ | 301 | | | $ | 113 | | | $ | 347 | | | $ | 497 | | | $ | 293 | | | $ | 107 | | | $ | 1,658 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Total Mortgage Loans(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
0% - 50% | | $ | 448 | | | $ | 105 | | | $ | 211 | | | $ | 308 | | | $ | 204 | | | $ | 49 | | | $ | 1,325 | |
50% - 70% | | | 492 | | | | 104 | | | | 755 | | | | 843 | | | | 116 | | | | 50 | | | | 2,360 | |
70% - 90% | | | 61 | | | | 102 | | | | 235 | | | | 446 | | | | 131 | | | | 23 | | | | 998 | |
90% plus | | | — | | | | — | | | | — | | | | 156 | | | | 89 | | | | 165 | | | | 410 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Total Mortgage Loans | | $ | 1,001 | | | $ | 311 | | | $ | 1,201 | | | $ | 1,753 | | | $ | 540 | | | $ | 287 | | | $ | 5,093 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | The debt service coverage ratio is calculated using the most recently reported net operating income results from property operations divided by annual debt service. |
(2) | The loan-to-value ratio is derived from current loan balance divided by the fair market value of the property. The fair market value of the underlying commercial properties is updated annually. |
F-37
Mortgage Loans by Loan-to-Value and Debt Service Coverage Ratios
December 31, 2011
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Debt Service Coverage Ratio | | | | |
Loan-to-Value Ratio:(2) | | Greater
than 2.0x | | | 1.8x to
2.0x | | | 1.5x to
1.8x | | | 1.2x to
1.5x | | | 1.0x to
1.2x | | | Less
than
1.0x | | | Total
Mortgage
Loans | |
| | | (In Millions) | |
Commercial Mortgage Loans(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
0% - 50% | | $ | 182 | | | $ | — | | | $ | 33 | | | $ | 30 | | | $ | 31 | | | $ | — | | | $ | 276 | |
50% - 70% | | | 201 | | | | 252 | | | | 447 | | | | 271 | | | | 45 | | | | — | | | | 1,216 | |
70% - 90% | | | — | | | | 41 | | | | 280 | | | | 318 | | | | 213 | | | | — | | | | 852 | |
90% plus | | | — | | | | — | | | | 84 | | | | 135 | | | | 296 | | | | 117 | | | | 632 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Commercial | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Loans | | $ | 383 | | | $ | 293 | | | $ | 844 | | | $ | 754 | | | $ | 585 | | | $ | 117 | | | $ | 2,976 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Agricultural Mortgage Loans(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
0% - 50% | | $ | 150 | | | $ | 89 | | | $ | 175 | | | $ | 247 | | | $ | 190 | | | $ | 8 | | | $ | 859 | |
50% - 70% | | | 68 | | | | 15 | | | | 101 | | | | 158 | | | | 82 | | | | 45 | | | | 469 | |
70% - 90% | | | — | | | | — | | | | — | | | | 1 | | | | — | | | | 8 | | | | 9 | |
90% plus | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Agricultural | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Loans | | $ | 218 | | | $ | 104 | | | $ | 276 | | | $ | 406 | | | $ | 272 | | | $ | 61 | | | $ | 1,337 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Total Mortgage Loans(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
0% - 50% | | $ | 332 | | | $ | 89 | | | $ | 208 | | | $ | 277 | | | $ | 221 | | | $ | 8 | | | $ | 1,135 | |
50% - 70% | | | 269 | | | | 267 | | | | 548 | | | | 429 | | | | 127 | | | | 45 | | | | 1,685 | |
70% - 90% | | | — | | | | 41 | | | | 280 | | | | 319 | | | | 213 | | | | 8 | | | | 861 | |
90% plus | | | — | | | | — | | | | 84 | | | | 135 | | | | 296 | | | | 117 | | | | 632 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
Total Mortgage Loans | | $ | 601 | | | $ | 397 | | | $ | 1,120 | | | $ | 1,160 | | | $ | 857 | | | $ | 178 | | | $ | 4,313 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | The debt service coverage ratio is calculated using the most recently reported net operating income results from property operations divided by annual debt service. |
(2) | The loan-to-value ratio is derived from current loan balance divided by the fair market value of the property. The fair market value of the underlying commercial properties is updated annually. |
F-38
The following table provides information relating to the aging analysis of past due mortgage loans at December 31, 2012 and 2011, respectively.
Age Analysis of Past Due Mortgage Loans
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 30-59
Days | | | 60-89
Days | | | 90
Days
Or > | | | Total | | | Current | | | Total
Financing
Receivables | | | Recorded
Investment
> 90 Days
and
Accruing | |
| | | (In Millions) | |
December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,435 | | | $ | 3,435 | | | $ | — | |
Agricultural | | | 6 | | | | 1 | | | | 10 | | | | 17 | | | | 1,641 | | | | 1,658 | | | | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Mortgage Loans | | $ | 6 | | | $ | 1 | | | $ | 10 | | | $ | 17 | | | $ | 5,076 | | | $ | 5,093 | | | $ | 9 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
December 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | $ | 61 | | | $ | — | | | $ | — | | | $ | 61 | | | $ | 2,915 | | | $ | 2,976 | | | $ | — | |
Agricultural | | | 5 | | | | 1 | | | | 7 | | | | 13 | | | | 1,324 | | | | 1,337 | | | | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Mortgage Loans | | $ | 66 | | | $ | 1 | | | $ | 7 | | | $ | 74 | | | $ | 4,239 | | | $ | 4,313 | | | $ | 3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table provides information relating to impaired loans at December 31, 2012 and 2011, respectively.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Impaired Mortgage Loans | | | | | | | |
| | | Recorded
Investment | | | Unpaid
Principal
Balance | | | Related
Allowance | | | Average
Recorded
Investment(1) | | | Interest
Income
Recognized | |
| | | (In Millions) | |
| | | | | |
December 31, 2012: | | | | | | | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial mortgage loans - other | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Agricultural mortgage loans | | | 2 | | | | 2 | | | | — | | | | 3 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 2 | | | $ | 2 | | | $ | — | | | $ | 3 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
With related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial mortgage loans - other | | $ | 170 | | | $ | 170 | | | $ | (34 | ) | | $ | 178 | | | $ | 10 | |
Agricultural mortgage loans | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 170 | | | $ | 170 | | | $ | (34 | ) | | $ | 178 | | | $ | 10 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
December 31, 2011: | | | | | | | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial mortgage loans - other | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Agricultural mortgage loans | | | 5 | | | | 5 | | | | — | | | | 5 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 5 | | | $ | 5 | | | $ | — | | | $ | 5 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
With related allowance recorded: | | | | | | | | | | | | | | | | | | | | |
Commercial mortgage loans - other | | $ | 202 | | | $ | 202 | | | $ | (32 | ) | | $ | 152 | | | $ | 8 | |
Agricultural mortgage loans | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 202 | | | $ | 202 | | | $ | (32 | ) | | $ | 152 | | | $ | 8 | |
| | | | | | | | | | | | | | | | | | | | |
(1) | Represents a five-quarter average of recorded amortized cost. |
F-39
Equity Real Estate
The Insurance Group’s investment in equity real estate is through investments in real estate joint ventures.
Equity Method Investments
Included in other equity investments are interests in limited partnership interests and investment companies accounted for under the equity method with a total carrying value of $1,520 million and $1,587 million, respectively, at December 31, 2012 and 2011. Included in equity real estate are interests in real estate joint ventures accounted for under the equity method with a total carrying value of $0 million and $91 million, respectively, at December 31, 2012 and 2011. The Company’s total equity in net earnings (losses) for these real estate joint ventures and limited partnership interests was $170 million, $179 million and $173 million, respectively, for 2012, 2011 and 2010.
Summarized below is the combined financial information only for those real estate joint ventures and for those limited partnership interests accounted for under the equity method in which the Company has an investment of $10 million or greater and an equity interest of 10.0% or greater (3 and 3 individual ventures at December 31, 2012 and 2011, respectively) and the Company’s carrying value and equity in net earnings (loss) for those real estate joint ventures and limited partnership interests:
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
BALANCE SHEETS | | | | | | | | |
Investments in real estate, at depreciated cost | | $ | 233 | | | $ | 584 | |
Investments in securities, generally at fair value | | | 54 | | | | 51 | |
Cash and cash equivalents | | | 8 | | | | 10 | |
Other assets | | | 14 | | | | 13 | |
| | | | | | | | |
Total Assets | | $ | 309 | | | $ | 658 | |
| | | | | | | | |
| | |
Borrowed funds - third party | | $ | 162 | | | $ | 372 | |
Other liabilities | | | 11 | | | | 6 | |
| | | | | | | | |
Total liabilities | | | 173 | | | | 378 | |
| | | | | | | | |
| | |
Partners’ capital | | | 136 | | | | 280 | |
| | | | | | | | |
Total Liabilities and Partners’ Capital | | $ | 309 | | | $ | 658 | |
| | | | | | | | |
| | |
The Company’s Carrying Value in These Entities Included Above | | $ | 63 | | | $ | 169 | |
| | | | | | | | |
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
STATEMENTS OF EARNINGS (LOSS) | | | | | | | | | | | | |
Revenues of real estate joint ventures | | $ | 26 | | | $ | 111 | | | $ | 110 | |
Net revenues of other limited partnership interests | | | 3 | | | | 6 | | | | 3 | |
Interest expense - third party | | | — | | | | (21 | ) | | | (22 | ) |
Other expenses | | | (19 | ) | | | (61 | ) | | | (59 | ) |
| | | | | | | | | | | | |
Net Earnings (Loss) | | $ | 10 | | | $ | 35 | | | $ | 32 | |
| | | | | | | | | | | | |
| | | |
The Company’s Equity in Net Earnings (Loss) of These Entities Included Above | | $ | 18 | | | $ | 20 | | | $ | 18 | |
| | | | | | | | | | | | |
F-40
Derivatives
The tables below present quantitative disclosures about the Company’s derivative instruments, including those embedded in other contracts though required to be accounted for as derivative instruments.
Derivative Instruments by Category
At or For the Year Ended December 31, 2012
| | | | | | | | | | | | | | | | |
| | | | | | Fair Value | | | | |
| | | Notional
Amount | | | Asset
Derivatives | | | Liability
Derivatives | | | Gains (Losses)
Reported In
Earnings (Loss) | |
| | | (In Millions) | |
Freestanding derivatives: | | | | | | | | | | | | | | | | |
Equity contracts:(1) | | | | | | | | | | | | | | | | |
Futures | | $ | 6,189 | | | $ | — | | | $ | 2 | | | $ | (1,058 | ) |
Swaps | | | 965 | | | | 2 | | | | 56 | | | | (320 | ) |
Options | | | 3,492 | | | | 443 | | | | 219 | | | | 66 | |
| | | | |
Interest rate contracts:(1) | | | | | | | | | | | | | | | | |
Floors | | | 2,700 | | | | 291 | | | | — | | | | 68 | |
Swaps | | | 18,239 | | | | 554 | | | | 353 | | | | 402 | |
Futures | | | 14,033 | | | | — | | | | — | | | | 84 | |
Swaptions | | | 7,608 | | | | 502 | | | | — | | | | (220 | ) |
| | | | |
Other freestanding contracts:(1) | | | | | | | | | | | | | | | | |
Foreign currency Contracts | | | 81 | | | | 1 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net investment income (loss) | | | | | | | | | | | | | | | (978 | ) |
| | | | | | | | | | | | | | | | |
| | | | |
Embedded derivatives: | | | | | | | | | | | | | | | | |
GMIB reinsurance contracts | | | — | | | | 11,044 | | | | — | | | | 497 | |
| | | | |
GIB and GWBL and other features(2) | | | — | | | | — | | | | 265 | | | | 26 | |
| | | | | | | | | | | | | | | | |
Balances, December 31, 2012 | | $ | 53,307 | | | $ | 12,837 | | | $ | 895 | | | $ | (455 | ) |
| | | | | | | | | | | | | | | | |
(1) | Reported in Other invested assets or Other liabilities in the consolidated balance sheets. |
(2) | Reported in Future policy benefits and other policyholder liabilities. |
F-41
Derivative Instruments by Category
At or For the Year Ended December 31, 2011
| | | | | | | | | | | | | | | | |
| | | | | | Fair Value | | | | |
| | | Notional
Amount | | | Asset
Derivatives | | | Liability
Derivatives | | | Gains (Losses)
Reported In
Earnings (Loss) | |
| | | (In Millions) | |
Freestanding derivatives: | | | | | | | | | | | | | | | | |
Equity contracts:(1) | | | | | | | | | | | | | | | | |
Futures | | $ | 6,443 | | | $ | — | | | $ | 2 | | | $ | (34 | ) |
Swaps | | | 784 | | | | 10 | | | | 21 | | | | 33 | |
Options | | | 1,211 | | | | 92 | | | | 85 | | | | (20 | ) |
| | | | |
Interest rate contracts:(1) | | | | | | | | | | | | | | | | |
Floors | | | 3,000 | | | | 327 | | | | — | | | | 139 | |
Swaps | | | 9,826 | | | | 503 | | | | 317 | | | | 590 | |
Futures | | | 11,983 | | | | — | | | | — | | | | 849 | |
Swaptions | | | 7,354 | | | | 1,029 | | | | — | | | | 817 | |
| | | | |
Other freestanding contracts:(1) | | | | | | | | | | | | | | | | |
Foreign currency contracts | | | 38 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net investment income (loss) | | | | | | | | | | | | | | | 2,374 | |
| | | | | | | | | | | | | | | | |
| | | | |
Embedded derivatives: | | | | | | | | | | | | | | | | |
GMIB reinsurance contracts | | | — | | | | 10,547 | | | | — | | | | 5,941 | |
| | | | |
GIB and GWBL and other features(2) | | | — | | | | — | | | | 291 | | | | (197 | ) |
| | | | | | | | | | | | | | | | |
Balances, December 31, 2011 | | $ | 40,639 | | | $ | 12,508 | | | $ | 716 | | | $ | 8,118 | |
| | | | | | | | | | | | | | | | |
(1) | Reported in Other invested assets in the consolidated balance sheets. |
(2) | Reported in Future policy benefits and other policyholder liabilities. |
F-42
Net Investment Income (Loss)
The following table breaks out Net investment income (loss) by asset category:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Fixed maturities | | $ | 1,529 | | | $ | 1,555 | | | $ | 1,616 | |
Mortgage loans on real estate | | | 264 | | | | 241 | | | | 231 | |
Equity real estate | | | 14 | | | | 19 | | | | 20 | |
Other equity investments | | | 189 | | | | 116 | | | | 111 | |
Policy loans | | | 226 | | | | 229 | | | | 234 | |
Short-term investments | | | 15 | | | | 5 | | | | 11 | |
Derivative investments | | | (978 | ) | | | 2,374 | | | | (284 | ) |
Broker-dealer related receivables | | | 14 | | | | 13 | | | | 12 | |
Trading securities | | | 85 | | | | (29 | ) | | | 49 | |
Other investment income | | | 33 | | | | 37 | | | | 36 | |
| | | | | | | | | | | | |
| | | |
Gross investment income (loss) | | | 1,391 | | | | 4,560 | | | | 2,036 | |
| | | |
Investment expenses | | | (50 | ) | | | (55 | ) | | | (56 | ) |
Interest expense | | | (3 | ) | | | (3 | ) | | | (4 | ) |
| | | | | | | | | | | | |
| | | |
Net Investment Income (Loss) | | $ | 1,338 | | | $ | 4,502 | | | $ | 1,976 | |
| | | | | | | | | | | | |
For 2012, 2011 and 2010, respectively, Net investment income (loss) from derivatives included $232 million, $1,303 million and $(968) million of realized gains (losses) on contracts closed during those periods and $746 million, $1,071 million and $684 million of unrealized gains (losses) on derivative positions at each respective year end.
Investment Gains (Losses), Net
Investment gains (losses), net including changes in the valuation allowances and OTTI are as follows:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Fixed maturities | | $ | (89 | ) | | $ | (29 | ) | | $ | (200 | ) |
Mortgage loans on real estate | | | (7 | ) | | | (14 | ) | | | (18 | ) |
Other equity investments | | | (13 | ) | | | (4 | ) | | | 34 | |
Other | | | 12 | | | | — | | | | — | |
| | | | | | | | | | | | |
Investment Gains (Losses), Net | | $ | (97 | ) | | $ | (47 | ) | | $ | (184 | ) |
| | | | | | | | | | | | |
For 2012, 2011 and 2010, respectively, investment results passed through to certain participating group annuity contracts as interest credited to policyholders’ account balances totaled $6 million, $10 million and $31 million.
F-43
4) | GOODWILL AND OTHER INTANGIBLE ASSETS |
The carrying value of goodwill related to AllianceBernstein totaled $3,472 million and $3,472 million at December 31, 2012 and 2011, respectively. The Company annually tests this goodwill for recoverability at December 31, first by comparing the fair value of its investment in AllianceBernstein, the reporting unit, to its carrying value and further by measuring the amount of impairment loss only if the result indicates a potential impairment. The Company also assesses this goodwill for recoverability at each interim reporting period in consideration of facts and circumstances that may indicate a shortfall of the fair value of its investment in AllianceBernstein as compared to its carrying value and thereby require re-performance of its annual impairment testing.
The Company primarily uses a discounted cash flow valuation technique to measure the fair value of its investment in AllianceBernstein for purpose of goodwill impairment testing. The cash flows used in this technique are sourced from AllianceBernstein’s current business plan and projected thereafter over the estimated life of the goodwill asset by applying an annual growth rate assumption. The present value amount that results from discounting these expected cash flows is then adjusted to reflect the noncontrolling interest in AllianceBernstein as well as taxes incurred at the Company level in order to determine the fair value of its investment in AllianceBernstein. At December 31, 2012 and 2011, the Company determined that goodwill was not impaired as the fair value of its investment in AllianceBernstein exceeded its carrying value at each respective date. Similarly, no impairments resulted from the Company’s interim assessments of goodwill recoverability during the periods then ended.
The gross carrying amount of AllianceBernstein related intangible assets was $561 million and $561 million at December 31, 2012 and 2011, respectively and the accumulated amortization of these intangible assets was $360 million and $336 million at December 31, 2012 and 2011, respectively. Amortization expense related to the AllianceBernstein intangible assets totaled $24 million, $23 million and $24 million for 2012, 2011 and 2010, respectively, and estimated amortization expense for each of the next five years is expected to be approximately $24 million.
At December 31, 2012 and 2011, respectively, net deferred sales commissions totaled $95 million and $60 million and are included within the Investment Management segment’s Other assets. The estimated amortization expense of deferred sales commissions, based on the December 31, 2012 net asset balance for each of the next five years is $39 million, $26 million, $20 million, $9 million and $0 million. AllianceBernstein tests the deferred sales commission asset for impairment quarterly by comparing undiscounted future cash flows to the recorded value, net of accumulated amortization. Each quarter, significant assumptions used to estimate the future cash flows are updated to reflect management’s consideration of current market conditions on expectations made with respect to future market levels and redemption rates. As of December 31, 2012, AllianceBernstein determined that the deferred sales commission asset was not impaired.
In 2011, AllianceBernstein made two acquisitions, Pyrander Capital Management LLC and Taiwan International Investment Management Co., both investment management companies. The purchase price of these acquisitions was $25 million, consisting of $21 million of cash payments and $4 million payable over the next two years. The excess of purchase price over current fair value of identifiable net assets acquired resulted in the recognition of $15 million of goodwill as of December 31, 2011.
On October 1, 2010, AllianceBernstein acquired SunAmerica’s alternative investment group, an experienced team that manages a portfolio of hedge fund and private equity fund investments. The purchase price of this acquisition was $49 million, consisting of $14 million of cash payments, $3 million of assumed deferred compensation liabilities and $32 million of net contingent consideration payable. The net contingent consideration payable consists of the net present value of three annual payments of $2 million to SunAmerica based on its assets under management transferred to AllianceBernstein in the acquisition and the net present value of projected revenue sharing payments of $36 million based on projected newly-raised AUM by the acquired group. This contingent consideration payable was offset by $4 million of performance-based fees earned in 2010 determined to be pre-acquisition consideration. The excess of the purchase price over the fair value of identifiable assets acquired resulted in the recognition of $46 million of goodwill. During 2011, no adjustments were made to the contingent consideration payable.
F-44
Summarized financial information for the AXA Equitable Closed Block is as follows:
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
CLOSED BLOCK LIABILITIES: | | | | | | | | |
Future policy benefits, policyholders’ account balances and other | | $ | 7,942 | | | $ | 8,121 | |
Policyholder dividend obligation | | | 373 | | | | 260 | |
Other liabilities | | | 192 | | | | 86 | |
| | | | | | | | |
Total Closed Block liabilities | | | 8,507 | | | | 8,467 | |
| | | | | | | | |
| | |
ASSETS DESIGNATED TO THE CLOSED BLOCK: | | | | | | | | |
Fixed maturities, available for sale, at fair value (amortized cost of $5,245 and $5,342) | | | 5,741 | | | | 5,686 | |
Mortgage loans on real estate | | | 1,255 | | | | 1,205 | |
Policy loans | | | 1,026 | | | | 1,061 | |
Cash and other invested assets | | | 2 | | | | 30 | |
Other assets | | | 232 | | | | 207 | |
| | | | | | | | |
Total assets designated to the Closed Block | | | 8,256 | | | | 8,189 | |
| | | | | | | | |
| | |
Excess of Closed Block liabilities over assets designated to the Closed Block | | | 251 | | | | 278 | |
| | |
Amounts included in accumulated other comprehensive income (loss): | | | | | | | | |
Net unrealized investment gains (losses), net of deferred income tax (expense) benefit of $(47) and $(33) and policyholder dividend obligation of $(373) and $(260) | | | 87 | | | | 62 | |
| | | | | | | | |
| | |
Maximum Future Earnings To Be Recognized From Closed Block Assets and Liabilities | | $ | 338 | | | $ | 340 | |
| | | | | | | | |
AXA Equitable’s Closed Block revenues and expenses follow:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
REVENUES: | | | | | | | | | | | | |
Premiums and other income | | $ | 316 | | | $ | 354 | | | $ | 365 | |
Investment income (loss) | | | 420 | | | | 438 | | | | 468 | |
Net investment gains (losses) | | | (9 | ) | | | (10 | ) | | | (23 | ) |
| | | | | | | | | | | | |
Total revenues | | | 727 | | | | 782 | | | | 810 | |
| | | | | | | | | | | | |
| | | |
BENEFITS AND OTHER DEDUCTIONS: | | | | | | | | | | | | |
Policyholders’ benefits and dividends | | | 724 | | | | 757 | | | | 776 | |
Other operating costs and expenses | | | — | | | | 2 | | | | 2 | |
| | | | | | | | | | | | |
Total benefits and other deductions | | | 724 | | | | 759 | | | | 778 | |
| | | | | | | | | | | | |
| | | |
Net revenues, before income taxes | | | 3 | | | | 23 | | | | 32 | |
Income tax (expense) benefit | | | (1 | ) | | | (8 | ) | | | (11 | ) |
| | | | | | | | | | | | |
Net Revenues (Losses) | | $ | 2 | | | $ | 15 | | | $ | 21 | |
| | | | | | | | | | | | |
F-45
A reconciliation of AXA Equitable’s policyholder dividend obligation follows:
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
Balances, beginning of year | | $ | 260 | | | $ | 119 | |
Unrealized investment gains (losses) | | | 113 | | | | 141 | |
| | | | | | | | |
Balances, End of year | | $ | 373 | | | $ | 260 | |
| | | | | | | | |
6) | CONTRACTHOLDER BONUS INTEREST CREDITS |
Changes in the deferred asset for contractholder bonus interest credits are as follows:
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
Balance, beginning of year | | $ | 718 | | | $ | 772 | |
Contractholder bonus interest credits deferred | | | 30 | | | | 34 | |
Amortization charged to income | | | (127 | ) | | | (88 | ) |
| | | | | | | | |
Balance, End of Year | | $ | 621 | | | $ | 718 | |
| | | | | | | | |
F-46
Assets and liabilities measured at fair value on a recurring basis are summarized below. Fair value measurements also are required on a non-recurring basis for certain assets, including goodwill, mortgage loans on real estate, equity real estate held for production of income, and equity real estate held for sale, only when an OTTI or other event occurs. When such fair value measurements are recorded, they must be classified and disclosed within the fair value hierarchy. At December 31, 2012 and 2011, no assets were required to be measured at fair value on a non-recurring basis.
Fair Value Measurements at December 31, 2012
| | | | | | | | | | | | | | | | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | (In Millions) | |
| | | | |
Assets | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | |
Fixed maturities, available-for-sale: | | | | | | | | | | | | | | | | |
Corporate | | $ | 6 | | | $ | 22,837 | | | $ | 355 | | | $ | 23,198 | |
U.S. Treasury, government and agency | | | — | | | | 5,180 | | | | — | | | | 5,180 | |
States and political subdivisions | | | — | | | | 480 | | | | 50 | | | | 530 | |
Foreign governments | | | — | | | | 511 | | | | 19 | | | | 530 | |
Commercial mortgage-backed | | | — | | | | — | | | | 900 | | | | 900 | |
Residential mortgage-backed(1) | | | — | | | | 1,940 | | | | 9 | | | | 1,949 | |
Asset-backed(2) | | | — | | | | 69 | | | | 113 | | | | 182 | |
Redeemable preferred stock | | | 242 | | | | 881 | | | | 15 | | | | 1,138 | |
| | | | | | | | | | | | | | | | |
Subtotal | | | 248 | | | | 31,898 | | | | 1,461 | | | | 33,607 | |
| | | | | | | | | | | | | | | | |
Other equity investments | | | 78 | | | | — | | | | 77 | | | | 155 | |
Trading securities | | | 446 | | | | 1,863 | | | | — | | | | 2,309 | |
Other invested assets: | | | | | | | | | | | | | | | | |
Short-term investments | | | — | | | | 98 | | | | — | | | | 98 | |
Swaps | | | — | | | | 148 | | | | — | | | | 148 | |
Futures | | | (2 | ) | | | — | | | | — | | | | (2 | ) |
Options | | | — | | | | 224 | | | | — | | | | 224 | |
Floors | | | — | | | | 291 | | | | — | | | | 291 | |
Swaptions | | | — | | | | 502 | | | | — | | | | 502 | |
| | | | | | | | | | | | | | | | |
Subtotal | | | (2 | ) | | | 1,263 | | | | — | | | | 1,261 | |
| | | | | | | | | | | | | | | | |
Cash equivalents | | | 2,289 | | | | — | | | | — | | | | 2,289 | |
Segregated securities | | | — | | | | 1,551 | | | | — | | | | 1,551 | |
GMIB reinsurance contracts | | | — | | | | — | | | | 11,044 | | | | 11,044 | |
Separate Accounts’ assets | | | 90,751 | | | | 2,775 | | | | 224 | | | | 93,750 | |
| | | | | | | | | | | | | | | | |
Total Assets | | $ | 93,810 | | | $ | 39,350 | | | $ | 12,806 | | | $ | 145,966 | |
| | | | | | | | | | | | | | | | |
| | | | |
Liabilities | | | | | | | | | | | | | | | | |
GIB and GWBL and other features’ liability | | | — | | | | — | | | | 265 | | | | 265 | |
| | | | | | | | | | | | | | | | |
Total Liabilities | | $ | — | | | $ | — | | | $ | 265 | | | $ | 265 | |
| | | | | | | | | | | | | | | | |
(1) | Includes publicly traded agency pass-through securities and collateralized obligations. |
(2) | Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans. |
F-47
Fair Value Measurements at December 31, 2011
| | | | | | | | | | | | | | | | |
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | (In Millions) | |
| | | | |
Assets | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | |
Fixed maturities, available-for-sale: | | | | | | | | | | | | | | | | |
Corporate | | $ | 7 | | | $ | 22,698 | | | $ | 432 | | | $ | 23,137 | |
U.S. Treasury, government and agency | | | — | | | | 3,948 | | | | — | | | | 3,948 | |
States and political subdivisions | | | — | | | | 487 | | | | 53 | | | | 540 | |
Foreign governments | | | — | | | | 503 | | | | 22 | | | | 525 | |
Commercial mortgage-backed | | | — | | | | — | | | | 902 | | | | 902 | |
Residential mortgage-backed(1) | | | — | | | | 1,632 | | | | 14 | | | | 1,646 | |
Asset-backed(2) | | | — | | | | 92 | | | | 172 | | | | 264 | |
Redeemable preferred stock | | | 203 | | | | 813 | | | | 14 | | | | 1,030 | |
| | | | | | | | | | | | | | | | |
Subtotal | | | 210 | | | | 30,173 | | | | 1,609 | | | | 31,992 | |
| | | | | | | | | | | | | | | | |
Other equity investments | | | 66 | | | | — | | | | 77 | | | | 143 | |
Trading securities | | | 457 | | | | 525 | | | | — | | | | 982 | |
Other invested assets: | | | | | | | | | | | | | | | | |
Short-term investments | | | — | | | | 132 | | | | — | | | | 132 | |
Swaps | | | — | | | | 177 | | | | (2 | ) | | | 175 | |
Futures | | | (2 | ) | | | — | | | | — | | | | (2 | ) |
Options | | | — | | | | 7 | | | | — | | | | 7 | |
Floors | | | — | | | | 327 | | | | — | | | | 327 | |
Swaptions | | | — | | | | 1,029 | | | | — | | | | 1,029 | |
| | | | | | | | | | | | | | | | |
Subtotal | | | (2 | ) | | | 1,672 | | | | (2 | ) | | | 1,668 | |
| | | | | | | | | | | | | | | | |
Cash equivalents | | | 2,475 | | | | — | | | | — | | | | 2,475 | |
Segregated securities | | | — | | | | 1,280 | | | | — | | | | 1,280 | |
GMIB reinsurance contracts | | | — | | | | — | | | | 10,547 | | | | 10,547 | |
Separate Accounts’ assets | | | 83,672 | | | | 2,532 | | | | 215 | | | | 86,419 | |
| | | | | | | | | | | | | | | | |
Total Assets | | $ | 86,878 | | | $ | 36,182 | | | $ | 12,446 | | | $ | 135,506 | |
| | | | | | | | | | | | | | | | |
| | | | |
Liabilities | | | | | | | | | | | | | | | | |
GIB and GWBL and other features’ liability | | $ | — | | | $ | — | | | $ | 291 | | | $ | 291 | |
| | | | | | | | | | | | | | | | |
Total Liabilities | | $ | — | | | $ | — | | | $ | 291 | | | $ | 291 | |
| | | | | | | | | | | | | | | | |
(1) | Includes publicly traded agency pass-through securities and collateralized obligations. |
(2) | Includes credit-tranched securities collateralized by sub-prime mortgages and other asset types and credit tenant loans. |
In 2012, AFS fixed maturities with fair values of $109 million were transferred out of Level 3 and into Level 2 principally due to the availability of trading activity and/or market observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $17 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 0.7% of total equity at December 31, 2012. In the first quarter of 2012, one of the Company’s private securities went public and as a result, $14 million was transferred from a Level 3 classification to a Level 2 classification. In the third quarter of 2012, $6 million was transferred from a Level 2 classification to a Level 1 classification due to the lapse of the trading restriction period for one of the Company’s public securities.
F-48
In 2011, AFS fixed maturities with fair values of $51 million were transferred out of Level 3 and into Level 2 principally due to the availability of trading activity and/or market observable inputs to measure and validate their fair values. In addition, AFS fixed maturities with fair value of $171 million were transferred from Level 2 into the Level 3 classification. These transfers in the aggregate represent approximately 1.3% of total equity at December 31, 2011. In the second quarter of 2011, $21 million was transferred from a Level 2 classification to a Level 1 classification due to the lapse of the trading restriction period for one of the Company’s public securities. In the third quarter of 2011, $3 million was transferred from a Level 2 classification to a Level 1 classification due to the lapse of the trading restriction period for one of the Company’s public securities.
The table below presents a reconciliation for all Level 3 assets and liabilities at December 31, 2012 and 2011, respectively.
Level 3 Instruments
Fair Value Measurements
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Corporate | | | State and
Political
Sub-
divisions | | | Foreign
Govts | | | Commercial
Mortgage-
backed | | | Residential
Mortgage-
backed | | | Asset-
backed | |
| | | (In Millions) | |
| | | | | | |
Balance, January 1, 2012 | | $ | 432 | | | $ | 53 | | | $ | 22 | | | $ | 902 | | | $ | 14 | | | $ | 172 | |
Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) as: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss) | | | 2 | | | | — | | | | — | | | | 2 | | | | — | | | | — | |
Investment gains (losses), net | | | 4 | | | | — | | | | — | | | | (105 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | | | 6 | | | | — | | | | — | | | | (103 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | | | 15 | | | | (1 | ) | | | — | | | | 128 | | | | — | | | | 4 | |
Purchases | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Issuances | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales | | | (47 | ) | | | (2 | ) | | | — | | | | (27 | ) | | | (5 | ) | | | (25 | ) |
Settlements | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Transfers into Level 3(2) | | | 17 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Transfers out of Level 3(2) | | | (68 | ) | | | — | | | | (3 | ) | | | — | | | | — | | | | (38 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2012(1) | | $ | 355 | | | $ | 50 | | | $ | 19 | | | $ | 900 | | | $ | 9 | | | $ | 113 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Balance, January 1, 2011 | | $ | 320 | | | $ | 49 | | | $ | 21 | | | $ | 1,103 | | | $ | — | | | $ | 148 | |
Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) as: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss) | | | 1 | | | | — | | | | — | | | | 2 | | | | — | | | | — | |
Investment gains (losses), net | | | — | | | | — | | | | — | | | | (30 | ) | | | — | | | | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | | $ | 1 | | | $ | — | | | $ | — | | | $ | (28 | ) | | $ | — | | | $ | 1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | | | (2 | ) | | | 5 | | | | (1 | ) | | | (34 | ) | | | (1 | ) | | | 2 | |
Purchases | | | 117 | | | | — | | | | 1 | | | | — | | | | — | | | | 21 | |
Sales | | | (52 | ) | | | (2 | ) | | | — | | | | (139 | ) | | | (5 | ) | | | (33 | ) |
Transfers into Level 3(2) | | | 100 | | | | 1 | | | | 1 | | | | — | | | | 20 | | | | 33 | |
Transfers out of Level 3(2) | | | (52 | ) | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2011(1) | | $ | 432 | | | $ | 53 | | | $ | 22 | | | $ | 902 | | | $ | 14 | | | $ | 172 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | There were no U.S. Treasury, government and agency securities classified as Level 3 at December 31, 2012 and 2011. |
(2) | Transfers into/out of Level 3 classification are reflected at beginning-of-period fair values. |
F-49
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Redeemable
Preferred
Stock | | | Other
Equity
Investments(1) | | | Other
Invested
Assets | | | GMIB
Reinsurance
Asset | | | Separate
Accounts
Assets | | | GWBL
and Other
Features
Liability | |
| | | (In Millions) | |
| | | | | | |
Balance, January 1, 2012 | | $ | 14 | | | $ | 77 | | | $ | (2 | ) | | $ | 10,547 | | | $ | 215 | | | $ | 291 | |
Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) as: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Investment gains (losses), net | | | — | | | | — | | | | — | | | | — | | | | 8 | | | | — | |
Increase (decrease) in the fair value of reinsurance contracts | | | — | | | | — | | | | — | | | | 315 | | | | — | | | | — | |
Policyholders’ benefits | | | — | | | | — | | | | — | | | | — | | | | — | | | | (77 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | | | — | | | | — | | | | — | | | | 315 | | | | 8 | | | | (77 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | | | 1 | | | | — | | | | 2 | | | | — | | | | — | | | | — | |
Purchases | | | — | | | | — | | | | — | | | | 182 | | | | 6 | | | | 51 | |
Issuances | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | | — | |
Settlements | | | — | | | | — | | | | — | | | | — | | | | (3 | ) | | | — | |
Transfers into Level 3(2) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Transfers out of Level 3(2) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2012 | | $ | 15 | | | $ | 77 | | | $ | — | | | $ | 11,044 | | | $ | 224 | | | $ | 265 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Balance, January 1, 2011 | | $ | 2 | | | $ | 73 | | | $ | — | | | $ | 4,606 | | | $ | 207 | | | $ | 94 | |
Total gains (losses), realized and unrealized, included in: | | | | | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) as: | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income (loss) | | | — | | | | — | | | | (2 | ) | | | — | | | | — | | | | — | |
Investment gains (losses), net | | | — | | | | 1 | | | | — | | | | — | | | | — | | | | — | |
Increase (decrease) in the fair value of reinsurance contracts | | | — | | | | — | | | | — | | | | 5,737 | | | | 17 | | | | — | |
Policyholders’ benefits | | | — | | | | — | | | | — | | | | — | | | | — | | | | 176 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Subtotal | | $ | — | | | $ | 1 | | | $ | (2 | ) | | $ | 5,737 | | | $ | 17 | | | $ | 176 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | | | (1 | ) | | | 6 | | | | — | | | | — | | | | — | | | | — | |
Purchases | | | — | | | | 2 | | | | — | | | | 204 | | | | 4 | | | | 21 | |
Sales | | | (2 | ) | | | (5 | ) | | | — | | | | — | | | | (11 | ) | | | — | |
Settlements | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | | — | |
Transfers into Level 3(2) | | | 15 | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2011 | | $ | 14 | | | $ | 77 | | | $ | (2 | ) | | $ | 10,547 | | | $ | 215 | | | $ | 291 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Includes Trading securities’ Level 3 amount. |
(2) | Transfers into/out of Level 3 classification are reflected at beginning-of-period fair values. |
F-50
The table below details changes in unrealized gains (losses) for 2012 and 2011 by category for Level 3 assets and liabilities still held at December 31, 2012 and 2011, respectively:
| | | | | | | | | | | | | | | | | | | | |
| | | Earnings (Loss) | | | OCI | | | Policy-
holders’
Benefits | |
| | | Net
Investment
Income
(Loss) | | | Investment
Gains
(Losses),
Net | | | Increase
(Decrease) in the
Fair Value of
Reinsurance
Contracts | | | |
| | | (In Millions) | |
Level 3 Instruments | | | | | | | | | | | | | | | | | | | | |
Full Year 2012 | | | | | | | | | | | | | | | | | | | | |
Still Held at December 31, 2012:(1) | | | | | | | | | | | | | | | | | | | | |
Change in unrealized gains (losses): | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, available-for-sale: | | | | | | | | | | | | | | | | | | | | |
Corporate | | $ | — | | | $ | — | | | $ | — | | | $ | 14 | | | $ | — | |
State and political subdivisions | | | — | | | | — | | | | — | | | | (1 | ) | | | — | |
Foreign governments | | | — | | | | — | | | | — | | | | 1 | | | | — | |
Commercial mortgage-backed | | | — | | | | — | | | | — | | | | 124 | | | | — | |
Asset-backed | | | — | | | | — | | | | — | | | | 3 | | | | — | |
Other fixed maturities, available-for-sale | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Subtotal | | $ | — | | | $ | — | | | $ | — | | | $ | 141 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
GMIB reinsurance contracts | | | — | | | | — | | | | 497 | | | | — | | | | — | |
Separate Accounts’ assets | | | — | | | | 8 | | | | — | | | | — | | | | — | |
GIB and GWBL and other features’ liability | | | — | | | | — | | | | — | | | | — | | | | 26 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | 8 | | | $ | 497 | | | $ | 141 | | | $ | 26 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Level 3 Instruments | | | | | | | | | | | | | | | | | | | | |
Full Year 2011 | | | | | | | | | | | | | | | | | | | | |
Still Held at December 31, 2011:(1) | | | | | | | | | | | | | | | | | | | | |
Change in unrealized gains (losses): | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, available-for-sale: | | | | | | | | | | | | | | | | | | | | |
Corporate | | $ | — | | | $ | — | | | $ | — | | | $ | 1 | | | $ | — | |
State and political subdivisions | | | — | | | | — | | | | — | | | | 5 | | | | — | |
Foreign governments | | | — | | | | — | | | | — | | | | (1 | ) | | | — | |
Commercial mortgage-backed | | | — | | | | — | | | | — | | | | (40 | ) | | | — | |
Asset-backed | | | — | | | | — | | | | — | | | | 2 | | | | — | |
Other fixed maturities, available-for-sale | | | — | | | | — | | | | — | | | | (2 | ) | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Subtotal | | $ | — | | | $ | — | | | $ | — | | | $ | (35 | ) | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
GMIB reinsurance contracts | | | — | | | | — | | | | 5,941 | | | | — | | | | — | |
Separate Accounts’ assets | | | — | | | | 18 | | | | — | | | | — | | | | — | |
GIB and GWBL and other features’ liability | | | — | | | | — | | | | — | | | | — | | | | (197 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | — | | | $ | 18 | | | $ | 5,941 | | | $ | (35 | ) | | $ | (197 | ) |
| | | | | | | | | | | | | | | | | | | | |
(1) | There were no Equity securities classified as AFS, Other equity investments, Cash equivalents or Segregated securities at December 31, 2012 and 2011. |
F-51
The following table discloses quantitative information about Level 3 fair value measurements by category for assets and liabilities as of December 31, 2012.
Quantitative Information about Level 3 Fair Value Measurements
December 31, 2012
| | | | | | | | | | |
| | | Fair
Value | | | Valuation Technique | | Significant Unobservable Input | | Range |
| | | (In Millions) |
Assets: | | | |
Investments: | | | | | | | | | | |
Fixed maturities, available-for-sale: | | | | | | | | | | |
Corporate | | $ | 94 | | | Matrix pricing model | | Spread over the industry-specific benchmark yield curve | | 125 bps - 650 bps |
| | | | |
Commercial mortgage-backed | | | 889 | | | Discounted Cash flow | | Constant default rate Probability of default Loss severity Discount rate | | 3.0% - 25.0%
55.0%49.0% 3.72% - 13.42% |
| | | | |
Residential mortgage-backed | | | 1 | | | Matrix pricing model | | Spread over U.S. Treasury curve | | 46 bps |
| | | | |
Asset-backed | | | 8 | | | Matrix pricing model | | Spread over U.S. Treasury curve | | 30 bps - 695 bps |
| | | | |
Other equity investments | | | 38 | | | Market comparable companies | | Revenue multiple | | 0.6x - 62.5x |
| | | | | | | R&D multiple | | 1.0x - 30.6x |
| | | | | | | | Discount rate | | 18.0% |
| | | | | | | | Discount years | | 1 - 2 |
| | | | | | | | Discount for lack of marketability | | |
| | | | | | | | and risk factors | | 40.0% - 60.0% |
| | | | |
Separate Accounts’ assets | | | 194 | | | Third party appraisal | | Capitalization rate | | 5.5% |
| | | | | | | | Exit capitalization rate | | 6.6% |
| | | | | | | | Discount rate | | 7.7% |
| | | | |
| | | 22 | | | Discounted cash flow | | Spread over U.S. Treasury curve | | 275 bps - 586 bps |
| | | | | | | | Inflation rate | | 2.0% - 3.0% |
| | | | | | | | Discount factor | | 1.0% - 2.0% |
| | | | |
GMIB reinsurance contracts | | | 11,044 | | | Discounted Cash flow | | Lapse Rates | | 1.5% - 8.0% |
| | | | | | | | Withdrawal Rates | | 0.2% - 8.0% |
| | | | | | | | GMIB Utilization Rates | | 0.0% - 15.0% |
| | | | | | | | Non-performance risk | | 13 bps - 45 bps |
| | | | | | | | Volatility rates - Equity | | 24.0% - 36.0% |
| | | | |
Liabilities: | | | | | | | | | | |
GMWB/GWBL(1) | | $ | 205 | | | Discounted Cash flow | | Lapse Rates | | 1.0% - 8.0% |
| | | | | | | | Withdrawal Rates | | 0.0% - 7.0% |
| | | | | | | | Volatility rates - Equity | | 24.0% - 36.0% |
(1) | Excludes GMAB and GIB liabilities. |
Excluded from the table above are approximately $516 million Level 3 fair value measurements of investments for which the underlying quantitative inputs are not developed by the Company and are not reasonably available. The fair value measurements of these Level 3 investments comprise approximately 29.3% of total assets classified as Level 3 and represent only 0.4% of total assets measured at fair value on a recurring basis. These investments primarily consist of certain privately placed debt securities with limited trading activity, including residential mortgage- and asset-backed instruments, and their fair values generally reflect unadjusted prices obtained from independent valuation service
F-52
providers and indicative, non-binding quotes obtained from third-party broker-dealers recognized as market participants. Significant increases or decreases in the fair value amounts received from these pricing sources may result in the Company’s reporting significantly higher or lower fair value measurements for these Level 3 investments.
Included in the table above are approximately $94 million fair value of privately placed, available-for-sale corporate debt securities classified as Level 3 at December 31, 2012 that is determined by application of a matrix pricing model, representing approximately 26.5% of the total fair value of Level 3 securities in the corporate fixed maturities asset class. The significant unobservable input to the matrix pricing model is the spread over the industry-specific benchmark yield curve. Generally, an increase or decrease in spreads would lead to directionally inverse movement in the fair value measurements of these securities.
Commercial mortgage-backed securities classified as Level 3 consist of holdings subordinate to the AAA-tranche position and for which the Company applies a discounted cash flow methodology to measure fair value. The process for determining fair value first adjusts the contractual principal and interest payments to reflect performance expectations and then discounts the securities’ cash flows to reflect an appropriate risk-adjusted return. The significant unobservable inputs used in these fair value measurements are default rate and probability, loss severity, and the discount rate. An increase either in the cumulative default rate, probability of default, or loss severity would result in a decrease in the fair value of these securities; generally, those assumptions would change in a directionally similar manner. A decrease in the discount rate would result in directionally inverse movement in the fair value measurement of these securities.
Residential mortgage-backed securities classified as Level 3 primarily consist of non-agency paper with low trading activity. Included in the table above are approximately 11.1% of the total fair value of these Level 3 securities at December 31, 2012 that is determined by application of a matrix pricing model and for which the spread over the U.S. Treasury curve is the most significant unobservable input to the pricing result. Generally, a change in spreads would lead to directionally inverse movement in the fair value measurements of these securities.
Asset-backed securities classified as Level 3 primarily consist of non-agency mortgage loan trust certificates, including subprime and Alt-A paper, credit tenant loans, and equipment financings. Included in the table above are approximately 7.1% of the total fair value of these Level 3 securities at December 31, 2012 that is determined by application of a matrix pricing model and for which the spread over the U.S. Treasury curve is the most significant unobservable input to the pricing result. Significant increases (decreases) in spreads would result in significantly lower (higher) fair value measurements.
Other equity investments classified as Level 3 primarily consist of private venture capital fund investments of AllianceBernstein for which fair values are adjusted to reflect expected exit values as evidenced by financing and sale transactions with third parties or when consideration of other factors, such as current company performance and market conditions, is determined by management to require valuation adjustment. Significant increase (decrease) in isolation in the underlying enterprise value to revenue multiple and enterprise value to R&D investment multiple, if applicable, would result in significantly higher (lower) fair value measurement. Significant increase (decrease) in the discount rate would result in a significantly lower (higher) fair value measurement. Significant increase (decrease) in isolation in the discount factor ascribed for lack of marketability and various risk factors would result in significantly lower (higher) fair value measurement. Changes in the discount factor generally are not correlated to changes in the value multiples. Also classified as Level 3 are approximately $30 million private venture capital fund-of-fund investments of AllianceBernstein for which fair value is estimated using the capital account balances provided by the partnerships. The interests in these partnerships cannot be redeemed. As of December 31, 2012, AllianceBernstein’s aggregate unfunded commitments to these investments were approximately $12 million.
Separate Accounts’ assets classified as Level 3 primarily consist of private equity investments with fair value of approximately $198 million, including approximately $194 million fair value investment in a private real estate fund, as well as mortgage loans with fair value of approximately $18 million. Third party appraisal is used to measure the fair value of the private real estate investment fund, including consideration of observable replacement cost and sales comparisons for the underlying commercial properties, as well as the results from applying a discounted cash flow approach. Significant increase (decrease) in isolation in the capitalization rate and exit capitalization rate assumptions used in the discounted cash flow approach to appraisal value would result in a higher (lower) measure of fair value. A discounted cash flow approach also is applied to determine the approximately $4 million fair value of the other private
F-53
equity investment and for which the significant unobservable assumptions are an inflation rate formula and a discount factor that takes into account various risks, including the illiquid nature of the investment. A significant increase (decrease) in the inflation rate would have directionally inverse effect on the fair value of the security. With respect to the fair value measurement of mortgage loans, a significant increase (decrease) in the assumed spread over US Treasuries would produce a lower (higher) fair value measurement. Changes in the discount rate or factor used in the valuation techniques to determine the fair values of these private equity investments and mortgage loans generally are not correlated to changes in the other significant unobservable inputs. Significant increase (decrease) in isolation in the discount rate or factor would result in significantly lower (higher) fair value measurements. The remaining Separate Accounts’ investments classified as Level 3 at December 31, 2012 consist of mortgage- and asset-backed securities with fair values of approximately $4 million and $4 million, respectively, and for which those measurements are determined using substantially the same valuation techniques as earlier described above for the Company’s General Account investments in these securities.
Significant unobservable inputs with respect to the fair value measurement of the Level 3 GMIB reinsurance contract asset and the Level 3 liabilities identified in the table above are developed using Company data. Validations of unobservable inputs are performed to the extent the Company has experience. When an input is changed the model is updated and the results of each step of the model are analyzed for reasonableness.
The significant unobservable inputs used in the fair value measurement of the Company’s GMIB reinsurance contract asset are lapse rates, withdrawal rates and GMIB utilization rates. Significant increases in GMIB utilization rates or decreases in lapse or withdrawal rates in isolation would tend to increase the GMIB reinsurance contract asset.
Fair value measurement of the GMIB reinsurance contract asset includes dynamic lapse and GMIB utilization assumptions whereby projected contractual lapses and GMIB utilization reflect the projected net amount of risks of the contract. As the net amount of risk of a contract increases, the assumed lapse rate decreases and the GMIB utilization increases. Increases in equity and interest rate volatility would increase the asset.
The significant unobservable inputs used in the fair value measurement of the Company’s GMWB and GWBL liability are lapse rates and withdrawal rates. Significant increases in withdrawal rates or decreases in lapse rates in isolation would tend to increase these liabilities. Increases in equity and interest rate volatility would increase these liabilities.
The carrying values and fair values at December 31, 2012 and 2011 for financial instruments not otherwise disclosed in Notes 3 and 12 are presented in the table below. Certain financial instruments are exempt from the requirements for fair value disclosure, such as insurance liabilities other than financial guarantees and investment contracts and pension and other postretirement obligations.
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2012 | |
| | | Carrying | | | Fair Value | |
| | | Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | | (In Millions) | |
| | | | | |
Mortgage loans on real estate | | $ | 5,059 | | | $ | — | | | $ | — | | | $ | 5,249 | | | $ | 5,249 | |
Other limited partnership interests | | | 1,514 | | | | — | | | | — | | | | 1,514 | | | | 1,514 | |
Loans to affiliates | | | 1,037 | | | | — | | | | 784 | | | | 402 | | | | 1,186 | |
Policyholders liabilities: Investment contracts | | | 2,494 | | | | — | | | | — | | | | 2,682 | | | | 2,682 | |
Long-term debt | | | 200 | | | | — | | | | 236 | | | | — | | | | 236 | |
Loans from affiliates | | | 1,325 | | | | — | | | | 1,676 | | | | — | | | | 1,676 | |
F-54
| | | | | | | | |
| | | December 31, 2011 | |
| | | Carrying
Value | | | Fair
Value | |
| | | (In Millions) | |
| | |
Mortgage loans on real estate | | $ | 4,281 | | | $ | 4,432 | |
Other limited partnership interests | | | 1,582 | | | | 1,582 | |
Loans to affiliates | | | 1,041 | | | | 1,097 | |
Policyholders liabilities: Investment contracts | | | 2,549 | | | | 2,713 | |
Long-term debt | | | 200 | | | | 220 | |
Loans from affiliates | | | 1,325 | | | | 1,485 | |
8) | GMDB, GMIB, GIB, GWBL AND OTHER FEATURES AND NO LAPSE GUARANTEE FEATURES |
A)Variable Annuity Contracts – GMDB, GMIB, GIB and GWBL and Other Features
The Company has certain variable annuity contracts with GMDB, GMIB, GIB and GWBL and other features in-force that guarantee one of the following:
| | • | | Return of Premium: the benefit is the greater of current account value or premiums paid (adjusted for withdrawals); |
| | • | | Ratchet: the benefit is the greatest of current account value, premiums paid (adjusted for withdrawals), or the highest account value on any anniversary up to contractually specified ages (adjusted for withdrawals); |
| | • | | Roll-Up: the benefit is the greater of current account value or premiums paid (adjusted for withdrawals) accumulated at contractually specified interest rates up to specified ages; |
| | • | | Combo: the benefit is the greater of the ratchet benefit or the roll-up benefit, which may include a five year or an annual reset; or |
| | • | | Withdrawal: the withdrawal is guaranteed up to a maximum amount per year for life. |
F-55
The following table summarizes the GMDB and GMIB liabilities, before reinsurance ceded, reflected in the General Account in future policy benefits and other policyholders’ liabilities:
| | | | | | | | | | | | |
| | | GMDB | | | GMIB | | | Total | |
| | | (In Millions) | |
| | | |
Balance at January 1, 2010 | | $ | 1,087 | | | $ | 1,558 | | | $ | 2,645 | |
Paid guarantee benefits | | | (208 | ) | | | (45 | ) | | | (253 | ) |
Other changes in reserve | | | 386 | | | | 798 | | | | 1,184 | |
| | | | | | | | | | | | |
Balance at December 31, 2010 | | | 1,265 | | | | 2,311 | | | | 3,576 | |
Paid guarantee benefits | | | (203 | ) | | | (47 | ) | | | (250 | ) |
Other changes in reserve | | | 531 | | | | 1,866 | | | | 2,397 | |
| | | | | | | | | | | | |
Balance at December 31, 2011 | | | 1,593 | | | | 4,130 | | | | 5,723 | |
Paid guarantee benefits | | | (288 | ) | | | (77 | ) | | | (365 | ) |
Other changes in reserve | | | 467 | | | | 508 | | | | 975 | |
| | | | | | | | | | | | |
Balance at December 31, 2012 | | $ | 1,772 | | | $ | 4,561 | | | $ | 6,333 | |
| | | | | | | | | | | | |
Related GMDB reinsurance ceded amounts were:
| | | | |
| | | GMDB | |
| | | (In Millions) | |
| |
Balance at January 1, 2010 | | $ | 405 | |
Paid guarantee benefits | | | (81 | ) |
Other changes in reserve | | | 209 | |
| | | | |
Balance at December 31, 2010 | | | 533 | |
Paid guarantee benefits | | | (81 | ) |
Other changes in reserve | | | 264 | |
| | | | |
Balance at December 31, 2011 | | | 716 | |
Paid guarantee benefits | | | (127 | ) |
Other changes in reserve | | | 255 | |
| | | | |
Balance at December 31, 2012 | | $ | 844 | |
| | | | |
The GMIB reinsurance contracts are considered derivatives and are reported at fair value.
F-56
The December 31, 2012 values for variable annuity contracts in force on such date with GMDB and GMIB features are presented in the following table. For contracts with the GMDB feature, the net amount at risk in the event of death is the amount by which the GMDB benefits exceed related account values. For contracts with the GMIB feature, the net amount at risk in the event of annuitization is the amount by which the present value of the GMIB benefits exceeds related account values, taking into account the relationship between current annuity purchase rates and the GMIB guaranteed annuity purchase rates. Since variable annuity contracts with GMDB guarantees may also offer GMIB guarantees in the same contract, the GMDB and GMIB amounts listed are not mutually exclusive:
| | | | | | | | | | | | | | | | | | | | |
| | | Return
of
Premium | | | Ratchet | | | Roll-Up | | | Combo | | | Total | |
| | | (Dollars In Millions) | |
GMDB: | | | | | | | | | | | | | | | | | | | | |
Account values invested in: | | | | | | | | | | | | | | | | | | | | |
General Account | | $ | 12,817 | | | $ | 223 | | | $ | 102 | | | $ | 467 | | | $ | 13,609 | |
Separate Accounts | | $ | 30,349 | | | $ | 7,419 | | | $ | 3,722 | | | $ | 34,536 | | | $ | 76,026 | |
Net amount at risk, gross | | $ | 756 | | | $ | 784 | | | $ | 2,722 | | | $ | 13,931 | | | $ | 18,193 | |
Net amount at risk, net of amounts reinsured | | $ | 756 | | | $ | 480 | | | $ | 1,843 | | | $ | 5,617 | | | $ | 8,696 | |
Average attained age of contractholders | | | 48.5 | | | | 63.8 | | | | 69.4 | | | | 64.6 | | | | 52.9 | |
Percentage of contractholders over age 70 | | | 8.1 | % | | | 29.3 | % | | | 49.9 | % | | | 30.8 | % | | | 14.8 | % |
Range of contractually specified interest rates | | | N/A | | | | N/A | | | | 3.0% - 6.0% | | | | 3.0% - 6.5% | | | | 3.0% - 6.5% | |
| | | | | |
GMIB: | | | | | | | | | | | | | | | | | | | | |
Account values invested in: | | | | | | | | | | | | | | | | | | | | |
General Account | | | N/A | | | | N/A | | | $ | 23 | | | $ | 562 | | | $ | 585 | |
Separate Accounts | | | N/A | | | | N/A | | | $ | 2,488 | | | $ | 46,378 | | | $ | 48,866 | |
Net amount at risk, gross | | | N/A | | | | N/A | | | $ | 1,995 | | | $ | 10,208 | | | $ | 12,203 | |
Net amount at risk, net of amounts reinsured | | | N/A | | | | N/A | | | $ | 593 | | | $ | 2,753 | | | $ | 3,346 | |
Weighted average years remaining until annuitization | | | N/A | | | | N/A | | | | 0.3 | | | | 4.4 | | | | 4.2 | |
Range of contractually specified interest rates | | | N/A | | | | N/A | | | | 3.0% - 6.0% | | | | 3.0% - 6.5% | | | | 3.0% - 6.5% | |
The liability for GIB and GWBL and other features, not included above, was $265 million and $291 million at December 31, 2012 and 2011, respectively, which are accounted for as embedded derivatives. This liability reflects the present value of expected future payments (benefits) less the fees attributable to these features over a range of market consistent economic scenarios.
F-57
B)Separate Account Investments by Investment Category Underlying GMDB and GMIB Features
The total account values of variable annuity contracts with GMDB and GMIB features include amounts allocated to the guaranteed interest option, which is part of the General Account and variable investment options that invest through Separate Accounts in variable insurance trusts. The following table presents the aggregate fair value of assets, by major investment category, held by Separate Accounts that support variable annuity contracts with GMDB and GMIB benefits and guarantees. The investment performance of the assets impacts the related account values and, consequently, the net amount of risk associated with the GMDB and GMIB benefits and guarantees. Since variable annuity contracts with GMDB benefits and guarantees may also offer GMIB benefits and guarantees in each contract, the GMDB and GMIB amounts listed are not mutually exclusive:
Investment in Variable Insurance Trust Mutual Funds
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
GMDB: | | | | | | | | |
Equity | | $ | 52,633 | | | $ | 46,207 | |
Fixed income | | | 3,748 | | | | 3,810 | |
Balanced | | | 19,102 | | | | 19,525 | |
Other | | | 543 | | | | 652 | |
| | | | | | | | |
Total | | $ | 76,026 | | | $ | 70,194 | |
| | | | | | | | |
| | |
GMIB: | | | | | | | | |
Equity | | $ | 33,361 | | | $ | 29,819 | |
Fixed income | | | 2,335 | | | | 2,344 | |
Balanced | | | 12,906 | | | | 13,379 | |
Other | | | 264 | | | | 345 | |
| | | | | | | | |
Total | | $ | 48,866 | | | $ | 45,887 | |
| | | | | | | | |
C)Hedging Programs for GMDB, GMIB, GIB and GWBL and Other Features
Beginning in 2003, AXA Equitable established a program intended to hedge certain risks associated first with the GMDB feature and, beginning in 2004, with the GMIB feature of the Accumulator® series of variable annuity products. The program has also been extended to cover other guaranteed benefits as they have been made available. This program currently utilizes derivative contracts, such as exchange-traded equity, currency and interest rate futures contracts, total return and/or equity swaps, interest rate swap and floor contracts, swaptions, variance swaps as well as equity options, that collectively are managed in an effort to reduce the economic impact of unfavorable changes in guaranteed benefits’ exposures attributable to movements in the equity and fixed income markets. At the present time, this program hedges certain economic risks on products sold from 2001 forward, to the extent such risks are not reinsured. At December 31, 2012, the total account value and net amount at risk of the hedged variable annuity contracts were $38,029 million and $7,035 million, respectively, with the GMDB feature and $21,615 million and $2,761 million, respectively, with the GMIB feature.
These programs do not qualify for hedge accounting treatment. Therefore, gains (losses) on the derivatives contracts used in these programs, including current period changes in fair value, are recognized in net investment income (loss) in the period in which they occur, and may contribute to earnings (loss) volatility.
F-58
D)Variable and Interest-Sensitive Life Insurance Policies – No Lapse Guarantee
The no lapse guarantee feature contained in variable and interest-sensitive life insurance policies keeps them in force in situations where the policy value is not sufficient to cover monthly charges then due. The no lapse guarantee remains in effect so long as the policy meets a contractually specified premium funding test and certain other requirements.
The following table summarizes the no lapse guarantee liabilities reflected in the General Account in Future policy benefits and other policyholders’ liabilities, and the related reinsurance ceded.
| | | | | | | | | | | | |
| | | Direct Liability | | | Reinsurance
Ceded | | | Net | |
| | | (In Millions) | |
| | | |
Balance at January 1, 2010 | | $ | 255 | | | $ | (174 | ) | | $ | 81 | |
Other changes in reserves | | | 120 | | | | (57 | ) | | | 63 | |
| | | | | | | | | | | | |
Balance at December 31, 2010 | | | 375 | | | | (231 | ) | | | 144 | |
Other changes in reserves | | | 95 | | | | (31 | ) | | | 64 | |
| | | | | | | | | | | | |
Balance at December 31, 2011 | | | 470 | | | | (262 | ) | | | 208 | |
Other changes in reserves | | | 86 | | | | (48 | ) | | | 38 | |
| | | | | | | | | | | | |
Balance at December 31, 2012 | | $ | 556 | | | $ | (310 | ) | | $ | 246 | |
| | | | | | | | | | | | |
The Company assumes and cedes reinsurance with other insurance companies. The Company evaluates the financial condition of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. Ceded reinsurance does not relieve the originating insurer of liability.
The Company reinsures most of its new variable life, UL and term life policies on an excess of retention basis. The Insurance Group maintains a maximum retention on each single-life policy of $25 million and on each second-to-die policy of $30 million with the excess 100% reinsured. The Company also reinsures the entire risk on certain substandard underwriting risks and in certain other cases.
At December 31, 2012, the Company had reinsured with non-affiliates and affiliates in the aggregate approximately 5.2% and 47.0%, respectively, of its current exposure to the GMDB obligation on annuity contracts in-force and, subject to certain maximum amounts or caps in any one period, approximately 21.3% and 51.3%, respectively, of its current liability exposure resulting from the GMIB feature. See Note 8.
Based on management’s estimates of future contract cash flows and experience, the estimated fair values of the GMIB reinsurance contracts, considered derivatives at December 31, 2012 and 2011 were $11,044 million and $10,547 million, respectively. The increases (decreases) in estimated fair value were $497 million, $5,941 million and $2,350 million for 2012, 2011 and 2010, respectively.
At December 31, 2012 and 2011, respectively, third-party reinsurance recoverables related to insurance contracts amounted to $2,465 million and $2,383 million, of which $1,964 million and $1,959 million related to two specific reinsurers, which are rated A/AA– with the remainder of the reinsurers rated BBB and above or not rated. At December 31, 2012 and 2011, affiliated reinsurance recoverables related to insurance contracts amounted to $1,383 million and $1,159 million, respectively. A contingent liability exists with respect to reinsurance should the reinsurers be unable to meet their obligations. The Insurance Group evaluates the financial condition of its reinsurers in an effort to minimize its exposure to significant losses from reinsurer insolvencies.
Reinsurance payables related to insurance contracts totaling $73 million and $73 million are included in other liabilities in the consolidated balance sheets at December 31, 2012 and 2011, respectively.
F-59
The Insurance Group cedes substantially all of its group life and health business to a third party insurer. Insurance liabilities ceded totaled $160 million and $177 million at December 31, 2012 and 2011, respectively.
The Insurance Group also cedes a portion of its extended term insurance and paid-up life insurance and substantially all of its individual disability income business through various coinsurance agreements.
The Insurance Group has also assumed accident, health, annuity, aviation and space risks by participating in or reinsuring various reinsurance pools and arrangements. In addition to the sale of insurance products, the Insurance Group currently acts as a professional retrocessionaire by assuming life reinsurance from professional reinsurers. Reinsurance assumed reserves at December 31, 2012 and 2011 were $752 million and $703 million, respectively.
The following table summarizes the effect of reinsurance:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Direct premiums | | $ | 873 | | | $ | 908 | | | $ | 903 | |
Reinsurance assumed | | | 219 | | | | 210 | | | | 213 | |
Reinsurance ceded | | | (578 | ) | | | (585 | ) | | | (586 | ) |
| | | | | | | | | | | | |
Premiums | | $ | 514 | | | $ | 533 | | | $ | 530 | |
| | | | | | | | | | | | |
| | | |
Universal Life and Investment-type Product Policy Fee Income Ceded | | $ | 234 | | | $ | 221 | | | $ | 210 | |
| | | | | | | | | | | | |
Policyholders’ Benefits Ceded | | $ | 667 | | | $ | 510 | | | $ | 536 | |
| | | | | | | | | | | | |
Individual Disability Income and Major Medical
Claim reserves and associated liabilities net of reinsurance ceded for individual DI and major medical policies were $86 million and $92 million at December 31, 2012 and 2011, respectively. At December 31, 2012 and 2011, respectively, $1,704 million and $1,684 million of DI reserves and associated liabilities were ceded through indemnity reinsurance agreements with a singular reinsurance group. Net incurred benefits (benefits paid plus changes in claim reserves) and benefits paid for individual DI and major medical policies are summarized below:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Incurred benefits related to current year | | $ | 16 | | | $ | 24 | | | $ | 30 | |
Incurred benefits related to prior years | | | 14 | | | | 18 | | | | 10 | |
| | | | | | | | | | | | |
Total Incurred Benefits | | $ | 30 | | | $ | 42 | | | $ | 40 | |
| | | | | | | | | | | | |
| | | |
Benefits paid related to current year | | $ | 21 | | | $ | 15 | | | $ | 12 | |
Benefits paid related to prior years | | | 16 | | | | 24 | | | | 30 | |
| | | | | | | | | | | | |
Total Benefits Paid | | $ | 37 | | | $ | 39 | | | $ | 42 | |
| | | | | | | | | | | | |
F-60
10) | SHORT-TERM AND LONG-TERM DEBT |
Short-term and long-term debt consists of the following:
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
Short-term debt: | | | | | | | | |
AllianceBernstein commercial paper (with interest rates of 0.5% and 0.2%) | | $ | 323 | | | $ | 445 | |
| | | | | | | | |
Total short-term debt | | | 323 | | | | 445 | |
| | | | | | | | |
| | |
Long-term debt: | | | | | | | | |
AXA Equitable: | | | | | | | | |
Surplus Notes, 7.7%, due 2015 | | | 200 | | | | 200 | |
| | | | | | | | |
Total long-term debt | | | 200 | | | | 200 | |
| | | | | | | | |
| | |
Total Short-term and Long-term Debt | | $ | 523 | | | $ | 645 | |
| | | | | | | | |
Short-term Debt
AXA Equitable is a member of the Federal Home Loan Bank of New York (“FHLBNY”), which provides AXA Equitable with access to collateralized borrowings and other FHLBNY products. As membership requires the ownership of member stock, AXA Equitable purchased stock to meet their membership requirement ($12 million, as of December 31, 2012). Any borrowings from the FHLBNY require the purchase of FHLBNY activity based stock in an amount equal to 4.5% of the borrowings. AXA Equitable’s borrowing capacity with FHLBNY is $1,000 million. As a member of FHLBNY, AXA Equitable can receive advances for which it would be required to pledge qualified mortgage-backed assets and government securities as collateral. At December 31, 2012, there were no outstanding borrowings from FHLBNY.
In December 2010, AllianceBernstein entered into a committed, unsecured three-year senior revolving credit facility (the “AB Credit Facility”) with a group of commercial banks and other lenders in an original principal amount of $1,000 million with SCB LLC as an additional borrower.
The AB Credit Facility is available for AllianceBernstein’s and SCB LLC’s business purposes, including the support of AllianceBernstein’s $1,000 million commercial paper program. Both AllianceBernstein and SCB LLC can draw directly under the AB Credit Facility and management expects to draw on the AB Credit Facility from time to time.
The AB Credit Facility contains affirmative, negative and financial covenants, which are customary for facilities of this type, including, among other things, restrictions on dispositions of assets, restrictions on liens, a minimum interest coverage ratio and a maximum leverage ratio. The AB Credit Facility also includes customary events of default (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or lender’s commitments may be terminated. Also, under such provisions, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the AB Credit Facility would automatically become immediately due and payable, and the lender’s commitments would automatically terminate.
The AB Credit Facility provides for possible increases in principal amount by up to an aggregate incremental amount of $250 million (“accordion feature”), any such increase being subject to the consent of the affected lenders. Amounts under the AB Credit Facility may be borrowed, repaid and re-borrowed by either company from time to time until the maturity of the facility. Voluntary prepayments and commitment reductions requested by AllianceBernstein are permitted at any time without fee (other than customary breakage costs relating to the prepayment of any drawn loans) upon proper notice and subject to a minimum dollar requirement. Borrowings under the AB Credit Facility bear interest at a rate per annum, which will be, at AllianceBernstein’s option, a rate equal to an applicable margin, which is subject to adjustment based on the credit ratings of AllianceBernstein, plus one of the following indexes: London Interbank Offered Rate (“LIBOR”); a floating base rate; or the Federal Funds rate.
F-61
On January 17, 2012, the AB Credit Facility was amended and restated. The principal amount was amended to $900 million from the original principal amount of $1,000 million. Also, the amendment increased the accordion feature from $250 million to $350 million. In addition, the maturity date of the AB Credit Facility has been extended from December 9, 2013 to January 17, 2017. There were no other significant changes in terms and conditions included in this amendment.
As of December 31, 2012 and 2011, AllianceBernstein had no amounts outstanding under the AB Credit Facility or the previous revolving credit facilities, respectively.
In addition, SCB LLC has five uncommitted lines of credit with four financial institutions. Two of these lines of credit permit us to borrow up to an aggregate of approximately $200 million while three lines have no stated limit.
Long-term Debt
At December 31, 2012, the Company was not in breach of any long-term debt covenants.
11) | RELATED PARTY TRANSACTIONS |
Loans to Affiliates
In September 2007, AXA issued a $650 million 5.4% Senior Unsecured Note to AXA Equitable. The note pays interest semi-annually and was scheduled to mature on September 30, 2012. In March 2011, the maturity date of these notes was extended to December 30, 2020 and the interest rate was increased to 5.7%.
In June 2009, AXA Equitable sold a jointly owned real estate property valued at $1,100 million to a non-insurance subsidiary of AXA Financial in exchange for $700 million in cash and $400 million in 8.0% ten year term mortgage notes on the property reported in Loans to affiliates in the consolidated balance sheets. The $439 million after-tax excess of the property’s fair value over its carrying value was accounted for as a capital contribution to AXA Equitable.
Loans from Affiliates
In 2005, AXA Equitable issued a surplus note to AXA Financial in the amount of $325 million with an interest rate of 6.0% and a maturity date of December 1, 2035. Interest on this note is payable semi-annually.
In November 2008, AXA Financial purchased a $500 million callable 7.1% surplus note from AXA Equitable. The note pays interest semi-annually and matures on December 1, 2018.
In December 2008, AXA Financial purchased a $500 million callable 7.1% surplus note from AXA Equitable. The note pays interest semi-annually and matures on December 1, 2018.
Other Transactions
In October 2012, AXA Equitable sold its 50% interest in a real estate joint venture supporting the Wind-up Annuities line of business to 1285 Holdings, LLC, a non-insurance subsidiary of AXA Financial in exchange for $402 million in cash. The $195 million after-tax excess of the real estate joint venture’s fair value over its carrying value has been accounted for as a capital contribution to AXA Equitable. In connection with this sale, the Company recognized a $226 million pre-tax premium deficiency reserve related to the Wind-up Annuities line of business.
In August 2012, the Company purchased agricultural mortgage loans from MONY Life Insurance Company (“MONY Life”) and MONY Life Insurance Company of America (“MLOA”), both of which are wholly-owned subsidiaries of AXA Financial, for a purchase price of $109 million.
F-62
The Company reimburses AXA Financial for expenses relating to the Excess Retirement Plan, Supplemental Executive Retirement Plan and certain other employee benefit plans that provide participants with medical, life insurance, and deferred compensation benefits. Such reimbursement was based on the cost to AXA Financial of the benefits provided which totaled $37 million, $14 million and $59 million, respectively, for 2012, 2011 and 2010.
In 2012, 2011 and 2010, respectively, the Company paid AXA Distribution and its subsidiaries $684 million, $641 million and $647 million of commissions and fees for sales of insurance products. The Company charged AXA Distribution’s subsidiaries $348 million, $413 million and $428 million, respectively, for their applicable share of operating expenses in 2012, 2011 and 2010, pursuant to the Agreements for Services.
The Company currently reinsures to AXA RE Arizona Company (formerly AXA Bermuda, which during second quarter 2012, redomesticated from Bermuda to Arizona and changed its name to AXA RE Arizona Company) (“AXA Arizona”) a 100% quota share of all liabilities for variable annuities with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under UL insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. The reinsurance arrangements with AXA Arizona provide important capital management benefits to AXA Equitable. At December 31, 2012 and 2011, the Company’s GMIB reinsurance asset with AXA Arizona had carrying values of $8,888 million and $8,129 million, respectively, and is reported in Guaranteed minimum income benefit reinsurance asset, at fair value in the consolidated balance sheets. Ceded premiums in 2012, 2011 and 2010 related to the UL and no lapse guarantee riders totaled approximately $484 million, $484 million and $477 million, respectively. Ceded claims paid in 2012, 2011 and 2010 were $68 million, $31 million and $39 million, respectively.
Various AXA affiliates, including AXA Equitable, cede a portion of their life, health and catastrophe insurance business through reinsurance agreements to AXA Global Life beginning in 2010 (and AXA Cessions in 2009 and prior), AXA affiliated reinsurers. AXA Global Life, in turn, retrocedes a quota share portion of these risks prior to 2008 to AXA Equitable on a one-year term basis. Premiums earned in 2012, 2011 and 2010 under this arrangement totaled approximately $0 million, $1 million and $0 million, respectively. Claims and expenses paid in 2012, 2011 and 2010 were $0 million, $0 million and $0 million, respectively.
AXA Life Insurance Company Ltd (Japan), an AXA subsidiary, cedes a portion of their annuity business to AXA Equitable. Premiums earned in 2012, 2011 and 2010 totaled approximately $9 million, $9 million and $9 million, respectively. Claims and expenses paid in 2012, 2011 and 2010 were $1 million, $1 million and $1 million, respectively.
Various AXA Financial affiliates cede a portion of their life business through excess of retention treaties to AXA Equitable on a yearly renewal term basis. Premiums earned in 2012, 2011 and 2010 from AXA Equitable Life and Annuity Company totaled approximately $7 million, $8 million and $7 million, respectively. Claims and expenses paid in 2012, 2011 and 2010 were $5 million, $4 million and $4 million, respectively. Premiums earned in 2012, 2011 and 2010 from U.S. Financial Life Insurance Company (“USFL”) totaled approximately $5 million, $5 million and $5 million, respectively. Claims and expenses paid in 2012, 2011 and 2010 were $7 million, $8 million and $10 million, respectively.
Both AXA Equitable and AllianceBernstein, along with other AXA affiliates, participate in certain intercompany cost sharing and service agreements including technology and professional development arrangements. AXA Equitable and AllianceBernstein incurred expenses under such agreements of approximately $161 million, $152 million and $160 million in 2012, 2011 and 2010, respectively. Expense reimbursements by AXA and AXA affiliates to AXA Equitable under such agreements totaled approximately $26 million, $22 million and $51 million in 2012, 2011 and 2010, respectively. The net receivable related to these contracts was approximately $8 million and $15 million at December 31, 2012 and 2011, respectively.
F-63
Commissions, fees and other income includes certain revenues for services provided to mutual funds managed by AllianceBernstein. These revenues are described below:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Investment advisory and services fees | | $ | 886 | | | $ | 840 | | | $ | 778 | |
Distribution revenues | | | 401 | | | | 352 | | | | 339 | |
Other revenues - shareholder servicing fees | | | 89 | | | | 92 | | | | 93 | |
Other revenues - other | | | 5 | | | | 6 | | | | 5 | |
12) | EMPLOYEE BENEFIT PLANS |
Pension Plans
AXA Equitable sponsors a qualified defined benefit plan covering its eligible employees (including certain qualified part-time employees), managers and financial professionals. This pension plan is non-contributory and its benefits are generally based on a cash balance formula and/or, for certain participants, years of service and average earnings over a specified period in the plan. The Company also sponsors non-qualified defined benefit plans and post-retirement plans. AllianceBernstein maintains a qualified, non-contributory, defined benefit retirement plan covering current and former employees who were employed by AllianceBernstein in the United States prior to October 2, 2000. AllianceBernstein’s benefits are based on years of credited service and average final base salary. The Company uses a December 31 measurement date for its pension plans.
For 2012, cash contributions by AXA Equitable and AllianceBernstein to their respective qualified pension plans were $260 million and $5 million. The funding policy of the Company for its qualified pension plans is to satisfy its funding obligations each year in an amount not less than the minimum required by the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended by the Pension Protection Act of 2006 (the “Pension Act”), and not greater than the maximum it can deduct for Federal income tax purposes. Based on the funded status of the plans at December 31, 2012, no minimum contribution is required to be made in 2013 under ERISA, as amended by the Pension Act, but management is currently evaluating if it will make contributions during 2013. AllianceBernstein currently estimates that it will contribute $4 million to its pension plan during 2013.
Components of net periodic pension expense for the Company’s qualified plans were as follows:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Service cost | | $ | 40 | | | $ | 41 | | | $ | 37 | |
Interest cost | | | 109 | | | | 122 | | | | 129 | |
Expected return on assets | | | (146 | ) | | | (120 | ) | | | (115 | ) |
Actuarial (gains) loss | | | 1 | | | | — | | | | — | |
Net amortization | | | 164 | | | | 145 | | | | 125 | |
Plan amendments and additions | | | — | | | | — | | | | 13 | |
| | | | | | | | | | | | |
Net Periodic Pension Expense | | $ | 168 | | | $ | 188 | | | $ | 189 | |
| | | | | | | | | | | | |
F-64
Changes in the Projected Benefit Obligation (“PBO”) of the Company’s qualified plans were comprised of:
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
Projected benefit obligation, beginning of year | | $ | 2,626 | | | $ | 2,424 | |
Service cost | | | 32 | | | | 30 | |
Interest cost | | | 109 | | | | 122 | |
Actuarial (gains) losses | | | 219 | | | | 229 | |
Benefits paid | | | (187 | ) | | | (179 | ) |
Plan amendments and additions | | | (2 | ) | | | — | |
| | | | | | | | |
Projected Benefit Obligation, End of Year | | $ | 2,797 | | | $ | 2,626 | |
| | | | | | | | |
The following table discloses the change in plan assets and the funded status of the Company’s qualified pension plans:
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
Pension plan assets at fair value, beginning of year | | $ | 2,093 | | | $ | 1,529 | |
Actual return on plan assets | | | 231 | | | | 77 | |
Contributions | | | 265 | | | | 672 | |
Benefits paid and fees | | | (193 | ) | | | (185 | ) |
| | | | | | | | |
Pension plan assets at fair value, end of year | | | 2,396 | | | | 2,093 | |
PBO | | | 2,797 | | | | 2,626 | |
| | | | | | | | |
Excess of PBO Over Pension Plan Assets | | $ | (401 | ) | | $ | (533 | ) |
| | | | | | | | |
Amounts recognized in the accompanying consolidated balance sheets to reflect the funded status of these plans were accrued pension costs of $401 million and $533 million at December 31, 2012 and 2011, respectively. The aggregate PBO and fair value of pension plan assets for plans with PBOs in excess of those assets were $2,797 million and $2,396 million, respectively, at December 31, 2012 and $2,626 million and $2,093 million, respectively, at December 31, 2011. The aggregate accumulated benefit obligation and fair value of pension plan assets for pension plans with accumulated benefit obligations in excess of those assets were $2,761 million and $2,396 million, respectively, at December 31, 2012 and $2,593 million and $2,093 million, respectively, at December 31, 2011. The accumulated benefit obligation for all defined benefit pension plans was $2,761 million and $2,593 million at December 31, 2012 and 2011, respectively.
The following table discloses the amounts included in AOCI at December 31, 2012 and 2011 that have not yet been recognized as components of net periodic pension cost:
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
Unrecognized net actuarial (gain) loss | | $ | 1,650 | | | $ | 1,679 | |
Unrecognized prior service cost (credit) | | | 4 | | | | 7 | |
| | | | | | | | |
Total | | $ | 1,654 | | | $ | 1,686 | |
| | | | | | | | |
F-65
The estimated net actuarial (gain) loss and prior service cost (credit) expected to be reclassified from AOCI and recognized as components of net periodic pension cost over the next year are $165 million and $1 million, respectively.
The following table discloses the allocation of the fair value of total plan assets for the qualified pension plans of the Company at December 31, 2012 and 2011:
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
Fixed Maturities | | | 52.8 | % | | | 52.4 | % |
Equity Securities | | | 36.5 | | | | 36.3 | |
Equity real estate | | | 8.4 | | | | 9.3 | |
Cash and short-term investments | | | 2.3 | | | | 2.0 | |
| | | | | | | | |
Total | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | |
The primary investment objective of the qualified pension plan of AXA Equitable is to maximize return on assets, giving consideration to prudent risk. Guidelines regarding the allocation of plan assets for AXA Equitable’s qualified pension plan are formalized by the Investment Committee established by the funded benefit plans of AXA Equitable and are designed with a long-term investment horizon. During 2012, AXA Equitable continued to implement an investment allocation strategy of the qualified defined benefit pension plan targeting 30%-40% equities, 50%-60% high quality bonds, and 0%-15% equity real estate and other investments. Exposure to real estate investments offers diversity to the total portfolio and long-term inflation protection.
In 2012, AXA Equitable’s qualified pension plan continued to implement hedging strategies intended to lessen downside equity risk. These hedging programs were initiated during fourth quarter 2008 and currently utilize derivative instruments, principally exchange-traded options contracts that are managed in an effort to reduce the economic impact of unfavorable changes in the equity markets.
The following tables disclose the fair values of plan assets and their level of observability within the fair value hierarchy for the qualified pension plans of the Company at December 31, 2012 and 2011, respectively.
| | | | | | | | | | | | | | | | |
December 31, 2012: | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Asset Categories | | (In Millions) | |
Fixed Maturities: | | | | | | | | | | | | | | | | |
Corporate | | $ | — | | | $ | 849 | | | $ | — | | | $ | 849 | |
U.S. Treasury, government and agency | | | — | | | | 410 | | | | — | | | | 410 | |
States and political subdivisions | | | — | | | | 18 | | | | — | | | | 18 | |
Other structured debt | | | — | | | | — | | | | 5 | | | | 5 | |
Common and preferred equity | | | 751 | | | | 62 | | | | — | | | | 813 | |
Mutual funds | | | 35 | | | | — | | | | — | | | | 35 | |
Private real estate investment funds | | | — | | | | — | | | | 3 | | | | 3 | |
Private real estate investment trusts | | | — | | | | 11 | | | | 197 | | | | 208 | |
Cash and cash equivalents | | | 25 | | | | — | | | | — | | | | 25 | |
Short-term investments | | | — | | | | 30 | | | | — | | | | 30 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 811 | | | $ | 1,380 | | | $ | 205 | | | $ | 2,396 | |
| | | | | | | | | | | | | | | | |
F-66
| | | | | | | | | | | | | | | | |
December 31, 2011: | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Asset Categories | | (In Millions) | |
Fixed Maturities: | | | | | | | | | | | | | | | | |
Corporate | | $ | — | | | $ | 797 | | | $ | — | | | $ | 797 | |
U.S. Treasury, government and agency | | | — | | | | 275 | | | | — | | | | 275 | |
States and political subdivisions | | | — | | | | 11 | | | | — | | | | 11 | |
Other structured debt | | | — | | | | — | | | | 6 | | | | 6 | |
Common and preferred equity | | | 712 | | | | 2 | | | | — | | | | 714 | |
Mutual funds | | | 33 | | | | — | | | | — | | | | 33 | |
Private real estate investment funds | | | — | | | | — | | | | 4 | | | | 4 | |
Private investment trusts | | | — | | | | 29 | | | | 183 | | | | 212 | |
Cash and cash equivalents | | | 1 | | | | 1 | | | | — | | | | 2 | |
Short-term investments | | | 7 | | | | 32 | | | | — | | | | 39 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 753 | | | $ | 1,147 | | | $ | 193 | | | $ | 2,093 | |
| | | | | | | | | | | | | | | | |
At December 31, 2012, assets classified as Level 1, Level 2, and Level 3 comprise approximately 33.9%, 57.5% and 8.6%, respectively, of qualified pension plan assets. At December 31, 2011, assets classified as Level 1, Level 2 and Level 3 comprised approximately 36.0%, 54.8% and 9.2%, respectively, of qualified pension plan assets. See Note 2 for a description of the fair value hierarchy. The fair values of qualified pension plan assets are measured and ascribed to levels within the fair value hierarchy in a manner consistent with the invested assets of the Company that are measured at fair value on a recurring basis. Except for an investment of approximately $3 million in a private REIT through a pooled separate account, there are no significant concentrations of credit risk arising within or across categories of qualified pension plan assets.
The tables below present a reconciliation for all Level 3 qualified pension plan assets at December 31, 2012 and 2011, respectively.
| | | | | | | | | | | | | | | | | | | | |
| | | Fixed
Maturities(1) | | | Private
Real Estate
Investment
Funds | | | Private
Investment
Trusts | | | Common
Equity | | | Total | |
| | | (In Millions) | |
| | | | | |
Balance at January 1, 2012 | | $ | 6 | | | $ | 4 | | | $ | 183 | | | $ | — | | | $ | 193 | |
Actual return on plan assets: | | | | | | | | | | | | | | | | | | | | |
Relating to assets still held at December 31, 2012 | | | — | | | | — | | | | 14 | | | | — | | | | 14 | |
Purchases/issues | | | — | | | | — | | | | — | | | | — | | | | — | |
Sales/settlements | | | (1 | ) | | | (1 | ) | | | — | | | | — | | | | (2 | ) |
Transfers into/out of Level 3 | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2012 | | $ | 5 | | | $ | 3 | | | $ | 197 | | | $ | — | | | $ | 205 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Balance at January 1, 2011 | | $ | 6 | | | $ | 13 | | | $ | 163 | | | $ | — | | | $ | 182 | |
Actual return on plan assets: | | | | | | | | | | | | | | | | | | | | |
Relating to assets still held at December 31, 2011 | | | — | | | | 3 | | | | 20 | | | | — | | | | 23 | |
Purchases/issues | | | — | | | | — | | | | — | | | | 1 | | | | 1 | |
Sales/settlements | | | — | | | | (12 | ) | | | — | | | | (1 | ) | | | (13 | ) |
Transfers into/out of Level 3 | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2011 | | $ | 6 | | | $ | 4 | | | $ | 183 | | | $ | — | | | $ | 193 | |
| | | | | | | | | | | | | | | | | | | | |
(1) | Includes commercial mortgage- and asset-backed securities and other structured debt. |
F-67
The discount rate assumptions used by the Company to measure the benefits obligations and related net periodic cost of its qualified pension plans reflect the rates at which those benefits could be effectively settled. Projected nominal cash outflows to fund expected annual benefits payments under each of the Company’s qualified pension plans were discounted using a published high-quality bond yield curve. The discount rate used to measure each of the benefits’ obligations at December 31, 2012 and 2011 represents the level equivalent spot discount rate that produces the same aggregate present value measure of the total benefits obligation as the aforementioned discounted cash flow analysis. The following table discloses the weighted-average assumptions used to measure the Company’s pension benefit obligations and net periodic pension cost at and for the years ended December 31, 2012 and 2011.
| | | | | | | | |
| | | 2012 | | | 2011 | |
| | |
Discount rates: | | | | | | | | |
Benefit obligation | | | 3.50 | % | | | 4.25 | % |
Periodic cost | | | 4.25 | % | | | 5.25 | % |
| | |
Rates of compensation increase: | | | | | | | | |
Benefit obligation and periodic cost | | | 6.00 | % | | | 6.00 | % |
| | |
Expected long-term rates of return on pension plan assets (periodic cost) | | | 6.75 | % | | | 6.75 | % |
The expected long-term rate of return assumption on plan assets is based upon the target asset allocation of the plan portfolio and is determined using forward-looking assumptions in the context of historical returns and volatilities for each asset class.
Prior to 1987, participants’ benefits under AXA Equitable’s qualified plan were funded through the purchase of non-participating annuity contracts from AXA Equitable. Benefit payments under these contracts were approximately $12 million, $13 million and $14 million for 2012, 2011 and 2010, respectively.
The following table provides an estimate of future benefits expected to be paid in each of the next five years, beginning January 1, 2013, and in the aggregate for the five years thereafter. These estimates are based on the same assumptions used to measure the respective benefit obligations at December 31, 2012 and include benefits attributable to estimated future employee service.
| | | | |
| | | Pension
Benefits | |
| | | (In Millions) | |
| |
2013 | | $ | 193 | |
2014 | | | 203 | |
2015 | | | 202 | |
2016 | | | 200 | |
2017 | | | 197 | |
Years 2018-2022 | | | 936 | |
Health Plans
The Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “Health Acts”), signed into law in March 2010, have both immediate and long-term financial reporting implications for many employers who sponsor health plans for active employees and retirees. While many of the provisions of the Health Acts do not take effect until future years and are intended to coincide with fundamental changes to the healthcare system, current-period measurement of the benefits obligation is required to reflect an estimate of the potential implications of presently enacted law changes absent consideration of potential future plan modifications. Management, in consultation with its actuarial advisors in respect of the Plan, has concluded the Health Acts have no material impact on the calculations on future benefit levels due to the caps on the Company subsidy. Any increases in plan cost, including those associated under the Excise Tax on high cost plans, are anticipated to be passed on to retirees.
F-68
Included among the major provisions of the Health Acts is a change in the tax treatment of the Medicare Part D subsidy. The subsidy came into existence with the enactment of the Medicare Modernization Act (“MMA”) in 2003 and is available to sponsors of retiree health benefit plans with a prescription drug benefit that is “actuarially equivalent” to the benefit provided by the Medicare Part D program. Prior to the Health Acts, sponsors were permitted to deduct the full cost of these retiree prescription drug plans without reduction for subsidies received. Although the Medicare Part D subsidy does not become taxable until years beginning after December 31, 2012, the effects of changes in tax law had to be recognized immediately in the income statement of the period of enactment. When MMA was enacted, the Company reduced its health benefits obligation to reflect the expected future subsidies from this program but did not establish a deferred tax asset for the value of the related future tax deductions. Consequently, passage of the Health Acts did not result in adjustment of the deferred tax accounts.
Since December 31, 1999, AXA Financial, Inc. has legally assumed primary liability from AXA Equitable for all current and future obligations of its Excess Retirement Plan, Supplemental Executive Retirement Plan and certain other employee benefit plans that provide participants with medical, life insurance, and deferred compensation benefits; AXA Equitable remains secondarily liable. AXA Equitable reimburses AXA Financial, Inc. for costs associated with these plans, as described in Note 11. In 2011, AXA Equitable eliminated any subsidy for retiree medical and dental coverage for individuals retiring on or after May 1, 2012 as well as a $10,000 retiree life insurance benefit for individuals retiring on or after January 1, 2012. As a result, the Company recognized a one-time reduction in benefits expense of approximately $37 million in 2011.
13) | SHARE-BASED AND OTHER COMPENSATION PROGRAMS |
AXA and AXA Financial sponsor various share-based compensation plans for eligible employees and financial professionals of AXA Financial and its subsidiaries, including the Company. AllianceBernstein also sponsors its own unit option plans for certain of its employees. Activity in these share-based plans in the discussions that follow relates to awards granted to eligible employees and financial professionals of AXA Financial and its subsidiaries under each of these plans in the aggregate, except where otherwise noted.
For 2012, 2011 and 2010, respectively, the Company recognized compensation costs of $194 million, $416 million and $199 million for share-based payment arrangements as further described herein.
U.S. employees are granted AXA ordinary share options under the Stock Option Plan for AXA Financial Employees and Associates (the “Stock Option Plan”) and are granted AXA performance units under the AXA Performance Unit Plan (the “Performance Unit Plan”).
Performance Units. On March 16, 2012, under the terms of the AXA Performance Unit Plan 2012, AXA awarded approximately 2.3 million unearned performance units to employees of AXA Equitable. The extent to which 2012-2013 cumulative performance targets measuring the performance of AXA and the insurance related businesses of AXA Financial Group are achieved will determine the number of performance units earned, which may vary in linear formula between 0% and 130% of the number of performance units at stake. The performance units earned during this performance period will vest and be settled in cash on the third anniversary of the award date. The price used to value the performance units at settlement will be the average closing price of the AXA ordinary share for the last 20 trading days of the vesting period converted to U.S. dollars using the Euro to U.S. dollar exchange rate on March 15, 2015. In 2012, the expense associated with the March 16, 2012 grant of performance units was approximately $11 million.
On April 12, 2012, cash distributions of approximately $9 million were made to AXA Equitable active and former employees in settlement of 539,406 performance units, representing 50 percent of the number of performance units earned under the terms of the AXA Performance Unit Plan 2010. The remaining earned performance units vest with continued service to March 19, 2013, the third anniversary of the date of grant, with limited exception for retirement, death, or disability, and will be valued using the average closing price of the AXA ordinary share for the last 20 trading days of the vesting period converted to U.S. dollars at the Euro to U.S. dollar exchange rate on March 18, 2013. Participants may elect to receive AXA ordinary shares in lieu of cash for all or a portion of that settlement.
F-69
On March 18, 2011, under the terms of the AXA Performance Unit Plan 2011, AXA awarded approximately 1.8 million unearned performance units to employees and financial professionals of AXA Financial’s subsidiaries. The extent to which 2011-2012 cumulative two-year targets measuring the performance of AXA and the insurance related businesses of AXA Financial Group are achieved will determine the number of performance units earned, which may vary in linear formula between 0% and 130% of the number of performance units at stake. The performance units earned during this performance period will vest and be settled on the third anniversary of the award date. The price used to value the performance units at settlement will be the average closing price of the AXA ordinary share for the last 20 trading days of the vesting period converted to U.S. dollars using the Euro to U.S. dollar exchange rate on March 17, 2014. For 2012 and 2011, the Company recognized expenses associated with the March 18, 2011 grant of performance units of approximately $11 million and $2 million, respectively.
On March 20, 2011, approximately 830,650 performance units earned under the AXA Performance Unit Plan 2009 were fully vested for total value of approximately $17 million. Distributions to participants were made on April 14, 2011, resulting in cash settlements of approximately 80% of these performance units for aggregate value of approximately $14 million and equity settlements of the remainder with approximately 163,866 restricted AXA ordinary shares for aggregate value of approximately $3 million. The AXA ordinary shares were sourced from Treasury shares.
On March 19, 2010, under the terms of the AXA Performance Unit Plan 2010, the AXA Board awarded approximately 1.6 million unearned performance units to employees and financial professionals of AXA Financial’s subsidiaries. The extent to which 2010-2011 cumulative two-year targets measuring the performance of AXA and the insurance related businesses of AXA Financial Group were achieved determines the number of performance units earned, which may vary in linear formula between 0% and 130% of the number of performance units at stake. Half of the performance units earned during this two-year cumulative performance period will vest and be settled on each of the second and third anniversaries of the award date. The price used to value the performance units at each settlement date will be the average closing price of the AXA ordinary share for the last 20 trading days of the vesting period converted to U.S. dollars using the Euro to U.S. dollar exchange rate on March 16, 2012 and March 18, 2013, respectively. Participants may elect to receive AXA ordinary shares in lieu of cash for all or a portion of the performance units that vest on the third anniversary of the grant date. For 2012, 2011 and 2010, the Company recognized expenses associated with the March 19, 2010 grant of performance units of approximately $620,000, $2 million and $8 million, respectively.
On April 1, 2010, approximately 620,507 performance units earned under the AXA Performance Unit Plan 2008 were fully vested for total value of approximately $14 million. Distributions to participants were made on April 22, 2010, resulting in cash settlements of approximately 81.5% of these performance units for aggregate value of approximately $11 million and equity settlements of the remainder with approximately 114,757 AXA ordinary shares for aggregate value of approximately $3 million. The AXA ordinary shares are subject to a non-transferability restriction for two years. These AXA ordinary shares were sourced from immediate exchange on a one-for-one basis of the 220,000 AXA ADRs for which AXA Financial Group paid $7 million in settlement on April 10, 2010 of a forward purchase contract entered into on June 16, 2008.
For 2012, 2011 and 2010, the Company recognized compensation costs of $24 million, $2 million and $16 million, respectively, for performance units earned to date. The change in fair value of these awards is measured by the closing price of the underlying AXA ordinary shares or AXA ADRs. The cost of performance unit awards, as adjusted for achievement of performance targets and pre-vesting forfeitures is attributed over the shorter of the cliff-vesting period or to the date at which retirement eligibility is achieved. The value of performance units earned and reported in Other liabilities in the consolidated balance sheets at December 31, 2012 and 2011 was $58 million and $24 million, respectively. Approximately 4,968,118 outstanding performance units are at risk to achievement of 2012 performance criteria, primarily representing the grant of March 16, 2012 for which cumulative average 2012-2013 performance targets will determine the number of performance units earned and including one-half of the award granted on March 18, 2011.
Option Plans. On March 16, 2012, approximately 900,790 options to purchase AXA ordinary shares were granted to AXA Equitable employees under the terms of the Stock Option Plan at an exercise price of 12.22 euros. All of those options have a four-year graded vesting schedule, with one-third vesting on each of the second, third, and fourth anniversaries of the grant date. Approximately 370,426 of the total options awarded on March 16, 2012 are further
F-70
subject to conditional vesting terms that require the AXA ordinary share price to outperform the Euro Stoxx Insurance Index over a specified period. All of the options granted on March 16, 2012 have a ten-year term. The weighted average grant date fair value per option award was estimated at $2.48 using a Black-Scholes options pricing model with modification to measure the value of the conditional vesting feature. Key assumptions used in the valuation included expected volatility of 39.89%, a weighted average expected term of 5.6 years, an expected dividend yield of 7.54% and a risk-free interest rate of 1.8%. The total fair value of these options (net of expected forfeitures) of approximately $2 million is charged to expense over the shorter of the vesting term or the period up to the date at which the participant becomes retirement eligible. In 2012, the expense associated with the March 16, 2012 grant of options was approximately $790,754.
On March 18, 2011, approximately 2.4 million options to purchase AXA ordinary shares were granted under the terms of the Stock Option Plan at an exercise price of 14.73 euros. Approximately 2.3 million of those options have a four-year graded vesting schedule, with one-third vesting on each of the second, third, and fourth anniversaries of the grant date, and approximately 154,711 have a four-year cliff vesting term. In addition, approximately 390,988 of the total options awarded on March 18, 2011 are further subject to conditional vesting terms that require the AXA ordinary share price to outperform the Euro Stoxx Insurance Index over a specified period. All of the options granted on March 18, 2011 have a ten-year term. The weighted average grant date fair value per option award was estimated at $2.49 using a Black-Scholes options pricing model with modification to measure the value of the conditional vesting feature. Key assumptions used in the valuation included expected volatility of 33.9%, a weighted average expected term of 6.4 years, an expected dividend yield of 7.0% and a risk-free interest rate of 3.13%. The total fair value of these options (net of expected forfeitures) of approximately $6 million is charged to expense over the shorter of the vesting term or the period up to the date at which the participant becomes retirement eligible. For 2012 and 2011, the Company recognized expenses associated with the March 18, 2011 grant of options of approximately $1 million and $2 million, respectively.
On March 19, 2010, approximately 2.3 million options to purchase AXA ordinary shares were granted under the terms of the Stock Option Plan at an exercise price of 15.43 euros. Approximately 2.2 million of those options have a four-year graded vesting schedule, with one-third vesting on each of the second, third, and fourth anniversaries of the grant date, and approximately 0.1 million have a four-year cliff vesting term. In addition, approximately 0.4 million of the total options awarded on March 19, 2010 are further subject to conditional vesting terms that require the AXA ordinary share price to outperform the Euro Stoxx Insurance Index over a specified period. All of the options granted on March 19, 2010 have a ten-year term. The weighted average grant date fair value per option award was estimated at $3.54 using a Black-Scholes options pricing model with modification to measure the value of the conditional vesting feature. Key assumptions used in the valuation included expected volatility of 36.5%, a weighted average expected term of 6.4 years, an expected dividend yield of 6.98% and a risk-free interest rate of 2.66%. The total fair value of these options (net of expected forfeitures) of approximately $8 million is charged to expense over the shorter of the vesting term or the period up to the date at which the participant becomes retirement eligible. For 2012, 2011 and 2010, the Company recognized expenses associated with the March 19, 2010 grant of options of approximately $662,000, $1 million and $3 million, respectively.
The number of AXA ADRs or AXA ordinary shares authorized to be issued pursuant to option grants and, as further described below, restricted stock grants under The AXA Financial, Inc. 1997 Stock Incentive Plan (the “Stock Incentive Plan”) is approximately 124 million less the number of shares issued pursuant to option grants under The AXA Financial, Inc. 1991 Stock Incentive Plan (the predecessor plan to the Stock Incentive Plan).
F-71
A summary of the activity in the AXA, AXA Financial and AllianceBernstein option plans during 2012 follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Options Outstanding | |
| | | AXA Ordinary Shares | | | AXA ADRs(3) | | | AllianceBernstein Holding
Units | |
| | | Number
Outstanding
(In Millions) | | | Weighted
Average
Exercise
Price | | | Number
Outstanding
(In Millions) | | | Weighted
Average
Exercise
Price | | | Number
Outstanding
(In Millions) | | | Weighted
Average
Exercise
Price | |
| | | | | | |
Options outstanding at January 1, 2012 | | | 18.1 | | | € | 19.40 | | | | 7.6 | | | $ | 18.47 | | | | 9.0 | | | $ | 39.63 | |
Options granted | | | 1.2 | | | € | 12.68 | | | | — | | | $ | — | | | | 0.1 | | | $ | 14.58 | |
Options exercised | | | (0.1 | ) | | € | 10.09 | | | | (1.1 | ) | | $ | 12.04 | | | | — | | | $ | — | |
Options forfeited, net | | | (1.1 | ) | | € | 19.46 | | | | (1.5 | ) | | $ | 18.19 | | | | — | | | $ | — | |
Options expired | | | — | | | | — | | | | — | | | | — | | | | (0.5 | ) | | $ | 32.34 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options Outstanding at December 31, 2012 | | | 18.1 | | | € | 21.00 | | | | 5.0 | | | $ | 20.01 | | | | 8.6 | | | $ | 39.77 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Aggregate Intrinsic Value(1) | | | | | | € | — | (2) | | | | | | $ | 1.1 | | | | | | | $ | — | (2) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted Average Remaining Contractual Term (in years) | | | 5.17 | | | | | | | | 1.62 | | | | | | | | 5.8 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Options Exercisable at December 31, 2012 | | | 12.8 | | | € | 23.94 | | | | 5.0 | | | $ | 20.03 | | | | 4.2 | | | | 33.85 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Aggregate Intrinsic Value(1) | | | | | | € | — | (2) | | | | | | $ | 1.1 | | | | | | | $ | — | (2) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Weighted Average Remaining Contractual Term (in years) | | | 4.06 | | | | | | | | 1.60 | | | | | | | | 5.7 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Intrinsic value, presented in millions, is calculated as the excess of the closing market price on December 31, 2012 of the respective underlying shares over the strike prices of the option awards. |
(2) | The aggregate intrinsic value on options outstanding, exercisable and expected to vest is negative and is therefore presented as zero in the table above. |
(3) | AXA ordinary shares generally will be delivered to participants in lieu of AXA ADRs at exercise or maturity. |
Cash proceeds received from employee and financial professional exercises of stock options in 2012 was $14 million. The intrinsic value related to employee and financial professional exercises of stock options during 2012, 2011 and 2010 were $5 million, $3 million and $3 million, respectively, resulting in amounts currently deductible for tax purposes of $2 million, $1 million and $1 million, respectively, for the periods then ended. In 2012, 2011 and 2010, windfall tax benefits of approximately $2 million, $1 million and $1 million, respectively, resulted from employee and financial professional exercises of stock option awards.
At December 31, 2012, AXA Financial held 534,628 AXA ADRs and AXA ordinary shares in treasury at a weighted average cost of approximately $25.22 per share, of which approximately 436,695 were designated to fund future exercises of outstanding stock options and approximately 97,933 were designated to fund restricted stock grants. The AXA ADRs were obtained primarily by exercise of call options that had been purchased by AXA Financial beginning in fourth quarter 2004 to mitigate the U.S. dollar price and foreign exchange risks associated with funding exercises of stock options. These call options expired on November 23, 2009. Outstanding employee options to purchase AXA ordinary shares began to become exercisable on March 29, 2007, coincident with the second anniversary of the first award made in 2005, and exercises of these awards are funded by newly issued AXA ordinary shares.
F-72
For the purpose of estimating the fair value of stock option awards, the Company applies the Black-Scholes model and attributes the result over the requisite service period using the graded-vesting method. A Monte-Carlo simulation approach was used to model the fair value of the conditional vesting feature of the awards of options to purchase AXA ordinary shares. Shown below are the relevant input assumptions used to derive the fair values of options awarded in 2012, 2011 and 2010, respectively.
| | | | | | | | | | | | | | | | | | | | | | |
| | | AXA Ordinary Shares | | | AllianceBernstein Holding
Units |
| | | 2012 | | | 2011 | | | 2010 | | | 2012 | | | 2011 | | | 2010 |
| | | | | | |
Dividend yield | | | 7.54 | % | | | 7.00 | % | | | 6.98 | % | | | 6.20 | % | | | 5.40 | % | | 7.2 - 8.2% |
| | | | | | |
Expected volatility | | | 39.89 | % | | | 33.90 | % | | | 36.5 | % | | | 49.20 | % | | | 47.30 | % | | 46.2 - 46.6% |
| | | | | | |
Risk-free interest rates | | | 1.80 | % | | | 3.13 | % | | | 2.66 | % | | | 0.70 | % | | | 1.9 | % | | 2.2 - 2.3% |
| | | | | | |
Expected life in years | | | 5.6 | | | | 6.4 | | | | 6.4 | | | | 6.0 | | | | 6.0 | | | 6.0 |
| | | | | | |
Weighted average fair value per option at grant date | | $ | 2.48 | | | $ | 2.49 | | | $ | 3.54 | | | $ | 3.67 | | | $ | 5.98 | | | $6.18 |
For 2012, 2011 and 2010, the Company recognized compensation costs for employee stock options of $9 million, $26 million, and $16 million, respectively. As of December 31, 2012, approximately $2 million of unrecognized compensation cost related to unvested employee and financial professional stock option awards, net of estimated pre-vesting forfeitures, is expected to be recognized by the Company over a weighted average period of 0.8 years.
Restricted Awards. Under the Stock Incentive Plan, AXA Financial grants restricted stock to employees and financial professionals of its subsidiaries. Generally, all outstanding restricted stock awards have vesting terms ranging from three to five years. Under The Equity Plan for Directors (the “Equity Plan”), AXA Financial grants non-officer directors restricted AXA ordinary shares (prior to 2011, AXA ADRs) and unrestricted AXA ordinary shares (prior to March 15, 2010, AXA ADRs) annually. Similarly, AllianceBernstein awards restricted AllianceBernstein Holding units to independent members of its General Partner. In addition, under its Century Club Plan, awards of restricted AllianceBernstein Holding units that vest ratably over three years are made to eligible AllianceBernstein employees whose primary responsibilities are to assist in the distribution of company-sponsored mutual funds.
For 2012, 2011 and 2010, respectively, the Company recognized compensation costs of $13 million, $378 million and $149 million for awards outstanding under these restricted award plans. The fair values of awards made under these plans are measured at the date of grant by reference to the closing price of the unrestricted shares, and the result generally is attributed over the shorter of the requisite service period, the performance period, if any, or to the date at which retirement eligibility is achieved and subsequent service no longer is required for continued vesting of the award. At December 31, 2012, approximately 19 million restricted shares and Holding units remain unvested. At December 31, 2012, approximately $61 million of unrecognized compensation cost related to these unvested awards, net of estimated pre-vesting forfeitures, is expected to be recognized over a weighted average period of 4.0 years.
F-73
The following table summarizes unvested restricted stock activity for 2012.
| | | | | | | | |
| | | Shares of
Restricted
Stock | | | Weighted
Average
Grant Date
Fair Value | |
| | |
Unvested as of January 1, 2012 | | | 243,572 | | | $ | 30.22 | |
Granted | | | 27,218 | | | $ | 13.23 | |
Vested | | | 93,789 | | | $ | 30.93 | |
Forfeited | | | — | | | | — | |
| | | | | | | | |
Unvested as of December 31, 2012 | | | 177,001 | | | $ | 27.23 | |
| | | | | | | | |
Restricted stock vested in 2012, 2011 and 2010 had aggregate vesting date fair values of approximately $1 million, $2 million and $2 million, respectively.
SARs. For 2012, 2011 and 2010, respectively, 352,158, 113,210 and 24,101 Stock Appreciation Rights (“SARs”) were granted to certain financial professionals of AXA Financial subsidiaries, each with a 4-year cliff-vesting schedule. These 2012, 2011 and 2010 awards entitle the holder to a cash payment equal to any appreciation in the value of the AXA ordinary share over prices ranging from 10.05 – 33.78 Euros, 10.71 – 14.96 Euros and 15.43 Euros, respectively, as of the date of exercise. At December 31, 2012, 840,324 SARs were outstanding, having weighted average remaining contractual term of 7.0 years. The accrued value of SARs at December 31, 2012 and 2011 was $538,928 and $136,667, respectively, and recorded as liabilities in the consolidated balance sheets. For 2012, 2011 and 2010, the Company recorded compensation expense (credit) for SARs of $(402,262), $(87,759) and $(865,661), respectively, reflecting the impact in those periods of the changes in their fair values as determined by applying the Black Scholes-Merton formula and assumptions used to price employee stock option awards.
AXA Shareplan. In 2012, eligible employees of participating AXA Financial subsidiaries were offered the opportunity to purchase newly issued AXA stock, subject to plan limits, under the terms of AXA Shareplan 2012. Eligible employees could reserve a share purchase during the reservation period from August 31, 2012 through September 17, 2012 and could cancel their reservation or elect to make a purchase for the first time during the retraction/subscription period from October 26, 2012 through October 31, 2012. The U.S. dollar purchase price was determined by applying the U.S. dollar/Euro forward exchange rate on October 24, 2012 to the discounted formula subscription price in Euros. “Investment Option A” permitted participants to purchase AXA ordinary shares at a 20% formula discounted price of $12.29 per share. “Investment Option B” permitted participants to purchase AXA ordinary shares at a 17.19% formula discounted price of $12.71 per share on a leveraged basis with a guaranteed return of initial investment plus a portion of any appreciation in the undiscounted value of the total shares purchased. For purposes of determining the amount of any appreciation, the AXA ordinary share price will be measured over a fifty two week period preceding the scheduled end date of AXA Shareplan 2012 which is July 2, 2017. All subscriptions became binding and irrevocable at October 31, 2012.
The Company recognized compensation expense of $18 million in 2012, $9 million in 2011 and $17 million in 2010 in connection with each respective year’s offering of AXA Shareplan, representing the aggregate discount provided to participants for their purchase of AXA stock under each of those plans, as adjusted for the post-vesting, five-year holding period. Participants in AXA Shareplans 2012, 2011 and 2010 primarily invested under Investment Option B for the purchase of approximately 9 million, 9 million and 8 million AXA ordinary shares, respectively.
AXA Miles Program. On March 16, 2012, under the terms of the AXA Miles Program 2012, AXA granted 50 AXA ordinary shares (“AXA Miles”) to every employee and eligible financial professional of AXA Group for the purpose of enhancing long-term employee-shareholder engagement. Each AXA Mile represents a phantom share of AXA stock that will convert to an actual AXA ordinary share at the end of a four-year vesting period provided the employee or financial professional remains in the employ of the company or has retired. Half of each AXA Miles grant, or 25 AXA Miles, are further subject to vesting conditions based on achievement of improvements in specific AXA performance metrics. The total fair value of these AXA Miles awards of approximately $6 million, net of expected forfeitures, is charged to expense over the shorter of the vesting term or the period up to the date at which the
F-74
participant becomes retirement eligible and is updated to reflect changes in respect of the expectation for meeting the predefined performance conditions. In 2012, the expense associated with the March 16, 2012 grant of AXA Miles was approximately $537,914.
On July 1, 2007, under the terms of the AXA Miles Program 2007, AXA granted 50 AXA Miles to every employee and eligible financial professionals of AXA Group for the purpose of enhancing long-term employee-shareholder engagement. Each AXA Mile represents the right to receive one unrestricted AXA ordinary share on July 1, 2011, conditional only upon continued employment with AXA at the close of the four-year cliff-vesting period with exceptions for retirement, death, and disability. The grant date fair value of approximately 449,400 AXA Miles awarded to employees and financial professionals of AXA Financial’s subsidiaries was approximately $19 million, measured as the market equivalent of a vested AXA ordinary share. Beginning on July 1, 2007, the total fair value of this award, net of expected forfeitures, has been expensed over the shorter of the vesting term or to the date at which the participant becomes retirement eligible. For 2011 and 2010, respectively, the Company recognized compensation expense of approximately $1 million and $2 million in respect of this grant of AXA Miles.
Stock Purchase Plans. On September 30, 2010, AXA Financial announced the rollout of a new stock purchase plan that offers eligible employees and financial professionals the opportunity to receive a 10% match on AXA ordinary share purchases. The first purchase date was November 11, 2010, after which purchases generally will be scheduled to occur at the end of each calendar quarter. The number of AXA ordinary shares reserved for purchase under the plan is 30,000,000. Compensation expense for 2012, 2011 and 2010 was $1 million, $1 million and $0 million, respectively.
AllianceBernstein Long-term Incentive Compensation Plans.AllianceBernstein maintains several unfunded long-term incentive compensation plans for the benefit of certain eligible employees and executives. The AllianceBernstein Capital Accumulation Plan was frozen on December 31, 1987 and no additional awards have been made, however, ACMC, LLC (“ACMC”), an indirect wholly owned subsidiary of AXA Financial, is obligated to make capital contributions to AllianceBernstein in amounts equal to benefits paid under this plan as well as other assumed contractual unfunded deferred compensation arrangements covering certain executives. Prior to changes implemented by AllianceBernstein in fourth quarter 2011, as further described below, compensation expense for the remaining active plans was recognized on a straight-line basis over the applicable vesting period. Prior to 2009, participants in these plans designated the percentages of their awards to be allocated among notional investments in Holding units or certain investment products (primarily mutual funds) sponsored by AllianceBernstein. Beginning in 2009, annual awards granted under the Amended and Restated AllianceBernstein Incentive Compensation Award Program were in the form of restricted Holding units.
In fourth quarter 2011, AllianceBernstein implemented changes to AllianceBernstein’s employee long-term incentive compensation award. AllianceBernstein amended all outstanding year-end deferred incentive compensation awards of active employees (i.e., those employees employed as of December 31, 2011), so that employees who terminate their employment or are terminated without cause may continue to vest, so long as the employees do not violate the agreements and covenants set forth in the applicable award agreement, including restrictions on competition, employee and client solicitation, and a claw-back for failing to follow existing risk management policies. This amendment resulted in the immediate recognition in the fourth quarter of the cost of all unamortized deferred incentive compensation on outstanding awards from prior years that would otherwise have been expensed in future periods.
As a result of this change, AllianceBernstein expensed in the fourth quarter all unamortized deferred incentive compensation awards from prior years and 100% of the expense associated with its 2011 deferred incentive compensation awards. The Company recorded a one-time, non-cash charge of $115 million, net of income taxes and noncontrolling interest in 2011.
In addition, awards granted in 2012 contain the same vesting provisions and, accordingly, AllianceBernstein’s annual incentive compensation expense reflect 100% of the expense associated with the deferred incentive compensation awarded in each year. This approach to expense recognition closely matches the economic cost of awarding deferred incentive compensation to the period in which the related service is performed.
F-75
AllianceBernstein engages in open-market purchases of AllianceBernstein Holding L.P. (“AB Holding”) units (“Holding units”) to help fund anticipated obligations under its incentive compensation award program, for purchases of Holding units from employees and other corporate purposes. During 2012 and 2011, AllianceBernstein purchased 15.7 million and 13.5 million Holding units for $238 million and $221 million respectively. These amounts reflect open-market purchases of 12.3 million and 11.1 million Holding units for $182 million and $192 million, respectively, with the remainder relating to purchases of Holding units from employees to allow them to fulfill statutory tax requirements at the time of distribution of long-term incentive compensation awards, offset by Holding units purchased by employees as part of a distribution reinvestment election.
AllianceBernstein granted to employees and Eligible Directors 12.1 million (including 8.7 million restricted Holding units granted in January 2012 for 2011 year-end awards) and 1.7 million restricted Holding awards during 2012 and 2011, respectively. To fund these awards, AllianceBernstein allocated previously repurchased Holding units that had been held in the consolidated rabbi trust.
The 2012 and 2011 long-term incentive compensation awards allowed most employees to allocate their award between restricted Holding units and deferred cash. As a result, 6.5 million restricted Holding unit awards for the December 2012 awards and 8.7 million restricted Holding unit awards for the December 2011 awards were awarded and allocated as such within the consolidated rabbi trust in January 2013 and 2012, respectively. There were approximately 17.9 million and 12.0 million unallocated Holding units remaining in the consolidated rabbi trust as of December 31, 2012 and January 31, 2013, respectively. The purchases and issuances of Holding units resulted in an increase of $60 million and $54 million in Capital in excess of par value during 2012 and 2011, respectively, with a corresponding decrease of $60 million and $54 million in Noncontrolling interest.
The Company recorded compensation and benefit expenses in connection with these long-term incentive compensation plans of AllianceBernstein totaling $147 million, $625 million (which includes the one-time, non-cash deferred compensation charge of $472 million) and $208 million for 2012, 2011 and 2010, respectively. The cost of the 2012 awards made in the form of restricted Holding units was measured, recognized, and disclosed as a share-based compensation program.
On July 1, 2010, the AllianceBernstein 2010 Long Term Incentive Plan (“2010 Plan”), as amended, was established, under which various types of Holding unit-based awards have been available for grant to its employees and Eligible Directors, including restricted or phantom restricted Holding unit awards, Holding unit appreciation rights and performance awards, and options to buy Holding units. The 2010 Plan will expire on June 30, 2020 and no awards under the 2010 Plan will be made after that date. Under the 2010 Plan, the aggregate number of Holding units with respect to which awards may be granted is 60 million, including no more than 30 million newly issued Holding units. As of December 31, 2012, 210,591 options to buy Holding units had been granted and 25 million Holding units net of forfeitures, were subject to other Holding unit awards made under the 2010 Plan. Holding unit-based awards (including options) in respect of 35 million Holding units were available for grant as of December 31, 2012.
AXA Financial’s Deregistration.In 2010, AXA voluntarily delisted the AXA ADRs from the New York Stock Exchange and filed to deregister and terminate its reporting obligation with the SEC. AXA’s deregistration became effective in second quarter 2010. Following these actions, AXA ADRs continue to trade in the over-the-counter markets in the U.S. and be exchangeable into AXA ordinary shares on a one-to-one basis while AXA ordinary shares continue to trade on the Euronext Paris, the primary and most liquid market for AXA shares. Consequently, current holders of AXA ADRs may continue to hold or trade those shares, subject to existing transfer restrictions, if any. The terms and conditions of AXA Financial’s share-based compensation programs generally were not impacted by the delisting and deregistration except that AXA ordinary shares generally will be delivered to participants in lieu of AXA ADRs at exercise or maturity of outstanding awards and new offerings are based on AXA ordinary shares. In addition, due to U.S. securities law restrictions, certain blackouts on option exercise occur each year when updated financial information for AXA is not available. Contributions to the AXA Financial Qualified and Non-Qualified Stock Purchase Plans were suspended and contributions to the AXA Equitable 401(k) Plan – AXA ADR Fund investment option were terminated coincident with AXA’s delisting and deregistration. None of the modifications made to AXA Financial’s share-based compensation programs as a result of AXA’s delisting and deregistration resulted in recognition of additional compensation expense.
F-76
A summary of the income tax (expense) benefit in the consolidated statements of earnings (loss) follows:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Income tax (expense) benefit: | | | | | | | | | | | | |
Current (expense) benefit | | $ | (233 | ) | | $ | 40 | | | $ | (34 | ) |
Deferred (expense) benefit | | | 391 | | | | (1,338 | ) | | | (755 | ) |
| | | | | | | | | | | | |
Total | | $ | 158 | | | $ | (1,298 | ) | | $ | (789 | ) |
| | | | | | | | | | | | |
The Federal income taxes attributable to consolidated operations are different from the amounts determined by multiplying the earnings before income taxes and noncontrolling interest by the expected Federal income tax rate of 35%. The sources of the difference and their tax effects are as follows:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Expected income tax (expense) benefit | | $ | (20 | ) | | $ | (1,443 | ) | | $ | (1,137 | ) |
Noncontrolling interest | | | 37 | | | | (36 | ) | | | 66 | |
Separate Accounts investment activity | | | 94 | | | | 83 | | | | 53 | |
Non-taxable investment income (loss) | | | 24 | | | | 8 | | | | 15 | |
Adjustment of tax audit reserves | | | (2 | ) | | | (7 | ) | | | (13 | ) |
State income taxes | | | 7 | | | | 7 | | | | (5 | ) |
AllianceBernstein Federal and foreign taxes | | | 10 | | | | (13 | ) | | | (3 | ) |
Tax settlement | | | — | | | | 84 | | | | 99 | |
ACMC conversion | | | — | | | | — | | | | 135 | |
Other | | | 8 | | | | 19 | | | | 1 | |
| | | | | | | | | | | | |
Income tax (expense) benefit | | $ | 158 | | | $ | (1,298 | ) | | $ | (789 | ) |
| | | | | | | | | | | | |
The Internal Revenue Service (“IRS”) completed its examination of the Company’s 2004 and 2005 Federal corporate income tax returns and issued its Revenue Agent’s Report during the third quarter of 2011. The impact of these completed audits on the Company’s financial statements and unrecognized tax benefits in 2011 was a tax benefit of $84 million.
AXA Equitable recognized a tax benefit in 2010 of $99 million related to the settlement with the Appeals Office of the IRS of issues for the 1997-2003 tax years.
Due to the conversion in 2010 of ACMC, Inc. from a corporation to a limited liability company, AXA Equitable recognized a tax benefit of $135 million primarily related to the release of state deferred taxes.
On August 16, 2007, the IRS issued Revenue Ruling 2007-54 that purported to change accepted industry and IRS interpretations of the statutes governing the computation of the Separate Account dividends received deduction (“DRD”). This ruling was suspended on September 25, 2007 in Revenue Ruling 2007-61, and the U.S. Department of the Treasury (the “Treasury”) indicated that it would address the computational issues in a regulation project. However, the Treasury 2012-2013 Priority Guidance Plan includes an item for guidance in the form of a revenue ruling rather than regulations with respect to the calculation of the Separate Account DRD. The ultimate timing and substance of any such guidance is unknown. It is also possible that the calculation of the Separate Account DRD will be addressed in future legislation. Any such guidance or legislation could result in the elimination or reduction on either a retroactive or prospective basis of the Separate Account DRD tax benefit that the Company receives.
F-77
The components of the net deferred income taxes are as follows:
| | | | | | | | | | | | | | | | |
| | | December 31, 2012 | | | December 31, 2011 | |
| | | Assets | | | Liabilities | | | Assets | | | Liabilities | |
| | | (In Millions) | |
| | | | |
Compensation and related benefits | | $ | 207 | | | $ | — | | | $ | 248 | | | $ | — | |
Reserves and reinsurance | | | — | | | | 2,419 | | | | — | | | | 3,060 | |
DAC | | | — | | | | 960 | | | | — | | | | 891 | |
Unrealized investment gains or losses | | | — | | | | 739 | | | | — | | | | 418 | |
Investments | | | — | | | | 1,137 | | | | — | | | | 1,101 | |
Alternative minimum tax credits | | | 157 | | | | — | | | | 242 | | | | — | |
Other | | | — | | | | 57 | | | | 79 | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | $ | 364 | | | $ | 5,312 | | | $ | 569 | | | $ | 5,470 | |
| | | | | | | | | | | | | | | | |
The Company does not provide income taxes on the undistributed earnings of non-U.S. corporate subsidiaries except to the extent that such earnings are not permanently invested outside the United States. As of December 31, 2012, $245 million of accumulated undistributed earnings of non-U.S. corporate subsidiaries were permanently invested. At existing applicable income tax rates, additional taxes of approximately $92 million would need to be provided if such earnings were remitted.
At December 31, 2012, the total amount of unrecognized tax benefits was $678 million, of which $522 million would affect the effective rate and $156 million was temporary in nature. At December 31, 2011, the total amount of unrecognized tax benefits was $550 million, of which $478 million would affect the effective rate and $72 million was temporary in nature.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in tax expense. Interest and penalties included in the amounts of unrecognized tax benefits at December 31, 2012 and 2011 were $105 million and $97 million, respectively. For 2012, 2011 and 2010, respectively, there were $4 million, $14 million and $10 million in interest expense related to unrecognized tax benefits.
A reconciliation of unrecognized tax benefits (excluding interest and penalties) follows:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Balance at January 1, | | $ | 453 | | | $ | 434 | | | $ | 577 | |
Additions for tax positions of prior years | | | 740 | | | | 337 | | | | 168 | |
Reductions for tax positions of prior years | | | (620 | ) | | | (235 | ) | | | (266 | ) |
Additions for tax positions of current year | | | — | | | | 1 | | | | 1 | |
Settlements with tax authorities | | | — | | | | (84 | ) | | | (46 | ) |
| | | | | | | | | | | | |
Balance at December 31, | | $ | 573 | | | $ | 453 | | | $ | 434 | |
| | | | | | | | | | | | |
In 2012, the Internal Revenue Service commenced the examination of the 2006 and 2007 tax years. An appeal of the 2004 and 2005 tax years is pending at the Appeals Office of the IRS. It is reasonably possible that the total amounts of unrecognized tax benefit will change within the next 12 months due to the conclusion of the IRS Appeals proceedings and the addition of new issues for open tax years. The possible change in the amount of unrecognized tax benefits cannot be estimated at this time.
F-78
15) | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
AOCI represents cumulative gains (losses) on items that are not reflected in earnings (loss). The balances for the past three years follow:
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Unrealized gains (losses) on investments | | $ | 1,352 | | | $ | 772 | | | $ | 406 | |
Defined benefit pension plans | | | (1,056 | ) | | | (1,082 | ) | | | (1,008 | ) |
| | | | | | | | | | | | |
Total accumulated other comprehensive income (loss) | | | 296 | | | | (310 | ) | | | (602 | ) |
| | | | | | | | | | | | |
Less: Accumulated other comprehensive (income) loss attributable to noncontrolling interest | | | 21 | | | | 13 | | | | (8 | ) |
| | | | | | | | | | | | |
Accumulated Other Comprehensive Income (Loss) Attributable to AXA Equitable | | $ | 317 | | | $ | (297 | ) | | $ | (610 | ) |
| | | | | | | | | | | | |
The components of OCI for the past three years follow:
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Net unrealized gains (losses) on investments: | | | | | | | | | | | | |
Net unrealized gains (losses) arising during the year | | $ | 1,013 | | | $ | 879 | | | $ | 646 | |
(Gains) losses reclassified into net earnings (loss) during the year | | | 91 | | | | 28 | | | | 189 | |
| | | | | | | | | | | | |
Net unrealized gains (losses) on investments | | | 1,104 | | | | 907 | | | | 835 | |
Adjustments for policyholders liabilities, DAC, deferred income taxes and insurance liability loss recognition | | | (524 | ) | | | (541 | ) | | | (376 | ) |
| | | | | | | | | | | | |
Change in unrealized gains (losses), net of adjustments | | | 580 | | | | 366 | | | | 459 | |
Change in defined benefit pension plans | | | 26 | | | | (74 | ) | | | (40 | ) |
| | | | | | | | | | | | |
Total other comprehensive income (loss), net of income taxes | | | 606 | | | | 292 | | | | 419 | |
Less: Other comprehensive (income) loss attributable to noncontrolling interest | | | 8 | | | | 21 | | | | 7 | |
| | | | | | | | | | | | |
Other Comprehensive Income (Loss) Attributable to AXA Equitable | | $ | 614 | | | $ | 313 | | | $ | 426 | |
| | | | | | | | | | | | |
16) | COMMITMENTS AND CONTINGENT LIABILITIES |
Debt Maturities
At December 31, 2012, aggregate maturities of the long-term debt, including any current portion of long-term debt, based on required principal payments at maturity, were $0 million for 2013 and 2014, $200 million for 2015 and $0 million thereafter.
Leases
The Company has entered into operating leases for office space and certain other assets, principally information technology equipment and office furniture and equipment. Future minimum payments under non-cancelable operating leases for 2013 and the four successive years are $214 million, $208 million, $204 million, $199 million, $197 million and $1,409 million thereafter. Minimum future sublease rental income on these non-cancelable operating leases for 2013 and the four successive years is $22 million, $24 million, $24 million, $24 million, $25 million and $137 million thereafter.
F-79
Restructuring
As part of the Company’s on-going efforts to reduce costs and operate more efficiently, from time to time, management has approved and initiated plans to reduce headcount and relocate certain operations. In 2012 and 2011, respectively, AXA Equitable recorded $30 million and $55 million pre-tax charges related to severance and lease costs. The restructuring costs and liabilities associated with the Company’s initiatives were as follows:
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Balance, beginning of year | | $ | 44 | | | $ | 11 | | | $ | 20 | |
Additions | | | 54 | | | | 79 | | | | 13 | |
Cash payments | | | (46 | ) | | | (43 | ) | | | (17 | ) |
Other reductions | | | — | | | | (3 | ) | | | (5 | ) |
| | | | | | | | | | | | |
Balance, End of Year | | $ | 52 | | | $ | 44 | | | $ | 11 | |
| | | | | | | | | | | | |
During 2010, AllianceBernstein performed a comprehensive review of its real estate requirements in connection with its workforce reductions commencing in 2008. As a result, AllianceBernstein recorded a non-cash pre-tax charge of $102 million in 2010 that reflected the net present value of the difference between the amount of AllianceBernstein’s ongoing contractual operating lease obligations for this space and their estimate of current market rental rates, as well as the write-off of leasehold improvements, furniture and equipment related to this space.
During 2012, AllianceBernstein completed a comprehensive review of its worldwide office locations and initiated a space consolidation plan. As a result, AllianceBernstein recorded pre-tax real estate charges of $223 million that reflected the net present value of the difference between the amount of AllianceBernstein’s on-going contractual operating lease obligations for this space and their estimate of current market rental rates, as well as the write-off of leasehold improvements, furniture and equipment related to this space offset by changes in estimates relating to previously recorded real estate charges.
Guarantees and Other Commitments
The Company provides certain guarantees or commitments to affiliates, investors and others. At December 31, 2012, these arrangements include commitments by the Company to provide equity financing of $355 million to certain limited partnerships under certain conditions. Management believes the Company will not incur material losses as a result of these commitments.
AXA Equitable is the obligor under certain structured settlement agreements it had entered into with unaffiliated insurance companies and beneficiaries. To satisfy its obligations under these agreements, AXA Equitable owns single premium annuities issued by previously wholly owned life insurance subsidiaries. AXA Equitable has directed payment under these annuities to be made directly to the beneficiaries under the structured settlement agreements. A contingent liability exists with respect to these agreements should the previously wholly owned subsidiaries be unable to meet their obligations. Management believes the need for AXA Equitable to satisfy those obligations is remote.
The Company had $18 million of undrawn letters of credit related to reinsurance at December 31, 2012. The Company had $328 million of commitments under existing mortgage loan agreements at December 31, 2012.
The Company has implemented capital management actions to mitigate statutory reserve strain for certain level term and UL policies with secondary guarantees and GMDB and GMIB riders on the Accumulator® products sold on or after January 1, 2006 and in-force at September 30, 2008 through reinsurance transactions with AXA Arizona, a wholly-owned subsidiary of AXA Financial.
AXA Equitable receives statutory reserve credits for reinsurance treaties with AXA Arizona to the extent that AXA Arizona holds assets in an irrevocable trust (the “Trust”) ($9,635 million at December 31, 2012) and/or letters of
F-80
credit ($2,626 million at December 31, 2012). Under the reinsurance transactions, AXA Arizona is permitted to transfer assets from the Trust under certain circumstances. The level of statutory reserves held by AXA Arizona fluctuate based on market movements, mortality experience and policyholder behavior. Increasing reserve requirements may necessitate that additional assets be placed in trust and/or securing additional letters of credit, which could adversely impact AXA Arizona’s liquidity.
During 2009, AllianceBernstein entered into a subscription agreement under which it committed to invest up to $35 million, as amended in 2011, in a venture capital fund over a six-year period. As of December 31, 2012, AllianceBernstein had funded $23 million of its revised commitment of $35 million.
During 2010, as general partner of the AllianceBernstein U.S. Real Estate L.P. (the “Real Estate Fund”), AllianceBernstein committed to invest $25 million in the Real Estate Fund. As of December 31, 2012, AllianceBernstein had funded $9 million of this commitment.
During 2012, AllianceBernstein entered into an investment agreement under which it committed to invest up to $8 million in an oil and gas fund over a three-year period. As of December 31, 2012, AllianceBernstein had funded $8 million of this commitment.
Insurance Litigation
A lawsuit was filed in the United States District Court of the District of New Jersey in July 2011, entitled Mary Ann Sivolella v. AXA Equitable Life Insurance Company and AXA Equitable Funds Management Group, LLC (“FMG LLC”). The lawsuit was filed derivatively on behalf of eight funds. The lawsuit seeks recovery under Section 36(b) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), for alleged excessive fees paid to AXA Equitable and FMG LLC for investment management services. In November 2011, plaintiff filed an amended complaint, adding claims under Sections 47(b) and 26(f) of the Investment Company Act, as well as a claim for unjust enrichment. In addition, plaintiff purports to file the lawsuit as a class action in addition to a derivative action. In the amended complaint, plaintiff seeks recovery of the alleged overpayments, rescission of the contracts, restitution of all fees paid, interest, costs, attorney fees, fees for expert witnesses and reserves the right to seek punitive damages where applicable. In December 2011, AXA Equitable and FMG LLC filed a motion to dismiss the amended complaint. In May 2012, the Plaintiff voluntarily dismissed her claim under Section 26(f) seeking restitution and rescission under Section 47(b) of the 1940 Act. In September 2012, the Court denied the defendants’ motion to dismiss as it related to the Section 36(b) claim and granted the defendants’ motion as it related to the unjust enrichment claim.
In January 2013, a second lawsuit was filed in the United States District Court of the District of New Jersey entitled Sanford et al. v. FMG LLC. The lawsuit was filed derivatively on behalf of eight funds, four of which are named in the Sivolella lawsuit as well as four new funds, and seeks recovery under Section 36(b) of the Investment Company Act for alleged excessive fees paid to FMG LLC for investment management services. In light of the similarities of the allegations in the Sivolella and Sanford lawsuits, the parties and the Court agreed to consolidate the two lawsuits.
Insurance Regulatory Matters
AXA Equitable is subject to various statutory and regulatory requirements concerning the payment of death benefits and the reporting and escheatment of unclaimed property, and is subject to audit and examination for compliance with these requirements. AXA Equitable, along with other life insurance industry companies, has been the subject of various inquiries regarding its death claim, escheatment, and unclaimed property procedures and is cooperating with these inquiries. For example, in June 2011, the New York State Attorney General’s office issued a subpoena to AXA Equitable in connection with its investigation of industry escheatment and unclaimed property procedures. AXA Equitable is also under audit by a third party auditor acting on behalf of a number of U.S. state jurisdictions reviewing compliance with unclaimed property laws of those jurisdictions. In July 2011, AXA Equitable received a request from the NYSDFS to use data available on the U.S. Social Security Administration’s Death Master File (“DMF”) or similar database to identify instances where death benefits under life insurance policies, annuities and retained asset accounts are payable, to locate and pay beneficiaries under such contracts, and to report the results of the use of the
F-81
data. AXA Equitable has filed a number of reports with the NYSDFS related to its request. A number of life insurance industry companies have received a multistate targeted market conduct examination notice issued on behalf of various U.S. state insurance departments reviewing use of the DMF, claims processing and payments to beneficiaries. In December 2012, AXA Equitable received an examination notice on behalf of at least six insurance departments. The audits and related inquiries have resulted in the payment of death benefits and changes to AXA Equitable’s relevant procedures. AXA Equitable expects it will also result in the reporting and escheatment of unclaimed death benefits, including potential interest on such payments, and the payment of examination costs. In addition, AXA Equitable, along with other life insurance industry companies, is subject to lawsuits that may be filed by state regulatory agencies or other litigants.
AllianceBernstein Litigation
During first quarter 2012, AllianceBernstein received a legal letter of claim (the “Letter of Claim”) sent on behalf of a former European pension fund client, alleging that AllianceBernstein Limited (a wholly-owned subsidiary of AllianceBernstein organized in the United Kingdom) was negligent and failed to meet certain applicable standards of care with respect to AllianceBernstein’s initial investment in and management of a £500 million portfolio of U.S. mortgage-backed securities. The alleged damages range between $177 million and $234 million plus compound interest on an alleged $125 million of realized losses in the portfolio. AllianceBernstein believes that it has strong defenses to these claims, which are set forth in AllianceBernstein’s October 12, 2012 response to the Letter of Claim, and will defend this matter vigorously.
In addition to the matters described above, a number of lawsuits, claims and assessments have been filed against life and health insurers and asset managers in the jurisdictions in which AXA Equitable and its respective subsidiaries do business. These matters involve, among other things, insurers’ sales practices, alleged agent misconduct, alleged failure to properly supervise agents, contract administration, breach of fiduciary duties, mismanagement of client funds and other matters. Some of the matters have resulted in the award of substantial judgments against other insurers and asset managers, including material amounts of punitive damages, or in substantial settlements. In some states, juries have substantial discretion in awarding punitive damages. AXA Equitable and its subsidiaries from time to time are involved in such matters. Some of these matters filed against AXA Equitable and its subsidiaries have been brought on behalf of various alleged classes of claimants and certain of these claimants seek damages of unspecified amounts. While the ultimate outcome of such matters cannot be predicted with certainty, in the opinion of management no such matter is likely to have a material adverse effect on AXA Equitable’s consolidated financial position or results of operations. However, it should be noted that the frequency of large damage awards, including large punitive damage awards that bear little or no relation to actual economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given matter.
Although the outcome of litigation and regulatory matters generally cannot be predicted with certainty, management intends to vigorously defend against the allegations made by the plaintiffs in the actions described above and believes that the ultimate resolution of the litigation and regulatory matters described therein involving AXA Equitable and/or its subsidiaries should not have a material adverse effect on the consolidated financial position of AXA Equitable. Management cannot make an estimate of loss, if any, or predict whether or not any of the litigations and regulatory matters described above will have a material adverse effect on AXA Equitable’s consolidated results of operations in any particular period.
F-82
18) | INSURANCE GROUP STATUTORY FINANCIAL INFORMATION |
AXA Equitable is restricted as to the amounts it may pay as dividends to AXA Financial. Under the applicable states’ insurance law, a domestic life insurer may, without prior approval of the Superintendent of the NYSDFS, pay a dividend to its shareholders not exceeding an amount calculated based on a statutory formula. This formula would permit AXA Equitable to pay shareholder dividends not greater than $469 million during 2013. Payment of dividends exceeding this amount requires the insurer to file notice of its intent to declare such dividends with the Superintendent of the NYSDFS who then has 30 days to disapprove the distribution. For 2012, 2011 and 2010, respectively, the Insurance Group’s statutory net income (loss) totaled $602 million, $967 million and $(510) million. Statutory surplus, capital stock and Asset Valuation Reserve (“AVR”) totaled $5,178 million and $4,845 million at December 31, 2012 and 2011, respectively. In 2012, 2011 and 2010, respectively, AXA Equitable paid $362 million, $379 million and $300 million in shareholder dividends.
At December 31, 2012, AXA Equitable, in accordance with various government and state regulations, had $81 million of securities on deposit with such government or state agencies.
In fourth quarter 2008, AXA Equitable issued two $500 million surplus notes to AXA Financial. The notes, both of which mature on December 1, 2018, have a fixed interest rate of 7.1%. The accrual and payment of interest expense and the payment of principal related to surplus notes require approval from the NYSDFS. Interest expense in 2013 will approximate $71 million.
At December 31, 2012 and for the year then ended, there were no differences in net income (loss) and capital and surplus resulting from practices prescribed and permitted by NYSDFS and those prescribed by NAIC Accounting Practices and Procedures effective at December 31, 2012.
Accounting practices used to prepare statutory financial statements for regulatory filings of stock life insurance companies differ in certain instances from U.S. GAAP. The differences between statutory surplus and capital stock determined in accordance with Statutory Accounting Principles (“SAP”) and total equity under U.S. GAAP are primarily: (a) the inclusion in SAP of an AVR intended to stabilize surplus from fluctuations in the value of the investment portfolio; (b) future policy benefits and policyholders’ account balances under SAP differ from U.S. GAAP due to differences between actuarial assumptions and reserving methodologies; (c) certain policy acquisition costs are expensed under SAP but deferred under U.S. GAAP and amortized over future periods to achieve a matching of revenues and expenses; (d) under SAP, Federal income taxes are provided on the basis of amounts currently payable with limited recognition of deferred tax assets while under U.S. GAAP, deferred taxes are recorded for temporary differences between the financial statements and tax basis of assets and liabilities where the probability of realization is reasonably assured; (e) the valuation of assets under SAP and U.S. GAAP differ due to different investment valuation and depreciation methodologies, as well as the deferral of interest-related realized capital gains and losses on fixed income investments; (f) the valuation of the investment in AllianceBernstein and AllianceBernstein Holding under SAP reflects a portion of the market value appreciation rather than the equity in the underlying net assets as required under U.S. GAAP; (g) the provision for future losses of the discontinued Wind-Up Annuities business is only required under U.S. GAAP; (h) reporting the surplus notes as a component of surplus in SAP but as a liability in U.S. GAAP; (i) computer software development costs are capitalized under U.S. GAAP but expensed under SAP; (j) certain assets, primarily prepaid assets, are not admissible under SAP but are admissible under U.S. GAAP and (k) the fair valuing of all acquired assets and liabilities including intangible assets are required for U.S. GAAP purchase accounting.
F-83
The following tables reconcile the Insurance Group’s statutory change in surplus and capital stock and statutory surplus and capital stock determined in accordance with accounting practices prescribed by NYSDFS laws and regulations with consolidated net earnings (loss) and equity attributable to AXA Equitable on a U.S. GAAP basis.
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Net change in statutory surplus and capital stock | | $ | 64 | | | $ | 824 | | | $ | 685 | |
Change in AVR | | | 269 | | | | (211 | ) | | | (291 | ) |
| | | | | | | | | | | | |
Net change in statutory surplus, capital stock and AVR | | | 333 | | | | 613 | | | | 394 | |
Adjustments: | | | | | | | | | | | | |
Future policy benefits and policyholders’ account balances | | | (508 | ) | | | (270 | ) | | | (61 | ) |
DAC | | | 142 | | | | (2,861 | ) | | | 981 | |
Deferred income taxes | | | 798 | | | | (1,272 | ) | | | (1,089 | ) |
Valuation of investments | | | (377 | ) | | | 16 | | | | 145 | |
Valuation of investment subsidiary | | | (306 | ) | | | 590 | | | | 366 | |
Increase (decrease) in the fair value of the reinsurance contract asset | | | 497 | | | | 5,941 | | | | 2,350 | |
Pension adjustment | | | (41 | ) | | | 111 | | | | 56 | |
Premiums and benefits ceded to AXA Arizona | | | (126 | ) | | | (156 | ) | | | (1,099 | ) |
Shareholder dividends paid | | | 362 | | | | 379 | | | | 300 | |
Changes in non-admitted assets | | | (489 | ) | | | (154 | ) | | | (64 | ) |
Other, net | | | (190 | ) | | | (10 | ) | | | (55 | ) |
| | | | | | | | | | | | |
U.S. GAAP Net Earnings (Loss) Attributable to AXA Equitable | | $ | 95 | | | $ | 2,927 | | | $ | 2,224 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Statutory surplus and capital stock | | $ | 4,689 | | | $ | 4,625 | | | $ | 3,801 | |
AVR | | | 489 | | | | 220 | | | | 431 | |
| | | | | | | | | | | | |
Statutory surplus, capital stock and AVR | | | 5,178 | | | | 4,845 | | | | 4,232 | |
Adjustments: | | | | | | | | | | | | |
Future policy benefits and policyholders’ account balances | | | (3,642 | ) | | | (2,456 | ) | | | (2,015 | ) |
DAC | | | 3,728 | | | | 3,545 | | | | 6,503 | |
Deferred income taxes | | | (5,330 | ) | | | (5,357 | ) | | | (4,117 | ) |
Valuation of investments | | | 3,271 | | | | 2,266 | | | | 1,658 | |
Valuation of investment subsidiary | | | (137 | ) | | | 231 | | | | (657 | ) |
Fair value of reinsurance contracts | | | 11,044 | | | | 10,547 | | | | 4,606 | |
Deferred cost of insurance ceded to AXA Arizona | | | 2,646 | | | | 2,693 | | | | 2,904 | |
Non-admitted assets | | | 467 | | | | 510 | | | | 761 | |
Issuance of surplus notes | | | (1,525 | ) | | | (1,525 | ) | | | (1,525 | ) |
Other, net | | | (264 | ) | | | (459 | ) | | | (521 | ) |
| | | | | | | | | | | | |
U.S. GAAP Total Equity Attributable to AXA Equitable | | $ | 15,436 | | | $ | 14,840 | | | $ | 11,829 | |
| | | | | | | | | | | | |
F-84
19) | BUSINESS SEGMENT INFORMATION |
The following tables reconcile segment revenues and earnings (loss) from continuing operations before income taxes to total revenues and earnings (loss) as reported on the consolidated statements of earnings (loss) and segment assets to total assets on the consolidated balance sheets, respectively.
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Segment revenues: | | | | | | | | | | | | |
Insurance | | $ | 6,443 | | | $ | 15,140 | | | $ | 8,511 | |
Investment Management(1) | | | 2,738 | | | | 2,750 | | | | 2,959 | |
Consolidation/elimination | | | (21 | ) | | | (18 | ) | | | (29 | ) |
| | | | | | | | | | | | |
Total Revenues | | $ | 9,160 | | | $ | 17,872 | | | $ | 11,441 | |
| | | | | | | | | | | | |
(1) | Intersegment investment advisory and other fees of approximately $58 million, $56 million and $62 million for 2012, 2011 and 2010, respectively, are included in total revenues of the Investment Management segment. |
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Segment earnings (loss) from continuing operations, before income taxes: | | | | | | | | | | | | |
Insurance | | $ | (132 | ) | | $ | 4,284 | | | $ | 2,846 | |
Investment Management(2) | | | 190 | | | | (164 | ) | | | 400 | |
Consolidation/elimination | | | — | | | | 4 | | | | 2 | |
| | | | | | | | | | | | |
Total Earnings (Loss) from Continuing Operations, before Income Taxes | | $ | 58 | | | $ | 4,124 | | | $ | 3,248 | |
| | | | | | | | | | | | |
(2) | Net of interest expenses incurred on securities borrowed. |
| | | | | | | | |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
Segment assets: | | | | | | | | |
Insurance | | $ | 164,201 | | | $ | 153,099 | |
Investment Management | | | 12,647 | | | | 11,811 | |
Consolidation/elimination | | | (5 | ) | | | (2 | ) |
| | | | | | | | |
Total Assets | | $ | 176,843 | | | $ | 164,908 | |
| | | | | | | | |
In accordance with SEC regulations, securities with a fair value of $1,509 million and $1,240 million have been segregated in a special reserve bank custody account at December 31, 2012 and 2011, respectively, for the exclusive benefit of securities broker-dealer or brokerage customers under the Exchange Act.
F-85
20) | QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) |
The quarterly results of operations for 2012 and 2011 are summarized below:
| | | | | | | | | | | | | | | | |
| | | Three Months Ended | |
| | | March 31 | | | June 30 | | | September 30 | | | December 31 | |
| | | (In Millions) | |
| | | | |
2012 | | | | | | | | | | | | | | | | |
Total Revenues | | $ | (952 | ) | | $ | 6,475 | | | $ | 1,728 | | | $ | 1,909 | |
| | | | | | | | | | | | | | | | |
| | | | |
Earnings (Loss) from Continuing Operations, Net of Income Taxes, Attributable to AXA Equitable | | $ | (1,635 | ) | | $ | 2,421 | | | $ | (241 | ) | | $ | (450 | ) |
| | | | | | | | | | | | | | | | |
| | | | |
Net Earnings (Loss), Attributable to AXA Equitable | | $ | (1,635 | ) | | $ | 2,421 | | | $ | (241 | ) | | $ | (450 | ) |
| | | | | | | | | | | | | | | | |
| | | | |
2011 | | | | | | | | | | | | | | | | |
Total Revenues | | $ | 1,311 | | | $ | 3,402 | | | $ | 10,858 | | | $ | 2,301 | |
| | | | | | | | | | | | | | | | |
| | | | |
Earnings (Loss) from Continuing Operations, Net of Income Taxes, Attributable to AXA Equitable | | $ | (572 | ) | | $ | 741 | | | $ | 2,824 | | | $ | (66 | ) |
| | | | | | | | | | | | | | | | |
| | | | |
Net Earnings (Loss), Attributable to AXA Equitable | | $ | (572 | ) | | $ | 741 | | | $ | 2,824 | | | $ | (66 | ) |
| | | | | | | | | | | | | | | | |
F-86
Report of Independent Registered Public Accounting Firm on
Consolidated Financial Statement Schedules
To the Board of Directors and Shareholder of
AXA Equitable Life Insurance Company:
Our audits of the consolidated financial statements referred to in our report dated March 8, 2013 appearing on page F-1 of this Annual Report on Form 10-K also included an audit of the accompanying financial statement schedules. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for the costs associated with acquiring or renewing insurance contracts on January 1, 2012.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 8, 2013
F-87
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE I
SUMMARY OF INVESTMENTS – OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2012
| | | | | | | | | | | | |
Type of Investment | | Cost(A) | | | Fair Value | | | Carrying
Value | |
| | | (In Millions) | |
| | | |
Fixed Maturities: | | | | | | | | | | | | |
U.S. government, agencies and authorities | | $ | 4,664 | | | $ | 5,180 | | | $ | 5,180 | |
State, municipalities and political subdivisions | | | 445 | | | | 530 | | | | 530 | |
Foreign governments | | | 386 | | | | 453 | | | | 453 | |
Public utilities | | | 3,541 | | | | 4,001 | | | | 4,001 | |
All other corporate bonds | | | 20,630 | | | | 22,341 | | | | 22,341 | |
Redeemable preferred stocks | | | 1,054 | | | | 1,102 | | | | 1,102 | |
| | | | | | | | | | | | |
Total fixed maturities | | | 30,720 | | | | 33,607 | | | | 33,607 | |
| | | | | | | | | | | | |
| | | |
Equity securities: | | | | | | | | | | | | |
Common stocks: | | | | | | | | | | | | |
Industrial, miscellaneous and all other | | | 23 | | | | 24 | | | | 24 | |
Mortgage loans on real estate | | | 5,059 | | | | 5,249 | | | | 5,059 | |
Real estate joint ventures | | | 4 | | | | N/A | | | | 4 | |
Policy loans | | | 3,512 | | | | 3,284 | | | | 3,512 | |
Other limited partnership interests and equity investments | | | 1,667 | | | | 1,667 | | | | 1,667 | |
Trading securities | | | 2,265 | | | | 2,309 | | | | 2,309 | |
Other invested assets | | | 1,828 | | | | 1,828 | | | | 1,828 | |
| | | | | | | | | | | | |
| | | |
Total Investments | | $ | 45,078 | | | $ | 47,968 | | | $ | 48,010 | |
| | | | | | | | | | | | |
(A) | Cost for fixed maturities represents original cost, reduced by repayments and writedowns and adjusted for amortization of premiums or accretion of discount; cost for equity securities represents original cost reduced by writedowns; cost for other limited partnership interests represents original cost adjusted for equity in earnings and reduced by distributions. |
F-88
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE II
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 2012 AND 2011
| | | | | | | | |
| | | 2012 | | | 2011 | |
| | | (In Millions) | |
| | |
ASSETS | | | | | | | | |
Investment: | | | | | | | | |
Fixed maturities available-for-sale, at fair value (amortized cost of $30,656 and $30,142, respectively) | | $ | 33,538 | | | $ | 31,922 | |
Mortgage loans on real estate | | | 5,059 | | | | 4,281 | |
Equity real estate, held for the production of income | | | 4 | | | | 99 | |
Policy loans | | | 3,512 | | | | 3,542 | |
Investments in and loans to affiliates | | | 2,328 | | | | 2,304 | |
Trading securities | | | 1,834 | | | | 472 | |
Other equity investments | | | 1,403 | | | | 1,446 | |
Other invested assets | | | 1,826 | | | | 2,334 | |
| | | | | | | | |
Total investments | | | 49,504 | | | | 46,400 | |
Cash and cash equivalents | | | 2,450 | | | | 2,516 | |
Deferred policy acquisition costs | | | 3,728 | | | | 3,545 | |
Amounts due from reinsurers | | | 3,847 | | | | 3,542 | |
Guaranteed minimum income benefit reinsurance asset, at fair value | | | 11,044 | | | | 10,547 | |
Other assets | | | 4,576 | | | | 4,782 | |
Separate Accounts’ assets | | | 94,139 | | | | 86,419 | |
| | | | | | | | |
| | |
Total Assets | | $ | 169,288 | | | $ | 157,751 | |
| | | | | | | | |
| | |
LIABILITIES | | | | | | | | |
Policyholders’ account balances | | $ | 28,263 | | | $ | 26,033 | |
Future policy benefits and other policyholders liabilities | | | 22,655 | | | | 21,562 | |
Broker-dealer related payables | | | 213 | | | | 11 | |
Short-term and long-term debt | | | 200 | | | | 200 | |
Current and deferred income taxes | | | 4,479 | | | | 4,385 | |
Loans from affiliates | | | 1,325 | | | | 1,325 | |
Other liabilities | | | 2,578 | | | | 2,976 | |
Separate Accounts’ liabilities | | | 94,139 | | | | 86,419 | |
| | | | | | | | |
Total liabilities | | | 153,852 | | | | 142,911 | |
| | | | | | | | |
| | |
SHAREHOLDER’S EQUITY | | | | | | | | |
Common stock, $1.25 par value, 2.0 million shares authorized, issued and outstanding | | | 2 | | | | 2 | |
Capital in excess of par value | | | 5,992 | | | | 5,743 | |
Retained earnings | | | 9,125 | | | | 9,392 | |
Accumulated other comprehensive income (loss) | | | 317 | | | | (297 | ) |
| | | | | | | | |
Total AXA Equitable’s equity | | | 15,436 | | | | 14,840 | |
| | | | | | | | |
| | |
Total Liabilities and AXA Equitable’s Equity | | $ | 169,288 | | | $ | 157,751 | |
| | | | | | | | |
The financial information of AXA Equitable Life Insurance Company (“Parent Company”) should be read in conjunction with the Consolidated Financial Statements and Notes thereto.
F-89
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE II
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
REVENUES | | | | | | | | | | | | |
Universal life and investment-type product policy fee income | | $ | 3,334 | | | $ | 3,312 | | | $ | 3,067 | |
Premiums | | | 514 | | | | 533 | | | | 530 | |
Net investment income (loss): | | | | | | | | | | | | |
Investment income (loss) from derivative instruments | | | (943 | ) | | | 2,369 | | | | (269 | ) |
Other investment income (loss) | | | 2,208 | | | | 2,186 | | | | 2,239 | |
| | | | | | | | | | | | |
Total net investment income (loss) | | | 1,265 | | | | 4,555 | | | | 1,970 | |
Investment gains (losses), net: | | | | | | | | | | | | |
Total other-than-temporary impairment losses | | | (96 | ) | | | (36 | ) | | | (300 | ) |
Portion of loss recognized in other comprehensive income (loss) | | | 2 | | | | 4 | | | | 18 | |
| | | | | | | | | | | | |
Net impairment losses recognized | | | (94 | ) | | | (32 | ) | | | (282 | ) |
Other investment gains (losses), net | | | 14 | | | | (10 | ) | | | 51 | |
| | | | | | | | | | | | |
Total investment gains (losses), net | | | (80 | ) | | | (42 | ) | | | (231 | ) |
Equity in earnings (loss) of subsidiaries | | | 483 | | | | 55 | | | | 468 | |
Commissions, fees and other income | | | 201 | | | | 338 | | | | 714 | |
Increase (decrease) in the fair value of the reinsurance contract asset | | | 497 | | | | 5,941 | | | | 2,350 | |
| | | | | | | | | | | | |
Total revenues | | | 6,214 | | | | 14,692 | | | | 8,868 | |
| | | | | | | | | | | | |
| | | |
BENEFITS AND OTHER DEDUCTIONS | | | | | | | | | | | | |
Policyholders’ benefits | | | 2,986 | | | | 4,357 | | | | 3,079 | |
Interest credited to policyholders’ account balances | | | 1,166 | | | | 999 | | | | 951 | |
Compensation and benefits | | | 399 | | | | 372 | | | | 463 | |
Commissions | | | 1,265 | | | | 1,212 | | | | 1,056 | |
Interest expense | | | 106 | | | | 106 | | | | 106 | |
Amortization of deferred policy acquisition costs | | | 576 | | | | 3,620 | | | | (326 | ) |
Capitalization of deferred policy acquisition costs | | | (718 | ) | | | (759 | ) | | | (655 | ) |
Rent expense | | | 34 | | | | 47 | | | | 56 | |
Premium taxes | | | 42 | | | | 43 | | | | 40 | |
Other operating costs and expenses | | | 472 | | | | 651 | | | | 785 | |
| | | | | | | | | | | | |
Total benefits and other deductions | | | 6,328 | | | | 10,648 | | | | 5,555 | |
| | | | | | | | | | | | |
| | | |
Earnings (loss) from continuing operations, before income taxes | | | (114 | ) | | | 4,044 | | | | 3,313 | |
Income tax (expense) benefit | | | 330 | | | | (1,218 | ) | | | (854 | ) |
| | | | | | | | | | | | |
Net Earnings (Loss) | | | 216 | | | | 2,826 | | | | 2,459 | |
Less: net (earnings) loss attributable to the noncontrolling interest | | | (121 | ) | | | 101 | | | | (235 | ) |
| | | | | | | | | | | | |
Net Earnings (Loss) Attributable to AXA Equitable | | | 95 | | | | 2,927 | | | | 2,224 | |
Total other comprehensive income (loss), net of income taxes, attributable to AXA Equitable | | | 614 | | | | 313 | | | | 426 | |
| | | | | | | | | | | | |
Comprehensive Income (Loss) Attributable to AXA Equitable | | $ | 709 | | | $ | 3,240 | | | $ | 2,650 | |
| | | | | | | | | | | | |
F-90
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE II
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Net earnings (loss) | | $ | 216 | | | $ | 2,826 | | | $ | 2,459 | |
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: | | | | | | | | | | | | |
Interest credited to policyholders’ account balances | | | 1,166 | | | | 999 | | | | 951 | |
Universal life and investment-type policy fee income | | | (3,334 | ) | | | (3,312 | ) | | | (3,067 | ) |
Investment gains (losses), net | | | 80 | | | | 42 | | | | 231 | |
Equity in net earnings of subsidiaries | | | (483 | ) | | | (55 | ) | | | (468 | ) |
Dividends from subsidiaries | | | 323 | | | | 332 | | | | 123 | |
Change in deferred policy acquisition costs | | | (142 | ) | | | 2,861 | | | | (981 | ) |
Change in future policy benefits and other policyholder funds | | | 876 | | | | 2,229 | | | | 1,136 | |
(Income) loss related to derivative instruments | | | 943 | | | | (2,369 | ) | | | 269 | |
Change in reinsurance recoverable with affiliate | | | (207 | ) | | | (242 | ) | | | (233 | ) |
Change in the fair value of the reinsurance contract asset | | | (497 | ) | | | (5,941 | ) | | | (2,350 | ) |
Change in current and deferred income taxes | | | (224 | ) | | | 1,250 | | | | 912 | |
Amortization of reinsurance cost | | | 47 | | | | 211 | | | | 274 | |
Amortization and depreciation | | | 62 | | | | 83 | | | | 100 | |
Other, net | | | (182 | ) | | | (190 | ) | | | (9 | ) |
| | | | | | | | | | | | |
| | | |
Net cash provided by (used in) operating activities | | | (1,356 | ) | | | (1,276 | ) | | | (653 | ) |
| | | | | | | | | | | | |
| | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Maturities and repayments of fixed maturities and mortgage loans on real estate | | | 3,547 | | | | 3,427 | | | | 2,746 | |
Sales of investments | | | 1,566 | | | | 626 | | | | 2,863 | |
Purchases of investments | | | (7,563 | ) | | | (7,462 | ) | | | (6,529 | ) |
Cash settlements related to derivative instruments | | | (287 | ) | | | 1,429 | | | | (651 | ) |
Decrease in loans to affiliates | | | 4 | | | | — | | | | 3 | |
Change in short-term investments | | | 34 | | | | 16 | | | | (53 | ) |
Change in policy loans | | | 31 | | | | 38 | | | | 37 | |
Other, net | | | (37 | ) | | | (44 | ) | | | (97 | ) |
| | | | | | | | | | | | |
| | | |
Net cash provided by (used in) investing activities | | | (2,705 | ) | | | (1,970 | ) | | | (1,681 | ) |
| | | | | | | | | | | | |
F-91
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE II
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 – CONTINUED
| | | | | | | | | | | | |
| | | 2012 | | | 2011 | | | 2010 | |
| | | (In Millions) | |
| | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Policyholders’ account balances: | | | | | | | | | | | | |
Deposits | | $ | 5,437 | | | $ | 4,461 | | | $ | 3,187 | |
Withdrawals and transfers to Separate Accounts | | | (982 | ) | | | (821 | ) | | | (483 | ) |
Shareholder dividends paid | | | (362 | ) | | | (379 | ) | | | (300 | ) |
Capital contribution | | | 195 | | | | — | | | | — | |
Change in collateralized pledged liabilities | | | (288 | ) | | | 989 | | | | (270 | ) |
Change in collateralized pledged assets | | | (5 | ) | | | 99 | | | | 533 | |
| | | | | | | | | | | | |
| | | |
Net cash provided by (used in) financing activities | | | 3,995 | | | | 4,349 | | | | 2,667 | |
| | | | | | | | | | | | |
| | | |
Change in cash and cash equivalents | | | (66 | ) | | | 1,103 | | | | 333 | |
Cash and cash equivalents, beginning of year | | | 2,516 | | | | 1,413 | | | | 1,080 | |
| | | | | | | | | | | | |
| | | |
Cash and Cash Equivalents, End of Year | | $ | 2,450 | | | $ | 2,516 | | | $ | 1,413 | |
| | | | | | | | | | | | |
| | | |
Supplemental cash flow information: | | | | | | | | | | | | |
Interest Paid | | $ | 107 | | | $ | 106 | | | $ | 110 | |
| | | | | | | | | | | | |
| | | |
Income Taxes (Refunded) Paid | | $ | 261 | | | $ | 15 | | | $ | (27 | ) |
| | | | | | | | | | | | |
F-92
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2012
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment | | Deferred
Policy
Acquisition
Costs | | | Policyholders’
Account
Balances | | | Future Policy
Benefits
and other
Policyholders’
Funds | | | Policy
Charges
And
Premium
Revenue | | | Net
Investment
Income
(Loss)(1) | | | Policyholders’
Benefits and
Interest
Credited | | | Amortization
of Deferred
Policy
Acquisition
Costs | | | Other
Operating
Expense(2) | |
| | | (In Millions) | |
| | | | | | | | |
Insurance | | $ | 3,728 | | | $ | 28,263 | | | $ | 22,687 | | | $ | 3,848 | | | $ | 1,242 | | | $ | 4,155 | | | $ | 576 | | | $ | 1,844 | |
Investment Management | | | — | | | | — | | | | — | | | | — | | | | 65 | | | | — | | | | — | | | | 2,548 | |
Consolidation/ Elimination | | | — | | | | — | | | | — | | | | — | | | | 31 | | | | — | | | | — | | | | (21 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 3,728 | | | $ | 28,263 | | | $ | 22,687 | | | $ | 3,848 | | | $ | 1,338 | | | $ | 4,155 | | | $ | 576 | | | $ | 4,371 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Net investment income (loss) is based upon specific identification of portfolios within segments. |
(2) | Operating expenses are principally incurred directly by a segment. |
F-93
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2011
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Segment | | Deferred
Policy
Acquisition
Costs | | | Policyholders’
Account
Balances | | | Future Policy
Benefits
and other
Policyholders’
Funds | | | Policy
Charges
And
Premium
Revenue | | | Net
Investment
Income
(Loss)(1) | | | Policyholders’
Benefits and
Interest
Credited | | | Amortization
of Deferred
Policy
Acquisition
Costs | | | Other
Operating
Expense(2) | |
| | | (In Millions) | |
| | | | | | | | |
Insurance | | $ | 3,545 | | | $ | 26,033 | | | $ | 21,595 | | | $ | 3,845 | | | $ | 4,526 | | | $ | 5,359 | | | $ | 3,620 | | | $ | 1,877 | |
Investment Management | | | — | | | | — | | | | — | | | | — | | | | (58 | ) | | | — | | | | — | | | | 2,914 | |
Consolidation/ Elimination | | | — | | | | — | | | | — | | | | — | | | | 34 | | | | — | | | | — | | | | (22 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 3,545 | | | $ | 26,033 | | | $ | 21,595 | | | $ | 3,845 | | | $ | 4,502 | | | $ | 5,359 | | | $ | 3,620 | | | $ | 4,769 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Net investment income (loss) is based upon specific identification of portfolios within segments. |
(2) | Operating expenses are principally incurred directly by a segment. |
F-94
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2010
| | | | | | | | | | | | | | | | | | | | |
Segment | | Policy
Charges
And
Premium
Revenue | | | Net
Investment
Income
(Loss)(1) | | | Policyholders’
Benefits and
Interest
Credited | | | Amortization
of Deferred
Policy
Acquisition
Costs | | | Other
Operating
Expense(2) | |
| | | | | |
Insurance | | $ | 3,597 | | | $ | 1,943 | | | $ | 4,032 | | | $ | (326 | ) | | $ | 1,959 | |
Investment Management | | | — | | | | 2 | | | | — | | | | — | | | | 2,559 | |
Consolidation/ Elimination | | | — | | | | 31 | | | | — | | | | — | | | | (31 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 3,597 | | | $ | 1,976 | | | $ | 4,032 | | | $ | (326 | ) | | $ | 4,487 | |
| | | | | | | | | | | | | | | | | | | | |
(1) | Net investment income (loss) is based upon specific identification of portfolios within segments. |
(2) | Operating expenses are principally incurred directly by a segment. |
F-95
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE IV
REINSURANCE(A)
AT OR FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010
| | | | | | | | | | | | | | | | | | | | |
| | | Gross
Amount | | | Ceded to
Other
Companies | | | Assumed
from
Other
Companies | | | Net
Amount | | | Percentage
of Amount
Assumed
to Net | |
| | | (Dollars In Millions) | |
| | | | | |
2012 | | | | | | | | | | | | | | | | | | | | |
Life Insurance In-Force | | $ | 409,488 | | | $ | 96,869 | | | $ | 34,361 | | | $ | 346,980 | | | | 9.9 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Premiums: | | | | | | | | | | | | | | | | | | | | |
Life insurance and annuities | | $ | 785 | | | $ | 518 | | | $ | 206 | | | $ | 473 | | | | 43.5 | % |
Accident and health | | | 88 | | | | 60 | | | | 13 | | | | 41 | | | | 31.7 | % |
| | | | | | | | | | | | | | | | | | | | |
Total Premiums | | $ | 873 | | | $ | 578 | | | $ | 219 | | | $ | 514 | | | | 42.6 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
2011 | | | | | | | | | | | | | | | | | | | | |
Life Insurance In-Force | | $ | 396,304 | | | $ | 101,926 | | | $ | 34,738 | | | $ | 329,116 | | | | 10.6 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Premiums: | | | | | | | | | | | | | | | | | | | | |
Life insurance and annuities | | $ | 815 | | | $ | 521 | | | $ | 195 | | | $ | 489 | | | | 39.9 | % |
Accident and health | | | 93 | | | | 64 | | | | 15 | | | | 44 | | | | 34.1 | % |
| | | | | | | | | | | | | | | | | | | | |
Total Premiums | | $ | 908 | | | $ | 585 | | | $ | 210 | | | $ | 533 | | | | 39.4 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
2010 | | | | | | | | | | | | | | | | | | | | |
Life Insurance In-Force | | $ | 378,078 | | | $ | 124,959 | | | $ | 37,124 | | | $ | 290,243 | | | | 17.7 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Premiums: | | | | | | | | | | | | | | | | | | | | |
Life insurance and annuities | | $ | 802 | | | $ | 517 | | | $ | 197 | | | $ | 482 | | | | 40.9 | % |
Accident and health | | | 101 | | | | 69 | | | | 16 | | | | 48 | | | | 33.3 | % |
| | | | | | | | | | | | | | | | | | | | |
Total Premiums | | $ | 903 | | | $ | 586 | | | $ | 213 | | | $ | 530 | | | | 40.2 | % |
| | | | | | | | | | | | | | | | | | | | |
(A) | Includes amounts related to the discontinued group life and health business. |
F-96
Part II, Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
9-1
Part II, Item 9A
CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
An evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of AXA Equitable Life Insurance Company (“AXA Equitable”) and its subsidiaries’ (together, the “Company”) disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2012. Based on that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that the AXA Equitable’s disclosure controls and procedures are effective.
Management’s annual report on internal control over financial reporting
Management, including the Chief Executive Officer and Chief Financial Officer of AXA Equitable, is responsible for establishing and maintaining adequate internal control over AXA Equitable’s financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
AXA Equitable’s management assessed the effectiveness of its internal control over financial reporting as of December 31, 2012 in relation to the criteria for effective internal control over financial reporting described inInternal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment under those criteria, management concluded that AXA Equitable’s internal control over financial reporting was effective as of December 31, 2012.
This annual report does not include an attestation report of AXA Equitable’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by AXA Equitable’s registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit AXA Equitable to provide only management’s report in this annual report.
Changes in internal control over financial reporting
There were no changes to AXA Equitable’s internal control over financial reporting that occurred during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect AXA Equitable’s internal control over financial reporting.
9A-1
Part II, Item 9B.
OTHER INFORMATION
None.
9B-1
Part III, Item 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
BOARD OF DIRECTORS
The Board currently consists of twelve members, including our Chief Executive Officer, President, two senior executives of AXA, one senior executive of AllianceBernstein and seven independent members.
The Board holds regular quarterly meetings, generally in February, May, September, and November of each year, and holds special meetings or takes action by unanimous written consent as circumstances warrant. The Board has standing Executive, Audit, Organization and Compensation, and Investment Committees, each of which is described in further detail below. Each of the Directors attended at least 75% of the Board and committee meetings to which he or she was assigned during 2012.
The current members of our Board are as follows:
Mark Pearson
Mr. Pearson, age 54, has been a Director of AXA Equitable since January 2011 and has served as Chairman of the Board and Chief Executive Officer since February 2011. Mr. Pearson also serves as President and Chief Executive Officer of AXA Financial since February 2011. Mr. Pearson is also a member of the Management and Executive Committees at AXA. Mr. Pearson joined AXA in 1995 with the acquisition of National Mutual Holdings (now AXA Asia Pacific Holdings) and was appointed Regional Chief Executive of AXA Asia Life in 2001. In 2008, he became President and Chief Executive Officer of AXA Japan Holding Co. Ltd. (“AXA Japan”) and was appointed a member of the Executive Committee of AXA. Before joining AXA, Mr. Pearson spent approximately 20 years in the insurance sector, assuming several senior manager positions at National Mutual Holdings and Friends Provident. Mr. Pearson is a Fellow of the Chartered Association of Certified Accountants. Mr. Pearson is also a director of AXA Financial (since January 2011), MONY Life (since January 2011), MLOA (since January 2011) and AllianceBernstein Corporation (since February 2011).
Mr. Pearson brings to the Board diverse financial services experience developed though his service as an executive, including as a Chief Executive Officer, to AXA Financial, AXA Japan and other AXA affiliates.
Andrew J. McMahon
Mr. McMahon, age 45, has been a Director of AXA Equitable since May 2011 and has served as President since January 2011. Prior thereto, Mr. McMahon served as Senior Executive Vice President and President, Financial Protection and Wealth Management of AXA Equitable. Mr. McMahon also serves as Senior Executive Vice President and President, Financial Protection and Wealth Management of AXA Financial. Mr. McMahon also served as President of AXA Financial on an interim basis for the period January 2011 through February 2011. Mr. McMahon has overall responsibility for life insurance manufacturing, marketing, distribution, business management operations, and in-force management. He also served as Chairman of AXA Advisors, LLC, the company’s broker/dealer and retail distribution channel from July 2007 through May 2012, where he has served as a Director since July 2007 and as Chief Financial Protection and Wealth Management Officer since 2010. Before joining AXA Equitable in 2005, Mr. McMahon was a principal at McKinsey & Co. and served as a life insurance practice leader in North America. Prior to McKinsey & Co., Mr. McMahon spent several years in management positions with various business divisions of General Electric Company. Mr. McMahon is a member of the Board of Directors of The American Council of Life Insurers. Mr. McMahon is also a director of AXA Financial (since May 2011), MONY Life (since May 2011), MLOA (since May 2011) and AllianceBernstein Corporation (since April 2012).
Mr. McMahon brings to the Board extensive financial services and insurance industry experience and key strategic planning, leadership and sales skills developed as an executive at AXA Equitable, McKinsey & Co. and General Electric Company.
Henri de Castries
Mr. de Castries, age 58, has been a Director of AXA Equitable since September 1993. Mr. de Castries has also served as Chairman of the Board of AXA Financial since April 1998. Since April 2010, Mr. de Castries has been Chairman of the Board and Chief Executive Officer of AXA. Mr. de Castries served as the Chairman of the Management Board of AXA from May 2000 through April 2010. Prior thereto, he served AXA in various capacities, including Vice Chairman of the
10-1
AXA Management Board; Senior Executive Vice President-Financial Services and Life Insurance Activities in the United States, Germany, the United Kingdom and Benelux from 1996 to 2000; Executive Vice President-Financial Services and Life Insurance Activities from 1993 to 1996; Corporate Secretary from 1991 to 1993; and Central Director of Finances from 1989 to 1991. Mr. de Castries is a member of the Board of Directors of Nestle S.A., where he serves on the Audit Committee. Mr. de Castries is also a director of AXA Financial (since September 1993), MONY Life (since July 2004), MLOA (since July 2004), AllianceBernstein Corporation (since October 1993) and various other subsidiaries and affiliates of the AXA Group.
Mr. de Castries brings to the Board his extensive experience as an AXA executive and, prior thereto, his financial and public sector experience gained from working in French government. The Board also benefits from his invaluable perspective as the Chairman and Chief Executive Officer of AXA.
Ramon de Oliveira
Mr. de Oliveira, age 58, has been a Director of AXA Equitable since May 2011. Since April 2010, Mr. de Oliveira has been a member of AXA’s Board of Directors, where he serves on the Finance Committee (Chair) and Audit Committee, and from April 2009 to May 2010, he was a member of AXA’s Supervisory Board. He is currently the Managing Director of the consulting firm Investment Audit Practice, LLC, based in New York, NY. From 2002 and 2006, Mr. de Oliveira was an adjunct professor of Finance at Columbia University. Prior thereto, starting in 1977, he spent 24 years at JP Morgan & Co. where he was Chairman and Chief Executive Officer of JP Morgan Investment Management and was also a member of the firm’s Management Committee since its inception in 1995. Upon the merger with Chase Manhattan Bank in 2001, Mr. de Oliveira was the only executive from JP Morgan & Co. asked to join the Executive Committee of the new firm with operating responsibilities. Mr. de Oliveira is currently a member of the Board of Directors of Investment Audit Practice, LLC, the Kauffman Foundation, Fonds de Dotation du Louvre, Tattinger-Kobrand, Quilvest SA and The Red Cross. Previously he was a Director of JP Morgan Suisse, American Century Company, Inc., SunGard Data Systems and The Hartford Insurance Company. Mr. de Oliveira is also a director of AXA Financial, MONY Life and MLOA since May 2011.
Mr. de Oliveira brings to the Board extensive financial services experience, and key leadership and analytical skills developed through his roles within the financial services industry and academia. The Board also benefits from his perspective as a director of AXA and as a former director of other companies.
Denis Duverne
Mr. Duverne, age 59, has been a Director of AXA Equitable since February 1998. Since April 2010, Mr. Duverne has been the Deputy Chief Executive Officer of AXA, in charge of Finance, Strategy and Operations and a member of AXA’s Board of Directors. From January 2010 until April 2010, Mr. Duverne was AXA’s Management Board member in charge of Finance, Strategy and Operations. Mr. Duverne was a member of the AXA Management Board from February 2003 through April 2010. He was Chief Financial Officer of AXA from May 2003 through December 2009. From January 2000 to May 2003, Mr. Duverne served as Group Executive Vice President-Finance, Control and Strategy. Mr. Duverne joined AXA as Senior Vice President in 1995. Mr. Duverne is also a director of AXA Financial (since November 2003), MONY Life (since July 2004), MLOA (since July 2004), AllianceBernstein Corporation (since February 1996) and various other subsidiaries and affiliates of the AXA Group.
Mr. Duverne brings to the Board the highly diverse experience he has garnered throughout the years from the many key roles he has served for AXA. The Board also benefits from his invaluable perspective as director and Deputy Chief Executive Officer of AXA.
Barbara Fallon-Walsh
Ms. Fallon-Walsh, age 60, has been a Director of AXA Equitable since May 2012. From 2006 to December 2011, Ms. Fallon-Walsh served as Head of Institutional Retirement Plan Services at The Vanguard Group, Inc. (“Vanguard”). Ms. Fallon-Walsh joined Vanguard in 1995 and prior to becoming the Head of Institutional Retirement Plan Services, Ms. Fallon-Walsh served in several executive positions. Prior to joining Vanguard, Ms. Fallon-Walsh served as Executive Vice President, Bay Area Region and LA Gold Coast Region at Bank of America Corporation from 1992 to 1995. From 1981 to 1992, Ms. Fallon-Walsh held several management positions at Security Pacific Corporation, which was acquired by Bank of America in 1992. Ms. Fallon-Walsh is also a director of AXA Financial, MONY Life and MLOA since May 2012.
Ms. Fallon-Walsh brings to the Board extensive financial services and general management expertise through her executive positions at Vanguard and Bank of America. The Board also benefits from her extensive knowledge of the retirement business.
10-2
Danny L. Hale
Mr. Hale, age 68, has been a Director of AXA Equitable since May 2010. From January 2003 to March 2008, Mr. Hale served as Senior Vice President and Chief Financial Officer of The Allstate Corporation. Prior to joining The Allstate Corporation in January 2003, he was Executive Vice President and Chief Financial Officer of the Promus Hotel Corporation until its acquisition by the Hilton Hotels Group in 1999. Prior to joining Promus Hotel Corporation, Mr. Hale was Executive Vice President and Chief Financial Officer of USF&G Corporation from 1993 to 1998. Mr. Hale joined insurer USF&G Corporation in 1991 as Executive Vice President of Diversified Insurance & Investment Operations. Prior thereto, Mr. Hale held various positions with each of Chase Manhattan Leasing and General Electric Company. Mr. Hale is also a director of AXA Financial, MONY Life and MLOA since May 2010.
Mr. Hale brings to the Board invaluable expertise as an audit committee financial expert, and extensive financial services and insurance industry experience and his general knowledge and experience in financial matters, including as a Chief Financial Officer.
Anthony J. Hamilton
Mr. Hamilton, age 71, has been a Director of AXA Equitable since May 2006. Since April 2010, Mr. Hamilton has been a member of AXA’s Board of Directors, where he serves on the Audit Committee (Chair) and Compensation and Human Resources Committee. Prior thereto, he was a member of AXA’s Supervisory Board from January 1996 to April 2010. Mr. Hamilton is also a director of AXA Equity and Law plc since 1993 and its Non-executive Chairman since 1995 and a director of AXA UK plc since 1995 and its Non-executive Chairman since September 2000. Mr. Hamilton joined the investment bank Fox-Pitt, Kelton Limited (“FPK”) in 1978. He was a principal shareholder and served as executive chairman of FPK from 1994 until FPK was acquired by Swiss RE in March 1999. Mr. Hamilton retired from his executive responsibilities at FPK in 2004. Mr. Hamilton is currently a director of Tawa plc and is a former director of FPK; Pinault Printemps Redoute SA; Swiss Re Capital Markets Limited; CX Reinsurance; and Binley Limited. Mr. Hamilton is also a director of AXA Financial (since December 1995), MONY Life (since May 2006) and MLOA (since May 2006).
Mr. Hamilton brings to the Board extensive financial services and insurance industry experience acquired through his years as a senior leader at FPK. The Board also benefits from his perspective as a director of Tawa plc and AXA and certain of its other subsidiaries.
Peter S. Kraus
Mr. Kraus, age 60, has been a Director of AXA Equitable since February 2009. Since December 2008, Mr. Kraus has served as Chairman of the Board of AllianceBernstein Corporation and Chief Executive Officer of AllianceBernstein Corporation, AllianceBernstein and AllianceBernstein Holding. From September 2008 through December 2008, Mr. Kraus served as an executive vice president, the head of global strategy and a member of the Management Committee of Merrill Lynch & Co. Inc. (“Merrill Lynch”). Prior to joining Merrill Lynch, Mr. Kraus spent 22 years with Goldman Sachs Group Inc. (“Goldman”), where he most recently served as co-head of the Investment Management Division and a member of the Management Committee, as well as head of firm-wide strategy and chairman of the Strategy Committee. Mr. Kraus also served as co-head of the Financial Institutions Group. Mr. Kraus is a member of the Management and Executive Committees of AXA. Mr. Kraus is also a director of AXA Financial, MONY and MLOA since February 2009.
Mr. Kraus brings to the Board extensive knowledge of the financial services industry and in-depth experience in the financial markets, including experience as co-head of the Investment Management Division and head of firm-wide strategy at Goldman.
Bertram L. Scott
Mr. Scott, age 61, has been a Director of AXA Equitable since May 2012. Since November 2012, Mr. Scott has served as President and Chief Executive Officer of Affinity Health Plans, an independent, not-for-profit organization offering quality health care coverage to low income New Yorkers. From June 2010 to December 2011, Mr. Scott served as President, U.S. Commercial of CIGNA Corporation. Prior thereto, he served as Executive Vice President of TIAA-CREF from 2000 to June 2010 and as President and Chief Executive Officer of TIAA-CREF Life Insurance Company from 2000 to 2007. Mr. Scott is currently a member of the Board of Directors of Becton, Dickinson and Company, where he serves on the Audit Committee and Compensation and Benefits Committee. Mr. Scott is also a director of AXA Financial, MONY Life and MLOA since May 2012.
10-3
Mr. Scott brings to the Board invaluable expertise as an audit committee financial expert, and strong strategic and operational expertise acquired through the variety of executive roles in which he has served during his career. The Board also benefits from his perspective as a director of Becton, Dickinson and Company.
Lorie A. Slutsky
Ms. Slutsky, age 60, has been a Director of AXA Equitable since September 2006. Since January 1990, Ms. Slutsky has been President and Chief Executive Officer of The New York Community Trust, a community foundation that manages a $2 billion endowment and annually grants more than $150 million to non-profit organizations. Ms. Slutsky is Secretary and a board member of the Independent Sector and co-chaired its National Panel on the Non-Profit Sector, which focused on reducing abuse and improving governance practices at non-profits. She served on the Board of Directors of BoardSource from 1999 to 2008 and served as its Chair from 2005 to 2007. She also served on the Board of Directors of the Council on Foundations from 1989 to 1995 and as its Chair from 1992 to 1994. Ms. Slutsky served as Trustee and Chair of the Budget Committee of Colgate University from 1989 to 1997. Ms. Slutsky is also a director of AXA Financial, MONY Life and MLOA (since September 2006) and AllianceBernstein Corporation (since July 2002).
Ms. Slutsky brings to the Board extensive corporate governance experience through her executive and managerial roles at The New York Community Trust, BoardSource and various other non-profit organizations.
Richard C. Vaughan
Mr. Vaughan, age 63, has been a Director of AXA Equitable since May 2010. From 1995 to May 2005, Mr. Vaughan served as Executive Vice President and Chief Financial Officer of Lincoln Financial Group (“Lincoln”). Mr. Vaughan joined Lincoln in July 1990 as Senior Vice President and Chief Financial Officer of Lincoln’s Employee Benefits Division. In June 1992, Mr. Vaughan was appointed Chief Financial Officer of Lincoln and was promoted to Executive Vice President of Lincoln in January 1995. Mr. Vaughan is a member of the Board of Directors of MBIA Inc., where he serves on the Audit Committee (Chair), Compensation and Governance Committee and Executive Committee. Previously, Mr. Vaughan was also a Director of The Bank of New York and Davita, Inc. Mr. Vaughan is also a director of AXA Financial, MONY and MLOA since May 2010.
Mr. Vaughan brings to the Board invaluable expertise as an audit committee financial expert, and extensive financial services and insurance industry experience and his general knowledge and experience in financial matters, including as a Chief Financial Officer. The Board also benefits from his perspective as a director of MBIA, Inc. and as a former director to other public companies.
EXECUTIVE OFFICERS
The current executive officers (other than Messrs. Pearson and McMahon, whose biographies are included above in the Board of Directors information) are as follows:
Dave S. Hattem, Senior Executive Director and General Counsel
Mr. Hattem, age 56, joined AXA Equitable in 1994 and currently serves as Senior Executive Director and General Counsel. Prior to his election as general counsel in 2010, Mr. Hattem served as senior vice president and deputy general counsel, taking on this role in 2004. Mr. Hattem is responsible for oversight of the Law Department, including the National Compliance Office, setting the strategic direction of the Department and ensuring the business areas are advised as to choices and opportunities available under existing law to enable company goals. Prior to joining AXA Equitable, Mr. Hattem served in several senior management positions in the Office of the United States Attorney for the Eastern District of New York. Mr. Hattem began his professional legal career as an Associate in the Litigation Department of Barrett Smith Schapiro Simon & Armstrong. Since September 2012, Mr. Hattem has been a member of the Board of Directors of The Life Insurance Council of New York.
Nicholas B. Lane, Senior Executive Director and President, Retirement Savings
Mr. Lane, age 39, rejoined AXA Equitable in February 2011 and currently serves as Senior Executive Director and President, Retirement Savings. Mr. Lane has overall responsibility for annuity product manufacturing, service delivery, marketing, in-force management and wholesale distribution. Mr. Lane rejoined AXA Equitable from AXA, where he served as head of AXA Group Strategy since 2008. Prior to joining AXA Group in 2008, he was a director of AXA Advisors LLC and a director and Vice Chairman of AXA Network LLC, AXA Financial Group’s retail broker dealer and insurance general agency, respectively. Prior to joining AXA Equitable, he was a leader in the sales and marketing practice of the strategic consulting firm McKinsey & Co. Prior thereto, Mr. Lane served as a captain in the U.S. Marine Corps.
10-4
Anders Malmstrom, Senior Executive Director and Chief Financial Officer
Mr. Malmstrom, age 45, joined AXA Equitable in June 2012 and currently serves as Senior Executive Director and Chief Financial Officer. Mr. Malmstrom is responsible for all actuarial, investment, and risk management functions, with oversight of the controller, tax, expense management and corporate real estate, corporate sourcing and procurement, and distribution finance areas. Prior to joining AXA Equitable, Mr. Malmstrom was a member of the Executive Board and served as the Head of the Life Business at AXA Winterthur. Prior to joining AXA Winterthur in January 2009, Mr. Malmstrom was a Senior Vice President at Swiss Life, where he was also a member of the Management Committee. Mr. Malmstrom joined Swiss Life in 1997, and held several positions of increasing responsibility during his tenure.
Salvatore Piazzolla, Senior Executive Director and Chief Human Resources Officer
Mr. Piazzolla, age 60, joined AXA Equitable in March 2011 and currently serves as Senior Executive Director and Chief Human Resources Officer. Mr. Piazzolla is responsible for developing and executing a business-aligned human capital management strategy focused on leadership development, talent management and total rewards. Prior to joining AXA Equitable, Mr. Piazzolla was Senior Executive Vice President, Head of Human Resources at UniCredit Group, where he was responsible for all aspects of human resources management, including leadership development, learning and industrial relations. Before joining UniCredit Group in 2005, he held various human resources senior management positions in the United States and abroad at General Electric Company, Pepsi Cola International and S.C. Johnson Wax.
Amy J. Radin, Senior Executive Director and Chief Marketing Officer
Ms. Radin, age 54, joined AXA Equitable in February 2012 and currently serves as Senior Executive Director and Chief Marketing Officer. Ms. Radin has overall responsibility for the Company’s customer strategy and building the Company’s brand. Ms. Radin leads the marketing and communications team which includes brand management and advertising, digital and multichannel programs, marketing for the Company’s core life insurance and retirement savings areas, insights and analytics and communications. In addition, she works closely with AXA on global marketing strategies. Prior to joining AXA Equitable, Ms. Radin was Executive Vice President and Chief Innovation Officer at E*TRADE, where she was responsible for identifying trends and opportunities in the financial services industry and for developing new sources of growth through broader and deeper relationships. Before joining E*TRADE in 2010, Ms. Radin served in several senior management positions at Reader’s Digest Association, Citigroup, Dime Bancorp and American Express.
CORPORATE GOVERNANCE
Committees of the Board
The Executive Committee of the Board (“Executive Committee”) is currently comprised of Mr. Pearson (Chair), Mr. de Castries, Mr. Duverne, Mr. Hamilton and Mr. Vaughan. The function of the Executive Committee is to exercise the authority of the Board in the management of the Company between meetings of the Board with the exceptions set forth in the Company’s By-Laws. The Executive Committee held one meeting in 2012.
The Audit Committee of the Board (“Audit Committee”) is currently comprised of Mr. Vaughan (Chair), Mr. Hale and Mr. Scott. The primary purposes of the Audit Committee are to: (i) assist the Board of Directors in its oversight of the (1) adequacy and effectiveness of the internal control and risk management frameworks, (2) financial reporting process and the integrity of the publicly reported results and disclosures made in the financial statements and (3) effectiveness and performance of the internal and external auditors and the independence of the external auditor; (ii) approve (1) the appointment, compensation and retention of the external auditor in connection with the annual audit and (2) the audit and non-audit services to be performed by the external auditor and (iii) resolve any disagreements between management and the external auditor regarding financial reporting. The Board has determined that each of Messrs. Vaughan, Hale and Scott is an “audit committee financial expert” within the meaning of Item 407(d) of Regulation S-K. The Board has also determined that each member of the Audit Committee is financially literate. The Audit Committee met nine times in 2012.
10-5
The Organization and Compensation Committee of the Board (“OCC”) is currently comprised of Ms. Slutsky (Chair), Ms. Fallon-Walsh and Mr. Hale. The primary purpose of the OCC is to: (i) recommend to the Board individuals to become Board members and the composition of the Board and its Committees; (ii) recommend to the Board the selection of executive management and to receive reports on succession planning for executive management; and (iii) be responsible for general oversight of compensation and compensation related matters. The OCC held six meetings in 2012.
The Investment Committee of the Board (“Investment Committee”) is currently comprised of Mr. Hamilton (Chair), Mr. de Castries, Mr. Hale, Mr. McMahon and Mr. Vaughan. The primary purpose of the Investment Committee is to oversee the investments of the Company by (i) taking actions with respect to the acquisition, management and disposition of investments and (ii) reviewing investment risk, exposure and performance, as well as the investment performance of products and accounts managed on behalf of third parties. The Investment Committee met five times in 2012.
Independence of Certain Directors
Although not subject to the independence standards of the New York Stock Exchange, as a best practice we have applied the independence standards required for listed companies of the New York Stock Exchange to the current members of the Board of Directors. Applying these standards, the Board of Directors has determined that Mr. de Oliveira, Ms. Fallon-Walsh, Mr. Hale, Mr. Hamilton, Mr. Scott, Ms. Slutsky and Mr. Vaughan are independent.
Code of Ethics
All of our officers and employees, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, are subject to the Policy Statement on Ethics (the “Code”), a code of ethics as defined under Regulation S-K.
The Code complies with Section 406 of the Sarbanes-Oxley Act of 2002 and is available on our website at www.axa-equitable.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding certain amendments to or waivers from provisions of the Code that apply to our chief executive officer, chief financial officer and chief accounting officer by posting such information on our website at the above address. To date, there have been no such amendments or waivers.
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
10-6
Part III, Item 11.
EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
In this section, we provide an overview of the goals and principal components of our executive compensation program and describe how we determine the compensation of our “Named Executive Officers.” For 2012, our Named Executive Officers were:
| | • | | Mark Pearson, Chairman and Chief Executive Officer |
| | • | | Anders Malmstrom, Senior Executive Director and Chief Financial Officer since June 1, 2012 |
| | • | | Bertrand Poupart-Lafarge, Interim Chief Financial Officer from April 13, 2012 through May 31, 2012(1) |
| | • | | Richard S. Dziadzio, Senior Executive Vice President and Chief Financial Officer through April 13, 2012 |
| | • | | Andrew McMahon, President |
| | • | | Nick Lane, Senior Executive Director and President, Retirement Savings |
| | • | | Salvatore F. Piazzolla, Senior Executive Director and Chief Human Resources Officer |
| | • | | Richard V. Silver, Senior Executive Vice President, Chief Administrative Officer and Chief Legal Officer (retired effective May 1, 2012) |
| (1) | Mr. Poupart-Lafarge’s compensation is not discussed below since his compensation was not adjusted during the limited period he served as Interim Chief Financial Officer. Rather, the compensation paid to him in 2012 was based on his positions as Chief Investment Officer and Treasurer, each a non-executive officer position. |
The details of each Named Executive Officer’s compensation may be found in the Summary Compensation Table and other compensation tables included in this Item 11.
Compensation Philosophy and Strategy
Overview
The overriding goal of our executive compensation program is to attract, retain and motivate top-performing executive officers who will dedicate themselves to the long-term financial and operational success of AXA Equitable and its parent, AXA Financial, Inc. To this end, we have structured the program to foster a pay-for-performance management culture by:
| | • | | providing total compensation opportunities that are competitive with the levels of total compensation available at the large diversified financial services companies with which we most directly compete in the marketplace; |
| | • | | making performance-based variable compensation the principal component of executive pay to drive superior performance by basing executive officers’ financial success on the financial and operational success of AXA Financial Group’s insurance-related businesses (“AXA Financial Life and Savings Operations”); |
| | • | | setting performance metrics and objectives for our variable compensation arrangements that reward executives for attaining both annual targets and medium-range and long-term business objectives, thereby providing individual executives with the opportunity to earn above-average compensation by achieving above-average results; |
| | • | | establishing equity-based arrangements that align our executives’ financial interests with those of our ultimate parent and shareholder, AXA, by ensuring our executives have a material financial stake in the rising equity value of AXA and the business success of its affiliates; and |
| | • | | structuring compensation packages and outcomes to foster internal equity. |
11-1
Compensation Components
To support this pay-for-performance strategy, our total compensation program provides a mix of fixed and variable compensation components that bases the majority of each executive’s compensation on our success and on an assessment of each executive’s overall contribution to that success.
Fixed Component
The fixed compensation component of our total compensation program, base salary, falls within the market median of the large financial services companies that are our major competitors and is meant to fairly and competitively compensate our executives for their positions and the scope of their responsibilities.
Variable Components
The variable compensation components of our total compensation program, our short-term incentive compensation program and our equity-based awards, give our executives the opportunity to receive compensation at the median of the market if they meet various corporate and individual financial and operational goals and at above the market average offered by our competitors if they exceed their goals. The variable compensation components measure and reward performance with short-term, medium-term and long-term focuses.
Our short-term incentive compensation program focuses our executives on annual corporate and business unit goals that, when attained, drive our global success. It also serves as our primary means for differentiating, recognizing and most directly rewarding individual executives for their personal achievements and leadership based on both qualitative and quantitative results.
Our equity-based awards are structured to reward both medium-term and long-term value creation. Performance unit awards serve as our medium range incentive, with three-year vesting schedules and payouts in cash. Our stock options, on the other hand, are intended to focus our executives on a longer time horizon. Stock options are typically granted with vesting schedules of four years and terms of 10 years so that they effectively merge a substantial portion of each executive’s compensation with the long-term financial success of AXA. We are confident that such a direct alignment of the long-term interests of our executives with those of AXA, combined with the multi-year time-vesting and performance periods of such awards, promotes executive retention, focuses our executives on gearing their performances to long-term value-creation strategies and discourages excessive risk-taking.
How Compensation Decisions Are Made
Role of the AXA Board of Directors
The global framework governing the executive compensation policies for AXA Group and its U.S. subsidiaries, including AXA Equitable, is set and administered at the AXA level through the operations of AXA’s Board of Directors. The AXA Board of Directors (i) oversees the activities of AXA, (ii) reviews the compensation policies that apply to executives of AXA Group worldwide, which are then adapted to local law, conditions and practices by the boards of directors and compensation committees of AXA’s subsidiaries, and (iii) sets annual caps on equity-based awards and reviews and approves all AXA equity-based compensation programs prior to their implementation, which it does in accordance with French laws that govern equity-based compensation.
The Compensation and Human Resources Committee of the AXA Board of Directors is responsible for reviewing the compensation of key executives of the AXA Group, including Mr. Pearson. The Compensation and Human Resources Committee also recommends to the AXA Board of Directors the amount of equity-based awards to be granted to the members of the Management Committee, an internal committee established to assist the Chief Executive Officer of AXA with the operational management of the AXA Group. Mr. Pearson is a member of the Management Committee. On February 20, 2013, the Compensation and Human Resources Committee was composed entirely of directors who were determined to be independent as of December 31, 2012 by the AXA Board of Directors in accordance with the criteria set forth in the AFEP/MEDEF Code (a code of corporate governance principles issued by the French Association of Private Companies (Association Française des Entreprises Privées – AFEP) and the French Confederation of Business Enterprises (Mouvement des Entreprises de France – MEDEF).
11-2
Role of the Organization and Compensation Committee of the Board of Directors of AXA Equitable
Within the global framework of executive compensation policies that AXA has established, direct responsibility for overseeing the development and administration of the executive compensation program for AXA Equitable falls to the Organization and Compensation Committee (the “OCC”) of the Board of Directors of AXA Equitable (the “Board of Directors”). The OCC consists of three members, all of whom were determined to be independent directors by the Board of Directors under New York Stock Exchange standards as of February 14, 2013. In implementing AXA’s global compensation program at the entity level, the OCC is aided by the Chairman and Chief Executive Officer of AXA who, while not a formal member of the OCC, is a member of the Board of Directors and participates in the OCC’s deliberations related to compensation issues and assists in ensuring coordination with AXA’s global compensation policies.
The OCC is primarily responsible for general oversight of compensation and compensation related matters, including reviewing new benefit plans, equity-based plans and the compensation practices of AXA Equitable to ensure they support AXA Equitable’s business strategy and meet the objectives set by AXA for its global compensation policy. In particular, the OCC of AXA Equitable is responsible for:
| | • | | evaluating the performance of the Named Executive Officers and recommending to the Board of Directors their compensation, including their salaries and variable compensation; |
| | • | | supervising the policies relating to compensation of officers and employees; and |
| | • | | reviewing corporate goals and objectives included in variable compensation arrangements and evaluating executive management performance in light of those goals and objectives. |
Following its review and discussion, the OCC submits its compensation recommendations to the Board of Directors for its discussion and approval. Pursuant to the provisions of the New York Insurance Law, the Board of Directors must approve the compensation of all principal officers of AXA Equitable and comparably paid employees. As of February 14, 2013, all of the Named Executive Officers were principal officers or comparably paid employees with the exception of Messrs. Dziadzio, Poupart-Lafarge and Silver.
Role of the Chief Executive Officer
Our Chief Executive Officer, Mr. Pearson, assists the OCC in its review of the total compensation of all the Named Executive Officers except himself. Mr. Pearson provides the OCC with his assessment of their performances relative to the corporate and individual goals and other expectations set for them for the preceding year. Based on these assessments, he then provides his recommendations for each Named Executive Officer’s total compensation and the appropriate goals for each in the year to come. However, the OCC is not bound by his recommendations.
Other than the Chief Executive Officer, no Named Executive Officer plays a decision-making role in determining the compensation of any other Named Executive Officer. As Chief Human Resources Officer, Mr. Piazzolla plays an administrative role as described below in “Role of AXA Equitable Human Resources.”
Role of AXA Equitable Human Resources
AXA Equitable Human Resources supports the OCC’s work on executive compensation matters, being responsible for many of the organizational and administrative tasks that underlie the compensation review and determination process and making presentations on various topics. Human Resources’ efforts include, among other things:
| | • | | suggesting appropriate peer groups for the approval of the OCC, and updating existing selections; |
| | • | | evaluating the compensation data from peer groups, national executive pay surveys and other sources for the Named Executive Officers and other officers as appropriate; |
| | • | | gathering and correlating performance ratings and reviews for individual executive officers, including the Named Executive Officers; |
11-3
| | • | | reviewing executive compensation recommendations against appropriate market data and for internal consistency and equity; and |
| | • | | reporting to, and answering requests for information from, the OCC. |
Human Resources officers also coordinate and share information with their counterparts at our ultimate parent company, AXA, and take part in its annual comprehensive review of the total compensation of executive officers, as described below in the section entitled “Executive Compensation Review.”
Role of Compensation Consultant
Towers Watson has been retained by AXA Equitable to serve as an executive compensation consultant. Towers Watson provides various services including advising senior management on various issues relating to our executive compensation practices and providing market information and analysis regarding the competitiveness of our total compensation program.
During 2012, Towers Watson performed the following specific services for senior management:
| | • | | prepared a comparative review of the total compensation of Mr. Pearson against that received by chief executive officers at peer companies; |
| | • | | provided periodic updates on legal, accounting and other developments and trends affecting compensation and benefits generally and executive compensation specifically; |
| | • | | offered competitive review of total compensation (including base, salary, targeted and actual annual incentives, annualized value of long-term incentives, welfare or retirement benefits) against selected peer companies, covering specific groups of executive positions; and |
| | • | | assisted in analyzing general reports published by third party national compensation consultants on corporate compensation and benefits. |
The senior management of Human Resources of AXA Equitable has full authority to approve all fees paid to Towers Watson, determine the nature and scope of its services, evaluate its performance and terminate its engagement upon 30 days’ written notice to Towers Watson. The total amount of fees paid to Tower Watson by AXA Equitable in 2012 was approximately $118,000 (representing $76,000 fees for executive compensation support and $42,000 fees for broad-based employee compensation support) for both executive compensation consulting and support for a performance review system. AXA Equitable also paid fees to Towers Watson for actuarial services unrelated to its compensation programs.
Use Of Competitive Compensation Data
Because we compete most directly for executive talent with other large diversified financial services companies, we regard it as essential to regularly review the competitiveness of our total compensation program for our executives to ensure that we are providing compensation opportunities that compare favorably with the levels of total compensation offered to similarly situated executives by our peer companies. We use a variety of sources of compensation information to benchmark the competitive market for our executives, including our Named Executive Officers.
For certain of our Named Executive Officers, our primary sources are compensation data compiled from peer groups of our business competitors, with different sources used for different officers depending on the availability of relevant data.
11-4
Mr. Pearson
Mr. Pearson’s peer group currently includes the following companies:
| | | | |
AFLAC | | MetLife | | |
Ameriprise | | Principal Financial | | |
Genworth Financial | | Prudential Financial | | |
Hartford Financial | | Sun Life Financial | | |
Lincoln Financial | | | | |
Mr. Pearson’s compensation is compared to two groups of executives within the peer group as follows:
| | • | | CEO Peer Group: This group includes the chief executive officers of the companies in the peer group. A discount is applied to the data to reflect the subsidiary status of AXA Equitable. Specifically, a 15% discount is applied to cash compensation, a 30% discount is applied to long-term incentive compensation and a 20% discount is applied to total compensation; and |
| | • | | President/Division CEOs:This group includes the “seconds” of the companies in the peer group or presidents and chief executive officers of their subsidiaries. There is no discount applied to this group. |
Other Named Executive Officers
For all other Named Executive Officers, we currently rely primarily on the Tower Watson U.S. Diversified Insurance Study of Executive Compensation (“Towers Watson DIS”) for information to compare their total compensation to the total compensation reported for equivalent executive officer positions, paid by peer groups of companies that included:
| | | | |
Aegon | | ING | | Phoenix Companies |
AFLAC | | John Hancock | | Principal Financial |
AIG | | Lincoln Financial | | Prudential Financial |
Allstate | | Massachusetts Mutual | | Securian Financial |
American United Life | | MetLife | | Sun Life Financial |
CIGNA | | Nationwide | | Thrivent Financial |
CNO Financial | | New York Life | | TIAA-CREF |
Genworth Financial | | Northwestern Mutual | | Unum Group |
Guardian Life | | Pacific Life | | USAA |
Hartford Financial | | | | |
Other Compensation Data Sources
We supplement the above U.S. compensation data sources with additional information from general surveys of corporate compensation and benefits published by various national compensation consulting firms. We also participate in surveys conducted by Mercer, McLagan Partners, Towers Watson and LOMA Executive Survey to benchmark both our executive and non-executive compensation programs.
All these information sources are employed to measure and compare actual pay levels not only on a total compensation basis but also by breaking down our total compensation program component by component to review and compare specific compensation elements as well as the particular mixes of fixed versus variable, short-term versus long-term and cash versus equity-based compensation at our peer companies. This information, as collected and reviewed by Human Resources, is submitted to the OCC for review and discussion.
Pricing Philosophy
We design our compensation practices with the aid of the market data to target the compensation of each Named Executive Officer at the median for total compensation with respect to the pay for comparable positions at the appropriate peer group. Our analysis takes into account certain individual factors such as the specific characteristics and responsibilities of a particular Named Executive Officer’s position as compared to similarly situated executives at peer companies. Differences in
11-5
the amounts of total compensation for our Named Executive Officers in 2012 resulted chiefly from differences in each executive’s level of responsibilities, tenure, performance and appropriate benchmark data as well as general considerations of internal consistency and equity.
Executive Compensation Review
In addition to the foregoing processes, each year AXA Human Resources conducts a comprehensive review of the total compensation paid to the top approximately 300 executives of AXA Group worldwide, including all the Named Executive Officers except Mr. Pearson since members of AXA’s Management Committee are reviewed separately by the Compensation and Human Resources Committee of the AXA Board of Directors. The Chairman and Chief Executive Officer of AXA and the Deputy Chief Executive Officer of AXA participate in this review which focuses on the executives’ performance over the last year and the decisions made about their compensation in light of those performances. The Chief Executive Officer of AXA Equitable and AXA Equitable Human Resources participate in the portion of the review relating to AXA Equitable executives.
Components Of The Total Rewards For Our Executive Officers
We provide a Total Rewards Program for our Named Executive Officers that consists of six components. These components include the three components of our total compensation program (i.e., base salary, short-term incentive compensation and equity-based awards) as well as: (i) retirement, health and other benefit programs, (ii) severance and change-in-control benefits and (iii) perquisites.
Base Salary
The primary purpose of base salary is to compensate each Named Executive Officer fairly based on the position held, the Named Executive Officer’s career experience, the scope of the position’s responsibilities and the Named Executive Officer’s own performance, all of which are reviewed with the aid of market survey data. Using this data, we maintain a 50th percentile pricing philosophy, comparing our base salaries against the median for comparable salaries at peer companies, unless exceptional conditions require otherwise (for example, Mr. Piazzolla’s initial base salary was set at a higher level to match his compensation at his prior employer and to include an additional amount in lieu of providing Mr. Piazzolla with a housing allowance; Mr. Malmstrom’s base salary also includes an additional amount in lieu of providing Mr. Malmstrom with a housing or education allowance) or a Named Executive Officer’s experience and tenure warrant a lower initial salary with an adjustment to market over time. Once set, we usually do not increase base salaries for the Named Executive Officers, except to reflect a change in job responsibility, a sustained change in the market compensation for the position or a market adjustment for a Named Executive Officer whose initial salary was set below the 50th percentile.
Mr. Pearson is the only Named Executive Officer with an employment agreement. Under this agreement, Mr. Pearson’s employment will continue until he is age 65 unless the employment agreement is terminated earlier by either party on 30 days’ prior written notice. Mr. Pearson is entitled to a minimum rate of base salary of $1,150,000 per year, except that his rate of base salary may be decreased in the case of across-the-board salary reductions similarly affecting all officers with the title of Executive Director or higher. In setting Mr. Pearson’s base salary, the company included an additional amount in lieu of providing Mr. Pearson with a housing allowance.
In 2012, none of the Named Executive Officers, except Mr. Lane, received an increase in their annual rate of base salary. Mr. Lane received an increase of $50,000 to bring his salary closer to the 50th percentile based on his growth in the role.
The base salaries earned by the Named Executive Officers in 2012 (and in the prior two fiscal years) are reported in the Summary Compensation Table included in this Item 11.
Short-Term Incentive Compensation Program
Annual variable cash awards for the Named Executive Officers are available under The AXA Equitable Short-Term Incentive Compensation Program for Senior Officers (the “STIC Program”).
11-6
The purpose of the STIC Program is to:
| | • | | align incentive awards with the company’s strategic objectives and reward employees based on both company and individual performance; |
| | • | | enhance the performance assessment process with a focus on accountability; |
| | • | | establish greater compensation differentiation based on performance; |
| | • | | provide competitive total compensation opportunities; and |
| | • | | attract, motivate and retain top performers. |
The STIC Program awards are typically made in February each year, following review of each participant’s performance and achievements over the course of the preceding fiscal year. Awards can vary from year to year, and differ by participant, depending primarily on the business and operational results of AXA Financial Life and Savings Operations, as measured by the performance objectives under the STIC Program and certain qualitative measures as well as the participant’s individual contributions to those results. No individual is guaranteed any award under the STIC Program, except for certain limited guarantees for new hires.
Individual Targets
Initially, individual target awards are assigned to each STIC Program participant based on evaluations of competitive market data for his or her position. These individual award targets are reviewed each year and may be increased or decreased, but generally remain constant from year to year unless there has been a significant change in the level of the participant’s responsibilities or a proven and sustained change in the market compensation for the position.
STIC Program Pool
All the money available to pay STIC Program awards to participants other than Mr. Pearson comes from, and is limited by, a cash pool (the “STIC Pool”) from which the awards of all the participants under the STIC Program are paid. The size of this pool is determined each year by a formula under which the sum of all the individual award targets established for all STIC Program participants for the year is multiplied by a funding percentage (the “Funding Percentage”). The Funding Percentage is initially based on a performance percentage that measures the performance of AXA Financial Life and Savings Operations (weighted 90%) and AXA Group (weighted 10%) against certain financial and other targets (the “Performance Percentage”). The performance of the Investment Management segment of AXA Equitable is not considered for this purpose since it reports the business of AllianceBernstein, the officers of which do not participate in the STIC Program. AllianceBernstein maintains separate compensation plans and programs.
After the Performance Percentage is determined, it may be adjusted positively or negatively by the Chairman and Chief Executive Officer of AXA, as described below, to arrive at the Funding Percentage.
Mr. Pearson’s STIC Program award is determined independently of the STIC Program Pool and is based 30% on AXA Group’s performance (which reflects his broader range of performance responsibilities within AXA Group worldwide as a member of the Management Committee), 40% on the performance of AXA Financial Life and Savings Operations and 30% on his individual performance.
Performance Percentage
Various performance objectives are established for each of AXA Group and AXA Financial Life and Savings Operations, and a target is set for each one. Each performance objective is separately subject to a 150% cap and 50% cliff with the exception of the Customer Scope component of AXA Financial Life and Savings Operations’ Customer Centricity performance objective for which the cliff was removed in 2012 due to the volatility of the measure. For example, if a particular performance objective is weighted 15% for AXA Financial Life and Savings Operations, 15% will be added to the overall performance percentage for AXA Financial Life and Savings Operations if that target is met, regardless of AXA Financial Life and Savings Operations’ performance on its other objectives. If the target for that performance objective is exceeded, the amount added to the overall performance percentage for AXA Financial Life and Savings Operations will be increased up to a maximum of 22.5% (150% × 15%). If the target for the performance objective is not met, the amount added to the performance percentage will be decreased down to a threshold of 7.5% (50% × 15%). If performance is below the threshold, 0% will be added to AXA Financial Life and Savings Operations’ overall performance percentage.
11-7
AXA Financial Life and Savings Operations –The following grid presents the targets for each of the performance objectives used to measure the performance of AXA Financial Life and Savings Operations in 2012, along with their relative weightings. The performance objectives for AXA Financial Life and Savings Operations and their relative weightings are standardized for AXA Group life and savings companies in mature markets worldwide and, accordingly, are not measures calculated and presented in accordance with generally accepted accounting principles in the United States.
| | | | | | | | |
AXA Financial Life and Savings Operations Performance Objectives | | Weighting | | | Target(1) | |
| | |
Underlying earnings(2) | | | 40.0 | % | | | 662 | |
| | |
Economic expenses(3) | | | 10.0 | % | | | 1,280 | |
| | |
Operating return on short-term economic capital(4) | | | 20.0 | % | | | 16.7 | % |
| | |
Operating free cash flow(5) | | | 15.0 | % | | | 754 | |
| | |
Customer Centricity(6) | | | | | | | | |
Customer Scope | | | 10.0 | % | | | 81.5 | % |
Brand Preference | | | 5.0 | % | | | 37.5 | % |
| (1) | The numbers for underlying earnings and economic expenses are in millions of U.S. dollars. |
| (2) | “Underlying earnings” means net income excluding net realized capital gains (losses), goodwill and related intangibles, profit and loss on financial assets under the fair value option, derivatives and exceptional operations. Underlying earnings is measured using International Financial Reporting Standards (“IFRS”) since AXA uses IFRS as its principal method of accounting. |
| (3) | “Economic expenses” means various controllable expenses as determined by AXA. |
| (4) | “Operating return on short-term economic capital” means the value generated by the business as compared to its capital consumption. |
| (5) | “Operating Free Cash Flow” means the ability to generate dividends (distributable earnings for shareholders). |
| (6) | “Customer Centricity” is comprised of two components – Customer Scope and Brand Preference. Generally, Customer Scope measures customers’ overall satisfaction with AXA Equitable and Brand Preference measures customers’ intention to buy additional products from AXA Equitable based on a weighted average of the percentage of favorable responses received for certain customer survey questions. |
Since the performance objectives are meant to cover only the key performance indicators for a year, there are generally no more than five objectives. The performance objectives are determined based on AXA’s strategy and focus and may change from year to year as different metrics may become more relevant. For example, the weighting of customer centricity has increased over the last few years as AXA Group has developed a global strategy of becoming more customer-focused. Underlying earnings is generally the most highly weighted performance objective since we believe that underlying earnings is the strongest indicator of performance for a year and should be the dominant metric to determine an executive’s annual incentive income.
AXA Group –AXA Group’s performance is primarily based on underlying earnings per share. Return on equity and customer scope are also considered. For this purpose, “return on equity” means the ratio of the change in available financial resources for a year to the average short-term economic capital. Short-term economic capital measures the portion of the available financial resources that could be lost in a year if a 1 in 200 year “shock” were to occur.
Adjustment by AXA Group Chairman and Chief Executive Officer
As stated above, the Performance Percentage may be adjusted by AXA’s Chairman and Chief Executive Officer to arrive at the Funding Percentage. This adjustment reflects AXA Equitable’s performance against other qualitative goals set by AXA at the beginning of the year and may increase or decrease the Performance Percentage by 15%, subject to an overall cap of 150% for the Funding Percentage. For 2012, these other qualitative goals included a wide range of customer centricity, trust and achievement, efficiency and other major strategic initiatives set at the beginning of the year. With respect to 2012, AXA’s Chairman and Chief Executive Officer made a positive adjustment based on his subjective evaluation of AXA Equitable’s performance for 2012, taking into account various accomplishments such as increasing the frequency and depth of organization talent discussions, delivering micro-inequities training to a substantial portion of the employee population and increasing our score on AXA’s corporate responsibility index.
11-8
Individual Determinations
Once the STIC Pool is determined, it is allocated to participants in the STIC Program based on their individual performance and demonstrated leadership behaviors. As stated above, no participant is guaranteed his or her target award or any award under the STIC Program except for certain limited guarantees for new hires. This section describes how the amounts of the STIC Program awards for the Named Executive Officers were determined.
The OCC reviewed the performance of each Named Executive Officer during 2012. Based on its subjective determination of each Named Executive Officer’s performance, the OCC made its recommendations as to the STIC Program award for each Named Executive Officer to the AXA Equitable Board of Directors who approved the final award amounts. In making its recommendations, the OCC took into account the factors that it deemed relevant, including the following accomplishments achieved in 2012 and the Funding Percentage. The accomplishments included:
| | • | | We made solid progress in executing our strategy to offer a more balanced and diversified product portfolio. As an example, our Structured Capital Strategies product surpassed the $1.5 billion new premium sales level in 2012; |
| | • | | We continued to take steps to reduce the risk associated with the in-force business including suspending the acceptance of contributions into certain Accumulator® contracts issued prior to June 2009 and taking steps to limit and/or suspend the acceptance of contributions to other annuity products as well as initiating a limited program to offer to purchase from certain policyholders the GMDB rider contained in their annuity contracts; |
| | • | | Our productivity initiatives and disciplined expense management resulted in a reduction to expenses and increased operational efficiency; |
| | • | | We achieved excellent customer satisfaction ratings and were once again a DALBAR Annuity Service Award winner; and |
| | • | | We continued to implement successful diversity initiatives resulting in significant recognition such as being named one of the Top 25 Best Companies for Multicultural Women inWorking Mother magazine, placing in the highest category of companies in the Human Rights Campaign’s Corporate Equality Index (95 out of 100), being recognized as having one of the Top 25 U.S. Diversity Councils by the Association of Diversity Councils and receiving the Corporate Leadership Award from the Women Presidents’ Educational Organization. |
No specific weight was assigned to any particular factor and all were evaluated in the aggregate to arrive at the recommended STIC Program award for each of the Named Executive Officers.
In addition to his STIC Program award for 2012, Mr. Malmstrom received a sign-on bonus of $150,000 in June 2012. The bonus is subject to recoupment in the event Mr. Malmstrom’s employment with AXA Equitable is terminated for any reason (other than death or job elimination) prior to one full year of employment.
The STIC Program awards earned by the Named Executive Officers in 2012 (and in the prior two fiscal years) are reported in the Summary Compensation Table included in this Item 11.
Equity-Based Awards
Annual equity-based awards for our officers, including the Named Executive Officers, are available under the umbrella of AXA’s global equity program. The value of the equity-based awards is linked to the performance of AXA’s stock.
The purpose of the equity-based awards is to:
| | • | | align strategic interests of participants with those of our ultimate parent and shareholder, AXA; |
| | • | | provide competitive total compensation opportunities; |
| | • | | focus on achievement of medium-range and long-term strategic business objectives; and |
| | • | | attract, motivate and retain top performers. |
11-9
Each year, AXA Equitable’s OCC submits to the AXA Board of Directors recommendations with respect to equity-based awards for officers, including the Named Executive Officers. The AXA Board of Directors approves individual grants as it deems appropriate.
Proposed grants under AXA’s global equity program involve a mix of two equity-based components: (1) AXA ordinary share options and (2) AXA performance units. U.S. employees are granted AXA ordinary share options under the AXA Stock Option Plan for AXA Financial Employees and Associates (the “Stock Option Plan”) and are granted AXA performance units under the AXA Performance Unit Plan (the “Performance Unit Plan”).
Both the Stock Option Plan and the Performance Unit Plan are subject to the oversight of the AXA Board of Directors, which is authorized to approve all stock option and performance unit programs within AXA Group prior to their implementation within the global cap for grants authorized by AXA’s shareholders. The AXA Board of Directors is also responsible for setting the size of the equity pool each year, after considering the amounts authorized by shareholders for stock options (AXA’s shareholders authorize a global cap for option awards every three to four years) and the recommendations of chief executive officers or boards of directors of affiliates worldwide on the number of option and performance unit grants for the year. The pools are allocated annually among AXA Group affiliates based on each affiliate’s contribution to AXA Group’s financial results during the preceding year.
The AXA Board of Directors sets the mix of performance units and stock options for individual grants, which is standardized through AXA Group worldwide. Since 2004 there has been an increasing reliance on performance units over stock options in equity-based awards since performance units avoid the dilutive effects that accompany grants of stock options. The mix between performance units and stock options is generally more heavily weighted toward performance units at the junior officer levels. For senior and executive officer grants, the proportion of stock options rises since stock options are a long-term award and AXA believes that senior officers should have more of a long-term focus.
Equity-based awards are granted using dollar values. These dollar values are converted into euros using the U.S. dollar to euro exchange rate at the time of grant. The resulting euro grant value is then allocated between stock options and performance units in accordance with the mix determined by the AXA Board of Directors. The number of stock options is then determined by dividing the portion of the euro grant value allocated to the options by the value of one stock option at the grant date as determined using a Black-Scholes pricing methodology. The number of performance units is then determined by dividing the portion of the euro grant value allocated to the performance units by the value of one performance unit. For this purpose, the value of a performance unit is deemed to be equal to 2.5 times the value of a stock option at the grant date. Note that the stock option and performance unit values used in determining the amount of a grant are based on assumptions which differ from the assumptions used in determining an option’s or performance unit’s grant date fair value reflected in the Summary Compensation Table which is based on FASB ASC Topic 718.
2012 Grants of Equity-Based Awards
On March 16, 2012, stock option and performance unit grants were made to the Named Executive Officers by the AXA Board of Directors based on a review of each officer’s potential future contributions, consideration of the importance of retaining the officer in his current position, a review of competitive market data relating to equity-based awards for similar positions at peer companies, as described above in the section entitled, “Use of Competitive Compensation Data,” and the recommendations of the AXA Equitable OCC.
Mr. Pearson was granted an equity-based award comprised of 40% stock options and 60% performance units. The number of stock options awarded was 116,000 and the number of performance units awarded was 69,600.
For the other Named Executive Officers, the equity-based award was comprised of 30% stock options and 70% performance units. The amounts were as follows: Mr. Dziadzio received 36,223 stock options and 33,808 performance units. Mr. Piazzolla received 20,856 stock options and 19,465 performance units. Mr. McMahon received 61,745 stock options and 57,628 performance units. Mr. Silver received 34,028 stock options and 31,759 performance units. Mr. Lane received 38,419 stock options and 35,857 performance units.
11-10
Stock Options
The stock options granted to the Named Executive Officers on March 16, 2012 have a 10-year term and a vesting schedule of four years, with one-third of the grant vesting on each of the second, third and fourth anniversaries of the grant, provided that the last third will be exercisable from March 16, 2016 only if the AXA ordinary share performs at least as well as the DowJones Europe Stoxx Insurance Index over a specified period (this performance condition applies to all of Mr. Pearson’s options). The exercise price for the options is 12.22 euro, which was the average of the closing prices for the AXA ordinary share on NYSE Euronext Paris SA over the 20 trading days immediately preceding March 16, 2012.
In the event of a Named Executive Officer’s retirement, the stock options continue to vest and may be exercised until the end of the term, except in the case of misconduct. Accordingly, since Mr. Silver retired, these stock options will not be forfeited due to any service condition.
Performance Units
The performance units granted to the Named Executive Officers on March 16, 2012 have a cliff vesting schedule of three years and will be settled in cash.
A performance unit is a “phantom” share of AXA stock that, once earned and vested, provides the right to a payment equal to the value of an AXA share at the time of payment. Performance units are granted unearned. Under the 2012 Performance Unit Plan, the number of units that is earned is determined at the end of a two-year performance period starting on January 1, 2012 and ending on December 31, 2013 by multiplying the number of units granted by a percentage that is determined based on the performance of AXA Group and AXA Financial Life and Savings Operations over the performance period. If no dividend is paid by AXA for fiscal year 2012 or fiscal year 2013, the percentage will be divided in half.
Performance Objectives –AXA and AXA Financial Life and Savings Operations each have their own performance objectives under the 2012 Performance Unit Plan, with AXA Group’s performance over the two-year performance period counting for one-third and AXA Financial Life and Savings Operations’ performance over the same period counting for two-thirds toward the final determination of how many performance units a participant has earned. If performance targets are met, 100% of the performance units initially granted is earned. Performance that exceeds the targets results in increases in the number of units earned, subject to a cap of 130% of the initial number of units. Performance that falls short of targets results in a decrease in the number of units earned with a possible forfeiture of all units. Since AXA uses IFRS as its principal method of accounting, the performance objectives are measured using IFRS. Accordingly, the performance objectives are not measures calculated and presented in accordance with generally accepted accounting principles in the United States.
For performance units granted under the 2012 Performance Unit Plan, the performance objectives are:
| | | | |
| | | AXA Financial Life and Savings |
AXA Group (1/3 weight) | | Operations (2/3 weight) |
• Net Income Per Share | | • Net Income(1) | | (weighted 50%) |
| | • Underlying earnings | | (weighted 50%) |
(1) | Net income means net income as determined under IFRS. |
For AXA Group, net income per share is the key performance objective since it is aligned with shareholder dividends and provides differentiation from the STIC Program performance objectives. For AXA Financial Life and Savings Operations, underlying earnings is included as a performance objective since it measures operating performance.
Payout –The settlement of 2012 performance units will be made in cash on March 16, 2015 or on the immediately following day that is a business day if March 16, 2015 is not a business day. The units will be valued based on the average closing price of the AXA ordinary share on NYSE Euronext Paris SA during the last 20 trading days immediately preceding the settlement date and converted to U.S. dollars using the euro to U.S. dollar exchange rate as published by the European Central Bank (or equivalent institution in the absence thereof) on the trading day immediately preceding the settlement date.
11-11
The 2012 Performance Unit Plan provides that, in the case of retirement, a participant is treated as if he or she continued employment until the end of the vesting period. Accordingly, Mr. Silver will receive a payout under this plan even though he retired prior to the end of the vesting period.
Grants under 2012 AXA Miles Program
On March 16, 2012, eligible AXA Group employees worldwide were each granted 50 AXA miles. AXA miles are “phantom” shares of AXA stock that will convert to actual AXA ordinary shares at the end of a four-year vesting period on March 16, 2016. In addition, 25 of the AXA miles are subject to performance conditions. Specifically, at least one of the following two metrics must have improved in 2012 in order for these 25 AXA miles to convert to actual shares: AXA’s underlying earnings per share (1.57 euro in 2011) or AXA’s customer scope index (79.3 in 2011).
Payout of 2010 Performance Units in 2012
In 2012, the Named Executive Officers with the exception of Mr. Piazzolla received a 50% payout under AXA’s 2010 Performance Unit Plan. The payout of the units was in cash.
The 2010 Performance Unit Plan was similar to the 2012 Performance Unit Plan except that 50% of the units earned were vested after two years, on March 19, 2012, and the remaining 50% will be vested on March 19, 2013. As in the 2012 Performance Unit Plan, AXA Financial Life and Savings Operations and AXA Group each had their own performance objectives under the 2010 Performance Unit Plan, with AXA Financial Life and Savings Operations’ performance over a two-year performance period counting for two-thirds and AXA Group’s performance over the same period counting for one-third toward the final determination of how many performance units a participant earned. AXA Group’s performance was based on net income per share while AXA Financial Life and Savings Operations’ performance was based on net income (weighted 50%) and underlying earnings (weighted 50%). The performance percentage that was ultimately achieved under the plan was 77.28%.
Detailed information on the stock option and performance unit grants for each of the Named Executive Officers in 2012 is reported in the 2012 Grants of Plan-Based Awards Table included in this Item 11.
Other Compensation and Benefits
We believe a comprehensive benefits program that offers long-term financial support and security for all employees plays a critical role in attracting high caliber executives and encouraging their long-term service. Accordingly, we offer our employees, including our Named Executive Officers, a benefits program that includes group health and disability coverage, group life insurance and various deferred compensation and retirement benefits.
We review the program from time to time to ensure that the benefits it provides continue to serve our business objectives and remain cost-effective and competitive with the programs offered by other diversified financial services companies.
Tax-Qualified Retirement Plans
The following tax-qualified retirement plans are offered to eligible employees, including our Named Executive Officers, except Mr. Malmstrom who continues to participate in the Switzerland retirement fund:
AXA Equitable 401(k) Plan (the “401(k) Plan”). AXA Equitable sponsors the 401(k) Plan, a tax-qualified defined contribution plan with a cash or deferred arrangement, for its eligible employees, including the Named Executive Officers except for Mr. Malmstrom. Eligible employees may contribute to the 401(k) Plan on a before tax, after-tax, or Roth 401(k) basis (or any combination of the foregoing), up to a percentage of annual eligible compensation as defined in the plan. Before-tax and Roth 401(k) contributions are subject to contribution limits ($17,000 in 2012 and $17,500 in 2013) and compensation limits ($250,000 in 2012 and $255,000 in 2013) imposed by the Internal Revenue Code of 1986, as amended (the “Code”). Prior to February 10, 2012, eligible employees received a matching contribution for their before-tax and Roth 401(k) contributions on a dollar for dollar basis up to three percent of the participant’s annual eligible compensation. Company matching contributions were subject to a three-year cliff-vesting schedule. On February 10, 2012, the matching contribution for AXA Equitable employees was replaced with a discretionary profit sharing contribution opportunity. The discretionary profit sharing contribution for a calendar year is based on company performance for that year and will range from 0% to 4% of eligible compensation. Any contribution for a calendar year is expected to be made in the first quarter of the following year. No profit sharing contribution was made for the 2012 plan year.
11-12
AXA Equitable Retirement Plan (the “Retirement Plan”).AXA Equitable sponsors the Retirement Plan, a tax-qualified defined benefit plan, for its eligible employees, including the Named Executive Officers except Mr. Malmstrom. The Retirement Plan provides for retirement benefits upon reaching age sixty-five and has provisions for early retirement, death benefits, and benefits upon termination of employment for vested participants. It has a three-year cliff-vesting schedule.
The Retirement Plan currently provides a cash balance benefit whereby AXA Equitable establishes a notional account in the name of each Retirement Plan participant. This notional account is credited with deemed pay credits equal to 5% of eligible compensation up to the Social Security wage base plus 10% of eligible compensation above the Social Security wage base. Eligible compensation is subject to limits imposed by the Code ($250,000 in 2012 and $255,000 in 2013). In addition, the notional account is credited with deemed interest credits. For pay credits earned on or after April 1, 2012, the interest rate is determined annually based on the average discount rates for one-year Treasury Constant Maturities. For pay credits earned prior to April 1, 2012, the annual interest rate is the greater of 4% or a rate derived from the average discount rates for one-year Treasury Constant Maturities. For pay credits earned prior to April 1, 2012 the rate was 4% for 2012 and for any pay credits earned on or after April 1, 2012, the rate was 0.25% for 2012.
For certain grandfathered participants, the Retirement Plan provides benefits under a formula based on final average pay, estimated Social Security benefits and service.
For additional information on retirement plan benefits for the Named Executive Officers, see the Pension Benefits Table included in this Item 11.
Nonqualified Retirement Plans
AXA Equitable Excess Retirement Plan (the “Excess Plan”). AXA Equitable sponsors the Excess Plan which allows eligible employees, including the Named Executive Officers except Mr. Malmstrom, to earn retirement benefits in excess of what is permitted under the Code with respect to the Retirement Plan. Specifically, the Retirement Plan is subject to rules under the Code that cap both the amount of eligible earnings that may be taken into account for determining benefits under the plan and the amount of benefits the plan may pay annually. The Excess Plan permits participants, including the Named Executive Officers, to accrue and be paid benefits that they would have earned and been paid under the Retirement Plan but for these limits. We believe the Excess Plan is an important component of competitive market-based compensation in both our peer group and generally.
Nonqualified Deferred Compensation Plan
The AXA Equitable Post-2004 Variable Deferred Compensation Plan for Executives (the “Post-2004 Plan”). AXA Equitable sponsors the Post-2004 Plan which allows eligible employees to defer the receipt of compensation. The amount deferred is credited to a bookkeeping account established in the participant’s name and participants may choose from a range of nominal investments according to which their accounts rise or decline. Participants annually elect the amount they want to defer, the date on which payment of their deferrals will begin and the form of payment. We believe that compensation deferral is a cost-effective method of enhancing the savings of executives.
For additional information on these plan benefits for the Named Executive Officers, see the Nonqualified Deferred Compensation Table included in this Item 11.
Financial Protection
The AXA Equitable Executive Survivor Benefits Plan (the “ESB Plan”).AXA Equitable sponsors the ESB Plan which offers financial protection to a participant’s family in the case of his or her death. Eligible employees may choose up to four levels of coverage and the form of benefit to be paid at each level. Each level provides a benefit equal to one times the participant’s eligible compensation (generally, base salary plus higher of most recent short-term incentive compensation award and the average of the three highest short-term incentive compensation awards) and offers different coverage choices. Generally, the participant can choose between a life insurance death benefit and a deferred compensation benefit payable upon death at each level.
11-13
Severance Arrangements
The AXA Equitable Severance Benefit Plan (the “Severance Plan”). AXA Equitable sponsors the Severance Plan to provide severance benefits to eligible employees whose jobs are eliminated for specific defined reasons. The Severance Plan generally bases severance payments to eligible employees on length of service or salary. Payments are capped at 52 weeks’ of salary or, in some cases, $300,000. To obtain benefits under the Severance Plan, participants must execute a general release and waiver of claims against AXA Equitable and affiliates.
The AXA Equitable Supplemental Severance Plan for Executives (the “Supplemental Severance Plan”). AXA Equitable sponsors the Supplemental Severance Plan for officers at the level of Executive Director or above. The Supplemental Severance Plan is intended solely to supplement, and is not duplicative of, any severance benefits for which an executive may be eligible under the Severance Plan. The Supplemental Severance Plan provides that eligible executives will receive, among other benefits:
| | • | | Severance payments equal to 52 weeks’ of salary, reduced by any severance payments for which the executive may be eligible under the Severance Plan; |
| | • | | Additional severance payments equal to the greater of: |
| | • | | The most recent short-term incentive compensation award paid to the executive; |
| | • | | The average of the three most recent short-term incentive compensation awards paid to the executive; and |
| | • | | The annual target short-term incentive compensation award for the executive for the year in which he or she receives notice of job elimination; and |
| | • | | A lump sum payment equal to the sum of: (a) the executive’s short-term incentive compensation for the year in which the executive receives notice of job elimination, pro-rated based on the number of the executive’s full calendar months of service in that year and (b) $40,000. |
Mr. Pearson’s Employment Agreement. Mr. Pearson waived the right to receive any benefits under the Severance Plan or the Supplemental Severance Plan. Rather, his employment agreement provides that, if his employment is terminated by AXA Equitable prior to his age 65 other than for cause, excessive absenteeism or death, or Mr. Pearson resigns for “good reason,” Mr. Pearson will be entitled to certain severance benefits, including (i) severance pay equal to the sum of two years of salary and two times the greatest of: (a) Mr. Pearson’s most recent bonus, (b) the average of Mr. Pearson’s last three bonuses and (c) Mr. Pearson’s target bonus for the year in which termination occurred, (ii) a pro-rated bonus at target for the year of termination, (iii) excess pension plan accruals on the severance pay, (iv) continued participation in the ESB Plan for an additional year following termination and (v) access to the company medical plans at Mr. Pearson’s or his spouse’s sole expense for two years from the date of termination. For this purpose, “good reason” includes a material reduction in Mr. Pearson’s duties or authority, the removal of Mr. Pearson from his positions, AXA Equitable requiring Mr. Pearson to be based at an office more than 75 miles from New York City, a diminution of Mr. Pearson’s titles, a material failure by the company to comply with the agreement’s compensation provisions, a failure of the company to secure a written assumption of the agreement by any successor company and a change in control of AXA Financial (provided that Mr. Pearson delivers notice of termination within 180 days after the change in control). The severance benefits are contingent upon Mr. Pearson releasing all claims against AXA Equitable and its affiliates and his entitlement to severance pay will be discontinued if he provides services for a competitor. Also, in the event of a termination of Mr. Pearson’s employment by AXA Equitable without cause or Mr. Pearson’s resignation due to a change in control, Mr. Pearson’s severance benefits will cease after one year if certain performance conditions are not met.
Change in Control Arrangements
We believe that it is important to provide our employees with a level of protection to reduce anxiety that may accompany a change in control. Accordingly, change in control benefits are provided for stock options, restricted stock and performance units.
For stock options granted under the Stock Option Plan in 2005 or later, if there is a change in control of AXA Financial, all stock options will become immediately exercisable for their term regardless of the otherwise applicable exercise schedule. For stock options granted to employees prior to 2005 under The AXA Financial, Inc. 1997 Stock Incentive Plan and restricted stock granted under that plan, each stock option will, at the discretion of the Organization and Compensation
11-14
Committee of the AXA Financial Board of Directors (the “AXA Financial OCC”), either be canceled in exchange for a payment in cash or become immediately exercisable and all restricted stock will become non-forfeitable and be immediately transferable unless the AXA Financial OCC reasonably determines that: (i) the stock options or restricted stock will be honored, (i) the stock options or restricted stock will be assumed or (iii) alternative awards will be substituted for the stock options and restricted stock. Such alternative awards must, among other items, provide rights and entitlements substantially equivalent to, or better than, the rights and entitlements of the existing awards and must have substantially equivalent economic value.
Under the 2012, 2011 and 2010 Performance Unit Plans, if there is a change in control of AXA Financial at any time between the end of the performance period and the settlement date of the performance units, participants in the plan will maintain the right to receive the settlement of their performance units on the settlement date.
Perquisites
We provide our Named Executive Officers with certain perquisites. Pursuant to his employment agreement, Mr. Pearson is entitled to unlimited personal use of a car and driver, two business class trips to the United Kingdom per year with his spouse, expatriate tax services, a company car for his personal use, excess liability insurance coverage, and repatriation costs. Each of the Named Executive Officers may use a car and driver for personal purposes from time to time and may occasionally bring spouses and guests on private aircraft flights otherwise being taken for business reasons. Also, Mr. McMahon and Mr. Lane are each permitted to use a corporate membership in a country club for personal purposes and, in 2012, the company paid for various relocation costs for Mr. Malmstrom and Mr. Lane.
In addition to the above, we provide financial planning and tax preparation services for our Named Executive Officers.
All the Named Executive Officers also receive tax gross-up payments in respect of their transportation and financial planning and tax preparation benefits. Additional tax gross-ups were paid in 2012 for Mr. Malmstrom’s and Mr. Lane’s relocation costs and for Mr. Pearson’s excess liability insurance coverage. Tax gross-ups on most perquisites will be discontinued for 2013.
The incremental costs of perquisites for the Named Executive Officers during 2012 are included in the column entitled “All Other Compensation” in the Summary Compensation Table included in this Item 12.
Other Compensation Policies
Clawbacks
In the event an individual’s employment is terminated for cause, all stock options and restricted stock awards held by the individual are forfeited as of the date of termination. In addition, if an individual retires and induces others to leave the employment of an AXA affiliate, misuses confidential information learned while in the employ of AXA affiliate or otherwise acts in a manner that is substantially detrimental to the business or reputation of any AXA affiliate, all outstanding stock options held by the individual will be forfeited.
Share Ownership Policy
In September 2006, AXA Financial Group approved stock ownership guidelines for senior officers of AXA Equitable including the Named Executive Officers. The stock ownership requirements are expressed as a multiple of base salary, with the chief executive officer required to own stock valued at five times his base salary, executive vice presidents required to own stock equal to three times their base salary and senior vice presidents required to own stock one and one half times their base salary. The requirement can be satisfied by owning AXA ordinary shares or AXA ADRs, including AXA ADRs held in accounts under our 401(k) Plan, vested restricted stock units held in the deferred compensation plan and earned performance units. Senior officers were given a five-year compliance window.
In September 2010, the OCC suspended the compliance window until 2015 due to stock price decline, and because AXA’s delisting of its ADRs and deregistration from the SEC decreased the number of vehicles available for the officers to meet their obligations.
11-15
Derivatives Trading and Hedging Policies
AXA Equitable’s reputation for integrity and high ethical standards in the conduct of its affairs is of paramount importance to all of us. To preserve this reputation, all employees, including the Named Executive Officers, are subject to the AXA Financial Insider Trading Policy. This policy prohibits, among other items, all short sales of securities of AXA and its publicly-traded subsidiaries and any hedging of equity compensation awards (including stock option, performance unit, restricted stock or similar awards) or the securities underlying those awards. Members of AXA’s Management Committee must pre-clear with the AXA Group General Counsel any derivatives transactions with respect to AXA securities and/or the securities of other AXA Group publicly-traded subsidiaries (including AllianceBernstein).
Impact of Tax Policies
Code Section 162(m) limits tax deductions relating to executive compensation of certain executives of publicly held companies. Because neither AXA Financial nor any of its subsidiaries within the Insurance Segment, including AXA Equitable, is deemed to be publicly held for purposes of Code Section 162(m), these limitations are not applicable to the executive compensation program described above.
COMPENSATION COMMITTEE REPORT
The members of the AXA Equitable Organization and Compensation Committee reviewed and discussed with management the Compensation Discussion and Analysis above and, based on such review and discussion, recommended its inclusion in this Form 10-K.
| | |
Lorie A. Slutsky (Chair) Danny L. Hale | | Barbara Fallon-Walsh (since May 15, 2012) |
CONSIDERATION OF RISK MATTERS IN DETERMINING COMPENSATION
We have considered whether our compensation practices are reasonably likely to have a material adverse effect on AXA Equitable and determined that they do not. When conducting our analysis, we considered that our programs have a number of features that contribute to prudent decision-making and avoid an incentive to take excessive risk. The overall incentive design and metrics of our incentive compensation program effectively balance performance over time, considering both company earnings and individual results with various multi-year time-vesting and performance periods. Our short-term incentive program mitigates risk by permitting discretionary adjustments for both funding and granting purposes. We also considered that our general risk management controls, oversight of our programs, award review and governance processes preclude decision-makers from taking excessive risk to achieve targets under the compensation plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Organization and Compensation Committee served as an officer or employee of AXA Equitable.
In 2012, Directors Duverne and Slutsky also served on the Compensation Committee of the Board of Directors of AllianceBernstein Corporation. Mr. de Castries resigned as a member of the Compensation Committee of the Board of Directors of AllianceBernstein Corporation in February 2012.
Mr. Kraus is a director of AXA Equitable. Mr. Kraus is Chairman of the Board and Chief Executive Officer of AllianceBernstein Corporation and, accordingly, also serves in that capacity for AllianceBernstein and AllianceBernstein Holding.
For additional information about the Organization and Compensation Committee, see “Directors, Executive Officers and Corporate Governance”.
11-16
SUMMARY COMPENSATION TABLE
The following table presents the total compensation of our Named Executive Officers for services performed for the AXA Financial Group for the years ended December 31, 2010, December 31, 2011, and December 31, 2012. The amounts listed in this table as well as all other tables reflect all payments made to the Named Executive Officers by AXA Equitable even though a portion of these costs may have been reimbursed by certain affiliates pursuant to various service agreements. The total compensation reported includes items such as salary and non-equity incentive compensation as well as the grant date fair value of performance unit, restricted stock and stock option grants. The performance units, restricted stock and stock options may never become payable or may end up with a value that is substantially different from the value reported here. The amounts in the Total column do not represent “total compensation” as described in the Compensation Discussion and Analysis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | | Fiscal
Year | | | Salary(1) | | | Bonus(2) | | | Stock
Awards(3) | | | Option
Awards(4) | | | Non-Equity
Incentive
Compensation(5) | | | Change in
Pension
Value and
Nonqualified
Deferred
Comp-
ensation
Earnings(6) | | | All Other
Comp-
ensation(7) | | | Total | |
Pearson, Mark | | | 2012 | | | $ | 1,148,562 | | | | | | | $ | 1,203,167 | | | $ | 286,034 | | | $ | 1,779,000 | | | $ | 1,446,980 | | | $ | 101,033 | | | $ | 5,964,776 | |
Chairman and Chief Executive Officer | | | 2011 | | | $ | 1,020,510 | | | $ | 1,773,216 | | | $ | 890,826 | | | $ | 341,946 | | | $ | 44,784 | | | $ | 163,551 | | | $ | 273,411 | | | $ | 4,508,244 | |
| | | | | | | | | |
Malmstrom, Anders | | | 2012 | | | $ | 370,694 | | | $ | 150,000 | | | | | | | | | | | $ | 350,000 | | | $ | 15,138 | | | $ | 104,448 | | | $ | 990,280 | |
Senior Executive Director and Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Poupart-Lafarge, Bertrand | | | 2012 | | | $ | 259,670 | | | | | | | $ | 244,385 | | | $ | 37,216 | | | $ | 140,875 | | | | — | | | $ | 317,546 | | | $ | 999,692 | |
Interim Chief Financial Officer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Dziadzio, Richard | | | 2012 | | | $ | 153,433 | | | | | | | $ | 585,299 | | | $ | 89,319 | | | | — | | | $ | 629,916 | | | $ | 368,479 | | | $ | 1,826,446 | |
Former Senior | | | 2011 | | | $ | 498,657 | | | | | | | $ | 519,688 | | | $ | 133,540 | | | $ | 950,000 | | | $ | 626,096 | | | $ | 40,622 | | | $ | 2,768,603 | |
Executive Vice President and Chief Financial Officer | | | 2010 | | | $ | 487,150 | | | | | | | $ | 457,746 | | | $ | 163,352 | | | $ | 1,190,000 | | | $ | 364,020 | | | $ | 40,140 | | | $ | 2,702,408 | |
| | | | | | | | | |
McMahon, Andrew | | | 2012 | | | $ | 598,389 | | | | | | | $ | 997,073 | | | $ | 152,251 | | | $ | 1,530,000 | | | $ | 727,010 | | | $ | 101,217 | | | $ | 4,105,940 | |
President | | | 2011 | | | $ | 586,881 | | | | | | | $ | 974,425 | | | $ | 250,389 | | | $ | 1,530,000 | | | $ | 609,702 | | | $ | 80,653 | | | $ | 4,032,050 | |
| | | 2010 | | | $ | 487,150 | | | | | | | $ | 879,406 | | | $ | 224,609 | | | $ | 2,000,000 | | | $ | 323,751 | | | $ | 71,397 | | | $ | 3,986,313 | |
| | | | | | | | | |
Piazzolla, Salvatore | | | 2012 | | | $ | 899,233 | | | | | | | $ | 337,354 | | | $ | 51,427 | | | $ | 840,000 | | | $ | 284,377 | | | $ | 94,351 | | | $ | 2,506,742 | |
Senior Executive Director and Chief Human Resources Officer | | | 2011 | | | $ | 743,907 | | | $ | 150,000 | | | $ | 270,672 | | | $ | 69,553 | | | $ | 650,000 | | | $ | 101,548 | | | $ | 237,309 | | | $ | 2,222,989 | |
| | | | | | | | | |
Lane, Nicholas | | | 2012 | | | $ | 492,904 | | | | | | | $ | 620,720 | | | $ | 94,734 | | | $ | 700,000 | | | $ | 306,755 | | | $ | 94,491 | | | $ | 2,309,604 | |
Senior Executive Director and President, Retirement Savings | | | 2011 | | | $ | 431,734 | | | | | | | $ | 324,795 | | | $ | 83,462 | | | $ | 540,000 | | | $ | 245,506 | | | $ | 53,480 | | | $ | 1,678,977 | |
| | | | | | | | | |
Silver, Richard | | | 2012 | | | $ | 164,940 | | | | | | | $ | 549,879 | | | $ | 83,907 | | | | — | | | $ | 774,625 | | | $ | 3,197,884 | | | $ | 4,771,235 | |
Former Senior | | | 2011 | | | $ | 498,657 | | | | | | | $ | 519,688 | | | $ | 133,540 | | | $ | 960,000 | | | $ | 934,789 | | | $ | 53,011 | | | $ | 3,099,685 | |
Executive Vice President, Chief Administrative Officer and Chief Legal Officer | | | 2010 | | | $ | 487,150 | | | | | | | $ | 457,746 | | | $ | 163,352 | | | $ | 1,190,000 | | | $ | 715,750 | | | $ | 55,514 | | | $ | 3,069,512 | |
| (1) | Mr. Malmstrom’s salary was paid from his hire date of June 1, 2012 to December 31, 2012. Mr. Poupart-Lafarge’s salary was paid from January 1, 2012 until his employment termination date of September 1, 2012. Mr. Dziadzio’s salary was paid from January 1, 2012 until his employment termination date of April 13, 2012. Mr. Silver’s salary was paid from January 1, 2012 until his retirement on May 1, 2012. |
11-17
| (2) | For Mr. Malmstrom, this amount represents a sign-on bonus of $150,000 that he received in June 2012. The bonus is subject to recoupment in the event Mr. Malmstrom’s employment is terminated for any reason (other than death or job elimination) prior to one full year of employment. |
| (3) | The amounts reported in this column represent the aggregate grant date fair value of performance units, AXA miles and restricted stock awarded in each year in accordance with US GAAP accounting guidance. The 2012 performance unit and AXA miles grants were valued at target which represents the probable outcome at grant date. A maximum payout for the performance unit grants would result in additional values of: Pearson $1,564,118, Poupart-Lafarge $316,577, McMahon $1,295,071, Piazzolla $437,436, Lane $805,813. |
| (4) | The amounts reported in this column represent the aggregate grant date fair value of stock options awarded in each year in accordance with US GAAP accounting guidance. |
| (5) | The amounts reported for 2012 are the awards paid in February 2013 to each of the Named Executive Officers based on their 2012 performance. The amounts reported for 2011 are the awards paid in February 2012 for 2011 performance. The amounts reported for 2010 are the awards paid in February 2011 for 2010 performance. |
| (6) | The amounts reported represent the change in the actuarial present value of accumulated pension benefits for each Named Executive Officer. The Named Executive Officers did not have any above-market earnings on non-qualified deferred compensation in 2010, 2011 or 2012. |
| (7) | The following table provides additional details for the compensation information found in the All Other Compensation column. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | | | | Transport(a) | | | Excess
Liability
Insurance(b) | | | Financial
Advice(c) | | | Tax
Gross
Ups(d) | | | Life
Insurance
Premiums(e) | | | Other
Perquisites/
Benefits(f) | | | Total | |
| | | | | | | | |
Pearson, Mark | | 2012 | | $ | 10,816 | | | $ | 4,985 | | | $ | 27,664 | | | $ | 53,138 | | | | — | | | $ | 4,429 | | | $ | 101,032 | |
| | 2011 | | $ | 6,036 | | | $ | 4,625 | | | $ | 21,405 | | | $ | 126,906 | | | | — | | | $ | 114,439 | | | $ | 273,411 | |
| | | | | | | | |
Malmstrom, Anders | | 2012 | | $ | 201 | | | | | | | $ | 12,897 | | | $ | 21,440 | | | $ | 757 | | | $ | 69,153 | | | $ | 104,448 | |
| | | | | | | | |
Poupart-Lafarge, Bertrand | | 2012 | | $ | 38 | | | | — | | | | — | | | $ | 71,539 | | | | — | | | $ | 245,969 | | | $ | 317,546 | |
| | | | | | | | |
Dziadzio, Richard | | 2012 | | | — | | | | — | | | $ | 5,235 | | | $ | 5,406 | | | | — | | | $ | 357,839 | | | $ | 368,480 | |
| | 2011 | | | — | | | $ | 1,750 | | | $ | 15,120 | | | $ | 16,402 | | | | — | | | $ | 7,350 | | | $ | 40,622 | |
| | 2010 | | | — | | | $ | 1,750 | | | $ | 14,545 | | | $ | 15,700 | | | | — | | | $ | 8,145 | | | $ | 40,140 | |
| | | | | | | | |
McMahon, Andrew | | 2012 | | $ | 13,281 | | | | — | | | $ | 16,164 | | | $ | 39,679 | | | $ | 14,171 | | | $ | 17,921 | | | $ | 101,216 | |
| | 2011 | | $ | 10,476 | | | $ | 1,750 | | | $ | 15,120 | | | $ | 29,178 | | | $ | 15,359 | | | $ | 8,770 | | | $ | 80,653 | |
| | 2010 | | $ | 10,746 | | | $ | 1,750 | | | $ | 14,545 | | | $ | 26,729 | | | $ | 10,277 | | | $ | 7,350 | | | $ | 71,397 | |
| | | | | | | | |
Piazzolla, Salvatore | | 2012 | | $ | 398 | | | | — | | | $ | 39,651 | | | $ | 39,753 | | | $ | 3,331 | | | $ | 11,218 | | | $ | 94,351 | |
| | 2011 | | $ | 73 | | | $ | 1,750 | | | $ | 21,405 | | | $ | 95,993 | | | $ | 4,045 | | | $ | 114,043 | | | $ | 237,309 | |
| | | | | | | | |
Lane, Nicholas | | 2012 | | $ | 724 | | | | — | | | $ | 12,363 | | | $ | 41,713 | | | $ | 1,018 | | | $ | 38,673 | | | $ | 94,491 | |
| | 2011 | | $ | 337 | | | $ | 1,750 | | | $ | 21,405 | | | $ | 19,549 | | | $ | 1,384 | | | $ | 9,055 | | | $ | 53,480 | |
| | | | | | | | |
Silver, Richard | | 2012 | | | — | | | | — | | | $ | 24,384 | | | $ | 20,169 | | | $ | 16,832 | | | $ | 3,136,500 | | | $ | 3,197,885 | |
| | 2011 | | | — | | | $ | 1,750 | | | $ | 15,120 | | | $ | 14,039 | | | $ | 14,752 | | | $ | 7,350 | | | $ | 53,011 | |
| | 2010 | | | — | | | $ | 1,750 | | | $ | 14,545 | | | $ | 14,972 | | | $ | 16,217 | | | $ | 8,030 | | | $ | 55,514 | |
| a. | Mr. Pearson is entitled to the business and personal use of a dedicated car and driver. The personal use of this vehicle for 2012 was valued based on a formula considering the annual lease value of the vehicle, the compensation of the driver and the cost of fuel. The other Named Executive Officers may use cars and drivers for personal matters from time to time. The value for each executive’s car use is based on a similar formula taking into account the annual lease value of the vehicle and the compensation of the driver. |
| b. | Prior to 2012, the company paid the premiums for excess liability insurance coverage for each of the Named Executive Officers. The company no longer offers this benefit to the Named Executive Officers, except for Mr. Pearson who is entitled to this benefit under his employment agreement. |
| c. | The company pays for financial planning and tax preparation services for each of the Named Executive Officers other than Mr. Poupart-Lafarge. |
| d. | The company pays for tax gross-ups related to the transport and financial planning and tax preparation services for each of the Named Executive Officers who incurred the applicable expenses. In addition, Mr. Pearson received tax gross-ups related to his excess liability insurance and his imputed income related to having a guest accompany him on private aircraft flights. Also, Mr. McMahon, Mr. Piazzolla and Mr. Lane received a tax gross-up related to having a guest accompany them |
11-18
| | on certain business trips. Mr. Malmstrom, Mr. Poupart-Lafarge and Mr. Lane received a tax gross-up related to their relocation costs. Mr. Lane also received a tax gross-up related to his personal use of a company membership in a country club. |
| e. | This column shows the cost of life insurance coverage provided to the Named Executive Officers under the AXA Equitable Executive Survivor Benefits Plan less the amount of any contributions made by the Named Executive Officers. For this purpose, the cost of the life insurance coverage was determined by multiplying the amount of coverage by the actual policy cost of insurance rates. |
| f. | This column includes the amount of any employer matching contributions received by each Named Executive Officer under the AXA Equitable 401(k) Plan. This column also includes a $100 or $200 incentive received by the Named Executive Officers who completed a health risk assessment in connection with the company’s wellness program. For Mr. Malmstrom, this column includes certain relocation costs ($43,167) and the amount of contributions made by the Company to his Swiss retirement plan ($25,989). For Mr. Poupart-Lafarge, this column includes certain relocation costs ($245,969). For Mr. Dziadzio, this column includes amounts received for a pay-out of unused vacation pay ($5,754) and a partial bonus payment for 2012 of $350,000. For Mr. McMahon and Mr. Piazzolla, this column includes certain costs related to having a guest accompany them on business trips ($15,650 for Mr. McMahon and $8,111 for Mr. Piazzolla). For Mr. Lane, this column includes the value of his personal use of a company membership in a country club ($17,334), certain relocation costs ($5,698) and certain costs related to having a guest accompany him on business trips ($14,087). For Mr. Silver, this column includes amounts received under a consulting agreement ($991,667), amounts received under his severance agreement ($2,135,435) and a pay-out of unused vacation days ($7,672). |
2012 GRANTS OF PLAN-BASED AWARDS
The following table provides additional information about plan-based compensation disclosed in the Summary Compensation Table. This table include both equity and non-equity awards granted during 2012.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | | Grant
Date | | Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards(1) | | | Estimated Future Payouts
Under Equity Incentive
Plan Awards(2) | | | All Other
Stock
Awards:
Number of
Shares of
Stocks
or Units | | | All Other
Option
Awards:
Number of
Securities
Underlying
Options | | | Exercise
or Base
Price of
Option
Awards(3) | | | Closing
Market
Price on
Date of
Grant(4) | | | Grant Date
Fair Value
of Stock and
Option
Awards(5) | |
| | | Thre-
shold | | | Target | | | Max-
imum | | | Thre-
shold | | | Target | | | Max-
imum | | | | | | |
| | | | | | | | | | | | |
Pearson, Mark | | | | | — | | | $ | 1,955,000 | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 116,000 | | | | 116,000 | | | | | | | | | | | $ | 15.96 | | | $ | 17.29 | | | $ | 286,034 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 69,600 | | | | 90,480 | | | | | | | | | | | | | | | | | | | $ | 1,203,167 | |
| | | | | | | | | | | | |
Malmstrom, Anders | | | | | — | | | $ | 350,000 | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
Poupart-Lafarge, Bertrand | | | | | — | | | $ | 165,735 | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 5,031 | | | | 5,031 | | | | | | | | 10,062 | | | $ | 15.96 | | | $ | 17.29 | | | $ | 37,216 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 14,087 | | | | 18,313 | | | | | | | | | | | | | | | | | | | $ | 243,520 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 25 | | | | 25 | | | | 25 | | | | | | | | | | | | | | | $ | 864 | |
| | | | | | | | | | | | |
Dziadzio, Richard | | | | | — | | | $ | 1,200,000 | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 12,073 | | | | 12,073 | | | | | | | | 24,150 | | | $ | 15.96 | | | $ | 17.29 | | | $ | 89,319 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 33,808 | | | | 43,950 | | | | | | | | | | | | | | | | | | | $ | 584,435 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 25 | | | | 25 | | | | 25 | | | | | | | | | | | | | | | $ | 864 | |
| | | | | | | | | | | | |
McMahon, Andrew | | | | | — | | | $ | 1,800,000 | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 20,581 | | | | 20,581 | | | | | | | | 41,164 | | | $ | 15.96 | | | $ | 17.29 | | | $ | 152,251 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 57,628 | | | | 74,916 | | | | | | | | | | | | | | | | | | | $ | 996,209 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 25 | | | | 25 | | | | 25 | | | | | | | | | | | | | | | $ | 864 | |
| | | | | | | | | | | | |
Piazzolla, Salvatore | | | | | — | | | $ | 800,000 | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 6,952 | | | | 6,952 | | | | | | | | 13,904 | | | $ | 15.96 | | | $ | 17.29 | | | $ | 51,427 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 19,465 | | | | 25,305 | | | | | | | | | | | | | | | | | | | $ | 336,489 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 25 | | | | 25 | | | | 25 | | | | | | | | | | | | | | | $ | 864 | |
11-19
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | | Grant
Date | | Estimated Future Payouts
Under Non-Equity Incentive
Plan Awards(1) | | | Estimated Future Payouts
Under Equity Incentive
Plan Awards(2) | | | All Other
Stock
Awards:
Number of
Shares of
Stocks
or Units | | | All Other
Option
Awards:
Number of
Securities
Underlying
Options | | | Exercise
or Base
Price of
Option
Awards(3) | | | Closing
Market
Price on
Date of
Grant(4) | | | Grant Date
Fair Value
of Stock and
Option
Awards(5) | |
| | | Thre-
shold | | | Target | | | Max-
imum | | | Thre-
shold | | | Target | | | Max-
imum | | | | | | |
| | | | | | | | | | | | |
Lane, Nicholas | | | | | — | | | $ | 700,000 | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 12,805 | | | | 12,805 | | | | | | | | 25,614 | | | $ | 15.96 | | | $ | 17.29 | | | $ | 94,734 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 35,857 | | | | 46,614 | | | | | | | | | | | | | | | | | | | $ | 619,856 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 25 | | | | 25 | | | | 25 | | | | | | | | | | | | | | | $ | 864 | |
| | | | | | | | | | | | |
Silver, Richard | | | | | — | | | $ | 1,200,000 | | | | N/A | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 11,342 | | | | 11,342 | | | | | | | | 22,686 | | | $ | 15.96 | | | $ | 17.29 | | | $ | 83,907 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 31,759 | | | | 41,287 | | | | | | | | | | | | | | | | | | | $ | 549,014 | |
| | 03/16/2012 | | | | | | | | | | | | | | | — | | | | 25 | | | | 25 | | | | 25 | | | | | | | | | | | | | | | $ | 864 | |
| (1) | The target column shows the target award for 2012 for each Named Executive Officer under the AXA Equitable 2012 Short-Term Incentive Compensation Plan for Senior Officers assuming the plan was fully funded. Mr. Malmstrom’s target was pro-rated based on his hire date of June 1, 2012. There is no minimum or maximum award for any participant in this plan. The actual 2012 awards granted to the Named Executive Officers are listed in the Non-Equity Incentive Compensation column of the Summary Compensation Table. |
| (2) | The second row for each Named Executive Officer (other than Mr. Malmstrom) shows the stock options granted under The AXA Stock Option Plan for AXA Financial Employees and Associates on March 16, 2012. Except for those awarded to Mr. Pearson, these stock options have a ten-year term and a vesting schedule of four years, with one-third of the grant vesting on each of the second, third and fourth anniversaries of the grant date, provided that the last third is subject to a performance condition requiring the AXA ordinary share to perform at least as well as the DowJones Europe Stoxx Insurance Index over a specified period. This performance condition applies to all of Mr. Pearson’s options. The third row for each Named Executive Officer shows the performance units granted under the 2012 AXA Performance Unit Plan on March 16, 2012. These performance units have a cliff vesting schedule of three years. Performance units are granted unearned. Under the 2012 AXA Performance Unit Plan, the number of units that is earned is determined at the end of a two-year performance period by multiplying the number of units granted by a percentage that is determined based on the performance of AXA Group and AXA Financial Life and Savings Operations over the performance period. The fourth row for each Named Executive Officer shows the AXA miles granted on March 16, 2012. |
| (3) | The exercise price for the stock options granted on March 16, 2012 is equal to the average of the closing prices for the AXA ordinary share on Euronext Paris over the 20 trading days immediately preceding March 16, 2012. For purposes of this table, the exercise price was converted to U.S. dollars using the euro to U.S. dollar exchange rate on March 15, 2012. |
| (4) | The closing market price on the date of grant was determined by converting the closing AXA ordinary share price on NYSE Euronext Paris SA on March 16, 2012 to U.S. dollars using the euro to U.S. dollar exchange rate on March 16, 2012. |
| (5) | The amounts in this column represent the aggregate grant date fair value of stock options and performance units granted in 2012 in accordance with US GAAP accounting guidance. |
11-20
OUTSTANDING EQUITY AWARDS AS OF DECEMBER 31, 2012
The following table lists outstanding equity grants for each Named Executive Officer as of December 31, 2012. The table includes outstanding equity grants from past years as well as the current year.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | OPTION AWARDS | | | STOCK AWARDS | |
| | | | | | | | | | | | | | | | | | | | | | | | Equity | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | Incentive | | | Incentive | |
| | | | | | | | | Equity | | | | | | | | | | | | | | | Plan | | | Plan | |
| | | | | | | | | Incentive | | | | | | | | | | | | | | | Awards: | | | Awards: | |
| | | | | | | | | Plan | | | | | | | | | | | | | | | Number of | | | Market or | |
| | | | | | | | | Awards: | | | | | | | | | Number | | | Market | | | Unearned | | | Payout Value | |
| | | Number of | | | Number of | | | Number of | | | | | | | | | of Shares | | | Value of | | | Shares, | | | of Unearned | |
| | | Securities | | | Securities | | | Securities | | | | | | | | | or Units | | | Shares or | | | Units or | | | Shares, Units | |
| | | Underlying | | | Underlying | | | Underlying | | | | | | | | | of Stock | | | Units of | | | Other | | | or Other | |
| | | Unexercised | | | Unexercised | | | Unexercised | | | Option | | | Option | | | That | | | Stock That | | | Rights That | | | Rights That | |
| | | Options | | | Options | | | Unearned | | | Exercise | | | Expiration | | | Have Not | | | Have Not | | | Have Not | | | Have Not | |
Name | | Exercisable(1) | | | Unexercisable(1) | | | Options(1) | | | Price(2) | | | Date | | | Vested(3) | | | Vested | | | Vested(4) | | | Vested | |
| | | | | | | | | |
Pearson, Mark | | | 6,308 | | | | | | | | | | | $ | 11.37 | | | | 03/14/13 | | | | 8,721 | | | $ | 153,611.61 | | | | 114,600 | | | $ | 2,018,563 | |
| | | 6,382 | | | | | | | | | | | $ | 20.50 | | | | 03/26/14 | | | | | | | | | | | | | | | | | |
| | | 5,771 | | | | | | | | | | | $ | 25.57 | | | | 03/29/15 | | | | | | | | | | | | | | | | | |
| | | 5,101 | | | | | | | | | | | $ | 33.57 | | | | 03/31/16 | | | | | | | | | | | | | | | | | |
| | | 5,874 | | | | | | | | 2,936 | | | $ | 44.60 | | | | 05/10/17 | | | | | | | | | | | | | | | | | |
| | | 5,874 | | | | | | | | 2,936 | | | $ | 33.21 | | | | 04/01/18 | | | | | | | | | | | | | | | | | |
| | | 23,050 | | | | | | | | 11,524 | | | $ | 21.59 | | | | 06/10/19 | | | | | | | | | | | | | | | | | |
| | | 20,167 | | | | 20,167 | | | | 20,166 | | | $ | 21.08 | | | | 03/19/20 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 137,500 | | | $ | 20.63 | | | | 03/18/21 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | 116,000 | | | $ | 15.96 | | | | 03/16/22 | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Malmstrom, Anders | | | 2,988 | | | | | | | | 1,494 | | | $ | 13.34 | | | | 03/20/19 | | | | 2,915 | | | $ | 51,344.78 | | | | 18,685 | | | $ | 329,117 | |
| | | 2,917 | | | | 2,917 | | | | 2,916 | | | $ | 21.08 | | | | 03/19/20 | | | | | | | | | | | | | | | | | |
| | | | | | | 7,700 | | | | 3,850 | | | $ | 20.63 | | | | 03/18/21 | | | | | | | | | | | | | | | | | |
| | | | | | | 7,200 | | | | 3,600 | | | $ | 15.96 | | | | 03/16/22 | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Poupart-Lafarge, Bertrand | | | 6,308 | | | | | | | | | | | $ | 11.37 | | | | 03/14/13 | | | | 1,975 | | | $ | 34,787.63 | | | | 21,912 | | | $ | 385,958 | |
| | | 8,893 | | | | | | | | | | | $ | 20.50 | | | | 03/26/14 | | | | | | | | | | | | | | | | | |
| | | 7,847 | | | | | | | | | | | $ | 25.57 | | | | 03/29/15 | | | | | | | | | | | | | | | | | |
| | | 577 | | | | | | | | | | | $ | 23.34 | | | | 06/27/15 | | | | | | | | | | | | | | | | | |
| | | 8,161 | | | | | | | | | | | $ | 33.57 | | | | 03/31/16 | | | | | | | | | | | | | | | | | |
| | | 3,996 | | | | | | | | 1,997 | | | $ | 44.60 | | | | 05/10/17 | | | | | | | | | | | | | | | | | |
| | | 3,381 | | | | | | | | 1,690 | | | $ | 33.21 | | | | 04/01/18 | | | | | | | | | | | | | | | | | |
| | | 3,108 | | | | | | | | 1,553 | | | $ | 13.34 | | | | 03/20/19 | | | | | | | | | | | | | | | | | |
| | | 1,750 | | | | 1,750 | | | | 1,750 | | | $ | 21.08 | | | | 03/19/20 | | | | | | | | | | | | | | | | | |
| | | | | | | 7,000 | | | | 3,500 | | | $ | 20.63 | | | | 03/18/21 | | | | | | | | | | | | | | | | | |
| | | | | | | 10,062 | | | | 5,031 | | | $ | 15.96 | | | | 03/16/22 | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Dziadzio, Richard | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
McMahon, Andrew | | | 68,366 | | | | | | | | | | | $ | 25.90 | | | | 03/29/15 | | | | 27,283 | | | $ | 480,562.49 | | | | 106,876 | | | $ | 1,882,513 | |
| | | 31,877 | | | | | | | | | | | $ | 33.78 | | | | 03/31/16 | | | | | | | | | | | | | | | | | |
| | | 17,944 | | | | | | | | 8,971 | | | $ | 45.72 | | | | 05/10/17 | | | | | | | | | | | | | | | | | |
| | | 18,536 | | | | | | | | 9,267 | | | $ | 33.21 | | | | 04/01/18 | | | | | | | | | | | | | | | | | |
| | | 20,058 | | | | | | | | 10,029 | | | $ | 13.34 | | | | 03/20/19 | | | | | | | | | | | | | | | | | |
| | | 20,073 | | | | 20,072 | | | | 20,072 | | | $ | 21.08 | | | | 03/19/20 | | | | | | | | | | | | | | | | | |
| | | | | | | 67,124 | | | | 33,560 | | | $ | 20.63 | | | | 03/18/21 | | | | | | | | | | | | | | | | | |
| | | | | | | 41,164 | | | | 20,581 | | | $ | 15.96 | | | | 03/16/22 | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Piazzolla, Salvatore | | | | | | | 18,646 | | | | 9,322 | | | $ | 20.63 | | | | 03/18/21 | | | | 25 | | | $ | 440.35 | | | | 33,163 | | | $ | 584,133 | |
| | | | | | | 13,904 | | | | 6,952 | | | $ | 15.96 | | | | 03/16/22 | | | | | | | | | | | | | | | | | |
11-21
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | OPTION AWARDS | | | STOCK AWARDS | |
| | | | | | | | | | | | | | | | | | | | | | | | Equity | | | Equity | |
| | | | | | | | | | | | | | | | | | | | | | | | Incentive | | | Incentive | |
| | | | | | | | | Equity | | | | | | | | | | | | | | | Plan | | | Plan | |
| | | | | | | | | Incentive | | | | | | | | | | | | | | | Awards: | | | Awards: | |
| | | | | | | | | Plan | | | | | | | | | | | | | | | Number of | | | Market or | |
| | | | | | | | | Awards: | | | | | | | | | Number | | | Market | | | Unearned | | | Payout Value | |
| | | Number of | | | Number of | | | Number of | | | | | | | | | of Shares | | | Value of | | | Shares, | | | of Unearned | |
| | | Securities | | | Securities | | | Securities | | | | | | | | | or Units | | | Shares or | | | Units or | | | Shares, Units | |
| | | Underlying | | | Underlying | | | Underlying | | | | | | | | | of Stock | | | Units of | | | Other | | | or Other | |
| | | Unexercised | | | Unexercised | | | Unexercised | | | Option | | | Option | | | That | | | Stock That | | | Rights That | | | Rights That | |
| | | Options | | | Options | | | Unearned | | | Exercise | | | Expiration | | | Have Not | | | Have Not | | | Have Not | | | Have Not | |
Name | | Exercisable(1) | | | Unexercisable(1) | | | Options(1) | | | Price(2) | | | Date | | | Vested(3) | | | Vested | | | Vested(4) | | | Vested | |
| | | | | | | | | |
Lane, Nicholas | | | 2,748 | | | | | | | | | | | $ | 23.37 | | | | 06/06/15 | | | | 3,399 | | | $ | 59,869.95 | | | | 52,289 | | | $ | 921,018 | |
| | | 3,794 | | | | | | | | | | | $ | 33.78 | | | | 03/31/16 | | | | | | | | | | | | | | | | | |
| | | 2,803 | | | | | | | | | | | $ | 45.72 | | | | 05/10/17 | | | | | | | | | | | | | | | | | |
| | | 4,520 | | | | | | | | 2,258 | | | $ | 33.21 | | | | 04/01/18 | | | | | | | | | | | | | | | | | |
| | | 5,738 | | | | | | | | 2,867 | | | $ | 13.34 | | | | 03/20/19 | | | | | | | | | | | | | | | | | |
| | | 3,500 | | | | 3,500 | | | | 3,500 | | | $ | 21.08 | | | | 03/19/20 | | | | | | | | | | | | | | | | | |
| | | | | | | 22,374 | | | | 11,187 | | | $ | 20.63 | | | | 03/18/21 | | | | | | | | | | | | | | | | | |
| | | | | | | 25,614 | | | | 12,805 | | | $ | 15.96 | | | | 03/16/22 | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
Silver, Richard | | | 62,302 | | | | | | | | | | | $ | 11.95 | | | | 03/14/13 | | | | 8,297 | | | $ | 146,143.28 | | | | 58,036 | | | $ | 1,022,246 | |
| | | 45,585 | | | | | | | | | | | $ | 19.68 | | | | 03/26/14 | | | | | | | | | | | | | | | | | |
| | | 34,805 | | | | | | | | | | | $ | 25.90 | | | | 03/29/15 | | | | | | | | | | | | | | | | | |
| | | 36,431 | | | | | | | | | | | $ | 33.78 | | | | 03/31/16 | | | | | | | | | | | | | | | | | |
| | | 19,066 | | | | | | | | 9,531 | | | $ | 45.72 | | | | 05/10/17 | | | | | | | | | | | | | | | | | |
| | | 19,694 | | | | | | | | 9,846 | | | $ | 33.21 | | | | 04/01/18 | | | | | | | | | | | | | | | | | |
| | | 20,058 | | | | | | | | 10,029 | | | $ | 13.34 | | | | 03/20/19 | | | | | | | | | | | | | | | | | |
| | | 14,598 | | | | 14,598 | | | | 14,598 | | | $ | 21.08 | | | | 03/19/20 | | | | | | | | | | | | | | | | | |
| | | | | | | 35,800 | | | | 17,898 | | | $ | 20.63 | | | | 03/18/21 | | | | | | | | | | | | | | | | | |
| | | | | | | 22,686 | | | | 11,342 | | | $ | 15.96 | | | | 03/16/22 | | | | | | | | | | | | | | | | | |
| (1) | All stock options have ten-year terms. All stock options granted in 2007 and later (other than the options granted to Mr. Lane in 2007) have a vesting schedule of four years, with one-third of the grant vesting on each of the second, third and fourth anniversaries of the grant date, provided that the last third will vest only if the AXA ordinary share performs at least as well as the DowJones EuroStoxx Insurance Index during a specified period (this condition applies to all options granted to Mr. Pearson in 2012 and 2011). All stock options granted in 2006 and earlier are vested. |
| (2) | Stock options granted prior to 2005 to each Named Executive Officer other than Mr. Pearson and Mr. Poupart-Lafarge have U.S. dollar exercise prices. Stock options granted in 2005 and later, and all options granted to Mr. Pearson, Mr. Malmstrom and Mr. Poupart-Lafarge, have euro exercise prices. All euro exercise prices have been converted to U.S. dollars based on the euro to U.S. dollar exchange rate on the day prior to the grant date. The actual U.S. dollar equivalent of the exercise price will depend on the exchange rate at the date of exercise. |
| (3) | For Mr. Pearson, this column reflects 8,721 earned performance units. For Mr. Malmstrom, this column reflects 2,890 earned performance units and 25 AXA miles. For Mr. Poupart-Lafarge, this column reflects 1,950 earned performance units and 25 AXA miles. For Mr. McMahon, this column reflects 11,375 earned performance units, 15,883 restricted AXA ordinary shares granted in 2010 and 25 AXA miles. For Mr. Piazzolla, this column reflects 25 AXA miles. For Mr. Lane, this column reflects 3,374 earned performance units and 25 AXA miles. For Mr. Silver this column reflects 8,272 earned performance units and 25 AXA miles. |
| (4) | The amounts in this column include all unearned and unvested performance units as of December 31, 2012 as well as the 25 AXA miles granted on March 16, 2012 which are subject to both time vesting and performance conditions. |
11-22
OPTION EXERCISES AND STOCK VESTED IN 2012
The following table summarizes the value received from stock option exercises and stock grants vested during 2012.
| | | | | | | | | | | | | | | | |
| | | OPTION AWARDS | | | STOCK AWARDS | |
Name | | Number of
Shares
Acquired
on Exercise | | | Value
Realized
on
Exercise | | | Number of
Shares
Acquired on
Vesting(1) | | | Value
Realized
on
Vesting(2) | |
| | | | |
Pearson, Mark | | | | | | | | | | | 11,531 | | | $ | 190,429 | |
| | | | |
Malmstrom, Anders | | | | | | | | | | | — | | | | — | |
| | | | |
Poupart-Lafarge, Bertrand | | | | | | | | | | | 1,950 | | | $ | 33,677 | |
| | | | |
Dziadzio, Richard | | | 53,704 | | | $ | 138,619 | | | | 8,273 | | | $ | 142,875 | |
| | | | |
McMahon, Andrew | | | | | | | | | | | 11,375 | | | $ | 196,446 | |
| | | | |
Piazzolla, Salvatore | | | | | | | | | | | — | | | | — | |
| | | | |
Lane, Nicholas | | | | | | | | | | | 3,374 | | | $ | 58,269 | |
| | | | |
Silver, Richard | | | 62,302 | | | $ | 313,441 | | | | 8,273 | | | $ | 142,875 | |
| (1) | This column reflects the number of performance units granted to the executives under the 2010 AXA Performance Unit Plan that vested on March 19, 2012. The payout of the units was 100% in cash. For Mr. Pearson, this column also includes 2,810 shares granted under AXA’s 2008 Performance Share Plan that vested on April 28, 2012. |
| (2) | The value of the performance units that vested in 2012 was determined based on the average of the high and low AXA ordinary share price on March 19, 2012, converted to U.S. dollars using euro to U.S. dollar exchange rate on March 19, 2012. |
PENSION BENEFITS AS OF DECEMBER 31, 2012
The following table lists the pension program participation and actuarial present value of each Named Executive Officer’s defined benefit pension at December 31, 2012.
| | | | | | | | | | | | | | |
Name | | Plan Name(1) | | Number of
Years
Credited
Service | | | Present Value of
Accumulated
Benefit | | | Payments during
the last fiscal year | |
| | | | |
Pearson, Mark | | AXA Equitable Retirement Plan | | | 3 | | | $ | 42,840 | | | | — | |
| | AXA Equitable Excess Retirement Plan | | | 3 | | | $ | 164,467 | | | | — | |
| | AXA Equitable Executive Survivor Benefit Plan | | | 3 | | | $ | 1,403,224 | | | | — | |
| | | | |
Malmstrom, Anders | | AXA Equitable Retirement Plan | | | — | | | $ | 0 | | | | — | |
| | AXA Equitable Excess Retirement Plan | | | — | | | $ | 0 | | | | — | |
| | AXA Equitable Executive Survivor Benefit Plan | | | — | | | $ | 15,138 | | | | — | |
| | | | |
Poupart-Lafarge | | AXA Equitable Retirement Plan | | | — | | | $ | 0 | | | | — | |
Bertrand | | AXA Equitable Excess Retirement Plan | | | — | | | $ | 0 | | | | — | |
| | AXA Equitable Executive Survivor Benefit Plan | | | — | | | $ | 0 | | | | — | |
| | | | |
Dziadzio, Richard | | AXA Equitable Retirement Plan | | | 7 | | | $ | 179,014 | | | | — | |
| | AXA Equitable Excess Retirement Plan | | | 7 | | | $ | 0 | | | $ | 826,805 | |
| | AXA Equitable Executive Survivor Benefit Plan | | | 7 | | | $ | 1,119,859 | | | | — | |
| | | | |
McMahon, Andrew | | AXA Equitable Retirement Plan | | | 6 | | | $ | 166,226 | | | | — | |
| | AXA Equitable Excess Retirement Plan | | | 6 | | | $ | 1,129,454 | | | | — | |
| | AXA Equitable Executive Survivor Benefit Plan | | | 6 | | | $ | 748,342 | | | | — | |
11-23
| | | | | | | | | | | | | | |
Name | | Plan Name(1) | | Number of
Years
Credited
Service | | | Present Value of
Accumulated
Benefit | | | Payments during
the last fiscal year | |
| | | | |
Piazzolla, Salvatore | | AXA Equitable Retirement Plan | | | 1 | | | $ | 18,035 | | | | — | |
| | AXA Equitable Excess Retirement Plan | | | 1 | | | $ | 46,856 | | | | — | |
| | AXA Equitable Executive Survivor Benefit Plan | | | 1 | | | $ | 321,034 | | | | — | |
| | | | |
Lane, Nicholas | | AXA Equitable Retirement Plan | | | 6 | | | $ | 158,355 | | | | — | |
| | AXA Equitable Excess Retirement Plan | | | 6 | | | $ | 240,143 | | | | — | |
| | AXA Equitable Executive Survivor Benefit Plan | | | 6 | | | $ | 281,561 | | | | — | |
| | | | |
Silver, Richard | | AXA Equitable Retirement Plan | | | 26 | | | $ | 672,667 | | | | — | |
| | AXA Equitable Excess Retirement Plan | | | 26 | | | $ | 777,589 | | | $ | 1,166,565 | |
| | AXA Equitable Executive Survivor Benefit Plan | | | 26 | | | $ | 2,322,002 | | | | — | |
| (1) | Except as described in the following sentence, the December 31, 2012 liabilities for the AXA Equitable Retirement Plan (the “Retirement Plan”), the AXA Equitable Excess Retirement Plan (the “Excess Plan”) and the AXA Equitable Executive Survivor Benefits Plan (the “ESB Plan”) were calculated using the same participant data, plan provisions and actuarial methods and assumptions used under U.S. GAAP accounting guidance. A retirement age of 65 is assumed for all pension plan calculations except that Mr. Silver is assumed to begin receiving payments at age 60 since he is eligible for an unreduced Prior Plan Annuity Benefit (as defined below) at that time. |
The Retirement Plan
The Retirement Plan is a tax-qualified defined benefit plan for eligible employees. Employees become eligible to participate after one year of service and become vested in their benefits after three years of service. Participants are eligible to retire and begin receiving benefits under the Retirement Plan: (a) at age 65 (the “normal retirement date”) or (b) if they are at least age 55 with at least 5 full years of service (an “early retirement date”).
The Retirement Plan currently provides a cash balance benefit whereby a notional account is established for each Retirement Plan participant. This notional account is credited with deemed pay credits equal to 5% of eligible earnings up to the Social Security wage base plus 10% of eligible earnings above the Social Security wage base. Eligible earnings include base salary and short-term incentive compensation and are subject to limits imposed by the Internal Revenue Code of 1986, as amended (currently, $255,000 in 2013). In addition, the notional account is credited with deemed interest credits. For pay credits earned on or after April 1, 2012, the interest rate is determined annually based on the average discount rates for one-year Treasury Constant Maturities. For pay credits earned prior to April 1, 2012, the annual interest rate is the greater of 4% or a rate derived from the average discount rates for one-year Treasury Constant Maturities. For pay credits earned prior to April 1, 2012 the rate was 4% for 2012 and for any pay credits earned on or after April 1, 2012, the rate was 0.25% for 2012.
All of the Named Executive Officers, except Mr. Malmstrom and Mr. Poupart-Lafarge, are entitled to a cash balance benefit. In addition, Mr. Silver is entitled to a monthly annuity benefit that is provided to employees who were participants in the Retirement Plan before January 1, 1989 (the “Prior Plan Annuity Benefit”). His Prior Plan Annuity Benefit is the product of 60% of his final average monthly earnings and his service reduction factor, with an offset for Social Security benefits. For this purpose, his final average monthly earnings is the average of his highest monthly eligible earnings for any 60-consecutive months during the 120-month period ending December 31, 1988 and his service reduction factor is the quotient of his actual years of service as of December 31, 1988 divided by 30.
Participants elect the time and form of payment of their Retirement Plan benefits after they separate from service. The normal form of payment for retirement plan benefits depends on a participant’s marital status as of the payment commencement date. If the participant is unmarried, the normal form will be a single life annuity. If the participant is married, the normal form will be a 50% joint and survivor annuity. Subject to spousal consent requirements, participants may elect the following optional forms of payment:
| | • | | Optional joint and survivor annuity of any whole percentage between 1% and 100%; and |
| | • | | Lump sum (cash balance benefits only). |
11-24
The Excess Plan
The Excess Plan allows eligible employees to earn retirement benefits in excess of what is permitted under the Retirement Plan. Specifically, the Retirement Plan is subject to rules under the Internal Revenue Code of 1986, as amended (the “Code”), that cap both the amount of eligible earnings that may be taken into account for determining benefits under the Retirement Plan and the amount of benefits that the Retirement Plan may pay annually. The Excess Plan permits participants to accrue and be paid benefits that they would have earned and been paid under the Retirement Plan but for these limits. The Excess Plan is an unfunded plan and no assets are actually set aside in participants’ names.
The Excess Plan was amended effective September 1, 2008 to comply with the provisions of Code Section 409A. Pursuant to the amendment, a participant’s Excess Plan benefits vested after 2005 will generally be paid in a lump sum on the first day of the month following the month in which separation from service occurs, provided that payment will be delayed six months for “specified employees” (generally, the fifty most highly-compensated officers of AXA Group), unless the participant made a special one-time election with respect to the time and form of payment of those benefits by November 14, 2008. The time and form of payment of Excess Plan benefits that vested prior to 2005 is the same as the time and form of payment of the participant’s Retirement Plan benefits. Mr. Malmstrom and Mr. Poupart-Lafarge do not participate in the Excess Plan.
The ESB Plan
The ESB Plan offers financial protection to a participant’s family in the case of his or her death. Eligible employees may choose up to four levels of coverage and the form of benefit to be paid at each level. Each level provides a benefit equal to one times the participant’s eligible compensation (generally, base salary plus higher of most recent short-term incentive compensation award and the average of the three highest short-term incentive compensation awards), subject to an overall $25 million cap. Each level offers different coverage choices. Generally, the participant can choose between a life insurance death benefit and a deferred compensation benefit payable upon death at each level.
Level 1
A participant can choose between two options at Level 1:
| | • | | Lump Sum Option – Under the Lump Sum Option, a life insurance policy is purchased on the participant’s life. At death, the participant’s beneficiary receives a tax-free lump sum death benefit from the policy. The participant is taxed annually on the value of the life insurance coverage provided. |
| | • | | Survivor Income Option – Upon the participant’s death, the Survivor Income Option provides the participant’s beneficiary with 15 annual payments approximating the value of the Lump Sum Option or a payment equal to the amount of the lump sum. The payments will be taxable but the participant is not subject to annual taxation. |
Level 1 coverage continues after retirement until the participant attains age 65.
Level 2
At Level 2, a participant can choose among the Lump Sum Option and Survivor Income Option, described above, and:
| | • | | Surviving Spouse Benefit Option – The Surviving Spouse Benefit Option provides the participant’s spouse with monthly income equal to about 25% of the participant’s monthly compensation (with an offset for social security). The payments are taxable but there is no annual taxation to the participant. The duration of the monthly income depends on the participant’s years of service at death (minimum of 5 years). |
Level 2 coverage continues after retirement until the participant’s death.
Levels 3 and 4
At Levels 3 and 4, a participant can choose among the Lump Sum Option and Survivor Income Option, described above and:
| | • | | Surviving Spouse Income Addition Option – The Surviving Spouse Income Addition Option provides monthly income to the participant’s spouse for life equal to 10% of the participant’s monthly compensation. The payments are taxable but there is no annual taxation to the participant. |
Participants are required to contribute to the cost of any option elected under Levels 3 and 4. Level 3 and 4 coverage continues after retirement until the participant’s death provided that contributions are still made by the participant until age 65.
11-25
NON-QUALIFIED DEFERRED COMPENSATION TABLE AS OF DECEMBER 31, 2012
The following table provides information on compensation the Named Executive Officers have elected to defer as described in the narrative that follows.
| | | | | | | | | | | | | | | | |
Name | | Executive
Contributions
in Last FY | | Registrant
Contributions
in Last FY | | Aggregate
Earnings in
Last FY | | | Aggregate
Withdrawals/Distributions | | | Aggregate
Balance at
at Last FYE | |
| | | | | |
Pearson, Mark | | | | | | | | | | | | | | | | |
| | | | | |
Malmstrom, Anders | | | | | | | | | | | | | | | | |
| | | | | |
Poupart-Lafarge, | | | | | | | | | | | | | | | | |
| | | | | |
Bertrand | | | | | | | | | | | | | | | | |
| | | | | |
Dziadzio, Richard | | | | | | | | | | | | | | | | |
| | | | | |
McMahon, Andrew | | | | | | | | | | | | | | | | |
| | | | | |
Piazzolla, Salvatore | | | | | | | | | | | | | | | | |
| | | | | |
Lane, Nick | | | | | | | | | | | | | | | | |
| | | | | |
Silver, Richard | | | | | | $ | 63,029 | | | $ | 26,852 | | | $ | 587,408 | |
The Variable Deferred Compensation Plan for Executives
The above table reflects amounts deferred by Mr. Silver under The Variable Deferred Compensation Plan for Executives (the “VDCP”). Under the VDCP, eligible employees were permitted to defer the receipt of up to 25% of their base salary and short-term incentive compensation, as well as 100% of any restricted stock grants. Deferrals were credited to a bookkeeping account in the participant’s name on the first day of the month following the month in which the compensation otherwise would have been paid to him or her. The account is used solely for record keeping purposes and no assets are actually placed into any account in the participant’s name. The VDCP was frozen as of December 31, 2004 so that no amounts earned or vested after 2004 could be deferred under the VDCP.
Account balances in the VDCP that are attributable to deferrals of base salary and short-term incentive compensation are credited with gains and losses as if invested in the available earnings crediting options chosen by the participant. The VDCP currently offers a variety of earnings crediting options which are among those offered by the AXA Premier VIP Trust and EQ Advisors Trust.
For deferrals of restricted stock awards, participants received deferred stock units in the same number and with the same vesting restrictions as the underlying awards. The participant is entitled to receive dividend equivalents on the deferred stock units, if applicable. The deferred stock units are distributed in stock.
Participants in the VDCP could elect to credit their deferrals to in-service or retirement distribution accounts. For retirement accounts, payments may be received in any combination of a lump sum and/or annual installments paid in consecutive years. Payments may begin in any January or July following the participant’s termination date, but they must begin by either the first January or the first July following the later of: (a) the participant’s attainment of age 65 and (b) the date that is thirteen months following the participant’s termination date. For in-service accounts, payments are made to the participant in December of the year elected by the participant in a lump sum or in up to five annual installments over consecutive years.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The table below and the accompanying text presents the hypothetical payments and benefits that would have been payable if the Named Executive Officers terminated employment, or a change-in-control of AXA Financial occurred, on December 31, 2012 (the “Trigger Date”). The payments and benefits described are hypothetical only, as no such payments or benefits have been paid or made available. Hypothetical payments or benefits that would be due under arrangements that are generally available on the same terms to all salaried employees are not described.
11-26
Retirement
No Named Executive Officers were eligible to retire on the Trigger Date. For this purpose, “retirement” means termination of service on or after the normal retirement date or any early retirement date under the Retirement Plan.
Voluntary Termination Other Than Retirement
Named Executive Officers Other than Mr. Pearson
If the Named Executive Officers, other than Mr. Pearson, had voluntarily terminated employment other than by retirement on the Trigger Date:
Short-Term Incentive Compensation: The executives would not have been entitled to any short-term incentive compensation awards for 2012.
Stock Options: All stock options granted under the Stock Option Plan to the executives after 2004 would have been forfeited on the termination date. All stock options granted prior to 2005 under The AXA Financial, Inc. 1997 Stock Incentive Plan would have continued to be exercisable until the earlier of their expiration date and 30 days following the termination date.
Performance Units: The executives would have forfeited all performance units.
AXA Miles: The executives would have forfeited all 50 of the AXA miles granted on March 16, 2012.
Restricted Stock: All non-transferable stock granted to the executives in connection with a performance unit payout would have immediately become transferable. Mr. McMahon’s restricted stock grant would have been forfeited.
Retirement Benefits: The executives would have been entitled to the benefits described in the pension and nonqualified deferred compensation tables above.
Mr. Pearson
If Mr. Pearson had voluntarily terminated on the Trigger Date for “Good Reason” as described below, he would have been entitled to: (i) severance pay equal to the sum of two years of salary and two times the greatest of: (a) Mr. Pearson’s most recent bonus, (b) the average of Mr. Pearson’s last three bonuses and (c) Mr. Pearson’s target bonus for the year in which termination occurred, (ii) a pro-rated bonus at target for the year of termination, (iii) excess pension plan accruals on the severance pay, (iv) continued participation in the ESB Plan for an additional year following termination and (v) access to the company medical plans at Mr. Pearson’s or his spouse’s sole expense for two years from the date of termination.
For this purpose, “good reason” includes a material reduction in Mr. Pearson’s duties or authority, the removal of Mr. Pearson from his positions, AXA Equitable requiring Mr. Pearson to be based at an office more than 75 miles from New York City, a diminution of Mr. Pearson’s titles, a material failure by the company to comply with the agreement’s compensation provisions, a failure of the company to secure a written assumption of the agreement by any successor company and a change in control of AXA Financial (provided that Mr. Pearson delivers notice of termination within 180 days after the change in control). The severance benefits are contingent upon Mr. Pearson releasing all claims against AXA Equitable and its affiliates and his entitlement to severance pay will be discontinued if he provides services for a competitor. Also, in the event of a termination of Mr. Pearson’s employment by AXA Equitable without cause or Mr. Pearson’s resignation due to a change in control, Mr. Pearson’s severance benefits will cease after one year if certain performance conditions are not met.
The following table quantifies severance payments or benefits Mr. Pearson would have received if he had voluntarily terminated for Good Reason on the Trigger Date:
| | | | |
Severance Pay | | $ | 6,210,000 | |
| |
Pro-Rated Bonus | | $ | 1,955,000 | |
| |
Additional Pension Accruals | | $ | 609,630 | |
11-27
Death
If the Named Executive Officers had terminated employment due to death on the Trigger Date:
Short-Term Incentive Compensation: The executives would not have been entitled to any short-term incentive compensation awards for 2012.
Stock Options: All stock options would have immediately vested. All stock options granted under the Stock Option Plan to the executives after 2004, and all options granted to Mr. Pearson, would have continued to be exercisable until the earlier of their expiration date and the six-month anniversary of the date of death. If the Participant’s beneficiary did not exercise the options within this time limit, the beneficiary would be granted a stock appreciation right (“SAR”) which would entitle the beneficiary to a cash payment equal to the appreciation in the stock over the exercise price of the forfeited option. The SAR would automatically be paid out on the date that is the earlier of (i) 5 years from the date of death and (ii) the expiration date of the forfeited option (note that in the case of Mr. Pearson, this SAR provision applies only to his 2011 and 2012 options). All stock options granted prior to 2005 under The AXA Financial, Inc. 1997 Stock Incentive Plan would have continued to be exercisable until their expiration date.
Performance Units: The number of unearned performance units outstanding on the Trigger Date would have been multiplied by an assumed Performance Factor of 1.3 and the resulting amount would have been paid to the executive’s heirs. The units would have been valued based on the closing price of the AXA ordinary share on Euronext Paris and the euro to U.S. dollar exchange rate on the Trigger Date.
AXA Miles: The executive’s heirs would receive 50 AXA ordinary shares at the end of the vesting period (i.e., March 16, 2016).
Restricted Stock: All non-transferable stock granted to the executives in connection with a performance unit payout would have immediately become transferable. Mr. McMahon’s restricted stock grant would have become immediately non-forfeitable and transferable.
Retirement Benefits: The executives’ heirs would have been entitled to the benefits described in the pension and nonqualified deferred compensation tables above.
Involuntary Termination Without Cause
Named Executive Officers Other than Mr. Pearson
Mr. Poupart-Lafarge, Mr. Silver and Mr. Dziadzio actually terminated employment during 2012. For the other Named Executive Officers excluding Mr. Pearson, had they been terminated, they would have been eligible for severance benefits under the AXA Equitable Severance Benefit Plan, as supplemented by the AXA Equitable Supplemental Severance Plan for Executives (collectively, the “Severance Plan”), if an involuntary termination of employment had occurred on the Trigger Date that satisfied the conditions in the Severance Plan. To receive benefits, the executives would have been required to sign a separation agreement including a release of all claims against AXA Equitable and its affiliates and non-solicitation provisions.
The severance benefits would have included:
| | • | | severance pay equal to 52 weeks’ of salary; |
| | • | | additional severance pay equal to the greater of: (i) the most recent STIC award paid to the executive, (ii) the average of the three most recent STIC awards paid to the executive or (iii) the executive’s target STIC award for 2012; |
| | • | | a lump sum payment equal to the sum of: (i) the executive’s target STIC award for 2012 and (ii) $40,000; |
| | • | | one year’s continued participation in the ESB Plan; and |
| | • | | pension accruals for all severance pay, subject to the terms of the Retirement Plan and the Excess Plan. |
11-28
The following table lists the payments and pension accruals that the executives would have received if they were involuntarily terminated under the Severance Plan on the Trigger Date as well as the implications for their stock option, performance unit and restricted stock awards:
| | | | | | | | | | | | | | | | | | | | |
| | | Severance Benefits | | | Equity Grants |
Name | | Severance | | | Lump Sum
Payment | | | Additional
Pension
Accruals | | | Stock Options | | Performance
Units | | | Restricted Stock(1) |
Malmstrom, Anders | | $ | 1,236,671 | | | $ | 390,000 | | | $ | 117,982 | | | Options would continue to vest and be exercisable until the earlier of their expiration date and 30 days after the end of the one-year severance period. | | | Forfeited | | | N/A |
| | | | | | |
McMahon, Andrew | | $ | 2,393,556 | | | $ | 1,840,000 | | | $ | 233,671 | | | Options would continue to vest and be exercisable until the earlier of their expiration date and 30 days after the end of the one-year severance period. | | | Forfeited | | | A pro-rated portion of each grant would become non- forfeitable on the Trigger Date based on the number of months worked since the grant date but remain non- transferable until the fifth anniversary of the grant date. |
| | | | | | |
Piazzolla, Salvatore | | $ | 1,695,435 | | | $ | 840,000 | | | $ | 163,859 | | | Options would continue to vest and be exercisable until the earlier of their expiration date and 30 days after the end of the one-year severance period. | | | Forfeited | | | N/A |
| | | | | | |
Lane, Nicholas | | $ | 1,196,778 | | | $ | 740,000 | | | $ | 113,993 | | | Options would continue to vest and be exercisable until the earlier of their expiration date and 30 days after the end of the one-year severance period. | | | Forfeited | | | N/A |
| (1) | This column only lists rules applicable to restricted stock grants other than non-transferable stock granted in connection with a performance unit plan payout. Such stock would have become immediately transferable. |
Mr. Pearson
Under Mr. Pearson’s employment agreement, he waived any right to participate in the Severance Plan. Rather, if Mr. Pearson’s employment had been terminated without “Cause” as defined below on the Trigger Date, he would have been entitled to the same benefits as termination for Good Reason as described above, subject to the same conditions. “Cause” is defined in Mr. Pearson’s employment agreement as: (i) willful failure to perform substantially his duties after reasonable notice of his failure, (ii) willful misconduct that is materially injurious to the company, (iii) conviction of, or plea ofnolo contedere to, a felony or (iv) willful breach of any written covenant or agreement with the company to not disclose information pertaining to them or to not compete or interfere with the company.
Change-in-Control
With the exception of Mr. Pearson, none of the Named Executive Officers are entitled to any special benefits upon a change-in-control of AXA Financial other than the benefits provided to all employees for their stock options, restricted stock and performance units.
For stock options granted under the Stock Option Plan in 2005 or later, if there is a change in control of AXA Financial, all stock options will become immediately exercisable for their term regardless of the otherwise applicable exercise schedule. For stock options granted to employees prior to 2005 under the AXA Financial, Inc. 1997 Stock Incentive Plan and restricted stock granted under that plan, each stock option will, at the discretion of the Organization and Compensation Committee of
11-29
the AXA Financial Board of Directors (the “AXA Financial OCC”), either be canceled in exchange for a payment in cash or become immediately exercisable and all restricted stock will become non-forfeitable and be immediately transferable unless the AXA Financial OCC reasonably determines that: (i) the stock options or restricted stock will be honored, (i) the stock options or restricted stock will be assumed or (iii) alternative awards will be substituted for the stock options and restricted stock. Such alternative awards must, among other items, provide rights and entitlements substantially equivalent to, or better than, the rights and entitlements of the existing awards and must have substantially equivalent economic value.
Under the 2012, 2011 and 2010 Performance Unit Plans, if there is a change in control of AXA Financial at any time between the end of the performance period and the settlement date of the performance units, participants in the plan will maintain the right to receive the settlement of their performance units.
As mentioned above, Mr. Pearson’s employment agreement provides that “Good Reason” includes Mr. Pearson’s termination of employment in the event of a change-in-control (provided that Mr. Pearson delivers notice of termination within 180 days after the change in control). Accordingly, Mr. Pearson would have been entitled to the benefits described above, subject to the same conditions. For this purpose, a change-in-control includes: (a) any person becoming the beneficial owner of more than 50% of the voting stock of AXA Financial, (b) AXA and its affiliates ceasing to control the election of a majority of the AXA Financial Board of directors and (c) approval by AXA Financial’s stock holders of a reorganization, merger or consolidation or sale of all or substantially all of the assets of AXA Financial unless AXA and its affiliates owned directly or indirectly more than 50% of voting power of the company resulting from such transaction.
2012 DIRECTOR COMPENSATION TABLE
The following table provides information on compensation that was paid to our directors for 2012 services. Each of our directors serves on the boards of AXA Financial, AXA Equitable and two other affiliates. The amounts below include amounts paid for the directors’ services for all four boards.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name | | Fees
Earned
or Paid in
Cash(1) | | | Stock
Awards(2) | | | Option
Awards(3) | | | Non-Equity
Incentive Plan
Compensation | | | Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings | | | All Other
Compensation(4) | | | Total | |
De Castries, Henri | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 125,562 | | | $ | 125,562 | |
Duverne, Denis | | | — | | | | — | | | | — | | | | — | | | | — | | | $ | 50,601 | | | $ | 50,601 | |
De Oliveira, Ramon | | $ | 65,000 | | | $ | 80,000 | | | $ | 5,509 | | | | — | | | | — | | | $ | 708 | | | $ | 151,217 | |
Fallon-Walsh, Barbara | | $ | 43,292 | | | $ | 31,445 | | | | — | | | | — | | | | — | | | $ | 1,287 | | | $ | 76,024 | |
Goins, Charlynn(5) | | $ | 72,200 | | | $ | 80,000 | | | $ | 5,509 | | | | — | | | | — | | | $ | 2,721 | | | $ | 160,430 | |
Hale, Danny L. | | $ | 94,100 | | | $ | 80,000 | | | $ | 5,509 | | | | — | | | | — | | | $ | 2,727 | | | $ | 182,336 | |
Hamilton, Anthony L. | | $ | 99,400 | | | $ | 80,000 | | | $ | 5,509 | | | | — | | | | — | | | $ | 902 | | | $ | 185,811 | |
Higgins, James F.(5) | | $ | 11,790 | | | $ | 5,460 | | | | — | | | | — | | | | — | | | $ | 217 | | | $ | 17,467 | |
Kraus, Peter S. | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Miller, Scott D.(5) | | $ | 7,098 | | | $ | 5,460 | | | | — | | | | — | | | | — | | | $ | 136 | | | $ | 12,694 | |
Scott, Bertram | | $ | 45,392 | | | $ | 31,445 | | | | — | | | | — | | | | — | | | $ | 518 | | | $ | 77,355 | |
Slutsky, Lorie A. | | $ | 83,508 | | | $ | 80,000 | | | $ | 5,509 | | | | — | | | | — | | | $ | 901 | | | $ | 169,918 | |
Suleiman, Ezra(5) | | $ | 79,700 | | | $ | 80,000 | | | $ | 5,509 | | | | — | | | | — | | | $ | 2,840 | | | $ | 168,049 | |
Tobin, Peter J.(5) | | $ | 13,563 | | | $ | 5,460 | | | | — | | | | — | | | | — | | | $ | 353 | | | $ | 19,376 | |
Vaughan, Richard C. | | $ | 101,636 | | | $ | 80,000 | | | $ | 5,509 | | | | — | | | | — | | | $ | 1,135 | | | $ | 188,280 | |
| (1) | For 2012, each of our non-officer directors received the following cash compensation: |
| | • | | $65,000 cash retainer (pro-rated for partial years of service); |
| | • | | $1,200 for each special board meeting attended; |
| | • | | $1,500 for each Audit Committee meeting attended; and |
| | • | | $1,200 for all other Committee meetings attended. |
In addition, the Chairpersons of the Organization and Compensation Committee, the Investment Committee and the Investment and Finance Committee each received an additional $10,000 retainer and the Chairman of the Audit Committee received a $12,500 retainer.
11-30
| (2) | The amounts reported in this column represent the aggregate grant date fair value of restricted and unrestricted stock awarded in 2012 in accordance with U.S. GAAP accounting guidance. As of December 31, 2012, our directors had outstanding restricted stock awards in the following amounts: |
| | |
Mr. De Oliveira | | 1,735 restricted shares |
Ms. Goins | | 4,655 restricted shares |
Mr. Hale | | 3,250 restricted shares |
Mr. Hamilton | | 4,655 restricted shares |
Mr. Higgins | | 2,920 restricted shares |
Mr. Miller | | 2,920 restricted shares |
Ms. Slutsky | | 4,655 restricted shares |
Mr. Suleiman | | 4,655 restricted shares |
Mr. Tobin | | 2,920 restricted shares |
Mr. Vaughan | | 3,250 restricted shares |
| (3) | The amounts reported in this column represent the aggregate grant date fair value of stock options awarded in 2012 in accordance with U.S. GAAP accounting guidance. As of December 31, 2012, our directors had outstanding stock options in the following amounts: |
| | |
Mr. De Oliveira | | 2,234 options |
Ms. Goins | | 11,178 options |
Mr. Hale | | 4,176 options |
Mr. Hamilton | | 15,789 options |
Mr. Higgins | | 13,555 options |
Mr. Miller | | 13,555 options |
Ms. Slutsky | | 11,178 options |
Mr. Suleiman | | 11,178 options |
Mr. Tobin | | 13,555 options |
Mr. Vaughan | | 4,176 options |
| (4) | For Mr. De Castries and Mr. Duverne, this column lists amounts received for consulting services as well as amounts paid by the company for their spouses to accompany them on a business trip or event (as well as any related tax gross-up). For all other directors, this column lists premiums paid by the company for $125,000 of group life insurance coverage and any amounts paid by the company for a director’s spouse to accompany the director on a business trip or event (as well as any related tax gross-up). |
| (5) | Mr. Higgins, Mr. Miller and Mr. Tobin retired effective February 10, 2012. Ms. Goins and Mr. Suleiman retired effective January 1, 2013. |
The Equity Plan for Directors
Under The Equity Plan for Directors (the “Equity Plan”), non-officer directors are granted the following each year:
| | • | | an option award (granted in the first quarter); |
| | • | | a restricted stock award (granted in the first quarter); and |
| | • | | a stock retainer of $50,000, payable in two installments in June and December. |
Stock Options
The value of the stock option grants are determined using the Black-Scholes methodology or other methodology used with respect to option awards contemporaneously made to employees. The options are subject to a four-year vesting schedule whereby one-third of each grant vests on the second, third and fourth anniversaries of the grant date.
Restricted Stock
The number of shares of restricted stock to be granted to each non-officer director is determined by dividing $30,000 by the fair market value of the stock on the applicable grant date (rounded down to the nearest whole number). During the restricted period, the directors are entitled to exercise full voting rights on the restricted stock and receive all dividends and distributions. The restricted stock has a three-year cliff vesting schedule.
Termination of Service
In the event a non-officer director dies or, after completing one year of service, is removed without cause, is not reelected, retires or resigns: (a) his or her options will become fully vested and exercisable at any time prior to the earlier of the expiration of the grant or five years from termination of service and (b) his or her restricted stock will immediately become non-forfeitable; provided that if the director performs an act of misconduct, all of his or her options and restricted stock then outstanding will become forfeited. Upon any other type of termination, all outstanding options and restricted stock are forfeited.
11-31
Deferrals of Restricted Stock and Stock Retainer
Non-officer directors may elect to defer receipt of at least ten percent of their stock retainer and/or restricted stock awards. Upon deferral, the director receives deferred stock units in the same number and with the same vesting restrictions, if any, as the underlying awards. The director is entitled to receive dividend equivalents on such deferred stock units, if applicable. The deferred stock units will be distributed in stock on an elected distribution date or upon the occurrence of certain events.
Change in Control
Upon a change in control of AXA Financial, unless the awards will be assumed or substituted following the change in control: (a) the options will either become fully exercisable or cancelled in exchange for a payment in cash equal to the excess, if any, of the change in control price over the exercise price, and (b) the restricted stock will become immediately non-forfeitable.
Charitable Award Program for Directors
Under the Charitable Award Program for Directors, a non-officer director may designate up to five charitable organizations and/or education institutions to receive an aggregate donation of $500,000 after his or her death. Although the company may purchase life insurance policies insuring the lives of the participants to financially support the program, it has not elected to do so.
Matching Gifts
Non-officer directors may participate in AXA Foundation’s Matching Gifts program. Under this program, the AXA Foundation matches donations made by participants to public charities of $50 or more, up to $2,000 per year.
Business Travel Accident
All directors are covered for accidental loss of life while traveling to, or returning from:
| | • | | board or committee meetings; |
| | • | | trips taken at our request; and |
| | • | | trips for which the director is compensated. |
Each director is covered up to four times their annual compensation, subject to certain maximums.
Director Education
All directors are encouraged to attend director education programs as they deem appropriate to stay abreast of developments in corporate governance and best practices relevant to their contribution to the board generally, as well as to their responsibilities in their specific committee assignments and other roles. We generally reimburse non-officer directors for the cost to attend director education programs offered by third parties, including related reasonable travel and lodging expenses, up to a maximum amount of $5,000 per director each calendar year.
The Post-2004 Variable Deferred Compensation Plan for Directors
Non-officer directors may defer up to 100% of their annual cash retainer and meetings fees under The Post-2004 Variable Deferred Compensation Plan for Directors (the “Deferral Plan”). Deferrals are credited to a bookkeeping account in the director’s name in the month that the compensation otherwise would have been paid to him or her. The account is used solely for record keeping purposes and no assets are actually placed into any account in the director’s name. The minimum deferral is 10%.
Account balances in the Deferral Plan are credited with gains and losses as if invested in the available earnings crediting options chosen by the participant. The Deferral Plan currently offers a variety of earnings crediting options which are among those offered by the AXA Premier VIP Trust and EQ Advisors Trust.
11-32
Participants in the Deferral Plan elect the form and timing of payments from their accounts. Payments may be received in any combination of a lump sum and/or annual installments paid in consecutive years. Payments may begin in any July or December after the year of deferral, but they must begin by the first July or the first December following age 70 (72 in the case of certain grandfathered directors). Participants make alternate elections in the event of separation from service prior to the specified payment date and death prior to both the specified payment date and separation from service.
The Deferral Plan was designed, and is intended to be administered, in accordance with the requirements of Code Section 409A.
Director Stock Ownership Guidelines
Stock ownership guidelines for non-officer directors were implemented in 2007 with a five-year compliance window. The guidelines require holdings of two times the annual cash retainer.
11-33
Part III, Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
We are an indirect wholly-owned subsidiary of AXA Financial. AXA Financial’s common stock is 100% owned by AXA and its subsidiaries.
For insurance regulatory purposes, the shares of common stock of AXA Financial beneficially owned by AXA and its subsidiaries have been deposited into a voting trust (“Voting Trust”), the term of which has been extended until April 29, 2021. The trustees of the Voting Trust (the “Voting Trustees”) are Henri de Castries, Denis Duverne and Mark Pearson. The Voting Trustees have agreed to exercise their voting rights to protect the legitimate economic interests of AXA, but with a view to ensuring that certain minority shareholders of AXA do not exercise control over AXA Financial or AXA Equitable.
AXA and any other holder of voting trust certificates will remain the beneficial owner of the shares deposited by it, except that the Trustees will be entitled to exercise all voting rights attached to the deposited shares so long as such shares remain subject to the Voting Trust. In voting the deposited shares, the Trustees must act to protect the legitimate economic interests of AXA and any other holders of voting trust certificates (but with a view to ensuring that certain indirect minority shareholders of AXA do not exercise control over AXA Financial or AXA Equitable). All dividends and distributions (other than those that are paid in the form of shares required to be deposited in the Voting Trust) in respect of deposited shares will be paid directly to the holders of voting trust certificates. If a holder of voting trust certificates sells or transfers deposited shares to a person who is not an AXA Party and is not (and does not, in connection with such sale or transfer, become) a holder of voting trust certificates, the shares sold or transferred will be released from the Voting Trust. The initial term of the Voting Trust ended in 2002 and the term of the Voting Trust has been extended, with the prior approval of the Superintendent, until April 29, 2021. Future extensions of the term of the Voting Trust remain subject to the prior approval of the Superintendent.
12-1
SECURITY OWNERSHIP BY MANAGEMENT
The following tables set forth, as of December 31, 2012, certain information regarding the beneficial ownership of common stock of AXA and of AllianceBernstein Holding Units and AllianceBernstein Units by each of our directors and executive officers and by all of our directors and executive officers as a group.
AXA Common Stock(1)
| | | | | | | | |
Name of Beneficial Owner | | Number of
Shares
and
Nature of
Beneficial
Ownership | | | Percent of
Class | |
| | |
Mark Pearson(2) | | | 125,236 | | | | | * |
| | |
Andrew McMahon(3) | | | 217,867 | | | | | * |
| | |
Henri de Castries(4) | | | 4,458,696 | | | | | * |
| | |
Ramon de Oliveria | | | 7,682 | | | | | * |
| | |
Denis Duverne(5) | | | 2,565,402 | | | | | * |
| | |
Barbara Fallon-Walsh(6) | | | 1,989 | | | | | * |
| | |
Danny L. Hale | | | 11,401 | | | | | * |
| | |
Anthony J. Hamilton(7) | | | 49,509 | | | | | * |
| | |
Peter S. Kraus | | | — | | | | | * |
| | |
Bertram L. Scott | | | 1,989 | | | | | * |
| | |
Lorie A. Slutsky(8) | | | 25,625 | | | | | * |
| | |
Richard C. Vaughan | | | 11,502 | | | | | * |
| | |
Dave S. Hattem(9) | | | 126,665 | | | | | * |
| | |
Nick Lane(10) | | | 45,335 | | | | | * |
| | |
Anders Malmstrom(11) | | | 9,877 | | | | | * |
| | |
Salvatore Piazzolla | | | 50 | | | | | * |
| | |
Amy J. Radin | | | 50 | | | | | * |
| | |
All directors, director nominees and executive officers as a group (17 persons)(12) | | | 7,658,875 | | | | | * |
| * | Number of shares listed represents less than 1% of the outstanding AXA common stock. |
| (1) | Holdings of AXA American Depositary Shares (“ADS”) are expressed as their equivalent in AXA ordinary shares. Each AXA ADS represents the right to receive one AXA ordinary share. |
| (2) | Includes 78,527 shares Mr. Pearson can acquire within 60 days under option plans. Also includes (i) 4,719 restricted AXA shares, representing the 30% payout of AXA performance units awarded to Mr. Pearson in 2009 and (ii) 8,721 earned and unpaid AXA performance units, which he can elect to receive in the form of shares or cash. |
| (3) | Includes 176,854 shares Mr. McMahon can acquire within 60 days under option plans. Also includes (i) 4,165 restricted AXA shares, representing the 30% payout of AXA performance units awarded to Mr. McMahon in 2009, (ii) 15,883 restricted shares that will vest on May 20, 2015, and (iii) 11,375 earned and unpaid AXA performance units, which he can elect to receive in the form of shares or cash. |
| (4) | Includes 2,950,340 shares Mr. de Castries can acquire within 60 days under option plans. Also includes 231,000 unvested AXA performance shares, which are paid out when vested based on the price of an AXA ordinary share at that time and are subject to achievement of internal performance conditions. |
| (5) | Includes 1,889,169 shares Mr. Duverne can acquire within 60 days under option plans. |
| (6) | Includes 1,989 deferred stock units under The Equity Plan for Directors. |
| (7) | Includes (i) 9,346 shares Mr. Hamilton can acquire within 60 days under options plans and (ii) 31,798 deferred stock units under The Equity Plan for Directors. |
12-2
| (8) | Includes (i) 4,735 shares Ms. Slutsky can acquire within 60 days under options plans and (ii) 19,845 deferred stock units under The Equity Plan for Directors. |
| (9) | Includes 70,017 shares Mr. Hattem can acquire within 60 days under option plans. Also includes (i) 1,406 restricted AXA shares, representing the 30% payout of AXA performance units awarded to Mr. Hattem in 2009 and (ii) 3,055 earned and unpaid AXA performance units, which he can elect to receive in the form of shares or cash. |
| (10) | Includes 23,103 shares Mr. Lane can acquire within 60 days under option plans. Also includes (i) 6,097 restricted AXA shares, representing the 30% payout of AXA performance units awarded to Mr. Lane in 2009 and (ii) 3,374 earned and unpaid AXA performance units, which he can elect to receive in the form of shares or cash. |
| (11) | Includes 5,905 shares Mr. Malmstrom can acquire within 60 days under option plans. Also includes 1,032 restricted AXA shares, representing the 30% payout of AXA performance units awarded to Mr. Malmstrom in 2009 and (ii) 2,890 earned and unpaid AXA performance units, which he can elect to receive in the form of shares or cash. |
| (12) | Includes 5,207,996 shares the directors and executive officers as a group can acquire within 60 days under option plans. |
AllianceBernstein Holding Units and AllianceBernstein Units
| | | | | | | | | | | | |
| | | AllianceBernstein Holding L.P. | | | AllianceBernstein L.P. | |
Name of Beneficial Owner | | Number of Units | | | Percent of Class | | | Number of Units | |
| | | |
Mark Pearson(1) | | | — | | | | * | | | | — | |
| | | |
Andrew McMahon(1) | | | — | | | | * | | | | — | |
| | | |
Henri de Castries(1) | | | 2,000 | | | | * | | | | — | |
| | | |
Ramon de Oliveira(1) | | | — | | | | * | | | | — | |
| | | |
Denis Duverne(1) | | | 2,000 | | | | * | | | | — | |
| | | |
Barbara Fallon-Walsh(1) | | | — | | | | * | | | | — | |
| | | |
Danny L. Hale(1) | | | — | | | | * | | | | — | |
| | | |
Anthony J. Hamilton(1) | | | — | | �� | | * | | | | — | |
| | | |
Peter S. Kraus(1) (2) | | | 4,337,643 | | | | 4.1 | % | | | — | |
| | | |
Bertram L. Scott(1) | | | — | | | | * | | | | — | |
| | | |
Lorie A. Slutsky(1) (3) | | | 56,863 | | | | * | | | | — | |
| | | |
Richard C. Vaughan(1) | | | — | | | | * | | | | — | |
| | | |
Dave S. Hattem(1) | | | — | | | | * | | | | — | |
| | | |
Nick Lane(1) | | | — | | | | * | | | | — | |
| | | |
Anders Malmstrom(1) | | | — | | | | * | | | | — | |
| | | |
Salvatore Piazzolla(1) | | | — | | | | * | | | | — | |
| | | |
Amy J. Radin(1) | | | — | | | | * | | | | — | |
| | | |
All directors, director nominees and executive officer of as a group (17 persons)(4) | | | 4,398,506 | | | | 4.1 | % | | | — | |
| * | Number of Holding Units listed represents less than 1% of the Units outstanding. |
| (1) | Excludes units beneficially owned by AXA and its subsidiaries. |
12-3
| (2) | In connection with the commencement of Mr. Kraus’s employment with AllianceBernstein, on December 19, 2008, he was granted 2,722,052 restricted Holding units. Subject to accelerated vesting clauses in Mr. Kraus’ employment agreement (e.g., immediate vesting upon AXA ceasing to control the management of AllianceBernstein’s business or AllianceBernstein Holding L.P. ceasing to be publicly traded and certain qualifying terminations of employment), Mr. Kraus’s restricted Holding Units vest ratably on each of the first five anniversaries of December 19, 2008, which commenced December 19, 2009, provided, with respect to each installment, Mr. Kraus continues to be employed by AllianceBernstein on the vesting date. AllianceBernstein withheld 280,263 Holding Units, 277,487 Holding Units, 274,764 Holding Units and 273,947 Holding Units, respectively, from Mr. Kraus’ distributions when the 2009, 2010, 2011 and 2012 tranches of his restricted Holding Unit grant vested to cover withholding tax obligations. Mr. Kraus’s total reflected in the table includes 544,410 Holdings Units awarded under Mr. Kraus’ employment agreement and 2,772,052 Holding Units under Mr. Kraus’ extended employment agreement that have not yet vested or been distributed to him. |
| (3) | Includes 44,572 Holding Units Ms. Slutsky can acquire within 60 days under an AllianceBernstein option plan. |
| (4) | Includes 44,572 Holding Units the directors and executive officers as a group can acquire within 60 days under AllianceBernstein option plans. |
12-4
Part III, Item 13.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
POLICIES AND PROCEDURES REGARDING TRANSACTIONS WITH RELATED PERSONS
Insurance
AXA Financial, our parent company, has formal policies covering its employees and directors that are designed to avoid conflicts of interests that may arise in certain related party transactions. For example, employees of AXA Financial and its subsidiaries are subject to the AXA Financial Policy Statement on Ethics (the “Ethics Policy Statement”). The Ethics Policy Statement includes provisions designed to avoid conflicts of interests that may lead to divided loyalties by requiring that employees, among other things, not exercise any responsibility in a transaction in which they have an interest, receive certain approvals before awarding any contract to a relative or close personal friend and not take for their own benefit business opportunities developed or learned of during the course of employment. Similarly, AXA Equitable’s non-officer directors are subject to the AXA Financial Policy Statement on Interests of Directors and Contracts With Directors And Their Relatives for Non-Officer Directors (the “Policy Statement”). The Policy Statement includes provisions designed to maintain the directors’ independent judgment by requiring, among other things, disclosure of interests in any proposed transaction and abstention from voting if a director has a significant financial interest in the transaction or the transaction is with a business organization in which the director has an official affiliation. It further prohibits certain credit related transactions and requires disclosure of potential contracts with and employment of close relatives. Each director must submit a report annually regarding his or her compliance with the Policy Statement.
Other than as set forth above, AXA Equitable does not have written policies regarding the employment of immediate family members of any of its related persons. Compensation and benefits for all of AXA Equitable’s employees are established in accordance with AXA Equitable’s employment and compensation practices applicable to employees with equivalent qualifications and responsibilities who hold similar positions.
As a wholly-owned subsidiary of AXA Financial, and ultimately of AXA, AXA Equitable (and its subsidiaries) enter into various transactions with both AXA Financial and AXA and their subsidiaries in the normal course of business including, among others, service agreements, reinsurance transactions, and lending and other financing arrangements. While there is no formal written policy for the review and approval of transactions between AXA Equitable and AXA and/or AXA Financial, such transactions are routinely subject to a review and/or approval process. For example, payments made by AXA Equitable to AXA and its subsidiaries pursuant to certain intercompany service or other agreements (“Intercompany Agreements”) are reviewed with the Audit Committee on an annual basis. The amount paid by AXA Equitable for any personnel, property and services provided under such Intercompany Agreements may not exceed the fair market value of such personnel, property and services. Additionally, Intercompany Agreements to which AXA Equitable is a party are subject to the approval of the New York State Department of Financial Services pursuant to New York’s insurance holding company systems act.
In practice, any proposed related party transaction which management deems to be significant or outside of the ordinary course of business would be submitted to the Board of Directors for its approval.
Investment Management
The partnership agreements for each of AllianceBernstein Holding and AllianceBernstein expressly permits AXA and its affiliates, which includes AXA Equitable and its affiliates (collectively, “AXA Affiliates”), to provide services to AllianceBernstein Holding and AllianceBernstein if the terms of the transaction are approved by AllianceBernstein Corporation (the “General Partner”) in good faith as being comparable to (or more favorable to each such partnership than) those that would prevail in a transaction with an unaffiliated party. This requirement is conclusively presumed to be satisfied as to any transaction or arrangement that (i) in the reasonable and good faith judgment of the General Partner, meets that unaffiliated party standard, or (ii) has been approved by a majority of those directors of the General Partner who are not also directors, officers or employees of an affiliate of the General Partner.
In practice, AllianceBernstein’s management pricing committees review investment advisory agreements with AXA Affiliates, which is the manner in which the General Partner reaches a judgment regarding the appropriateness of the fees. Other transactions with AXA Affiliates are submitted to AllianceBernstein’s audit committee for review and approval; in 2012, the unanimous consent of the AllianceBernstein audit committee constituted the consent of four of six independent directors on the board. AllianceBernstein is not aware of any transaction during 2012 between it and any related person with respect to which these procedures were not followed.
13-1
AllianceBernstein does not have written policies regarding the employment of immediate family members of any of its related persons. Compensation and benefits for all of its employees are established in accordance with AllianceBernstein’s employment and compensation practices applicable to employees with equivalent qualifications and responsibilities who hold similar positions.
For additional information about AllianceBernstein’s related party transactions, see AllianceBernstein’s Annual Report on Form 10-K for the year-ended December 31, 2012 filed with the SEC on February 12, 2013.
TRANSACTIONS BETWEEN AXA EQUITABLE AND AFFILIATES
The following tables summarize transactions between AXA Equitable and related persons during 2012. The first set of tables summarize services that related persons provided to AXA Equitable, and the second set tables summarize services that AXA Equitable provided to related persons:
INSURANCE(1)
| | | | | | |
Parties | | General Description of Relationship | | Amount Paid or
Accrued in 2012 | |
| | |
AXA Distribution Holding Corporation and is subsidiaries (“AXA Distribution Holding”)(2) (3) | | We pay commissions and fees to AXA Distribution Holding and its subsidiaries for the sale of our insurance products. | | $ | 684,079,498 | |
| | |
AXA Technology Services America, Inc. (“AXA Tech”)(3) | | AXA Tech provides certain technology related services, including data processing services and functions. | | $ | 110,995,909 | |
| | |
AXA Financial(3) (4) | | We reimburse AXA Financial for expenses relating to the Excess Retirement Plan, Supplemental Executive Retirement Plan and certain other employee benefit plans that provide participants with medical, life insurance, and deferred compensation benefits. | | $ | 11,771,551 | |
| | |
GIE Informatique AXA (“GIE Informatique”)(3) | | GIE Informatique provides certain services, including but not limited to marketing and branding, finance and control, strategy, business support and development and audit, and legal. | | $ | 9,999,564 | |
| | |
AXA Business Service Private Ltd. (“ABS”)(3) | | ABS provides certain policy administration services, including policy records updates, account maintenance, certain claim review and approval services and employee records updates and reporting services. | | $ | 7,567,445 | |
| | |
AXA Group Solutions Pvt. Ltd. (“AXA Group Solutions”)(3) | | AXA Group Solutions provides maintenance and development support for applications | | $ | 1,657,576 | |
| | |
GIE AXA Universite (“GIE
Universite”)(3) | | GIE Universite provides management training seminars to our management employees. | | $ | 259,207 | |
| | |
AXA Liabilities Manager (“AXA LM”)(3) | | AXA LM provides accounting services and claims managements services to the accident and health reinsurance pools we participate in. | | $ | 250,879 | |
13-2
INVESTMENT MANAGEMENT(5)
| | | | | | |
Parties | | General Description of
Relationship | | Amount Paid or
Accrued in 2012 | |
| | |
AXA Advisors LLC (“AXA
Advisors”)(3) (6) | | AXA Advisors distributes certain of AllianceBernstein retail products and provides private client referrals. | | $ | 7,924,000 | |
| | |
ABS(3) | | ABS provides data processing services and support for certain investment operations functions. | | $ | 7,623,000 | |
| | |
AXA Technology Services India Pvt. Ltd. (“AXA Tech India”)(3) | | AXA Tech India provides certain data processing services and functions. | | $ | 3,991,000 | |
| | |
AXA Group Solutions(3) | | AXA Group Solutions provides maintenance and development support for applications. | | $ | 2,287,000 | |
| | |
AXA Advisors(3) (6) | | AXA Advisors sells shares of AllianceBernstein’s mutual funds under Distribution Services and Educational Support agreements. | | $ | 1,430,000 | |
| | |
GIE(3) | | GIE provides cooperative technology development and procurement services. | | $ | 905,000 | |
| (1) | AXA Equitable or one of its subsidiaries is a party to each transaction. |
| (2) | AXA Distribution is an indirect wholly-owned subsidiary of AXA Financial. Its subsidiaries include AXA Advisors, LLC, AXA Network, LLC and PlanConnect LLC. |
| (3) | Each entity is an indirect wholly-owned subsidiary of AXA. |
| (4) | We are an indirect wholly-owned subsidiary of AXA Financial. |
| (5) | AllianceBernstein or one of its subsidiaries is a party to each transaction. |
| (6) | AXA Advisors is an indirect wholly-owned subsidiary of AXA Financial. |
INSURANCE(1)
| | | | | | |
Parties | | General Description of
Relationship | | Amount Received or
Accrued in 2012 | |
| | |
AXA Distribution Holding and its subsidiaries(3) (4) | | We provide certain services, including personnel, employee benefits, facilities, supplies and equipment, to AXA Distribution Holding and its subsidiaries. | | $ | 348,249,548 | |
| | |
MONY Life Insurance Company and its subsidiaries (“MONY
Life”)(2) (4) | | We provide certain services, including personnel, employee benefits, facilities, supplies and equipment, to MONY and its subsidiaries. | | $ | 132,360,147 | |
| | |
AXA Investment Managers (“AXA IM”), AXA Tech and AXA LM(4) | | Employees of these entities and/or their subsidiaries are enrolled in certain of our employee benefit plans. | | $ | 10,558,000 | |
| | |
AXA Corporate Solutions Life Reinsurance Company (“ACS”)(4) | | We provide certain administrative services to ACS including, but not limited to marketing and branding, finance and control, strategy, audit and legal. | | $ | 4,252,498 | |
| | |
AXA Equitable Life and Annuity Company (“AXA Equitable L&A”)(4) (6) | | We provide certain services, including personnel, employee benefits, facilities, supplies and equipment, to AXA Equitable’s L&A so that AXA Equitable L&A may conduct its business. | | $ | 1,994,736 | |
| | |
AXA Arizona(4) (5) | | We provide certain services, including personnel, employee benefits, facilities, supplies and equipment to AXA Arizona so that AXA Arizona may conduct its business. | | $ | 249,842 | |
13-3
INVESTMENT MANAGEMENT(7)
| | | | | | |
| | | | | Amount Paid or | |
Parties | | General Description of
Relationship(8) | | Accrued in 2012 | |
AXA Life Japan Limited(4) | | | | $ | 24,037,000 | |
MONY Life and its subsidiaries(2) (4) | | AllianceBernstein provides investment management services and ancillary accounting services. | | $ | 8,756,000 | |
AXA Arizona(4) (5) | | | | $ | 7,248,000 | |
AXA U.K. Group Pension Scheme(4) | | | | $ | 2,917,000 | |
AXA Rosenberg Investment Management Asia Pacific(4) | | | | $ | 2,701,000 | |
AXA France(4) | | | | $ | 2,234,000 | |
AXA Germany(4) | | | | $ | 1,706,000 | |
AXA Corporate Solutions(4) | | | | $ | 1,054,000 | |
AXA Investment Managers, Ltd. Paris(4) | | | | $ | 944,000 | |
| (1) | AXA Equitable or one of its subsidiaries is a party to each transaction. |
| (2) | MONY Life is an indirect wholly-owned subsidiary of AXA Financial. Its subsidiaries include MONY Life Insurance Company of America and U.S. Financial Life Insurance Company. |
| (3) | AXA Distribution is an indirect wholly-owned subsidiary of AXA Financial. Its subsidiaries include AXA Advisors, LLC, AXA Network, LLC and PlanConnect LLC. |
| (4) | Each entity is an indirect wholly owned subsidiary of AXA. |
| (5) | AXA Arizona is an indirect wholly owned subsidiary of AXA Financial. |
| (6) | AXA Life &Annuity is an indirect wholly-owned subsidiary of AXA Financial. |
| (7) | AllianceBernstein or one of its subsidiaries is a party to each transaction. |
| (8) | AllianceBernstein provides investment management services unless otherwise indicated. |
ADDITIONAL TRANSACTIONS WITH RELATED PERSONS
Reinsurance
AXA Equitable ceded to AXA Arizona a 100% quota share of all liabilities for variable annuity with enhanced GMDB and GMIB riders issued on or after January 1, 2006 and in-force on September 30, 2008. AXA Arizona also reinsures a 90% quota share of level premium term insurance issued by AXA Equitable on or after March 1, 2003 through December 31, 2008 and lapse protection riders under universal life insurance policies issued by AXA Equitable on or after June 1, 2003 through June 30, 2007. Ceded premiums in 2012 to AXA Arizona totaled $484,158,000. Ceded claims paid in 2012 were $67,521,201.
Various subsidiaries of AXA Financial cede a portion of their life business through excess of retention treaties to AXA Equitable on a yearly renewal term basis. Premiums earned in 2012 from AXA Equitable Life and Annuity Company totaled $7,393,794. Claims and expenses paid in 2012 were $5,244,310. Premiums earned in 2012 from U.S. Financial Life Insurance Company totaled $5,421,502. Claims and expenses paid in 2012 were $7,135,008.
AXA Life Insurance Company Ltd (Japan), a subsidiary of AXA, cedes a portion of their annuity business to AXA Equitable. Premiums earned in 2012 totaled $8,711,526. Claims and expenses paid in 2012 were $667,962.
Various AXA affiliates including AXA Equitable, cede a portion of their life, health and catastrophe insurance business through reinsurance agreements to AXA Global Life, a subsidiary of AXA. AXA Global Life, in turn, retrocedes a quota share portion of these risks to AXA Equitable on a one-year term basis. Premiums earned in 2012 under this arrangement totaled $177,666. Claims and expenses paid in 2012 were $10,963.
13-4
Loans from Affiliates
In 2005, AXA Equitable issued a note to AXA Financial in the amount of $325 million with an interest rate of 6.0% and a maturity date of December 1, 2035. Interest on this note is payable semi-annually.
In November 2008, AXA Financial purchased a $500 million callable 7.1% surplus note from AXA Equitable. The note pays interest semi-annually and matures on December 1, 2018.
In December 2008, AXA Financial purchased a $500 million callable 7.1% surplus note from AXA Equitable. The note pays interest semi-annually and matures on December 1, 2018.
Loans to Affiliates
In September 2007, AXA issued $650 million in 5.4% Senior Unsecured Notes to AXA Equitable. These notes pay interest semi-annually and were scheduled to mature on September 30, 2012. In March 2011, the maturity date of these notes was extended to December 30, 2020 and the interest rate was increased to 5.7%.
In June 2009, AXA Equitable sold a jointly owned real estate property valued at $1,100 million to a non-insurance subsidiary of AXA Financial in exchange for $700 million in cash and $400 million in 8.0% ten year term mortgage notes on the property reported in Loans to affiliates in the consolidated balance sheets.
Other Transactions
In October 2012, AXA Equitable sold its 50% interest in a joint venture supporting the Wind-up Annuities line of business to 1285 Holdings, LLC, a non-insurance subsidiary of AXA Financial in exchange for $402,000,000 in cash.
In August 2012, AXA Equitable purchased agricultural mortgage loans from MONY Life Insurance Company and MONY Life Insurance Company of America for a purchase price of $109,000,000.
AXA Equitable reimburses AXA Financial for expenses related to the Excess Retirement Plan, Supplemental Executive Retirement Plan and certain other employee benefit plans that provide participants with medical, life and insurance, and deferred compensation benefits. Such reimbursement was based on the costs to AXA Financial of the benefits which total $36,685,522 for 2012.
DIRECTOR INDEPENDENCE
See “Corporate Governance – Independence of Certain Directors” in Part III, Item 10 of this Report.
13-5
Part III, Item 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for professional audit services rendered by PricewaterhouseCoopers LLP (“PwC”) for the audit of AXA Equitable’s annual financial statements for 2012 and 2011, and fees for other services rendered by PwC:
| | | | | | | | |
| | | 2012 | | | 2011 | |
| | | (In Thousands) | |
| | |
Principal Accounting Fees and Services: | | | | | | | | |
Audit fees | | $ | 10,058 | | | $ | 9,664 | |
Audit related fees | | | 3,514 | | | | 3,125 | |
Tax fees | | | 1,854 | | | | 2,878 | |
All other fees | | | 43 | | | | 37 | |
| | | | | | | | |
Total | | $ | 15,469 | | | $ | 15,704 | |
| | | | | | | | |
Audit fees for AXA Financial and AXA Equitable are paid pursuant to a single engagement letter with PwC.
Audit related fees in both years principally consist of fees for audits of financial statements of certain employee benefit plans, internal control related reviews and services and accounting consultation.
Tax fees consist of fees for tax preparation, consultation and compliance services.
All other fees consist of miscellaneous non-audit services.
AXA Equitable’s audit committee has determined that all services to be provided by its independent registered public accounting firm must be reviewed and approved by the audit committee on a case-by-case basis provided, however, that the audit committee has delegated to its chairperson the ability to pre-approve any non-audit engagement where the fees are expected to be less than or equal to $100,000 per engagement. Any exercise of this delegated authority by the audit committee chairperson is required to be reported at the next audit committee meeting.
On November 9, 2005, AllianceBernstein’s committees adopted a policy to pre-approve audit and non-audit service engagements with the independent registered public accounting firm. The policy was revised on August 3, 2006. The independent registered public accounting firm is to provide annually a comprehensive and detailed schedule of each proposed audit and non-audit service to be performed. The audit committee then affirmatively indicates its approval of the listed engagements. Engagements that are not listed, but that are of similar scope and size to those listed and approved, may be deemed to be approved, if the fee for such service is less than $100,000. In addition, each audit committee has delegated to its chairman the ability to approve any permissible non-audit engagement where the fees are expected to be less than $100,000.
All services provided by PwC in 2012 were pre-approved in accordance with the procedures described above.
14-1
Part IV, Item 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) The following documents are filed as part of this report:
The financial statements are listed in the Index to Consolidated Financial Statements and Schedules on page FS-1.
| | 2. | Consolidated Financial Statement Schedules |
The consolidated financial statement schedules are listed in the Index to Consolidated Financial Statements and Schedules on page FS-1.
The exhibits are listed in the Index to Exhibits that begins on page E-1.
15-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, AXA Equitable Life Insurance Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | | |
Date: March 11, 2013 | | AXA EQUITABLE LIFE INSURANCE COMPANY |
| | |
| | By: | | /s/ Mark Pearson |
| | Name: | | Mark Pearson |
| | | | Chairman of the Board and Chief Executive Officer, Director |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | |
/s/ Mark Pearson | | Chairman of the Board and Chief Executive Officer, Director | | March 11, 2013 |
Mark Pearson | | |
| | |
/s/ Andrew J. McMahon | | President and Director | | March 11, 2013 |
Andrew J. McMahon | | | | |
| | |
/s/ Anders Malmstrom | | Senior Executive Director and Chief Financial Officer | | March 11, 2013 |
Anders Malmstrom | | |
| | |
/s/ Andrea Nitzan | | Executive Director and Chief Accounting Officer | | March 11, 2013 |
Andrea Nitzan | | |
| | |
/s/ Henri de Castries | | Director | | March 11, 2013 |
Henri de Castries | | | | |
| | |
/s/ Ramon de Oliveira | | Director | | March 11, 2013 |
Ramon de Oliveira | | | | |
| | |
/s/ Denis Duverne | | Director | | March 11, 2013 |
Denis Duverne | | | | |
| | |
/s/ Barbara Fallon-Walsh | | Director | | March 11, 2013 |
Barbara Fallon-Walsh | | | | |
| | |
/s/ Danny L. Hale | | Director | | March 11, 2013 |
Danny L. Hale | | | | |
| | |
/s/ Anthony J. Hamilton | | Director | | March 11, 2013 |
Anthony J. Hamilton | | | | |
| | |
/s/ Peter S. Kraus | | Director | | March 11, 2013 |
Peter S. Kraus | | | | |
| | |
/s/ Bertram L. Scott | | Director | | March 11, 2013 |
Bertram L. Scott | | | | |
| | |
/s/ Lorie A. Slutsky | | Director | | March 11, 2013 |
Lorie A. Slutsky | | | | |
| | |
/s/ Richard C. Vaughan | | Director | | March 11, 2013 |
Richard C. Vaughan | | | | |
S-1
INDEX TO EXHIBITS
| | | | | | |
Number | | Description | | Method of Filing | | Tag Value |
| | | |
| 2.1 | | Stock Purchase Agreement dated as of August 30, 2000 among CSG, AXA, Equitable Life, AXA Participations Belgium and AXA Financial | | Filed as Exhibit 2.1 to AXA Financial’s Current Report on Form 8-K dated November 14, 2000 and incorporated herein by reference | | |
| | | |
| 2.2 | | Letter Agreement dated as of October 6, 2000 to the Stock Purchase Agreement among CSG, AXA, Equitable Life, AXA Paticipations Belgium and AXA Financial | | Filed as Exhibit 2.2 to AXA Financial’s Current Report on Form 8-K dated November 14, 2000 and incorporated herein by reference | | |
| | | |
| 3.1 | | Restated Charter of AXA Equitable, as amended September 16, 2010 | | Filed as Exhibit 3.1 to registrant’s Form 10-Q for the quarter ended September 30, 2010 and incorporated herein by reference | | |
| | | |
| 3.2 | | Restated By-laws of Equitable Life, as amended November 21, 1996 | | Filed as Exhibit 3.2(a) to registrant’s Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated herein by reference | | |
| | | |
| 10.1 | | Cooperation Agreement, dated as of July 18, 1991, as amended among Equitable Life, AXA Financial and AXA | | Filed as Exhibit 10(d) to AXA Financial’s Form S-1 Registration Statement (No. 33- 48115), dated May 26, 1992 and incorporated herein by reference | | |
| | | |
| 10.2 | | Letter Agreement, dated May 12, 1992, among AXA Financial, Equitable Life and AXA | | Filed as Exhibit 10(e) to AXA Financial’s Form S-1 Registration Statement (No. 33- 48115), dated May 26, 1992 and incorporated herein by reference | | |
| | | |
| 10.3 | | Amended and Restated Reinsurance Agreement, dated as of March 29, 1990, between Equitable Life and First Equicor Life Insurance Company | | Filed as Exhibit 10(o) to AXA Financial’s Form S-1 Registration Statement (No. 33- 48115), dated May 26, 1992 and incorporated herein by reference | | |
| | | |
| 10.4 | | Fiscal Agency Agreement between Equitable Life and the Chase Manhattan Bank, N.A. | | Filed as Exhibit 10.5 to registrant’s Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference | | |
| | | |
| 10.5 | | Distribution and Servicing Agreement between AXA Advisors (as Successor to Equico Securities, Inc.) and Equitable Life dated as of May 1, 1994 | | Filed as Exhibit 10.7 to registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference | | |
| | | |
| 10.6 | | Agreement for Cooperative and Joint Use of Personnel, Property and Services between Equitable Life and AXA Advisors dated as of September 21, 1999 | | Filed as Exhibit 10.8 to registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference | | |
| | | |
| 10.7 | | General Agent Sales Agreement between Equitable Life and AXA Network, dated as of January 1, 2000 | | Filed as Exhibit 10.9 to registrant��s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference | | |
E-1
| | | | | | |
Number | | Description | | Method of Filing | | Tag Value |
| | | |
| 10.8 | | Agreement for Services by Equitable Life to AXA Network dated as of January 1, 2000 | | Filed as Exhibit 10.10 to registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference | | |
| | | |
| 10.9 | | Consulting Agreement, dated as of March 7, 2012, between Richard V. Silver and AXA Equitable | | Filed as Exhibit 10.9 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2011 and incorporated herein by reference. | | EX-10.9 |
| | | |
| 13.1 | | AllianceBernstein Risk Factors | | Filed herewith | | EX-13.1 |
| | | |
| 21 | | Subsidiaries of the registrant | | Filed herewith | | EX-21 |
| | | |
| 31.1 | | Section 302 Certification made by the registrant’s Chief Executive Officer | | Filed herewith | | EX-31.1 |
| | | |
| 31.2 | | Section 302 Certification made by the registrant’s Chief Financial Officer | | Filed herewith | | EX-31.2 |
| | | |
| 32.1 | | Section 906 Certification made by the registrant’s Chief Executive Officer | | Filed herewith | | EX-32.1 |
| | | |
| 32.2 | | Section 906 Certification made by the registrant’s Chief Financial Officer | | Filed herewith | | EX-32.2 |
| | | |
| 101.INS | | XBRL Instance Document | | Filed herewith | | EX-101.INS |
| | | |
| 101.SCH | | XBRL Taxonomy Extension Schema Document | | Filed herewith | | EX-101.SCH |
| | | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | Filed herewith | | EX-101.CAL |
| | | |
| 101.LAB | | XBRL Taxonomy Label Linkbase Document | | Filed herewith | | EX-101.LAB |
| | | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | Filed herewith | | EX-101.PRE |
| | | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | Filed herewith | | EX-101.DEF |
E-2
