UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2001 Commission File No. 0-25280
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The Equitable Life Assurance Society of the United States
(Exact name of registrant as specified in its charter)
New York 13-5570651
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
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None
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(Former name, former address, and former fiscal year if changed since last
report.)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at August 10, 2001
- ------------------------------------------------- ---------------------------
Common Stock, $1.25 par value 2,000,000
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction H (1) (a) and
(b) of Form 10-Q and is therefore filing this form with the Reduced Disclosure
Format.
Page 1 of 22
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2001
TABLE OF CONTENTS
Page #
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2001 and
December 31, 2000.................................................. 3
Consolidated Statements of Earnings for the Three Months and
Six Months Ended June 30, 2001 and 2000............................. 4
Consolidated Statements of Shareholder's Equity for
the Six Months Ended June 30, 2001 and 2000......................... 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2001 and 2000.............................................. 6
Notes to Consolidated Financial Statements............................ 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ("Management Narrative").................. 16
Item 3: Quantitative and Qualitative Disclosures About Market Risk*........... 19
PART II OTHER INFORMATION
Item 1: Legal Proceedings..................................................... 20
Item 6: Exhibits and Reports on Form 8-K...................................... 21
SIGNATURES...................................................................... 22
*Omitted pursuant to General Instruction H to Form 10-Q.
2
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2001 2000
----------------- -----------------
(In Millions)
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 22,324.4 $ 20,659.4
Held to maturity, at amortized cost..................................... - 204.6
Mortgage loans on real estate............................................. 4,430.0 4,712.6
Equity real estate........................................................ 1,031.8 1,017.8
Policy loans.............................................................. 4,063.3 4,034.6
Other equity investments.................................................. 801.8 2,427.2
Other invested assets..................................................... 725.3 765.8
----------------- -----------------
Total investments..................................................... 33,376.6 33,822.0
Cash and cash equivalents................................................... 1,027.2 2,116.8
Cash and securities segregated, at estimated fair value..................... 1,102.1 1,306.3
Broker-dealer related receivables........................................... 1,661.7 1,900.3
Deferred policy acquisition costs........................................... 5,261.8 5,128.8
Intangible assets, net...................................................... 3,445.6 3,525.8
Amounts due from reinsurers................................................. 2,176.2 2,097.9
Other assets................................................................ 3,811.7 3,787.4
Separate Accounts assets.................................................... 49,723.8 51,705.9
----------------- -----------------
Total Assets................................................................ $ 101,586.7 $ 105,391.2
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 20,395.7 $ 20,445.8
Future policy benefits and other policyholders liabilities.................. 13,442.9 13,432.1
Broker-dealer related payables.............................................. 1,499.4 1,283.0
Customers related payables.................................................. 1,357.8 1,636.9
Amounts due to reinsurers................................................... 755.6 730.3
Short-term and long-term debt............................................... 1,474.3 1,630.2
Federal income taxes payable................................................ 1,576.0 2,003.3
Other liabilities........................................................... 1,607.4 1,650.7
Separate Accounts liabilities............................................... 49,655.5 51,632.1
Minority interest in equity of consolidated subsidiaries.................... 1,797.4 1,820.4
Minority interest subject to redemption rights.............................. 665.8 681.1
----------------- -----------------
Total liabilities..................................................... 94,227.8 96,945.9
----------------- -----------------
Commitments and contingencies (Note 10)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value, 2.0 million shares authorized,
issued and outstanding.................................................... 2.5 2.5
Capital in excess of par value.............................................. 4,709.0 4,723.8
Retained earnings........................................................... 2,558.3 3,706.2
Accumulated other comprehensive income...................................... 89.1 12.8
----------------- -----------------
Total shareholder's equity............................................ 7,358.9 8,445.3
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 101,586.7 $ 105,391.2
================= =================
See Notes to Consolidated Financial Statements.
3
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ---------------------------------
2001 2000 2001 2000
---------------- --------------- ---------------- ---------------
(In Millions)
REVENUES
Universal life and investment-type
product policy fee income........................ $ 340.4 $ 348.6 $ 686.1 $ 689.0
Premiums........................................... 245.0 288.0 513.7 574.0
Net investment income.............................. 580.7 733.2 1,192.6 1,482.4
Investment losses, net............................. (51.2) (58.1) (29.2) (185.2)
Commissions, fees and other income................. 783.7 642.8 1,558.5 1,293.2
---------------- --------------- ---------------- ---------------
Total revenues............................... 1,898.6 1,954.5 3,921.7 3,853.4
---------------- --------------- ---------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits............................ 463.2 517.9 932.3 1,057.2
Interest credited to policyholders' account
balances......................................... 249.1 254.1 497.9 519.6
Compensation and benefits.......................... 360.0 170.6 576.5 374.3
Commissions........................................ 179.7 218.5 380.5 487.9
Distribution plan payments......................... 124.1 119.3 248.2 235.8
Amortization of deferred sales commissions......... 57.9 53.2 116.2 103.9
Interest expense................................... 21.7 28.4 47.2 53.8
Amortization of deferred policy acquisition
costs............................................ 57.5 96.2 152.7 191.8
Capitalization of deferred policy acquisition
costs............................................ (194.1) (194.9) (379.6) (390.5)
Rent expense....................................... 38.4 28.5 76.6 57.6
Amortization of intangible assets, net............. 44.4 1.6 88.8 2.9
Other operating costs and expenses................. 222.2 220.0 472.4 326.0
---------------- --------------- ---------------- ---------------
Total benefits and other deductions.......... 1,624.1 1,513.4 3,209.7 3,020.3
---------------- --------------- ---------------- ---------------
Earnings from continuing operations before
Federal income taxes and minority interest....... 274.5 441.1 712.0 833.1
Federal income tax expense......................... (57.5) (119.0) (176.4) (210.2)
Minority interest in net income of
consolidated subsidiaries........................ (96.7) (65.2) (188.2) (139.4)
---------------- --------------- ---------------- ---------------
Earnings from continuing operations................ 120.3 256.9 347.4 483.5
(Loss) earnings from discontinued operations, net
of Federal income taxes.......................... (1.8) (1.5) 8.2 (6.4)
Cumulative effect of accounting change, net of
Federal income taxes............................. - - (3.5) -
---------------- --------------- ---------------- ---------------
Net Earnings....................................... $ 118.5 $ 255.4 $ 352.1 $ 477.1
================ =============== ================ ===============
See Notes to Consolidated Financial Statements.
4
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
----------------- -----------------
(In Millions)
SHAREHOLDER'S EQUITY
Common stock, at par value, beginning of year and end of period............. $ 2.5 $ 2.5
----------------- -----------------
Capital in excess of par value, beginning of year........................... 4,723.8 3,557.2
(Decrease) increase in additional capital in excess of par value............ (14.8) 418.2
----------------- -----------------
Capital in excess of par value, end of period............................... 4,709.0 3,975.4
----------------- -----------------
Retained earnings, beginning of year........................................ 3,706.2 2,600.7
Net earnings................................................................ 352.1 477.1
Shareholder dividends paid.................................................. (1,500.0) (150.0)
----------------- -----------------
Retained earnings, end of period............................................ 2,558.3 2,927.8
----------------- -----------------
Accumulated other comprehensive income (loss), beginning of year............ 12.8 (392.9)
Other comprehensive income (loss)........................................... 76.3 (44.8)
----------------- -----------------
Accumulated other comprehensive income (loss), end of period................ 89.1 (437.7)
----------------- -----------------
Total Shareholder's Equity, End of Period................................... $ 7,358.9 $ 6,468.0
================= =================
See Notes to Consolidated Financial Statements.
5
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
2001 2000
----------------- -----------------
(In Millions)
Net earnings................................................................ $ 352.1 $ 477.1
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Interest credited to policyholders' account balances.................... 497.9 519.6
Universal life and investment-type product policy fee income............ (686.1) (689.0)
Net change in broker-dealer and customer related receivables/payables... (142.2) 45.7
Investment losses, net.................................................. 29.2 185.2
Change in deferred policy acquisition costs............................. (226.0) (197.6)
Change in future policy benefits........................................ (13.9) 57.3
Change in property and equipment........................................ (140.8) (122.3)
Change in Federal income tax payable.................................... (470.6) (27.8)
Decrease in segregated cash and securities, net......................... 204.3 -
Change in accounts payable and accrued expenses......................... 47.2 81.2
Other, net.............................................................. 375.1 (235.2)
----------------- -----------------
Net cash (used) provided by operating activities............................ (173.8) 94.2
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 1,192.1 1,282.9
Sales.................................................................... 4,883.3 2,927.4
Purchases................................................................. (5,107.7) (3,437.3)
Decrease (increase) in short-term investments............................. 165.6 (.9)
Other, net................................................................ (230.9) (140.8)
----------------- -----------------
Net cash provided by investing activities................................... 902.4 631.3
----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 1,479.5 1,327.6
Withdrawals and transfers to Separate Accounts.......................... (1,392.9) (2,314.8)
Net (decrease) increase in short-term financings.......................... (156.2) 435.6
Shareholder dividends paid ............................................... (1,500.0) (150.0)
Proceeds from newly issued Alliance units................................. - 1,600.0
Other, net................................................................ (248.6) (122.8)
----------------- -----------------
Net cash (used) provided by financing activities............................ (1,818.2) 775.6
----------------- -----------------
Change in cash and cash equivalents......................................... (1,089.6) 1,501.1
Cash and cash equivalents, beginning of year................................ 2,116.8 695.8
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 1,027.2 $ 2,196.9
================= =================
Supplemental cash flow information
Interest Paid............................................................. $ 27.5 $ 47.7
================= =================
Income Taxes Paid......................................................... $ 619.4 $ 276.9
================= =================
See Notes to Consolidated Financial Statements.
6
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The preparation of the accompanying unaudited consolidated financial
statements in conformity with GAAP requires management to make estimates
and assumptions (including normal, recurring accruals) that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. These statements should
be read in conjunction with the consolidated financial statements of the
Company for the year ended December 31, 2000. The results of operations
for the six months ended June 30, 2001 are not necessarily indicative of
the results to be expected for the full year.
The terms "second quarter 2001" and "second quarter 2000" refer to the
three months ended June 30, 2001 and 2000, respectively. The terms "first
half of 2001" and "first half of 2000" refer to the six months ended June
30, 2001 and 2000, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform these periods with the current presentation.
2) ACCOUNTING CHANGES
On January 1, 2001, the Company adopted SFAS No. 133, as amended, that
established new accounting and reporting standards for all derivative
instruments, including certain derivatives embedded in other contracts,
and for hedging activities. Free-standing derivative instruments
maintained by the Company at January 1, 2001 include interest rate caps,
floors and collars intended to hedge crediting rates on interest-sensitive
individual annuities contracts and certain reinsurance contracts. Based
upon guidance from the FASB and the Derivatives Implementation Group
("DIG"), the caps, floors and collars could not be designated in a
qualifying hedging relationship under SFAS No. 133 and, consequently,
require mark-to-market accounting through earnings for changes in their
fair values beginning January 1, 2001. In accordance with the transition
provisions of SFAS No. 133, the Company recorded a cumulative-effect-type
charge to earnings of $3.5 million to recognize the difference between the
carrying values and fair values of free standing derivative instruments at
January 1, 2001. With respect to adoption of the requirements on embedded
derivatives, the Company elected a January 1, 1999 transition date,
thereby effectively "grandfathering" existing accounting for derivatives
embedded in hybrid instruments acquired, issued, or substantively modified
before that date. As a consequence of this election, coupled with recent
interpretive guidance from the FASB and the DIG with respect to issues
specifically related to insurance contracts and features, adoption of the
new requirements for embedded derivatives had no material impact on the
Company's results of operation or its financial position. Upon its
adoption of SFAS No. 133, the Company reclassified $196.6 million of
held-to-maturity securities as available-for-sale. This reclassification
resulted in an after-tax cumulative-effect-type adjustment of $5.8 million
in other comprehensive income, representing the after-tax unrealized gain
on these securities at January 1, 2001.
The Company adopted SOP 00-3 prospectively as of January 1, 2001 with no
financial impact upon initial implementation. Prior period
reclassifications have been made to include Closed Block assets,
liabilities, revenues and expenses on a line-by-line basis as required by
SOP 00-3.
7
3) NEW ACCOUNTING PRONOUNCEMENTS
In 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 required all
business combinations initiated after June 30, 2001 to be accounted for
using only the purchase method. Under SFAS No. 142, goodwill and other
intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to impairment tests. Other intangible assets
will continue to be amortized over their useful lives. The provisions of
SFAS No. 142 are required to be applied starting with fiscal years
beginning after December 15, 2001. Impairment losses for goodwill and
indefinite lived intangible assets that arise due to the initial
application of SFAS No. 142 will be reported as resulting from a change in
accounting principle.
The Company will apply SFAS No. 142's provisions beginning in first
quarter 2002. The Company's management has not yet determined the impact
of the initial application of SFAS No. 142 on results of operations or
capital resources.
4) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
Six Months Ended
June,
-----------------------------------
2001 2000
--------------- ---------------
(In Millions)
Balances, beginning of year............................................... $ 126.2 $ 177.9
Additions charged to income............................................... 15.8 36.4
Deductions for writedowns and asset dispositions.......................... (25.7) (76.7)
--------------- ---------------
Balances, End of Period................................................... $ 116.3 $ 137.6
=============== ===============
Balances, end of period:
Mortgage loans on real estate........................................... $ 41.1 $ 35.1
Equity real estate...................................................... 75.2 102.5
--------------- ---------------
Total..................................................................... $ 116.3 $ 137.6
=============== ===============
For the second quarters and first half of 2001 and of 2000, investment
income is shown net of investment expenses of $54.1 million, $57.3
million, $115.4 million and $117.4 million, respectively.
As of June 30, 2001 and December 31, 2000, fixed maturities classified as
available for sale had amortized costs of $22,062.9 million and $20,609.7
million and fixed maturities in the held to maturity portfolio had
estimated fair values of $210.5 million at December 31, 2000. Other equity
investments included trading securities having carrying values of $5.7
million and $1,563.3 million and costs of $49.6 million and $1,607.1
million at June 30, 2001 and December 31, 2000, respectively, and other
equity securities with carrying values of $39.9 million and $28.9 million
and costs of $40.5 million and $31.5 million as of June 30, 2001 and
December 31, 2000, respectively.
In the second quarters and first half of 2001 and of 2000, respectively,
net unrealized and realized holding (losses) gains on trading account
equity securities of $(.2) million, $1.1 million, $26.5 million and $5.4
million were included in net investment income in the consolidated
statements of earnings.
For the first half of 2001 and 2000, proceeds received on sales of fixed
maturities classified as available for sale amounted to $3,276.0 million
and $2,672.9 million, respectively. Gross gains of $103.7 million and
$56.6 million and gross losses of $56.0 million and $111.7 million were
realized on these sales for the first half of 2001 and 2000, respectively.
Unrealized investment gains related to fixed maturities classified as
available for sale increased by $211.7 million during the first half of
2001, resulting in a balance of $261.5 million at June 30, 2001.
8
Impaired mortgage loans along with the related provision for losses were
as follows:
June 30, December 31,
2001 2000
--------------- -----------------
(In Millions)
Impaired mortgage loans with provision for losses....................... $ 80.9 $ 170.9
Impaired mortgage loans without provision for losses.................... 17.7 5.8
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 98.6 176.7
Provision for losses.................................................... (41.2) (45.7)
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 57.4 $ 131.0
=============== =================
During the first half of 2001 and 2000, respectively, the Company's
average recorded investment in impaired mortgage loans was $137.3 million
and $171.5 million. Interest income recognized on these impaired mortgage
loans totaled $2.9 million and $7.4 million ($.2 million on a cash basis
for 2001) for the first half of 2001 and 2000, respectively.
5) PURCHASE AND SALE OF INTERESTS IN AFFILIATES
During second quarter 2000, Alliance sold approximately 32.6 million newly
issued Alliance Units to the Holding Company for $1.60 billion. Alliance
used the cash proceeds primarily to fund the cash portion of the
consideration of its fourth quarter acquisition of the assets and
liabilities of Sanford C. Bernstein. The Company recorded an increase in
Capital in excess of par value as a result of this transaction. At June
30, 2001 and 2000, respectively, the Company's consolidated economic
interest in Alliance was approximately 39% and 47%.
6) CLOSED BLOCK
The excess of Closed Block liabilities over Closed Block assets (adjusted
to exclude the impact of related amounts in accumulated other
comprehensive income and DAC) represents the expected maximum future
post-tax earnings from the Closed Block which 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 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 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.
9
Summarized financial information for the Closed Block is as follows:
June 30, December 31,
2001 2000
----------------- -----------------
(In Millions)
CLOSED BLOCK LIABILITIES:
Future policy benefits and other policyholders' account balances....... $ 8,985.4 $ 9,026.4
Other liabilities...................................................... 65.5 33.8
----------------- -----------------
Total Closed Block liabilities......................................... 9,050.9 9,060.2
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Available for sale, at fair value (amortized cost
of $4,404.6 and $4,373.5)........................................... 4,502.9 4,408.0
Mortgage loans on real estate.......................................... 1,530.6 1,581.8
Policy loans........................................................... 1,538.6 1,557.7
Cash and other invested assets......................................... 253.3 174.7
Other assets........................................................... 212.4 237.1
----------------- -----------------
Total assets designated to the Closed Block............................ 8,037.8 7,959.3
----------------- -----------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................... 1,013.1 1,100.9
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred Federal
income tax of $34.4 and $12.2................................... 63.9 22.7
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities.............................................. $ 1,077.0 $ 1,123.6
================= =================
Closed Block revenues and expenses were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- ---------------- --------------- ---------------
(In Millions)
REVENUES:
Premiums and other income............... $ 143.6 $ 150.4 $ 291.5 $ 303.4
Investment income (net of investment
expenses of $1.8, $3.3, $2.5
and $6.7)............................ 143.0 146.6 290.7 289.6
Investment (losses) gains, net.......... (14.4) 2.0 (12.6) (1.0)
--------------- ---------------- --------------- ---------------
Total revenues.......................... 272.2 299.0 569.6 592.0
--------------- ---------------- --------------- ---------------
BENEFITS AND
OTHER DEDUCTIONS:
Policyholders' benefits and dividends... 253.3 254.5 486.8 511.8
Other operating costs and expenses...... 5.0 4.3 9.6 9.2
--------------- ---------------- --------------- ---------------
Total benefits and other deductions..... 258.3 258.8 496.4 521.0
--------------- ---------------- --------------- ---------------
Net revenues before Federal income
taxes................................ 13.9 40.2 73.2 71.0
Federal income taxes.................... (5.3) (14.5) (26.6) (25.8)
--------------- ---------------- --------------- ---------------
Net Revenues............................ $ 8.6 $ 25.7 $ 46.6 $ 45.2
=============== ================ =============== ===============
10
7) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
June 30, December 31,
2001 2000
----------------- -------------------
(In Millions)
BALANCE SHEETS
Mortgage loans on real estate.......................................... $ 198.9 $ 330.9
Equity real estate..................................................... 308.2 350.9
Fixed maturities, available for sale, at estimated fair value
(amortized cost $406.6 and $321.5).................................. 422.3 336.5
Other equity investments............................................... 29.4 43.1
Other invested assets.................................................. 2.7 1.9
----------------- -------------------
Total investments................................................. 961.5 1,063.3
Cash and cash equivalents.............................................. 147.5 84.3
Other assets........................................................... 174.6 148.8
----------------- -------------------
Total Assets........................................................... $ 1,283.6 $ 1,296.4
================= ===================
Policyholders liabilities.............................................. $ 945.4 $ 966.8
Allowance for future losses............................................ 159.7 159.8
Other liabilities...................................................... 178.5 169.8
----------------- -------------------
Total Liabilities...................................................... $ 1,283.6 $ 1,296.4
================= ===================
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
(In Millions)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $6.3, $9.4, $12.5
and $19.8)............................. $ 17.6 $ 23.3 $ 51.8 $ 52.3
Investment gains, net.................... 10.5 4.3 12.0 2.0
Policy fees, premiums and
other income........................... (.1) .2 (.1) .2
--------------- --------------- --------------- ---------------
Total revenues........................... 28.0 27.8 63.7 54.5
Benefits and other deductions............ 27.3 27.8 51.8 54.5
Earnings credited to allowance for
future losses.......................... .7 - 11.9 -
--------------- --------------- --------------- ---------------
Pre-tax results from operations.......... - - - -
Pre-tax earnings (loss) from releasing
(strengthening) the allowance for
future losses.......................... (2.7) (2.2) 12.7 (9.8)
Federal income tax benefit (expense)..... .9 .7 (4.5) 3.4
--------------- --------------- --------------- ---------------
(Loss) Income from Discontinued
Operations............................ $ (1.8) $ (1.5) $ 8.2 $ (6.4)
=============== =============== =============== ===============
The Company's quarterly process for evaluating the allowance for future
losses applies the current period's results of discontinued operations
against the allowance, re-estimates future losses, and adjusts the
allowance, if appropriate. The evaluations performed in the first half of
2001 and 2000 resulted in management's decision to release the allowance
by $12.7 million for the first half of 2001 and strengthen the allowance
by $9.8 million for the first half of 2000. This resulted in after-tax
income of $8.2 million for the first half of 2001 and after-tax losses of
$6.4 million for the first half of 2000.
11
Management believes the allowance for future losses at June 30, 2001 is
adequate to provide for all future losses; however, the determination of
the allowance involves numerous estimates and subjective judgments
regarding the expected performance of Discontinued Operations Investment
Assets. There can be no assurance the losses provided for will not differ
from the losses ultimately realized. To the extent actual results or
future projections of discontinued operations differ from management's
current estimates and assumptions underlying the allowance for future
losses, the difference would be reflected in the consolidated statements
of earnings in discontinued operations. In particular, to the extent
income, sales proceeds and holding periods for equity real estate differ
from management's previous assumptions, periodic adjustments to the loss
allowance are likely to result.
Investment valuation allowances amounted to $2.4 million and $2.9 million
on mortgage loans and $10.8 million and $11.4 million on equity real
estate at June 30, 2001 and December 31, 2000, respectively.
8) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary,
at the end of each successive interim period to reflect the current
estimate of the annual effective tax rate.
9) STOCK APPRECIATION RIGHTS
Following completion of the merger of AXA Merger Corp. with and into the
Holding Company, certain employees exchanged AXA ADR options for tandem
Stock Appreciation Rights ("SARs") and at-the-money AXA ADR options of
equivalent intrinsic value. The maximum obligation for the SARs is $84.7
million, based upon the underlying price of AXA ADRs at January 2, 2001,
the closing date of the aforementioned merger transaction. The Company
recorded an increase of $2.9 million for the second quarter of 2001 and a
reduction of $33.2 million for the first half of 2001 in the SARs
liability, reflecting the variable accounting for the SARs, based on the
change in the market value of AXA ADRs for the respective periods ended
June 30, 2001.
10) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in the Company's
Notes to Consolidated Financial Statements for the year ended December 31,
2000, except as described below:
Annuity Contract Case
In June 2001, the District Court granted defendants' motion to dismiss AXA
Client Solutions and the Holding Company from the amended complaint, and
dismissed the conversion claims. The District Court denied defendants'
motion to dismiss the remaining claims. Equitable Life has answered the
amended complaint.
Agent Health Benefits Case
Plaintiffs filed a second amended complaint which, among other things,
alleges that Equitable Life failed to comply with plan amendment
procedures and deletes the promissory estoppel claim. Equitable Life
answered the complaint in June 2001.
Alliance Reorganization Case
In April 2001, the court issued a decision granting in part and denying in
part defendants' motion to dismiss; the claim alleging that the
partnership agreement of Alliance Holding was not validly amended was one
of the claims dismissed.
Prime Property Fund Case
This action was settled in June 2001 and the plaintiff's claims were
dismissed with prejudice.
12
Disposal of DLJ
In April 2001, oral argument of defendants' motion to dismiss was held in
the putative class action lawsuit filed in the United States District
Court, Southern District of New York.
A putative class action was filed in Delaware Chancery Court on behalf of
the holders of CSFBdirect tracking stock. Named defendants include AXA
Financial, Credit Suisse First Boston (USA), Inc., the former directors of
DLJ and the directors of Credit Suisse First Boston (USA), Inc. The
complaint challenges the sale of DLJ common stock as well as the March
2001 offer by Credit Suisse to purchase the publicly owned CSFBdirect
tracking stock for $4 per share and asserts claims for breaches of
fiduciary duties and breach of contract. Plaintiffs seek injunctive
relief, an unspecified amount of compensatory damages, and costs and
expenses, including attorneys' fees. This new action, along with the
actions previously reported have been consolidated. In May 2001, the
Delaware Chancery Court ordered that this new complaint be the operative
complaint in the consolidated actions. A memorandum of understanding
outlining the terms of a proposed settlement was executed in July 2001.
Outcome of Litigation
Although the outcome of litigation cannot be predicted with certainty, the
Company's management believes that the ultimate resolution of the matters
described above should not have a material adverse effect on the
consolidated financial position of the Company. The Company's management
cannot make an estimate of loss, if any, or predict whether or not such
litigations will have a material adverse effect on the Company's
consolidated results of operations in any particular period.
Alliance Investment Company Act Cases
In April 2001, an amended class action complaint was filed in Federal
District Court in the Southern District of Illinois against Alliance,
Alliance Fund Distributors, Inc. ("AFD"), a wholly owned subsidiary of
Alliance, and other defendants alleging violations of the Federal
Investment Company Act of 1940, as amended ("ICA"), and breaches of common
law fiduciary duty. The allegations in the amended complaint concern six
mutual funds with which Alliance has investment advisory agreements,
including Alliance Premier Growth Fund, Alliance Health Care Fund,
Alliance Growth Fund, Alliance Quasar Fund, Alliance Fund, and Alliance
Disciplined Value Fund. The amended complaint alleges principally that (i)
certain advisory agreements concerning these funds were negotiated,
approved, and executed in violation of the ICA, in particular because
certain directors of these funds should be deemed interested under the
ICA; (ii) the distribution plans for these funds were negotiated,
approved, and executed in violation of the ICA; and (iii) the advisory
fees and distribution fees paid to Alliance and AFD, respectively, are
excessive and, therefore, constitute a breach of fiduciary duty. Alliance
and AFD believe that plaintiffs' allegations are without merit and intend
to vigorously defend against these allegations. At the present time,
management of Alliance and AFD are unable to estimate the impact, if any,
that the outcome of this action may have on Alliance's results of
operations or financial condition.
In June 2001, an amended class action complaint was filed in Federal
District Court in the Southern District of Illinois against Alliance, AFD,
and numerous other defendants in the mutual fund industry alleging
violations of the ICA and breaches of common law fiduciary duty. The
allegations in the amended complaint concern three mutual funds with which
Alliance has investment advisory agreements, including Alliance Premier
Growth Fund, Alliance Growth Fund and Alliance Quasar Fund. The amended
complaint alleges principally that (i) certain advisory agreements
concerning these funds were negotiated, approved, and executed in
violation of the ICA, in particular because certain directors of these
funds should be deemed interested under the ICA; (ii) the distribution
plans for these funds were negotiated, approved, and executed in violation
of the ICA; and (iii) the advisory fees paid to Alliance and AFD,
respectively, are excessive and, therefore, constitute a breach of
fiduciary duty. Alliance and AFD believe that plaintiffs' allegations are
without merit and intend to vigorously defend against these allegations.
At the present time, management of Alliance and AFD are unable to estimate
the impact, if any, that the outcome of this action may have on Alliance's
results of operations or financial condition.
13
Other Matters
In addition to the matters previously reported and those described above,
the Holding Company and its subsidiaries are involved in various legal
actions and proceedings in connection with their businesses. Some of the
actions and proceedings 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 the Company'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.
11) BUSINESS SEGMENT INFORMATION
The following tables reconcile segment revenues and earnings from
continuing operations before Federal income taxes to total revenues and
earnings as reported on the consolidated statements of earnings and
segment assets to total assets on the consolidated balance sheets,
respectively.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ----------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ----------------
(In Millions)
Segment revenues:
Insurance............................... $ 1,161.9 $ 1,368.7 $ 2,465.8 $ 2,665.9
Investment Services..................... 759.9 615.4 1,503.6 1,246.4
Consolidation/elimination............... (23.2) (29.6) (47.7) (58.9)
--------------- --------------- --------------- ----------------
Total Revenues.......................... $ 1,898.6 $ 1,954.5 $ 3,921.7 $ 3,853.4
=============== =============== =============== ================
Segment earnings from continuing
operations before Federal income
taxes and minority interest:
Insurance............................... $ 122.6 $ 245.1 $ 414.2 $ 392.5
Investment Services..................... 151.9 196.0 297.8 440.6
--------------- --------------- --------------- ----------------
Total Earnings from Continuing
Operations before Federal Income
Taxes and Minority Interest.......... $ 274.5 $ 441.1 $ 712.0 $ 833.1
=============== =============== =============== ================
June 30, December 31,
2001 2000
------------------ ------------------
(In Millions)
Assets:
Insurance......................................................... $ 85,565.2 $ 88,641.1
Investment Services............................................... 16,021.5 16,807.2
Consolidation/elimination......................................... - (57.1)
------------------ ------------------
Total Assets...................................................... $ 101,586.7 $ 105,391.2
================== ==================
14
12) RELATED PARTY TRANSACTIONS
Beginning January 1, 2000, the Company reimburses the Holding Company 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 the Holding Company
of the benefits provided which totaled $12.6 million and $8.5 million,
respectively, for the first half of 2001 and of 2000.
The Company paid $304.5 million and $358.2 million, respectively, of
commissions and fees to AXA Distribution and its subsidiaries for sales of
insurance products for the first half of 2001 and of 2000. The Company
charged AXA Distribution's subsidiaries $245.9 million and $172.4 million,
respectively, for their applicable share of operating expenses for the
first half of 2001 and of 2000, pursuant to the Agreements for Services.
13) COMPREHENSIVE INCOME
The components of comprehensive income for second quarters 2001 and 2000
and the first half of 2001 and of 2000 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2001 2000 2001 2000
--------------- --------------- --------------- ---------------
(In Millions)
Net earnings............................. $ 118.5 $ 255.4 $ 352.1 $ 477.1
--------------- --------------- --------------- ---------------
Change in unrealized (losses) gains,
net of reclassification adjustment..... (94.1) (49.0) 76.3 (44.8)
--------------- --------------- --------------- ---------------
Other comprehensive (loss) income........ (94.1) (49.0) 76.3 (44.8)
--------------- --------------- --------------- ---------------
Comprehensive Income..................... $ 24.4 $ 206.4 $ 428.4 $ 432.3
=============== =============== =============== ===============
14) SHAREHOLDER DIVIDENDS
In second quarters 2001 and 2000, respectively, the Company paid cash
shareholder dividends totaling $1.5 billion and $150.0 million.
15
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The management narrative for the Company that follows should be read in
conjunction with the Consolidated Financial Statements and the related Notes to
Consolidated Financial Statements included elsewhere herein, and with the
management narrative found in the Management's Discussion and Analysis ("MD&A")
section included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000 ("2000 Form 10-K").
CONSOLIDATED RESULTS OF OPERATIONS
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Earnings from continuing operations before Federal income taxes and minority
interest was $712.0 million for the first six months of 2001, a decrease of
$121.1 million from the year earlier period. Net earnings for the Company
totaled $352.1 million for the first six months of 2001, down $125.0 million
from $477.1 million for the 2000 period. Net earnings for the 2001 period
included a $3.5 million cumulative effect adjustment related to the January 1,
2001 adoption of SFAS No. 133 while the 2000 period included a $124.3 million
contribution to earnings from DLJ, sold in fourth quarter 2000.
Revenues. Total revenues increased $68.3 million as higher commissions, fees and
other income and lower investment losses in the 2001 period more than offset
decreases in net investment income and premiums.
Premiums declined $60.3 million principally due to lower individual DI premiums
due to the indemnity reinsurance agreement entered into in July 2000.
Net investment income decreased $289.8 million primarily attributable to other
equity securities and fixed maturity investments in the Financial
Advisory/Insurance segment in first half of 2001. The fixed maturity impact was
primarily attributable to a declining interest rate environment and a smaller
asset balance in the General Account, while the decrease in income from equity
securities reflected equity market declines.
Investment losses, net totaled $29.2 million in the 2001 period compared to
$185.2 million in the first six months of 2000. The investment losses in both
periods were primarily related to fixed maturities.
The 20.5% growth in commissions, fees and other income was principally due to a
$252.8 million increase in investment advisory and service fees and to $135.6
million in institutional research service fees related to Bernstein activities
(purchased in fourth quarter 2000), partially offset by DLJ's $124.3 million
contribution to earnings in the 2000 period and by $24.0 million lower
distribution revenues at Alliance. The increase in investment advisory and
service fees was primarily due to higher average assets under management, higher
performance fees and transaction charges principally due to the Bernstein
acquisition, partially offset by a decline in the retail sector's advisory fees
as a result in a shift in assets to lower fee cash management products. The
lower distribution revenues at Alliance reflected lower average daily mutual
funds outstanding due to market depreciation.
Benefits and Other Deductions. Total benefits and other deductions increased
$189.4 million primarily due to the inclusion of Bernstein in the first six
months of 2001.
While interest credited to policyholders' account balances decreased $21.7
million primarily due to lower General Account Investment Asset balances,
policyholders' benefits decreased $124.9 million due primarily to the decline in
DI benefits that were reinsured in July 2000 and the reserve impact of lower
premiums in the first six months of 2001, partially offset by less favorable
mortality.
The $202.2 million increase in compensation and benefits was primarily due to
the Bernstein acquisition and to payments to certain former executive officers
of the Company under continuity agreements related to AXA's minority interest
buyout. Additional compensation and benefits costs may be incurred as the
Company implements various expense reduction initiatives. The $107.4 million
reduction of commissions was due to lower sales of insurance and mutual fund
products principally in the Insurance segment in 2001. Higher distribution plan
payments and amortization of deferred sales commissions resulted from Alliance
sales of sponsored mutual funds and cash management services' products,
including ongoing sales of back-end load mutual funds. The increases in rent
expense and in amortization of goodwill and intangibles were primarily
attributable to the Bernstein acquisition.
16
Other operating costs and expenses grew $146.4 million primarily due to higher
general and administrative expenses at Alliance, principally related to the
Bernstein acquisition, and in the Insurance segment.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products for the first six months of 2001 decreased from prior year levels by
$809.8 million to $4.70 billion primarily due to lower sales of individual
annuities. Management believes the decline in individual annuity sales in the
first half of 2001 was primarily due to the weak equity market and comparisons
to a strong performance in the first six months of 2000.
Surrenders and Withdrawals. When totals for the first six months of 2001 are
compared to the comparable 2000 period, surrenders and withdrawals were down,
from $2.95 billion to $2.51 billion. The annualized annuities surrender rate
declined to 9.1% in the 2001 period from 10.1% in the same period in 2000, while
the individual life surrender rates showed a modest improvement to 4.0% from
4.1%. The trends in surrender and withdrawal rates described above continue to
fall within the range of expected experience.
Assets Under Management. An analysis of assets under management follows.
Assets Under Management
(In Millions)
June 30,
---------------------------------
2001 2000
--------------- ---------------
Third party (1)................................................................... $ 407,120 $ 321,682
Separate Accounts................................................................. 49,724 55,600
General Account, Holding Company Group and other (1).............................. 35,916 37,389
--------------- ---------------
Total Assets Under Management..................................................... $ 492,760 $ 414,671
=============== ===============
<FN>
1) June 30, 2000 amounts have been restated to exclude the $69.00 billion of
DLJ related assets.
</FN>
Third party assets under management at June 30, 2001 increased $85.44 billion
primarily as a result of the Bernstein acquisition, which added $85.8 billion at
October 2, 2000, and net asset inflows, offset by market depreciation. General
Account, Holding Company Group and other assets under management decreased $1.47
billion as the asset reductions related to the July 2000 DI indemnity
reinsurance transaction and writedowns of fixed maturities offset the net
proceeds from the sale of DLJ (after taxes and funding used in the AXA minority
buyout). The decline in Separate Account assets under management resulted from
continued market depreciation which more than offset net new deposits.
Alliance assets under management at June 30, 2001 totaled $465.33 billion, as
compared to $387.76 billion at June 30, 2000. Non-US clients accounted for 16.0%
of the June 30, 2001 total.
LIQUIDITY AND CAPITAL RESOURCES
Equitable Life. During first quarter 2001, Equitable Life sold its remaining
holdings of CSG stock received upon the sale of DLJ.
In April 2001, Equitable Life paid a $1.50 billion shareholder dividend.
In June 2001, Equitable Life renewed its 364-day credit facility, reducing its
credit line from $350.0 million to $250.0 million. At June 30, 2001, no amounts
were outstanding under Equitable Life's commercial paper program or its
revolving credit facility.
17
Alliance. At June 30, 2001, Alliance had $613.4 million of short-term debt
outstanding, principally under its commercial paper program. On August 15, 2001,
Alliance is expected to issue $400.0 million 5.625% notes due 2006 under its
July 11, 2001 shelf registration statement. The net proceeds will be used to
reduce short-term debt and for general partnership purposes.
FORWARD-LOOKING STATEMENTS
The Company's management has made in this report, and from time to time may make
in its public filings and press releases as well as in oral presentations and
discussions, forward-looking statements concerning the Company's operations,
economic performance and financial condition. Forward-looking statements
include, among other things, discussions concerning the Company's potential
exposure to market risks, as well as statements expressing management's
expectations, beliefs, estimates, forecasts, projections and assumptions, as
indicated by words such as "believes," "estimates," "intends," "anticipates,"
"expects," "projects," "should," "probably," "risk," "target," "goals,"
"objectives," or similar expressions. The Company claims the protection afforded
by the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and assumes no duty to update any
forward-looking statement. Forward-looking statements are based on management's
expectations and beliefs concerning future developments and their potential
effects and are subject to risks and uncertainties. Actual results could differ
materially from those anticipated by forward-looking statements due to a number
of important factors including those discussed elsewhere in this report and in
the Company's other public filings, press releases, oral presentations and
discussions. The following discussion highlights some of the more important
factors that could cause such differences.
Market Risk. The Company's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. Primary market risk exposures exist in the Financial
Advisory/Insurance segment and result from interest rate fluctuations, equity
price movements and changes in credit quality. The nature of each of these risks
is discussed under the caption "Quantitative and Qualitative Disclosures About
Market Risk" and in Note 16 of Notes to Consolidated Financial Statements, both
contained in the 2000 Form 10-K.
Insurance. The Insurance Group's future sales of life insurance and annuity
products and financial planning services are dependent on numerous factors
including: successful implementation of the Company's strategic initiatives; the
intensity of competition from other insurance companies, banks and other
financial institutions; conditions in the securities markets; the strength and
professionalism of distribution channels; the continued development of
additional channels; the financial and claims paying ratings of Equitable Life;
its reputation and visibility in the market place; its ability to develop,
distribute and administer competitive products and services in a timely,
cost-effective manner; and its investment management performance. In addition,
the nature and extent of competition and the markets for products sold by the
Insurance Group may be materially affected by changes in laws and regulations,
including changes relating to savings, retirement funding and taxation. See
"Business - Regulation" contained in the 2000 Form 10-K. The profitability of
the Insurance Group depends on a number of factors, including levels of gross
operating expenses and the amount which can be deferred as DAC, successful
implementation of expense-reduction initiatives, secular trends, the Company's
mortality, morbidity, persistency and claims experience, and profit margins
between investment results from General Account Investment Assets and interest
credited on individual insurance and annuity products; and the adequacy of
reserves and the extent to which subsequent experience differs from management's
estimates and assumptions used in determining those reserves. The performance of
General Account Investment Assets depends, among other things, on levels of
interest rates and the markets for equity securities and real estate, the need
for asset valuation allowances and writedowns, and the performance of equity
investments which have created, and in the future may create, significant
volatility in investment income. The ability of the Company to continue its
accelerated real estate sales program without incurring net losses will depend
on real estate markets for the remaining properties held for sale and the
negotiation of transactions which confirm management's expectations on property
values.
Investment Services. Alliance's revenues are largely dependent on the total
value and composition of assets under its management and are, therefore,
affected by market appreciation and depreciation, additions and withdrawals of
assets, purchases and redemptions of mutual funds and shifts of assets between
accounts or products with different fee structures. See "Combined Operating
Results by Segment - Investment Services" contained in the 2000 Form 10-K.
18
Discontinued Operations. The determination of the allowance for future losses
for the discontinued Wind-Up Annuities continues to involve numerous estimates
and subjective judgments including those regarding expected performance of
investment assets, ultimate mortality experience and other factors which affect
investment and benefit projections. There can be no assurance the losses
provided for will not differ from the losses ultimately realized. To the extent
actual results or future projections of Discontinued Operations differ from
management's current best estimates underlying the allowance, the difference
would be reflected as earnings or loss from discontinued operations within the
consolidated statements of earnings. In particular, to the extent income, sales
proceeds and holding periods for equity real estate differ from management's
previous assumptions, periodic adjustments to the allowance are likely to
result.
Technology and Information Systems. The Company's information systems are
central to, among other things, designing and pricing products, 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
information purposes. Any significant difficulty associated with the operation
of such systems, or any material delay or inability to develop needed system
capabilities, could have a material adverse effect on the Company's results of
operations and, ultimately, its ability to achieve its strategic goals.
Legal Environment. A number of lawsuits have been filed against life and health
insurers involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents and other matters. Some of the 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. The
Holding Company's insurance subsidiaries, including Equitable Life, like other
life and health insurers, are involved in such litigation. While no such lawsuit
has resulted in an award or settlement of any material amount against the
Company to date, its results of operations and financial condition 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 the Holding Company and its subsidiaries. In addition, examinations by
Federal and state regulators could result in adverse publicity, sanctions and
fines. For further information, see "Business - Regulation," contained in the
2000 Form 10-K, and "Legal Proceedings," contained in the 2000 Form 10-K and
herein.
Future Accounting Pronouncements. In the future, new accounting pronouncements
may have material effects on the Company's consolidated statements of earnings
and shareholder's equity. See Note 2 of Notes to Consolidated Financial
Statements contained in the 2000 Form 10-K for pronouncements issued but not
effective at December 31, 2000, as well as Notes 2 and 3 of Notes to
Consolidated Financial Statements included elsewhere herein.
Regulation. The businesses conducted by the Holding Company's subsidiaries,
including Equitable Life, are subject to extensive regulation and supervision by
state insurance departments and Federal and state agencies regulating, among
other things, insurance and annuities, securities transactions, investment
companies and investment advisors. Changes in the regulatory environment could
have a material impact on operations and results. The activities of the
Insurance Group are subject to the supervision of the insurance regulators of
each of the 50 states. See "Business - Regulation" contained in the 2000 Form
10-K.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H to Form 10-Q.
19
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
There have been no new material legal proceedings and no material developments
in matters which were previously reported in the Registrant's Form 10-K for the
year ended December 31, 2000, except as described below:
In Franze, in March 2001, the United States Court of Appeals for the Eleventh
Circuit granted the petition of Equitable Life and EVLICO for permission to
appeal the order denying summary judgment and granting class certification. In
May 2001, Equitable Life and EVLICO appealed that order.
In Patenaude, in June 2001, defendants' motion for reconsideration was denied.
In Wood, in April 2001, EVLICO filed a notice of removal to the United States
District Court for the Southern District of California. Plaintiff filed an
amended complaint in June 2001 and in August 2001, plaintiff voluntarily
dismissed the action without prejudice.
In American National Bank, in June 2001, the District Court granted defendants'
motion to dismiss AXA Client Solutions and the Holding Company from the amended
complaint, and dismissed the conversion claims. The District Court denied
defendants' motion to dismiss the remaining claims. Equitable Life has answered
the amended complaint.
In Duncan, plaintiffs' motions to set aside the orders of dismissal with
prejudice and to reinstate their individual claims have been withdrawn.
In Fischel, plaintiffs filed a second amended complaint which, among other
things, alleges that Equitable Life failed to comply with plan amendment
procedures and deletes the promissory estoppel claim. Equitable Life answered
the complaint in June 2001.
In R.S.M., in April 2001, the court issued a decision granting in part and
denying in part defendants' motion to dismiss; the claim alleging that the
partnership agreement of Alliance Holding was not validly amended was one of the
claims dismissed.
BT-I was settled in June 2001 and the plaintiff's claims were dismissed with
prejudice.
In Siamac Sedighim, in April 2001, oral argument of defendants' motion to
dismiss was held.
A putative class action entitled David Uhrik v. Credit Suisse First Boston
(USA), Inc., et al. was filed in Delaware Chancery Court on behalf of the
holders of CSFBdirect tracking stock. Named defendants include AXA Financial,
Credit Suisse First Boston (USA), Inc., the former directors of DLJ and the
directors of Credit Suisse First Boston (USA), Inc. The complaint challenges the
sale of DLJ common stock as well as the March 2001 offer by Credit Suisse to
purchase the publicly owned CSFBdirect tracking stock for $4 per share and
asserts claims for breaches of fiduciary duties and breach of contract.
Plaintiffs seek injunctive relief, an unspecified amount of compensatory
damages, and costs and expenses, including attorneys' fees. The Uhrik action,
along with the actions captioned Irvin Woods, et al. v. Joe L. Roby, et al.;
Thomas Rolle v. Joe L. Roby, et al.; Andrew Loguercio v. Joe L. Roby, et al.;
and Robert Holschen v. Joe. L. Roby, et al., are among the actions that have
been consolidated under the caption In re CSFB Direct Tracking Stock
Shareholders Litigation. In May 2001, the Delaware Chancery Court ordered that
the Uhrik complaint be the operative complaint in the consolidated actions. A
memorandum of understanding outlining the terms of a proposed settlement was
executed in July 2001.
Although the outcome of litigation cannot be predicted with certainty, the
Company's management believes that the ultimate resolution of the matters
described above should not have a material adverse effect on the consolidated
financial position of the Company. The Company's management cannot make an
estimate of loss, if any, or predict whether or not such litigations will have a
material adverse effect on the Company's consolidated results of operations in
any particular period.
In April 2001, an amended class action complaint entitled Miller, et al. v.
Mitchell Hutchins Assets Management, Inc., et al. was filed in Federal District
Court in the Southern District of Illinois against Alliance, Alliance Fund
Distributors, Inc. ("AFD"), a wholly owned subsidiary of Alliance, and other
20
defendants alleging violations of the Federal Investment Company Act of 1940, as
amended ("ICA"), and breaches of common law fiduciary duty. The allegations in
the amended complaint concern six mutual funds with which Alliance has
investment advisory agreements, including Alliance Premier Growth Fund, Alliance
Health Care Fund, Alliance Growth Fund, Alliance Quasar Fund, Alliance Fund, and
Alliance Disciplined Value Fund. The amended complaint alleges principally that
(i) certain advisory agreements concerning these funds were negotiated,
approved, and executed in violation of the ICA, in particular because certain
directors of these funds should be deemed interested under the ICA; (ii) the
distribution plans for these funds were negotiated, approved, and executed in
violation of the ICA; and (iii) the advisory fees and distribution fees paid to
Alliance and AFD, respectively, are excessive and, therefore, constitute a
breach of fiduciary duty. Alliance and AFD believe that plaintiffs' allegations
are without merit and intend to vigorously defend against these allegations. At
the present time, management of Alliance and AFD are unable to estimate the
impact, if any, that the outcome of this action may have on Alliance's results
of operations or financial condition.
In June 2001, an amended class action complaint entitled Nelson, et al. v. AIM
Advisors, Inc., et al. was filed in Federal District Court in the Southern
District of Illinois against Alliance, AFD, and numerous other defendants in the
mutual fund industry alleging violations of the ICA and breaches of common law
fiduciary duty. The allegations in the amended complaint concern three mutual
funds with which Alliance has investment advisory agreements, including Alliance
Premier Growth Fund, Alliance Growth Fund and Alliance Quasar Fund. The amended
complaint alleges principally that (i) certain advisory agreements concerning
these funds were negotiated, approved, and executed in violation of the ICA, in
particular because certain directors of these funds should be deemed interested
under the ICA; (ii) the distribution plans for these funds were negotiated,
approved, and executed in violation of the ICA; and (iii) the advisory fees paid
to Alliance and AFD, respectively, are excessive and, therefore, constitute a
breach of fiduciary duty. Alliance and AFD believe that plaintiffs' allegations
are without merit and intend to vigorously defend against these allegations. At
the present time, management of Alliance and AFD are unable to estimate the
impact, if any, that the outcome of this action may have on Alliance's results
of operations or financial condition.
In addition to the matters previously reported and those described above, the
Holding Company and its subsidiaries are involved in various legal actions and
proceedings in connection with their businesses. Some of the actions and
proceedings 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 the Company'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.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.10 Employment Agreement dated May 11, 2001 between the
Holding Company, Equitable Life and Christopher M. Condron,
filed as Exhibit 10.16 to the Holding Company's quarterly
report on Form 10-Q for the quarter ended June 30, 2001.
(b) Reports on Form 8-K
1. On May 30, 2001, the Holding Company filed a report on
Form 8-K relating to certain announced management changes.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Life Assurance Society of the United States has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 10, 2001 THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By: /S/Stanley B. Tulin
---------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: August 10, 2001 /S/Alvin H. Fenichel
---------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and
Controller
22