Exhibit 99.3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis ("MD&A") for AXA Financial which follows
should be read in conjunction with the Consolidated Financial Statements and
related footnotes included elsewhere in this report. Reports and filings with
the SEC made before September 3, 1999 will be found under The Equitable
Companies Incorporated's name.
DISCONTINUED OPERATIONS - INVESTMENT BANKING AND BROKERAGE
On November 3, 2000, AXA Financial sold its 63.0% interest in DLJ to Credit
Suisse Group. AXA Financial received $2.33 billion in cash and $4.86 billion
(or 25.2 million shares) in Credit Suisse Group common stock. The fair value
of the stock consideration was based on the exchange rate and stock price at
the time the transaction closed. Credit Suisse Group repurchased $1.18 billion
(6.3 million shares) of its common stock from AXA Financial at closing. AXA
Financial estimates the gain on the DLJ sale at $2.35 billion (net of $2.01
billion in taxes, including the $407.0 million recorded in third quarter 2000).
In connection with the sale of DLJ, AXA Financial began reporting its Investment
Banking and Brokerage segment as discontinued operations and reclassified prior
years' financial information. The discussion of the discontinued Investment
Banking and Brokerage segment can be found on page 17.
COMBINED OPERATING RESULTS
The combined and segment-level discussions for the Financial Advisory/Insurance
and Investment Management segments in this MD&A are presented on an adjusted
pre-tax basis, which is a non-GAAP measure. Amounts reported in the GAAP
financial statements have been adjusted to exclude realized investment
gains/losses, net of related DAC and other charges, and the effect of unusual or
non-recurring events and transactions. A reconciliation of adjusted pre-tax
earnings to GAAP reported earnings from continuing operations precedes each
discussion. A discussion of significant adjustments begins on the next page. The
excluded items are important to an understanding of our overall results of
operations.
The following table presents the results of operations outside of the Closed
Block combined on a line-by-line basis with the Closed Block's operating
results. The Financial Advisory/Insurance analysis, which begins on page 4,
likewise combines the Closed Block amounts on a line-by-line basis. The MD&A
addresses the combined results of operations unless noted otherwise. The
Investment Management discussion begins on page 8.
1
1999 1998 1997
----------------- ----------------- -----------------
(IN MILLIONS)
Operating Results:
Policy fee income and premiums............................ $ 2,431.0 $ 2,304.6 $ 2,238.5
Net investment income..................................... 2,832.1 2,825.6 2,881.1
Commissions, fees and other income........................ 2,007.8 1,391.7 1,097.7
----------------- ----------------- ----------------
Total revenues........................................ 7,270.9 6,521.9 6,217.3
----------------- ----------------- ----------------
Interest credited to policyholders' account balances...... 1,092.8 1,167.8 1,281.6
Policyholders' benefits................................... 2,048.7 2,092.5 2,030.5
Other operating costs and expenses........................ 2,818.4 2,297.0 2,200.8
----------------- ----------------- ----------------
Total benefits and other deductions................... 5,959.9 5,557.3 5,512.9
----------------- ------------------ ----------------
Adjusted pre-tax earnings before minority interest........ 1,311.0 964.6 704.4
Minority interest......................................... (216.8) (141.5) (108.5)
----------------- ----------------- ----------------
Adjusted pre-tax earnings................................. 1,094.2 823.1 595.9
Pre-tax Adjustments:
Investment gains (losses), net of related DAC
and other charges....................................... (203.3) 50.6 (291.8)
Gain on sale of ERE....................................... - - 249.8
Intangible asset writedown................................ - - (120.9)
Non-recurring DAC adjustments............................. (131.7) - -
Restructuring charges..................................... - - (42.4))
----------------- ----------------- ----------------
Total pre-tax adjustments............................. (335.0) 50.6 (205.3)
Minority interest......................................... 216.8 141.5 108.5
----------------- ----------------- ----------------
GAAP Reported:
Earnings from continuing operations before
Federal income taxes and minority interest.............. 976.0 1,015.2 499.1
Federal income taxes...................................... 308.7 338.2 90.9
Minority interest in net income of
consolidated subsidiaries............................... 199.4 125.2 54.8
----------------- ----------------- ----------------
Earnings from continuing operations....................... 467.9 551.8 353.4
Earning (loss) from discontinued operations,
net of Federal income taxes:
Investment Banking and Brokerage...................... 630.1 278.6 294.8
Other................................................. 28.1 2.7 (87.2)
----------------- ----------------- ----------------
Net Earnings................................................ $ 1,126.1 $ 833.1 $ 561.0
================= ================= ================
Pre-tax adjustments to GAAP reported earnings in calculating adjusted earnings
for 1999 reflect the exclusion of investment losses, net of related DAC and
other charges, of $203.3 million. These net investment losses included $294.9
million of writedowns and losses on sales of General Account fixed maturities.
The $87.3 million of gains recognized upon reclassification of publicly-traded
common equities to a trading portfolio and gains resulting from the exercise of
Alliance options partially offset these losses. In addition, the $131.7 million
non-recurring DAC adjustments that resulted from the revisions to estimated
future gross margins related to the investment asset reallocation in second
quarter are excluded from 1999 adjusted results (see Note 2 of Notes to
Consolidated Financial Statements contained in Exhibit 99.1 attached hereto).
The 1998 pre-tax adjustments reflect the exclusion of $50.6 million of net
investment gains (excluding related DAC and other charges and credits totaling
$23.9 million). Investment gains on General Account Investment Assets totaled
$67.6 million, principally due to gains on sales of equity real estate. An
additional $9.5 million resulted from the exercise of Alliance options.
2
Pre-tax adjustments for 1997 included losses of $291.8 million (net of related
DAC amortization of $51.0 million) in connection with the real estate sales
program. Also excluded were the gain on Equitable Life's sale of ERE, the
Alliance writedown of Cursitor-related intangible assets and restructuring costs
in connection with cost reduction programs.
During fourth quarter 1997, AXA Financial released approximately $82.7 and $14.8
million of tax reserves related to continuing and discontinued operations,
respectively, for years prior to 1989. The effect on continuing operations is
reflected in Federal income taxes for 1997. See "Discontinued Operations" for a
discussion of the significant reserve strengthening actions which affected the
results of other discontinued operations in 1997.
CONTINUING OPERATIONS
1999 COMPARED TO 1998 - Adjusted pre-tax earnings increased for both segments
in 1999 as compared to 1998. The decrease in Federal income taxes reflected the
lower GAAP reported earnings for the Financial Advisory/Insurance segment and
the change in Alliance's tax status as a private partnership in fourth quarter
1999 which eliminated the 3.5% Federal tax. Minority interest in net income of
consolidated subsidiaries increased as a result of higher earnings at Alliance.
AXA Financial's economic interest in Alliance's operations declined to 57.2%
from 57.7% at December 31, 1999 and 1998, respectively.
Revenues increased 11.5% to $7.27 billion in 1999. The $616.1 million higher
commissions, fees and other income was principally due to increased business
activity within the Investment Management segment.
Benefits and other deductions rose 7.2% to $5.96 billion in 1999. The $521.4
million increase in other operating costs and expenses was primarily due to
$394.0 million higher expenses in the Investment Management segment principally
resulting from higher costs associated with increased revenues at Alliance.
1998 COMPARED TO 1997 - The higher adjusted pre-tax earnings for 1998 reflected
increased earnings by both the Financial Advisory/Insurance and Investment
Management segments. Federal income taxes increased due to the higher pre-tax
results of operations, the 1997 tax reserve release and the 3.5% Federal tax on
partnership gross income from the active conduct of a trade or business which
was imposed on certain publicly traded limited partnerships, including Alliance,
effective January 1, 1998. Minority interest in net income of consolidated
subsidiaries was higher principally due to increased earnings at Alliance and to
reductions in AXA Financial's ownership interest in Alliance's operations to
57.7% at December 31, 1998 from 57.9% at December 31, 1997.
The $304.6 million increase in revenues for 1998 compared to 1997 was attributed
primarily to the $294.0 million increase in commissions, fees and other income
principally due to increased business activity within the Investment Management
segment. Net investment income decreased $55.5 million for 1998 principally due
to a $41.4 million decrease for Financial Advisory/Insurance.
For 1998, total benefits and other deductions increased $44.4 million from 1997,
reflecting increases in other operating costs and expenses of $96.2 million and
a $62.0 million increase in policyholders' benefits partially offset by a $113.8
million decrease in interest credited to policyholders.
3
COMBINED OPERATING RESULTS BY SEGMENT
Financial Advisory/Insurance. The following table combines the Closed Block
amounts with the adjusted operating results outside of the Closed Block on
a line-by-line basis:
FINANCIAL ADVISORY/INSURANCE - COMBINED OPERATING RESULTS
(IN MILLIONS)
1999
-------------------------------------------
INSURANCE CLOSED 1998 1997
OPERATIONS BLOCK COMBINED Combined Combined
------------- ------------ ------------- ------------- --------------
Operating Results:
Universal life and investment-type
product policy fee income............ $ 1,253.9 $ - $ 1,253.9 $ 1,056.2 $ 950.5
Premiums............................... 558.2 618.9 1,177.1 1,248.4 1,287.9
Net investment income.................. 2,200.5 574.2 2,774.7 2,765.9 2,807.3
Commissions, fees and other income..... 238.5 (11.1) 227.4 137.9 118.1
Contribution from the Closed Block..... 86.4 (86.4) - - -
------------- ------------ ------------- ------------- -------------
Total revenues..................... 4,337.5 1,095.6 5,433.1 5,208.4 5,163.8
------------- ------------ ------------- ------------- -------------
Interest credited to policyholders'
account balances..................... 1,078.2 14.6 1,092.8 1,167.7 1,281.6
Policyholders' benefits................ 1,038.6 1,010.1 2,048.7 2,092.5 2,030.5
Deferred policy acquisition costs...... (379.3) 65.5 (313.8) (273.2) (127.6)
All other operating costs
and expenses......................... 1,747.1 5.4 1,752.5 1,567.4 1,509.7
------------- ------------ ------------- ------------- -------------
Total benefits and
other deductions................. 3,484.6 1,095.6 4,580.2 4,554.4 4,694.2
------------- ------------ ------------- ------------- -------------
Adjusted pre-tax earnings.............. 852.9 - 852.9 654.0 469.6
Pre-tax Adjustments:
Investment (losses) gains, net of related
DAC and other charges................ (207.8) - (207.8) 41.1 (291.9)
Non-recurring DAC adjustments.......... (131.7) - (131.7) - -
Restructuring charges.................. - - - - (41.7)
------------- ------------ ------------- ------------- -------------
Total pre-tax adjustments.......... (339.5) - (339.5) 41.1 (333.6)
------------- ------------ ------------- ------------- -------------
GAAP Reported:
Earnings from Continuing
Operations before Federal
Income Taxes ........................ $ 513.4 $ - $ 513.4 $ 695.1 $ 136.0
============= ============ ============= ============= =============
1999 COMPARED TO 1998 - Adjusted pre-tax earnings rose 30.4% to $852.9 million
compared to $654.0 million in 1998, driven by improvements in net interest
margins, fee income and insurance spreads, partially offset by higher expenses
and DAC amortization. Revenues increased $224.7 million to $5.43 billion in
1999. Higher revenues resulted from policy fee income increases of $197.7
million on variable and interest-sensitive life and annuity products due to
higher sales and appreciation and $89.5 million higher commissions, fees and
other income principally due to higher mutual fund and investment product sales.
These increases were partially offset by $71.3 million lower premiums
principally on traditional life and individual health insurance policies. Net
investment income increased slightly as higher income on other equity
investments, mortgages and cash and cash equivalents was offset by lower income
on equity real estate and fixed maturities as well as lower income from the
Holding Company Group's investment portfolio.
In 1999, total benefits and other deductions increased $25.8 million to $4.58
billion. There was a $185.1 million increase in other operating costs and
expenses. The increase was primarily due to increased commissions and other
variable expenses due to increased sales volume, higher information technology
costs and expenses related to the strategic initiatives in connection with the
introduction and repositioning of brands, new products and services, field force
restructuring and financial planning/advisory training and higher compensation
4
and benefits. Lower interest expense on lower short-term borrowings partially
offset these increases. The $74.9 million decrease in interest credited on
policyholders' account balances was primarily due to lower crediting rates in
1999 as compared to 1998. DAC capitalization increased by $86.8 million to
$709.8 million primarily related to increased deferrable expenses related to
higher sales volume and DAC amortization was $46.2 million higher due
principally to reactivity to mortality, General Account investment spread and
fee income. The $43.8 million decrease in policyholders' benefits was primarily
attributed to lower traditional life insurance mortality and lower reserve
increases due to lower renewal premiums.
1998 COMPARED TO 1997 - Adjusted pre-tax earnings for 1998 reflected an increase
of $184.4 million from the prior year. Total revenues increased by $44.6 million
primarily due to a $105.7 million increase in policy fees and a $19.8 million
increase in commissions, fees and other income, offset by a $41.4 million
decrease in investment income and a $39.5 million decline in premiums. Policy
fee income for 1998 increased to $1.06 billion in 1998 due to higher insurance
and annuity account balances. The decrease in investment income primarily was
due to $25.3 million lower income on General Account Investment Assets and a
$26.7 million decrease in interest income on loans to discontinued operations in
1998. The decrease in premiums during 1998 principally was due to lower
traditional life and individual health premiums.
Total benefits and other deductions for 1998 declined $139.8 million from 1997.
A $113.9 million decrease in interest credited on policyholders' account
balances resulted from moderately lower crediting rates on slightly lower
General Account balances which more than offset the decline in net investment
income. The decline in policyholders' account balances was primarily due to the
single large company-owned life insurance ("COLI") policy surrendered in the
first quarter of 1998. DAC capitalization increased by $101.2 million primarily
related to increased sales volume and DAC amortization was $44.4 million lower
due principally to reactivity to mortality, General Account investment spread
and fee income. There were $96.4 million higher commission expenses due to
increased sales, partially offset by a $38.7 million decrease in other general
operating costs principally related to lower interest expense. The $62.0 million
increase in policyholders' benefits primarily resulted from higher death claims
experience on a higher in force book of business.
SUBSEQUENT EVENT - During July 2000, Equitable Life transferred, at no gain or
loss, all the risk of its directly written DI business for years 1993 and prior
to Centre Life Insurance Company, a subsidiary of Zurich Financial Services. The
transfer of risk to Centre Life Insurance was accomplished through an indemnity
reinsurance contract. The cost of the arrangement will be amortized over the
expected lives of the contracts reinsured and will not have a significant impact
on the results of operations in any specific period.
5
Premiums, Deposits and Mutual Fund Sales - The following table lists sales for
major insurance product lines and mutual funds. Premiums and deposits are
presented net of internal conversions and are presented gross of reinsurance
ceded.
PREMIUMS, DEPOSITS AND MUTUAL FUND SALES
(IN MILLIONS)
1999 1998 1997
----------------- ---------------- -----------------
RETAIL:
Annuities
First year.............................................. $ 3,276.8 $ 2,863.1 $ 2,491.3
Renewal................................................. 1,812.6 1,707.1 1,600.9
----------------- ---------------- ----------------
5,089.4 4,570.2 4,092.2
Life(1)
First year.............................................. 407.7 426.1 409.3
Renewal................................................. 2,211.2 2,160.0 2,121.3
----------------- ---------------- ----------------
2,618.9 2,586.1 2,530.6
Other(2)
First year.............................................. 10.5 11.3 36.4
Renewal................................................. 381.0 398.8 384.8
Mutual fund sales(3).................................... 2,787.0 2,373.2 1,706.7
----------------- ---------------- ----------------
3,178.5 2,783.3 2,127.9
----------------- ---------------- ----------------
----------------- ---------------- ----------------
Total retail........................................ 10,886.8 9,939.6 8,750.7
----------------- ---------------- ----------------
WHOLESALE:
Annuities
First year.............................................. 2,229.6 1,686.8 648.4
Renewal................................................. 43.5 10.5 -
----------------- ---------------- ----------------
Total wholesale..................................... 2,273.1 1,697.3 648.4
----------------- ---------------- ----------------
Total Premiums, Deposits and Mutual Fund Sales............ $ 13,159.9 $ 11,636.9 $ 9,399.1
================= ================ ================
(1) Includes variable, interest-sensitive and traditional life products.
(2) Includes reinsurance assumed and health insurance.
(3) Includes sales through AXA Advisors' brokerage accounts in 1999.
First year premiums and deposits for insurance and annuity products for 1999
increased from the prior year's level by $937.3 million primarily due to higher
sales of individual annuities by both the retail and wholesale distribution
channels, partially offset by an $18.4 million decline in life sales. In fourth
quarter 1999, first year life sales increased due to sales of a new series of
variable life products introduced in 1999. Renewal premiums and deposits
increased by $171.9 million during 1999 over 1998 as increases in the larger
block of annuity and variable life business were partially offset by decreases
in traditional life policies.
First year premiums and deposits for insurance and annuity products for 1998
increased from prior year's level by $1.40 billion primarily due to higher sales
of individual annuities. Renewal premiums and deposits increased by $169.4
million during 1998 over 1997 as increases in the larger block of individual
annuities and variable and interest-sensitive life policies were partially
offset by decreases in the traditional life product line. The 44.9% increase in
first year individual annuities premiums and deposits in 1998 over the prior
year included a $1.04 billion increase in sales of a line of retirement annuity
products sold through expanded wholesale distribution channels over the $648.4
million sold through that distribution channel in 1997. Compared with 1997,
sales of annuities by the retail sales associates rose 14.9% to $2.86 billion in
1998.
6
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
(IN MILLIONS)
1999 1998 1997
-------------------------- ------------------------- -----------------------
AMOUNT RATE (1) Amount Rate (1) Amount Rate (1)
--------------- ---------- ------------- ----------- ------------ ---------
Annuities........................... $ 3,549.3 8.8% $ 2,621.8 8.0% $ 2,404.2 8.8%
Variable and interest-sensitive life 612.8 3.8% 1,080.2 7.5%(2) 498.9 3.8%
Traditional life.................... 345.8 4.2% 353.1 4.4% 372.9 4.6%
-------------- ------------- --------------
Total............................... $ 4,507.9 $ 4,055.1 $ 3,276.0
============== ============= ==============
(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 1999, 1998 and 1997, respectively.
(2) Excluding the single large COLI surrender, the surrender rate would have been 3.6%.
Policy and contract surrenders and withdrawals increased $452.8 million during
1999 compared to 1998. The 1998 total included the first quarter 1998 surrender
of $561.8 million related to a single large COLI contract. Since policy loans
were outstanding on the surrendered contract, there were no cash outflows.
Excluding the effect of this one surrender, the $1.01 billion increase in 1999
over 1998 resulted from higher surrenders and withdrawals due to both the
growing size and maturity of the book of annuities and variable and
interest-sensitive life business partially offset by the decrease in the
traditional life surrender rate. Policy and contract surrenders and withdrawals
increased $779.1 million during 1998 compared to 1997 principally due to the
COLI surrender mentioned above. Excluding the effect of this one surrender, the
remaining $217.3 million increase resulted from higher surrenders and
withdrawals in the larger book of individual annuities and variable and
interest-sensitive life policies.
The persistency of life insurance and annuity products is a critical element of
their profitability. As of December 31, 1999, all in force individual life
insurance policies (other than individual life term policies without cash values
which comprise 8.9% of in force policies) and approximately 96% of individual
annuity contracts (as measured by reserves) were surrenderable. However, a
surrender charge often applies in the early contract years and declines to zero
over time. Contracts without surrender provisions cannot be terminated prior to
maturity. Trends in surrenders and withdrawals discussed above continue to fall
within the range of expected experience underlying the current invested asset
allocation strategy.
Margins on Insurance and Annuity Products - The segment's results significantly
depend on profit margins between investment results from General Account
Investment Assets allocated to the products in accordance with AXA Financial's
asset/liability management strategy and interest credited on insurance and
annuity products. During 1999, margins widened as lower average crediting rates
more than offset lower investment yields. In 1999, the crediting rate ranges
were: 4.25% to 6.40% for variable and interest-sensitive life insurance; 4.15%
to 6.00% for variable deferred annuities; 4.05% to 7.00% for SPDA contracts; and
5.00% for retirement investment accounts.
Margins on insurance and annuity products are affected by interest rate
fluctuations. Rising interest rates result in a decline in the market value of
assets. However, the positive cash flows from renewal premiums and payments of
principal and interest on existing assets would make an early disposition of
investment assets to meet operating cash flow requirements unlikely. Rising
interest rates also would result in available cash flows being invested at
higher interest rates, which would help support a gradual increase in new
business and renewal interest rates on interest-sensitive products. A sharp,
sudden rise in interest rates without a concurrent increase in crediting rates
could result in higher surrenders, particularly for annuities. The effect of
such surrenders would be to reduce earnings modestly over the long term while
increasing earnings in the period of the surrenders to the extent surrender
charges were applicable. To protect against sharp increases in interest rates,
Equitable Life maintains an interest rate cap program designed to hedge
crediting rate increases on interest-sensitive annuity contracts. At December
31, 1999, the notional amounts of contracts outstanding totaled $7.58 billion,
as compared to $8.45 billion at December 31, 1998.
7
If interest rates fall, crediting interest rates and dividends would be adjusted
subject to competitive pressures. Only a minority of Equitable Life's insurance
policies and annuity contracts have fixed interest rates locked in at issue. The
majority of contracts are adjustable, having guaranteed minimum rates ranging
from approximately 2.5% to 5.5%. Approximately 90% of the life policies have a
minimum rate of 4.5% or lower. Should interest rates fall below such policy
minimums, adjustments to life policies' mortality and expense charges could
cover the shortfall in most situations. Lower crediting interest rates and
dividends could result in higher surrenders. To protect against interest rate
decreases, Equitable Life maintains interest rate floors; at both December 31,
1999 and 1998, the outstanding notional amount of contracts totaled $2.0
billion.
Investment Management. The following table presents the adjusted operating
results of the Investment Management segment, which consists principally of the
operations of Alliance. Alliance's operations were conducted by Alliance Holding
prior to its reorganization in October 1999. For information on the
reorganization, see Note 1 of Notes to Consolidated Financial Statements,
"Liquidity and Capital Resources-Alliance," and the Alliance Holding Report on
Form 10-K for the year ended December 31, 1999.
INVESTMENT MANAGEMENT - OPERATING RESULTS
(IN MILLIONS)
1999 1998 1997
----------------- ----------------- ----------------
Operating Results:
Investment advisory and services fees(1).................. $ 1,331.8 $ 953.0 $ 699.0
Distribution revenues..................................... 441.8 301.9 216.9
Other revenues(1)......................................... 96.6 73.8 157.6
----------------- ----------------- ----------------
Total revenues........................................ 1,870.2 1,328.7 1,073.5
----------------- ----------------- ----------------
Promotion and servicing................................... 620.7 460.3 312.2
Employee compensation and benefits........................ 508.6 340.9 264.3
All other operating expenses.............................. 282.8 216.9 262.2
----------------- ----------------- ----------------
Total expenses........................................ 1,412.1 1,018.1 838.7
----------------- ----------------- ----------------
Adjusted pre-tax earnings before minority interest........ 458.1 310.6 234.8
Minority interest......................................... (216.8) (141.5) (108.5)
----------------- ----------------- ----------------
Adjusted pre-tax earnings................................. 241.3 169.1 126.3
Pre-tax Adjustments:
Investment gains (losses), net of DAC..................... 4.5 9.5 .1
Gain on sale of ERE....................................... - - 249.8
Intangible asset writedown................................ - - (120.9)
Restructuring charges..................................... - - (.7)
----------------- ----------------- ----------------
Total pre-tax adjustments............................. 4.5 9.5 128.3
Minority interest........................................... 216.8 141.5 108.5
----------------- ----------------- ----------------
GAAP Reported:
Earnings from Continuing Operations before
Federal Income Taxes and Minority Interest.............. $ 462.6 $ 320.1 $ 363.1
================= ================= ================
(1) Includes fees earned by Alliance and, in 1997, EREIM totaling $44.3
million, $61.8 million and $87.4 million in 1999, 1998 and 1997,
respectively, for services provided to the Insurance Group and
unconsolidated real estate joint ventures.
1999 COMPARED TO 1998 - Adjusted pre-tax earnings for the Investment Management
segment increased 42.7% in 1999 to $241.3 million. Total revenues were $1.87
billion, a 40.8% increase over 1998. Investment advisory and service fees at
Alliance were $1.33 billion, a $378.8 million increase over the prior year. The
39.7% fee increase was primarily due to increased sales of mutual funds, asset
appreciation and higher performance fees related to mutual funds and third party
clients, partially offset by lower performance fees from affiliates, notably the
Equitable Life General Account. Distribution revenues at Alliance were $139.9
million higher in 1999 than in 1998 principally due to higher average equity
mutual fund assets under management due to strong sales and to market
appreciation.
8
Expenses for Investment Management increased $394.0 million to $1.41 billion in
1999 as compared to $1.02 billion in 1998. Promotion and servicing expenses at
Alliance were $160.4 million higher primarily due to increased distribution plan
payments to financial intermediaries resulting from higher average domestic,
offshore and cash management assets under management. Other promotion and
servicing expense increases were primarily due to $55.1 million higher
amortization of deferred sales commissions, higher travel and entertainment
costs and higher promotional expenditures related to mutual fund sales
initiatives. Alliance's employee compensation and benefits totaled $508.6
million, a 49.2% increase over the prior year. Incentive compensation's increase
was principally related to Alliance's higher operating earnings while increased
base compensation and commissions were due to increased headcount in the mutual
fund and technology areas and to salary increases. The $65.9 million increase in
all other operating expenses related principally to higher expenses incurred for
the Year 2000 project and other technology initiatives, higher interest on
deferred compensation and debt and increased occupancy costs.
1998 COMPARED TO 1997 - Investment Management's adjusted pre-tax earnings
before minority interest for 1998 increased $75.8 million from the prior year.
Revenues totaled $1.33 billion for 1998, an increase of 23.8% from 1997.
Alliance's 1998 investment advisory and service fees increased $254.0 million as
higher overall mutual fund sales and market appreciation led to higher average
assets under management. Distribution revenues grew $85.0 million due to higher
average equity mutual fund assets under management and higher average cash
assets under management. Other revenues declined $83.8 million in 1998 as
compared to the prior year principally due to the inclusion of EREIM's $91.6
million of revenues through its sale date in June 1997.
Total expenses for Investment Management increased $179.4 million during 1998.
The $148.1 million increase in promotion and servicing expenses at Alliance
resulted from higher distribution plan payments resulting from higher average
offshore mutual fund, cash management and domestic equity mutual fund assets
under management. Employee compensation and benefits rose $76.6 million in 1998
as Alliance's increased operating earnings resulted in higher incentive
compensation and as business expansion led to a 24% increase in headcount from
December 31, 1997. The decline in all other operating expenses principally
resulted from the $76.8 million decrease attributed to the sale of EREIM in June
1997.
SUBSEQUENT EVENTS - The resolution of a class action lawsuit resulted in the
recognition of a one-time, non-cash gain of $23.9 million in first quarter 2000.
On October 2, 2000, Alliance acquired substantially all of the assets and
liabilities of Sanford C. Bernstein Inc. ("Bernstein") for an aggregate current
value of approximately $3.5 billion ($1.48 billion in cash and 40.8 million
newly issued Alliance Units). The Holding Company provided Alliance with the
cash portion of the consideration by purchasing approximately 32.6 million newly
issued Alliance Units for $1.60 billion on June 21, 2000. As a result of these
transactions, AXA Financial's consolidated economic interest in Alliance was
approximately 52.7%. Additionally, the Holding Company has agreed to provide
liquidity to former Bernstein shareholders after a two-year lock-out period to
allow the 40.8 million private Units to be sold to the Holding Company over the
following eight years, but generally not more than 20% of such Units in any one
annual period at a then average current price of the publicly traded units.
9
Fees and Assets Under Management. Breakdowns of fees and assets under
management follow:
FEES AND ASSETS UNDER MANAGEMENT
(IN MILLIONS)
AT OR FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
----------------- ---------------- -----------------
FEES:
Third parties............................................. $ 1,180.5 $ 806.7 $ 629.7
Equitable Life Separate Accounts.......................... 107.6 99.7 88.8
Equitable Life General Account and other.................. 43.7 46.6 74.6
----------------- ---------------- ----------------
Total Fees................................................ $ 1,331.8 $ 953.0 $ 793.1
================= ================ ================
ASSETS UNDER MANAGEMENT:
Assets by Manager
Alliance:
Third party............................................. $ 301,366 $ 228,321 $ 165,137
Equitable Life General Account and Holding Company Group 25,475 24,179 24,942
Equitable Life Separate Accounts........................ 41,480 34,159 28,575
----------------- ---------------- ----------------
Total Alliance............................................ 368,321 286,659 218,654
----------------- ---------------- ----------------
Equitable Life:
Equitable Life (non-Alliance) General Account........... 12,774 14,452 14,469
Equitable Life Separate Accounts - EQ Advisors Trust.... 6,397 3,024 877
Equitable Life real estate related Separate Accounts.... 3,851 4,151 5,546
Equitable Life Separate Accounts - other................ 2,726 1,968 1,541
----------------- ---------------- ----------------
Total Equitable Life...................................... 25,748 23,595 22,433
----------------- ---------------- ----------------
Total by Account:
Third party(1)......................................... 301,666 228,321 165,137
General Account and other(2)........................... 38,249 38,631 39,411
Separate Accounts....................................... 54,454 43,302 36,539
----------------- ---------------- ----------------
Total Assets Under Management............................. $ 394,069 $ 310,254 $ 241,087
================= ================ ================
(1) Includes $2.47 billion, $2.44 billion and $2.13 billion of assets managed
on behalf of AXA affiliates at December 31, 1999, 1998 and 1997,
respectively. Third party assets under management include 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 AXA Financial not managed by the Investment
Subsidiaries, principally policy loans, totaling approximately $4.76
billion, $7.07 billion and $6.31 billion at December 31, 1999, 1998 and
1997, respectively, and mortgages and equity real estate totaling $7.11
billion and $7.38 billion at December 31, 1999 and 1998, respectively.
Fees for assets under management increased 39.7% during 1999 from 1998 as a
result of the continued growth in assets under management for third parties.
Total assets under management increased $83.82 billion, primarily due to $73.05
billion higher third party assets under management at Alliance. The Alliance
growth in 1999 was principally due to market appreciation and net sales of
mutual funds and other products.
Fees for assets under management increased $159.9 million or 20.2% during 1998
from 1997 also as a result of the continued growth in assets under management
for third parties. Total third party assets under management increased $63.18
billion at Alliance. The Alliance growth in 1998 was principally due to market
appreciation, increased sales of Equitable Separate Account based individual
annuity contracts and net sales of mutual funds and other products.
10
CONTINUING OPERATIONS INVESTMENT PORTFOLIO
The continuing operations investment portfolio is composed of the General
Account investment portfolio and investment assets of the Holding Company and
its distribution and non-operating subsidiaries, principally AXA Client
Solutions, AXA Advisors, the EQ Asset Trust 1993 ("the "Trust") and the SECT
(together, the "Holding Company Group").
GENERAL ACCOUNT INVESTMENT PORTFOLIO
Management discusses the Closed Block assets and the assets outside of the
Closed Block on a combined basis as General Account Investment Assets. The
combined portfolio and its investment results support the insurance and annuity
liabilities of Equitable Life's continuing operations. The following table
reconciles the consolidated balance sheet asset amounts to General Account
Investment Assets.
GENERAL ACCOUNT INVESTMENT ASSET CARRYING VALUES
DECEMBER 31, 1999
(IN MILLIONS)
GENERAL
BALANCE HOLDING ACCOUNT
SHEET CLOSED COMPANY INVESTMENT
BALANCE SHEET CAPTIONS: TOTAL BLOCK OTHER (1) GROUP (2) ASSETS
- ----------------------- ----------------- ----------------- ----------------- ------------- ------------------
Fixed maturities:
Available for sale(3)......... $ 18,849.1 $ 4,014.0 $ (75.9) $ 249.5 $ 22,689.5
Held to maturity.............. 253.4 - - 120.2 133.2
Mortgage loans on real estate... 3,270.0 1,704.2 - - 4,974.2
Equity real estate.............. 1,160.2 89.3 (1.7) - 1,251.2
Policy loans.................... 2,257.3 1,593.9 - - 3,851.2
Other equity investments........ 673.5 36.3 .1 2.3 707.4
Other invested assets........... 914.7 .9 265.3 2.0 648.3
---------------- ----------------- ----------------- ------------- ------------------
Total investments............. 27,378.2 7,438.6 187.8 374.0 34,255.0
Cash and cash equivalents....... 796.0 67.7 123.4 168.0 572.3
Equitable Life debt & other (4). - - 767.0 - (767.0)
---------------- ----------------- ----------------- ------------- -----------------
Total........................... $ 28,174.2 $ 7,506.3 $ 1,078.2 $ 542.0 $ 34,060.3
================ ================ ================= ============= ==================
(1) Assets listed in the "Other" category principally consist of assets held
in portfolios other than the Holding Company Group and the General Account
which are not managed as part of General Account Investment Assets and
certain reclassifications and intercompany adjustments. The "Other"
category is deducted in arriving at General Account Investment Assets.
(2) The "Holding Company Group" category includes that group's assets, which
are not managed as part of General Account Investment Assets. The "Holding
Company Group" category is deducted in arriving at General Account
Investment Assets.
(3) Fixed maturities available for sale are reported at estimated fair value.
At December 31, 1999, the amortized costs of the General Account's
available for sale and held to maturity fixed maturity portfolios were
$23.59 billion and $133.2 million, respectively, compared with estimated
market values of $22.69 billion and $133.2 million, respectively.
(4) Includes Equitable Life debt and other miscellaneous assets and
liabilities related to General Account Investment Assets and reclassified
from various balance sheet lines.
11
ASSET VALUATION ALLOWANCES AND WRITEDOWNS
The following table shows asset valuation allowances and additions to and
deductions from such allowances for the periods indicated.
GENERAL ACCOUNT INVESTMENT ASSETS
VALUATION ALLOWANCES
(IN MILLIONS)
EQUITY REAL
MORTGAGES ESTATE TOTAL
----------------- ---------------- ---------------
Balances at January 1, 1998............................... $ 74.3 $ 345.5 $ 419.8
Additions............................................... 22.5 77.3 99.8
Deductions(1)........................................... (51.4) (211.0) (262.4)
----------------- ---------------- ---------------
Balances at December 31, 1998............................. 45.4 211.8 257.2
Additions............................................... 7.5 75.6 83.1
Deductions(1)........................................... (20.8) (141.6) (162.4)
----------------- ---------------- ---------------
Balances at December 31, 1999............................. $ 32.1 $ 145.8 $ 177.9
================= ================ ===============
(1) Primarily reflects releases of allowances due to asset dispositions.
Writedowns on fixed maturities, principally below investment grade securities,
aggregated $226.5 million, $101.6 million and $15.2 million in 1999, 1998 and
1997, respectively. The increases in writedowns on fixed maturities in 1999 and
1998 were primarily attributable to an increased level of defaults in high yield
and emerging market securities. Writedowns on equity real estate totaled $165.2
million in 1997; there were no real estate writedowns in 1999 and 1998. The 1997
equity real estate writedowns principally resulted from changes in assumptions
related to real estate holding periods and property cash flows.
GENERAL ACCOUNT INVESTMENT ASSETS
The following table shows the amortized cost, valuation allowances and net
amortized cost of major categories of General Account Investment Assets as of
December 31, 1999 and net amortized cost as of December 31, 1998.
GENERAL ACCOUNT INVESTMENT ASSETS
(IN MILLIONS)
DECEMBER 31, 1999 December 31, 1998
------------------------------------------------ ----------------------
NET Net
AMORTIZED VALUATION AMORTIZED Amortized
COST ALLOWANCES COST Cost
--------------- ------------- --------------- ----------------------
Fixed maturities(1)...................... $ 23,719.1 $ - $ 23,719.1 $ 22,804.8
Mortgages................................ 5,006.3 (32.1) 4,974.2 4,443.3
Equity real estate....................... 1,397.0 (145.8) 1,251.2 1,774.1
Other equity investments................. 826.2 - 826.2 769.4
Policy loans............................. 3,851.2 - 3,851.2 3,727.9
Cash and short-term investments(2)....... 1,220.6 - 1,220.6 1,597.8
------------- -------------- --------------- ----------------------
Total.................................... $ 36,020.4 $ (177.9) $ 35,842.5 $ 35,117.3
============= ============== =============== ======================
(1) Excludes unrealized losses of $896.4 million and unrealized gains of $814.3
million on fixed maturities classified as available for sale at December 31,
1999 and 1998, respectively.
(2) Comprises "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance
sheet.
12
INVESTMENT RESULTS OF GENERAL ACCOUNT INVESTMENT ASSETS
The following table summarizes investment results by asset category for the
periods indicated.
INVESTMENT RESULTS BY ASSET CATEGORY
(DOLLARS IN MILLIONS)
1999 1998 1997
----------------------------- ----------------------------- -----------------------------
(1) (1) (1)
YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------------ --------------- ----------- --------------- ------------ ---------------
FIXED MATURITIES:
Income...................... 7.95% $ 1,834.9 8.08% $ 1,854.2 8.12% $ 1,842.6
Investment gains(losses).... (1.31)% (294.9) (0.09)% (21.6) 0.42% 94.0
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 6.64% $ 1,540.0 7.99% $ 1,832.6 8.54% $ 1,936.6
Ending assets(2)............ $ 24,171.2 $ 23,254.5 $ 23,944.9
MORTGAGES:
Income...................... 8.66% $ 403.3 9.31% $ 363.8 9.56% $ 387.1
Investment gains(losses).... (0.04)% (1.9) (0.26)% (10.0) (0.49)% (19.1)
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 8.62% $ 401.4 9.05% $ 353.8 9.07% $ 368.0
Ending assets(3)............ $ 5,019.6 $ 4,472.8 $ 4,003.1
EQUITY REAL ESTATE:
Income(4)................... 7.38% $ 94.2 8.10% $ 145.2 2.90% $ 73.7
Investment gains(losses).... (1.28)% (16.0) 4.16% 71.3 (16.15)% (432.4)
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 6.10% $ 78.2 12.26% $ 216.5 (13.25)% $ (358.7)
Ending assets(4)............ $ 1,014.4 $ 1,398.2 $ 1,970.5
OTHER EQUITY INVESTMENTS:
Income...................... 25.94% $ 196.3 10.98% $ 125.1 19.32% $ 198.6
Investment gains(losses).... 13.10% 87.8 2.57% 27.9 1.54% 14.8
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 39.04% $ 284.1 13.55% $ 153.0 20.86% $ 213.4
Ending assets(5)............ $ 827.8 $ 859.1 $ 1,269.5
POLICY LOANS:
Income...................... 6.75% $ 246.8 6.93% $ 249.8 7.25% $ 285.6
Ending assets............... $ 3,851.2 $ 3,727.9 $ 4,123.1
CASH AND SHORT-TERM
INVESTMENTS:
Income...................... 7.73% $ 74.7 11.03% $ 52.5 6.35% $ 23.0
Ending assets(6)............ $ 1,222.3 $ 1,625.3 $ 327.2
EQUITABLE LIFE DEBT AND OTHER:
Interest expense and other. 7.85% $ (50.0) 7.05% $ (48.3) 7.27% $ (43.0)
Ending liabilities......... $ (767.0) $ (598.1) $ (647.0)
TOTAL:
Income(7)................... 8.29% $ 2,800.2 8.26% $ 2,742.3 8.13% $ 2,767.6
Investment gains(losses).... (0.69)% (225.0) 0.21% 67.6 (1.03)% (342.7)
------------ --------------- ----------- --------------- ------------ ---------------
Total(8).................... 7.60% $ 2,575.2 8.47% $ 2,809.9 7.10% $ 2,424.9
Ending net assets........... $ 35,339.5 $ 34,739.7 $ 34,991.3
(1) Yields have been calculated on a compound annual effective rate basis
using the quarterly average asset carrying values, excluding unrealized
gains (losses) in fixed maturities and adjusted for the current year's
income, gains (losses) and fees.
(2) Fixed maturities investment assets are shown net of securities purchased
but not yet paid for of $8.4 million, $4.7 million and $73.3 million, and
include accrued income of $413.5 million, $392.4 million and $393.7
million, amounts due from securities sales of $29.4 million, $29.6 million
and $17.1 million and other assets of $17.5 million, $31.4 million and
$30.1 million at December 31, 1999, 1998 and 1997, respectively.
(3) Mortgage investment assets include accrued income of $59.2 million, $56.6
million and $74.3 million and are adjusted for related liability balances
of $(13.8) million, $(27.1) million and $(24.2) million at December 31,
1999, 1998 and 1997, respectively.
13
(4) Equity real estate carrying values are shown, and equity real estate
yields are calculated, net of third party debt and minority interest of
$251.4 million, $381.3 million and $568.0 million at December 31, 1999,
1998 and 1997, respectively. The carrying values include accrued income of
$27.8 million, $31.6 million and $35.7 million and are adjusted for
related liability balances of $(13.2) million, $(20.3) million and
$(101.4) million as of December 31, 1999, 1998 and 1997, respectively.
Equity real estate income is shown net of operating expenses,
depreciation, third party interest expense and minority interest. Third
party interest expense and minority interest totaled $19.1 million, $35.7
million and $52.9 million for 1999, 1998 and 1997, respectively.
(5) Other equity investment assets include accrued income and pending
trade settlements of $1.6 million, $0.0 million and $0.6 million at
December 31, 1999, 1998 and 1997, respectively.
(6) Cash and short-term investments are shown net of financing arrangements of
$(300.6) million at December 31, 1997 as well as accrued income and cash
in transit totaling $1.8 million, $5.6 million and $2.3 million at
December 31, 1999, 1998 and 1997, respectively.
(7) Total investment income includes non-cash income from amortization,
payment-in-kind distributions and undistributed equity earnings of $59.6
million, $52.7 million and $52.8 million for 1999, 1998 and 1997,
respectively. Investment income is shown net of depreciation of $22.5
million, $31.5 million and $80.9 million for 1999, 1998 and 1997,
respectively.
(8) Total yields are shown before deducting investment fees paid to investment
advisors. These fees include asset management, acquisition, disposition,
accounting and legal fees. If investment fees had been deducted, total
yields would have been 7.33%, 8.19% and 6.79% for 1999, 1998 and 1997,
respectively.
Fixed Maturities. The fixed maturities portfolio consists largely of investment
grade corporate debt securities, including significant amounts of U.S.
government and agency obligations. Investment income on fixed maturities
decreased $19.3 million in 1999 from 1998 due to lower yields. The investment
losses in 1999 were due to $226.5 million in writedowns primarily on domestic
and emerging market high-yield securities and net losses of $68.4 million on
sales. At year end 1999, 76.9% of total fixed maturities were publicly traded;
87.4% of below investment grade securities were publicly traded. At December 31,
1999, AXA Financial held collateralized mortgage obligations ("CMOs") with an
amortized cost of $2.45 billion, including $2.04 billion in publicly traded
CMOs, $2.66 billion of mortgage pass-through securities, and $1.47 billion of
public and private asset-backed securities. Fixed maturities by NAIC rating are
shown in the following table.
FIXED MATURITIES
BY CREDIT QUALITY
(IN MILLIONS)
DECEMBER 31, 1999 December 31, 1998
-------------------------------------- -----------------------------------
EQUIVALENT
NAIC RATING AGENCY AMORTIZED ESTIMATED Amortized Estimated
RATING DESIGNATION COST FAIR VALUE Cost Fair Value
- -------------- ---------------------- ------------------ ----------------- ----------------- -----------------
1-2 Aaa/Aa/A and Baa..... $ 20,561.4 $ 19,973.0 $ 19,588.1 $ 20,712.6
3-6 Ba and lower......... 3,157.7 2,849.7 3,217.7 2,907.5
------------------ ----------------- ----------------- -----------------
Total Fixed Maturities.............. $ 23,719.1 $ 22,822.7 $ 22,805.8 $ 23,620.1
================== ================= ================= =================
Management defines problem fixed maturities as securities (i) as to which
principal and/or interest payments are in default or are to be restructured
pursuant to commenced negotiations or (ii) issued by a company that went into
bankruptcy subsequent to the acquisition of such securities. The amortized cost
of problem fixed maturities was $154.0 million (0.6% of the total amortized cost
of this category) at December 31, 1999 compared to $94.9 million (0.4%) at
December 31, 1998 and $31.0 million (0.1%) at December 31, 1997. In 1999,
additions to problem fixed maturities were concentrated in domestic high-yield
and emerging market securities and were related to an increased level of
defaults in these securities during the year.
AXA Financial does not accrue interest income on problem fixed maturities unless
management believes the full collection of principal and interest is probable.
Interest not accrued on problem fixed maturities totaled $42.5 million, $13.1
million and $10.5 million for 1999, 1998 and 1997, respectively. The amortized
cost of wholly or partially non-accruing problem fixed maturities was $116.1
million, $82.1 million and $28.9 million at December 31, 1999, 1998 and 1997,
respectively.
14
Based on its monitoring of fixed maturities, management identifies a class of
potential problem fixed maturities. This class includes those fixed maturities
not currently classified as problems but for which management has serious doubts
as to the issuer's ability to comply with the present debt payment terms and
which may result in the security becoming a problem or being restructured. The
decision whether to classify a performing fixed maturity security as a potential
problem involves significant subjective judgments by management as to likely
future industry conditions and developments with respect to the issuer. The
amortized cost of potential problem fixed maturities was $42.7 million at
December 31, 1999, as compared to $74.9 million and $17.9 million at December
31, 1998 and 1997, respectively.
Mortgages. At December 31, 1999, the mortgage portfolio included commercial
($3.05 billion), agricultural ($1.96 billion) and residential loans ($0.7
million). In 1999, the $39.5 million investment income increase on mortgages
resulted from lower interest rates on a larger asset base.
At December 31, 1999, 1998 and 1997, respectively, management identified
impaired mortgage loans with carrying values of $148.8 million, $158.0 million
and $240.8 million. The provision for losses for these impaired loans was $27.1
million, $39.1 million and $69.2 million at those same respective dates. Income
earned on impaired loans in 1999, 1998 and 1997, respectively, was $15.3
million, $17.0 million and $24.6 million, including cash received of $14.8
million, $15.3 million and $23.0 million.
Management categorizes 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, as problem mortgages. Based on its monthly monitoring of
mortgages, management identifies a class of potential problem mortgages, which
consists of mortgage loans not currently classified as problems but for which
management has serious 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. Potential problem
commercial mortgages decreased during 1999 primarily due to foreclosures.
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED MORTGAGES
AMORTIZED COST
(IN MILLIONS)
DECEMBER 31,
--------------------------------------------------------
1999 1998 1997
----------------- ---------------- -----------------
COMMERCIAL MORTGAGES...................................... $ 3,048.2 $ 2,660.7 $ 2,305.8
Problem commercial mortgages(1)........................... .5 .4 19.3
Potential problem commercial mortgages.................... 120.6 170.7 180.9
Restructured commercial mortgages(2)...................... 130.7 116.4 194.9
AGRICULTURAL MORTGAGES.................................... $ 1,957.4 $ 1,826.9 $ 1,719.2
(1) All problem commercial mortgages were delinquent mortgage loans at
December 31, 1999, 1998 and 1997; there were no mortgage
loans in process of foreclosure at December 31, 1999, 1998 and 1997.
(2) Excludes restructured commercial mortgages of $1.7 million that are shown
as problems at December 31, 1997, and excludes $1.2 million, $24.5 million
and $57.9 million of restructured commercial mortgages that are shown as
potential problems at December 31, 1999, 1998 and 1997, respectively.
For 1999, scheduled amortization payments and prepayments received on commercial
mortgage loans aggregated $158.1 million. For 1999, $133.8 million of commercial
mortgage loan maturity payments were scheduled. Of that total, $50.6 million
(37.8%) were paid as due, $63.8 million (47.7%) were granted short-term
extensions of up to six months, $18.5 million (13.8%) were foreclosed upon and
$0.9 million (0.7%) were extended for a weighted average of 6.8 years at a
weighted average interest rate of 9.0%.
15
During 2000, approximately $394.2 million of commercial mortgage principal
payments are scheduled, including $377.3 million of payments at maturity on
commercial mortgage balloon loans. An additional $649.6 million of commercial
mortgage principal payments, including $616.6 million of payments at maturity on
commercial mortgage balloon loans, are scheduled for 2001 and 2002. Depending on
market conditions and lending practices in future years, some maturing loans may
have to be refinanced, restructured or foreclosed upon. During 1999, 1998 and
1997, the amortized cost of new foreclosed commercial mortgages totaled $45.5
million, $40.1 million and $153.5 million, respectively.
Equity Real Estate. Equity real estate consists primarily of office, retail,
industrial, mixed use and other properties. Office properties constituted the
largest component (57.7% of amortized cost) of this portfolio at December 31,
1999.
Proceeds from the sale of equity real estate totaled $576.6 million, $1.05
billion and $386.0 million in 1999, 1998 and 1997, respectively, with recognized
gains of $50.0 million, $124.1 million and $50.5 million, respectively. The
carrying value of the equity real estate at date of sale reflected total
writedowns and additions to valuation allowances on the properties taken in
periods prior to their sale of $126.8 million, $189.8 million and $61.1 million,
respectively. In connection with the accelerated real estate sales program, at
December 31, 1997, Equitable Life reclassified $1.5 billion depreciated cost of
continuing and discontinued operations' equity real estate from "held for
production of income" to "held for sale". Since held for sale properties are
carried at the lower of depreciated cost or estimated fair value, less
disposition costs, the reclassification generated additions to valuation
allowances of $243.0 million for continuing operations in fourth quarter 1997.
Also, during fourth quarter 1997, the review of the equity real estate portfolio
identified properties held for production of income which were impaired,
resulting in writedowns of $161.1 million for continuing operations. The total
pre-tax impact of these 1997 actions was $345.1 million (net of related DAC
amortization of $59.0 million) for continuing operations. In addition, these
real estate actions contributed to a $129.6 million strengthening of
discontinued operations' allowance for future losses in fourth quarter 1997. At
December 31, 1999, the depreciated cost of continuing operations' held for sale
real estate portfolio totaled $619.6 million, excluding related valuation
allowances of $145.8 million.
Management establishes valuation allowances on individual properties identified
as held for sale. The objective is to fully reserve for anticipated shortfalls
between depreciated cost and sales proceeds. On a quarterly basis, the valuation
allowances on real estate held for sale are adjusted to reflect changes in
market values in relation to depreciated cost. As the equity real estate sales
program continues into 2000, management expects further reductions to this
portfolio will depend on market conditions, the level of mortgage foreclosures
and expenditures required to fund necessary or desired improvements to
properties. It is management's policy not to invest substantial new funds in
equity real estate except to safeguard values in existing investments or to
honor outstanding commitments.
At December 31, 1999, the overall vacancy rate for the General Account's real
estate office properties was 6.8%, with a vacancy rate of 5.5% for properties
acquired as investment real estate and 17.3% for properties acquired through
foreclosure. The national commercial office vacancy rate was 9.6% (as of
September 30, 1999) as measured by CB Commercial. Lease rollover rates for
office properties for 2000, 2001 and 2002 range from 8.1% to 11.5%.
At December 31, 1999, the equity real estate portfolio included $805.5 million
depreciated cost of properties acquired as investment real estate (or 57.7% of
depreciated cost of equity real estate held) and $591.5 million (42.3%)
amortized cost of properties acquired through foreclosure, including
in-substance foreclosure. Cumulative writedowns recognized on foreclosed
properties were $144.2 million through December 31, 1999. As of December 31,
1999, the carrying value of the equity real estate properties was 62.6% of their
original cost. The depreciated cost of foreclosed equity real estate totaled
$754.4 million (38.0%) and $955.1 million (29.5%) at year end 1998 and 1997,
respectively.
16
Other Equity Investments. Other equity investments consist of LBO, mezzanine,
venture capital and other limited partnership interests ($481.0 million or 58.1%
of the amortized cost of this portfolio at December 31, 1999), alternative
limited partnerships ($193.3 million or 23.4%) and common stock and other equity
securities ($153.5 million or 18.5%). Alternative funds utilize trading
strategies that may be leveraged. These funds attempt to protect against market
risk through a variety of methods including short sales, financial futures,
options and other derivative instruments. Other equity investments can produce
significant volatility in investment income since they predominantly are
accounted for in accordance with the equity method which treats increases and
decreases in the estimated fair value of the underlying assets (or allocable
portion thereof, in the case of partnerships), whether realized or unrealized,
as investment income or loss to the General Account. The excess of Separate
Accounts assets over Separate Accounts liabilities at December 31, 1999, 1998
and 1997 were $118.7 million, $89.4 million and $231.0 million, respectively.
This excess represented an investment by the General Account principally in
equity securities. As demonstrated by the market volatility and negative returns
experienced in the latter half of 1998, returns on equity investments are very
volatile and investment results for any period are not representative of any
other period.
Commencing in third quarter 1998, in response to a perceived increase in the
price volatility of publicly-traded equity markets, AXA Financial began to
reduce its holdings of common stock investments. With the persistence of high
price volatility, management believed that publicly-traded common stocks should
be actively managed to control risk and generate investment returns. Effective
January 1, 1999, all investments in publicly-traded common equity securities in
the General Account and Holding Company Group portfolios were designated as
"trading securities" for the purpose of classification under SFAS No. 115 and
all changes in the investments' fair value are being reported through earnings.
DISCONTINUED OPERATIONS
Investment Banking and Brokerage
Earnings from the discontinued Investment Banking and Brokerage operations
included $234.9 million, $40.3 million and $6.7 million of pre-tax gains
resulting from transactions in DLJ's common stock for 1999, 1998 and 1997,
respectively. In 1999, the gains were primarily due to the $212.3 million gain
related to the sale of an approximately 18% interest in DLJdirect's financial
performance through the sale of a new class of DLJ common stock in second
quarter 1999. The 1998 and 1997 gains, as well as the remaining 1999 gains, were
due to the exercise of DLJ stock options and the conversion of RSUs.
Other Discontinued Operations
In 1991, management adopted a plan to discontinue the business of certain
pension operations consisting of Wind-Up Annuities and GIC lines of business and
recorded an allowance for future losses based on management's best judgment at
that time. During 1997, the allowance for future losses was strengthened by
$134.1 million. The principal factor in the 1997 reserve strengthening action
was the change in projected cash flows for equity real estate due to
management's plan to accelerate the sale of equity real estate.
Management'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. Additionally, as part of the annual planning process that takes
place in the fourth quarter of each year, investment and benefit cash flow
projections are prepared. These projections were utilized in the fourth quarter
evaluation of the adequacy of the allowance for future losses. 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 for future losses, 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.
17
Results of Operations. Post-tax earnings of $28.1 million were recognized in
1999 compared to $2.7 million in 1998 and post-tax losses of $(87.2) million in
1997. The allowance for future losses totaled $242.2 million at December 31,
1999.
For 1999, the investment assets of the Wind-Up Annuities and GIC operations
("Discontinued Operations Investment Assets") produced investment results
totaling $82.3 million, a $79.5 million decrease as compared to 1998 results.
Investment income declined $28.8 million to $95.8 million in 1999, as lower
income on other equity investments, equity real estate and mortgages more than
offset higher income on fixed maturities. In 1999, there were investment losses
of $13.5 million as compared to $37.2 million of investment gains in the prior
year. In 1999, $18.3 million in losses on equity real estate were recorded
compared to gains of $41.2 million in 1998. The 1999 real estate losses resulted
as the gains on sales were more than offset by additions to valuation allowances
on held for sale properties. Losses on fixed maturities were $13.5 million
higher in 1999 principally due to the writedown of two issues. These losses more
than offset the $19.1 million of gains on other equity investments as compared
to a $3.3 million loss in 1998. Investment income yields were 8.95% in 1999.
In 1998, investment results from Discontinued Operations Investment Assets
totaled $161.8 million, as compared to $(23.0) million in 1997 principally due
to investment gains of $37.2 million as compared to the $173.7 million of
investment losses in 1997. The 1997 investment losses resulted from the fourth
quarter 1997 increases in valuation allowances of $80.2 million and writedowns
relating to equity real estate of $92.5 million. This increase in investment
gains (losses) was partially offset by a $26.1 million decrease in investment
income in 1998, principally reflecting a decrease of $38.4 million for other
equity investments. There was a $20.4 million loss on mortgage loans in 1997
compared to the 1998 gain of $0.3 million and gains of $41.2 million compared to
$151.1 million of losses on equity real estate. Investment income yields
decreased to 11.69% from 12.37% in 1997, principally due to lower returns on
other equity investments.
Interest credited and policyholders' benefits on Wind-Up Annuities and GIC
contracts were $96.2 million in 1999, as compared to $99.1 million and $108.0
million in 1998 and 1997, respectively. The weighted average crediting rates
were 9.5%, 9.6% and 9.3% in 1999, 1998 and 1997, respectively. No interest
expense on intersegment borrowings by discontinued operations from continuing
operations was reported in 1999, compared with $26.6 million and $53.3 million
in 1998 and 1997, respectively, as such borrowings were repaid in 1998.
At year end 1999, $993.3 million of policyholders' liabilities were outstanding,
substantially all of which relate to Wind-Up Annuities. During 1998, the $660.0
million of intersegment borrowings outstanding at December 31, 1997 were repaid.
See Notes 2 and 8 of Notes to Consolidated Financial Statements contained in
Exhibit 99.1 attached hereto.
Cash Flow Projections. At December 31, 1999, estimates of annual net cash flows
for other discontinued operations in 2000 and 2001 were $218.7 million and $46.2
million, respectively. At December 31, 1998, the projections for 1999 and 2000
were $255.5 million and $16.7 million, respectively. The increase in estimated
2000 net cash flows was principally due to a higher level of assumed cash flows
resulting from equity real estate sales. Other material assumptions used in
determining these projections included the following: future estimated annual
investment income yields on the existing portfolio of 6.9% to 9.1% in the 1999
projection (compared to 7.8% to 9.7% used in the 1998 projection); use of
proceeds from equity real estate sales and other maturing investment assets to
pay benefits on Wind-Up Annuities and maturing liabilities, with reinvestment of
excess funds; and mortality experience for Wind-Up Annuities based on the 1983
Group Annuity Mortality table with projections for mortality improvements.
Discontinued Operations Investment Assets by Asset Category. For information on
the asset categories and valuation allowances and writedowns, see Note 8 of
Notes to Consolidated Financial Statements contained in Exhibit 99.1 attached
hereto.
18
Fixed Maturities - During 1999, discontinued operations began reinvesting excess
cash flow in investment grade fixed maturities. At December 31, 1999, the
amortized cost of the fixed maturities portfolio totaled $90.2 million.
Mortgages - As of December 31, 1999, discontinued operations commercial
mortgages totaled $427.9 million (93.7% of amortized cost of the category) and
agricultural loans totaled $28.6 million (6.3%). Potential problem commercial
mortgages totaled $6.1 million, $20.1 million and $15.4 million in 1999, 1998
and 1997, respectively, while restructured commercial mortgages aggregated $3.4
million, $106.2 million and $198.9 million, respectively.
For 1999, scheduled amortization payments and prepayments on commercial mortgage
loans aggregated $58.4 million. For 1999, $29.2 million of mortgage loan
maturity payments were scheduled, of which $26.4 million (90.4%) were paid as
due. During 2000, approximately $96.7 million of commercial mortgage principal
payments are scheduled, including $91.5 million of payments at maturity on
commercial mortgage balloon loans. An additional $139.2 million of principal
payments, including $130.2 million of payments at maturity on commercial
mortgage balloon loans, are scheduled from 2001 through 2002. Depending on the
condition of the real estate market and lending practices in future years, many
maturing loans may have to be refinanced, restructured or foreclosed upon.
Equity Real Estate - During 1999, 1998 and 1997, discontinued operations
received proceeds from the sale of equity real estate of $52.3 million, $287.9
million and $183.5 million, respectively, and recognized gains of $5.3 million,
$41.3 million and $35.4 million, respectively. These gains reflected total
writedowns and additions to valuation allowances on properties sold of $14.6
million, $71.7 million and $22.9 million, respectively, at the date of sale. The
depreciated cost of discontinued operations' equity real estate properties held
for sale at December 31, 1999 was $152.8 million for which allowances of $54.8
million have been established.
Other Equity Investments - At December 31, 1999, discontinued operations' other
equity investments of $55.6 million consisted primarily of limited partnership
interests managed by third parties that invest in a selection of equity and
fixed income securities ($49.9 million or 89.7% of amortized cost of this
portfolio at that date). Discontinued operations' other equity investments also
included common stocks acquired in connection with limited partnership
investments, as well as other equity investments ($5.7 million or 10.3%).
Returns on other equity investments have been very volatile and investment
results for any period are not representative of any other period. Total
investment results on other equity investments were $23.4 million, $25.5 million
and $65.2 million in 1999, 1998 and 1997, respectively. These investment results
reflected yields of 31.65%, 17.79% and 28.77% for 1999, 1998 and 1997,
respectively.
YEAR 2000
Following the implementation of Equitable Life's and Alliance's Year 2000
compliance initiatives, no Year 2000 problems were encountered that could have a
material adverse effect on the business, financial condition or results of
operations of AXA Financial. Through December 31, 1999, Year 2000 compliance
project costs were $32.1 million for Equitable Life and $43 million for
Alliance.
LIQUIDITY AND CAPITAL RESOURCES
THE HOLDING COMPANY
The Holding Company's Board of Directors declared a two-for-one Stock Split for
shareholders of record at the close of business on September 27, 1999. All share
and per share amounts have been restated to reflect the effect of this Stock
Split. Quarterly dividends following the split were $.025 per share. In
September 1999, the Holding Company received a cash dividend of $150.0 million
from Equitable Life, the first since Equitable Life's demutualization in 1992.
Also in September 1999, the SECT converted 4,020 shares of Series D Convertible
Preferred Stock equivalent to 1.6 million shares of Common Stock. The Holding
Company, as part of its stock repurchase program, purchased 1,356,500 shares for
$37.6 million. Of the remaining shares, AXA, AXA Financial's principal
stockholder, purchased 146,100 shares. The remaining shares were sold to the
public. As a result of these transactions, the Holding Company's equity
increased by $7.4 million, the net proceeds of the sales and repurchases. In
February 2000, the Holding Company's Board of Directors approved an increase in
the number of authorized shares of Common Stock from 500,000,000 to
2,000,000,000. The increase is subject to shareholder approval, which is
expected at the May 2000 annual meeting of shareholders.
19
Under the Board authorized stock repurchase program, the Holding Company
repurchased approximately 8.0 million shares of Common Stock at a cost of
approximately $243.7 million during 1999, including the aforementioned shares
from the SECT. Of the 2.0 million shares of Common Stock originally subject to
put options sold in 1998 in connection with the repurchase program, the Holding
Company purchased 800,000 shares in 1998 and none during 1999; 1,200,000 of such
options expired unexercised during 1999. During the first nine months of 2000,
the Holding Company repurchased approximately 3.6 million shares of Common Stock
at a cost of approximately $137.7 million, including the August SECT share
purchase mentioned below. In fourth quarter 1999, the Holding Company privately
placed put options entitling the holder to sell up to 200,000 shares of Common
Stock at a specified price on a specified date in third quarter 2000. These
options expired unexercised in September 2000. No put options were outstanding
at September 30, 2000.
In April 1998, the Holding Company completed an offering
under its existing shelf registration of $250.0 million 6 1/2% Senior Notes due
2008 and $350.0 million 7% Senior Debentures due 2028 (together the "1998 Senior
Debt"), resulting in net proceeds of $591.1 million to be used for general
corporate purposes. Pre-tax debt service on the 1998 Senior Debt is
approximately $40.8 million per annum.
For further information, see Notes 9 and 11 of Notes to Consolidated Financial
Statements contained in Exhibit 99.1 attached hereto.
SUBSEQUENT EVENTS - On June 21, 2000, the Holding Company borrowed $1.45 billion
from Bank of America N.A. pursuant to a promissory note with an interest rate of
7.06% and maturing on September 22, 2000. The proceeds from the borrowing and
available cash were used by the Holding Company to purchase 32.6 million new
Alliance Units. 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 Bernstein (see "Combined Operating Results by Segment -
Investment Management"). In July 2000, the Holding Company issued $480.0 million
7.75% Senior Notes due 2010 under its March 1998 shelf registration.
Substantially all of the net proceeds of $472.7 million was used to repay a
portion of the $1.45 billion borrowing incurred in connection with the Bernstein
acquisition. In September 2000, the Holding Company negotiated a $1.00 billion,
364-day revolving credit facility to replace the Bank of America N.A. promissory
note. At September 30, 2000, $1.00 billion was outstanding under the facility
with an interest rate of 6.80%.
Liquidity Requirements. The Holding Company's cash requirements include debt
service, operating expenses, taxes, dividends on its Common Stock and, effective
December 31, 1999, certain employee benefits described below. Pre-tax debt
service totaled $86.5 million in 1999, while general and administrative expenses
were $20.6 million. Since 1992, the Holding Company's Board of Directors has
declared quarterly cash dividends of $.025 per share on the outstanding shares
of its Common Stock (adjusted for the Stock Split). During 1999, aggregate cash
dividends paid on the Holding Company's Common Stock were $43.7 million.
Effective December 31, 1999, the Holding Company assumed primary liability from
Equitable Life for all current and future obligations of its Excess Retirement
Plan, Supplemental Executive Retirement Plan and certain other non-qualified
benefit plans that provide participants with medical, life insurance, and
deferred compensation benefits. Equitable Life remains secondarily liable. In
1999, Equitable Life paid $52.8 million in benefits on those plans. The
estimated benefit payments for 2000 approximate $52.1 million, a portion of
which will be reimbursed by certain subsidiaries of the Holding Company other
than Equitable Life.
Liquidity Sources. At December 31, 1999, the Holding Company held cash and
short-term investments and U.S. Treasury securities of approximately $149.4
million and investment grade publicly traded bonds totaling $207.7 million.
Other primary sources of liquidity for the Holding Company include (i) amounts
the Holding Company may receive from its subsidiaries in connection with SECT
distributions, (ii) dividends from Equitable Life and (iii) dividends,
distributions or sales proceeds from less liquid investment assets. The Holding
Company held common stock and less liquid investment assets having an aggregate
carrying value of approximately $77.3 million at December 31, 1999.
The assets of the SECT (47,940 and 43,920 shares of the Series D Preferred
Stock at December 31, 1999 and September 30, 2000, respectively) will be
distributed over time (subject to periodic minimum and maximum requirements) to
fund various employee compensation and benefit programs of certain of AXA
Financial's subsidiaries. These subsidiaries will pay the Holding Company an
amount equal to any such distributions. Management expects amounts received by
the Holding Company from its subsidiaries in connection with distributions by
the SECT will be an additional source of funds. The aggregate amount available
to the Holding Company from this source will fluctuate over time with changes in
the market value of the Holding Company's Common Stock. In August 2000, the SECT
converted 4,020 shares of Series D Convertible Preferred Stock equivalent to
approximately 1.6 million shares of Common Stock. The Holding Company, as part
of its stock repurchase program, purchased all of these shares for $80.0
million.
20
For the first time since the 1992 demutualization, the Holding Company received
$150.0 million in dividends from Equitable Life. Through September 30, 2000,
Equitable Life paid an additional $250.0 million in shareholder dividends. Under
the New York Insurance Law, Equitable Life is permitted to pay shareholder
dividends only if it files notice of its intention to declare such a dividend
and the amount thereof with the Superintendent and the Superintendent, who by
statute has broad discretion in such matters, does not disapprove the
distribution. See Note 20 to Notes to Consolidated Financial Statements
contained in Exhibit 99.1 attached hereto.
Management believes the primary sources of liquidity described above are
sufficient to meet the Holding Company's cash requirements for several years.
EQUITABLE LIFE
The principal sources of Equitable Life cash flows are premiums, deposits and
charges on policies and contracts, investment income, repayments of principal
and proceeds from maturities and sales of General Account Investment Assets and
dividends and distributions from subsidiaries.
The Equitable Life liquidity requirements principally relate to the liabilities
associated with its various life insurance, annuity and group pension products
in its continuing operations; the liabilities of discontinued operations;
shareholders dividends; and operating expenses, including debt service.
Equitable Life liabilities include 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. Management may from time to time
explore selective acquisition opportunities in core insurance and investment
management businesses.
Equitable Life's liquidity requirements are regularly monitored to match cash
inflows with cash requirements. Daily cash needs are forecasted and projected
sources and uses of funds, as well as the asset, liability, investment and cash
flow assumptions underlying these projections, are reviewed periodically.
Adjustments are periodically made to the Equitable Life's investment policies
with respect to, among other things, the maturity and risk characteristics of
General Account Investment Assets to reflect changes in the business' cash needs
and also to reflect the changing competitive and economic environment.
Sources of Liquidity. The primary source of short-term liquidity to support
continuing and discontinued insurance operations is a pool of highly liquid,
high quality short-term instruments structured to provide liquidity in excess of
the expected cash requirements. At December 31, 1999, this asset pool included
an aggregate of $1.39 billion in highly liquid short-term investments, as
compared to $1.59 billion and $816.4 million at December 31, 1998 and 1997,
respectively. 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 Equitable Life's liquidity needs.
Other liquidity sources include dividends and distributions from Alliance. In
1999, Equitable Life received cash distributions from Alliance of $203.5 million
as compared to $157.0 million in 1998 and $125.7 million in 1997.
Management believes there is sufficient liquidity in the form of short-term
assets and its bond portfolio together with cash flows from operations and
scheduled maturities of fixed maturities to satisfy Equitable Life's liquidity
needs. In addition, in July 1999, the Board of Directors authorized an increase
in the limit on Equitable Life's commercial paper program to $1.00 billion from
$500.0 million. This program is available for general corporate purposes to
support Equitable Life's liquidity needs. In 1999, the Board also authorized
increasing Equitable Life's existing $350.0 million bank credit facility to
$700.0 million. In June 2000, Equitable Life renewed its $350.0 million bank
5-year credit facility and its $350.0 million 364-day credit facility. These
credit facilities support the commercial paper program. At September 30, 2000
and December 31, 1999, respectively, $523.7 million and $166.9 million were
outstanding under the commercial paper program; there were no amounts
outstanding under the back-up credit facilities. For more information on
guarantees, commitments and contingencies, see Notes 13, 16, 17, 18 and 19 of
Notes to Consolidated Financial Statements.
Factors Affecting Liquidity. Equitable Life's liquidity needs are affected by
fluctuations in the level of surrenders and withdrawals previously discussed in
"Combined Operating Results by Segment - Financial Advisory/Insurance -
Surrenders and Withdrawals". Management believes the Insurance Group has
adequate internal sources of funds for its presently anticipated needs.
21
Statutory Capital. Life insurers are subject to certain risk-based capital
("RBC") guidelines which provide a method to measure the adjusted capital
(statutory capital and surplus plus the Asset Valuation Reserve ("AVR") and
other adjustments) that a life insurance company should have for regulatory
purposes, taking into account the risk characteristics of the company's
investments and products. A life insurance company's RBC ratio depends upon many
factors, including its earnings, the mix of assets in its investment portfolio,
the nature of the products it sells and its rate of sales growth, as well as
changes in the RBC formulas required by regulators.
The RBC guidelines are intended to be a regulatory tool only. Equitable Life's
RBC ratio has improved in each of the last six years, and management believes
that Equitable Life's statutory capital, as measured by its year end 1999 RBC,
is adequate to support its current business needs and financial ratings.
On March 16, 1998, members of the NAIC approved its Codification of Statutory
Accounting Principles ("Codification") project. Codification provides regulators
and insurers with uniform statutory guidance, addressing areas where statutory
accounting previously was silent and changing certain existing statutory
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. In February 2000, the
Superintendent indicated the New York Insurance Department intends to proceed
with implementation of Codification rules, subject to any provisions in New York
statutes which conflict with particular points in the Codification rules. It is
not possible to predict in what form, or when Codification will be adopted in
New York, and accordingly it is not possible to predict the effect of
Codification on Equitable Life.
At December 31, 1999, $29.1 million (or 0.7%) of the Insurance Group's aggregate
statutory capital and surplus (representing 0.5% of statutory capital and
surplus and AVR) resulted from surplus relief reinsurance. The level of surplus
relief reinsurance was reduced by approximately $81.9 million in 1999.
ALLIANCE
Alliance's principal sources of liquidity have been cash flows from operations
and the issuance, both publicly and privately, of debt and Units. Alliance
requires financial resources to fund commissions paid on certain back-end load
mutual fund sales, to fund distributions to Unitholders, to fund capital
expenditures and for general working capital purposes.
On October 29, 1999, Alliance Holding transferred its business to a newly-formed
private limited partnership following the reorganization approved by Unitholders
at their special meeting on September 22, 1999 and the expiration of the related
exchange offer. Separately, Equitable Life and its subsidiaries exchanged
substantially all of their public Alliance Holding's Units for limited
partnership interests and a general partnership interest in the new private
limited partnership. The new partnership is conducting Alliance's business
without change in management or employee responsibilities. Alliance Holding's
principal asset is its interest in the new partnership, and it is functioning as
a holding company through which its Unitholders own an indirect interest in
Alliance, the new partnership. As a result of the reorganization and exchange,
Equitable Life and its subsidiaries' share of the private partnership's income
will not be subject to the 3.5% Federal tax on publicly traded partnerships. In
1999 and 1998, the impact of this Federal tax on Equitable Life and its
subsidiaries was approximately $19 million and $18 million, respectively.
In July 1999, Alliance entered into a new $200.0 million three-year revolving
credit facility, increasing its borrowing capacity under all credit facilities
to $725.0 million. Like the existing credit facility, the new credit facility
will be used to fund commission payments to financial intermediaries for certain
mutual fund sales and for general working capital purposes. At December 31,
1999, Alliance had $384.7 million outstanding under its $425.0 million
commercial paper program. Proceeds are being used to fund commission payments
and for capital expenditures. There were no amounts outstanding under Alliance's
revolving credit facilities. In December 1999, Alliance established a $100.0
million ECN program to supplement its commercial paper program; there were no
ECNs outstanding at year end 1999.
22
CONSOLIDATED CASH FLOWS
Net cash provided by operating activities was $169.7 million for 1999 as
compared to $458.6 million in 1998 and $308.3 million in 1997.
Net cash used by investing activities totaled $1.24 billion for 1999 as compared
to net cash provided by investing activities of $1.03 billion in 1998 and net
cash used by investing activities of $379.3 million in 1997. Investment
purchases in 1999 exceeded sales, maturities and repayments by $948.7 million.
In 1998, investment sales, maturities and repayments exceeded purchases by
$627.8 million. Other discontinued operations repaid $660.0 million of loans
from continuing operations during 1998. In 1997, decreases in loans to other
discontinued operations totaled $420.1 million. Investment sales, maturities and
repayments exceeded purchases by $32.6 million in 1997.
Net cash provided by financing activities was $582.0 million in 1999 as compared
to net cash used by financing activities of $527.0 million for 1998 and $179.4
million in 1997. Deposits to policyholders' account balances exceeded
withdrawals in 1999 by $600.4 million. During 1998, withdrawals from
policyholders' account balances exceeded deposits by $216.5 million as compared
with $605.1 million in 1997. In 1999 and 1998, respectively, treasury stock
purchased totaled $243.7 million and $247.1 million. There were net additions
to long-term debt of $445.6 million in 1998 compared to net decreases of $70.9
million and $31.9 million in 1999 and 1997, respectively.
The operating, investing and financing activities described above resulted in a
decrease in cash and cash equivalents of $490.2 million in 1999 as compared to
an increase of $961.9 million in 1998 and a decrease of $250.4 million in 1997.
FORWARD-LOOKING STATEMENTS
AXA Financial'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 AXA Financial's
operations, economic performance and financial condition. Forward-looking
statements include, among other things, discussions concerning AXA Financial'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. AXA Financial 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 AXA Financial'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. AXA Financial'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" in the MD&A and in Note 15 of Notes to Consolidated Financial
Statements contained in Exhibit 99.3 and 99.1, respectively, attached hereto.
Following the sale of its majority shareholdings in DLJ and the sale of $1.18
billion of Credit Suisse Group common stock ("CSG Shares"), AXA Financial holds
CSG Shares with a market value approximating $3.69 billion as of November 3,
2000. Any change in the market value of the CSG Shares will affect earnings.
23
STRATEGIC INITIATIVES. AXA Financial continues to implement certain strategic
initiatives identified after a comprehensive review of its organization and
strategy conducted in late 1997. These initiatives are designed to make AXA
Financial a premier provider of financial planning, insurance and investment
management products and services. The "branding" initiative, which consists in
part of a reorganization of certain wholly owned subsidiaries and changes to the
names of such subsidiaries and the Holding Company, is designed to separate
product manufacturing under the "Equitable" name from product distribution and
the provision of financial planning services under the "AXA" name.
Implementation of these strategic initiatives could affect certain historic
trends in the Financial Advisory/Insurance segment. Implementation is subject to
various uncertainties, including those relating to timing and expense, and the
results of the implementation of these initiatives could be other than what
management intends. AXA Financial may, from time to time, explore selective
acquisition opportunities in its core insurance and investment management
businesses.
FINANCIAL ADVISORY/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 strategic
initiatives referred to above, the intensity of competition from other insurance
companies, banks and other financial institutions, 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 as well
as changes resulting from the Gramm-Leach-Bliley Act. The Administration's
fiscal year 2001 revenue proposals contain provisions which, if enacted, could
have a material adverse impact on sales of certain insurance products and would
adversely affect the taxation of insurance companies. See "Business - Segment
Information - Financial Advisory/Insurance" and "Business - Regulation - Federal
Initiatives" in the 1999 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, secular trends and AXA Financial'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. 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. See "Investment Results of General Account
Investment Assets". The ability of AXA Financial 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. For
further information, including information concerning the writedown in the
fourth quarter of 1997 in connection with management's decision to accelerate
the sale of certain real estate assets, see "Investment Results of General
Account Investment Assets - Equity Real Estate". AXA Financial's DI and group
pension businesses produced pre-tax losses in 1995 and 1996. In late 1996, loss
recognition studies for the DI and group pension businesses were completed. As a
result, $145.0 million of unamortized DAC on DI policies at December 31, 1996
was written off; reserves for directly written DI policies and DI reinsurance
assumed were strengthened by $175.0 million; and a Pension Par premium
deficiency reserve was established which resulted in a $73.0 million pre-tax
charge to results of continuing operations at December 31, 1996. Based on the
experience that emerged on these two books of business since 1996, management
continues to believe the DI and Pension Par reserves have been calculated on a
reasonable basis and are adequate. However, there can be no assurance that they
will be sufficient to provide for all future liabilities. Equitable Life no
longer underwrites new DI policies. Equitable Life is reviewing the arrangements
pursuant to which a third party manages claims incurred under DI policies
previously issued by Equitable Life and is exploring its ability to dispose of
the DI business through reinsurance.
INVESTMENT MANAGEMENT. 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 Management".
24
OTHER DISCONTINUED OPERATIONS. The determination of the allowance for future
losses for the discontinued Wind-Up Annuities and GIC lines of business
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. See "Discontinued Operations" for further
information including a discussion of significant reserve strengthening in 1997
and the assumptions used in making cash flow projections.
TECHNOLOGY AND INFORMATION SYSTEMS. AXA Financial'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 AXA Financial'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. AXA
Financial's insurance subsidiaries, 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 AXA Financial 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" in the 1999 Form 10-K and "Legal Proceedings" in the
Form 10-Q for the quarter ended September 30, 2000.
FUTURE ACCOUNTING PRONOUNCEMENTS. In the future, new accounting pronouncements
may have material effects on AXA Financial's consolidated statements of earnings
and shareholders' equity. See Note 2 of Notes to Consolidated Financial
Statements contained in Exhibit 99.1 attached hereto for pronouncements issued
but not implemented. In addition, members of the NAIC approved its Codification
project providing regulators and insurers with uniform statutory guidance,
addressing areas where statutory accounting previously was silent and changing
certain existing statutory positions. Equitable Life will be subject to
Codification to the extent and in the form adopted in New York State, which
would require action by both the New York legislature and the New York Insurance
Department. In February 2000, the Superintendent indicated the New York
Insurance Department intends to proceed with implementation of Codification
rules, subject to any provisions in New York statutes which conflict with
particular points in the Codification rules. It is not possible to predict in
what form, or when Codification will be adopted in New York, and accordingly it
is not possible to predict the effect of Codification on Equitable Life.
REGULATION. The businesses conducted by AXA Financial's subsidiaries 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.
25
PART II, ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
AXA Financial's businesses are subject to market risks arising from its
insurance asset/liability management, asset management and trading activities.
Such risks are evaluated and managed by each business on a decentralized basis.
Primary market risk exposures result from interest rate fluctuations, equity
price movements and changes in credit quality.
OTHER-THAN-TRADING ACTIVITIES
Investment Management. Alliance's investments are divided into two portfolios:
available for sale investments and other investments. Alliance's available for
sale portfolio primarily includes equity and fixed income mutual funds and money
market investments. The carrying value of money market investments approximates
fair value. Although these assets are purchased for long-term investment, the
portfolio strategy considers them available for sale in response to changes in
market interest rates, equity prices and other relevant factors. Other
investments include Alliance's hedge fund investments. At December 31, 1999,
Alliance's interest rate, equity price and credit quality risks were not
material to AXA Financial. For further information, see Alliance Holding's and
Alliance's Annual Reports on Form 10-K for the year ended December 31, 1999.
Insurance Group. Insurance Group results significantly depend on profit margins
between investment results from 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 can 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. 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.
Insurance Group assets with interest rate risk include fixed maturities and
mortgage loans which make up 81.6% of the carrying value of General Account
Investment Assets. 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 basis point increase in interest rates at December 31, 1999 would
have on the fair value of fixed maturities and mortgages:
26
INTEREST RATE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 1999 December 31, 1998
---------------------------------------- ------------------------------------
FAIR +100 BASIS Fair +100 Basis
VALUE POINT CHANGE Value Point Change
-------------------- ------------------- ---------------- -------------------
Continuing Operations:
Fixed maturities:
Fixed rate........................ $ 21,498.2 $ 20,341.1 $ 22,332.6 $ 21,167.6
Floating rate..................... 1,241.2 1,206.1 1,208.5 1,208.5
Mortgage loans...................... 4,889.6 4,700.7 4,665.3 4,482.8
Other Discontinued Operations:
Fixed maturities:
Fixed rate........................ $ 85.4 $ 81.4 $ 20.2 $ 19.5
Floating rate..................... .1 .1 4.7 4.7
Mortgage loans...................... 467.0 454.2 599.9 580.8
Holding Company Group:
Fixed maturities:
Fixed rate........................ $ 367.8 $ 355.4 $ 517.2 $ 501.5
Floating rate..................... 7.8 7.7 83.9 83.9
A 100 basis point fluctuation 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.
The investment portfolios also have direct holdings of public and private equity
securities. In addition, the General Account is exposed to equity price risk
from the excess of Separate Accounts assets over Separate Accounts liabilities.
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, 1999 and 1998:
EQUITY PRICE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 1999 December 31, 1998
----------------------------------------- ------------------------------------
FAIR -10% EQUITY Fair -10% Equity
VALUE PRICE CHANGE Value Price Change
------------------ --------------------- -------------- ---------------------
Insurance Group:
Continuing operations............... $ 33.2 $ 29.9 $ 164.4 $ 148.0
Other discontinued operations....... 5.7 5.1 19.3 17.4
Excess of Separate Accounts assets
over Separate Accounts liabilities 121.4 109.3 91.0 81.9
Holding Company Group................. $ 2.3 $ 2.1 $ 47.7 $ 42.9
27
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.
At years end 1999 and 1998, the aggregate carrying value of policyholders'
liabilities were $36,134.0 million and $35,618.7 million, respectively,
including $12,796.4 million and $12,954.0 million, respectively, of the General
Account's investment contracts. The aggregate fair value of those investment
contracts at years end 1999 and 1998 were $12,850.5 million and $13,455.0
million, respectively. The impact of a relative 1% decrease in interest rates
would be an increase in the fair value of those investment contracts to
$12,977.7 million and $13,644.0 million, respectively. Those investment
contracts represent only a portion of total policyholders' liabilities. As such,
meaningful assessment of net market risk exposure cannot be made by comparing
the results of the invested assets sensitivity analyses presented herein to the
potential exposure from the policyholders' liabilities quantified in this
paragraph.
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. On the basis of these more comprehensive analyses, management
believes there is no material solvency risk to Equitable Life with respect to
interest rate movements up or down of 100 basis points from year end 1999 levels
or with respect to a 10% drop in equity prices from year end 1999 levels.
As more fully described in Note 15 of Notes to Consolidated Financial Statements
contained in Exhibit 99.1 attached hereto various derivative financial
instruments are used to manage exposure to fluctuations in interest rates,
including interest rate swaps to convert floating rate assets to fixed rate
assets, interest rate caps and floors to hedge crediting rates on
interest-sensitive products, and interest rate futures to hedge a decline in
interest rates between receipt of funds and purchase of appropriate assets. 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 which take into consideration current market
values and estimates of potential future movements in market values given
potential fluctuations in market interest rates.
While notional amount is the most commonly used measure of volume in the
derivatives market, it is not used by the Insurance Group as a measure of risk
as the notional amount greatly exceeds the possible credit and market loss that
could arise from such transactions. 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 Insurance Group as the
counterparty would owe money to the Insurance Group if the contract were closed.
Alternatively, a negative value indicates the Insurance Group would owe money to
the counterparty if the contract were closed. If there is more than one
derivatives 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.
At years end 1999 and 1998, the net market value exposure of the Insurance
Group's derivatives was $53.7 million and $71.7 million, respectively. The table
that follows shows the interest rate sensitivity of those derivatives, measured
in terms of fair value. These exposures will change as a result of ongoing
portfolio and risk management activities.
28
INSURANCE GROUP - DERIVATIVE FINANCIAL INSTRUMENTS
(IN MILLIONS, EXCEPT FOR WEIGHTED AVERAGE TERM)
Weighted
Average
Notional Term -100 Basis Fair +100 Basis
Amount (Years) Point Change Value Point Change
--------------- -------------- ----------------- ---------------- -------------------
DECEMBER 31, 1999
Swaps:
Floating to fixed rate. $ 92.3 0.35 $ 41.4 $ 9.8 $ (19.5)
Fixed to floating rate. 705.0 5.58 (2.1) (1.8) (1.9)
Options:
Caps................... 7,775.0 3.25 16.0 45.5 103.1
Floors................. 2,000.0 2.28 .8 .2 -
--------------- -------------- ----------------- ------------------- -------------------
Total.................... $ 10,572.3 3.20 $ 56.1 $ 53.7 $ 81.7
=============== ============== ================= =================== ==================
December 31, 1998
Swaps:
Floating to fixed rate. $ 623.2 5.67 $ 88.0 $ 57.5 $ 28.8
Fixed to floating rate. 257.7 0.93 (9.8) (8.0) (6.2)
Options:
Caps................... 8,650.0 3.89 3.4 14.2 41.4
Floors................. 2,000.0 3.28 22.8 8.0 3.0
--------------- ----------------- ------------------- -------------------
Total.................... $ 11,530.9 3.81 $ 104.4 $ 71.7 $ 67.0
=============== ============== ================= =================== ===================
At year end 1999 and 1998, the aggregate fair values of long-term debt issued by
Equitable Life and the Holding Company Group were $1.98 billion and $2.40
billion, respectively. The table below shows the potential fair value exposure
to an immediate 100 basis point decrease in interest rates from those prevailing
at years end 1999 and 1998.
INTEREST RATE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 1999 December 31, 1998
--------------------------------------- -------------------------------------
FAIR -100 BASIS Fair -100 Basis
VALUE POINT CHANGE Value Point Change
------------------ ------------------- ------------------ ------------------
Continuing Operations:
Fixed rate........................ $ 583.5 $ 621.4 $ 779.7 $ 828.4
Floating rate..................... 251.4 251.3 251.3 251.3
Other Discontinued Operations:
Fixed rate........................ $ - $ - $ 45.1 $ 45.1
Floating rate..................... 101.9 101.9 102.1 102.1
Holding Company Group............... $ 1,043.7 $ 1,116.7 $ 1,218.1 $ 1,311.3
29