UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2002 Commission File No. 1-11166
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AXA FINANCIAL, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3623351
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
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None
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(Former name, former address, and former fiscal year if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of November 12, 2002.
At November 12, 2002, 436,192,949 shares of the registrant's Common Stock were
outstanding.
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction H (1) (a) and
(b) of Form 10-Q and is therefore filing this form with the Reduced Disclosure
Format.
Page 1 of 32
AXA FINANCIAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
Page #
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PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
o Consolidated Balance Sheets, September 30, 2002 and
December 31, 2001............................................. 3
o Consolidated Statements of Earnings, Three Months and
Nine Months Ended September 30, 2002 and 2001................. 4
o Consolidated Statements of Shareholders' Equity,
Nine Months Ended September 30, 2002 and 2001................. 5
o Consolidated Statements of Cash Flows, Nine Months Ended
September 30, 2002 and 2001................................... 6
o Notes to Consolidated Financial Statements.................... 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ("Management Narrative").............. 18
Item 3: Quantitative and Qualitative Disclosures About Market Risk*..... 25
Item 4 Controls and Procedures......................................... 25
PART II OTHER INFORMATION
Item 1: Legal Proceedings............................................... 26
Item 2: Changes in Securities........................................... 29
Item 3: Defaults Upon Senior Securities................................. 29
Item 4: Submission of Matters to a Vote of Security Holders............. 29
Item 5: Other Information............................................... 29
Item 6: Exhibits and Reports on Form 8-K................................ 29
SIGNATURES................................................................. 30
CERTIFICATIONS............................................................. 31
*Omitted pursuant to General Instruction H to Form 10-Q.
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PART I FINANCIAL INFORMATION
ITEM 1: UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
AXA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, December 31,
2002 2001
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(IN MILLIONS)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 25,993.8 $ 23,355.0
Mortgage loans on real estate............................................. 3,762.3 4,333.3
Equity real estate........................................................ 793.8 875.7
Policy loans.............................................................. 4,120.3 4,100.7
Other equity investments.................................................. 795.7 768.4
Other invested assets..................................................... 978.8 687.2
----------------- -----------------
Total investments..................................................... 36,444.7 34,120.3
Cash and cash equivalents................................................... 1,467.6 884.4
Cash and securities segregated, at estimated fair value..................... 1,147.9 1,415.2
Broker-dealer related receivables........................................... 1,419.4 1,950.9
Deferred policy acquisition costs........................................... 5,727.2 5,513.7
Goodwill and other intangible assets, net................................... 3,952.4 3,928.4
Amounts due from reinsurers................................................. 2,313.3 2,237.0
Loans to affiliates......................................................... 400.0 400.0
Other assets................................................................ 3,852.3 3,515.2
Separate Accounts assets.................................................... 35,975.3 46,947.3
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TOTAL ASSETS................................................................ $ 92,700.1 $ 100,912.4
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LIABILITIES
Policyholders' account balances............................................. $ 22,711.5 $ 20,939.1
Future policy benefits and other policyholders liabilities.................. 13,687.7 13,542.7
Broker-dealer related payables.............................................. 1,223.8 1,265.5
Customers related payables.................................................. 1,495.0 1,814.5
Short-term and long-term debt............................................... 3,033.2 2,982.1
Federal income taxes payable................................................ 1,512.9 1,286.5
Other liabilities........................................................... 3,564.2 3,475.2
Separate Accounts liabilities............................................... 35,862.5 46,875.6
Minority interest in equity of consolidated subsidiaries.................... 1,250.7 1,255.2
Minority interest subject to redemption rights.............................. 639.4 651.4
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Total liabilities..................................................... 84,980.9 94,087.8
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Commitments and contingencies (Note 10)
SHAREHOLDERS' EQUITY
Common stock, at par value.................................................. 3.9 3.9
Capital in excess of par value.............................................. 1,023.5 1,016.7
Retained earnings........................................................... 6,171.7 5,601.9
Accumulated other comprehensive income...................................... 520.1 202.1
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Total shareholders' equity............................................ 7,719.2 6,824.6
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................. $ 92,700.1 $ 100,912.4
================= =================
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 323.0 $ 325.9 $ 994.2 $ 1,012.0
Premiums............................................. 227.8 244.8 699.7 758.5
Net investment income................................ 600.9 592.9 1,785.8 1,814.4
Investment losses, net............................... (75.3) (118.2) (88.2) (147.4)
Commissions, fees and other income................... 827.9 790.2 2,572.5 2,418.5
--------------- ---------------- --------------- ---------------
Total revenues................................. 1,904.3 1,835.6 5,964.0 5,856.0
--------------- ---------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits.............................. 461.2 459.8 1,390.0 1,392.1
Interest credited to policyholders' account
balances........................................... 244.6 246.2 739.7 744.1
Compensation and benefits............................ 383.5 447.8 1,166.7 1,259.5
Commissions.......................................... 131.3 108.2 403.7 352.9
Distribution plan payments........................... 106.3 120.9 344.0 369.1
Amortization of deferred sales commissions........... 56.2 57.4 174.0 173.6
Interest expense..................................... 55.6 53.6 164.0 172.9
Amortization of deferred policy acquisition costs.... 72.3 75.3 213.6 228.0
Capitalization of deferred policy acquisition costs.. (184.7) (169.2) (556.4) (548.8)
Rent expense......................................... 50.1 44.8 146.9 135.3
Amortization of other intangible assets.............. 6.0 51.5 18.1 154.2
Other operating costs and expenses................... 189.3 187.4 655.4 707.3
--------------- ---------------- --------------- ---------------
Total benefits and other deductions............ 1,571.7 1,683.7 4,859.7 5,140.2
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
Federal income tax benefit (expense) and
minority interest.................................. 332.6 151.9 1,104.3 715.8
Federal income tax benefit (expense)................. 71.3 (28.8) (133.1) (177.3)
Minority interest in net income of
consolidated subsidiaries.......................... (62.5) (71.2) (220.4) (218.6)
--------------- ---------------- --------------- ---------------
Earnings from continuing operations.................. 341.4 51.9 750.8 319.9
Earnings (loss) from discontinued operations, net
of Federal income taxes.......................... 19.4 (.5) 19.0 7.7
Cumulative effect of accounting change, net of
Federal income taxes.............................. - - - (3.5)
--------------- ---------------- --------------- ---------------
NET EARNINGS......................................... $ 360.8 $ 51.4 $ 769.8 $ 324.1
=============== ================ =============== ===============
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
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(IN MILLIONS)
SHAREHOLDERS' EQUITY
Series D convertible preferred stock, beginning of year .................... $ - $ 219.6
Exchange of Series D convertible preferred stock ........................... (54.6)
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Series D convertible preferred stock, end of period......................... - 165.0
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Stock employee compensation trust, beginning of year ....................... - (219.6)
Exchange of Series D convertible preferred stock in the employee
compensation trust..................................................... - 54.6
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Stock employee compensation trust, end of period............................ - (165.0)
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Common stock, at par value, beginning of year............................... 3.9 4.6
Shares cancelled in connection with merger of AXA Merger Corp. ............. - (.5)
Treasury stock retired, at par value........................................ - (.2)
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Common stock, at par value, end of period................................... 3.9 3.9
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Capital in excess of par value, beginning of year........................... 1,016.7 4,753.8
Decrease related to the merger of AXA Merger Corp. ......................... - (2,999.5)
Decrease from retirement of treasury stock.................................. - (629.4)
Other changes in additional capital in excess of par value.................. 6.8 (115.1)
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Capital in excess of par value, end of period............................... 1,023.5 1,009.8
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Treasury stock, beginning of year........................................... - (629.6)
Retirement of treasury stock................................................ - 629.6
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Treasury stock, end of period............................................... - -
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Retained earnings, beginning of year........................................ 5,601.9 5,380.6
Net earnings................................................................ 769.8 324.1
Dividends on common stock................................................... (200.0) -
Decrease in retained earnings in connection with merger of
AXA Merger Corp. ........................................................ - (3.5)
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Retained earnings, end of period............................................ 6,171.7 5,701.2
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Accumulated other comprehensive income (loss), beginning of year............ 202.1 (2.3)
Other comprehensive income.................................................. 318.0 418.3
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Accumulated other comprehensive income, end of period....................... 520.1 416.0
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TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD................................... $ 7,719.2 $ 7,130.9
================= =================
See Notes to Consolidated Financial Statements.
-5-
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
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(IN MILLIONS)
Net earnings................................................................ $ 769.8 $ 324.1
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Interest credited to policyholders' account balances.................... 739.7 744.1
Universal life and investment-type product policy fee income............ (994.2) (1,012.0)
Net change in broker-dealer customer related receivables/payables...... (256.1) (36.9)
Investment losses, net.................................................. 88.2 147.4
Decrease in segregated cash and securities, net......................... 267.2 212.9
Change in deferred policy acquisition costs............................. (342.2) (319.2)
Change in future policy benefits........................................ (8.6) (34.0)
Change in property and equipment........................................ (89.1) (202.0)
Change in Federal income tax payable.................................... 40.7 (1,401.6)
Change in fair value of guaranteed minimum income benefit
reinsurance contract.................................................. (247.0) -
Amortization of goodwill and other intangible assets ................... 18.1 154.2
Other, net.............................................................. 377.7 347.4
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Net cash provided (used) by operating activities............................ 364.2 (1,075.6)
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Cash flows from investing activities:
Maturities and repayments................................................. 2,057.7 1,757.8
Sales.................................................................... 6,510.3 6,072.5
Purchases................................................................. (9,738.4) (7,827.9)
Increase in short-term investments........................................ (393.6) (350.4)
Other, net................................................................ 210.0 (75.9)
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Net cash used by investing activities....................................... (1,354.0) (423.9)
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Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 3,308.2 2,118.2
Withdrawals and transfers to Separate Accounts.......................... (1,375.1) (1,809.3)
Net increase (decrease) in short-term financings.......................... 70.9 (299.5)
Additions to long-term debt............................................... - 398.4
Dividends paid on common stock ........................................... (200.0) -
Other, net................................................................ (231.0) (288.5)
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Net cash provided by financing activities................................... 1,573.0 119.3
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Change in cash and cash equivalents......................................... 583.2 (1,380.2)
Cash and cash equivalents, beginning of year................................ 884.4 2,479.5
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CASH AND CASH EQUIVALENTS, END OF PERIOD.................................... $ 1,467.6 $ 1,099.3
================= =================
Supplemental cash flow information
INTEREST PAID............................................................. $ 132.3 $ 126.5
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INCOME TAXES PAID......................................................... $ 91.8 $ 1,577.3
================= =================
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The preparation of the accompanying unaudited consolidated financial
statements in conformity with GAAP requires management to make estimates
and assumptions (including normal, recurring accruals) that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The accompanying
unaudited interim consolidated financial statements reflect all
adjustments (which include only normal recurring adjustments) necessary in
the opinion of management to present fairly the consolidated financial
position of AXA Financial and its consolidated results of operations and
cash flows for the periods presented. All significant intercompany
transactions and balances except those with Other Discontinued Operations
(See Note 6) have been eliminated in consolidation. These statements
should be read in conjunction with the consolidated financial statements
of AXA Financial for the year ended December 31, 2001. The results of
operations for the nine months ended September 30, 2002 are not
necessarily indicative of the results to be expected for the full year.
The terms "third quarter 2002" and "third quarter 2001" refer to the three
months ended September 30, 2002 and 2001, respectively. The terms "first
nine months of 2002" and "first nine months of 2001" refer to the nine
months ended September 30, 2002 and 2001, respectively.
On January 2, 2001, AXA Merger Corp., a wholly-owned subsidiary of AXA,
was merged with and into the Holding Company, resulting in AXA Financial
becoming a wholly owned subsidiary of AXA. As a result of AXA Merger
Corp's merger into the Holding Company, AXA Merger's obligation to repay a
$3.0 billion loan to the Holding Company was extinguished resulting in a
decrease in consolidated shareholders' equity of $3.0 billion. In
conjunction with the minority interest buyout, 53.4 million shares of
Common Stock purchased by AXA Merger were exchanged for the common shares
of AXA Merger held by AXA and 20.7 million treasury shares held by the
Holding Company were retired.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
2) ACCOUNTING CHANGES
On January 1, 2002, AXA Financial adopted SFAS No. 141, "Business
Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," and
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
Assets". Upon adoption of SFAS No. 142, amortization of goodwill ceased.
Amortization of goodwill and other intangible assets for third quarter and
first nine months of 2001, respectively, was approximately $30.9 million
and $92.6 million, net of minority interest of $20.5 million and $61.6
million, of which $3.2 million and $10.0 million, net of minority interest
of $2.7 million and $8.1 million, related to other intangible assets.
Amortization of goodwill and other intangible assets for the years ended
December 31, 2001, 2000 and 1999, respectively, was approximately $123.7
million, $49.6 million and $3.3 million, net of minority interest of $82.3
million, $29.7 million and $1.5 million, of which $13.5 million, $2.8
million and $.6 million, net of minority interest of $10.8 million, $1.1
million and $.5 million, related to other intangible assets. Net income,
excluding goodwill amortization expense, for third quarter and first nine
months of 2001, respectively, would have been $79.1 million and $406.7
million. Net income, excluding goodwill amortization expense, for the
years ended December 31, 2001, 2000 and 1999, respectively, would have
been $535.0 million, $2,462.2 million and $1,128.8 million. Amortization
of other intangible assets for third quarter and first nine months of 2002
was $3.6 million and $10.8 million, net of minority interest of $2.4
million and $7.3 million. Amounts presently estimated to be recorded in
each of the succeeding five years ended December 31, 2006 for amortization
of other intangible assets are not expected to vary significantly from the
amount for the full year December 31, 2001 of $13.5 million, net of
minority interest of $10.8 million. The gross carrying amount and
accumulated amortization of other intangible assets were $478.5 million
and $141.6 million, respectively, at September 30, 2002 and $615.4 million
and $123.5 million, respectively, at December 31, 2001. The carrying
amount of goodwill was $3,473.9 million and $3,436.5 million,
respectively, at September 30, 2002 and at
-7-
December 31, 2001 and relates solely to the Investment Management segment.
No losses resulted from completion in first six months of 2002 of
transitional impairment testing of indefinite-lived intangible assets and
goodwill. SFAS No. 141 and No. 144 had no material impact on the results
of operations or financial position of AXA Financial upon their adoption
on January 1, 2002.
On January 1, 2001, AXA Financial adopted SFAS No. 133, as amended, that
established new accounting and reporting standards for all derivative
instruments, including certain derivatives embedded in other contracts,
and for hedging activities. Free-standing derivative instruments
maintained by AXA Financial at January 1, 2001 include interest rate caps,
floors and collars intended to hedge crediting rates on interest-sensitive
individual annuity contracts and certain reinsurance contracts. Based upon
guidance from the FASB and the Derivatives Implementation Group ("DIG"),
the caps, floors and collars could not be designated in a qualifying
hedging relationship under SFAS No. 133 and, consequently, require
mark-to-market accounting through earnings for changes in their fair
values beginning January 1, 2001. In accordance with the transition
provision of SFAS No. 133, AXA Financial recorded a cumulative-effect-type
charge to earnings of $3.5 million to recognize the difference between the
carrying values and fair values of free-standing derivative instruments at
January 1, 2001. With respect to adoption of the requirements on embedded
derivatives, AXA Financial elected a January 1, 1999 transition date,
thereby effectively "grandfathering" existing accounting for derivatives
embedded in hybrid instruments acquired, issued, or substantively modified
before that date. As a consequence of this election, coupled with recent
interpretive guidance from the FASB and the DIG with respect to issues
specifically related to insurance contracts and features, adoption of the
new requirements for embedded derivatives had no material impact on AXA
Financial's results of operation or its financial position. Upon its
adoption of SFAS No. 133, AXA Financial reclassified $256.7 million of
held-to-maturity securities as available-for-sale. This reclassification
resulted in an after-tax cumulative-effect-type adjustment of $8.9 million
in other comprehensive income, representing the after-tax unrealized gain
on these securities at January 1, 2001. See Note 7 regarding the GMIB
reinsurance asset.
AXA Financial adopted the AICPA's SOP 00-3, which established new
accounting and reporting standards for demutualizations, prospectively as
of January 1, 2001 with no financial impact upon initial implementation.
3) NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 established
financial accounting and reporting standards for costs associated with
exit or disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized only when the
liability is incurred and measured initially at fair value. However, the
cost of termination benefits provided under the terms of an ongoing
benefit arrangement, such as a standard severance offering based on years
of service, continues to be covered by other accounting pronouncements and
is unchanged by SFAS No. 146. SFAS No. 146 is effective for exit and
disposal activities initiated after December 31, 2002. AXA Financial's
management is assessing the impact of adoption.
4) INVESTMENTS
Investment valuation allowances for mortgage loans and equity real estate
and changes thereto follow:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2002 2001
--------------- ---------------
(IN MILLIONS)
Balances, beginning of year.................................... $ 87.6 $ 126.2
Additions charged to income.................................... 26.4 31.1
Deductions for writedowns and asset dispositions............... (9.1) (36.7)
--------------- ---------------
Balances, End of Period........................................ $ 104.9 $ 120.6
=============== ===============
Balances, end of period comprise:
Mortgage loans on real estate................................ $ 23.0 $ 44.7
Equity real estate........................................... 81.9 75.9
--------------- ---------------
Total.......................................................... $ 104.9 $ 120.6
=============== ===============
-8-
For the third quarters and first nine months of 2002 and of 2001,
investment income is shown net of investment expenses of $37.2 million,
$54.3 million, $140.3 million and $170.8 million, respectively.
As of September 30, 2002 and December 31, 2001, fixed maturities
classified as available for sale had amortized costs of $24,699.0 million
and $22,874.1 million. Other equity investments included trading
securities having carrying values of $1.0 million and $2.4 million and
costs of $3.4 million and $4.9 million at September 30, 2002 and December
31, 2001, respectively, and other equity securities with carrying values
of $98.5 million and $64.1 million and costs of $115.1 million and $59.9
million as of September 30, 2002 and December 31, 2001, respectively.
In the third quarters and first nine months of 2002 and of 2001,
respectively, net unrealized and realized holding (losses) gains on
trading account equity investments of $(.3) million, $(1.4) million, $.3
million and $25.1 million were included in net investment income in the
consolidated statements of earnings.
For the first nine months of 2002 and of 2001, proceeds received on sales
of fixed maturities classified as available for sale amounted to $5,766.6
million and $4,308.3 million, respectively. Gross gains of $86.0 million
and $131.8 million and gross losses of $137.0 million and $82.4 million
were realized on these sales for the first nine months of 2002 and of
2001, respectively. Unrealized net investment gains related to fixed
maturities classified as available for sale increased by $814.0 million
during the first nine months of 2002, resulting in a balance of $1,294.8
million at September 30, 2002.
Impaired mortgage loans along with the related investment valuation
allowances for losses follows:
SEPTEMBER 30, December 31,
2002 2001
----------------- -----------------
(IN MILLIONS)
Impaired mortgage loans with investment valuation allowances............ $ 115.6 $ 114.2
Impaired mortgage loans without investment valuation allowances......... 20.4 30.6
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 136.0 144.8
Investment valuation allowances......................................... (23.0) (19.2)
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 113.0 $ 125.6
=============== =================
During the first nine months of 2002 and of 2001, respectively, AXA
Financial's average recorded investment in impaired mortgage loans was
$141.7 million and $156.1 million. Interest income recognized on these
impaired mortgage loans totaled $7.5 million and $5.4 million for the
first nine months of 2002 and of 2001, respectively.
5) CLOSED BLOCK
The excess of Closed Block liabilities over Closed Block assets (adjusted
to exclude the impact of related amounts in accumulated other
comprehensive income) represents the expected maximum future post-tax
earnings from the Closed Block which would be recognized in income from
continuing operations over the period the policies and contracts in the
Closed Block remain in-force. As of January 1, 2001, AXA Financial has
developed an actuarial calculation of the expected timing of the Closed
Block earnings.
If the actual cumulative earnings from the Closed Block are greater than
the expected cumulative earnings, only the expected earnings will be
recognized in net income. Actual cumulative earnings in excess of expected
cumulative earnings at any point in time are recorded as a policyholder
dividend obligation because they will ultimately be paid to Closed Block
policyholders as an additional policyholder dividend unless offset by
future performance that is less favorable than originally expected. If a
policyholder dividend obligation has been previously established and the
actual Closed Block earnings in a subsequent period are less than the
expected earnings for that period, the policyholder dividend obligation
would be reduced (but not below zero). If, over the period the policies
and contracts in the Closed Block remain in force, the actual cumulative
earnings of the Closed Block are less than the expected cumulative
earnings, only actual earnings would be recognized in income from
continuing operations. If the Closed Block has insufficient funds to make
guaranteed policy benefit payments, such payments will be made from assets
outside the Closed Block.
Many expenses related to Closed Block operations, including amortization
of DAC, are charged to operations outside of the Closed Block;
accordingly, net revenues of the Closed Block do not represent the actual
profitability of the Closed Block operations. Operating costs and expenses
outside of the Closed Block are, therefore, disproportionate to the
business outside of the Closed Block.
-9-
Summarized financial information for the Closed Block is as follows:
SEPTEMBER 30, December 31,
2002 2001
----------------- -----------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances and other...... $ 9,217.2 $ 9,049.9
Other liabilities...................................................... 85.2 53.6
----------------- -----------------
Total Closed Block liabilities......................................... 9,302.4 9,103.5
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities available for sale, at estimated fair value (amortized
cost $4,628.7 and $4,600.4).......................................... 4,934.8 4,705.7
Mortgage loans on real estate.......................................... 1,479.8 1,514.4
Policy loans........................................................... 1,466.0 1,504.4
Cash and other invested assets......................................... 209.5 141.0
Other assets........................................................... 238.1 214.7
----------------- -----------------
Total assets designated to the Closed Block........................... 8,328.2 8,080.2
----------------- -----------------
Excess of Closed Block liabilities over assets designated
to the Closed Block.................................................. 974.2 1,023.3
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred Federal income
tax of $44.2 and $20.4 and policyholder dividend obligation .... 51.5 37.8
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities.............................................. $ 1,025.7 $ 1,061.1
================= =================
Closed Block revenues and expenses were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
REVENUES:
Premiums and other income............... $ 126.8 $ 135.2 $ 404.2 $ 426.7
Investment income (net of investment
expenses of $.9, $.1, $4.6
and $2.6)............................ 144.8 146.5 436.8 437.2
Investment losses, net.................. (12.4) (.6) (32.2) (13.2)
--------------- ---------------- --------------- ---------------
Total revenues.......................... 259.2 281.1 808.8 850.7
--------------- ---------------- --------------- ---------------
BENEFITS AND
OTHER DEDUCTIONS:
Policyholders' benefits and dividends... 235.7 238.1 735.0 724.9
Other operating costs and expenses...... 4.5 4.4 14.0 14.0
--------------- ---------------- --------------- ---------------
Total benefits and other deductions..... 240.2 242.5 749.0 738.9
--------------- ---------------- --------------- ---------------
Net revenues before Federal income
taxes................................ 19.0 38.6 59.8 111.8
Federal income taxes.................... (7.8) (13.8) (24.4) (40.4)
--------------- ---------------- --------------- ---------------
Net Revenues............................ $ 11.2 $ 24.8 $ 35.4 $ 71.4
=============== ================ =============== ===============
-10-
6) OTHER DISCONTINUED OPERATIONS
Summarized financial information for Other Discontinued Operations
follows:
SEPTEMBER 30, December 31,
2002 2001
----------------- -------------------
(IN MILLIONS)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost $690.1 and $542.9).................................. $ 720.0 $ 559.6
Equity real estate..................................................... 206.0 252.0
Mortgage loans on real estate.......................................... 89.5 160.3
Other equity investments............................................... 16.2 22.3
Other invested assets.................................................. .5 .4
----------------- -------------------
Total investments................................................. 1,032.2 994.6
Cash and cash equivalents.............................................. 20.4 41.1
Other assets........................................................... 144.0 152.6
----------------- -------------------
Total Assets........................................................... $ 1,196.6 $ 1,188.3
================= ===================
Policyholders liabilities.............................................. $ 916.4 $ 932.9
Allowance for future losses............................................ 150.6 139.9
Other liabilities...................................................... 129.6 115.5
----------------- -------------------
Total Liabilities...................................................... $ 1,196.6 $ 1,188.3
================= ===================
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $4.3, $5.8, $13.8
and $18.3)............................. $ 16.3 $ 21.5 $ 56.9 $ 73.3
Investment gains, net.................... 6.1 2.7 44.7 14.7
Policy fees, premiums and
other income.......................... - .3 .2 .2
--------------- --------------- --------------- ---------------
Total revenues........................... 22.4 24.5 101.8 88.2
Benefits and other deductions............ 27.1 24.3 74.9 76.1
(Losses) earnings (charged) credited to
allowance for future losses........... (4.7) .2 26.9 12.1
--------------- --------------- --------------- ---------------
Pre-tax results from operations.......... - - - -
Pre-tax earnings (loss) from
releasing (strengthening) the allowance
for future losses...................... 29.9 (.9) 29.2 11.8
Federal income tax (expense) benefit..... (10.5) .4 (10.2) (4.1)
--------------- --------------- --------------- ---------------
Income (Loss) from Other Discontinued
Operations............................ $ 19.4 $ (.5) $ 19.0 $ 7.7
=============== =============== =============== ===============
AXA Financial's quarterly process for evaluating the allowance for future
losses applies the current period's results of Other Discontinued
Operations against the allowance, re-estimates future losses, and adjusts
the allowance, if appropriate. These updated assumptions and estimates
resulted in a strengthening or release of allowance in each of the periods
presented above.
-11-
Management believes the allowance for future losses at September 30, 2002
is adequate to provide for all future losses; however, the determination
of the allowance involves numerous estimates and subjective judgments
regarding the expected performance of Discontinued Operations Investment
Assets. There can be no assurance the losses provided for will not differ
from the losses ultimately realized. To the extent actual results or
future projections of Other Discontinued Operations differ from
management's current estimates and assumptions underlying the allowance
for future losses, the difference would be reflected in the consolidated
statements of earnings in Other Discontinued Operations. In particular, to
the extent income, sales proceeds and holding periods for equity real
estate differ from management's previous assumptions, periodic adjustments
to the loss allowance are likely to result.
Valuation allowances of $4.9 million and $4.8 million on mortgage loans on
real estate and $1.7 million and $5.0 million on equity real estate were
held at September 30, 2002 and December 31, 2001, respectively.
7) VARIABLE ANNUITY CONTRACTS - GUARANTEED MINIMUM INCOME AND DEATH BENEFITS
Equitable Life issues certain variable annuity products that contain a
guaranteed minimum income benefit ("GMIB") feature which, if elected by
the policyholder after a stipulated waiting period from contract issuance,
guarantees a minimum lifetime annuity based on predetermined annuity
purchase rates that may be in excess of what the contract account value
can purchase at then-current annuity purchase rates. Equitable Life bears
the risk that protracted under-performance of the financial markets could
result in GMIB benefits being higher than what accumulated policyholder
account balances would support. Equitable Life reinsures, subject to
certain maximum amounts or caps in any one period, approximately 70.0% of
its current liability exposure resulting from the GMIB feature.
The GMIB reinsurance contracts are considered derivatives under SFAS No.
133 and, therefore, are required to be reported in the balance sheet at
their fair value. Based on management's estimates of future contract cash
flows and experience, the estimated fair values of the GMIB reinsurance
contracts at September 30, 2002 and June 30, 2002 were $247.0 million and
$138.0 million, respectively. These fair values are reported in the
consolidated balance sheets in Other assets. The increases in estimated
fair values of $109.0 million and $247.0 million for the three and nine
months ended September 30, 2002, respectively, were due primarily to
significant equity market declines during 2002. These changes in fair
value are reflected in Commissions, fees and other income in the
consolidated statements of earnings. Since there is no readily available
market for GMIB reinsurance contracts, the determination of their fair
values is based on models which involve numerous estimates and subjective
judgments including those regarding expected market rates of return and
volatility, GMIB election rates, contract surrender rates and mortality
experience. There can be no assurance that ultimate actual experience will
not differ from management's estimates.
The consolidated financial statements only reflect the fair value of the
GMIB reinsurance contract asset. Under GAAP, no provision or liability for
the gross GMIB obligation to contractholders or amount net of reinsurance
is permitted to be reflected in these statements. While SFAS No. 133
requires Equitable Life to record the GMIB reinsurance contract asset at
fair value, it does not allow reporting of Equitable Life's GMIB
obligation to contractholders as an embedded derivative at fair value.
Further, SFAS No. 97, "Accounting and Reporting by Insurance Enterprises
for Certain Long-Duration Contracts and for Realized Gains and Losses from
the Sale of Investments," prohibits the recording of a liability for the
GMIB feature. A proposed AICPA SOP, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for
Separate Accounts" (the "Proposed SOP"), however, would allow recording of
a liability for variable annuity products with a guaranteed minimum death
benefit ("GMDB") feature under certain circumstances and contains a
methodology for establishing a liability for potential GMDB benefits.
Management believes this methodology would be appropriate for valuing and
disclosing the GMIB liability net of reinsurance as well. The unrecorded
GMIB liabilities, net of reinsurance, calculated under this proposed
methodology would be $51.0 million as of September 30, 2002. The
determination of this estimated liability is based on proposed accounting
guidance which is subject to change prior to release of a final document
and is expected to be effective January 1, 2004 at the earliest. The
determination of this liability is also based on models which involve
numerous estimates and subjective judgments, including those regarding
expected market rates of return and volatility, GMIB election rates,
contract surrender rates and mortality experience. Assumptions regarding
Separate Account performance used for purposes of this calculation are set
using a long-term view of expected average market returns by applying a
reversion to the mean approach, consistent with that used for DAC
amortization. There can be no assurance that ultimate actual experience
will not differ from management's estimates.
-12-
Equitable Life also issues certain variable annuity products with a GMDB
feature. As with GMIB, Equitable Life bears the risk that protracted
under-performance of the financial markets could result in GMDB benefits
being higher than what accumulated policyholder account balances would
support. At September 30, 2002, Equitable Life had reinsured in the
aggregate approximately 15.0% of its current exposure to the GMDB
obligation on annuity contracts in-force. GMDB related policyholder
benefits incurred, net of related reinsurance, were $35.1 million and
$10.1 million for the nine months ended September 30, 2002 and 2001,
respectively. SFAS No. 133 does not permit reporting of Equitable Life's
GMDB obligation to contractholders or GMDB reinsurance contracts at fair
value, and SFAS No. 97 prohibits the recording of a liability for the GMDB
feature. However, based on management's understanding of the Proposed SOP
described in the previous paragraph, the unrecorded GMDB liabilities, net
of reinsurance, were estimated to be $118.0 million and $28.0 million at
September 30, 2002 and December 31, 2001, respectively. The determination
of this estimated liability is also based on proposed accounting guidance
which is subject to change prior to release of a final document and is
expected to be effective January 1, 2004 at the earliest. The
determination of this liability is also based on models which involve
numerous estimates and subjective judgments, including those regarding
expected market rates of return and volatility, contract surrender rates
and mortality experience. Assumptions regarding Separate Account
performance used for purposes of this calculation are set using a
long-term view of expected average market returns by applying a reversion
to the mean approach, consistent with that used for DAC amortization.
There can be no assurance that ultimate actual experience will not differ
from management's estimates.
The scope of coverage of a portion of Equitable Life's reinsurance for its
exposure from its GMIB and GMDB features is currently the subject of a
dispute between Equitable Life and one of its reinsurers representing
approximately 20.0% of its September 30, 2002 liability exposure related
to the GMIB feature and approximately 6.0% of its September 30, 2002
exposure to the GMDB obligation on annuity contracts in-force. That
dispute is scheduled for arbitration in early 2003. Although the outcome
cannot be predicted with certainty, AXA Financial's management does not
believe that the outcome of such arbitration will reduce its reinsurance
coverage to an extent that would have a material effect on AXA Financial's
consolidated financial position or results of operations.
8) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary,
at the end of each successive interim period to reflect the current
estimate of the annual effective tax rate.
In third quarter 2002, AXA Financial recorded a $144.3 million benefit
resulting from the favorable treatment of certain tax matters related to
Separate Account investment activity arising during the 1997-2001 tax
years and a settlement with the IRS with respect to such tax matters for
the 1992-1996 tax years.
9) STOCK APPRECIATION RIGHTS
Following completion of the merger of AXA Merger Corp. with and into the
Holding Company, certain employees exchanged AXA ADR options for tandem
Stock Appreciation Rights ("SARs") and at-the-money AXA ADR options of
equivalent intrinsic value. The maximum obligation for the SARs is $85.6
million, based upon the underlying price of AXA ADRs at January 2, 2001,
the closing date of the aforementioned merger. AXA Financial recorded a
(reduction) increase in the SARs liability of $(1.8) million and $(40.7)
million for the third quarters of 2002 and 2001, and of $(11.4) million
and $(80.0) million for the first nine months of 2002 and 2001,
respectively, reflecting the variable accounting for the SARs, based on
the change in the market value of AXA ADRs for the respective periods
ended September 30, 2002 and 2001.
10) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in AXA
Financial's Notes to Consolidated Financial Statements for the year ended
December 31, 2001, except as described below:
In Franze, in July 2002, the Court of Appeals reversed the District
Court's decision certifying the class on the ground that the named
plaintiffs lacked standing to assert claims against Equitable Life because
their claims were time-barred. In August 2002, after remand, the District
Court vacated its previous order regarding class certification and
dismissed the case with prejudice.
-13-
In McEachern, in March 2002, plaintiff filed a motion to alter or amend
the court's judgment. In September 2002, plaintiff filed an amended
complaint in the United States District Court for the Southern District of
Alabama. In the amended complaint, the original plaintiff added two new
plaintiffs who are alleged to have purchased individual retirement
annuities in 1998 and 1999. The amended complaint does not assert any
claims against Equitable Life's agent, previously named as a defendant.
Plaintiffs seek to represent a class of (i) all persons who purchased
deferred variable annuities from Equitable Life in tax deferred qualified
retirement plans, and (ii) all persons who were charged allegedly
unnecessary mortality fees for tax deferral for variable annuities held in
qualified retirement accounts. Plaintiffs assert causes of action for
unjust enrichment, money had and received (a common-law cause of action
similar to unjust enrichment), conversion, breach of contract, negligence,
negligent and/or wanton training, negligent and/or wanton supervision, and
breach of fiduciary duty. Plaintiffs seek damages, including punitive
damages, in an unspecified amount and attorneys' fees and expenses.
In Patenaude, in May 2002, the United States Court of Appeals for the
Ninth Circuit affirmed the judgment of the District Court which dismissed
the complaint. The deadline for plaintiff to appeal this order has passed.
In Malholtra, in March 2002, defendants filed a motion to dismiss
plaintiffs' amended complaint.
In the Mississippi Actions, two additional lawsuits were filed in April
and May 2002, respectively, one by 79 additional plaintiffs and the
second, by four additional plaintiffs. In the lawsuit involving 79
plaintiffs, Equitable Life filed a notice of removal and, in August 2002,
the United States District Court for the Northern District of Mississippi
denied plaintiffs' motion for reconsideration of that Court's order
denying plaintiffs' motion to remand. Accordingly, that lawsuit has been
removed from Mississippi State Court to the United States District Court
for the Northern District of Mississippi. Motions to remand are pending in
several other cases. Plaintiffs' appeal, in a previously filed lawsuit, of
the dismissal of the action by the Circuit Court of Sunflower County has
been fully briefed. There are currently 27 lawsuits filed in Mississippi
by approximately 290 plaintiffs.
In four of the Mississippi Actions, between May and August 2002 four
former agents and one retired agent of Equitable Life named as defendants
have asserted cross-claims against Equitable Life seeking indemnification,
as well as compensatory and punitive damages for, among other things,
alleged injury to their reputations. Equitable Life filed motions to
dismiss those counter-claims and commenced actions in the Federal district
courts in Mississippi seeking to compel arbitration of the cross-claims.
In The Equitable Life Assurance Society of the United States v. American
National Bank and Trust Company of Chicago, as trustee f/b/o Emerald
Investments LP and Emerald Investments LP, in May 2002, the District Court
granted in part and denied in part Equitable Life's motion to dismiss
defendants' counterclaims, dismissing defendants' Illinois Securities Act
and New York Consumer Fraud Act claims. Equitable Life has answered
defendants' remaining counterclaims.
In Fischel, in May 2002, the District Court issued an order granting
plaintiffs' motion for partial summary judgment, granting Equitable Life's
motion for summary judgment on plaintiffs' claim for breach of fiduciary
duty and otherwise denying Equitable Life's motion for summary judgment.
The court ruled that Equitable Life is liable to plaintiffs on their
contract claims for benefits under ERISA. The court has deferred
addressing the relief to which plaintiffs are entitled in light of the May
2002 order. A decision was rendered in October 2002 on the appeal by
plaintiffs to the Court of Appeals for the Ninth Circuit concerning the
award of legal fees to plaintiffs' counsel for the previously settled
claim not involving health benefits. The Court of Appeals denied
plaintiffs' challenge to the District Court's subject matter jurisdiction
over the settled claim, affirmed the method that the District Court used
to calculate the award of legal fees to plaintiffs' counsel and remanded
for further consideration of the fee award.
In Hirt, in April 2002, plaintiffs filed a motion seeking to certify a
class of "all Plan participants, whether active or retired, their
beneficiaries and Estates, whose accrued benefits or pension benefits are
based on the Plan's Cash Balance Formula." Defendants responded to that
motion in May 2002. Also, in April 2002, plaintiffs agreed to dismiss with
prejudice their claim that the change to the cash balance formula violates
ERISA by improperly applying the formula to retroactively reduce accrued
benefits. That claim has been dismissed.
In R.S.M., in October 2002, the Delaware Court of Chancery approved the
settlement.
In In re AXA Financial, Inc. Shareholders Litigation, a hearing with
respect to approval of the proposed settlement was held in March 2002. In
May 2002, the court approved the settlement and entered an Order and
-14-
Final Judgment. In June 2002, one shareholder appealed. The shareholder
voluntarily dismissed his appeal in September 2002 making the Order and
Final Judgment final and not subject to further appeal.
In Uhrik, a hearing with respect to approval of the proposed settlement
was held in June 2002 and the court entered an Order and Final Judgment
approving the settlement and dismissing the case. The deadline to appeal
the Order and Final Judgment has passed.
In Miller, in April 2002, plaintiffs filed a second amended complaint. The
allegations and relief sought in the second amended complaint are
virtually identical to the amended class action complaint. In May 2002,
defendants filed a motion to dismiss the second amended complaint.
Plaintiffs in the Benak, Roy, Roffe, Tatem and Gissen cases have moved to
consolidate the complaints. In July 2002, a complaint entitled Pfeiffer v.
Alliance Capital Management L.P. and Alliance Premier Growth Fund
("Pfeiffer Complaint") was filed in Federal District Court in the District
of New Jersey against Alliance and Premier Growth Fund. The allegations
and relief sought in the Pfeiffer Complaint are virtually identical to the
Benak Complaint. In August 2002, all of these cases, including the
Pfeiffer Complaint, have been consolidated in Federal District Court in
the District of New Jersey. Alliance believes the plaintiff's allegations
in the Pfeiffer Complaint are without merit and intends to vigorously
defend against these allegations.
Although the outcome of litigation cannot be predicted with certainty, AXA
Financial's management believes that the ultimate resolution of the
matters described above should not have a material adverse effect on the
consolidated financial position of AXA Financial. AXA Financial's
management cannot make an estimate of loss, if any, or predict whether or
not such litigations will have a material adverse effect on AXA
Financial's consolidated results of operations in any particular period.
In April 2002, a consolidated complaint entitled In re Enron Corporation
Securities Litigation was filed in Federal District Court in the Southern
District of Texas, Houston Division, against numerous defendants,
including Alliance. The principal allegations of the complaint, as they
pertain to Alliance, are that Alliance violated Sections 11 and 15 of the
Securities Act of 1933, with respect to a registration statement filed by
Enron and effective with the SEC on July 18, 2001, which was used to sell
$1.9 billion Enron Corporation Zero Coupon Convertible Senior Notes due
2021. Plaintiffs allege that Frank Savage, who was at that time an
employee of Alliance and who was and remains a director of the general
partner of Alliance, signed the registration statement at issue.
Plaintiffs allege that the registration statement was materially
misleading. Plaintiffs further allege that Alliance was a controlling
person of Frank Savage. Plaintiffs therefore assert that Alliance is
itself liable for the allegedly misleading registration statement.
Plaintiffs seek recission or a recissionary measure of damages. The
complaint specifically states that "[n]o allegations of fraud are made
against or directed at" Alliance. In June 2002, Alliance moved to dismiss
the complaint as the allegations therein pertain to it. Alliance believes
the allegations of the complaint as to it are without merit and intends to
vigorously defend against these allegations. At the present time,
management of Alliance is unable to estimate the impact, if any, that the
outcome of this action may have on Alliance's results of operations or
financial condition and AXA Financial's management is unable to estimate
the impact, if any, that the outcome of this action may have on its
consolidated results of operations or financial condition.
In May, 2002, a complaint entitled The Florida State Board of
Administration v. Alliance Capital Management L.P. (the "SBA Complaint")
was filed in the Circuit Court of the Second Judicial Circuit, in and for
Leon County, Florida against Alliance. The SBA Complaint alleges breach of
contract relating to the Investment Management Agreement between The
Florida State Board of Administration ("SBA") and Alliance, breach of the
covenant of good faith and fair dealing contained in the Investment
Management Agreement, breach of fiduciary duty, negligence, gross
negligence and violation of the Florida Securities and Investor Protection
Act, in connection with purchases and sales of Enron common stock for the
SBA investment account. The SBA seeks more than $300 million in
compensatory damages and an unspecified amount of punitive damages. In
June 2002, Alliance moved to dismiss the SBA Complaint. In September 2002,
that motion was denied. Alliance believes the SBA's allegations in the SBA
Complaint are without merit and intends to vigorously defend against these
allegations. At the present time, Alliance's management is unable to
estimate the impact, if any, that the outcome of this action may have on
Alliance's results of operations or financial condition and AXA
Financial's management is unable to estimate the impact, if any, that the
outcome of this action may have on its consolidated results of operations
or financial condition.
In September 2002, a complaint entitled Lawrence E. Jaffe Pension Plan,
Lawrence E. Jaffe Trustee U/A 1198 v. Alliance Capital Management L.P.,
Alfred Harrison and Alliance Premier Growth Fund, Inc. ("Jaffe Complaint")
was filed in Federal District Court in the Southern District of New York
against Alliance, Alfred Harrison and Premier Growth Fund alleging
violation of the ICA. The Jaffe Complaint alleges that the
-15-
defendants breached their fiduciary duties of loyalty, care and good faith
to Premier Growth Fund by causing Premier Growth Fund to invest in the
securities of Enron and that the agreements between Premier Growth Fund
and Alliance violated the ICA because all of the directors of Premier
Growth Fund should be deemed interested under the ICA. Plaintiff seeks
damages equal to Premier Growth Fund's losses as a result of Premier
Growth Fund's investment in shares of Enron and a recovery of all fees
paid to Alliance beginning November 1, 2000. Alliance and Alfred Harrison
believe that plaintiff's allegations in the Jaffe Complaint are without
merit and intend to vigorously defend against these allegations. At the
present time, management of Alliance is unable to estimate the impact, if
any, that the outcome of this action may have on its results of operations
or financial condition and AXA Financial's management is unable to
estimate the impact, if any, that the outcome of this action may have on
its consolidated results of operations or financial condition.
In addition to the matters previously reported and those described above,
the Holding Company and its subsidiaries are involved in various legal
actions and proceedings in connection with their businesses. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on AXA Financial's consolidated
financial position. However, it should be noted that the frequency of
large damage awards, including large punitive damage awards that bear
little or no relation to actual economic damages incurred by plaintiffs in
some jurisdictions, continues to create the potential for an unpredictable
judgment in any given matter. Accordingly, AXA Financial's management
cannot make an estimate of loss, if any, or predict whether or not any
given matter will have a material adverse effect on AXA Financial's
consolidated results of operations in any particular period.
11) BUSINESS SEGMENT INFORMATION
The following tables reconcile segment revenues and earnings from
continuing operations before Federal income taxes and minority interest to
total revenues and earnings as reported on the consolidated statements of
earnings and segment assets to total assets on the consolidated balance
sheets, respectively.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ----------------
(IN MILLIONS)
SEGMENT REVENUES:
Financial Advisory/Insurance............ $ 1,274.7 $ 1,131.2 $ 3,926.8 $ 3,690.6
Investment Management................... 650.6 726.3 2,096.9 2,235.0
Consolidation/elimination............... (21.0) (21.9) (59.7) (69.6)
--------------- --------------- --------------- ----------------
Total Revenues.......................... $ 1,904.3 $ 1,835.6 $ 5,964.0 $ 5,856.0
=============== =============== =============== ================
SEGMENT EARNINGS FROM CONTINUING
OPERATIONS BEFORE FEDERAL INCOME
TAXES AND MINORITY INTEREST:
Financial Advisory/Insurance............ $ 224.0 $ 30.3 $ 704.9 $ 342.3
Investment Management................... 108.6 121.6 399.4 373.5
--------------- --------------- --------------- ----------------
Total Earnings from Continuing
Operations before Federal Income
Taxes and Minority Interest.......... $ 332.6 $ 151.9 $ 1,104.3 $ 715.8
=============== =============== =============== ================'
-16-
SEPTEMBER 30, December 31,
2002 2001
---------------- ------------------
(IN MILLIONS)
ASSETS:
Financial Advisory/Insurance....................... $ 78,612.9 $ 84,955.2
Investment Management.............................. 14,143.0 16,031.3
Consolidation/elimination.......................... (55.8) (74.1)
---------------- ------------------
Total Assets....................................... $ 92,700.1 $ 100,912.4
================ ==================
12) RELATED PARTY TRANSACTIONS
In May 2002, the Holding Company paid a cash shareholder dividend of
$200.0 million.
In September 2001, Equitable Life loaned $400.0 million to AXA Insurance
Holding Co. Ltd., a subsidiary of AXA. This investment has an interest
rate of 5.89% and matures on June 15, 2007. All payments, including
interest payable semi-annually, are guaranteed by AXA.
13) COMPREHENSIVE INCOME
The components of comprehensive income for third quarters 2002 and 2001
and the first nine months of 2002 and of 2001 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ---------------
(IN MILLIONS)
Net earnings............................. $ 360.8 $ 51.4 $ 769.8 $ 324.1
--------------- --------------- --------------- ---------------
Change in unrealized gains,
net of reclassification adjustment..... 278.7 337.0 318.0 418.3
--------------- --------------- --------------- ---------------
Other comprehensive income .............. 278.7 337.0 318.0 418.3
--------------- --------------- --------------- ---------------
Comprehensive Income .................... $ 639.5 $ 388.4 $ 1,087.8 $ 742.4
=============== =============== =============== ===============
-17-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is omitted pursuant to General Instruction
H of Form 10-Q. The management narrative for AXA Financial that follows should
be read in conjunction with the Consolidated Financial Statements, the related
Notes to Consolidated Financial Statements and the information discussed under
Forward-Looking Statements included in this Form 10-Q, and with the management
narrative found in the Management's Discussion and Analysis ("MD&A") section
included in AXA Financial's Annual Report on Form 10-K for the year ended
December 31, 2001 ("2001 Form 10-K").
CONSOLIDATED RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001
Earnings from continuing operations before Federal income taxes and minority
interest were $1.10 billion for the first nine months of 2002, an increase of
$388.5 million or 54.3% from the year earlier period, with $362.6 million higher
earnings reported by the Financial Advisory/Insurance segment and $25.9 million
higher earnings for the Investment Management segment. The increase reflects the
impact of the $247.0 million increase in the fair value of the GMIB reinsurance
contracts and the cessation of goodwill amortization in the 2002 period. Net
earnings for AXA Financial totaled $769.8 million for the first nine months of
2002, up $445.7 million from $324.1 million for the 2001 period. Net earnings in
2002 included the $144.3 million tax benefit related to the favorable treatment
of certain tax matters related to Separate Account investment activity during
the 1997-2001 tax years and a settlement with the IRS with respect to such tax
matters for the 1992-1996 tax years. The corresponding 2001 period included the
negative impacts of the $82.6 million amortization of goodwill, net of minority
interest, and of the $3.5 million cumulative effect adjustment related to the
January 1, 2001 adoption of SFAS No 133.
Revenues. Total revenues for the first nine months of 2002 increased $108.0
million as revenues for the Financial Advisory/Insurance segment increased
$236.2 million while Investment Management segment revenues declined $138.1
million or 6.2% compared to the first nine months of 2001.
Premiums declined $58.8 million, reflecting lower premiums on traditional life
products due to the Financial Advisory/Insurance segment's focus on sales of
variable and interest-sensitive investment and annuity products whose revenues
are not reported as premiums and on reinsurance assumed related to Equitable
Life's withdrawal from certain accident and health and aviation and space
reinsurance pools. Policy fee income was $17.8 million lower, largely due to the
effect of market depreciation on average Separate Account balances partially
offset by higher product-level mortality and surrender charges.
Net investment income decreased $28.6 million, primarily due to the absence of
income on short-term investments generated on the proceeds from the sale of DLJ
in first quarter 2001 and to lower investment yields due to declining interest
rates partially offset by a higher level of fixed maturity assets in the General
Account due to higher sales of General Account products and transfers from the
Separate Accounts. During the first three months of 2001, short-term investment
portfolios for both the General Account and the Holding Company Group included
proceeds from the sale of DLJ which were subsequently used to pay taxes on that
transaction and to pay dividends, with the remaining funds being reinvested
principally in fixed maturities. These net decreases in investment income were
partially offset by lower losses on equity investments of $18.1 million compared
to $82.9 million in the first nine months of 2002 and 2001, respectively. Net
losses on equity investments in the 2001 period included income of $27.1 million
on CSG trading securities sold in first quarter 2001. The 2001 losses primarily
reflected the impact of significant market declines on limited partnerships
invested in technology and communications issues.
Investment losses, net totaled $88.2 million in the 2002 period compared to
$147.4 million in the first nine months of 2001. The investment losses in the
first nine months of 2002 included writedowns of $140.0 million on fixed
maturities, primarily in the telecommunications, airline and energy sectors. In
addition, there were $41.2 million of net losses incurred on disposals of fixed
maturities, including $82.9 million of losses on telecommunications securities.
These losses were substantially offset by a $96.8 million gain on the sale of
one real estate property in second quarter 2002. Investment losses in the first
nine months of 2001 were principally related to $208.4 million of writedowns
primarily of high yield fixed maturities partially offset by gains on sales of
fixed maturities.
The $154.0 million increase in commissions, fees and other income was primarily
due to the $247.0 million increase in the fair value of the GMIB reinsurance
contracts in the Financial Advisory/Insurance segment, disclosed in Note 7 of
Notes to Consolidated Financial Statements included elsewhere herein, partially
offset by $115.9 million lower
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fees in the Investment Management segment. The $85.6 million decrease in
Alliance's investment advisory and services fees principally resulted from lower
average assets under management due to market depreciation and lower performance
fees primarily related to certain accounts with a value equity investment
orientation, partially offset by higher brokerage transaction charges received
by Alliance. The $49.3 million lower distribution revenues at Alliance were
primarily due to lower average daily mutual fund assets under management
attributable to market depreciation and net asset outflows. The declines were
partially offset by a $26.5 million increase in revenues from institutional
research services due to higher NYSE, European and OTC trading volumes.
Benefits and Other Deductions. Total benefits and other deductions decreased
$280.5 million, primarily due to the cessation of goodwill amortization upon the
adoption of SFAS No. 142 on January 1, 2002, lower compensation and benefits and
lower other operating costs and expenses.
Policyholders' benefits decreased slightly by $2.1 million as the absence of
claims associated with the September 11, 2001 terrorist attacks and favorable
life mortality in the 2002 period were partially offset by higher GMDB claims
and higher claims experience in reinsurance assumed product lines.
Interest credited to policyholders' account balances also posted a small
decrease of $4.4 million in the 2002 period as the impact of lower crediting
rates was substantially offset by higher General Account balances.
When compared to the first nine months of 2001, there was a $92.8 million
decrease in compensation and benefits in the first nine months of 2002 as $127.7
million lower expenses in the Financial Advisory/Insurance segment were
partially offset by a $35.1 million increase in the Investment Management
segment. The Financial Advisory/Insurance segment totals included $11.4 million
of credits resulting from changes in the SARs liability in the 2002 period as
compared to $80.0 million in the comparable 2001 period. The negative impact of
lower SARs credits was more than offset by lower employee salary expenses due to
reduced headcounts partially offset by higher pension plan costs, including the
impact of reducing the expected long-range return on assets for the qualified
pension plan from 10.25% as of January 1, 2001 to 9.0% as of January 1, 2002.
Compensation and benefits for the first nine months of 2001 for the Financial
Advisory/Insurance segment included payments to certain former AXA Financial
executive officers under continuity agreements related to AXA's minority
interest buyout. The increase in compensation and benefits in the Investment
Services segment was due to higher commissions and higher incentive compensation
primarily attributable to deferred compensation agreements entered into in
connection with the Bernstein acquisition partially offset by lower base
compensation at Alliance.
Commissions increased $50.8 million due to higher sales of annuity contracts and
third-party insurance products.
Distribution plan payments totaled $344.0 million for the first nine months of
2002, down $25.1 million from the prior year's total due to lower payments by
Alliance to financial intermediaries for distribution of sponsored mutual funds
and cash management services' products due to lower average mutual fund assets
under management.
Interest expense decreased $8.9 million to $164.0 million principally due to the
absence of interest on the short-term loan from AXA that was repaid in April
2001.
DAC amortization declined $14.4 million to $213.6 million for the first nine
months of 2002. As required by SFAS No. 97, "Accounting and Reporting by
Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains
and Losses from the Sale of Investments," and SFAS No. 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for
Certain Long-Duration Participating Contracts," estimates and assumptions
underlying the DAC amortization rates are reassessed and updated at the end of
each reporting period ("DAC unlocking"). In accordance with SFAS No. 97, DAC for
variable and interest-sensitive life insurance and variable annuities is
amortized over the expected total life of the contracts as a constant percentage
of estimated gross profits arising principally from investment results, Separate
Account fees, mortality and expense margins and surrender charges based on
historical and anticipated future experience, updated at the end of each
accounting period. The effect of DAC unlocking is reflected in earnings in the
period such estimated gross profits are revised. A decrease in expected gross
profits would accelerate DAC amortization. Conversely, an increase in expected
gross profits would slow DAC amortization.
A significant assumption in the amortization of DAC on variable and
interest-sensitive life insurance and variable annuities relates to projected
future Separate Account performance. Expected future gross profit assumptions
related to Separate Account performance are set by management using a long-term
view of expected average market returns by applying a reversion to the mean
approach. In applying this approach to develop estimates of future returns, it
is assumed that the market will return to an average gross long-term return
estimate, developed with reference to historical long-term equity market
performance and subject to assessment of the reasonableness of resulting
estimates of future return assumptions. For purposes of making this
reasonableness assessment,
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management has set limitations as to maximum and minimum future rate of return
assumptions, as well as a limitation on the duration of use of these maximum or
minimum rates of return. Currently, the average gross long-term annual return
estimate is 9% (7.15% net of product weighted average Separate Account fees),
and the gross maximum and minimum annual rate of return limitations are 15%
(13.15% net of product weighted average Separate Account fees) and 0% (-1.85%
net of product weighted average Separate Account fees), respectively. The
maximum duration over which these rate limitations may be applied is 5 years.
This approach will continue to be applied in future periods. If actual market
returns continue at levels that would result in assuming future market returns
of 15% for more than 5 years in order to reach the average gross long-term
return estimate, the application of the 5 year maximum duration limitation would
result in an acceleration of DAC amortization. Conversely, actual market returns
resulting in assumed future market returns of 0% for more than 5 years would
result in a required deceleration of DAC amortization. As of September 30, 2002,
current projections of future average gross market returns are within the
maximum and minimum limitations and assume a reversion to the mean of 9% after 3
years.
In addition, projections of future mortality assumptions related to variable and
interest-sensitive life products are based on a long-term average of actual
experience. This assumption is updated quarterly to reflect recent experience as
it emerges. Improvement of life mortality in future periods from that currently
projected would result in future deceleration of DAC amortization. Conversely,
deterioration of life mortality in future periods from that currently projected
would result in future acceleration of DAC amortization. Generally, life
mortality experience has improved in recent periods.
Capitalization of DAC increased $7.6 million to $556.4 million in the first nine
months of 2002 due to higher commissions partially offset by lower deferrable
expenses.
The $136.1 million decline in the amortization of intangible assets was the
result of the cessation of goodwill amortization upon adopting SFAS No. 142.
Other operating costs and expenses declined $51.9 million primarily due to lower
consulting fees, lower premium taxes and state and local income taxes and the
impact of other cost saving measures on travel, printing and other general
expenses, partially offset by an increased accrual for litigation.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products for the first nine months of 2002 increased from prior year levels by
$1.25 billion to $6.05 billion. This increase was primarily due to higher
premiums from annuities in both the retail and wholesale channels, including
$668.3 million in sales of a new single premium deferred annuity product in the
2002 period compared to $8.3 million in third quarter 2001 when it was first
introduced, and $2.11 billion in sales of the new line of variable annuity
products, introduced in April 2002. Total sales of mutual funds and fee based
assets gathered increased $345.8 million to $2.77 billion in the first nine
months of 2002, up from $2.43 billion in the comparable 2001 period.
Surrenders and Withdrawals. When totals for the first nine months of 2002 are
compared to the comparable 2001 period, surrenders and withdrawals increased
from $3.58 billion to $3.85 billion, including the surrender of a single large
pension plan contract totaling $123.8 million in second quarter 2002 that caused
the annualized annuities surrender rate to increase to 10.0% for the first nine
months of 2002. When this surrender is excluded, the annualized annuities
surrender rate increased to 9.6% in the 2002 period from 8.7% in the same period
in 2001, while the individual life surrender rate remained steady at 3.8%. The
trends in surrender and withdrawal rates described above continue to fall within
the range of expected experience.
Assets Under Management. An analysis of assets under management follows:
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
SEPTEMBER 30,
---------------------------------
2002 2001
--------------- ---------------
Third party (1).......................................................... $ 319,889 $ 364,096
General Account and other................................................ 38,874 36,916
Separate Accounts........................................................ 35,975 42,666
--------------- ---------------
Total Assets Under Management............................................ $ 394,738 $ 443,678
=============== ===============
(1) 2001 amounts have been restated to conform to 2002 presentation.
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Third party assets under management at September 30, 2002 decreased $44.21
billion primarily due to decreases at Alliance. General Account and other assets
under management increased $1.96 billion from the amounts reported at September
30, 2001 due to higher sales of General Account based products and products with
General Account and dollar cost averaging options and to policyholder initiated
transfers from the Separate Account. The $6.69 billion decline in Separate
Account assets under management resulted from continued market depreciation
which more than offset net new deposits.
Alliance assets under management at September 30, 2002 decreased to $368.65
billion from $417.80 billion at September 30, 2001, principally due to
significant market depreciation and net cash outflows. Decreases of $30.7
billion and $19.7 billion, respectively, in retail and institutional assets
under management were partially offset by a $1.3 billion increase in the private
client sector. Net asset outflows of $11.1 billion in the retail channel in the
first nine months of 2002 more than offset net asset inflows in both the
institutional investment management and private client distribution channels of
$2.6 billion and $3.8 billion, respectively. Non-US clients accounted for 14.4%
of Alliance's September 30, 2002 assets under management total.
Other Discontinued Operations. During the third quarter, as part of AXA
Financial's annual planning process, investment and benefit cash flow
projections were prepared. These detailed projections resulted in a $29.9
million ($19.4 million after tax) release of Other Discontinued Operations'
allowance for future losses in third quarter 2002. Earnings from Other
Discontinued Operations in the first nine months of 2002 primarily reflected
this release.
LIQUIDITY AND CAPITAL RESOURCES
Holding Company. The Holding Company paid a cash shareholder dividend of
$200.0 million in May 2002.
In January 2001, upon the merger of AXA Merger Corp. into the Holding Company,
the 53.4 million shares of Holding Company Common Stock held by AXA Merger Corp.
were cancelled and 20.7 million shares of treasury stock were retired. In
addition, the $3.0 billion loan to AXA Merger by the Holding Company was
extinguished. The loan proceeds had been used to fund a portion of the AXA
minority interest buyout in December 2000. Also in first quarter 2001, the
Holding Company borrowed $1.10 billion from AXA under a renewable financing
agreement and used the proceeds to partially fund second quarter 2001 tax
payments related to the gain on the sale of DLJ. The borrowings were repaid in
April 2001.
Equitable Life. In the first nine months of 2002, Equitable Life paid
shareholder dividends of $250.0 million as compared to $1.50 billion in the
comparable 2001 period.
Equitable Life contributed $100.0 million to fund its defined benefit pension
plan in third quarter 2002. Management is considering an additional contribution
in fourth quarter 2002, depending upon the performance of pension plan assets.
At September 30, 2002, Equitable Life's short-term debt totaled $244.5 million
which primarily consisted of mortgage-backed repurchase agreements. In June
2002, Equitable Life renewed its $250.0 million 364-day credit facility. At
September 30, 2002, no amounts were outstanding under Equitable Life's
commercial paper program or its revolving credit facility.
During first quarter 2001, Equitable Life sold its remaining holdings of CSG
stock received upon the sale of DLJ.
Alliance. At September 30, 2002, Alliance had $35.5 million of short-term debt
outstanding, principally under its commercial paper program, compared to $173.0
million outstanding at September 30, 2001. In August 2001, Alliance issued
$400.0 million 5.625% notes due 2006 under its July 11, 2001 shelf registration
statement. The net proceeds were used to reduce short-term debt and for general
partnership purposes.
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
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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 risk
and other factors that could cause such differences and/or, if realized, could
have a material adverse effect on AXA Financial's consolidated financial
position and/or results of operations.
Market Risk. AXA Financial's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. The primary market risk exposures result from interest rate
fluctuations, equity price movements and changes in credit quality. The nature
of each of these risks is discussed under the caption "Quantitative and
Qualitative Disclosures About Market Risk" and in Note 15 of Notes to
Consolidated Financial Statements, both contained in the 2001 Form 10-K.
Increased volatility of equity markets can impact profitability of the Financial
Advisory/Insurance and Investment Management segments. For the Insurance Group,
in addition to impacts on equity securities held in the General Account,
significant changes in equity markets impact asset-based policy fees charged on
variable life and annuity products. Moreover, for variable life and annuity
products with guaranteed minimum death or income benefits, sustained periods
with declines in the value of underlying Separate Account investments would
increase the Insurance Group's net exposure to guaranteed benefits under those
contracts (increasing claims, net of any reinsurance) at a time when fee income
for these benefits is also reduced from prior period levels.
Equity market volatility also may impact DAC amortization on variable and
universal life insurance contracts, variable annuities and participating
traditional life contracts. To the extent that actual market trends, and
reasonable expectations as to future performance drawn from those trends, lead
to reductions in the investment return and/or other related estimates underlying
the DAC amortization rates, DAC amortization could be accelerated. Volatile
equity markets can also impact the level of contractholder surrender activity,
which, in turn, can impact future profitability.
Interest rate fluctuations, equity price movements and changes in credit quality
may also affect invested assets held in the qualified pension plan which could
impact future pension plan costs.
The effects of significant equity market fluctuations on the Insurance Group's
operating results can be complex and subject to a variety of estimates and
assumptions, such as assumed rates of long-term equity market performance,
making it difficult to reliably predict effects on operating earnings over a
broad range of equity markets performance alternatives. Further, these effects
may not always be proportional for market increases and market decreases.
Margins on interest-sensitive annuities and universal life insurance can be
affected by interest rate fluctuations. In a declining interest rate
environment, credited rates can generally be adjusted more quickly than the
related invested asset portfolio is affected by declining reinvestment rates,
tending to result in higher net interest margins on interest-sensitive products
in the short term. However, under scenarios in which interest rates fall and
remain at significantly lower levels, minimum guarantees on interest-sensitive
annuities and universal life insurance (generally 2.5% to 4.5%) could cause the
spread between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate.
For both interest-sensitive annuities and universal life insurance, a rapid and
sustained rise in interest rates poses risks of deteriorating spreads and high
surrenders. In this environment, there is pressure to increase credited rates on
interest-sensitive products to match competitors' new money rates. However, such
changes in credited rates generally occur more quickly than the earned rates on
the related invested asset portfolios reflect changes in market yields. The
greater and faster the rise in interest rates, the more the earned rates will
tend to lag behind market rates.
For the Investment Management segment, significant changes in equity markets can
impact revenues and the recoverability of deferred costs. See "Other Risks of
the Investment Management Segment" below.
Other Risks of the Financial Advisory/Insurance Segment. 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 AXA Financial's strategy; the intensity of competition from other insurance
companies, banks and other financial institutions; conditions in the securities
markets; the strength and professionalism of distribution channels; the
continued development of additional channels; the financial and claims paying
ratings of Equitable Life; its reputation and visibility in the market place;
its ability to develop, distribute and administer competitive products and
services in a timely, cost-effective manner; and its investment management
performance. In addition,
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the nature and extent of competition and the markets for products sold by the
Insurance Group may be materially affected by changes in laws and regulations,
including changes relating to savings, retirement funding and taxation. See
"Business - Regulation" contained in the 2001 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 and software
capitalization; successful implementation of expense-reduction initiatives;
secular trends; AXA Financial's mortality, morbidity, persistency and claims
experience; margins between investment results from General Account Investment
Assets and interest credited on individual insurance and annuity products, which
are subject to contractual minimum guarantees; the account balances against
which policy fees are assessed on universal and variable life insurance and
variable annuity products; the pattern of DAC amortization which is based on
models involving numerous estimates and subjective judgments including those
regarding investment, mortality and expense margins, expected market rates of
return, lapse rates and anticipated surrender charges; the adequacy of reserves
and the extent to which subsequent experience differs from management's
estimates and assumptions, including future reinvestment rates, used in
determining those reserves; and the effects of the September 2001 and any future
terrorist attacks and the results of war on terrorism. Recoverability of DAC is
dependent on future contract cash flows (including premiums and deposits,
contract charges, benefits, surrenders, withdrawals, and expenses), which can be
affected by equity market and interest rate trends as well as changes in
contract persistency levels. 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.
Other Risks of the Investment Management Segment. Alliance's revenues are
largely dependent on the total value and composition of assets under its
management and are, therefore, affected by the performance of financial markets,
the investment performance of sponsored investment products and separately
managed accounts, additions and withdrawals of assets, purchases and redemptions
of mutual funds and shifts of assets between accounts or products with different
fee structures, as well as general economic conditions, future acquisitions,
competitive conditions and government regulations, including tax rates. See
"Combined Operating Results by Segment - Investment Management" contained in the
2001 Form 10-K.
Payments by Alliance made to financial intermediaries in connection with the
sale of back-end load shares under Alliance's mutual fund distribution system
are capitalized as deferred sales commissions and amortized over periods not
exceeding five and one-half years, the periods of time during which deferred
sales commissions are expected to be recovered from distribution fees received
from those funds and from contingent deferred sales charges ("CDSC") received
from shareholders of those funds upon redemption of their shares. CDSC reduces
unamortized deferred sales commissions when received. The recorded amount of the
deferred sales commission asset was $544.0 million at September 30, 2002.
Alliance's management tests the deferred sales commission asset for
recoverability quarterly, or when events or changes in circumstances occur that
could significantly increase the risk of impairment of the asset. Alliance's
management determines recoverability by estimating undiscounted future cash
flows to be realized from this asset, as compared to its recorded amount, as
well as the estimated remaining life of the deferred sales commission asset over
which undiscounted future cash flows are expected to be received. Undiscounted
future cash flows consist of ongoing distribution fees and CDSC. Distribution
fees are calculated as a percentage of average assets under management related
to back-end load shares. CDSC is based on lower of cost or current value, at the
time of redemption, of back-end load shares redeemed and the point at which
redeemed during the applicable minimum holding period under the mutual fund
distribution system.
Significant assumptions utilized to estimate average assets under management of
back-end load shares include expected future market levels and redemption rates.
Market assumptions are selected using a long-term view of expected average
market returns based on historical returns of broad market indices. At September
30, 2002, Alliance's management used estimates of 10% and 7% for equity and
fixed income annual market returns, respectively. An increase in the expected
average market returns would increase the undiscounted future cash flows, while
a reduction in the expected average market returns would decrease the
undiscounted future cash flows. Future redemption rate assumptions were
determined by reference to actual redemption experience over the last five
years. Alliance's management determined that a range of assumed average annual
redemption rates of 14% to 16%, calculated as a percentage of average assets
under management, should be used at September 30, 2002. An increase in the
assumed rate of redemptions would decrease the undiscounted future cash flows,
while a decrease in the assumed rate of redemptions would increase the
undiscounted future cash flows. These assumptions are updated periodically.
Estimates of undiscounted future cash flows and the remaining life of the
deferred sales commission asset are made from these assumptions. Alliance's
management considers the results of these analyses performed at various dates
and, if it determines this asset is not recoverable, an impairment condition
would exist and a loss would be measured as the amount by which the recorded
amount of the asset exceeds its estimated fair value.
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Estimated fair value is determined using Alliance management's best estimate of
discounted cash flows. Should an impairment occur, any loss would reduce
materially the recorded amount of the asset with a corresponding charge to
expense.
Capital market declines and higher redemption rates, such as occurred during
third quarter 2002, increase the risk that an impairment will be deemed to have
occurred. Alliance's management determined that the deferred sales commission
asset was not impaired as of September 30, 2002.
Declines in financial markets from September 30, 2002 levels or continued higher
redemption levels, or both, as compared to the assumptions used to estimate
undiscounted future cash flows could result in the impairment of the deferred
sales commission asset. Due to the volatility of the capital markets and changes
in redemption rates, Alliance's management is unable to predict whether or when
a future impairment of the deferred sales commission asset will occur.
Other Discontinued Operations. The determination of the allowance for future
losses for the discontinued Wind-Up Annuities continues to involve numerous
estimates and subjective judgments including those regarding expected
performance of investment assets, ultimate mortality experience and other
factors which affect investment and benefit projections. There can be no
assurance the losses provided for will not differ from the losses ultimately
realized. To the extent actual results or future projections of Other
Discontinued Operations differ from management's current best estimates
underlying the allowance, the difference would be reflected as earnings or loss
from discontinued operations within the consolidated statements of earnings. In
particular, to the extent income, sales proceeds and holding periods for equity
real estate differ from management's previous assumptions, periodic adjustments
to the allowance are likely to result.
Technology and Information Systems. 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 ongoing
management information purposes in a secure and timely manner. These systems are
maintained to provide customer privacy and are tested to ensure the viability of
business resumption plans. Any significant difficulty associated with the
ongoing 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. The frequency of large damage awards, including large punitive
damage awards that bear little or no relation to actual economic damages
incurred by plaintiffs in some jurisdictions, continues to create the potential
for an unpredictable judgment in any given matter. In addition, examinations by
Federal and state regulators could result in adverse publicity, sanctions and
fines. For further information, see "Business - Regulation," contained in the
2001 Form 10-K, and "Legal Proceedings," contained in the 2001 Form 10-K and
herein.
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 the 2001 Form 10-K for pronouncements issued but not
effective at December 31, 2001.
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, investment advisors
and anti-money laundering compliance programs. Changes in the regulatory
environment could have a material impact on operations and results. The
activities of the Insurance Group are subject to the supervision of the
insurance regulators of each of the 50 states. See "Business - Regulation"
contained in the 2001 Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H to Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of AXA Financial's
disclosure controls and procedures as of September 30, 2002. Based on that
evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that AXA Financial's disclosure controls and
procedures are effective. There have been no significant changes in AXA
Financial's internal controls or in other factors that could significantly
affect internal controls subsequent to September 30, 2002.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no new material legal proceedings and no material developments
in matters which were previously reported in the Registrant's Form 10-K for the
year ended December 31, 2001, except as described below:
In Franze, in July 2002, the Court of Appeals reversed the District Court's
decision certifying the class on the ground that the named plaintiffs lacked
standing to assert claims against Equitable Life because their claims were
time-barred. In August 2002, after remand, the District Court vacated its
previous order regarding class certification and dismissed the case with
prejudice.
In McEachern, in March 2002, plaintiff filed a motion to alter or amend the
court's judgment. In September 2002, plaintiff filed an amended complaint in the
United States District Court for the Southern District of Alabama. In the
amended complaint, the original plaintiff added two new plaintiffs who are
alleged to have purchased individual retirement annuities in 1998 and 1999. The
amended complaint does not assert any claims against Equitable Life's agent,
previously named as a defendant. Plaintiffs seek to represent a class of (i) all
persons who purchased deferred variable annuities from Equitable Life in tax
deferred qualified retirement plans, and (ii) all persons who were charged
allegedly unnecessary mortality fees for tax deferral for variable annuities
held in qualified retirement accounts. Plaintiffs assert causes of action for
unjust enrichment, money had and received (a common-law cause of action similar
to unjust enrichment), conversion, breach of contract, negligence, negligent
and/or wanton training, negligent and/or wanton supervision, and breach of
fiduciary duty. Plaintiffs seek damages, including punitive damages, in an
unspecified amount and attorneys' fees and expenses.
In Patenaude, in May 2002, the United States Court of Appeals for the Ninth
Circuit affirmed the judgment of the District Court which dismissed the
complaint. The deadline for plaintiff to appeal this order has passed.
In Malholtra, in March 2002, defendants filed a motion to dismiss plaintiffs'
amended complaint.
In the Mississippi Actions, two additional lawsuits were filed in April and May
2002, respectively, one by 79 additional plaintiffs and the second, by four
additional plaintiffs. In the lawsuit involving 79 plaintiffs, Equitable Life
filed a notice of removal and, in August 2002, the United States District Court
for the Northern District of Mississippi denied plaintiffs' motion for
reconsideration of that Court's order denying plaintiffs' motion to remand.
Accordingly, that lawsuit has been removed from Mississippi State Court to the
United States District Court for the Northern District of Mississippi. Motions
to remand are pending in several other cases. Plaintiffs' appeal, in a
previously filed lawsuit, of the dismissal of the action by the Circuit Court of
Sunflower County has been fully briefed. There are currently 27 lawsuits filed
in Mississippi by approximately 290 plaintiffs.
In four of the Mississippi Actions, between May and August 2002 four former
agents and one retired agent of Equitable Life named as defendants have asserted
cross-claims against Equitable Life seeking indemnification, as well as
compensatory and punitive damages for, among other things, alleged injury to
their reputations. Equitable Life filed motions to dismiss those counter-claims
and commenced actions in the Federal district courts in Mississippi seeking to
compel arbitration of the cross-claims.
In The Equitable Life Assurance Society of the United States v. American
National Bank and Trust Company of Chicago, as trustee f/b/o Emerald Investments
LP and Emerald Investments LP, in May 2002, the District Court granted in part
and denied in part Equitable Life's motion to dismiss defendants' counterclaims,
dismissing defendants' Illinois Securities Act and New York Consumer Fraud Act
claims. Equitable Life has answered defendants' remaining counterclaims.
In Fischel, in May 2002, the District Court issued an order granting plaintiffs'
motion for partial summary judgment, granting Equitable Life's motion for
summary judgment on plaintiffs' claim for breach of fiduciary duty and otherwise
denying Equitable Life's motion for summary judgment. The court ruled that
Equitable Life is liable to plaintiffs on their contract claims for benefits
under ERISA. The court has deferred addressing the relief to which plaintiffs
are entitled in light of the May 2002 order. A decision was rendered in October
2002 on the appeal by plaintiffs to the Court of Appeals for the Ninth Circuit
concerning the award of legal fees to plaintiffs' counsel for the previously
settled claim not involving health benefits. The Court of Appeals denied
plaintiffs' challenge to the District Court's subject matter jurisdiction over
the settled claim, affirmed the method that the District Court used to calculate
the award of legal fees to plaintiffs' counsel and remanded for further
consideration of the fee award.
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In Hirt, in April 2002, plaintiffs filed a motion seeking to certify a class of
"all Plan participants, whether active or retired, their beneficiaries and
Estates, whose accrued benefits or pension benefits are based on the Plan's Cash
Balance Formula." Defendants responded to that motion in May 2002. Also, in
April 2002, plaintiffs agreed to dismiss with prejudice their claim that the
change to the cash balance formula violates ERISA by improperly applying the
formula to retroactively reduce accrued benefits. That claim has been dismissed.
In R.S.M., in October 2002, the Delaware Court of Chancery approved the
settlement.
In In re AXA Financial, Inc. Shareholders Litigation, a hearing with respect to
approval of the proposed settlement was held in March 2002. In May 2002, the
court approved the settlement and entered an Order and Final Judgment. In June
2002, one shareholder appealed. The shareholder voluntarily dismissed his appeal
in September 2002 making the Order and Final Judgment final and not subject to
further appeal.
In Uhrik, a hearing with respect to approval of the proposed settlement was held
in June 2002 and the court entered an Order and Final Judgment approving the
settlement and dismissing the case. The deadline to appeal the Order and Final
Judgment has passed.
In Miller, in April 2002, plaintiffs filed a second amended complaint. The
allegations and relief sought in the second amended complaint are virtually
identical to the amended class action complaint. In May 2002, defendants filed a
motion to dismiss the second amended complaint.
Plaintiffs in the Benak, Roy, Roffe, Tatem and Gissen cases have moved to
consolidate the complaints. In July 2002, a complaint entitled Pfeiffer v.
Alliance Capital Management L.P. and Alliance Premier Growth Fund ("Pfeiffer
Complaint") was filed in Federal District Court in the District of New Jersey
against Alliance and Premier Growth Fund. The allegations and relief sought in
the Pfeiffer Complaint are virtually identical to the Benak Complaint. In August
2002, all of these cases, including the Pfeiffer Complaint, have been
consolidated in Federal District Court in the District of New Jersey. Alliance
believes the plaintiff's allegations in the Pfeiffer Complaint are without merit
and intends to vigorously defend against these allegations.
Although the outcome of litigation cannot be predicted with certainty, AXA
Financial's management believes that the ultimate resolution of the matters
described above should not have a material adverse effect on the consolidated
financial position of AXA Financial. AXA Financial's management cannot make an
estimate of loss, if any, or predict whether or not such litigations will have a
material adverse effect on AXA Financial's consolidated results of operations in
any particular period.
In April 2002, a consolidated complaint entitled In re Enron Corporation
Securities Litigation was filed in Federal District Court in the Southern
District of Texas, Houston Division, against numerous defendants, including
Alliance. The principal allegations of the complaint, as they pertain to
Alliance, are that Alliance violated Sections 11 and 15 of the Securities Act of
1933, with respect to a registration statement filed by Enron and effective with
the SEC on July 18, 2001, which was used to sell $1.9 billion Enron Corporation
Zero Coupon Convertible Senior Notes due 2021. Plaintiffs allege that Frank
Savage, who was at that time an employee of Alliance and who was and remains a
director of the general partner of Alliance, signed the registration statement
at issue. Plaintiffs allege that the registration statement was materially
misleading. Plaintiffs further allege that Alliance was a controlling person of
Frank Savage. Plaintiffs therefore assert that Alliance is itself liable for the
allegedly misleading registration statement. Plaintiffs seek recission or a
recissionary measure of damages. The complaint specifically states that "[n]o
allegations of fraud are made against or directed at" Alliance. In June 2002,
Alliance moved to dismiss the complaint as the allegations therein pertain to
it. Alliance believes the allegations of the complaint as to it are without
merit and intends to vigorously defend against these allegations. At the present
time, management of Alliance is unable to estimate the impact, if any, that the
outcome of this action may have on Alliance's results of operations or financial
condition and AXA Financial's management is unable to estimate the impact, if
any, that the outcome of this action may have on its consolidated results of
operations or financial condition.
In May, 2002, a complaint entitled The Florida State Board of Administration v.
Alliance Capital Management L.P. (the "SBA Complaint") was filed in the Circuit
Court of the Second Judicial Circuit, in and for Leon County, Florida against
Alliance. The SBA Complaint alleges breach of contract relating to the
Investment Management Agreement between The Florida State Board of
Administration ("SBA") and Alliance, breach of the covenant of good faith and
fair dealing contained in the Investment Management Agreement, breach of
fiduciary duty, negligence, gross negligence and violation of the Florida
Securities and Investor Protection Act, in connection with purchases and sales
of Enron common stock for the SBA investment account. The SBA seeks more than
$300 million in compensatory damages and an unspecified amount of punitive
damages. In June 2002, Alliance moved to dismiss the SBA Complaint. In September
2002, that motion was denied. Alliance believes the SBA's allegations in the SBA
Complaint are without merit and intends to vigorously defend against these
allegations. At the present time,
-27-
Alliance's management is unable to estimate the impact, if any, that the outcome
of this action may have on Alliance's results of operations or financial
condition and AXA Financial's management is unable to estimate the impact, if
any, that the outcome of this action may have on its consolidated results of
operations or financial condition.
In September 2002, a complaint entitled Lawrence E. Jaffe Pension Plan, Lawrence
E. Jaffe Trustee U/A 1198 v. Alliance Capital Management L.P., Alfred Harrison
and Alliance Premier Growth Fund, Inc. ("Jaffe Complaint") was filed in Federal
District Court in the Southern District of New York against Alliance, Alfred
Harrison and Premier Growth Fund alleging violation of the ICA. The Jaffe
Complaint alleges that the defendants breached their fiduciary duties of
loyalty, care and good faith to Premier Growth Fund by causing Premier Growth
Fund to invest in the securities of Enron and that the agreements between
Premier Growth Fund and Alliance violated the ICA because all of the directors
of Premier Growth Fund should be deemed interested under the ICA. Plaintiff
seeks damages equal to Premier Growth Fund's losses as a result of Premier
Growth Fund's investment in shares of Enron and a recovery of all fees paid to
Alliance beginning November 1, 2000. Alliance and Alfred Harrison believe that
plaintiff's allegations in the Jaffe Complaint are without merit and intend to
vigorously defend against these allegations. At the present time, management of
Alliance is unable to estimate the impact, if any, that the outcome of this
action may have on its results of operations or financial condition and AXA
Financial's management is unable to estimate the impact, if any, that the
outcome of this action may have on its consolidated results of operations or
financial condition.
In addition to the matters previously reported and those described above, the
Holding Company and its subsidiaries are involved in various legal actions and
proceedings in connection with their businesses. Some of the actions and
proceedings have been brought on behalf of various alleged classes of claimants
and certain of these claimants seek damages of unspecified amounts. While the
ultimate outcome of such matters cannot be predicted with certainty, in the
opinion of management no such matter is likely to have a material adverse effect
on AXA Financial's consolidated financial position. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards that bear little or no relation to actual economic damages incurred by
plaintiffs in some jurisdictions, continues to create the potential for an
unpredictable judgment in any given matter. Accordingly, AXA Financial's
management cannot make an estimate of loss, if any, or predict whether or not
any given matter will have a material adverse effect on AXA Financial's
consolidated results of operations in any particular period.
-28-
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On November 8, 2002, SCB Inc. (formerly Bernstein) and SCB Partners
Inc. gave notice with respect to the excercise of their rights to
sell to AXA Financial or an entity designated by AXA Financial 8.16
million Alliance Units at a purchase price equal to the average of
the closing prices of an Alliance Holding unit as quoted on the NYSE
for ten trading days ending on November 15, 2002. Upon completion of
this transaction, the Holding Company, Equitable Life and certain
subsidiaries' beneficial ownership in Alliance will increase
approximately 3.2% to approximately 55.7%.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
On August 14, 2002, the Holding Company furnished a current
report on Form 8-K relating to the certifications made by
its Chief Executive Officer and Chief Financial Officer as
required by Section 906 of the Sarbanes-Oxley Act of 2002.
On September 4, 2002, the Holding Company furnished a
current report on Form 8-K relating to a discussion of DAC
amortization by Vice Chairman of the Board and Chief
Financial Officer Stanley B. Tulin to security analysts on
September 3, 2002.
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, AXA
Financial, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 12, 2002 AXA FINANCIAL, INC.
By: /s/ Stanley B. Tulin
-------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: November 12, 2002 /s/ Alvin H. Fenichel
-------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and
Controller
-30-
CERTIFICATIONS
I, Christopher M. Condron, President and Chief Executive Officer of
AXA Financial, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of AXA Financial, Inc.
(the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have identified
for the Registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Christopher M. Condron
-------------------------------------
Christopher M. Condron
President and Chief Executive Officer
-31-
I, Stanley B. Tulin, Vice Chairman of the Board and Chief Financial Officer of
AXA Financial, Inc., certify that:
1) I have reviewed this quarterly report on Form 10-Q AXA Financial, Inc. (the
"Registrant");
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
quarterly report;
4) The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6) The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Stanley B. Tulin
----------------------------------------
Stanley B. Tulin
Vice Chairman of the Board and
Chief Financial Officer
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