Exhibit 99.1
FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AXA FINANCIAL, INC.
Report of Independent Accountants......................................................................... F-1
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2002 and 2002................................................. F-2
Consolidated Statements of Earnings, Years Ended December 31, 2002, 2001 and 2000....................... F-3
Consolidated Statements of Shareholders' Equity and Comprehensive Income,
Years Ended December 31, 2002, 2001 and 2000.......................................................... F-4
Consolidated Statements of Cash Flows, Years Ended December 31, 2002, 2001 and 2000..................... F-5
Notes to Consolidated Financial Statements.............................................................. F-7
FS-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
AXA Financial, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholders' equity and comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of AXA Financial, Inc. and its subsidiaries ("AXA Financial") at
December 31, 2002 and December 31, 2001, and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of AXA
Financial's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, AXA Financial
changed its method of accounting for variable annuity products that contain
guaranteed minimum death benefit and guaranteed minimum income benefit features,
and its method of accounting for intangible and long-lived assets in 2002.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 4, 2003
F-1
AXA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
----------------- --------------------
(In Millions)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 26,336.6 $ 23,355.0
Mortgage loans on real estate............................................. 3,746.2 4,333.3
Equity real estate........................................................ 717.3 875.7
Policy loans.............................................................. 4,035.6 4,100.7
Other equity investments.................................................. 751.4 768.4
Other invested assets..................................................... 1,331.6 687.2
----------------- --------------------
Total investments................................................ 36,918.7 34,120.3
Cash and cash equivalents................................................... 501.7 884.4
Cash and securities segregated, at estimated fair value..................... 1,174.3 1,415.2
Broker-dealer related receivables........................................... 1,446.2 1,950.9
Deferred policy acquisition costs........................................... 5,801.0 5,513.7
Goodwill and other intangible assets, net................................... 4,067.8 3,928.4
Amounts due from reinsurers................................................. 2,351.7 2,237.0
Loans to affiliates, at estimated fair value................................ 413.0 400.0
Other assets................................................................ 3,861.4 3,515.2
Separate Accounts assets.................................................... 39,012.1 46,947.3
----------------- --------------------
TOTAL ASSETS................................................................ $ 95,547.9 $ 100,912.4
================= ====================
LIABILITIES
Policyholders' account balances............................................. $ 23,037.5 $ 20,939.1
Future policy benefits and other policyholders liabilities.................. 13,975.7 13,542.7
Broker-dealer related payables.............................................. 735.2 1,265.5
Customers related payables.................................................. 1,566.8 1,814.5
Short-term and long-term debt............................................... 2,725.7 2,982.1
Federal income taxes payable................................................ 1,793.1 1,286.5
Other liabilities........................................................... 3,520.6 3,475.2
Separate Accounts liabilities............................................... 38,883.8 46,875.6
Minority interest in equity of consolidated subsidiaries.................... 1,301.0 1,255.2
Minority interest subject to redemption rights.............................. 515.4 651.4
----------------- --------------------
Total liabilities..................................................... 88,054.8 94,087.8
----------------- --------------------
Commitments and contingencies (Notes 14, 17, 18, 19 and 20)
SHAREHOLDERS' EQUITY
Common stock, at par value.................................................. 3.9 3.9
Capital in excess of par value.............................................. 1,028.6 1,016.7
Retained earnings........................................................... 5,805.5 5,601.9
Accumulated other comprehensive income...................................... 655.1 202.1
----------------- --------------------
Total shareholders' equity............................................ 7,493.1 6,824.6
----------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................. $ 95,547.9 $ 100,912.4
================= ====================
See Notes to Consolidated Financial Statements.
F-2
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------------- ----------------- ----------------
(In Millions)
REVENUES
Universal life and investment-type product policy fee
income...................................................... $ 1,315.5 $ 1,342.3 $ 1,413.3
Premiums...................................................... 945.2 1,019.9 1,175.0
Net investment income......................................... 2,393.7 2,423.1 2,668.2
Investment losses, net........................................ (287.7) (207.7) (829.6)
Commissions, fees and other income............................ 3,158.6 3,245.1 2,730.4
----------------- ----------------- -----------------
Total revenues.......................................... 7,525.3 7,822.7 7,157.3
----------------- ----------------- -------------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits....................................... 2,034.0 1,886.9 2,060.3
Interest credited to policyholders' account balances.......... 972.5 981.7 1,048.5
Compensation and benefits..................................... 1,561.3 1,708.5 1,250.2
Commissions................................................... 540.5 477.8 533.2
Distribution plan payments.................................... 392.8 429.1 421.3
Amortization of deferred sales commissions.................... 229.0 230.8 219.7
Interest expense.............................................. 211.6 235.0 226.7
Amortization of deferred policy acquisition costs............. 296.7 287.9 309.0
Capitalization of deferred policy acquisition costs........... (754.8) (746.4) (778.1)
Rent expense.................................................. 194.3 185.0 146.4
Amortization of goodwill and other intangible assets, net..... 24.2 206.1 79.2
Expenses related to AXA's minority interest acquisition....... - - 751.4
Other operating costs and expenses............................ 973.5 1,046.1 989.1
----------------- ----------------- ------------------
Total benefits and other deductions..................... 6,675.6 6,928.5 7,256.9
----------------- ----------------- ------------------
Earnings (loss) from continuing operations before Federal
income taxes and minority interest.......................... 849.7 894.2 (99.6)
Federal income tax (expense) benefit.......................... (9.8) (219.6) 42.5
Minority interest in net income of consolidated subsidiaries.. (283.8) (290.2) (280.2)
----------------- ----------------- ------------------
Earnings (loss) from continuing operations.................... 556.1 384.4 (337.3)
Earnings from discontinued operations, net of Federal
income taxes:
Investment Banking and Brokerage segment.................. - - 376.2
Other..................................................... 5.6 43.9 58.6
Gain on disposal of the discontinued Investment Banking and
Brokerage segment, net of Federal income taxes.............. - - 2,317.9
Cumulative effect of accounting changes, net of Federal
income taxes................................................ (33.1) (3.5) -
----------------- ----------------- ------------------
Net Earnings.................................................. $ 528.6 $ 424.8 $ 2,415.4
================= ================= ==================
See Notes to Consolidated Financial Statements
F-3
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------------- ----------------- -----------------
(In Millions)
Series D convertible preferred stock, beginning of year......... $ - $ 219.6 $ 239.7
Exchange of Series D convertible preferred stock................ - (54.6) (20.1)
Redemption of Series D convertible preferred stock.............. - (165.0) -
----------------- ----------------- -----------------
Series D convertible preferred stock, end of year............... - - 219.6
----------------- ----------------- -----------------
Stock employee compensation trust, beginning of year............ - (219.6) (239.7)
Exchange of Series D convertible preferred stock in the
stock employee compensation trust............................. - 54.6 20.1
Redemption of Series D convertible preferred stock in the
stock employee compensation trust............................. - 165.0 -
----------------- ----------------- -----------------
Stock employee compensation trust, end of year.................. - - (219.6)
----------------- ----------------- -----------------
Common stock, at par value, beginning of year................... 3.9 4.6 4.5
Issuance of common stock........................................ - - .1
Shares cancelled in connection with merger of
AXA Merger Corp............................................... - (.5) -
Treasury stock retired, at par value............................ - (.2) -
----------------- ----------------- -----------------
Common stock, at par value, end of year......................... 3.9 3.9 4.6
----------------- ----------------- -----------------
Capital in excess of par value, beginning of year............... 1,016.7 4,753.8 3,739.1
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...... 11.9 (108.2) 1,014.7
----------------- ----------------- -----------------
Capital in excess of par value, end of year..................... 1,028.6 1,016.7 4,753.8
----------------- ----------------- -----------------
Treasury stock, beginning of year............................... - (629.6) (490.8)
Purchase of shares for treasury................................. - - (138.8)
Retirement of treasury stock.................................... - 629.6 -
----------------- ----------------- -----------------
Treasury stock, end of year..................................... - - (629.6)
----------------- ----------------- -----------------
Retained earnings, beginning of year............................ 5,601.9 5,380.6 3,008.6
Net earnings.................................................... 528.6 424.8 2,415.4
Dividends on common stock....................................... (325.0) (200.0) (43.4)
Decrease in retained earnings in connection with merger of
AXA Merger Corp............................................... - (3.5) -
----------------- ----------------- -----------------
Retained earnings, end of year.................................. 5,805.5 5,601.9 5,380.6
----------------- ----------------- -----------------
Accumulated other comprehensive income, (loss) beginning of
year.......................................................... 202.1 (2.3) (422.5)
Other comprehensive income...................................... 453.0 204.4 420.2
----------------- ----------------- -----------------
Accumulated other comprehensive income (loss), end of year...... 655.1 202.1 (2.3)
----------------- ----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY, END OF YEAR......................... $ 7,493.1 $ 6,824.6 $ 9,507.1
================= ================= =================
COMPREHENSIVE INCOME
Net earnings.................................................... $ 528.6 $ 424.8 $ 2,415.4
----------------- ----------------- -----------------
Change in unrealized gains (losses), net of reclassification
adjustment.................................................... 470.4 204.8 417.4
Minimum pension liability adjustment............................ (17.4) (.4) 2.8
----------------- ----------------- -----------------
Other comprehensive income...................................... 453.0 204.4 420.2
----------------- ----------------- -----------------
COMPREHENSIVE INCOME............................................ $ 981.6 $ 629.2 $ 2,835.6
================= ================= =================
See Notes to Consolidated Financial Statements.
F-4
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------------- ----------------- -----------------
(In Millions)
Net earnings.................................................. $ 528.6 $ 424.8 $ 2,415.4
Adjustments to reconcile net earnings to net cash provided
(used) by operating activities:
Interest credited to policyholders' account balances........ 972.5 981.7 1,048.5
Universal life and investment-type product
policy fee income......................................... (1,315.5) (1,342.3) (1,413.3)
Net change in broker-dealer and customer
related receivables/payables.............................. (237.8) 185.8 422.9
Investment losses (gains), net.............................. 287.7 207.7 829.6
Gain on disposal of the discontinued Investment Banking and
Brokerage segment......................................... - - (2,317.9)
Expenses related to AXA's minority interest acquisition..... - - 702.7
Change in deferred policy acquisition costs................. (458.1) (458.5) (469.1)
Change in future policy benefits............................ 218.0 (15.1) (825.6)
Change in property and equipment............................ (113.4) (234.0) (326.4)
Change in Federal income taxes.............................. 252.0 (1,249.0) 1,769.6
Purchase of segregated cash and securities, net............. 240.8 (108.8) (610.4)
Change in fair value of guaranteed minimum income
benefit reinsurance contracts............................. (120.0) - -
Amortization of goodwill and other intangible assets........ 24.2 206.1 79.2
Other, net.................................................. 239.5 430.1 (405.5)
----------------- ----------------- -----------------
Net cash provided (used) by operating activities.............. 518.5 (971.5) 899.7
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................... 3,006.7 2,480.0 2,583.0
Sales....................................................... 8,039.2 9,289.8 8,652.2
Purchases................................................... (12,725.7) (11,842.5) (8,676.9)
(Increase) decrease in short-term investments............... (571.4) 228.3 126.9
Sale of subsidiary.......................................... - - 3,461.2
Acquisition of subsidiary................................... (249.7) - (1,480.0)
Loans to affiliates......................................... - (400.0) (3,000.0)
Other, net.................................................. 156.8 (101.6) (149.8)
----------------- ----------------- -----------------
Net cash (used) provided by investing activities.............. (2,344.1) (346.0) 1,516.6
----------------- ----------------- -----------------
F-5
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(CONTINUED)
2002 2001 2000
----------------- ----------------- -----------------
(In Millions)
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................. $ 4,328.5 $ 3,198.8 $ 2,695.6
Withdrawals and transfers to Separate Accounts............ (2,022.9) (2,458.1) (3,941.8)
Net (decrease) increase in short-term financings............ (201.9) (803.1) 490.1
Additions to long-term debt................................. - 398.7 496.5
Repayments of long-term debt................................ (56.4) (46.2) (35.1)
Dividends paid on common stock.............................. (325.0) (200.7) (42.8)
Purchase of treasury stock.................................. - - (138.7)
Other, net.................................................. (279.4) (367.0) (324.3)
----------------- ----------------- -----------------
Net cash provided (used) by financing activities.............. 1,442.9 (277.6) (800.5)
----------------- ----------------- -----------------
Change in cash and cash equivalents........................... (382.7) (1,595.1) 1,615.8
Cash and cash equivalents, beginning of year.................. 884.4 2,479.5 863.7
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year........................ $ 501.7 $ 884.4 $ 2,479.5
================= ================= =================
Supplemental cash flow information:
Interest Paid............................................... $ 195.2 $ 207.0 $ 215.2
================= ================= =================
Income Taxes (Refunded) Paid................................ $ (267.6) $ 1,485.8 $ 351.6
================= ================= =================
See Notes to Consolidated Financial Statements.
F-6
AXA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
AXA Financial, Inc. (the "Holding Company," and collectively with its
consolidated subsidiaries, "AXA Financial") is a diversified financial
services organization serving a broad spectrum of insurance and
investment management customers. AXA Financial's financial advisory and
insurance product businesses are conducted principally by its wholly
owned life insurance subsidiary, The Equitable Life Assurance Society of
the United States ("Equitable Life"), its insurance general agency, AXA
Network, LLC (together with its subsidiaries, collectively, "AXA
Network"), and its broker dealers, AXA Advisors, LLC ("AXA Advisors")
and AXA Distributors, LLC. AXA Financial's investment management and
related services business is conducted by Alliance Capital Management
L.P. ("Alliance"). The investment banking and brokerage business was
conducted by Donaldson, Lufkin & Jenrette, Inc. ("DLJ"). AXA Financial
sold its interest in DLJ on November 3, 2000. The Investment Banking and
Brokerage segment is reported as discontinued operations for the year
ended December 31, 2000.
In October 2000, Alliance acquired substantially all of the assets and
liabilities of SCB Inc., formerly known as Sanford C. Bernstein Inc.
("Bernstein"), for an aggregate current value of approximately $3.50
billion: $1.48 billion in cash and 40.8 million newly issued units in
Alliance ("Alliance Units"). The Holding Company provided Alliance with
the cash portion of the consideration by purchasing approximately 32.6
million Alliance Units for $1.60 billion in June 2000. The acquisition
was accounted for under the purchase method with the results of
Bernstein included in the consolidated financial statements from the
acquisition date. The excess of purchase price over the fair value of
net assets acquired resulted in the recognition of goodwill and
intangible assets of approximately $3.40 billion. In connection with the
issuance of Alliance Units to former Bernstein shareholders, AXA
Financial recorded a non-cash gain of $501.7 million (net of related
Federal income tax of $270.1 million) which is reflected as an addition
to capital in excess of par value. In the fourth quarter of 2002, AXA
Financial acquired 8.16 million Alliance Units at the aggregate market
price of $249.7 million from SCB Inc. and SCB Partners, Inc. under a
preexisting agreement (see Note 2). Upon completion of this transaction
AXA Financial's beneficial ownership in Alliance increased by
approximately 3.2%. At December 31, 2002, AXA Financial's beneficial
ownership in Alliance was approximately 55.7%.
AXA, a French holding company for an international group of insurance
and related financial services companies, has been the Holding Company's
largest shareholder since 1992. In October 2000, the Board of Directors
of the Holding Company, acting upon a unanimous recommendation of a
special committee of independent directors, approved an agreement with
AXA for the acquisition of the approximately 40% of outstanding Holding
Company Common Stock it did not already own. Under terms of the
agreement, the minority shareholders of the Holding Company received
$35.75 in cash and 0.295 of an AXA American Depositary Receipt ("ADR")
(before giving effect to AXA's May 2001 four-for-one stock split and
related change in ADRs' parity) for each Holding Company share. On
January 2, 2001, AXA Merger Corp. ("AXA Merger"), 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 its merger into the Holding Company, AXA Merger's obligation
to repay the $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.
F-7
2) SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The preparation of the accompanying consolidated financial statements in
conformity with U.S. generally accepted accounting principles ("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 consolidated financial statements
reflect all 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.
The accompanying consolidated financial statements include the accounts
of the Holding Company; Equitable Life; those of their subsidiaries
engaged in insurance related businesses (collectively, the "Insurance
Group"); other subsidiaries, principally Alliance, AXA Advisors and AXA
Network; and those investment companies, partnerships and joint ventures
in which AXA Financial has control and a majority economic interest.
All significant intercompany transactions and balances except those with
discontinued operations (see Note 8) have been eliminated in
consolidation. The years "2002," "2001" and "2000" refer to the years
ended December 31, 2002, 2001 and 2000, respectively. Certain
reclassifications have been made in the prior period amounts to conform
to the current presentation.
CLOSED BLOCK
When it demutualized on July 22, 1992, Equitable Life established a
Closed Block for the benefit of certain individual participating
policies that were in force on that date. The assets allocated to the
Closed Block, together with anticipated revenues from policies included
in the Closed Block, were reasonably expected to be sufficient to
support such business, including provision for the payment of claims,
certain expenses and taxes, and for continuation of dividend scales
payable in 1991, assuming the experience underlying such scales
continues.
Assets allocated to the Closed Block inure solely to the benefit of the
Closed Block policyholders and will not revert to the benefit of the
Holding Company. No reallocation, transfer, borrowing or lending of
assets can be made between the Closed Block and other portions of
Equitable Life's General Account, any of its Separate Accounts or any
affiliate of Equitable Life without the approval of the New York
Superintendent of Insurance (the "Superintendent"). Closed Block assets
and liabilities are carried on the same basis as similar assets and
liabilities held in the General Account. The excess of Closed Block
liabilities over Closed Block assets represents the expected future
post-tax contribution from the Closed Block which would be recognized in
income over the period the policies and contracts in the Closed Block
remain in force.
DISCONTINUED OPERATIONS
In 1991, management discontinued the business of certain pension
operations ("Other Discontinued Operations"). Other Discontinued
Operations at December 31, 2002 principally consists of the Group
Non-Participating Wind-Up Annuities ("Wind-Up Annuities"), for which a
premium deficiency reserve has been established. Management reviews the
adequacy of the allowance for future losses each quarter and makes
adjustments when necessary. Management believes the allowance for future
losses at December 31, 2002 is adequate to provide for all future
losses; however, the quarterly allowance review continues to involve
numerous estimates and subjective judgments regarding the expected
performance of invested assets ("Discontinued Operations Investment
Assets") held by Other Discontinued Operations. 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 the discontinued operations differ from management's current best
estimates and assumptions underlying the allowance for future losses,
the difference would be reflected in the consolidated statements of
earnings in discontinued operations (see Note 8).
In 2000, discontinued operations included the Investment Banking and
Brokerage segment that is discussed in Note 8.
F-8
ACCOUNTING CHANGES
On January 1, 2002, AXA Financial adopted Statement of Financial
Accounting Standards ("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". SFAS
No. 142 embraced an entirely new approach to accounting for goodwill by
eliminating the long-standing requirement for systematic amortization
and instead imposing periodic impairment testing to determine whether
the fair value of the reporting unit to which the goodwill is ascribed
supports its continued recognition. Concurrent with its adoption of SFAS
No. 142, AXA Financial ceased to amortize goodwill. Amortization of
goodwill and other intangible assets for the years ended December 31,
2001 and 2000, respectively, was approximately $123.7 million and $49.6
million, net of minority interest of $82.3 million and $29.7 million, of
which $13.5 million and $2.8 million, net of minority interest of $10.8
million and $1.1 million, related to other intangible assets. Net
income, excluding goodwill amortization expense, for the years ended
December 31, 2001 and 2000, respectively, would have been $535.0 million
and $2,462.2 million. The carrying amount of goodwill was $3,585.2
million and $3,436.5 million, respectively, at December 31, 2002 and at
December 31, 2001 and relates solely to the Investment Management
segment. No losses resulted from completion in 2002 of transitional and
annual impairment testing of goodwill and indefinite-lived intangible
assets. Amounts presently estimated to be recorded in each of the
succeeding five years ending December 31, 2007 for amortization of other
intangible assets are not expected to vary significantly from the amount
for the full year December 31, 2002 of $14.4 million, net of minority
interest of $9.8 million. The gross carrying amount and accumulated
amortization of other intangible assets were $630.3 million and $147.7
million, respectively, at December 31, 2002 and $615.4 million and
$123.5 million, respectively, at December 31, 2001. SFAS No. 144 retains
many of the fundamental recognition and measurement provisions
previously required by SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed of," except for the removal of goodwill
from its scope, inclusion of specific guidance on cash flow
recoverability testing and the criteria that must be met to classify a
long-lived asset as held-for-sale. 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.
Effective January 1, 2002, AXA Financial changed its method of
accounting for liabilities associated with variable annuity contracts
that contain guaranteed minimum death benefit ("GMDB") and guaranteed
minimum income benefit ("GMIB") features, to establish reserves for AXA
Financial's estimated obligations associated with these features. The
method was changed to achieve a better matching of revenues and
expenses. The initial impact of adoption as of January 1, 2002 resulted
in a charge of $33.1 million for the cumulative effect of this
accounting change, net of Federal income taxes of $17.9 million, in the
consolidated statements of earnings. Prior to the adoption of this
accounting change, benefits under these features were expensed as
incurred. The impact of this change was to reduce Earnings from
continuing operations in 2002 by $113.0 million, net of Federal income
taxes of $61.0 million. The pro-forma effects of retroactive application
of this change on 2001 and 2000 results were not material.
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 included 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 Financial Accounting Standards
Board ("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 operations 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.
The accounting for the GMIB reinsurance assets that are considered an
SFAS No. 133 derivative is discussed in the Policyholders' Account
Balances and Future Policy Benefits section of this Note.
AXA Financial adopted the AICPA's Statement of Position ("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.
F-9
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," provides the accounting and
reporting rules for sales, securitizations, servicing of receivables and
other financial assets, for secured borrowings and collateral
transactions and extinguishments of liabilities. SFAS No. 140 emphasizes
the legal form of the transfer rather than the previous accounting that
was based upon the risks and rewards of ownership. SFAS No. 140 was
effective for transfers after March 31, 2001 and is principally applied
prospectively. Since that March 2001 effective date, no significant
transactions were impacted by SFAS No. 140.
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.
In November 2002, the FASB issued Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others". FIN No. 45
addresses the disclosures made by a guarantor in its interim and annual
financial statements about obligations under guarantees. FIN No. 45 also
clarifies the requirements related to the recognition of a liability by
a guarantor at the inception of a guarantee for the obligations that the
guarantor has undertaken in issuing that guarantee. The fair value
reporting provisions of FIN No. 45 are to be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The
disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002 (see Note 17).
The initial recognition and initial measurement provisions are to be
applied only on a prospective basis to guarantees issued or modified
after December 31, 2002.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities," to address when it is appropriate to consolidate
financial interests in any variable interest entity ("VIE"), a new term
to define a business structure that either does not have equity
investors with voting or other similar rights or has equity investors
that do not provide sufficient financial resources to support its
activities. For entities with these characteristics, including many
formerly known as special purpose entities, FIN 46 imposes a
consolidation model that focuses on the relative exposures of the
participants to the economic risks and rewards from the assets of the
VIE rather than on ownership of its voting interests, if any, to
determine whether a parent-subsidiary relationship exists. Under the VIE
consolidation model, the party with a majority of the economic risks or
rewards associated with a VIE's activities, including those conveyed by
derivatives, credit enhancements, and other arrangements, is the
"primary beneficiary" and, therefore, is required to consolidate the
VIE.
The consolidation requirements of FIN 46 phase-in beginning in the first
quarter of 2003, with immediate application to all new VIEs created
after January 31, 2003 and further application to existing VIEs starting
in the first interim period beginning after June 15, 2003. However,
specific disclosures are required in 2002 year-end financial statements
issued subsequent to January 31, 2003 if it is "reasonably possible"
that a company will have a significant, but not necessarily
consolidated, variable interest in a VIE when the consolidation
requirements become effective. At December 31, 2002, AXA Financial
identified significant variable interests totaling $123.7 million,
representing its participation in seven collateralized debt obligation
structures and four investment limited partnerships determined to be
VIEs. These variable interests are reflected in the consolidated balance
sheets as fixed maturities or other equity investments and, accordingly,
are subject to ongoing review for impairments in value deemed to be
other than temporary. These variable interests and approximately $24.5
million related funding commitments to the investment limited
partnerships, as more fully described in Note 17, represent AXA
Financial's maximum exposure to loss from its involvement with these
VIEs. AXA Financial has no further economic interests in these VIEs in
the form of related guarantees, derivatives or similar instruments and
obligations.
By no later than third quarter 2003, AXA Financial is required by FIN 46
to consolidate those VIEs where it is determined to be the primary
beneficiary, which includes consideration of the aggregate variable
interests in these VIEs held by related parties. Management's
preliminary assessment indicates consolidation is likely to be required
for one collateralized debt obligation security and two investment
limited partnerships, which comprise $93.5 million of the significant
variable interests identified at December 31, 2002. Management believes
no material impact on consolidated financial position or reported
amounts of consolidated total liabilities would result from
F-10
consolidation of these VIEs. Similarly, management believes there would
be no material impact on consolidated results of operations as AXA
Financial's economic interests in these VIEs are accounted for primarily
under the equity method.
The FASB is in the process of considering the application of SFAS No.
133 in situations in which a financial instrument incorporates credit
risk exposures that are unrelated or only partially related to the
creditworthiness of the issuer of the instrument. The issue is whether
an embedded derivative exists in such instruments, related to the
transfer of credit risk that is unrelated to the creditworthiness of the
issuer, which must be bifurcated and reported at fair value. This issue
may have application to certain insurance and reinsurance contracts,
such as modified coinsurance arrangements in which a total return on a
specified group of assets is paid to the reinsurer, and group pension
participating contracts which credit the contractholder a total return
on a specified portfolio of assets. Based on management's understanding
of the issues under discussion, this potential accounting change is not
expected to have a material impact on AXA Financial's results of
operations or financial position upon adoption.
INVESTMENTS
The carrying values of fixed maturities identified as available for sale
are reported at estimated fair value. Changes in estimated fair value
are reported in comprehensive income. The amortized cost of fixed
maturities is adjusted for impairments in value deemed to be other than
temporary.
Mortgage loans on real estate are stated at unpaid principal balances,
net of unamortized discounts and valuation allowances. Valuation
allowances are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or on its
collateral value if the loan is collateral dependent. However, if
foreclosure is or becomes probable, the collateral value measurement
method is used.
Impaired mortgage loans without provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. Interest income earned on loans where the collateral value
is used to measure impairment is recorded on a cash basis. Interest
income on loans where the present value method is used to measure
impairment is accrued on the net carrying value amount of the loan at
the interest rate used to discount the cash flows. Changes in the
present value attributable to changes in the amount or timing of
expected cash flows are reported as investment gains or losses.
Real estate, including real estate acquired in satisfaction of debt, is
stated at depreciated cost less valuation allowances. At the date of
foreclosure (including in-substance foreclosure), real estate acquired
in satisfaction of debt is valued at estimated fair value. Impaired real
estate is written down to fair value with the impairment loss being
included in investment gains (losses), net. Valuation allowances on real
estate held for sale are computed using the lower of depreciated cost or
current estimated fair value, net of disposition costs. Depreciation is
discontinued on real estate held for sale.
Depreciation of real estate held for production of income is computed
using the straight-line method over the estimated useful lives of the
properties, which generally range from 40 to 50 years.
Valuation allowances are netted against the asset categories to which
they apply.
Policy loans are stated at unpaid principal balances.
Partnerships, investment companies and joint venture interests in which
AXA Financial has control and a majority economic interest (that is,
greater than 50% of the economic return generated by the entity) are
consolidated; those in which AXA Financial does not have control and a
majority economic interest are reported on the equity basis of
accounting and are included either with equity real estate or other
equity investments, as appropriate.
Equity securities include common stock and non-redeemable preferred
stock classified as either trading or available for sale securities, are
carried at estimated fair value and are included in other equity
investments.
Short-term investments are stated at amortized cost that approximates
fair value and are included with other invested assets.
Cash and cash equivalents includes cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity
of three months or less.
All securities owned as well as United States government and agency
securities, mortgage-backed securities, futures and forwards
transactions are recorded in the consolidated financial statements on a
trade date basis.
F-11
NET INVESTMENT INCOME, INVESTMENT GAINS (LOSSES), NET AND UNREALIZED
INVESTMENT GAINS (LOSSES)
Net investment income and realized investment gains (losses), net
(together "investment results") related to certain participating group
annuity contracts which are passed through to the contractholders are
offset in amounts reflected as interest credited to policyholders'
account balances.
Realized investment gains (losses) are determined by identification with
the specific asset and are presented as a component of revenue. Changes
in the valuation allowances are included in investment gains or losses.
Realized and unrealized holding gains (losses) on trading securities are
reflected in net investment income.
Unrealized investment gains and losses on fixed maturities and equity
securities available for sale held by AXA Financial are accounted for as
a separate component of accumulated comprehensive income, net of related
deferred Federal income taxes, amounts attributable to Other
Discontinued Operations, Closed Block policyholders dividend obligation,
participating group annuity contracts and deferred policy acquisition
costs ("DAC") related to universal life and investment-type products and
participating traditional life contracts.
RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES
Premiums from universal life and investment-type contracts are reported
as deposits to policyholders' account balances. Revenues from these
contracts consist of amounts assessed during the period against
policyholders' account balances for mortality charges, policy
administration charges and surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the
period in excess of related policyholders' account balances.
Premiums from participating and non-participating traditional life and
annuity policies with life contingencies generally are recognized as
income when due. Benefits and expenses are matched with such income so
as to result in the recognition of profits over the life of the
contracts. This match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period
over which benefits are provided, premiums are recorded as income when
due with any excess profit deferred and recognized in income in a
constant relationship to insurance in-force or, for annuities, the
amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
DEFERRED POLICY ACQUISITION COSTS
Acquisition costs that vary with and are primarily related to the
acquisition of new and renewal insurance business, including
commissions, underwriting, agency and policy issue expenses, are
deferred. DAC is subject to recoverability testing at the time of policy
issue and loss recognition testing at the end of each accounting period.
For universal life products and investment-type products, DAC is
amortized over the expected total life of the contract group as a
constant percentage of estimated gross profits arising principally from
investment results, Separate Account fees, mortality and expense margins
and surrender charges based on historical and anticipated future
experience, updated at the end of each accounting period. The effect on
the amortization of DAC of revisions to estimated gross profits 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. The effect on the DAC asset that would result
from realization of unrealized gains (losses) is recognized with an
offset to accumulated comprehensive income in consolidated shareholders'
equity as of the balance sheet date.
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
F-12
assessment, 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 9.0% (7.2% net of
product weighted average Separate Account fees), and the gross maximum
and minimum annual rate of return limitations are 15.0% (13.2% net of
product weighted average Separate Account fees) and 0% (-1.9% 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 December 31, 2002,
current projections of future average gross market returns are within
the maximum and minimum limitations and assume a reversion to the mean
of 9.0% after 2.5 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.
Other significant assumptions underlying gross profit estimates relate
to contract persistency and general account investment spread.
For participating traditional life policies (substantially all of which
are in the Closed Block), DAC is amortized over the expected total life
of the contract group as a constant percentage based on the present
value of the estimated gross margin amounts expected to be realized over
the life of the contracts using the expected investment yield. At
December 31, 2002, the average rate of assumed investment yields,
excluding policy loans, was 7.9% grading to 7.3% over 8 years. Estimated
gross margin includes anticipated premiums and investment results less
claims and administrative expenses, changes in the net level premium
reserve and expected annual policyholder dividends. The effect on the
amortization of DAC of revisions to estimated gross margins is reflected
in earnings in the period such estimated gross margins are revised. The
effect on the DAC asset that would result from realization of unrealized
gains (losses) is recognized with an offset to accumulated comprehensive
income in consolidated shareholders' equity as of the balance sheet
date.
For non-participating traditional life policies, DAC is amortized in
proportion to anticipated premiums. Assumptions as to anticipated
premiums are estimated at the date of policy issue and are consistently
applied during the life of the contracts. Deviations from estimated
experience are reflected in earnings in the period such deviations
occur. For these contracts, the amortization periods generally are for
the total life of the policy.
POLICYHOLDERS' ACCOUNT BALANCES AND FUTURE POLICY BENEFITS
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account
values represent an accumulation of gross premium payments plus credited
interest less expense and mortality charges and withdrawals.
Equitable Life issues certain variable annuity products with a GMDB
feature. Equitable Life also issues certain variable annuity products
that contain a GMIB feature which, if elected by the policyholder after
a stipulated waiting period from contract issuance, guarantees a minimum
lifetime annuity based on predetermined annuity purchase rates that may
be in excess of what the contract account value can purchase at
then-current annuity purchase rates. This minimum lifetime annuity is
based on predetermined annuity purchase rates applied to a guarantee
minimum income benefit base. The risk associated with the GMDB and GMIB
features is that a protracted under-performance of the financial markets
could result in GMDB and GMIB benefits being higher than what
accumulated policyholder account balances would support. Reserves for
GMDB and GMIB obligations are calculated on the basis of actuarial
assumptions related to projected benefits and related contract charges
over the lives of the contracts using assumptions consistent with those
used in estimating gross profits for purposes of amortizing DAC. The
determination of this estimated liability is based on models which
involve numerous estimates and subjective judgments, including those
regarding expected market rates of return and volatility, contract
surrender rates, mortality experience, and, for GMIB, GMIB election
rates. Assumptions regarding Separate Account performance used for
purposes of this calculation are set using a long-term view of expected
average market returns by applying a reversion to the mean approach,
consistent with that used for DAC amortization. There can be no
assurance that ultimate actual experience will not differ from
management's estimates.
F-13
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. GMIB fair values are reported in the consolidated
balance sheets in Other assets. Changes in GMIB fair values 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.
For reinsurance contracts other than those covering GMIB exposure,
reinsurance recoverable balances are calculated using methodologies and
assumptions that are consistent with those used to calculate the direct
liabilities.
For participating traditional life policies, future policy benefit
liabilities are calculated using a net level premium method on the basis
of actuarial assumptions equal to guaranteed mortality and dividend fund
interest rates. The liability for annual dividends represents the
accrual of annual dividends earned. Terminal dividends are accrued in
proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy
benefit liabilities are estimated using a net level premium method on
the basis of actuarial assumptions as to mortality, persistency and
interest established at policy issue. Assumptions established at policy
issue as to mortality and persistency are based on the Insurance Group's
experience that, together with interest and expense assumptions,
includes a margin for adverse deviation. When the liabilities for future
policy benefits plus the present value of expected future gross premiums
for a product are insufficient to provide for expected future policy
benefits and expenses for that product, DAC is written off and
thereafter, if required, a premium deficiency reserve is established by
a charge to earnings. Benefit liabilities for traditional annuities
during the accumulation period are equal to accumulated contractholders'
fund balances and, after annuitization, are equal to the present value
of expected future payments. Interest rates used in establishing such
liabilities range from 2.25% to 10.9% for life insurance liabilities and
from 2.25% to 8.43% for annuity liabilities.
Individual health benefit liabilities for active lives are estimated
using the net level premium method and assumptions as to future
morbidity, withdrawals and interest. Benefit liabilities for disabled
lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
While management believes its disability income ("DI") reserves have
been calculated on a reasonable basis and are adequate, there can be no
assurance reserves will be sufficient to provide for future liabilities.
Claim reserves and associated liabilities net of reinsurance ceded for
individual DI and major medical policies were $86.0 million and $104.2
million at December 31, 2002 and 2001, respectively. At December 31,
2002 and 2001, respectively, $1,088.9 million and $1,101.8 million of DI
reserves and associated liabilities were ceded through an indemnity
reinsurance agreement principally with a single reinsurer (see Note 14).
Incurred benefits (benefits paid plus changes in claim reserves) and
benefits paid for individual DI and major medical policies are
summarized as follows:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Incurred benefits related to current year.......... $ 36.6 $ 44.0 $ 56.1
Incurred benefits related to prior years........... (6.3) (10.6) 15.0
----------------- ---------------- -----------------
Total Incurred Benefits............................ $ 30.3 $ 33.4 $ 71.1
================= ================ =================
Benefits paid related to current year.............. $ 11.5 $ 10.7 $ 14.8
Benefits paid related to prior years............... 37.2 38.8 106.0
----------------- ---------------- -----------------
Total Benefits Paid................................ $ 48.7 $ 49.5 $ 120.8
================= ================ =================
POLICYHOLDERS' DIVIDENDS
The amount of policyholders' dividends to be paid (including dividends
on policies included in the Closed Block) is determined annually by
Equitable Life's board of directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity and expense experience for the year and judgment as to the
appropriate level of statutory surplus to be retained by Equitable Life.
F-14
At December 31, 2002, participating policies, including those in the
Closed Block, represent approximately 19.4% ($36.5 billion) of directly
written life insurance in-force, net of amounts ceded.
SEPARATE ACCOUNTS
Generally, Separate Accounts established under New York State Insurance
Law are not chargeable with liabilities that arise from any other
business of the Insurance Group. Separate Accounts assets are subject to
General Account claims only to the extent Separate Accounts assets
exceed Separate Accounts liabilities. Assets and liabilities of the
Separate Accounts represent the net deposits and accumulated net
investment earnings less fees, held primarily for the benefit of
contractholders, and for which the Insurance Group does not bear the
investment risk. Separate Accounts' assets and liabilities are shown on
separate lines in the consolidated balance sheets. The Insurance Group
bears the investment risk on assets held in one Separate Account;
therefore, such assets are carried on the same basis as similar assets
held in the General Account portfolio. Assets held in the other Separate
Accounts are carried at quoted market values or, where quoted values are
not available, at estimated fair values as determined by the Insurance
Group.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate
Accounts liabilities and are not reported in revenues in the
consolidated statements of earnings. For 2002, 2001 and 2000, investment
results of such Separate Accounts were (losses) gains of $(4,740.7)
million, $(2,214.4) million and $8,051.7 million, respectively.
Deposits to Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges on all Separate Accounts are
included in revenues.
RECOGNITION OF INVESTMENT MANAGEMENT REVENUES AND RELATED EXPENSES
Commissions, fees and other income principally include Investment
Management advisory and service fees. Investment Management advisory and
service fees are recorded as revenue as the related services are
performed; they include brokerage transactions charges of Sanford C.
Bernstein & Co., LLC ("SCB LLC"), a wholly owned subsidiary of Alliance,
for substantially all private client transactions and certain
institutional investment management client transactions. Certain
investment advisory contracts provide for a performance fee, in addition
to or in lieu of a base fee, that is calculated as either a percentage
of absolute investment results or a percentage of the related investment
results in excess of a stated benchmark over a specified period of time.
Performance fees are recorded as revenue at the end of the measurement
period. Transaction charges earned and related expenses are recorded on
a trade date basis. Distribution revenues and shareholder servicing fees
are accrued as earned.
Institutional research services revenue consists of brokerage
transaction charges and underwriting syndicate revenues related to
services provided to institutional investors. Brokerage transaction
charges earned and related expenses are recorded on a trade date basis.
Syndicate participation and underwriting revenues include gains, losses
and fees, net of syndicate expenses, arising from securities offerings
in which SCB LLC acts as underwriter or agent. Syndicate participation
and underwriting revenues are recorded on the offering date.
Sales commissions paid to financial intermediaries in connection with
the sale of shares of open-end Alliance mutual funds sold without a
front-end sales charge are capitalized and amortized over periods not
exceeding five and one-half years, the period of time during which
deferred sales commissions are expected to be recovered from
distribution plan payments received from those funds and from contingent
deferred sales charges ("CDSC") received from shareholders of those
funds upon the redemption of their shares. CDSC reduces unamortized
deferred sales commissions when received. At December 31, 2002 and 2001,
respectively, deferred sales commissions totaled $500.9 million and
$648.2 million and are included within Other assets.
Impairment of the deferred sales commission asset is evaluated
quarterly, or when a significant decrease in the estimated fair value of
the asset occurs, by comparing the undiscounted cash flows estimated by
Alliance's management to be realized from this asset to its recorded
amount. If the estimated undiscounted cash flows are less that the
recorded amount and if Alliance's management estimates that the recorded
amount is not fully recoverable, an impairment loss is recognized for
the difference between the recorded amount and the estimated fair value
of the asset. 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 the values
of back-end load shares redeemed and, generally, the length of time the
shares have been held.
F-15
OTHER ACCOUNTING POLICIES
In accordance with regulations of the Securities and Exchange Commission
("SEC"), securities with a fair value of $1.17 billion have been
segregated in a special reserve bank custody account at December 31,
2002 for the exclusive benefit of securities broker-dealer or brokerage
customers under Rule 15c3-3 under the Securities Exchange Act of 1934,
as amended.
Intangible assets include costs assigned to contracts of businesses
acquired. These costs continue to be amortized on a straight-line basis
over estimated useful lives of twenty years.
Capitalized internal-use software is amortized on a straight-line basis
over the estimated useful life of the software.
The Holding Company and its consolidated subsidiaries file a
consolidated Federal income tax return. Current Federal income taxes are
charged or credited to operations based upon amounts estimated to be
payable or recoverable as a result of taxable operations for the current
year. Deferred income tax assets and liabilities are recognized based on
the difference between financial statement carrying amounts and income
tax bases of assets and liabilities using enacted income tax rates and
laws.
Minority interest subject to redemption rights represents the remaining
32.6 million of private Alliance Units issued to former Bernstein
shareholders in connection with Alliance's acquisition of Bernstein. The
Holding Company agreed to provide liquidity to these former Bernstein
shareholders after a two-year lockout period, which ended October 2002.
AXA Financial acquired 8.16 million of the former Bernstein
shareholders' Units in 2002. The outstanding 32.6 million Alliance Units
may be sold to the Holding Company at the prevailing market price over
the remaining seven years of the original eight-year period, ending in
2009. Generally, not more than 20% of the original Units issued to the
former Bernstein shareholders may be put to the Holding Company in any
one annual period.
AXA Financial accounts for its stock option and other stock-based
compensation plans in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. In accordance with the opinion,
stock option awards result in compensation expense only if the current
market price of the underlying stock exceeds the option strike price at
the grant date. See Note 12 for the pro forma disclosures required by
SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and
Disclosure".
F-16
3) INVESTMENTS
The following table provides additional information relating to fixed
maturities and equity securities.
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ----------------- ----------------- ---------------
(In Millions)
December 31, 2002
Fixed Maturities:
Available for Sale:
Corporate..................... $ 20,128.0 $ 1,494.9 $ 269.0 $ 21,353.9
Mortgage-backed............... 2,428.8 99.4 - 2,528.2
U.S. Treasury, government
and agency securities....... 895.5 84.1 - 979.6
States and political
subdivisions................ 197.6 17.9 - 215.5
Foreign governments........... 231.8 37.4 .8 268.4
Redeemable preferred stock.... 923.7 71.4 4.1 991.0
----------------- ----------------- ----------------- ----------------
Total Available for Sale.... $ 24,805.4 $ 1,805.1 $ 273.9 $ 26,336.6
================= ================= ================= ================
Equity Securities:
Available for sale.............. $ 61.4 $ 5.3 $ 3.5 $ 63.2
Trading securities.............. 3.3 .8 3.0 1.1
----------------- ----------------- ----------------- ----------------
Total Equity Securities........... $ 64.7 $ 6.1 $ 6.5 $ 64.3
================= ================= ================= ================
December 31, 2001
Fixed Maturities:
Available for Sale:
Corporate..................... $ 18,637.8 $ 665.9 $ 292.3 $ 19,011.4
Mortgage-backed............... 2,436.1 39.2 5.5 2,469.8
U.S. Treasury, government
and agency securities....... 1,113.5 62.3 1.5 1,174.3
States and political
subdivisions................ 138.9 6.8 1.3 144.4
Foreign governments........... 143.1 15.6 1.0 157.7
Redeemable preferred stock.... 404.7 16.5 23.8 397.4
----------------- ----------------- ----------------- ----------------
Total Available for Sale.... $ 22,874.1 $ 806.3 $ 325.4 $ 23,355.0
Equity Securities:
Available for sale.............. $ 59.9 $ 5.8 $ 1.6 $ 64.1
Trading securities.............. 4.9 .9 3.4 2.4
----------------- ----------------- ----------------- ----------------
Total Equity Securities........... $ 64.8 $ 6.7 $ 5.0 $ 66.5
================= ================= ================= ================
F-17
For publicly traded fixed maturities and equity securities, estimated
fair value is determined using quoted market prices. For fixed
maturities without a readily ascertainable market value, AXA Financial
determines estimated fair values using a discounted cash flow approach,
including provisions for credit risk, generally based on the assumption
such securities will be held to maturity. Such estimated fair values do
not necessarily represent the values for which these securities could
have been sold at the dates of the consolidated balance sheets. At
December 31, 2002 and 2001, securities without a readily ascertainable
market value having an amortized cost of $4,941.6 million and $5,419.4
million, respectively, had estimated fair values of $5,183.0 million and
$5,510.8 million, respectively.
The contractual maturity of bonds at December 31, 2002 is shown below:
Available for Sale
------------------------------------
Amortized Estimated
Cost Fair Value
---------------- -----------------
(In Millions)
Due in one year or less.............................................. $ 613.0 $ 612.7
Due in years two through five........................................ 5,249.0 5,536.9
Due in years six through ten......................................... 8,662.9 9,304.7
Due after ten years.................................................. 6,928.0 7,363.1
Mortgage-backed securities........................................... 2,428.8 2,528.2
---------------- -----------------
Total................................................................ $ 23,881.7 $ 25,345.6
================ =================
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting of public high yield bonds,
redeemable preferred stocks and directly negotiated debt in leveraged
buyout transactions. The Insurance Group seeks to minimize the higher
than normal credit risks associated with such securities by monitoring
concentrations in any single issuer or in a particular industry group.
Certain of these corporate high yield securities are classified as other
than investment grade by the various rating agencies, i.e., a rating
below Baa or National Association of Insurance Commissioners ("NAIC")
designation of 3 (medium grade), 4 or 5 (below investment grade) or 6
(in or near default). At December 31, 2002, approximately 7.1% of the
$23,881.7 million aggregate amortized cost of bonds held by AXA
Financial was considered to be other than investment grade.
At December 31, 2002, the carrying value of fixed maturities which were
non-income producing for the twelve months preceding that date was
$134.2 million.
The Insurance Group holds equity in limited partnership interests that
primarily invest in securities considered to be other than investment
grade. The carrying values at December 31, 2002 and 2001 were $679.0
million and $701.9 million, respectively.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage
loans on real estate, based on amortized cost, amounted to $75.3 million
and $31.5 million at December 31, 2002 and 2001, respectively. Gross
interest income on these loans included in net investment income
aggregated $5.3 million, $3.2 million and $9.7 million in 2002, 2001 and
2000, respectively. Gross interest income on restructured mortgage loans
on real estate that would have been recorded in accordance with the
original terms of such loans amounted to $6.8 million, $4.2 million and
$11.0 million in 2002, 2001 and 2000, respectively.
F-18
Impaired mortgage loans along with the related investment valuation
allowances follow:
December 31,
----------------------------------------
2002 2001
------------------- -------------------
(In Millions)
Impaired mortgage loans with investment valuation allowances....... $ 111.8 $ 114.2
Impaired mortgage loans without investment valuation allowances.... 20.4 30.7
------------------- -------------------
Recorded investment in impaired mortgage loans..................... 132.2 144.9
Investment valuation allowances.................................... (23.4) (19.3)
------------------- -------------------
Net Impaired Mortgage Loans........................................ $ 108.8 $ 125.6
=================== ===================
During 2002, 2001 and 2000, respectively, AXA Financial's average
recorded investment in impaired mortgage loans was $138.1 million,
$141.7 million and $169.8 million. Interest income recognized on these
impaired mortgage loans totaled $10.0 million, $7.2 million and $12.4
million for 2002, 2001 and 2000, respectively.
Mortgage loans on real estate are placed on nonaccrual status once
management believes the collection of accrued interest is doubtful. Once
mortgage loans on real estate are classified as nonaccrual loans,
interest income is recognized under the cash basis of accounting and the
resumption of the interest accrual would commence only after all past
due interest has been collected or the mortgage loan on real estate has
been restructured to where the collection of interest is considered
likely. At December 31, 2002 and 2001, respectively, the carrying value
of mortgage loans on real estate that had been classified as nonaccrual
loans was $91.1 million and $95.8 million.
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At
December 31, 2002 and 2001, the carrying value of equity real estate
held for sale amounted to $107.7 million and $216.6 million,
respectively. For 2002, 2001 and 2000, respectively, real estate of $5.6
million, $64.8 million and $21.6 million was acquired in satisfaction of
debt. At December 31, 2002 and 2001, AXA Financial owned $268.8 million
and $376.5 million, respectively, of real estate acquired in
satisfaction of debt of which $2.7 million and $11.1 million,
respectively, are held as real estate joint ventures.
Accumulated depreciation on real estate was $163.6 million and $160.3
million at December 31, 2002 and 2001, respectively. Depreciation
expense on real estate totaled $18.0 million, $16.1 million and $21.7
million for 2002, 2001 and 2000, respectively.
Investment valuation allowances for mortgage loans and equity real
estate and changes thereto follow:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Balances, beginning of year........................ $ 87.6 $ 126.2 $ 177.9
Additions charged to income........................ 32.5 40.0 68.2
Deductions for writedowns and
asset dispositions............................... (65.1) (78.6) (119.9)
----------------- ---------------- -----------------
Balances, End of Year.............................. $ 55.0 $ 87.6 $ 126.2
================= ================ =================
Balances, end of year comprise:
Mortgage loans on real estate.................... $ 23.4 $ 19.3 $ 50.5
Equity real estate............................... 31.6 68.3 75.7
----------------- ---------------- -----------------
Total.............................................. $ 55.0 $ 87.6 $ 126.2
================= ================ =================
4) EQUITY METHOD INVESTMENTS
Included in equity real estate or other equity investments, as
appropriate, are interests in real estate joint ventures, limited
partnership interests and investment companies accounted for under the
equity method with a total carrying value of $801.6 million and $883.9
million, respectively, at December 31, 2002 and 2001. AXA Financial's
total equity in net (losses) earnings for these real estate joint
ventures and limited partnership interests was $(14.9) million, $(111.1)
million and $180.3 million, respectively, for 2002, 2001 and 2000.
F-19
Summarized below is the combined financial information only for those
real estate joint ventures and for those limited partnership interests
accounted for under the equity method in which AXA Financial has an
investment of $10.0 million or greater and an equity interest of 10% or
greater (7 and 10 individual ventures at December 31, 2002 and 2001,
respectively) and AXA Financial's carrying value and equity in net
earnings for those real estate joint ventures and limited partnership
interests:
December 31,
------------------------------------
2002 2001
---------------- -----------------
(In Millions)
BALANCE SHEETS
Investments in real estate, at depreciated cost........................ $ 550.0 $ 570.5
Investments in securities, generally at estimated fair value........... 237.5 255.7
Cash and cash equivalents.............................................. 27.9 23.7
Other assets........................................................... 32.2 39.4
---------------- -----------------
Total Assets........................................................... $ 847.6 $ 889.3
================ =================
Borrowed funds - third party........................................... $ 264.7 $ 269.6
Other liabilities...................................................... 19.2 20.3
---------------- -----------------
Total liabilities...................................................... 283.9 289.9
---------------- -----------------
Partners' capital...................................................... 563.7 599.4
---------------- -----------------
Total Liabilities and Partners' Capital................................ $ 847.6 $ 889.3
================ =================
AXA Financial's Carrying Value in These Entities Included Above........ $ 172.3 $ 188.2
================ =================
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures............. $ 98.4 $ 95.6 $ 147.6
Net (Losses) Revenues of
other limited partnership interests.............. (23.2) 29.8 16.5
Interest expense - third party..................... (19.8) (11.5) (17.0)
Interest expense - AXA Financial................... - (.7) (2.0)
Other expenses..................................... (59.3) (58.2) (88.0)
----------------- ---------------- -----------------
Net (Losses) Earnings.............................. $ (3.9) $ 55.0 $ 57.1
================= ================ =================
AXA Financial's Equity in Net Earnings of These
Entities Included Above.......................... $ 12.8 $ 13.2 $ 17.8
================= ================ =================
F-20
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income follow:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Fixed maturities................................... $ 1,760.3 $ 1,668.9 $ 1,777.0
Mortgage loans on real estate...................... 314.8 361.6 387.1
Equity real estate................................. 153.7 166.2 207.2
Other equity investments........................... (28.9) (69.2) 18.2
Policy loans....................................... 269.4 268.2 258.3
Other investment income............................ 112.7 247.6 231.7
----------------- ---------------- -----------------
Gross investment income.......................... 2,582.0 2,643.3 2,879.5
Investment expenses................................ (188.3) (220.2) (211.3)
----------------- ---------------- -----------------
Net Investment Income.............................. $ 2,393.7 $ 2,423.1 $ 2,668.2
================= ================ =================
Investment (losses) gains, including changes in the valuation
allowances, follow:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Fixed maturities................................... $ (383.4) $ (225.2) $ (796.5)
Mortgage loans on real estate...................... 3.7 (11.4) (18.0)
Equity real estate................................. 101.5 34.5 1.6
Other equity investments........................... 3.3 (12.6) (20.9)
Issuance and sales of Alliance Units............... .5 (3.1) 3.9
Other.............................................. (13.3) 10.1 .3
----------------- ---------------- -----------------
Investment Losses, Net............................. $ (287.7) $ (207.7) $ (829.6)
================= ================ =================
Writedowns of fixed maturities amounted to $322.9 million, $287.5
million and $635.5 million for 2002, 2001 and 2000, respectively,
including $499.2 million in fourth quarter 2000. Writedowns of mortgage
loans on real estate and equity real estate amounted to $5.5 million and
$5.8 million, respectively, for 2002.
For 2002, 2001 and 2000, respectively, proceeds received on sales of
fixed maturities classified as available for sale amounted to $7,177.3
million, $7,372.3 million and $7,685.5 million. Gross gains of $108.4
million, $156.2 million and $79.7 million and gross losses of $172.9
million, $115.9 million and $220.9 million, respectively, were realized
on these sales. The change in unrealized investment gains (losses)
related to fixed maturities classified as available for sale for 2002,
2001 and 2000 amounted to $1,050.4 million, $430.9 million and $958.7
million, respectively.
In conjunction with the sale of DLJ in 2000, AXA Financial received 25.2
million shares in Credit Suisse Group ("CSG") common stock, 6.3 million
shares of which were immediately repurchased by CSG at closing. The CSG
shares were designated as trading account securities. In December 2000,
6.5 million shares of the CSG shares were sold to AXA at fair value for
$1.2 billion. The $1.56 billion carrying value of CSG shares that were
held by AXA Financial at December 31, 2000 were sold in January 2001.
Net investment income included realized gains of $27.1 million in 2001
and included realized losses of $116.6 million and unrealized holding
losses of $43.3 million in 2000 on the CSG shares.
In 2002, 2001 and 2000, respectively, net unrealized and realized
holding gains (losses) on trading account equity securities of $.5
million, $25.0 million and $(159.4) million were included in net
investment income in the consolidated statements of earnings. These
trading securities had a carrying value of $1.1 million and $2.4 million
and costs of $3.3 million and $4.9 million at December 31, 2002 and
2001, respectively.
For 2002, 2001 and 2000, investment results passed through to certain
participating group annuity contracts as interest credited to
policyholders' account balances amounted to $92.1 million, $96.7 million
and $110.6 million, respectively.
F-21
The net unrealized investment gains (losses) included in the
consolidated balance sheets as a component of accumulated comprehensive
income and the changes for the corresponding years, including Other
Discontinued Operations on a line by line basis, follow:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Balance, beginning of year......................... $ 215.8 $ 11.0 $ (406.4)
Changes in unrealized investment gains (losses).... 1,056.8 439.0 980.9
Changes in unrealized investment (gains) losses
attributable to:
Participating group annuity contracts,
Closed Block policyholder dividend
obligation and other......................... (157.3) (48.6) (18.3)
DAC............................................ (174.1) (71.6) (262.1)
Deferred Federal income taxes.................. (255.0) (114.0) (283.1)
----------------- ---------------- -----------------
Balance, End of Year............................... $ 686.2 $ 215.8 $ 11.0
================= ================ =================
Balance, end of year comprises:
Unrealized investment gains (losses) on:
Fixed maturities............................... $ 1,576.1 $ 497.6 $ 64.9
Other equity investments....................... 1.7 4.3 (3.6)
Other.......................................... (21.9) (2.8) (1.2)
----------------- ---------------- -----------------
Total......................................... 1,555.9 499.1 60.1
Amounts of unrealized investment (losses) gains
attributable to:
Participating group annuity contracts,
Closed Block policyholder dividend
obligation and other.......................... (221.2) (63.9) (15.3)
DAC............................................. (274.0) (99.9) (28.3)
Deferred Federal income taxes................... (374.5) (119.5) (5.5)
----------------- ---------------- -----------------
Total.............................................. $ 686.2 $ 215.8 $ 11.0
================= ================ =================
Changes in unrealized gains (losses) reflect changes in fair value of
only those fixed maturities and equity securities classified as
available for sale and do not reflect any changes in fair value of
policyholders' account balances and future policy benefits.
F-22
6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) represents cumulative
gains and losses on items that are not reflected in earnings. The
balances for the past three years follow:
December 31
--------------------------------------------------------
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Unrealized gains (losses) on investments......... $ 686.2 $ 215.8 $ 11.0
Minimum pension liability........................ (31.1) (13.7) (13.3)
----------------- ---------------- -----------------
Total Accumulated Other
Comprehensive Income (Loss)...................... $ 655.1 $ 202.1 $ (2.3)
================= ================ =================
The components of other comprehensive income (loss) for the past three
years follow:
2002 2001 2000
----------------- ---------------- ----------------
(In Millions)
Net unrealized gains (losses) on investments:
Net unrealized gains arising during
the period..................................... $ 1,015.8 $ 528.2 $ 190.2
Losses (gains) reclassified into net earnings
during the period.............................. 41.0 (89.2) 790.7
---------------- --------------- ----------------
Net unrealized gains on investments................ 1,056.8 439.0 980.9
Adjustments for policyholders liabilities, DAC
and deferred Federal income taxes................ (586.4) (234.2) (563.5)
---------------- --------------- ----------------
Change in unrealized gains, net of
adjustments...................................... 470.4 204.8 417.4
Change in minimum pension liability................ (17.4) (.4) 2.8
---------------- --------------- ----------------
Total Other Comprehensive Income................... $ 453.0 $ 204.4 $ 420.2
================ =============== ================
7) 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 had
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.
F-23
Summarized financial information for the Closed Block is as follows:
December 31,
--------------------------------------
2002 2001
----------------- -----------------
(In Millions)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances
and other.......................................................... $ 8,997.3 $ 9,002.8
Policyholder dividend obligation..................................... 213.3 47.1
Other liabilities.................................................... 97.6 53.6
----------------- -----------------
Total Closed Block liabilities....................................... 9,308.2 9,103.5
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $4,794.0 and $4,600.4).......................... 5,098.4 4,705.7
Mortgage loans on real estate........................................ 1,456.0 1,514.4
Policy loans......................................................... 1,449.9 1,504.4
Cash and other invested assets....................................... 141.9 141.0
Other assets......................................................... 219.9 214.7
----------------- -----------------
Total assets designated to the Closed Block..,....................... 8,366.1 8,080.2
----------------- -----------------
Excess of Closed Block liabilities over assets designated to
the Closed Block................................................... 942.1 1,023.3
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred Federal
income tax of $31.8 and $20.4 and policyholder dividend
obligation....................................................... 59.1 37.8
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities............................................. $ 1,001.2 $ 1,061.1
================= =================
Closed Block revenues and expenses were as follows:
2002 2001 2000
--------------- --------------- ----------------
(In Millions)
REVENUES:
Premiums and other income............................ $ 543.8 $ 571.5 $ 594.7
Investment income (net of investment
expenses of $5.4, $3.0, and $8.1).................. 582.4 583.5 578.7
Investment losses, net............................... (47.0) (42.3) (35.8)
--------------- --------------- ----------------
Total revenues....................................... 1,079.2 1,112.7 1,137.6
--------------- --------------- ----------------
BENEFITS AND
OTHER DEDUCTIONS:
Policyholders' benefits and dividends................ 980.2 1,009.3 1,025.2
Other operating costs and expenses................... 4.4 4.7 5.2
--------------- --------------- ----------------
Total benefits and other deductions.................. 984.6 1,014.0 1,030.4
--------------- --------------- ----------------
Net revenues before Federal income taxes............. 94.6 98.7 107.2
Federal income taxes................................. (34.7) (36.2) (38.2)
--------------- --------------- ----------------
Net Revenues......................................... $ 59.9 $ 62.5 $ 69.0
=============== =============== ================
F-24
Reconciliation of the policyholder dividend obligation is as follows:
December 31,
-------------------------------------
2002 2001
---------------- ------------------
(In Millions)
Balance at beginning of year......................................... $ 47.1 $ -
Unrealized investment gains (losses)................................. 166.2 47.1
---------------- ------------------
Balance at end of year .............................................. $ 213.3 $ 47.1
================ ==================
Impaired mortgage loans along with the related investment valuation
allowances follows:
December 31,
------------------------------------
2002 2001
---------------- -----------------
(In Millions)
Impaired mortgage loans with investment valuation allowances......... $ 18.6 $ 26.7
Impaired mortgage loans without investment valuation allowances...... .9 6.5
---------------- -----------------
Recorded investment in impaired mortgages............................ 19.5 33.2
Investment valuation allowances...................................... (4.0) (5.8)
---------------- -----------------
Net Impaired Mortgage Loans.......................................... $ 15.5 $ 27.4
================ =================
During 2002, 2001 and 2000, the Closed Block's average recorded
investment in impaired mortgage loans was $26.0 million, $30.8 million
and $31.0 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $2.1 million, $1.2 million and $2.0
million for 2002, 2001 and 2000, respectively.
Valuation allowances amounted to $3.9 million and $5.7 million on
mortgage loans on real estate and $.1 million and $9.8 million on equity
real estate at December 31, 2002 and 2001, respectively. Writedowns of
fixed maturities amounted to $40.0 million, $30.8 million and $27.7
million for 2002, 2001 and 2000, respectively, including $23.3 million
in fourth quarter 2001.
8) DISCONTINUED OPERATIONS
INVESTMENT BANKING AND BROKERAGE SEGMENT
The discontinued Investment Banking and Brokerage segment included DLJ
and served institutional, corporate, governmental and individual clients
both domestically and internationally. DLJ's businesses included
securities underwriting, sales and trading, merchant banking, financial
advisory services, investment research, venture capital, correspondent
brokerage services, online interactive brokerage services and asset
management.
On November 3, 2000, AXA Financial sold its interest in DLJ to CSG. AXA
Financial received $2.29 billion in cash and $4.86 billion (or 25.2
million shares) in CSG common stock. The fair value of the stock
consideration was based upon the exchange rate and stock price at the
time the transaction closed. CSG repurchased $1.18 billion (6.3 million
shares) of its common stock from AXA Financial at closing. AXA Financial
recognized a gain on the DLJ sale of $2.32 billion (net of $1.99 billion
in taxes).
Revenues from the Investment Banking and Brokerage segment were $7,056.3
million for 2000. Net earnings were net of Federal income taxes totaling
$173.5 million for 2000.
F-25
OTHER DISCONTINUED OPERATIONS
Summarized financial information for Other Discontinued Operations
follows:
December 31,
--------------------------------------
2002 2001
----------------- -----------------
(In Millions)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $677.8 and $542.9)............................ $ 722.7 $ 559.6
Equity real estate................................................. 203.7 252.0
Mortgage loans on real estate...................................... 87.5 160.3
Other equity investments........................................... 9.4 22.3
Other invested assets.............................................. .2 .4
----------------- -----------------
Total investments............................................... 1,023.5 994.6
Cash and cash equivalents.......................................... 31.0 41.1
Other assets....................................................... 126.5 152.6
----------------- -----------------
Total Assets....................................................... $ 1,181.0 $ 1,188.3
================= =================
Policyholders liabilities.......................................... $ 909.5 $ 932.9
Allowance for future losses........................................ 164.6 139.9
Other liabilities.................................................. 106.9 115.5
----------------- -----------------
Total Liabilities.................................................. $ 1,181.0 $ 1,188.3
================= =================
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $18.1, $25.3 and $37.0)............ $ 69.7 $ 91.6 $ 102.2
Investment gains (losses), net................... 34.2 33.6 (6.6)
Policy fees, premiums and other income........... .2 .2 .7
----------------- ---------------- -----------------
Total revenues................................... 104.1 125.4 96.3
Benefits and other deductions.................... 98.7 100.7 106.9
Earnings credited (losses charged) to allowance
for future losses.............................. 5.4 24.7 (10.6)
----------------- ---------------- -----------------
Pre-tax loss from operations..................... - - -
Pre-tax earnings from releasing the allowance
for future losses.............................. 8.7 46.1 90.2
Federal income tax expense....................... (3.1) (2.3) (31.6)
----------------- ---------------- -----------------
Earnings from Other
Discontinued Operations........................ $ 5.6 $ 43.8 $ 58.6
================= ================ =================
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. Additionally, as part of AXA Financial's
annual planning process, investment and benefit cash flow projections
are prepared. These updated assumptions and estimates resulted in a
release of allowance in each of the three years presented.
Valuation allowances of $4.9 million and $4.8 million on mortgage loans
on real estate and zero and $5.0 million on equity real estate were held
at December 31, 2002 and 2001, respectively. During 2002, 2001 and 2000,
other discontinued operations' average recorded investment in impaired
mortgage loans was $25.3 million, $32.2 million and $11.3 million,
respectively. Interest income recognized on these impaired mortgage
loans totaled $2.5 million, $2.5 million and $.9 million for 2002, 2001
and 2000, respectively.
In 2001, Federal income tax expense for Other Discontinued Operations
reflected a $13.8 million reduction in taxes due to settlement of open
tax years.
F-26
9) VARIABLE ANNUITY CONTRACTS - GMDB AND GMIB
Equitable Life issues certain variable annuity contracts with GMDB and
GMIB features that guarantee either:
a) Return of Premium: the benefit is the greater of current account
value and premiums paid (adjusted for withdrawals),
b) Ratchet: the benefit is the greatest of current account value,
premiums paid (adjusted for withdrawals), and the highest account
value on any anniversary up to contractually specified ages
(adjusted for withdrawals), or
c) Roll-Up: the benefit is the greater of current account value and
premiums paid (adjusted for withdrawals) accumulated at
contractually specified interest rates up to specified ages,
d) Combo: the benefit is the greater of the ratchet benefit or the
roll-up benefit.
The following table summarizes the GMDB and GMIB liabilities, before
reinsurance ceded, reflected in the General Account in future policy
benefits and other policyholders liabilities in 2002:
GMDB GMIB Total
----------------- ---------------- -----------------
(In Millions)
Balance at January 1, 2002....................... $ 43.0 $ 15.0 $ 58.0
Paid guarantee benefits........................ (65.0) - (65.0)
Other changes in reserve....................... 150.4 102.5 252.9
----------------- ---------------- -----------------
Balance at December 31, 2002..................... $ 128.4 $ 117.5 $ 245.9
================= ================ =================
Related GMDB reinsurance ceded amounts were:
GMDB
------------------
(In Millions)
Balance at January 1, 2002......................... $ 7.0
Paid guarantee benefits ceded.................... (14.5)
Other changes in reserve......................... 29.0
------------------
Balance at December 31, 2002....................... $ 21.5
==================
The GMIB reinsurance contracts are considered derivatives and are
reported at fair value (see Note 14).
F-27
At December 31, 2002 AXA Financial had the following variable contracts
with guarantees. Note that AXA Financial's variable contracts with GMDB
guarantees may also offer GMIB guarantees in each contract, therefore,
the GMDB and GMIB amounts listed are not mutually exclusive:
Return
of
Premium Ratchet Roll-Up Combo Total
----------- ---------- ---------- --------- ---------
(Dollars In Millions)
GMDB:
Account value (1)................ $ 21,052 $ 3,991 $ 6,030 $ 1,488 $ 32,561
Net amount at risk, gross........ $ 5,609 $ 1,724 $ 3,036 $ 44 $ 10,413
Net amount at risk, net of
amounts reinsured.............. $ 5,602 $ 1,187 $ 1,897 $ 44 $ 8,730
Average attained age of
contractholders................ 50.0 58.9 61.0 59.6 51.7
Percentage of contractholders
over age 70.................... 7.0% 19.8% 24.3% 20.4% 9.5%
Range of guaranteed minimum
return rates................... N/A N/A 3-6% 3-6% N/A
GMIB:
Account value (2)................ N/A N/A $ 4,782 $ 2,042 $ 6,824
Net amount at risk, gross........ N/A N/A $ 1,112 $ 10 $ 1,122
Net amount at risk, net of
amounts reinsured.............. N/A N/A $ 308 $ 5 $ 313
Weighted average years
remaining until annuitization N/A N/A 5.0 10.2 5.0
Range of guaranteed minimum
return rates................... N/A N/A 3-6% 3-6% 3-6%
(1) Included General Account balances of $10,141 million, $96 million,
$129 million and $257 million, respectively, for a total of $10,623
million.
(2) Included General Account balances of $20 million and $356 million,
respectively, for a total of $376 million.
For contracts in the event of death, the net amount at risk is defined
as the amount by which the GMDB benefits exceed related account values.
For contracts at annuitization, the net amount at risk is defined as the
amount by which the GMIB benefit bases exceed related account values,
taking into account the relationship between current annuity purchase
rates and the GMIB guaranteed annuity purchase rates.
F-28
10) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
December 31,
--------------------------------------
2002 2001
----------------- -----------------
(In Millions)
Short-term debt.................................................... $ 98.8 $ 279.4
----------------- -----------------
Long-term debt:
Holding Company:
Senior notes, 7.75%, due through 2010............................ 476.9 476.5
Senior notes, 6.5%, due 2008..................................... 249.6 249.5
Senior notes, 9%, due 2004....................................... 300.0 300.0
Senior notes, 7.30%, due through 2003............................ - 76.8
Senior debentures, 7.0%, due 2028................................ 347.7 347.7
----------------- -----------------
Total Holding Company........................................ 1,374.2 1,450.5
----------------- -----------------
Equitable Life:
Surplus notes, 6.95%, due 2005................................... 399.8 399.7
Surplus notes, 7.70%, due 2015................................... 199.7 199.7
----------------- -----------------
Total Equitable Life......................................... 599.5 599.4
----------------- -----------------
Alliance:
Senior Notes, 5.625% due 2006.................................... 398.4 398.0
Other............................................................ 6.5 6.5
----------------- -----------------
Total Alliance............................................... 404.9 404.5
----------------- -----------------
Wholly owned and joint venture real estate:
Mortgage notes, 3.09%, due through 2017.......................... 248.3 248.3
----------------- -----------------
Total long-term debt............................................... 2,626.9 2,702.7
----------------- -----------------
Total Short-term and Long-term Debt................................ $ 2,725.7 $ 2,982.1
================= =================
SHORT-TERM DEBT
Equitable Life has a $350.0 million bank five year credit facility. The
interest rates are based on external indices dependent on the type of
borrowing ranging from 1.60% to 4.25%. There were no amounts outstanding
under this credit facility at December 31, 2002.
Equitable Life has a commercial paper program with an issue limit of
$500.0 million. This program is available for general corporate purposes
used to support Equitable Life's liquidity needs and is supported by
Equitable Life's $350.0 million bank credit facility. At December 31,
2002, there were no amounts outstanding under this program.
Since 1998, Alliance has had a $425.0 million commercial paper program.
In September 2002, Alliance entered into an $800.0 million five-year
credit facility with a group of commercial banks and other lenders that
replaced three previously existing credit facilities aggregating $875.0
million. Of the $800.0 million total, $425.0 million is intended to
provided back-up liquidity for Alliance's commercial paper program, with
the balance available for general purposes, including capital
expenditures and deferred sales commissions. Under this revolving credit
facility, the interest rate, at the option of Alliance, is a floating
rate generally based upon a defined prime rate, a rate related to the
London Interbank Offered Rate ("LIBOR") or the Federal funds rate. The
credit facility also provides for a facility fee payable on the total
facility. In addition, a utilization rate fee is payable in the event
the average aggregate daily outstanding balance exceeds $400.0 million
for each calendar quarter. The revolving credit facility contains
covenants that, among other things, require Alliance to meet certain
financial ratios. Alliance was in compliance with the covenants at
December 31, 2002. At December 31, 2002, Alliance had commercial paper
outstanding totaling $22.0 million at an effective interest rate of
1.3%; there were no borrowings outstanding under Alliance's revolving
credit facilities.
F-29
Since December 1999, Alliance maintained a $100.0 million extendible
commercial notes ("ECN") program as a supplement to its $425.0 million
commercial paper program. ECNs are short-term uncommitted debt
instruments that do not require back-up liquidity support. At December
31, 2002, there were no borrowings outstanding under the ECN program.
LONG-TERM DEBT
Certain of the long-term debt agreements, principally mortgage notes,
have restrictive covenants related to the total amount of debt, net
tangible assets and other matters. At December 31, 2002, AXA Financial
was in compliance with all debt covenants.
At December 31, 2002 and 2001, respectively, AXA Financial has pledged
real estate of $322.9 million and $314.5 million as collateral for
certain long-term debt.
At December 31, 2002, aggregate maturities of the long-term debt based
on required principal payments at maturity was $325.1 million for 2003,
$300.0 million for 2004, $400.0 million for 2005, $406.5 million for
2006, $0.0 in 2007 and $1,280.0 million thereafter.
In August 2001, Alliance issued $400.0 million 5.625% notes in a public
offering. Alliance may issue up to $600.0 million in senior debt
securities. The Alliance notes mature in 2006 and are redeemable at any
time. The proceeds from the Alliance notes were used to reduce
commercial paper and credit facility borrowings and for other general
partnership purposes.
11) FEDERAL INCOME TAXES
A summary of the Federal income tax expense (benefit) in the
consolidated statements of earnings follows:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Federal income tax expense (benefit):
Current........................................ $ (443.1) $ (138.5) $ (123.1)
Deferred....................................... 452.9 358.1 80.6
----------------- ---------------- -----------------
Total............................................ $ 9.8 $ 219.6 $ (42.5)
================= ================ =================
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings before
Federal income taxes and minority interest by the expected Federal
income tax rate of 35%. The sources of the difference and their tax
effects follow:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Expected Federal income tax expense (benefit)......... $ 297.4 $ 313.1 $ (34.9)
Minority interest..................................... (101.6) (103.1) (94.0)
Separate Account investment activity.................. (159.3) - (5.5)
Non-deductible stock option compensation expense...... - - 61.6
Adjustment of tax audit reserves...................... (42.9) (28.2) 23.4
Non-deductible goodwill and other intangible assets... 3.4 30.3 10.4
Other................................................. 12.8 7.5 (3.5)
----------------- ---------------- -----------------
Federal Income Tax Expense (Benefit).................. $ 9.8 $ 219.6 $ (42.5)
================= ================ =================
F-30
The components of the net deferred Federal income taxes are as follows:
December 31, 2002 December 31, 2001
--------------------------------- ---------------------------------
Assets Liabilities Assets Liabilities
--------------- ---------------- --------------- ---------------
(In Millions)
Compensation and related benefits.... $ 13.4 $ - $ 218.6 $ -
Other................................ 31.6 - 39.0 -
DAC, reserves and reinsurance........ - 1,264.5 - 1,011.5
Investments.......................... - 600.6 - 350.4
--------------- ---------------- --------------- ---------------
Total................................ $ 45.0 $ 1,865.1 $ 257.6 $ 1,361.9
=============== ================ =============== ===============
The deferred Federal income taxes impacting operations reflect the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The sources of these temporary differences
and their tax effects follow:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
DAC, reserves and reinsurance.................... $ 270.9 $ 283.1 $ 403.3
Investments...................................... (4.7) 50.7 (139.9)
Compensation and related benefits................ 179.1 19.5 (154.3)
Other............................................ 7.6 4.8 (28.5)
----------------- ---------------- -----------------
Deferred Federal Income Tax Expense.............. $ 452.9 $ 358.1 $ 80.6
================= ================ =================
In 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 Internal Revenue Service (the "IRS") with respect to
such tax matters for the 1992-1996 tax years.
The IRS commenced in January 2003 an examination of AXA Financial's
consolidated Federal income tax returns for the years 1997 through 2001.
Management believes this audit will have no material adverse effect on
AXA Financial's consolidated results of operations.
12) CAPITAL STOCK, STOCK APPRECIATION RIGHTS, AND OPTIONS
At December 31, 2002 and 2001, there were 436.2 million shares issued
and outstanding of the Holding Company's Common Stock that have a
par value of $.01 per share.
In 1993, the Holding Company established a Stock Employee Compensation
Trust ("SECT") to fund a portion of its obligations arising from its
various employee compensation and benefits programs. At that time, the
Holding Company sold 60,000 shares of Series D Preferred Stock,
convertible into 23.8 million shares of the Holding Company's common
stock ("Common Stock"), to the SECT in exchange for cash and a
promissory note of $299.9 million, for a total of $300.0 million. This
had no effect on AXA Financial's consolidated shareholders' equity as
the Series D Preferred Stock was reported as outstanding on AXA
Financial's consolidated balance sheets but was offset by a
contra-equity account. An increase in consolidated shareholders' equity
resulted only when shares of Series D Preferred Stock were released from
the SECT and converted into shares of Common Stock. The conversion of
the Series D Preferred Stock released from the SECT and the related
reduction in benefit liabilities were recorded at fair value. The SECT
terminated in December 2001 following the release of the shares of
Series D Preferred Stock which converted all assets of the SECT.
In September 2001, the SECT released 10,920 shares of Series D Preferred
Stock, having an approximate value of $203.5 million. The value of the
Series D Preferred Stock was remitted to Equitable Life to fund
designated benefit plans. Equitable Life reimbursed the Holding Company
for the value of the Series D Preferred Stock. This transaction had no
impact on consolidated shareholders' equity.
In conjunction with approval of the agreement for AXA's acquisition of
the minority interest in the Holding Company's Common Stock, generally
all outstanding options awarded under the 1997 and 1991 Stock Incentive
Plans were amended to become immediately and fully exercisable pursuant
to their terms upon expiration of the initial tender offer. In addition,
the agreement provided that at the effective time of the merger, the
terms of all outstanding options granted under those Plans would be
further amended and converted into options of equivalent intrinsic value
to acquire a number of AXA ordinary shares in the form of ADRs. Also
F-31
pursuant to the agreement, holders of non-qualified options were
provided with an alternative to elect cancellation of those options at
the effective time of the merger in exchange for a cash payment from AXA
Financial. For the year ended December 31, 2000, AXA Financial, Inc.
recognized compensation expense of $702.7 million, representing the cost
of these Plan amendments and modifications, approximately $349.9 million
of which has been accrued for the cash settlement of approximately 11.9
million non-qualified options. The remaining cost of approximately
$352.8 million as related to the conversion and exchange of option
shares was reflected as an addition to capital in excess of par value.
Beginning in 2001, under the 1997 Stock Incentive Plan, the Holding
Company can issue options to purchase AXA ADRs. The options, which
include Incentive Stock Options and Nonstatutory Stock Options, are
issued at the fair market value of the AXA ADRs on the date of grant.
Generally, one-third of stock options granted vest and become
exercisable on each of the first three anniversaries of the date such
options were granted. Options are currently exercisable up to 10 years
from the date of grant.
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 $(11.4) million and
$(74.0) million for 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 December 31, 2002 and 2001.
AXA Financial has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB No. 25.
Stock-based employee compensation expense is not reflected in the
statement of earnings as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock
on the date of the grant. The following table illustrates the effect on
net income had compensation expense as related to options awarded under
AXA Financial's Stock Incentive Plans been determined based on SFAS No.
123's fair value based method, including the cost of the amendments and
modifications made in connection with AXA's acquisition of the minority
interest in the Holding Company:
2002 2001 2000
----------------- ---------------- -------------------
(In Millions)
Net income as reported............................. $ 528.6 $ 424.8 $ 2,415.4
Add: Compensation charge resulting from
AXA's acquisition of minority interest
included in net earnings......................... - - 457.4
Less: Total stock-based employee compensation
expense determined under fair value method for
all awards, net of Federal income tax benefit.... (37.3) (22.2) (34.6)
----------------- ---------------- -------------------
Pro forma net earnings............................. $ 491.3 $ 402.6 $ 2,838.2
================= ================ ===================
F-32
The Black-Scholes option pricing model was used in determining the fair
values of option awards used in the pro-forma disclosures above. The
option pricing assumptions for 2002, 2001 and 2000 follow:
Holding Company Alliance
----------------------------------------- ------------------------------
2002(1) 2001(1) 2000 2002 2001 2000
------------- ------------- ------------ --------- ---------- ---------
Dividend yield............... 2.54% 1.52% 0.32% 5.80% 5.80% 7.20%
Expected volatility.......... 46% 29% 28% 32% 33% 30%
Risk-free interest rate...... 4.04% 4.98% 6.24% 4.2% 4.5% 5.90%
Expected life in years....... 5 5 5 7.0 7.2 7.4
Weighted average fair value
per option at grant date... $6.30 $9.42 $11.08 $5.89 $9.23 $8.32
(1) Beginning in 2001, the option pricing assumptions reflect options
granted by the Holding Company representing rights to acquire AXA
ADRs.
A summary of the activity in the option shares of the Holding Company
and Alliance's option plans follows, including information about options
outstanding and exercisable at December 31, 2002. Outstanding options at
January 2, 2001 to acquire AXA ADRs reflect the conversion of 11.5
million share options of the Holding Company that remained outstanding
following the above-described cash settlement made pursuant to the
agreement for AXA's acquisition of the minority interest in the Holding
Company's Common Stock. All information presented below as related to
options to acquire AXA ADRs gives appropriate effect to AXA's May 2001
four-for-one stock split and the related changes in ADR parity for each
Holding Company share option:
Holding Company Alliance
------------------------------------ -------------------------------------
Common
Stock Weighted Weighted
and Average Average
AXA ADRs Exercise Units Exercise
(In Millions) Price (In Millions) Price
----------------- ---------------- ---------------- -----------------
Holding Company Option Shares:
Balance at December 31, 1999..... 22.7 $24.60 12.5 $17.95
Granted........................ 6.5 $31.06 4.7 $50.93
Exercised...................... (4.5) $18.57 (1.7) $10.90
Forfeited...................... (1.2) $26.15 (.1) $26.62
----------------- ---------------
Balance at December 31, 2000..... 23.5 $27.20 15.4 $28.73
================= ===============
AXA ADR Option Shares:
Balance at January 2, 2001 18.3 $21.65
Granted........................ 17.0 $31.55 2.5 $50.34
Exercised...................... (2.2) $11.57 (1.7) $13.45
Forfeited...................... (3.1) $32.02 (.3) $34.33
----------------- ----------------
Balance at December 31, 2001..... 30.0 $31.55 15.9 $33.58
Granted........................ 6.7 $17.24 2.4 $39.32
Exercised...................... (.2) $10.70 (1.4) $14.83
Forfeited...................... (1.2) $27.12 (.5) $42.99
----------------- ----------------
Balance at December 31, 2002..... 35.3 $25.14 16.4 $34.91
================= ================
F-33
Information about options outstanding and exercisable at December 31,
2002 follows:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (In Millions) Life (Years) Price (In Millions) Price
-------------------- ----------------- --------------- -------------- ---------------- ------------
AXA ADRs
--------------------
$ 6.325 - $ 9.01 1.8 1.26 $ 6.76 1.8 $ 6.76
$10.195 - $14.73 3.3 6.41 $13.13 2.4 $13.28
$15.995 - $22.84 10.3 7.82 $18.47 4.7 $18.80
$26.095 - $33.025 14.9 5.60 $30.93 8.5 $31.76
$36.031 5.0 6.48 $36.03 5.0 $36.03
----------------- ------------------
$ 6.325 - $36.031 35.3 6.22 $25.14 22.4 $26.00
================= ==================
Alliance
----------------------
$ 8.81 - $18.47 3.5 3.43 $13.21 3.5 $13.21
$22.50 - $30.25 3.8 6.34 $27.87 2.6 $27.60
$30.94 - $48.50 4.9 8.68 $41.01 1.0 $48.46
$50.15 - $50.56 2.3 8.92 $50.25 .5 $50.25
$51.10 - $58.50 1.9 7.95 $53.78 .7 $53.77
----------------- ------------------
$ 8.81 - $58.50 16.4 6.98 $34.91 8.3 $27.72
================= ==================
AXA Financial's ownership interest in Alliance will continue to be
reduced upon the exercise of unit options granted to certain Alliance
employees. Options are exercisable over a period of up to ten years.
In 2002 and 2001, AXA Financial granted to senior executives AXA ADRs
having a value of $12.3 million and $8.7 million, respectively, on the
effective date of the grants. The AXA ADRs vest over three years. In
2002 and 2001, AXA Financial recognized $6.3 million and $1.2 million,
respectively, in compensation and benefit expense relating to this
program.
In 1997, Alliance Holding established a long-term incentive compensation
plan under which grants are made to key employees for terms established
by Alliance Holding at the time of grant. These awards include options,
restricted Alliance Holding units and phantom restricted Alliance
Holding units, performance awards, other Alliance Holding unit based
awards, or any combination thereof. At December 31, 2002, approximately
14.4 million Alliance Holding units of a maximum 40.0 million units were
subject to options granted and 80,433 Alliance Holding units were
subject to awards made under this plan.
13) RELATED PARTY TRANSACTIONS
In December 2000, the Holding Company loaned AXA Merger $3.0 billion at
an annual rate of 6.96% with principal and interest payable March 14,
2001. The loan proceeds were used to partially fund the AXA Financial
minority interest buyout. Interest income totaled $5.3 million for 2000.
As a result of its merger into the Holding Company, AXA Merger's
obligation to repay this loan was extinguished in January 2001. This
non-cash event resulted in a decrease in AXA Financial's consolidated
shareholders' equity.
In March 2001, the Holding Company borrowed from AXA $1.10 billion due
March 30, 2001 under a renewable financing agreement. The proceeds were
used to partially fund Federal income tax payments in first quarter
2001. Both interest of $3.8 million and principal were paid in 2001.
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.
The Holding Company, Equitable Life and Alliance, along with other AXA
affiliates, participate in certain intercompany cost sharing and service
agreements including technology and professional development
arrangements. Payments by AXA Financial to AXA under such agreements
totaled approximately $16.3 million and $18.4 million in
F-34
2002 and 2001, respectively. Payments by AXA and AXA affiliates to AXA
Financial under such agreements totaled approximately $17.6 million
and $9.9 million in 2002 and 2001, respectively.
Commissions, fees and other income includes certain revenues for
services provided to mutual funds managed by Alliance described below:
2002 2001 2000
----------------- ---------------- ------------------
(In Millions)
Investment advisory and services fees.............. $ 950.1 $ 1,089.7 $ 1,021.8
Distribution revenues.............................. 467.5 544.6 621.6
Shareholder servicing fees......................... 89.7 87.2 85.6
Other revenues..................................... 10.2 11.0 11.6
Brokerage.......................................... 7.0 5.7 1.0
14) REINSURANCE AGREEMENTS
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Ceded reinsurance does not relieve the originating insurer
of liability.
The effect of reinsurance (excluding group life and health) is
summarized as follows:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Direct premiums.................................... $ 954.6 $ 990.0 $ 1,103.8
Reinsurance assumed................................ 181.4 203.0 194.2
Reinsurance ceded.................................. (190.8) (173.1) (123.0)
----------------- ---------------- -----------------
Premiums........................................... $ 945.2 $ 1,019.9 $ 1,175.0
================= ================ =================
Universal Life and Investment-type Product
Policy Fee Income Ceded.......................... $ 96.6 $ 86.9 $ 92.1
================= ================ =================
Policyholders' Benefits Ceded...................... $ 346.3 $ 370.3 $ 239.2
================= ================ =================
Interest Credited to Policyholders' Account
Balances Ceded................................... $ 54.6 $ 50.4 $ 46.5
================= ================ =================
Since 1997 AXA Financial has reinsured on a yearly renewal term basis
90% of the mortality risk on new issues of certain term, universal and
variable life products. AXA Financial's retention limit on joint
survivorship policies is $15.0 million and $5.0 million on single life
policies. All other in force business above $5.0 million is reinsured.
The Insurance Group also reinsures the entire risk on certain
substandard underwriting risks and in certain other cases.
At December 31, 2002, Equitable Life had reinsured in the aggregate
approximately 16.0% of its current exposure to the GMDB obligation on
annuity contracts in-force and, subject to certain maximum amounts or
caps in any one period, approximately 72.0% of its current liability
exposure resulting from the GMIB feature.
During July 2000, Equitable Life transferred, at no gain or loss, all
the risk of its directly written DI business for years 1993 and prior
through an indemnity reinsurance contract. The cost of the arrangement
will be amortized over the expected lives of the contracts reinsured and
will not have a significant impact on the results of operations in any
specific period.
At December 31, 2002 and 2001, respectively, reinsurance recoverables
related to insurance contracts amounted to $2,351.7 million and $2,237.0
million, of which $1,049.2 million and $1,060.4 million relates to one
specific reinsurer. Reinsurance payables related to insurance contracts
totaling $867.5 million and $798.5 million are included in Other
liabilities in the consolidated balance sheets.
Based on management's estimates of future contract cash flows and
experience, the estimated fair values of the GMIB reinsurance contracts,
which are considered derivatives under SFAS No. 133, at December 31,
2002 and 2001 were $120.0 million and zero, respectively. The increase
in estimated fair value of $120.0 million for the year ended December
31, 2002 was due primarily to significant equity market declines during
2002.
F-35
The Insurance Group cedes 100% of its group life and health business to
a third party insurer. Insurance liabilities ceded totaled $410.9
million and $444.2 million at December 31, 2002 and 2001, respectively.
In addition to the sale of insurance products, the Insurance Group acts
as a professional retrocessionaire by assuming life and annuity
reinsurance from professional reinsurers. The Insurance Group also
assumes accident, health, aviation and space risks by participating in
various reinsurance pools. Reinsurance assumed reserves at December 31,
2002 and 2001 were $570.7 million and $540.2 million, respectively.
15) EMPLOYEE BENEFIT PLANS
AXA Financial sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified
part-time employees), managers and certain agents. The pension plans are
non-contributory. Equitable Life's benefits are based on a cash balance
formula or years of service and final average earnings, if greater,
under certain grandfathering rules in the plans. Alliance's benefits are
based on years of credited service, average final base salary and
primary social security benefits. AXA Financial made cash contributions
in 2002 to the qualified plans totaling $348.2 million.
Generally, AXA Financial's funding policy is to make the minimum
contribution required by the Employee Retirement Income Security Act of
1974 ("ERISA").
Components of net periodic pension expense (credit) for the qualified
and non-qualified plans were as follows:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Service cost....................................... $ 39.4 $ 40.7 $ 37.2
Interest cost on projected benefit obligations..... 151.7 152.0 146.4
Expected return on assets.......................... (181.9) (218.9) (223.3)
Net amortization and deferrals..................... 17.4 5.9 5.4
----------------- ---------------- -----------------
Net Periodic Pension Expense (Credit).............. $ 26.6 $ (20.3) $ (34.3)
================= ================ =================
The plans' projected benefit obligations under the qualified and
non-qualified plans was comprised of:
December 31,
------------------------------------
2002 2001
---------------- -----------------
(In Millions)
Benefit obligations, beginning of year................................. $ 2,184.6 $ 2,024.6
Service cost........................................................... 34.4 35.7
Interest cost.......................................................... 151.7 152.0
Actuarial losses (gains)............................................... 55.8 114.0
Benefits paid.......................................................... (145.4) (141.7)
---------------- -----------------
Benefit Obligations, End of Year....................................... $ 2,281.1 $ 2,184.6
================ =================
F-36
The change in plan assets and the funded status of the qualified and
non-qualified pension plans was as follows:
December 31,
------------------------------------
2002 2001
---------------- -----------------
(In Millions)
Plan assets at fair value, beginning of year............................. $ 1,847.0 $ 2,121.3
Actual return on plan assets............................................. (278.1) (147.9)
Contributions............................................................ 348.2 -
Benefits paid and fees................................................... (130.2) (126.4)
---------------- -----------------
Plan assets at fair value, end of year................................... 1,786.9 1,847.0
Projected benefit obligations............................................ 2,281.1 2,184.6
---------------- -----------------
(Underfunding) excess of plan assets over projected benefit obligations.. (494.2) (337.6)
Unrecognized prior service cost.......................................... (4.2) (7.3)
Unrecognized net loss from past experience different
from that assumed...................................................... 1,131.3 641.9
Unrecognized net asset at transition..................................... (1.3) (1.7)
Additional minimum pension liability..................................... (73.9) (61.1)
---------------- -----------------
Prepaid Pension Cost, Net................................................ $ 557.7 $ 234.2
================ =================
The prepaid pension cost for pension plans with assets in excess of
projected benefit obligations was $913.0 million and $552.0 million and
the accrued liability for pension plans with accumulated benefit
obligations in excess of plan assets was $355.3 million and $317.7
million at December 31, 2002 and 2001, respectively.
The pension plan assets include corporate and government debt
securities, equity securities, equity real estate and shares of group
trusts managed by Alliance. The discount rate and rate of increase in
future compensation levels used in determining the actuarial present
value of projected benefit obligations were 6.75% and 7.26%,
respectively, at December 31, 2002 and 7.25% and 7.19%, respectively, at
December 31, 2001. As of January 1, 2002 and 2001, the expected
long-term rate of return on assets for the retirement plan was 9.0% and
10.25%, respectively.
AXA Financial recorded, as a reduction of shareholders' equity, an
additional minimum pension liability of $31.1 million, $13.7 million and
$13.3 million, net of Federal income taxes, at December 31, 2002, 2001
and 2000, respectively, primarily representing the excess of the
accumulated benefit obligation of the non-qualified pension plan over
the accrued liability and an intangible pension asset of $35.8 million
at December 31, 2002, representing the amount of unrecognized prior
service cost, which is reported in Other assets. The aggregate
accumulated benefit obligation and fair value of plan assets for pension
plans with accumulated benefit obligations in excess of plan assets were
$400.0 million and $25.7 million, respectively, at December 31, 2002 and
$352.0 million and $30.3 million, respectively, at December 31, 2001.
Prior to 1987, the qualified plan funded participants' benefits through
the purchase of non-participating annuity contracts from Equitable Life.
Benefit payments under these contracts were approximately $26.0 million,
$27.3 million and $28.7 million for 2002, 2001 and 2000, respectively.
AXA Financial provides certain medical and life insurance benefits
(collectively, "postretirement benefits") for qualifying employees,
managers and agents retiring from AXA Financial (i) on or after
attaining age 55 who have at least 10 years of service or (ii) on or
after attaining age 65 or (iii) whose jobs have been abolished and who
have attained age 50 with 20 years of service. The life insurance
benefits are related to age and salary at retirement for certain
grandfathered retirees, and a flat dollar amount for others. AXA
Financial continues to fund postretirement benefits costs on a
pay-as-you-go basis and, for 2002, 2001 and 2000, AXA Financial made
estimated postretirement benefits payments net of employee contributions
of $36.2 million, $32.5 million and $39.3 million, respectively.
F-37
The following table sets forth the postretirement benefits plan's
status, reconciled to amounts recognized in AXA Financial's consolidated
financial statements:
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Service cost....................................... $ 4.6 $ 4.8 $ 4.8
Interest cost on accumulated postretirement
benefits obligation.............................. 35.4 31.8 35.5
Net amortization and deferrals..................... (.7) (4.4) (3.2)
----------------- ---------------- -----------------
Net Periodic Postretirement Benefits Costs......... $ 39.3 $ 32.2 $ 37.1
================= ================ =================
December 31,
------------------------------------
2002 2001
---------------- -----------------
(In Millions)
Accumulated postretirement benefits obligation,
beginning of year.................................................... $ 438.6 $ 476.0
Service cost........................................................... 4.6 4.8
Interest cost.......................................................... 35.4 31.8
Contributions and benefits paid........................................ (36.2) (32.5)
Actuarial losses (gains)............................................... 101.4 (41.5)
---------------- -----------------
Accumulated postretirement benefits obligation, end of year............ 543.8 438.6
Unrecognized prior service cost........................................ 13.5 21.5
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions.................... (148.8) (54.6)
---------------- -----------------
Accrued Postretirement Benefits Cost................................... $ 408.5 $ 405.5
================ =================
In 1993, AXA Financial announced a limit on the amount that would be
contributed toward retiree healthcare. AXA Financial's contribution
limit is expected to be reached in 2003.
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefits obligation was 9.0% in 2002,
gradually declining to 5.0% in the year 2012, and in 2001 was 10.0%,
gradually declining to 5.0% in the year 2011. The discount rate used in
determining the accumulated postretirement benefits obligation was 6.75%
and 7.25% at December 31, 2002 and 2001, respectively.
If the health care cost trend rate assumptions were increased by 1.0%,
the accumulated postretirement benefits obligation as of December 31,
2002 would be decreased .7%. The effect of this change on the sum of the
service cost and interest cost would be a decrease of .6%. If the health
care cost trend rate assumptions were decreased by 1.0% the accumulated
postretirement benefits obligation as of December 31, 2002 would be
increased by .7%. The effect of this change on the sum of the service
cost and interest cost would be an increase of .9%. The limited impact
of the change in trend rate assumptions reflects the application of AXA
Financial's contribution limit.
Alliance maintains several unfunded deferred compensation plans for the
benefit of certain eligible employees and executives. The Capital
Accumulation Plan was frozen on December 31, 1987 and no additional
awards have been made. For the active plans, benefits vest over a period
ranging from 3 to 8 years and are amortized as compensation and benefit
expense. ACMC, Inc. ("ACMC"), a subsidiary of AXA Financial, is
obligated to make capital contributions to Alliance in amounts equal to
benefits paid under the Capital Accumulation Plan and the contractual
unfunded deferred compensation arrangements. In connection with the
acquisition of Bernstein, Alliance agreed to invest $96.0 million per
annum for three years to fund purchases of Alliance Holding units or an
Alliance sponsored money market fund in each case for the benefit of
certain individuals who were stockholders or principals of Bernstein or
hired to replace them. AXA Financial has recorded compensation and
benefit expenses in connection with the plans totaling $101.4 million,
$58.1 million and $29.8 million for 2002, 2001 and 2000, respectively
(including $63.7 million, $34.6 million and $6.8 million for 2002, 2001
and 2000, respectively, relating to the Bernstein deferred compensation
plan).
F-38
16) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Insurance Group primarily uses derivatives for asset/liability risk
management and for hedging individual securities. Derivatives mainly are
utilized to reduce the Insurance Group's exposure to interest rate
fluctuations. Various derivative financial instruments are used to
achieve this objective, including interest rate caps and floors to hedge
crediting rates on interest-sensitive individual annuity contracts,
interest rate futures to protect against declines in interest rates
between receipt of funds and purchase of appropriate assets, and
interest rate swaps to modify the duration and cash flows of fixed
maturity investments. In addition, AXA Financial periodically enters
into forward and futures contracts to hedge certain equity exposures.
Also, AXA Financial has purchased reinsurance contracts to mitigate the
risks associated with the impact of potential market fluctuations on
future policyholder elections of GMIB features contained in certain
annuity contracts issued by AXA Financial.
As earlier described in Note 2 of Notes to Consolidated Financial
Statements, AXA Financial adopted SFAS No. 133, as amended, on January
1, 2001. Consequently, all derivatives outstanding at December 31, 2002
and 2001 are recognized on the balance sheet at their fair values. The
outstanding notional amounts of derivative financial instruments
purchased and sold were $9,050.0 million and zero, respectively, at
December 31, 2002. These amounts principally consist of interest rate
cap contracts of Equitable Life that have a total fair value at December
31, 2002 of $8.7 million. At December 31, 2002 and during the year then
ended, there were no hybrid instruments that required bifurcation of an
embedded derivative component under the provisions of SFAS No. 133.
All gains and losses on derivative financial instruments utilized by AXA
Financial in 2002 and 2001 are reported in earnings as none of the
derivatives were designated to qualifying hedging relationships under
SFAS No. 133 either at initial adoption of the Statement or at inception
of the contracts. For 2002 and 2001, respectively, investment results,
principally in net investment income, included gross gains of $24.3
million and $27.5 million and gross losses of $7.7 million and $20.2
million that were recognized on derivative positions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
AXA Financial defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases
where quoted market prices are not available, fair values are estimated
using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument,
including estimates of the timing and amount of expected future cash
flows and the credit standing of counterparties. Such estimates do not
reflect any premium or discount that could result from offering for sale
at one time AXA Financial's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates
cannot be substantiated by comparison to independent markets, nor can
the disclosed value be realized in immediate settlement of the
instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts.
Fair market value of off-balance-sheet financial instruments of the
Insurance Group was not material at December 31, 2002 and 2001.
Fair values for mortgage loans on real estate are estimated by
discounting future contractual cash flows using interest rates at which
loans with similar characteristics and credit quality would be made.
Fair values for foreclosed mortgage loans and problem mortgage loans are
limited to the estimated fair value of the underlying collateral if
lower.
Fair values of policy loans are estimated by discounting the face value
of the loans from the time of the next interest rate review to the
present, at a rate equal to the excess of the current estimated market
rates over the current interest rate charged on the loan.
The estimated fair values for AXA Financial's association plan
contracts, supplementary contracts not involving life contingencies
("SCNILC") and annuities certain, which are included in policyholders'
account balances, and guaranteed interest contracts are estimated using
projected cash flows discounted at rates reflecting expected current
offering rates.
The fair values for variable deferred annuities and single premium
deferred annuities, which are included in policyholders' account
balances, are estimated as the discounted value of projected account
values. Current account values are projected to the time of the next
crediting rate review at the current crediting rates and are projected
beyond that date at the greater of current estimated market rates
offered on new policies or the guaranteed minimum crediting rate.
Expected cash flows and projected account values are discounted back to
the present at the current estimated market rates.
F-39
Fair values for long-term debt are determined using published market
values, where available, or contractual cash flows discounted at market
interest rates. The estimated fair values for non-recourse mortgage debt
are determined by discounting contractual cash flows at a rate which
takes into account the level of current market interest rates and
collateral risk. The estimated fair values for recourse mortgage debt
are determined by discounting contractual cash flows at a rate based
upon current interest rates of other companies with credit ratings
similar to AXA Financial. AXA Financial's carrying value of short-term
borrowings approximates their estimated fair value.
The carrying values and estimated fair values for financial instruments
not previously disclosed in Notes 3, 7, 8 and 10 are presented below:
December 31,
--------------------------------------------------------------------
2002 2001
--------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------- ---------------- --------------- ---------------
(In Millions)
CONSOLIDATED AXA FINANCIAL:
Mortgage loans on real estate........ $ 3,746.2 $ 4,070.1 $ 4,333.3 $ 4,438.7
Other limited partnership interests.. 679.0 679.0 701.9 701.9
Policy loans......................... 4,035.6 4,728.2 4,100.7 4,476.4
Policyholders liabilities:
Investment contracts............... 14,555.0 15,114.9 12,256.4 12,514.0
Long-term debt....................... 2,626.9 2,868.1 2,702.7 2,816.4
CLOSED BLOCK:
Mortgage loans on real estate........ $ 1,456.0 $ 1,572.6 $ 1,514.4 $ 1,532.6
Other equity investments............. 16.4 16.4 24.4 24.4
Policy loans......................... 1,449.4 1,740.9 1,504.4 1,664.8
SCNILC liability..................... 16.5 16.6 18.2 18.1
OTHER DISCONTINUED OPERATIONS:
Mortgage loans on real estate........ $ 87.5 $ 94.7 $ 160.3 $ 171.6
Other equity investments............. 9.4 9.4 22.3 22.3
Guaranteed interest contracts........ 18.3 17.0 18.8 16.1
Long-term debt....................... 101.7 101.7 101.7 101.7
17) COMMITMENTS AND CONTINGENT LIABILITIES
In addition to its debt and lease commitments discussed in Notes 10 and
19, from time to time, AXA Financial has provided certain guarantees or
commitments to affiliates, investors and others. At December 31, 2002,
these arrangements include commitments by AXA Financial, to provide
equity financing of $298.6 million to certain limited partnerships under
certain conditions. Management believes AXA Financial will not incur any
material losses as a result of these commitments.
Equitable Life is the obligor under certain structured settlement
agreements that it had entered into with unaffiliated insurance
companies and beneficiaries. To satisfy its obligations under these
agreements, Equitable Life owns single premium annuities issued by
previously wholly owned life insurance subsidiaries. Equitable Life has
directed payment under these annuities to be made directly to the
beneficiaries under the structured settlement agreements. A contingent
liability exists with respect to these agreements should the previously
wholly owned subsidiaries be unable to meet their obligations.
Management believes the need for Equitable Life to satisfy those
obligations is remote.
AXA Financial had $57.3 million of letters of credit related to
reinsurance of which no amounts were outstanding at December 31, 2002.
In February 2002, Alliance signed a $125.0 million agreement with a
group of commercial banks and other lenders. Under the agreement,
Alliance guarantees various obligations of SCB LLC incurred in the
ordinary course of its business up to $125.0 million in the event SCB
LLC is unable to meet these obligations.
F-40
18) LITIGATION
A number of lawsuits have been filed against life and health insurers in
the jurisdictions in which Equitable Life and its subsidiaries do
business involving insurers' sales practices, alleged agent misconduct,
alleged 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. Equitable Life, Equitable
Variable Life Insurance Company ("EVLICO," which was merged into
Equitable Life effective January 1, 1997, but whose existence continues
for certain limited purposes, including the defense of litigation) and
EOC, like other life and health insurers, from time to time are involved
in such litigations. Among litigations against Equitable Life, EVLICO
and EOC of the type referred to in this paragraph are the litigations
described in the following four paragraphs.
In March 2000, an action entitled Brenda McEachern v. THE EQUITABLE LIFE
ASSURANCE SOCIETY OF THE UNITED STATES AND GARY RAYMOND, JR. was
commenced against Equitable Life and one of its agents in Circuit Court,
Mobile County, Alabama, and asserts claims under state law. The action
was brought by an individual who alleges that she purchased a variable
annuity from Equitable Life in 1997. The action purports to be on behalf
of a class consisting of all persons who from January 1, 1989 (i)
purchased a variable annuity from Equitable Life to fund a qualified
retirement plan, (ii) were charged allegedly unnecessary fees for tax
deferral for variable annuities held in qualified retirement accounts,
or (iii) were sold a variable annuity while owning a qualified
retirement plan from Equitable Life. The complaint alleges various
improper sales practices, including misrepresentations in connection
with the use of variable annuities in a qualified retirement plan or
similar arrangement, charging inflated or hidden fees, and failure to
disclose unnecessary tax deferral fees. Plaintiff seeks damages,
including punitive damages, in an unspecified amount and attorneys' fees
and expenses. In May 2000, Equitable Life removed the case to the United
States District Court for the Southern District of Alabama and filed a
motion to dismiss the complaint, and plaintiff filed a motion to remand
the case to state court. The court has permitted limited discovery on
the issue of whether the Securities Litigation Uniform Standards Act
applies. In November 2001, plaintiff filed a motion for leave to join
additional plaintiffs. In February 2002, the court denied the
plaintiff's motion to remand and granted defendants' motion to dismiss,
but permitted plaintiff until April 1, 2002 to file an amended complaint
in Federal Court. 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 December 2002, the court
granted Equitable Life's motion to dismiss the complaint, ruling that
the Securities Litigation Uniform Standards Act applied. The complaint
has been dismissed without prejudice.
In October 2000, an action entitled SHAM MALHOTRA, ET AL. V. THE
EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, AXA ADVISORS, LLC
AND EQUITABLE DISTRIBUTORS, INC. was commenced in the Supreme Court of
the State of New York, County of Nassau. The action was brought by two
individuals who purchased Equitable Life deferred annuity products. The
action purports to be on behalf of a class consisting of all persons who
purchased an individual deferred annuity contract or who received a
certificate to a group deferred annuity contract, sold by one of the
defendants, which was used to fund a contributory retirement plan or
arrangement qualified for favorable income tax treatment; excluded from
the class are officers, directors and agents of the defendants. The
complaint alleges that the defendants engaged in fraudulent and
deceptive practices in connection with the marketing and sale of
deferred annuity products to fund tax-qualified contributory retirement
plans. The complaint asserts claims for: deceptive business acts and
practices in violation of the New York General Business Law ("GBL"); use
of misrepresentations and misleading statements in violation of the New
York Insurance Law; false or misleading advertising in violation of the
GBL; fraud, fraudulent concealment and deceit; negligent
misrepresentation; negligence; unjust enrichment and imposition of a
constructive trust; declaratory and injunctive relief; and reformation
of the annuity contracts. The complaint seeks injunctive and declaratory
relief, an unspecified amount of compensatory and punitive damages,
restitution for all members of the class, and an award of attorneys'
fees, costs and expenses. In October 2000, the defendants removed the
action to the United States District Court for the Eastern District of
New York, and thereafter filed a motion to dismiss. Plaintiffs filed a
motion to remand the case to state court. In September 2001, the
District Court issued a decision granting defendants' motion to dismiss
and denying plaintiffs' motion to remand, and judgment was entered in
favor of the defendants. In October 2001, plaintiffs filed a motion
seeking leave to reopen the case for the purpose of filing an amended
complaint. In addition, plaintiffs filed a new complaint in the District
F-41
Court, alleging a similar class and similar facts. The new complaint
asserts causes of action for violations of Federal securities laws in
addition to the state law causes of action asserted in the previous
complaint. In January 2002, plaintiffs amended their new complaint in
response to defendants' motion to dismiss and, subsequently, in March
2002, defendants filed a motion to dismiss the amended complaint.
Between June 2000 and January 2003, 29 lawsuits were filed in the state
courts of Mississippi (the "Mississippi Actions") by more than 300
plaintiffs naming as defendants Equitable Life, EVLICO, EOC and AXA
Advisors and various present and former individual sales agents. The
actions arise from the purchase by each of the plaintiffs of various
types of life insurance policies from Equitable Life, EVLICO and/or EOC.
The policies at issue include term, variable and whole life policies
purchased as early as 1954. The actions allege misrepresentations in
connection with the sale of life insurance policies including that the
defendants misrepresented the stated number of years that premiums would
need to be paid. Plaintiffs assert claims for breach of contract, fraud,
fraudulent inducement, misrepresentation, conspiracy, negligent
supervision and other tort claims. Plaintiffs seek unspecified
compensatory and punitive damages. The parties are engaged in various
stages of discovery in many of the pending actions. In March 2002, the
Circuit Court of Sunflower County, in one of the lawsuits, granted
Equitable Life's motion, joined by the agent defendant, to dismiss that
action with prejudice; plaintiffs' appeal to the Supreme Court of
Mississippi has been fully briefed. The lawsuit involving 79 plaintiffs
has been removed from state court to the United States District Court
for the Northern District of Mississippi. Motions to remand are pending
in several other cases.
In six of the Mississippi Actions, between May 2002 and January 2003
three former sales agents and one retired sales 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 cross-claims and in the Federal
district courts in Mississippi, is seeking to compel arbitration of the
cross-claims. In January 2003, the United States District Court for the
Southern District of Mississippi granted Equitable Life's petition to
compel arbitration of the cross-claims asserted by a former agent in two
of the Mississippi Actions and also granted Equitable Life's motion to
enjoin prosecution of those cases in state court.
In October 2000, an action entitled AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO, AS TRUSTEE F/B/O EMERALD INVESTMENTS LP AND EMERALD
INVESTMENTS LP V. AXA CLIENT SOLUTIONS, LLC; THE EQUITABLE LIFE
ASSURANCE SOCIETY OF THE UNITED STATES; AND AXA FINANCIAL, INC. was
commenced in the United States District Court for the Northern District
of Illinois. The complaint alleges that the defendants (i) in connection
with certain annuities issued by Equitable Life breached an agreement
with the plaintiffs involving the execution of mutual fund transfers,
and (ii) wrongfully withheld withdrawal charges in connection with the
termination of such annuities. Plaintiffs seek substantial lost profits
and injunctive relief, punitive damages and attorneys' fees. Plaintiffs
also seek return of the withdrawal charges. In February 2001, the
District Court granted in part and denied in part defendants' motion to
dismiss the complaint. In March 2001, plaintiffs filed an amended
complaint. The District Court granted defendants' motion to dismiss AXA
Client Solutions and the Holding Company from the amended complaint, and
dismissed the conversion claims in June 2001. The District Court denied
defendants' motion to dismiss the remaining claims. Equitable Life has
answered the amended complaint. While the monetary damages sought by
plaintiffs, if awarded, could have a material adverse effect on the
consolidated financial position and results of operations of AXA
Financial, management believes that the ultimate resolution of this
litigation should not have a material adverse on AXA Financial's
consolidated financial position.
After the District Court denied defendants' motion to assert certain
defenses and counterclaims in AMERICAN NATIONAL BANK, Equitable Life
commenced an action, in December 2001, entitled 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 the United States District Court for the
Northern District of Illinois. The complaint arises out of the same
facts and circumstances as described in AMERICAN NATIONAL BANK.
Equitable Life's complaint alleges common law fraud and equitable
rescission in connection with certain annuities issued by Equitable
Life. Equitable Life seeks unspecified money damages, rescission,
punitive damages and attorneys' fees. In March 2002, defendants filed an
answer to Equitable Life's complaint and asserted counterclaims.
Defendants' counterclaims allege common law fraud, violations of the
Federal and Illinois Securities Acts and violations of the Illinois and
New York Consumer Fraud Acts. Defendants seek unspecified money damages,
punitive damages and attorneys' fees. 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 November 1997, an amended complaint was filed in PETER FISCHEL, ET
AL. V. THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
alleging, among other things, that Equitable Life violated ERISA by
eliminating certain alternatives pursuant to which agents of Equitable
Life could qualify for health care coverage. In March 1999, the United
F-42
States District Court for the Northern District of California entered an
order certifying a class consisting of "[a]ll current, former and
retired Equitable agents, who while associated with Equitable satisfied
[certain alternatives] to qualify for health coverage or contributions
thereto under applicable plans." Plaintiffs allege various causes of
action under ERISA, including claims for enforcement of alleged promises
contained in plan documents and for enforcement of agent bulletins,
breach of a unilateral contract, breach of fiduciary duty and promissory
estoppel. In June 2000, plaintiffs appealed to the Court of Appeals for
the Ninth Circuit contesting the District Court's award of legal fees to
plaintiffs' counsel in connection with a previously settled count of the
complaint unrelated to the health benefit claims. In that appeal,
plaintiffs challenged the District Court's subject matter jurisdiction
over the health benefit claims. In May 2001, plaintiffs filed a second
amended complaint which, among other things, alleges that Equitable Life
failed to comply with plan amendment procedures and deletes the
promissory estoppel claim. In September 2001, Equitable Life filed a
motion for summary judgment on all of plaintiffs' claims, and plaintiffs
filed a motion for partial summary judgment on all claims except their
claim for breach of fiduciary duty. 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
subsidized 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
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.
A putative class action entitled STEFANIE HIRT, ET AL. v. THE EQUITABLE
RETIREMENT PLAN FOR EMPLOYEES, MANAGERS AND AGENTS, ET AL. was filed in
the District Court for the Southern District of New York in August 2001
against The Equitable Retirement Plan for Employees, Managers and Agents
(the "Retirement Plan") and The Officers Committee on Benefit Plans of
Equitable Life, as Plan Administrator. The action was brought by five
participants in the Retirement Plan and purports to be on behalf 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." The complaint challenges the change,
effective January 1, 1989, in the pension benefit formula from a final
average pay formula to a cash balance formula. Plaintiffs allege that
the change to the cash balance formula violates ERISA by reducing the
rate of accruals based on age, failing to comply with ERISA's notice
requirements and improperly applying the formula to retroactively reduce
accrued benefits. The relief sought includes a declaration that the cash
balance plan violates ERISA, an order enjoining the enforcement of the
cash balance formula, reformation and damages. Defendants answered the
complaint in October 2001. 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." 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. The parties have agreed on class certification
and in October 2002, the court accepted the recommendation of a special
master to certify a plaintiff class.
In April 2001, an amended class action complaint entitled MILLER, ET AL.
V. MITCHELL HUTCHINS ASSET MANAGEMENT, INC., ET AL. ("Miller Complaint")
was filed in Federal District Court in the Southern District of Illinois
against Alliance, Alliance Fund Distributors, Inc. ("AFD"), a wholly
owned subsidiary of Alliance, and other defendants alleging violations
of the Investment Company Act of 1940, as amended ("ICA"), and breaches
of common law fiduciary duty. The allegations in the Miller Complaint
concern six mutual funds with which Alliance has investment advisory
agreements, including Alliance Premier Growth Fund ("Premier Growth
Fund"), Alliance Health Care Fund, Alliance Growth Fund, Alliance Quasar
Fund, Alliance Fund and Alliance Disciplined Value Fund. The Miller
Complaint alleges principally that (i) certain advisory agreements
concerning these funds were negotiated, approved, and executed in
violation of the ICA, in particular because certain directors of these
funds should be deemed interested under the ICA; (ii) the distribution
plans for these funds were negotiated, approved, and executed in
violation of the ICA; and (iii) the advisory fees and distribution fees
paid to Alliance and AFD, respectively, are excessive and, therefore,
constitute a breach of fiduciary duty. Plaintiffs seek a recovery of
certain fees paid by these funds to Alliance. In March 2002, the court
issued an order granting defendants' joint motion to dismiss the Miller
Complaint. The court allowed plaintiffs up to and including April 1,
2002 to file an amended complaint comporting with its order. In April
2002, plaintiffs filed a second amended complaint. The allegations and
relief sought in the second amended complaint are virtually identical to
the Miller Complaint. In May 2002, defendants filed a motion to dismiss
the amended complaint. Alliance and AFD believe that plaintiffs'
allegations are without merit and intend to vigorously defend against
these allegations. At the present time, management of Alliance and AFD
are unable to estimate the impact, if any, that the outcome of this
action may have on Alliance's results of operations or financial
condition.
In December 2001 a complaint entitled BENAK V. ALLIANCE CAPITAL
MANAGEMENT L.P. AND ALLIANCE PREMIER GROWTH FUND ("Benak Complaint") was
filed in Federal District Court in the District of New Jersey against
Alliance and Alliance Premier Growth Fund alleging violation of the ICA.
The principal allegations of the Benak
F-43
Complaint are that Alliance breached its duty of loyalty to Premier
Growth Fund because one of the directors of the General Partner of
Alliance served as a director of Enron Corp. ("Enron") when Premier
Growth Fund purchased shares of Enron and as a consequence thereof, the
investment advisory fees paid to Alliance by Premier Growth Fund should
be returned as a means of recovering for Premier Growth Fund the losses
plaintiff alleges were caused by the alleged breach of the duty of
loyalty. Plaintiff seeks recovery of fees paid by Premier Growth Fund to
Alliance. Subsequently, between December 2001 and July 2002, five
complaints making substantially the same allegations and seeking the
same relief as the Benak Complaint were filed against Alliance Capital
Management L.P. and Alliance Premier Growth Fund. All of those actions
were consolidated in Federal District Court in the District of New
Jersey. In January 2003, a consolidated amendment entitled BENAK V
ALLIANCE CAPITAL MANAGEMENT L.P. was filed containing allegations
similar to those in the individual complaints and alleging violation of
the ICA. While the Consolidated Amended Complaint seeks relief similar
to that requested in the individual actions, it does not name the
Premier Growth Fund as a defendant. Alliance believes the plaintiffs'
allegations in the Benak Consolidated Amended 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 these actions may have on Alliance's results of
operations or financial condition.
Three previously disclosed lawsuits, FRANK FRANZE JR. AND GEORGE BUSHER,
INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED V. THE
EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, AND EQUITABLE
VARIABLE LIFE INSURANCE COMPANY, RAYMOND PATENAUDE V. THE EQUITABLE LIFE
ASSURANCE SOCIETY OF THE UNITED STATES, AXA ADVISORS, LLC AND EQUITABLE
DISTRIBUTORS, INC. AND SIAMAC SEDIGHIM V. DONALDSON LUFKIN & JENRETTE,
INC., ET AL. have been dismissed with prejudice. In addition, in three
previously disclosed actions, R.S.M. INC., ET AL. V. ALLIANCE CAPITAL
MANAGEMENT L.P., ET AL., IN RE AXA FINANCIAL, INC. SHAREHOLDERS
LITIGATION and DAVID UHRIK V. CREDIT SUISSE FIRST BOSTON (USA), INC., ET
AL., the parties have agreed to settle and the actions have been
dismissed.
Although the outcome of litigation generally cannot be predicted with
certainty, AXA Financial's management believes that, subject to the
foregoing, (i) the settlement of the R.S.M., IN RE AXA FINANCIAL, INC.
SHAREHOLDERS LITIGATION and the UHRIK litigations will not have a
material adverse effect on the consolidated financial position or
results of operations of AXA Financial and (ii) the ultimate resolution
of the other litigations 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 any of such other litigations described above
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 ("Enron Complaint") was filed in Federal District
Court in the Southern District of Texas, Houston Division, against
numerous defendants, including Alliance. The principal allegations of
the Enron Complaint, as they pertain to Alliance, are that Alliance
violated Sections 11 and 15 of the Securities Act of 1933, as amended
("Securities Act") 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 Corp. 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
Enron 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. That
motion is pending. Alliance believes the allegations of the Enron
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
F-44
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 position.
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, the court denied Alliance's motion to dismiss the SBA
Complaint in its entirety, and the case is currently in discovery.
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
position.
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. In November 2002,
Alliance filed a motion to transfer the Jaffe Complaint to the United
States District Court for the District of New Jersey to be consolidated
with the BENAK V. ALLIANCE CAPITAL MANAGEMENT L.P. action already
pending there. Alliance's time to move, answer or otherwise respond to
the Jaffe Complaint is stayed pending a decision on the motion to
transfer. 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 position.
In December 2002, a complaint entitled PATRICK J. GOGGINS ET AL. V.
ALLIANCE CAPITAL MANAGEMENT L.P. ET AL. ("Goggins Complaint") was filed
in Federal District Court in the Southern District of New York against
Alliance, Premier Growth Fund, and individual directors and certain
officers of the Fund. The Goggins Complaint alleges that defendants
violated the Securities Act because Premier Growth Fund's registration
statements and prospectuses allegedly were materially misleading,
contained untrue statements of material fact and omitted material facts
in describing the strategic objectives and investment strategies of
Premier Growth Fund in relation to the Premier Growth Fund's
investments, including Premier Growth Fund's investments in Enron Corp.
securities. Plaintiffs seek rescissory relief or an unspecified amount
of compensatory damages. Alliance's time to move, answer or otherwise
respond to the Goggins Complaint is currently stayed. Alliance, Premier
Growth Fund and the other defendants believe the plaintiffs' allegations
in the Goggins 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 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 position.
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.
19) LEASES
AXA Financial has entered into operating leases for office space and
certain other assets, principally information technology equipment and
office furniture and equipment. Future minimum payments under
noncancelable operating leases for 2003 and the four successive years
are $123.6 million, $127.9 million, $117.5 million, $99.9 million, $91.8
F-45
million and $848.4 million thereafter. Minimum future sublease rental
income on these noncancelable operating leases for 2003 and the four
successive years is $5.6 million, $5.6 million, $5.4 million, $2.2
million, $2.2 million and $18.1 million thereafter.
At December 31, 2002, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 2003
and the four successive years is $81.7 million, $78.8 million, $75.9
million, $75.2 million, $67.6 million and $535.8 million thereafter.
AXA Financial has entered into capital leases for certain information
technology equipment. Future minimum payments under noncancelable
capital leases for 2003 and the two successive years are $4.4 million,
$2.8 million, and $.9 million.
20) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Equitable Life is restricted as to the amounts it may pay as dividends
to the Holding Company. Under the New York Insurance Law, a domestic
life insurer may, without prior approval of the Superintendent, pay a
dividend to its shareholders not exceeding an amount calculated based on
a statutory formula. This formula would permit Equitable Life to pay
shareholder dividends not greater than $408.9 million during 2003.
Payment of dividends exceeding this amount requires the insurer to file
notice of its intent to declare such dividends with the Superintendent
who then has 30 days to disapprove the distribution. For 2002, 2001 and
2000, the Insurance Group statutory net income totaled $451.6 million,
$547.7 million and $1,068.6 million, respectively. Statutory surplus,
capital stock and Asset Valuation Reserve ("AVR") totaled $4,281.0
million and $6,100.4 million at December 31, 2002 and 2001,
respectively. In 2002, 2001 and 2000, respectively, $500.0 million, $1.7
billion and $250.0 million in shareholder dividends were paid by
Equitable Life.
At December 31, 2002, the Insurance Group, in accordance with various
government and state regulations, had $23.3 million of securities
deposited with such government or state agencies.
In 1998, the NAIC approved a codification of statutory accounting
practices ("Codification"), which provides regulators and insurers with
uniform statutory guidance, addresses areas where statutory accounting
previously was silent and changes certain existing statutory positions.
Equitable Life and Equitable of Colorado became subject to Codification
rules for all state filings upon adoption of Codification by the
respective states.
On December 27, 2000, an emergency rule was issued by the New York
Insurance Department (NYID), which adopted Codification in New York
effective on January 1, 2001 except where the guidance conflicted with
New York Law. Differences in the New York regulation adopted in 2000
from Codification were in accounting for deferred taxes and goodwill,
which are required to be disclosed in the notes to the Annual Statement,
as well as the Annual Audited Report. On September 24, 2002 the bill
authorizing the admissibility of deferred taxes by New York insurers was
signed into law and was effective as of January 1, 2002. The impact of
adopting the accounting for deferred taxes at January 1,2002 was a
$363.6 million decrease to surplus.
The implementation of Codification in 2001 resulted in a $1,630.9
million increase to surplus and capital stock, principally due to the
$1,660.8 million valuation adjustment related to Alliance.
The application of the Codification rules as adopted by the State of
Colorado had no significant effect on Equitable Life or Equitable of
Colorado.
At December 31, 2002 and for the year then ended, there were no
differences in net income and capital and surplus resulting from
practices prescribed and permitted by the State of New York and those
prescribed in the January 1, 2001 NAIC Accounting Practices and
Procedures manual.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The differences between statutory surplus and
capital stock determined in accordance with Statutory Accounting
Principles ("SAP") and total shareholders' equity under GAAP are
primarily: (a) the inclusion in SAP of an AVR intended to stabilize
surplus from fluctuations in the value of the investment portfolio; (b)
future policy benefits and policyholders' account balances under SAP
differ from GAAP due to differences between actuarial assumptions and
reserving methodologies; (c) certain policy acquisition costs are
expensed under SAP but deferred under GAAP and amortized over future
periods to achieve a matching of revenues and expenses; (d) under SAP,
Federal income taxes are provided on the basis of amounts currently
F-46
payable with provisions made for deferred amounts that reverse within
one year while under GAAP, deferred taxes are recorded for temporary
differences between the financial statements and tax basis of assets and
liabilities where the probability of realization is reasonably assured
(e) the valuation of assets under SAP and GAAP differ due to different
investment valuation and depreciation methodologies, as well as the
deferral of interest-related realized capital gains and losses on fixed
income investments; (f) the valuation of the investment in Alliance and
Alliance Holding under SAP reflects a portion of the market value
appreciation rather than the equity in the underlying net assets as
required under GAAP; (g) the provision for future losses of the
discontinued Wind-Up Annuities business is only required under GAAP; (h)
reporting the surplus notes as a component of surplus in SAP but as a
liability in GAAP; (i) computer software development costs are
capitalized under GAAP but expensed under SAP; and (j) certain assets,
primarily pre-paid assets, are not admissible under SAP but are
admissible under GAAP.
The following reconciles the Insurance Group's statutory change in
surplus and capital stock and statutory surplus and capital stock
determined in accordance with accounting practices prescribed by the
NYID with net earnings and equity on a GAAP basis.
2002 2001 2000
----------------- ---------------- -----------------
(In Millions)
Net change in statutory surplus and
capital stock.................................... $ (1,354.7) $ 104.1 $ 1,321.4
Change in AVR...................................... (464.7) (230.2) (665.5)
----------------- ---------------- -----------------
Net change in statutory surplus, capital stock
and AVR.......................................... (1,819.4) (126.1) 655.9
Adjustments:
Future policy benefits and policyholders'
account balances............................... 255.2 270.8 254.5
DAC.............................................. 458.1 458.5 469.1
Deferred Federal income taxes.................... (634.6) (354.8) (127.3)
Valuation of investments......................... (74.8) 67.9 (134.8)
Valuation of investment subsidiary............... 1,399.4 (1,507.9) (29.2)
Change in fair value of guaranteed minimum income
benefit reinsurance contracts.................. 120.0 - -
Shareholder dividends paid...................... 500.0 1,700.0 250.0
Changes in non-admitted assets................... 384.2 138.3 73.8
Stock option expense related to AXA's minority
interest acquisition........................... - - (493.9)
Other, net....................................... (23.7) 5.4 383.1
GAAP adjustments for Other Discontinued
Operations..................................... 23.0 (5.1) 54.3
----------------- ---------------- -----------------
Net Earnings of the Insurance Group................ $ 587.4 $ 647.0 $ 1,355.5
================= ================ =================
F-47
December 31,
---------------------------------------------------------
2002 2001 2000
----------------- ---------------- ------------------
(In Millions)
Statutory surplus and capital stock................ $ 4,091.3 $ 5,446.0 $ 5,341.9
AVR................................................ 189.7 654.4 884.6
----------------- ---------------- ------------------
Statutory surplus, capital stock and AVR........... 4,281.0 6,100.4 6,226.5
Adjustments:
Future policy benefits and policyholders'
account balances............................... (1,237.6) (1,492.8) (1,763.6)
DAC.............................................. 5,801.0 5,513.7 5,128.8
Deferred Federal income taxes.................... (1,835.8) (1,252.2) (640.7)
Valuation of investments......................... 1,629.6 635.9 140.2
Valuation of investment subsidiary............... (1,191.4) (2,590.8) (1,082.9)
Change in fair value of guaranteed minimum income
benefit reinsurance contracts.................. 120.0 - -
Non-admitted assets.............................. 1,162.3 778.1 639.8
Issuance of surplus notes........................ (599.6) (539.4) (539.1)
Other, net....................................... 157.2 536.6 500.6
GAAP adjustments for Other Discontinued
Operations..................................... (108.7) (123.8) (164.3)
----------------- ---------------- ------------------
Equity of the Insurance Group...................... $ 8,178.0 $ 7,565.7 $ 8,445.3
================= ================ ==================
21) BUSINESS SEGMENT INFORMATION
AXA Financial's operations consist of the Financial Advisory/Insurance
and Investment Management segments. AXA Financial's management evaluates
the performance of each of these segments independently and allocates
resources based on current and future requirements of each segment.
The Financial Advisory/Insurance segment offers a variety of
traditional, variable and interest-sensitive life insurance products,
annuity products, mutual fund asset management accounts and other
investment products to individuals and small groups and provides
financial planning services for individuals. It also administers
traditional participating group annuity contracts with conversion
features, generally for corporate qualified pension plans, and
association plans which provide full service retirement programs for
individuals affiliated with professional and trade associations. This
segment also includes Separate Accounts for individual insurance and
annuity products.
The Investment Management segment principally includes Alliance.
Alliance provides diversified investment management and related services
globally to a broad range of clients including: (a) institutional
clients, including pension funds, endowments and domestic and foreign
financial institutions, (b) private clients, including high net worth
individuals, trusts and estates and charitable foundations, (c)
individual investors, principally through a broad line of mutual funds,
and (d) institutional investors by means of in-depth research, portfolio
strategy and other services. This segment also includes institutional
Separate Accounts that provide various investment options for large
group pension clients, primarily defined benefit and contribution plans,
through pooled or single group accounts.
Intersegment investment advisory and other fees of approximately $102.2
million, $116.6 million and $153.6 million for 2002, 2001 and 2000,
respectively, are included in total revenues of the Investment
Management segment.
F-48
The following tables reconcile segment revenues and earnings from
continuing operations before Federal income taxes to total revenues and
earnings as reported on the consolidated statements of earnings and
segment assets to total assets on the consolidated balance sheets,
respectively.
2002 2001 2000
----------------- ---------------- ------------------
(In Millions)
Segment revenues:
Financial Advisory/Insurance....................... $ 4,857.1 $ 4,912.4 $ 4,754.1
Investment Management.............................. 2,744.4 3,000.3 2,523.6
Consolidation/elimination.......................... (76.2) (90.0) (120.4)
----------------- ---------------- ------------------
Total Revenues..................................... $ 7,525.3 $ 7,822.7 $ 7,157.3
================= ================ ==================
Segment earnings (loss) from continuing operations
before Federal income taxes and minority
interest:
Financial Advisory/Insurance....................... $ 327.6 $ 401.5 $ (642.4)
Investment Management.............................. 522.1 492.7 542.8
----------------- ---------------- ------------------
Total Earnings (Loss) from Continuing
Operations before Federal Income Taxes
and Minority Interest............................ $ 849.7 $ 894.2 $ (99.6)
================= ================ ==================
December 31,
--------------------------------------------------------
2002 2001 2000
----------------- ---------------- ------------------
(In Millions)
Assets:
Financial Advisory/Insurance....................... $ 81,036.0 $ 84,955.2 $ 91,685.0
Investment Management.............................. 14,467.9 16,031.3 17,672.3
Consolidation/elimination.......................... 44.0 (74.1) (96.5)
----------------- ---------------- ------------------
Total Assets....................................... $ 95,547.9 $ 100,912.4 $ 109,260.8
================= ================ ==================
22) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 2002 and 2001 are summarized
below:
Three Months Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- --------------- ---------------- -----------------
(In Millions)
2002
----
Total Revenues...................... $ 1,926.2 $ 2,133.5 $ 1,904.3 $ 1,561.3
=============== =============== ================ =================
Earnings (Loss) from Continuing
Operations........................ $ 127.6 $ 204.0 $ 262.6 $ (38.1)
=============== =============== ================ =================
Net Earnings (Loss)................. $ 95.4 $ 202.6 $ 282.0 $ (51.4)
=============== =============== ================ =================
2001
----
Total Revenues...................... $ 2,078.3 $ 1,942.1 $ 1,835.6 $ 1,966.7
=============== =============== ================ =================
Earnings from Continuing
Operations........................ $ 195.9 $ 72.1 $ 51.9 $ 64.5
=============== =============== ================ =================
Net Earnings........................ $ 202.4 $ 70.3 $ 51.4 $ 100.7
=============== =============== ================ =================
F-49
The quarterly results of operations for the first three quarters of 2002
have been restated to reflect the accounting change adopted in the
fourth quarter of 2002 as of January 1, 2002 for liabilities associated
with variable annuity contracts that contain GMDB and GMIB features, as
follows:
Three Months Ended
------------------------------------------------------------
March 31 June 30 September 30
----------------- ---------------- ----------------------
(In Millions)
Earnings (Loss) from Continuing Operations as
previously reported................................ $ 125.5 $ 283.9 $ 341.4
Adjustment to reflect adoption of accounting
change as of January 1, 2002...................... 2.1 (79.9) (78.8)
----------------- ---------------- ----------------------
Earnings (Loss) from Continuing
Operations as restated............................ $ 127.6 $ 204.0 $ 262.6
================= ================ ======================
Net Earnings (Loss) as previously reported......... $ 126.5 $ 282.5 $ 360.8
Adjustment to reflect adoption of accounting
change as of January 1, 2002...................... (31.1) (79.9) (78.8)
----------------- ---------------- ----------------------
Net Earnings (Loss) as restated.................... $ 95.4 $ 202.6 $ 282.0
================= ================ ======================
23) PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
Assuming the Bernstein acquisition had occurred on January 1, 2000,
revenues for AXA Financial would have been $6.72 billion for 2000
on a pro forma basis. The impact of the acquisition on net earnings on a
pro forma basis would not have been material.
This pro forma financial information does not necessarily reflect the
results of operations that would have resulted had the Bernstein
acquisition actually occurred on January 1, 2000, nor is the pro forma
financial information necessarily indicative of the results of
operations that may be achieved for any future period.
F-50