UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-11166
AXA FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3623351
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- -------------------------------- -------------------------------------------
None None
Securities registered pursuant to Section
12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ ] No [X]
No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of March 27, 2003.
As of March 27, 2003, 436,192,949 shares of the registrant's Common Stock were
outstanding.
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction I (1)(a) and
(b) of Form 10-K and is therefore filing this form with the Reduced Disclosure
Format.
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TABLE OF CONTENTS
Part I Page
Item 1. Business........................................................................ 1-1
Overview........................................................................ 1-1
Recent Events................................................................... 1-1
Segment Information............................................................. 1-2
Assets Under Management and Fees................................................ 1-5
Discontinued Operations......................................................... 1-5
General Account Investment Portfolio............................................ 1-5
Employees and Financial Professionals........................................... 1-6
Competition..................................................................... 1-6
Regulation...................................................................... 1-7
Parent Company.................................................................. 1-9
Item 2. Properties...................................................................... 2-1
Item 3. Legal Proceedings............................................................... 3-1
Item 4. Submission of Matters to a Vote of Security Holders*............................ 4-1
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........... 5-1
Item 6. Selected Financial Data*........................................................ 6-1
Item 7. Management's Discussion and Analysis of Financial Position and
Results of Operations ("Management Narrative")................................ 7-1
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................... 7A-1
Item 8. Financial Statements and Supplementary Data..................................... FS-1
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure.......................................................... 9-1
Part III
Item 10. Directors and Executive Officers of the Registrant*............................. 10-1
Item 11. Executive Compensation*......................................................... 11-1
Item 12. Security Ownership of Certain Beneficial Owners and Management*................. 12-1
Item 13. Certain Relationships and Related Transactions*................................. 13-1
Item 14. Controls and Procedures......................................................... 14-1
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 15-1
Signatures ................................................................................ S-1
Certifications ................................................................................ C-1
Index to Exhibits ................................................................................ E-1
*Omitted pursuant to General Instruction I to Form 10-K
PART I, ITEM 1.
BUSINESS(1)
OVERVIEW
AXA Financial is a diversified financial services organization offering a broad
spectrum of financial advisory, insurance and investment management products and
services. It is one of the world's largest asset managers, with total assets
under management of approximately $415.31 billion at December 31, 2002. AXA
Financial conducts operations in two business segments. The financial advisory
and insurance business conducted by AXA Advisors, AXA Network, AXA Distributors
and Equitable Life and their subsidiaries is reported in the Financial
Advisory/Insurance segment. Equitable Life, which was established in the State
of New York in 1859, is among the largest life insurance companies in the United
States. The investment management business conducted by Alliance Capital
Management L.P., a Delaware limited partnership, and its subsidiaries
("Alliance"), is reported in the Investment Management segment. Alliance is a
leading global investment management firm. For additional information on AXA
Financial's business segments, see "Results Of Continuing Operations By Segment"
included in the management narrative ("Management Narrative") provided in lieu
of "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 21 of Notes to Consolidated Financial Statements. AXA, a
French holding company for an international group of insurance and related
financial services companies, is the Holding Company's sole shareholder. AXA is
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and files annual reports on Form 20-F. For
additional information regarding AXA, see "Parent Company".
RECENT EVENTS
In 2001, AXA's management announced, in view of the decline in financial markets
and challenging overall economic environment, the implementation of a global
cost reduction program aimed at reducing administrative expenses by 10%
groupwide. In the United States in 2001, 2002 and early 2003, AXA Financial
reduced staff levels and other overhead costs and reorganized its field
operations from 18 regions to six divisions. These measures are designed to
reduce costs and achieve greater efficiencies.
AXA Financial's losses, incurred in 2001, for insurance claims arising in
connection with the September 11, 2001 terrorist attacks were approximately
$14.2 million after reinsurance coverages, DAC amortization and taxes. These
terrorist attacks and the responsive actions have significantly adversely
affected general economic, market and political conditions. For additional
information, see "General Account Investment Portfolio".
In November 2000, AXA and AXA Merger Corp., a wholly owned subsidiary of AXA,
commenced a joint exchange offer for all outstanding publicly held shares of
common stock of the Holding Company. As a result, as of December 31, 2000, AXA
and its subsidiaries owned approximately 92.4% of the issued and outstanding
Holding Company shares. AXA and its subsidiaries acquired the remaining issued
and outstanding Holding Company shares as of January 2, 2001, resulting in the
Holding Company becoming a wholly owned subsidiary of AXA.
On November 3, 2000, AXA Financial sold its 63.0% interest in Donaldson, Lufkin
& Jenrette, Inc. ("DLJ") to Credit Suisse Group ("CSG") for $2.29 billion in
cash and $4.86 billion (or 25.2 million shares) in CSG common stock. By January
26, 2001, AXA Financial had disposed of all of the CSG common stock acquired in
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(1) As used in this Form 10-K, the term "AXA Financial" refers to AXA
Financial, Inc., a Delaware corporation (the "Holding Company") and its
consolidated subsidiaries. The term "Holding Company Group" refers
collectively to the Holding Company and to its non-operating subsidiaries.
The term "Financial Advisory/Insurance Group" refers collectively to The
Equitable Life Assurance Society of the United States ("Equitable Life"), a
New York stock life insurance corporation, to Equitable Life's wholly owned
subsidiaries, The Equitable of Colorado, Inc. ("EOC") and AXA Distributors,
LLC and its subsidiaries, successor to Equitable Distributors, Inc.
(collectively, "AXA Distributors"), to AXA Advisors, LLC, a Delaware
limited liability company ("AXA Advisors"), and to AXA Network, LLC, a
Delaware limited liability company and its subsidiaries (collectively "AXA
Network"). The term "Insurance Group" refers collectively to Equitable Life
and certain of its affiliates engaged in insurance-related businesses. The
term "General Account" refers to the assets held in the respective general
accounts of Equitable Life and EOC and all of the investment assets held in
certain of Equitable Life's separate accounts on which the Insurance Group
bears the investment risk. The term "Separate Accounts" refers to the
separate account investment assets of Equitable Life excluding the assets
held in those separate accounts on which the Insurance Group bears the
investment risk. The term "General Account Investment Assets" refers to
assets held in the General Account associated with the Insurance Group's
continuing operations (which includes the Closed Block) and does not
include assets held in the General Account associated primarily with the
Insurance Group's discontinued Wind-Up Annuity line of business ("Other
Discontinued Operations").
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the transaction. For additional information about the DLJ sale, see "Management
Narrative - General" and Notes 1, 5 and 8 of Notes to Consolidated Financial
Statements.
In October 2000, Alliance acquired (the "Bernstein Acquisition") the business
and assets and assumed the liabilities of SCB Inc., formerly known as Sanford C.
Bernstein, Inc. ("Bernstein"), for an aggregate value of $3.50 billion ($1.48
billion in cash and 40.8 million newly issued units representing assignments of
beneficial ownership of limited partnership interests of Alliance ("Alliance
Units")). In November 2002, pursuant to Bernstein and SCB Partners Inc.'s
exercise of their rights to sell Alliance Units to AXA Financial or an entity
designated by AXA Financial, an indirectly wholly owned subsidiary of AXA
Financial purchased 8.16 million Alliance Units at a purchase price of
approximately $250 million. At December 31, 2002, AXA Financial's consolidated
economic interest in Alliance is approximately 55.7% after giving effect to
consummation of the Bernstein Acquisition and the November 2002 acquisition of
Alliance Units. For additional information about the Bernstein Acquisition and
the November 2002 acquisition of Alliance Units, see "Management Narrative --
General" and Note 1 of Notes to Consolidated Financial Statements.
SEGMENT INFORMATION
FINANCIAL ADVISORY/INSURANCE
The Financial Advisory/Insurance Group offers a variety of traditional, variable
and interest-sensitive life insurance products, variable and fixed-interest
annuity products, mutual fund and other investment products and asset management
services to individuals, small groups, small and medium-size businesses, state
and local governments and not-for-profit organizations, as well as financial
planning services to 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. The Financial Advisory/Insurance segment, which includes Separate
Accounts for individual and group insurance and annuity products, accounted for
approximately $4.86 billion of revenues (or 64.5% of total revenues, after
intersegment eliminations) for the year ended December 31, 2002.
Financial Advisory/Insurance segment products are offered on a retail basis in
all 50 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands
by AXA Advisors, a broker-dealer, and AXA Network, an insurance general agency,
through a retail sales force of approximately 7,100 financial professionals. In
addition, AXA Distributors, a broker-dealer subsidiary of Equitable Life,
distributes Equitable Life products on a wholesale basis in all 50 states, the
District of Columbia, Puerto Rico and the U.S. Virgin Islands through major
securities firms, other broker-dealers and banks. Association and corporate
pension plans are marketed directly to clients by the Insurance Group. As of
December 31, 2002, the Insurance Group had approximately three million policy
and contractholders. For additional information on this segment, see "Management
Narrative - Results Of Continuing Operations By Segment - Financial
Advisory/Insurance", Note 21 of Notes to Consolidated Financial Statements, as
well as "Employees and Agents", "Competition" and "Regulation".
PRODUCTS AND SERVICES. The Financial Advisory/Insurance Group offers a
portfolio of insurance, annuity and investment products and services, including
financial planning services, an asset management account and money management
products, designed to meet a broad range of its customers' needs throughout
their financial life-cycles. The focus on financial planning is intended to add
significant value to client service and provides a foundation for building
long-term relationships with customers by identifying a customer's financial
goals in light of his or her unique situation. The Insurance Group is among the
country's leading issuers of variable life insurance and variable annuity
products. In 2002, individual variable and interest-sensitive life insurance
policies and variable annuity contracts accounted for 15.9% and 66.0%,
respectively of total premiums and deposits of life insurance and annuity
products. Variable life insurance products include Incentive Lifesm, Equitable
Life's flagship life insurance product, as well as a second-to-die policy and a
product for the corporate owned life insurance ("COLI") market. Equitable Life
also offers traditional whole life insurance, universal life insurance and term
life insurance policies.
Variable annuity products include Equi-Vest(R) and Accumulator(sm), which are a
series of individual variable deferred annuities, and the Momentum(sm) series of
group annuities for the employer retirement plan market. Individual variable
deferred annuities may be purchased on either a single or flexible premium
basis; group annuities generally have recurring premium from the retirement
plans they fund. Most individual variable annuity products offer one or more
enhanced features, which may include an extra-credit to the initial account
value, dollar cost averaging programs, enhanced death benefits and a guaranteed
minimum income benefit. In addition, in April 2002, Equitable Life introduced a
new Accumulator(sm) series of annuities that offer a menu of various contract
features that may be selected by customers.
1-2
Equitable Life also offers individual single premium deferred annuities
including Guaranteed Growth Annuity, introduced in September 2001, which credit
an initial and subsequent annually declared interest rates, and payout annuity
products, including traditional immediate annuities and variable immediate
annuities, which provide lifetime periodic payments that fluctuate with the
performance of underlying investment portfolios, and the Income Manager(sm),
which provides guaranteed lifetime payments with cash values during an initial
period.
The continued growth of third-party assets under management remains a strategic
objective of AXA Financial, which seeks to increase the percentage of its income
that is fee-based and derived from managing funds, including Separate Account
assets, for its clients (who bear the investment risk and reward upon
surrender). Over the past five years, Separate Account assets for individual
variable life and variable annuities have increased by $7.86 billion to $32.36
billion at December 31, 2002 (although, these assets declined from $39.66
billion at December 31, 2001), including approximately $29.42 billion invested
through EQ Advisors Trust ("EQAT"), a mutual fund offering variable life and
annuity contractholders investment portfolios advised by Alliance and by
unaffiliated investment advisors. At December 31, 2002, EQAT had 34 investment
portfolios. Alliance, including its Bernstein Investment Research and Management
unit, provides the day-to-day advisory services to 11 investment portfolios and
three allocated portions of multi-advised portfolios of EQAT, representing 70.6%
of the assets in EQAT. The other 23 investment portfolios and allocated portions
of multi-advised investment portfolios are advised by unaffiliated investment
advisors.
Equitable Life also issues certain variable annuity products that contain a
guaranteed minimum income benefit ("GMIB") feature and/or a guaranteed minimum
death benefit ("GMDB") feature. The GMIB feature, if elected by the policyholder
after a stipulated waiting period from contract issuance, guarantees a minimum
lifetime annuity based on predetermined annuity purchase rates that may be in
excess of what the contract account value can purchase at then-current annuity
purchase rates. The GMDB feature, if elected by the policyholder, guarantees a
minimum death benefit, which may be in excess of the contract account value. For
additional information, see Notes 2, 9 and 14 of Notes to Consolidated Financial
Statements.
During periods of sustained market downturns, such as the one we are currently
experiencing, demand for variable products like the ones emphasized by Equitable
Life typically declines relative to fixed products. In response to this market
environment, Equitable Life is placing greater emphasis on the development and
sale of fixed products.
In January 2002, Equitable Life launched the AXA Premier Funds Trust, a family
of multi-manager, sub-advised retail mutual funds which provide investors with
diversified investment strategies based on their individual needs and risk
tolerance. The AXA Premier Funds Trust features ten mutual funds, including
eight equity funds, one bond fund and one money market fund. The equity and bond
funds are also offered within the Equitable Life variable life and annuity
product array through AXA Premier VIP Trust, a new trust established for this
purpose. Eighteen money management firms serve as sub-advisers to the AXA
Premier Funds Trust, including Alliance, its Bernstein Investment Research and
Management unit and AXA Rosenberg Investment Management LLC. At December 31,
2002, the AXA Premier Funds Trust had assets of $119 million and AXA Premier VIP
Trust had assets of $875 million. Equitable Life's affiliates provide the
day-to-day advisory services to 15 allocated portions, which represent
approximately 19% of the combined assets, of the AXA Premier Funds Trust and AXA
Premier VIP Trust. Equitable Life serves as the Investment Manager of EQAT, AXA
Premier Funds Trust and AXA Premier VIP Trust.
In addition to products issued by the Insurance Group, financial professionals
through AXA Network have access to products and services from unaffiliated
insurers and from other financial services firms, including life, health and
long-term care insurance products, annuity products and mutual funds and other
investment products and services.
MARKETS. The Financial Advisory/Insurance Group's targeted customers include
affluent and emerging affluent individuals who are seeking financial planning
advice, such as professionals and owners of small businesses, as well as
employees of public schools, universities, not-for-profit entities and certain
other tax-exempt organizations, and existing customers. Variable and universal
life insurance are targeted at the middle-to-upper income life markets. Life
insurance products are also used in the estate planning, business continuation
and executive benefit markets. Target markets for variable annuities include, in
addition to the personal retirement savings market, the tax-exempt markets
(particularly retirement plans for educational and not-for-profit
organizations), corporate pension plans (particularly 401(k) defined
contribution plans for small to mid-size groups) and the IRA retirement planning
market. Mutual funds and other investment products are intended for new and
existing financial planning, annuity and brokerage clients to add breadth and
depth to the range of needs-based services and products the Financial
Advisory/Insurance Group is able to provide.
1-3
DISTRIBUTION. Retail distribution of products and services is accomplished by
approximately 7,100 financial professionals of AXA Advisors and/or AXA Network,
approximately 3,000 of whom are fully credentialed to offer a broad array of
insurance and investment products and who account for the substantial majority
of our production. Field operations are organized into six divisions across the
United States. The retail organization's business process and informational
website, www.AXAonline.com, provides operational efficiencies for retail
distribution, serving as the single point of entry for all web-based
company resources.
Wholesale distribution of products is undertaken through AXA Distributors, which
at year end 2002 had 615 selling agreements, including arrangements with four
major wirehouse firms, 90 banks or similar financial institutions, and 521
broker-dealers and financial planners. Three major securities firms were
responsible for approximately 25.4%, 14.4% and 9.1%, respectively, of AXA
Distributors' 2002 premiums and deposits. In 2002, AXA Distributors was
responsible for approximately 34.32% of product sales.
REINSURANCE. During the first quarter of 2003, the Insurance Group began to
transition to excess of retention reinsurance on most new variable life,
universal life and term life policies whereby mortality risk will be retained up
to a maximum of $15 million on single-life policies and $20 million on
second-to-die policies with the excess 100% reinsured. Previously the Insurance
Group ceded 90% of mortality risk on substantially all new variable life,
universal life and term life policies, with risk retained to a maximum of $5.0
million on single-life policies, and $15.0 million on second-to-die policies.
For amounts applied for in excess of those limits, reinsurance is sought. A
contingent liability exists with respect to reinsurance ceded should the
reinsurers be unable to meet their obligations. The Insurance Group carefully
evaluates the financial condition of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. The Insurance Group is not party
to any risk reinsurance arrangement with any reinsurer pursuant to which the
amount of reserves on reinsurance ceded to such reinsurer equals more than 3.8%
of the total policy life reserves of the Insurance Group (including Separate
Accounts).
The Insurance Group also cedes a percentage of its exposure on variable annuity
products which contain a GMIB feature and/or GMDB feature. Equitable Life
reinsures, subject to certain maximum amounts or caps in any one period,
approximately 72% of its net amount of risk resulting from the GMIB feature and
approximately 16% of its net amount of risk to the GMDB obligation on annuity
contracts in force as of December 31, 2002. For additional information, see
Notes 2, 9 and 14 of Notes to Consolidated Financial Statements.
The Insurance Group acts as a retrocessionaire by assuming life reinsurance from
reinsurers. Mortality risk through reinsurance assumed is managed under the same
corporate retention amounts noted above, although lower internal retention
limits currently apply to life reinsurance assumed.
In July 2000, Equitable Life transferred, at no gain or loss, all the risk of
its directly written disability income business for years 1993 and prior to
Centre Life Insurance Company, a subsidiary of Zurich Financial Services
("Centre Life"). The transfer of risk to Centre Life was accomplished through an
indemnity reinsurance contract. The cost of the arrangement will be amortized
over the expected lives of the contracts reinsured and will not have a
significant impact on the results of operations in any specific period. For
additional information about this indemnity reinsurance contract and the
Insurance Group's reinsurance agreements in general, see Note 14 of Notes to
Consolidated Financial Statements.
INVESTMENT MANAGEMENT
GENERAL. The Investment Management segment is comprised of the operations of
Alliance, which provides diversified investment management and related services
to the Insurance Group and globally to a broad range of other clients, including
(a) institutional investors, consisting of unaffiliated entities such as
corporate and public employee pension funds, endowment funds, domestic and
foreign institutions and governments, and AXA and its insurance company
subsidiaries, by means of separate accounts, sub-advisory relationships
resulting from the efforts of the institutional marketing department, structured
products, group trusts, mutual funds and investment vehicles sold exclusively to
institutional investors and high net worth individuals, (b) private clients,
consisting of high net worth individuals, trusts and estates, charitable
foundations, partnerships, private and family corporations and other entities,
by means of separate accounts, hedge funds, and certain other vehicles, (c)
individual investors by means of retail mutual funds sponsored by Alliance, its
subsidiaries and affiliated joint venture companies including cash management
products such as money market funds and deposit accounts and sub-advisory
relationships in respect of mutual funds sponsored by third parties resulting
from the efforts of Alliance's mutual fund marketing department and "managed
account" products, and (d) institutional investors desiring institutional
research services by means of in-depth research,
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portfolio strategy, trading and brokerage-related services. Alliance and its
subsidiaries provide investment management, distribution and shareholder and
administrative services to the mutual funds described in this paragraph.
Alliance provides a broad offering of investment products, global in scope, with
expertise in both growth and value oriented strategies, the two predominant
equity investment styles, coupled with a fixed income capability in both taxable
and tax exempt securities.
The Investment Management segment in 2002 accounted for approximately $2.74
billion (or 36.4%) of total revenues, after intersegment eliminations. As of
December 31, 2002, Alliance had approximately $386.58 billion in assets under
management including approximately $210.99 billion from institutional investors,
$39.69 billion for private clients and approximately $135.90 billion from retail
mutual fund accounts. As of December 31, 2002, assets of AXA and the Insurance
Group, including investments in EQAT, represented approximately 14.6% of
Alliance's total assets under management, and approximately 4.6% of Alliance's
total revenues.
INTEREST IN ALLIANCE. At December 31, 2002, the Holding Company, Equitable Life
and certain subsidiaries had combined holdings equaling an approximate 55.7%
economic interest in Alliance's operations, including the general partnership
interest held indirectly by Equitable Life as the sole shareholder of the
general partner of Alliance Capital Management Holding L.P. ("Alliance
Holding"), and Alliance. Alliance Holding is subject to an annual 3.5% Federal
tax on its proportionate share of the gross business income of Alliance.
Alliance, as a private partnership, is not subject to this 3.5% tax. Alliance
Holding and Alliance are generally not subject to state and local income taxes,
with the exception of the New York City unincorporated business tax of 4.0%.
For additional information about Alliance, including its results of operations,
see "Regulation" and "Management Narrative - Results of Continuing Operations by
Segment - Investment Management" and Alliance's Annual Report on Form 10-K for
the year ended December 31, 2002.
ASSETS UNDER MANAGEMENT AND FEES
AXA Financial continues to pursue its strategy of increasing third-party assets
under management. The Investment Management segment continues to add third-party
assets under management, and to provide asset management services to the
Insurance Group. Of the $415.31 billion of assets under management at December
31, 2002, $337.99 billion (or 81.4%) were managed for third parties, including
$298.98 billion from unaffiliated third parties and $39.01 billion for the
Separate Accounts, and $38.31 billion were managed principally for the General
Account and invested assets of subsidiaries. Of the $1.85 billion of fees for
assets under management for the year ended December 31, 2002, $1.81 billion were
received from third parties, including $1.74 billion from unaffiliated third
parties and $70.16 million in respect of Separate Accounts, and $36.17 million
in respect of the General Account. For additional information on assets under
management, see "Management Narrative - Results of Continuing Operations by
Segment - Assets Under Management".
DISCONTINUED OPERATIONS
In November 2000, AXA Financial sold its interest in DLJ. DLJ's operations
comprised the Investment Banking and Brokerage segment and are reflected in the
consolidated financial statements as discontinued operations. Other Discontinued
Operations includes primarily Wind-Up Annuity products, the terms of which were
fixed at issue, which were sold to corporate sponsors of terminating qualified
defined benefit plans. At December 31, 2002, $909.5 million of contractholder
liabilities were outstanding. For additional information about discontinued
operations, see Note 8 of Notes to Consolidated Financial Statements.
GENERAL ACCOUNT INVESTMENT PORTFOLIO
GENERAL. The General Account consists of a diversified portfolio of investments.
The General Account liabilities can be divided into two primary types,
participating and non-participating. For participating products, the investment
results of the underlying assets determine, to a large extent, the return to the
policyholder, and the Insurance Group's profits are earned from investment
management, mortality and other charges. For non-participating or
interest-sensitive products, the Insurance Group's profits are earned from a
positive spread between the investment return and the crediting or reserve
interest rate.
The Insurance Group has developed an asset/liability management approach with
separate investment objectives for specific classes of product liabilities, such
as insurance, annuity and group pension. As part of this approach, the Insurance
Group develops investment guidelines for each product line which form the basis
for investment strategies to manage such product line's investment return and
liquidity requirements, consistent with management's overall investment
objectives for the General Account Investment Portfolio. Investments frequently
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meet the investment objectives of more than one class of product liabilities;
each such class may be allocated a pro rata interest in such investments and the
returns therefrom.
The following table summarizes General Account Investment Assets by asset
category at December 31, 2002.
GENERAL ACCOUNT INVESTMENT ASSETS
NET AMORTIZED COST (1)
(DOLLARS IN MILLIONS)
AMOUNT % OF TOTAL
------------------ -------------------
Fixed maturities (2)................... $ 25,501.1 71.5%
Mortgages.............................. 3,770.5 10.6
Equity real estate..................... 708.1 2.0
Other equity investments............... 906.5 2.5
Policy loans........................... 4,034.7 11.3
Cash and short-term investments (3).... 745.4 2.1
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Total.................................. $ 35,666.3 100.0%
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(1) Net amortized cost is the cost of the General Account Investment Assets
(adjusted for impairments in value deemed to be other than temporary, if
any) less depreciation and amortization, where applicable, and less
valuation allowances on mortgage and real estate portfolios.
(2) Excludes net unrealized gains of $1.54 billion on fixed maturities
classified as available for sale. Fixed maturities includes approximately
$1.82 billion net amortized cost of below investment grade securities.
(3) Comprised of "Cash and cash equivalents" and short-term investments
included within the "Other invested assets" caption on the consolidated
balance sheet.
Certain investments contained in the General Account's investment portfolio
include securities issued by companies in industries that could be adversely
affected by future terrorist acts and any responsive actions. These industries
could include commercial airlines, hotels and property and casualty insurers and
reinsurers. As of December 31, 2002, directly held investments in fixed income
or equities involving companies in the above-mentioned industries represented
approximately 2.0% of the General Account investment portfolio.
INVESTMENT SURVEILLANCE. As part of the Insurance Group's investment management
process, management, with the assistance of its investment advisors, constantly
monitors General Account investment performance. This internal review process
culminates with a quarterly review of certain assets by the Insurance Group's
Surveillance Committee which evaluates whether any investments are other than
temporarily impaired, whether specific investments should be classified as
problems, potential problems or restructures, and whether specific investments
should be put on an interest non-accrual basis.
EMPLOYEES AND FINANCIAL PROFESSIONALS
As of December 31, 2002, AXA Financial had approximately 8,805 employees. Of
these, approximately 4,687 were employed full-time by the Financial
Advisory/Insurance Group and approximately 4,118 were employed full-time by
Alliance. In addition, the Financial Advisory/Insurance Group had a sales force
of approximately 7,100 financial professionals, including approximately 446
field force managers.
COMPETITION
FINANCIAL ADVISORY/INSURANCE. There is strong competition among companies
seeking clients for the types of products and services provided by the Financial
Advisory/Insurance Group. The market for financial planning products and
services has become increasingly competitive because of increased activity by
insurance companies, brokerage houses, banks and independent financial planners.
Many other insurance companies offer one or more products similar to those
offered by the Insurance Group and in some cases through similar marketing
techniques. In addition, there is competition with banks, brokerage firms and
other financial institutions for sales of insurance, annuity and other
investment products and services and with mutual funds, investment advisers and
other financial entities for the investment of savings dollars. The principal
competitive factors affecting the Financial Advisory/Insurance Group's business
are price, financial and claims-paying ratings, size, strength, professionalism
and objectivity of the sales force, range of product lines, product quality,
reputation and customer service, visibility and brand recognition in the
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marketplace, quality of service and, with respect to variable insurance and
annuity products, mutual funds and other investment products, investment
management performance.
FINANCIAL RATINGS. Ratings are an important factor in establishing the
competitive position of insurance companies. As of March 27, 2003, the financial
strength or claims-paying rating of Equitable Life was AA- from Standard &
Poor's Corporation (4th highest of 20 ratings; with stable outlook), Aa3 from
Moody's Investors Service (4th highest of 21 ratings), A+ from A.M. Best
Company, Inc. (2nd highest of 15 ratings), and AA from Fitch Investors Service,
L.P. (3rd highest of 24 ratings). As of March 27, 2003, AXA Financial's
long-term debt rating was A from Standard & Poor's Corporation (6th highest of
20 ratings; with stable outlook), A3 from Moody's Investors Services (7th
highest of 21 ratings; with stable outlook) and A+ from Fitch Investors Service,
L.P. (5th highest of 24 ratings).
INVESTMENT MANAGEMENT. The financial services industry is highly competitive and
new entrants continually are attracted to it. No single competitor, or any small
group of competitors, is dominant in the industry. Alliance is subject to
substantial competition in all aspects of its business. Pension fund,
institutional and corporate assets are managed by investment management firms,
broker-dealers, banks and insurance companies. Many of these financial
institutions have substantially greater resources than Alliance. Alliance
competes with other providers of institutional investment products and services
primarily on the basis of the range of investment products offered, the
investment performance of such products and the services provided to clients.
Consultants also play a major role in the selection of managers for pension
funds.
Many of the firms competing with Alliance for institutional clients also offer
mutual fund shares and cash management services to individual investors.
Competitiveness in this area is chiefly a function of the range of mutual funds
and cash management services offered, investment performance, quality in
servicing customer accounts and the capacity to provide financial incentives to
financial intermediaries through distribution assistance and administrative
services payments funded by "Rule 12b-1" distribution plans and the investment
adviser's own resources.
AXA, AXA Financial, Equitable Life and certain of their direct and indirect
subsidiaries provide financial products and services, some of which are
competitive with those offered by Alliance. Alliance's partnership agreement
specifically allows Equitable Life and its subsidiaries (other than the general
partner of Alliance) to compete with Alliance and to exploit opportunities that
may be available to Alliance. In addition, Alliance provides investment
management services to unaffiliated insurance companies.
Management from time to time continues to explore selective acquisition
opportunities in AXA Financial's financial advisory/insurance and investment
management businesses.
REGULATION
STATE SUPERVISION. Members of the Insurance Group are licensed to transact
insurance business in, and are subject to extensive regulation and supervision
by, insurance regulators in all 50 states of the United States, the District of
Columbia, Puerto Rico, the U.S. Virgin Islands and nine of Canada's twelve
provinces and territories. Equitable Life is domiciled in New York and is
primarily regulated by the Superintendent (the "Superintendent") of the New York
Insurance Department (the "NYID"). EOC is domiciled in Colorado and is primarily
regulated by the Commissioner of Insurance of the Colorado Division of
Insurance. The extent of state regulation varies, but most jurisdictions have
laws and regulations governing sales practices, standards of solvency, levels of
reserves, risk-based capital, permitted types and concentrations of investments,
and business conduct to be maintained by insurance companies as well as agent
licensing, approval of policy forms and, for certain lines of insurance,
approval or filing of rates. Additionally, the New York Insurance Law limits
sales commissions and certain other marketing expenses that may be incurred by
Equitable Life. Each of Equitable Life and EOC is required to file detailed
annual financial statements, prepared on a statutory accounting basis, with
supervisory agencies in each of the jurisdictions in which it does business.
Such agencies may conduct regular or targeted examinations of Equitable Life's
and EOC's operations and accounts, and make occasional requests for particular
information from the Insurance Group. In January 1998 the Florida Attorney
General and the Florida Department of Insurance issued subpoenas to Equitable
Life, and in December 1999 the Florida Attorney General issued an additional
subpoena to Equitable Life, in each case requesting, among other things,
documents relating to various sales practices. Equitable Life has responded to
the subpoenas. A number of states have enacted legislation requiring insurers
who sold policies in Europe prior to and during the Second World War to file
information concerning those policies with state authorities. Although Equitable
Life intends to comply with these laws with respect to its own activities, the
ability of AXA and its European affiliates to comply may be impacted by various
factors including the availability of relevant information after the passage of
more than 50 years and privacy laws in effect in various European countries,
1-7
which could result in state regulatory authorities seeking to take enforcement
actions against AXA and its U.S. affiliates, including Equitable Life, even
though Equitable Life does not control AXA.
HOLDING COMPANY AND SHAREHOLDER DIVIDEND REGULATION. Several states, including
New York, regulate transactions between an insurer and its affiliates under
insurance holding company acts. These acts contain certain reporting
requirements and restrictions on provision of services and on transactions, such
as intercompany service agreements, asset transfers, loans and shareholder
dividend payments by insurers. Depending on their size, such transactions and
payments may be subject to prior notice to or approval by the NYID. Equitable
Life has agreed with the NYID that similar approval requirements also apply to
transactions between (i) material subsidiaries of Equitable Life and (ii) the
Holding Company (and certain affiliates, including AXA). In 2002, Equitable Life
paid an aggregate of $500.0 million in shareholder dividends, and expects to pay
dividends in 2003.
STATUTORY SURPLUS AND CAPITAL. Insurance regulators have the discretionary
authority to limit or prohibit new issuances of business to policyholders within
their jurisdiction when, in their judgment, such regulators determine that the
issuing company is not maintaining adequate statutory surplus or capital.
FEDERAL INITIATIVES. Although the Federal government generally does not directly
regulate the insurance business, many Federal laws affect the business in a
variety of ways. There are a number of existing, newly enacted or recently
proposed Federal initiatives which may significantly affect the Insurance Group.
In June 2001, tax legislation was enacted which, among other things, provides
several years of lower rates for estate, gift and generation skipping taxes
("GST") as well as one year of estate and GST repeal (in 2010) before a return
to 2001 law for the year 2011 and thereafter. Other provisions of the
legislation increased amounts which may be contributed to tax qualified
retirement plans and could have a positive impact on funding levels of tax
qualified retirement products. Recently, legislation has been proposed regarding
accelerating and making permanent the repeal of the estate and generation
skipping taxes. If enacted, this legislation would have an adverse impact on
sales of life insurance in connection with estate planning. Other provisions of
the proposed legislation relate to the business use of life insurance, creation
of new tax favored savings accounts, modifications to qualified plan rules, the
tax-free treatment of certain corporate dividends whether paid or retained and
adjustments to certain life insurance company tax rules. If enacted, these
provisions could adversely affect the sale of life insurance to businesses, as
well as the attractiveness of qualified plan arrangements, cash value life
insurance and deferred annuities and could increase life insurance company
taxes. Management cannot predict what other proposals may be made, what
legislation, if any, may be introduced or enacted or what the effect of any such
legislation might be.
SECURITIES LAWS. The Holding Company, certain of its subsidiaries, and certain
policies and contracts offered by the Insurance Group are subject to regulation
under the Federal securities laws administered by the Securities and Exchange
Commission (the "SEC") and under certain state securities laws. The SEC conducts
regular examinations of the Insurance Group's operations, and makes occasional
requests for particular information from the Insurance Group. Certain Separate
Accounts of Equitable Life are registered as investment companies under the
Investment Company Act of 1940, as amended (the "Investment Company Act").
Separate Account interests under certain annuity contracts and insurance
policies issued by Equitable Life are also registered under the Securities Act
of 1933, as amended (the "Securities Act"). EQAT, AXA Premier Funds Trust, and
AXA Premier VIP Trust are registered as investment companies under the
Investment Company Act and shares offered by these investment companies are also
registered under the Securities Act. AXA Advisors, AXA Distributors, Alliance
Fund Distributors, Inc., Sanford C. Bernstein & Co., LLC and certain other
subsidiaries of AXA Financial are registered as broker-dealers (collectively the
"Broker-Dealers") under the Exchange Act. The Broker-Dealers are subject to
extensive regulation by the SEC, and are members of, and subject to regulation
by, the National Association of Securities Dealers, Inc. ("NASD").
Broker-dealers are subject to regulation by state securities administrators in
those states in which they conduct business. The SEC, other governmental
regulatory authorities, including state securities administrators, and the NASD
may institute administrative or judicial proceedings which may result in
censure, fine, the issuance of cease-and-desist orders, the suspension or
expulsion of a broker-dealer or member, its officers or employees or other
similar consequences.
As broker-dealers registered with the SEC, the Broker-Dealers are subject to the
capital requirements of the SEC and/or NASD. These capital requirements specify
minimum levels of capital, computed in accordance with regulatory requirements
("net capital"), that the Broker-Dealers are required to maintain and also limit
the amount of leverage that the Broker-Dealers are able to obtain in their
businesses.
Equitable Life, AXA Advisors, Alliance and certain affiliates of Alliance also
are registered as investment advisors under the Investment Advisers Act of 1940,
as amended (the "Investment Advisers Act"). Many of the investment companies
1-8
managed by Alliance, including a variety of mutual funds and other pooled
investment vehicles, are registered with the SEC under the Investment Company
Act. All aspects of the investment advisory activities of Equitable Life, AXA
Advisors and Alliance are subject to various Federal and state laws and
regulations and to the laws in those foreign countries in which they conduct
business.
PRIVACY OF CUSTOMER INFORMATION. Federal and state law and regulation require
financial institutions to protect the security and confidentiality of customer
information and to notify customers about their policies and practices relating
to their collection, disclosure and protection of customer information. Federal
and state laws also regulate disclosures of customer information. Congress and
state legislatures are expected to consider additional regulation relating to
privacy and other aspects of customer information.
PARENT COMPANY
AXA, the sole shareholder of the Holding Company, is the holding company for an
international group of insurance and related financial services companies
engaged in the financial protection and wealth management business. AXA is the
largest French insurance group and one of the largest insurance groups in the
world. AXA operates primarily in Western Europe, North America, and the
Asia/Pacific region and, to a lesser extent, in other regions including the
Middle East, Africa and South America. AXA has five operating business segments:
life and savings, property and casualty, international insurance (including
reinsurance), asset management, and other financial services.
Neither AXA nor any affiliate of AXA has any obligation to provide additional
capital or credit support to the Holding Company or any of its subsidiaries.
VOTING TRUST. In connection with AXA's application to the Superintendent for
approval of its acquisition of capital stock of the Holding Company, AXA and the
initial Trustees of the Voting Trust entered into a Voting Trust Agreement dated
as of May 12, 1992 (as amended by the First Amendment, dated January 22, 1997
and as amended and restated by the Amended and Restated Voting Trust Agreement
dated May 12, 2002, the "Voting Trust Agreement"). Pursuant to the Voting Trust
Agreement, AXA and its affiliates ("AXA Parties") have deposited the shares of
the Holding Company's Common Stock held by them in the Voting Trust. The purpose
of the Voting Trust is to ensure for insurance regulatory purposes that certain
indirect minority shareholders of AXA will not be able to exercise control over
the Holding Company or Equitable Life.
AXA and any other holder of voting trust certificates will remain the beneficial
owner of the shares deposited by it, except that the Trustees will be entitled
to exercise all voting rights attaching to the deposited shares so long as such
shares remain subject to the Voting Trust. In voting the deposited shares, the
Trustees must act to protect the legitimate economic interests of AXA and any
other holders of voting trust certificates (but with a view to ensuring that
certain indirect minority shareholders of AXA do not exercise control over the
Holding Company or Equitable Life). All dividends and distributions (other than
those which are paid in the form of shares required to be deposited in the
Voting Trust) in respect of deposited shares will be paid directly to the
holders of voting trust certificates. If a holder of voting trust certificates
sells or transfers deposited shares to a person who is not an AXA Party and is
not (and does not, in connection with such sale or transfer, become) a holder of
voting trust certificates, the shares sold or transferred will be released from
the Voting Trust. The initial term of the Voting Trust ended in 2002 and the
term of the Voting Trust has been extended, with the prior approval of the
Superintendent, until May 12, 2012. Future extensions of the term of the Voting
Trust remain subject to the prior approval of the Superintendent.
1-9
PART I, ITEM 2.
PROPERTIES
FINANCIAL ADVISORY/INSURANCE
Equitable Life leases on a long-term basis approximately 810,000 square feet of
office space located at 1290 Avenue of the Americas, New York, NY, which serves
as the Holding Company's and Equitable Life's headquarters. Additionally,
Equitable Life leases an aggregate of approximately 50,000 square feet of office
space at two other locations in New York, NY. Equitable Life also has the
following significant office space leases: 244,000 square feet in Secaucus, NJ,
under a lease that expires in 2011 for its Annuity Operations; 185,000 square
feet in Charlotte, NC, under a lease that expires in 2013 for use by its
National Operations Center; 113,000 square feet in Alpharetta, GA, under a lease
thatexpires in 2006 for its Distribution Organizations' training and support
use; and 67,800 square feet in Leonia, NJ, under a lease that expires in 2009
for its Information Technology processing use. In addition, Equitable Life
leases property both domestically and abroad, the majority of which houses sales
and distribution operations. Management believes its facilities are adequate for
its present needs in all material respects. For additional information, see
Note 19 of Notes to Consolidated Financial Statements.
Equitable Life subleases its office space at 1290 Avenue of the Americas to the
New York City Industrial Development Agency (the "IDA"), and sub-subleases that
space back from the IDA, in connection with the IDA's granting of sales tax
benefits to Equitable Life.
INVESTMENT MANAGEMENT
Alliance's principal executive offices at 1345 Avenue of the Americas, New York,
NY are occupied pursuant to a lease that extends until 2019. Alliance currently
occupies approximately 568,500 square feet of space at this location. Alliance
also occupies approximately 114,097 square feet of space at 135 West 50th
Street, New York, NY, and approximately 75,630 square feet of space at 767 Fifth
Avenue, New York, NY, under leases expiring in 2016 and 2005, respectively.
Alliance also occupies approximately 47,621 square feet of space at 925
Westchester Avenue, White Plains, NY, 4,341 square feet of space at One North
Broadway, White Plains, NY, and 141,002 square feet of space at One North
Lexington, White Plains, NY, under leases expiring in 2008. Alliance and its
subsidiaries, Alliance Fund Distributors, Inc. and Alliance Global Investor
Services, Inc., occupy approximately 134,261 square feet of space in Secaucus,
New Jersey, approximately 92,067 square feet of space in San Antonio, Texas, and
approximately 60,653 square feet of space in Scranton, Pennsylvania, under
leases expiring in 2016, 2009, and 2005, respectively.
Alliance also leases space in 11 cities in the United States and its
subsidiaries and affiliates lease space in London, England, Tokyo, Japan and 27
other cities outside the United States.
2-1
PART I, ITEM 3.
LEGAL PROCEEDINGS
The matters set forth in Note 18 of Notes to the Registrant's Consolidated
Financial Statements for the year ended December 31, 2002 (Item 8 of this
report) are incorporated herein by reference, with the following additional
information.
In Malhotra, in March 2003, the United States District Court for the Eastern
District of New York: (i) granted plaintiffs' motion, filed October 2001,
seeking leave to reopen their original case for the purpose of filing an amended
complaint and accepted plaintiffs' proposed amended complaint, (ii) appointed
the named plaintiffs as lead plaintiffs and their counsel as lead counsel for
the putative class, (iii) consolidated plaintiffs' original action with their
second action, which was filed in October 2001, and (iv) ruled that the court
would apply Equitable Life's motion to dismiss the amended complaint in the
second action to the plaintiffs' amended complaint from the original action. The
court subsequently dismissed plaintiffs' operative amended complaint without
prejudice to their filing a second amended complaint within 30 days.
In the Mississippi Actions, plaintiffs' motions to remand two lawsuits, one
involving 79 plaintiffs and the other involving four plaintiffs, which lawsuits
had been removed from state court to the United States District Court for the
Northern District of Mississippi, have been denied. In March 2003, the Supreme
Court of Mississippi has affirmed the dismissal with prejudice of the Circuit
Court of Sunflower County lawsuit.
In January and February 2003, the United States District Court for the Southern
District of Mississippi granted Equitable Life's petitions to compel arbitration
of the cross-claims asserted by two former agents in three of the Mississippi
Actions and also granted Equitable Life's motion to enjoin prosecution of those
cross-claims in state court.
In Miller, in March 2003, the Federal District Court in the Southern District of
Illinois denied in part, and granted in part, defendants' motion to dismiss. The
court declined to dismiss plaintiffs' claims that certain advisory and
distribution fees paid to Alliance and AFD, respectively, were excessive in
violation of Section 36(b) of the ICA. The court dismissed plaintiffs' claims
that certain distribution plans were adopted in violation of the ICA.
In Benak, in February 2003, Alliance moved to dismiss the Consolidated Amended
Complaint. That motion is pending.
In Enron, in March 2003, Alliance's motion to dismiss was denied.
In Jaffe, in March 2003, the court granted Alliance's motion to transfer the
Jaffe Complaint to the United States District Court for the District of
New Jersey.
3-1
PART I, ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K.
4-1
PART II, ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Prior to the close of business on January 2, 2001, the Holding Company's Common
Stock was listed on the New York Stock Exchange ("NYSE") under the symbol AXF.
Following January 2, 2001, all of the Holding Company's Common Stock is owned by
AXA and certain of its affiliates and there is no longer a public trading market
for the Holding Company's Common Stock.
In 2002 and 2001, respectively, the Holding Company paid shareholder dividends
of $325.0 million and $200.0 million. For information on the Holding Company's
present and future ability to pay dividends, see "Liquidity and Capital
Resources" of Management Narrative (Item 7 of this report).
5-1
PART II, ITEM 6.
SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I to Form 10-K.
6-1
PART II, ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is omitted pursuant to General Instruction
I(2)(a) of Form 10-K. The management narrative for AXA Financial that follows
should be read in conjunction with the consolidated financial statements and
related notes to consolidated financial statements and information discussed
under forward-looking statements included elsewhere in this Form 10-K.
GENERAL
Certain non-recurring events have impacted AXA Financial's results of
operations. In fourth quarter 2000 and January 2001, AXA and AXA Merger acquired
the approximately 40% minority interest share of the Holding Company's Common
Stock. As a result of this purchase, AXA Financial's management amended the
terms of substantially all of the outstanding Holding Company stock options.
Approximately $751.4 million of expenses, principally related to modifications
to and accelerated vesting of Holding Company stock options that resulted from
the AXA minority interest buyout, are included in pre-tax earnings from
continuing operations for 2000. In January 2001, AXA Merger was merged into the
Holding Company, resulting in AXA Financial becoming a wholly owned subsidiary
of AXA. See Notes 1 and 2 of Notes to Consolidated Financial Statements for
further information.
Also in 2000, AXA Financial sold its interest in DLJ for cash and CSG stock
totaling $7.15 billion. See Notes 1 and 8 of Notes to Consolidated Financial
Statements for further information. In 2001 and 2000, respectively, $27.1
million of realized income and $159.9 million of realized and unrealized losses
on the CSG shares were included in net investment income. The remaining CSG
shares were sold in first quarter 2001.
In October 2000, Alliance purchased Bernstein. The cash portion of the
consideration came from the Holding Company's purchase of new Alliance Units
earlier in that year. For further information on the Bernstein acquisition, see
Note 1 of Notes to Consolidated Financial Statements.
CONSOLIDATED RESULTS OF OPERATIONS
Earnings from continuing operations before Federal income taxes and minority
interest were $849.7 million for 2002, a decrease of $44.5 million from the
$894.2 million reported in 2001. The decrease resulted from a $73.9 million
decrease in the Financial Advisory/Insurance segment partially offset by a $29.4
million increase for the Investment Management segment.
Total revenues decreased $297.4 million to $7.53 billion in 2002 from $7.82
billion in 2001 due to decreases in both the Financial Advisory/Insurance and
Investment Management segments. The 2002 decrease principally resulted from
lower policy fee and premium income and higher investment losses in the
Financial Advisory/Insurance segment and lower investment advisory and services
fees and lower distribution revenues in the Investment Management segment,
partially offset by higher other income in the Financial Advisory/Insurance
segment related to the fair value of derivative reinsurance contracts.
Total benefits and other deductions were $6.68 billion in 2002, a $252.9 million
decrease as compared to $6.93 billion in 2001. The reduction in amortization
expense due to the cessation of goodwill amortization upon the adoption of SFAS
No. 142 on January 1, 2002 as well as lower compensation and benefits and lower
other operating costs and expenses in both segments in 2002 was partially offset
by higher policyholders' benefits related to the GMDB/GMIB features and by
higher commission expense in the Financial Advisory/Insurance segment.
Federal income tax expense totaled $9.8 million in 2002 as compared to the
$219.6 million reported in 2001. The decrease resulted principally from a $144.3
million tax benefit in 2002 related to the favorable treatment of certain tax
matters related to Separate Account investment activity during the 1997-2001 tax
years and a settlement with the IRS with respect to such tax matters for the
1992-1996 tax years. Federal income tax expense also reflected the release of
tax audit reserves of $42.9 million and $28.2 million in 2002 and 2001,
respectively.
7-1
In 2002 and 2001, AXA Financial reported cumulative effects of accounting
changes of $(33.1) million and $(3.5) million (net of Federal income tax
benefits of $17.9 million and $1.9 million), respectively. The 2002 amount
resulted from AXA Financial's change in the method of accounting for liabilities
associated with variable annuity contracts with GMDB/GMIB features while the
2001 change resulted from the adoption of SFAS No. 133. For further information,
see "New Accounting Pronouncements" in Note 2 of Notes to Consolidated Financial
Statements.
Net earnings were $528.6 million for 2002 compared to $424.8 million for 2001
with higher net earnings in both segments in 2002.
RESULTS OF CONTINUING OPERATIONS BY SEGMENT
FINANCIAL ADVISORY/INSURANCE.
FINANCIAL ADVISORY/INSURANCE - RESULTS OF OPERATIONS
(IN MILLIONS)
2002 2001
-------- -------
Universal life and investment-type product policy fee income ..... $1,315.5 $1,342.3
Premiums ......................................................... 945.2 1,019.9
Net investment income ............................................ 2,351.2 2,349.8
Investment losses, net ........................................... (286.3) (204.6)
Commissions, fees and other income ............................... 531.5 405.0
-------- --------
Total revenues .............................................. 4,857.1 4,912.4
-------- --------
Policyholders' benefits .......................................... 2,034.0 1,886.9
Interest credited to policyholders' account balances ............. 972.5 981.7
Compensation and benefits ........................................ 643.0 784.5
Commissions ...................................................... 540.5 477.8
Deferred policy acquisition costs, net ........................... (458.1) (458.5)
Rent expense ..................................................... 92.2 90.3
All other operating costs and expenses ........................... 705.4 748.2
-------- --------
Total benefits and other deductions ...................... 4,529.5 4,510.9
-------- --------
Earnings from Continuing Operations before Federal Income Taxes... $ 327.6 $ 401.5
======== ========
2002 COMPARED TO 2001 - In 2002, pre-tax earnings from continuing operations in
the Financial Advisory/Insurance segment declined $73.9 million to $327.6
million as compared to $401.5 million in 2001, principally due to lower policy
fee income, higher investment losses and the reserve increase in policyholders'
benefits related to variable annuity products with GMDB/GMIB features partially
offset by the increase in the fair value of derivative reinsurance contracts in
other income, lower compensation and lower operating costs and expenses.
Segment revenues decreased $55.3 million over the prior year period as $101.5
million lower premiums and policy fee income and $81.7 million in higher
investment losses, net were partially offset by a $126.5 million increase in
commissions, fees and other income.
Policy fee income was $26.8 million lower largely due to the effect of market
depreciation on average Separate Account balances partially offset by higher
product level mortality and surrender charges.
Premiums decreased $74.7 million in 2002 reflecting lower premiums on
traditional life products due to the Financial Advisory/Insurance segment's
focus on sales of variable and interest-sensitive life and annuity products
whose revenues are not reported as premiums and lower reinsurance assumed
premiums related to Equitable Life's withdrawal from certain accident and health
and aviation and space reinsurance pools.
Net investment income increased $1.4 million as higher earnings on fixed
maturities, primarily attributed to a higher General Account asset base, were
7-2
substantially offset by lower yields and the absence of earnings on the proceeds
received from the sale of DLJ (which were subsequently utilized for the payment
of income taxes and dividends in April 2001).
Investment losses, net were $81.7 million higher in 2002 as compared to 2001
principally as a result of net losses of $61.5 million as compared to net gains
of $72.4 million on sales of fixed maturities and writedowns of $312.8 million
on fixed maturities, up $25.3 million from 2001. These losses were partially
offset by a $96.8 million gain on the sale of a single real estate property in
second quarter 2002. The 2002 fixed maturity writedowns occurred primarily on
securities in the telecommunications, airline, utilities and energy sectors
while the losses on fixed maturity sales included $97.2 million and $32.5
million of losses on telecommunications and utilities securities, respectively.
In fourth quarter 2002, writedowns of $172.8 million were taken, principally on
securities in the utilities, airline, energy and telecommunications industries,
while losses on fixed maturities sales totaling $20.2 million were primarily due
to losses on utilities and telecommunications securities.
Commissions, fees and other income increased $126.5 million in 2002 as compared
to 2001 principally due to the $120.0 million increase in the fair value of the
GMIB reinsurance contracts accounted for as derivatives and to higher sales of
third-party brokerage insurance products.
Total benefits and other deductions in 2002 increased $18.6 million from 2001 as
higher policyholders' benefits and commissions were partially offset by lower
compensation and benefits and other operating expenses.
The $147.1 million increase in policyholders' benefits was principally due to
the change in reserves related to the GMDB/GMIB features contained in certain
variable annuity contracts, discussed in "Accounting Changes" in Note 2 and as
well as in Note 9 of Notes to Consolidated Financial Statements, higher GMDB
claims, higher claims experience in reinsurance assumed product lines and
increased accruals for litigation. These increases were partially offset by the
absence of claims associated with the September 11, 2001 terrorist attacks.
Interest credited to policyholders' account balances declined $9.2 million in
2002 as the impact of lower crediting rates was substantially offset by higher
General Account balances.
Compensation and benefits for the Financial Advisory/Insurance segment declined
$141.5 million to $643.0 million in 2002 as compared to $784.5 million in 2001.
The 2002 total included $11.4 million of credits resulting from changes in the
SARs liability as compared to $74.0 million in 2001. The negative impact of
lower SARs credits was more than offset by lower employee salary expenses due to
reduced headcounts partially offset by higher pension plan costs, which included
the impact of reducing the expected long-range return on assets for the
qualified pension plan from 10.25% as of January 1, 2001 to 9.0% as of January
1, 2002. Compensation and benefits in 2001 included severance benefits for
certain former senior officers and employees associated with cost reduction
programs, as well as payments to certain former senior officers under continuity
agreements related to AXA's minority interest buyout.
Commissions increased $62.7 million in 2002 from $477.8 million in 2001 due to
higher sales of annuity contracts and third-party insurance products.
DAC amortization increased to $296.7 million in 2002, up $8.8 million from
$287.9 million in 2001. DAC for universal life, investment-type and
participating traditional life policies is amortized over the expected total
life of the contract group as a constant percentage of estimated gross profits
(for universal life and investment-type contracts) or margins (for participating
traditional life policies). Estimates and assumptions underlying these DAC
amortization rates are reassessed and updated at the end of each reporting
period ("DAC unlocking"). The effect of DAC unlocking is reflected in earnings
in the period such estimated gross profits are revised. A decrease in expected
gross profits would accelerate DAC amortization. Conversely, an increase in
expected gross profits would slow DAC amortization.
Expected gross profits for variable and interest-sensitive life insurance and
variable annuities arise principally from investment results, Separate Account
fees, mortality and expense margins and surrender charges. A significant
assumption in the development of expected gross profits and, therefore, the
amortization of DAC on these products relates to projected future Separate
Account performance. Expected future gross profit assumptions related to
Separate Account performance are set by management using a long-term view of
expected average market returns by applying a reversion to the mean approach. In
applying this approach to develop estimates of future returns, it is assumed
that the market will return to an average gross long-term return estimate,
developed with reference to historical long-term equity market performance and
subject to assessment of the reasonableness of resulting estimates of future
return assumptions. For purposes of making this reasonableness assessment,
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
7-3
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 15.0%
for more than 5 years in order to reach the average gross long-term return
estimate, the application of the 5 year maximum duration limitation would result
in an acceleration of DAC amortization. Conversely, actual market returns
resulting in assumed future market returns of 0% 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.
DAC capitalization increased $8.4 million from $746.4 million in 2001 to $754.8
million in 2002 as higher commissions were partially offset by lower deferrable
operating expenses.
Interest expense decreased $9.2 million to $138.4 million in 2002 principally
due to the absence of interest on the short-term loan from AXA that was repaid
in April 2001. All other operating costs declined $33.6 million to $567.0
million from $600.6 million in 2001 primarily due to lower consulting fees,
lower premium taxes and state and local taxes, partially offset by an increased
accrual for litigation.
Premiums and Deposits. First year premiums and deposits for life and annuity
products in 2002 increased from prior year levels by $1.76 billion to $6.58
billion primarily due to $1.49 billion higher sales of individual annuities. The
increase in variable annuity sales that began in the second quarter of 2002 was
primarily due to higher deposits from annuities in the wholesale channel, and
included $754.2 million in sales of a new single premium deferred annuity
product in 2002 compared to $418.5 million in 2001, when first introduced, and
$3.58 billion in sales of a new line of variable annuity products introduced in
April 2002. Renewal premiums and deposits decreased by $205.0 million to $4.19
billion in 2002 from $4.39 billion in 2001. Total sales of mutual funds and
fee-based assets gathered increased $215.2 million to $3.41 billion in 2002.
Surrenders and Withdrawals. Policy and contract surrenders and withdrawals
increased $284.8 million to $5.15 billion during 2002 compared to 2001. The
annuity surrender rates increased from 9.0% in 2001 to 10.1% in 2002. When a
single large pension plan contract that surrendered in second quarter 2002,
which totaled $123.8 million, is excluded, the 2002 surrender rate would
decrease to 9.8%. The individual life surrender rate increased slightly to 4.0%
from 3.8% in the prior year. The trends in surrenders and withdrawals continue
to fall within the range of expected experience.
7-4
INVESTMENT MANAGEMENT.
The table that follows presents the operating results of the Investment
Management segment, consisting principally of Alliance's operations.
INVESTMENT MANAGEMENT - RESULTS OF OPERATIONS
(IN MILLIONS)
2002 2001
--------------- ----------------
Revenues:
Investment advisory and services fees (1)............................. $ 1,847.9 $ 2,023.8
Distribution revenues................................................. 467.5 544.6
Institutional research services ...................................... 294.9 265.8
Shareholder servicing fees............................................ 101.6 96.3
Other revenues, net (1)............................................... 32.5 69.8
--------------- ----------------
Total revenues.................................................... 2,744.4 3,000.3
--------------- ----------------
Expenses:
Alliance employee compensation and benefits........................... 907.1 930.7
Distribution plan payments............................................ 392.8 429.1
Amortization of deferred sales commissions............................ 229.0 230.8
All other promotion and servicing expenses............................ 193.3 233.6
Amortization of goodwill and intangibles.............................. 24.2 206.1
All other operating expenses.......................................... 475.9 477.3
--------------- ----------------
Total expenses.................................................... 2,222.3 2,507.6
--------------- ----------------
Earnings from Continuing Operations before
Federal Income Taxes and Minority Interest........................... $ 522.1 $ 492.7
=============== ================
(1) Includes fees earned by Alliance totaling $36.2 million and $35.9 million
in 2002 and 2001, respectively, for services provided to the Insurance
Group.
2002 COMPARED TO 2001 - Investment Management's pre-tax results of operations
for 2002 were $522.1 million, an increase of $29.4 million from the prior year.
Revenues totaled $2.74 billion in 2002, a decrease of $255.9 million from 2001,
principally due to $175.9 million lower investment advisory and services fees
and $77.1 million lower distribution revenues, partially offset by a $29.1
million increase in institutional research services. Investment advisory and
services fees include brokerage transaction charges for SCB LLC. The decrease in
investment advisory and services fees primarily resulted from lower average
assets under management ("AUM") primarily as a result of significant market
depreciation related to on-going global equity market declines and net asset
outflows of $4.3 million and a decrease in performance fees from $79.4 million
in 2001 to $54.1 million in 2002. Lower performance fees in 2002 were
principally related to lower investment returns, caused by adverse equity and
fixed income markets, earned by certain hedge funds investing in value stocks
and certain growth investment advisory contracts, partially offset by higher
performance fees in certain value investment advisory contracts, while the 2001
performance fees were principally the result of certain hedge funds investing in
value stocks during 2001. The decrease in distribution revenues was principally
due to lower average mutual fund AUM attributed to market depreciation and net
redemptions of back-end load mutual fund shares. Institutional research services
revenues increased $29.1 million to $294.9 million in 2002 from $265.8 million
for 2001 due to higher market share of NYSE volumes, expanded research and
broader trading capabilities.
The segment's total expenses were $2.22 billion in 2002, compared to $2.51
billion in 2001. Investment Management's total expenses decreased $285.3 million
in 2002 primarily due to $181.9 million lower amortization of goodwill and
intangibles, a $40.3 million decrease in all other promotion and servicing
expenses and a decrease of $36.3 million in distribution plan payments. The
$181.9 decrease in amortization of goodwill and intangibles was the result of
the cessation of goodwill amortization upon adopting SFAS No. 142. The 2002
decrease in all other promotion and servicing expenses was due to decreases in
travel, entertainment and printing costs. Lower distribution plan payments in
2002 were due to lower average mutual fund AUM. The $23.6 million decrease in
Alliance employee compensation and benefits was due to lower base compensation,
fringe benefits and other compensation due to reduced headcounts and expense
control initiatives. Incentive and commission compensation was flat in 2002 due
to lower operating earnings and higher deferred compensation primarily
attributable to deferred compensation agreements entered into in connection with
the Bernstein acquisition and the realignment of certain sales management
professionals to incentive-based from commission-based compensation.
7-5
ASSETS UNDER MANAGEMENT
A breakdown of AUM follows:
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
DECEMBER 31,
-------------------------------------
2002 2001
----------------- ------------------
Third party (1) (2)............................... $ 337,984 $ 394,648
General Account and other (3)..................... 38,315 36,153
Separate Accounts................................. 39,012 46,947
----------------- ------------------
Total Assets Under Management................. $ 415,311 $ 477,748
================= ==================
(1) AUM previously reported has been restated to conform to 2002 presentation,
which excludes assets managed by unconsolidated affiliates of Alliance.
(2) Includes $7.83 billion and $5.31 billion of assets managed on behalf of AXA
affiliates at December 31, 2002 and 2001, respectively. Also included in
2002 and 2001 are $8.7 billion and $7.5 billion, respectively, in assets
related to an Australian joint venture between Alliance and an AXA
affiliate. Third party AUM includes 100% of the estimated fair value of
real estate owned by joint ventures in which third party clients own an
interest.
(3) Includes invested assets of AXA Financial not managed by Alliance,
principally cash and short-term investments and policy loans, totaling
approximately $8.66 billion and $6.62 billion at December 31, 2002 and
2001, respectively, as well as mortgages and equity real estate totaling
$4.83 billion and $5.62 billion at December 31, 2002 and 2001,
respectively.
Third party AUM declined $56.66 billion to $337.98 billion in 2002 primarily due
to decreases at Alliance. General Account and other AUM increased $2.16 billion
from the total reported in 2001 due to higher sales of General Account based
products and products with General Account and dollar cost averaging options.
The $7.94 billion decrease in Separate Accounts AUM in 2002 resulted from
continued equity market depreciation that more than offset net new deposits.
Alliance's AUM decreased $65.58 billion to $386.58 billion in 2002 from $452.16
billion in 2001; $61.3 billion of the decrease resulted from significant market
depreciation due to global equity market declines and $4.3 billion to net asset
outflows.
OTHER DISCONTINUED OPERATIONS
Earnings from Other Discontinued Operations of $5.6 million in 2002 as compared
to $43.9 million in 2001 reflect releases of the allowance for future losses due
to favorable investment results projected for future years partially offset by
unfavorable investment results actually realized during 2002.
LIQUIDITY AND CAPITAL RESOURCES
THE HOLDING COMPANY
In January 2001, upon the merger of AXA Merger Corp. into the Holding Company,
the 53.4 million shares of Holding Company Common Stock held by AXA Merger Corp.
were exchanged for 100% of AXA's shares of AXA Merger common stock and 20.7
million shares of treasury stock were retired. In addition, the $3.0 billion
loan to AXA Merger made by the Holding Company in December 2000 was
extinguished. The loan proceeds had been used to fund a portion of the AXA
minority interest buyout in December 2000. In first quarter 2001, the Holding
Company borrowed $1.10 billion from AXA under a renewable financing agreement
and used the proceeds to partially fund second quarter 2001 tax payments related
to the gain on the sale of DLJ. The borrowings were repaid in April 2001 with
dividend proceeds of $1.50 billion received from Equitable Life. In June 2001,
the Holding Company cancelled its $1.00 billion revolving credit facility. In
2002 and 2001, respectively, the Holding Company paid cash dividends of $325.0
million and $200.0 million and received $500.0 million and $1.70 billion of
dividends from Equitable Life.
In 2001, the Holding Company used those monies to pay $1.85 billion in Federal
income taxes on the gain on the sale of DLJ (including $858.2 million related to
Equitable Life's portion of the proceeds) as well as approximately $197.4
million of cash payments related to the exercise of Holding Company Common Stock
options.
7-6
In connection with Alliance's acquisition of Bernstein, the Holding Company has
agreed to provide liquidity to the former Bernstein shareholders after a
two-year lock-out period which ended October 2002. In the fourth quarter of
2002, AXA Financial acquired 8.16 million of these Alliance Units at the
aggregate market price of $249.7 million. The remaining 32.6 million Alliance
Units outstanding at December 31, 2002 may be sold to the Holding Company at the
prevailing market price over the remaining seven years 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.
Sources of Liquidity. The Holding Company's cash requirements include debt
service, operating expenses, taxes, shareholder dividends to AXA, certain
employee benefits and providing funding to certain non-Insurance Group
subsidiaries to meet their capital requirements. Pre-tax debt service totaled
$121.1 million in 2002, while general and administrative expenses were $26.8
million In January 2001, AXA Merger Corp.'s debt to the Holding Company was
extinguished at the date of merger. Since the Holding Company's December 1999
assumption of primary liability from Equitable Life for all current and future
obligations of certain of its benefit plans, the Holding Company paid $64.2
million and $62.2 million in benefits, all of which was reimbursed by
subsidiaries of the Holding Company in 2002 and 2001, respectively. In 2002, the
Holding Company received a Federal income tax refund totaling $297.6 million of
which $153.6 million was remitted to Equitable Life.
At December 31, 2002, the Holding Company held cash and short-term investments
and U.S. Treasury securities of approximately $146.7 million and investment
grade publicly traded bonds totaling $1.5 million. Other primary sources of
liquidity for the Holding Company include (i) dividends from Equitable Life,
(ii) distributions from Alliance, (iii) dividends, distributions or sales
proceeds from less liquid investment assets and (iv) borrowings from AXA. Cash
distributions from Alliance totaled $84.8 million and $102.4 million in 2002 and
2001, respectively. The Holding Company held common stock and less liquid
investment assets having an aggregate carrying value of approximately $68.8
million at December 31, 2002. Management believes the primary sources of
liquidity described above are sufficient to meet the Holding Company's cash
requirements for several years.
EQUITABLE LIFE
The principal sources of Equitable Life's cash flows are premiums, deposits and
charges on policies and contracts, investment income, repayments of principal
and proceeds from sales of fixed maturities, sales of other General Account
Investment Assets and dividends and distributions from subsidiaries.
Equitable Life's liquidity requirements principally relate to the liabilities
associated with its various life insurance, annuity and group pension products
in its continuing operations; the liabilities of discontinued operations;
shareholder dividends to AXA Financial; and operating expenses, including debt
service. Equitable Life's liabilities include the payment of benefits under life
insurance, annuity and group pension products, as well as cash payments in
connection with policy surrenders, withdrawals and loans. Management from time
to time explores selective acquisition opportunities in insurance and investment
management businesses.
Sources of Liquidity. Equitable Life's primary source of short-term liquidity to
support continuing and discontinued insurance operations is a pool of highly
liquid, high quality short-term instruments structured to provide liquidity in
excess of the expected cash requirements. At December 31, 2002, this asset pool
included an aggregate of $767.4 million in highly liquid short-term investments,
as compared to $485.2 million at December 31, 2001. In addition, a substantial
portfolio of public bonds including U.S. Treasury and agency securities and
other investment grade fixed maturities is available to meet Equitable Life's
liquidity needs.
In fourth quarter 2000, Equitable Life received cash proceeds of $1.05 billion
from the sale of its shares in DLJ and a further $557.3 million from sales of a
portion of the CSG shares through December 31, 2000. All remaining shares of CSG
stock were sold during first quarter 2001. These proceeds funded the $1.5
billion shareholder dividend paid in April 2001.
Other liquidity sources include dividends and distributions from Alliance. In
2002, Equitable Life received cash distributions from Alliance and Alliance
Holding of $259.3 million as compared to $313.2 million in 2001.
Management believes there is sufficient liquidity in the form of short-term
assets and its bond portfolio together with cash flows from operations,
scheduled maturities of fixed maturities and borrowings available under its
commercial paper program and bank credit facilities to satisfy Equitable Life's
liquidity needs.
7-7
Liquidity Requirements. Equitable Life's liquidity needs are affected by
fluctuations in mortality and other benefit payments and in the level of
surrenders and withdrawals previously discussed in "Results of Continuing
Operations by Segment - Financial Advisory/Insurance," as well as by dividends
to its shareholder. In 2002 and 2001, respectively, Equitable Life paid
shareholder dividends totaling $500.0 million and $1.70 billion. Management
believes the Insurance Group has adequate internal sources of funds for its
presently anticipated needs.
ALLIANCE
Alliance's principal sources of liquidity have been cash flows from operations
and the issuance, both publicly and privately, of debt and Alliance Units.
Alliance requires financial resources to fund commissions paid on certain
back-end load mutual fund sales, to fund distributions to Unitholders, to fund
capital expenditures and for general working capital purposes. In 2002 and 2001,
respectively, subsidiaries of Alliance purchased Alliance Holding units totaling
$73.1 million and $36.2 million for deferred and other compensation plans.
Management believes Alliance's substantial equity base, its access to public and
private debt and its cash flows from operations will provide the financial
resources to meet its capital and general business requirements. For further
information, see Alliance's Annual Report on Form 10-K for the year ended
December 31, 2002.
SUPPLEMENTARY INFORMATION
AXA Financial is involved in a number of ventures and transactions with AXA and
certain of its affiliates. At December 31, 2002, Equitable Life had a $400.0
million, 5.89% loan outstanding with AXA Insurance Holding Co., Ltd., a Japanese
subsidiary of AXA. All payments, including interest, are guaranteed by AXA.
Alliance provides investment management and related services to AXA and AXA
Financial and certain of their subsidiaries and affiliates. In 2001, Alliance
entered into joint ventures with an Australian affiliate of AXA and recognized
management fees of $14.1 million and $12.3 million in 2002 and 2001,
respectively. The Holding Company, Equitable Life and Alliance, along with other
AXA affiliates, participate in certain cost sharing and servicing agreements
which include technology and professional development arrangements. Payments by
the Holding Company and Equitable Life to AXA totaled approximately $16.3
million and $17.5 million in 2002 and 2001, respectively, while Alliance's share
of such costs were approximately $1.6 million and $0.9 million, respectively.
See Notes 13 and 21 of Notes to the Consolidated Financial Statements and
Alliance's Report on Form 10-K for the year ended December 31, 2002 for
information on related party transactions.
A schedule of future payments under certain of AXA Financial's consolidated
contractual obligations follows:
CONTRACTUAL OBLIGATIONS - DECEMBER 31, 2002
(IN MILLIONS)
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
LESS THAN OVER
TOTAL 1 YEAR 1 - 3 YEARS 4 - 5 YEARS 5 YEARS
----------- ------------ ----------- ------------ ------------
Contractual obligations:
Long-term debt.................. $ 2,711.6 $ 325.1 $ 700.0 $ 406.5 $ 1,280.0
Operating leases................ 1,417.2 128.0 249.1 191.7 848.4
----------- ----------- ---------- ------------ -------------
Total Contractual
Obligations................. $ 4,128.8 $ 453.1 $ 949.1 $ 598.2 $ 2,128.4
=========== =========== ========== =========== =============
AXA Financial also has contractual obligations to the policy and contractholders
of its various life insurance and annuity products and/or their designated
beneficiaries. These obligations include paying death claims and making annuity
payments. The timing of such payments depends upon such factors as the mortality
and persistency of its customer base.
In addition, AXA Financial has obligations under contingent commitments at
December 31, 2002, including: Equitable Life and Alliance's respective revolving
credit facilities and commercial paper programs; Alliance's $100.0 million ECN
program; the Insurance Group's $57.3 million letters of credit; Alliance's
$125.0 million guarantee on behalf of SCB LLC; and AXA Financial's guarantees or
commitments to provide equity financing to certain limited partnerships of
$298.6 million. Information on these contingent commitments can be found in
Notes 10, 13 and 17 of Notes to Consolidated Financial Statements.
7-8
Further, AXA Financial is exposed to potential risk related to its own ceded
reinsurance agreements with other insurers and to insurance guaranty fund laws
in all 50 states, the District of Columbia and Puerto Rico. Under these laws,
insurers doing business in these states can be assessed amounts up to prescribed
limits to protect policyholders of companies that become impaired or insolvent.
In the aftermath of the September 11, 2001 terrorist attacks, while traditional
indicators continue to be used to monitor insurers' financial position, the
ability of otherwise fiscally healthy insurers, or even the insurance industry,
to absorb further catastrophic losses of such a nature cannot be predicted.
CRITICAL ACCOUNTING POLICIES
AXA Financial's management narrative is based upon AXA Financial's consolidated
financial statements that have been prepared in accordance with GAAP. The
preparation of these financial statements 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 period. On an on-going basis, AXA Financial
evaluates its estimates, including those related to investments, recognition of
insurance income and related expenses, DAC, future policy benefits, recognition
of Investment Management revenues and related expenses and pension cost. AXA
Financial bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. The
results of such factors form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from those estimates under different
assumptions or conditions.
AXA Financial believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
Investments - AXA Financial records an investment impairment charge when it
believes an investment has experienced a decline in fair value that is other
than temporary. Identifying those situations requires management's careful
consideration of the facts and circumstances, including but not limited to the
duration and extent to which the fair value has been depressed, the financial
position, cash flows, and near-term earnings potential of the issuer, as well as
AXA Financial's ability and intent to retain the investment to allow sufficient
time for any anticipated recovery in fair value. The basis for measuring fair
value may require utilization of investment valuation methodologies, such as
discounted cash flow analysis, if quoted market prices are not readily
available.
Recognition of Insurance Income and Related Expenses - Profits on
non-participating traditional life policies and annuity contracts with life
contingencies emerge from the matching of benefits and other expenses against
the related premiums. Profits on participating traditional life, universal life
and investment-type contracts emerge from the matching of benefits and other
expenses against the related contract margins. This matching is accomplished by
means of the provision for liabilities for future policy benefits and the
deferral, and subsequent amortization, of policy acquisition costs. Secular
trends and AXA Financial's own mortality, morbidity, persistency and claims
experience have a direct impact on the benefits and expenses reported in any
given period.
DAC - The level of operating expenses of the Insurance Group that can be
deferred is another significant factor in that business' reported profitability
in any given period. Additionally, for universal life and investment-type
contracts and participating traditional life policies, DAC amortization may be
affected by changes in estimated gross profits and margins principally related
to investment results, Separate Account fees, mortality and expense margins,
lapse rates and anticipated surrender charges. Should revisions to estimated
gross profits or margins be required, the effect is reflected in earnings in the
period such estimated gross profits are revised.
Future Policy Benefits - Future policy benefit liabilities for traditional
policies are based on actuarial assumptions as to such factors as mortality,
persistency, interest and expenses and, in the case of participating policies,
expected annual and terminal dividends. Determination of the GMDB/GMIB
liabilities is based on models that 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. Premium deficiency reserves are based upon estimates of future
gross premiums, expected policy benefits and other expenses. The allowance for
future losses for the discontinued Wind-Up Annuities is based upon numerous
estimates and subjective judgments regarding the expected performance of the
related invested assets, future asset reinvestment rates and future benefit
payments.
Recognition of Investment Management Revenues and Related Expenses - The
Investment Management segment's revenues are largely dependent on the total
value and composition of assets under management. The most significant
7-9
factors that could affect segment results include, but are not limited to, the
performance of the financial markets and the investment performance and
composition of sponsored investment products and separately managed accounts.
Performance fees are recorded as revenue at the end of the specified period and
will generally be higher in favorable markets and lower in unfavorable markets,
which may increase the volatility of the segment's revenues and earnings.
Capitalized sales commissions paid to financial intermediaries in connection
with the sale of shares of open-end mutual funds sold without a front-end sales
charge are expected to be recovered from distribution plan payments received
from those funds and from contingent deferred sales charges received from
shareholders of those funds upon redemption of their shares. The recoverability
of these commissions is estimated based on management's assessment of these
future revenue flows.
Pension Cost - Net periodic pension cost is the aggregation of the compensation
cost of benefits promised, interest cost resulting from deferred payment of
those benefits, and investment results of assets dedicated to fund those
benefits. Each cost component is based on AXA Financial's best estimate of
long-term actuarial and investment return assumptions. Actual experience
different from that assumed generally is recognized prospectively over future
periods; however, significant variances could result in immediate recognition if
they exceed certain prescribed thresholds or in conjunction with a
reconsideration of the related assumptions.
FORWARD-LOOKING STATEMENTS
AXA Financial's management has made in this report, and from time to time may
make in its public filings and press releases as well as in oral presentations
and discussions, forward-looking statements concerning AXA Financial's
operations, economic performance and financial position. Forward-looking
statements include, among other things, discussions concerning AXA Financial's
potential exposure to market risks, as well as statements expressing
management's expectations, beliefs, estimates, forecasts, projections and
assumptions, as indicated by words such as "believes," "estimates," "intends,"
"anticipates," "expects," "projects," "should," "probably," "risk," "target,"
"goals," "objectives," or similar expressions. AXA Financial claims the
protection afforded by the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and assumes no duty to
update any forward-looking statement. Forward-looking statements are based on
management's expectations and beliefs concerning future developments and their
potential effects and are subject to risks and uncertainties. Actual results
could differ materially from those anticipated by forward-looking statements due
to a number of important factors including those discussed elsewhere in this
report and in AXA Financial's other public filings, press releases, oral
presentations and discussions. The following discussion highlights some of the
more important risk and other factors that could cause such differences and/or,
if realized, could have a material adverse effect on AXA Financial's
consolidated financial position and/or results of operations.
Market Risk. AXA Financial's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. The primary market risk exposures result from interest rate
fluctuations, equity price movements and changes in credit quality. The nature
of each of these risks is discussed under the caption "Quantitative and
Qualitative Disclosures About Market Risk" contained herein and in Note 16 of
Notes to Consolidated Financial Statements.
Increased volatility of equity markets can impact profitability of the Financial
Advisory/Insurance and Investment Management segments. For the Insurance Group,
in addition to impacts on equity securities held in the General Account,
significant changes in equity markets impact asset-based policy fees charged on
variable life and annuity products. Moreover, for variable life and annuity
products with GMDB/GMIB features, sustained periods with declines in the value
of underlying Separate Account investments would increase the Insurance Group's
net exposure to guaranteed benefits under those contracts (increasing claims and
reserves, net of any reinsurance) at a time when fee income for these benefits
is also reduced from prior period levels. Increased volatility of equity markets
also will result in increased volatility of the fair value of the GMIB
reinsurance contracts.
Equity market volatility also may impact DAC amortization on variable and
universal life insurance contracts, variable annuities and participating
traditional life contracts. To the extent that actual market trends, and
reasonable expectations as to future performance drawn from those trends, lead
to reductions in the investment return and/or other related estimates underlying
the DAC amortization rates, DAC amortization could be accelerated. Volatile
equity markets can also impact the level of contractholder surrender activity,
which, in turn, can impact future profitability.
7-10
Interest rate functuations, equity price movements and changes in credit quality
may also affect invested assets held in the qualified pension plan which could
impact future pension plan costs.
The effects of significant equity market fluctuations on the Insurance Group's
operating results can be complex and subject to a variety of estimates and
assumptions, such as assumed rates of long-term equity market performance,
making it difficult to reliably predict effects on operating earnings over a
broad range of equity markets performance alternatives. Further, these effects
may not always be proportional for market increases and market decreases.
Margins on interest-sensitive annuities and universal life insurance can be
affected by interest rate fluctuations. In a declining interest rate
environment, credited rates can generally be adjusted more quickly than the
related invested asset portfolio is affected by declining reinvestment rates,
tending to result in higher net interest margins on interest-sensitive products
in the short term. However, under scenarios in which interest rates fall and
remain at significantly lower levels, minimum guarantees on interest-sensitive
annuities and universal life insurance (generally 2.5% to 4.5%) could cause the
spread between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate.
For both interest-sensitive annuities and universal life insurance, a rapid and
sustained rise in interest rates poses risks of deteriorating spreads and high
surrenders. In this environment, there is pressure to increase credited rates on
interest-sensitive products to match competitors' new money rates. However, such
changes in credited rates generally occur more quickly than the earned rates on
the related invested asset portfolios reflect changes in market yields. The
greater and faster the rise in interest rates, the more the earned rates will
tend to lag behind market rates.
For the Investment Management segment, significant changes in equity markets can
impact revenues and the recoverability of deferred costs. See "Other Risks of
the Investment Management Segment" below.
Other Risks of the Financial Advisory/Insurance Segment. The Insurance Group's
future sales of life insurance and annuity products and financial planning
services are dependent on numerous factors including: successful implementation
of AXA Financial's strategy; the intensity of competition from other insurance
companies, banks and other financial institutions; conditions in the securities
markets; the strength and professionalism of distribution channels; the
continued development of additional channels; the financial and claims-paying
ratings of Equitable Life; its reputation and visibility in the market place;
its ability to develop, distribute and administer competitive products and
services in a timely, cost-effective manner; its ability to obtain reinsurance
for certain products, the offering of which products depends upon the ability to
reinsure all or a substantial portion of the risks; its investment management
performance; and unanticipated changes in industry trends. In addition, the
nature and extent of competition and the markets for products sold by the
Insurance Group may be materially affected by changes in laws and regulations,
including changes relating to savings, retirement funding and taxation. See
"Business - Regulation" contained herein. The profitability of the Insurance
Group depends on a number of factors including: levels of gross operating
expenses and the amount which can be deferred as DAC and software
capitalization; successful implementation of expense-reduction initiatives;
secular trends; AXA Financial's mortality, morbidity, persistency and claims
experience; margins between investment results from General Account Investment
Assets and interest credited on individual insurance and annuity products, which
are subject to contractual minimum guarantees; the level of claims and reserves
on contracts with GMDB/GMIB features and the impact of related reinsurance; the
account balances against which policy fees are assessed on universal and
variable life insurance and variable annuity products; the pattern of DAC
amortization which is based on models involving numerous estimates and
subjective judgments including those regarding investment, mortality and expense
margins, expected market rates of return, lapse rates and anticipated surrender
charges; the adequacy of reserves and the extent to which subsequent experience
differs from management's estimates and assumptions, including future
reinvestment rates, used in determining those reserves; and the effects of the
September 11, 2001 and any future terrorist attacks and the results of war on
terrorism. Recoverability of DAC is dependent on future contract cash flows
(including premiums and deposits, contract charges, benefits, surrenders,
withdrawals, and expenses), which can be affected by equity market and interest
rate trends as well as changes in contract persistency levels. The performance
of General Account Investment Assets depends, among other things, on levels of
interest rates and the markets for equity securities and real estate, the need
for asset valuation allowances and writedowns, and the performance of equity
investments which have created, and in the future may create, significant
volatility in investment income.
Other Risks of the Investment Management Segment. Alliance's revenues are
largely dependent on the total value and composition of assets under its
management and are, therefore, affected by the performance of financial markets,
the investment performance of sponsored investment products and separately
7-11
managed accounts, additions and withdrawals of assets, purchases and redemptions
of mutual funds and shifts of assets between accounts or products with different
fee structures, as well as general economic conditions, future acquisitions,
competitive conditions and government regulations, including tax rates. See
"Results of Continuing Operations by Segment - Investment Management" contained
herein.
Payments by Alliance made to financial intermediaries in connection with the
sale of back-end load shares under Alliance's mutual fund distribution system
are capitalized as deferred sales commissions and amortized over periods not
exceeding five and one-half years, the periods of time during which deferred
sales commissions are expected to be recovered from distribution fees received
from those funds and from contingent deferred sales charges ("CDSC") received
from shareholders of those funds upon redemption of their shares. CDSC reduces
unamortized deferred sales commissions when received. The recorded amount of the
deferred sales commission asset was $500.9 million at December 31, 2002.
Alliance's management tests the deferred sales commission asset for
recoverability quarterly, or more often when events or changes in circumstances
occur that could significantly increase the risk of impairment of the asset.
Alliance's management determines recoverability by estimating undiscounted
future cash flows to be realized from this asset, as compared to its recorded
amount, as well as the estimated remaining life of the deferred sales commission
asset over which undiscounted future cash flows are expected to be received.
Undiscounted future cash flows consist of ongoing distribution fees and CDSC.
Distribution fees are calculated as a percentage of average assets under
management related to back-end load shares. CDSC is based on lower of cost or
current value, at the time of redemption, of back-end load shares redeemed and
the point at which redeemed during the applicable minimum holding period under
the mutual fund distribution system.
Significant assumptions utilized to estimate average assets under management of
back-end load shares include expected future market levels and redemption rates.
Market assumptions are selected using a long-term view of expected average
market returns based on historical returns of broad market indices. At December
31, 2002, Alliance's management used estimates of 10% and 7% for equity and
fixed income annual market returns, respectively. An increase in the expected
average market returns would increase the undiscounted future cash flows, while
a reduction in the expected average market returns would decrease the
undiscounted future cash flows. Future redemption rate assumptions were
determined by reference to actual redemption experience over the last five
years. Alliance's management determined that a range of assumed average annual
redemption rates of 14% to 16%, calculated as a percentage of average assets
under management, should be used at December 31, 2002. An increase in the
assumed rate of redemptions would decrease the undiscounted future cash flows,
while a decrease in the assumed rate of redemptions would increase the
undiscounted future cash flows. These assumptions are updated periodically.
Estimates of undiscounted future cash flows and the remaining life of the
deferred sales commission asset are made from these assumptions. Alliance's
management considers the results of these analyses performed at various dates.
Alliance's management determined that the deferred sales commission asset was
not impaired as December 31, 2002. If Alliance's management determines in the
future that the deferred sales commission asset is not recoverable, an
impairment condition would exist and a loss would be measured as the amount by
which the recorded amount of the asset exceeds its estimated fair value.
Estimated fair value is determined using Alliance management's best estimate of
discounted cash flows discounted to a present value amount.
During 2002, equity markets declined by approximately 22% as measured by the
change in the Standard & Poor's 500 Stock Index while fixed income markets
increased by approximately 10% as measured by the change in the Lehman Brothers'
Aggregate Bond Index. The redemption rate for domestic back-end load shares
exceeded 20% in 2002. Continued declines in financial markets or continued
higher redemption levels, or both, as compared to the assumptions used to
estimate undiscounted future cash flows, could result in the impairment of the
deferred sales commission asset. Due to the volatility of the capital markets
and changes in redemption rates, Alliance's management is unable to predict
whether or when a future impairment of the deferred sales commission asset will
occur. Should an impairment occur, any loss would reduce materially the recorded
amount of the asset with a corresponding charge to expense.
Other Discontinued Operations. The determination of the allowance for future
losses for the discontinued Wind-Up Annuities continues to involve numerous
estimates and subjective judgments including those regarding expected
performance of investment assets, asset reinvestment rates, ultimate mortality
experience and other factors which affect investment and benefit projections.
There can be no assurance the losses provided for will not differ from the
losses ultimately realized. To the extent actual results or future projections
of Other Discontinued Operations differ from management's current best estimates
underlying the allowance, the difference would be reflected as earnings or loss
from discontinued operations within the consolidated statements of earnings. In
7-12
particular, to the extent income, sales proceeds and holding periods for equity
real estate differ from management's previous assumptions, periodic adjustments
to the allowance are likely to result.
Technology and Information Systems. AXA Financial's information systems are
central to, among other things, designing and pricing products, marketing and
selling products and services, processing policyholder and investor
transactions, client recordkeeping, communicating with retail sales associates,
employees and clients, and recording information for accounting and management
information purposes in a secure and timely manner. These systems are maintained
to provide customer privacy and are tested to ensure the viability of business
resumption plans. Any significant difficulty associated with the operation of
such systems, or any material delay or inability to develop needed system
capabilities, could have a material adverse effect on AXA Financial's results of
operations and, ultimately, its ability to achieve its strategic goals.
Legal Environment. A number of lawsuits have been filed against life and health
insurers involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents and other matters. Some of the lawsuits have
resulted in the award of substantial judgments against other insurers, including
material amounts of punitive damages, or in substantial settlements. In some
states, juries have substantial discretion in awarding punitive damages. AXA
Financial's insurance subsidiaries, like other life and health insurers, are
involved in such litigation. While no such lawsuit has resulted in an award or
settlement of any material amount against AXA Financial to date, its results of
operations and financial position could be affected by defense and settlement
costs and any unexpected material adverse outcomes in such litigations as well
as in other material litigations pending against the Holding Company and its
subsidiaries. The frequency of large damage awards, including large punitive
damage awards that bear little or no relation to actual economic damages
incurred by plaintiffs in some jurisdictions, continues to create the potential
for an unpredictable judgment in any given matter. In addition, examinations by
Federal and state regulators could result in adverse publicity, sanctions and
fines. For further information, see "Business - Regulation" and "Legal
Proceedings" contained herein.
Future Accounting Pronouncements. In the future, new accounting pronouncements,
as well as new interpretations of accounting pronouncements, may have material
effects on AXA Financial's consolidated statements of earnings and shareholders'
equity. See Note 2 of Notes to Consolidated Financial Statements for
pronouncements issued but not effective at December 31, 2002.
Regulation. The businesses conducted by AXA Financial's subsidiaries are subject
to extensive regulation and supervision by state insurance departments and
Federal and state agencies regulating, among other things, insurance and
annuities, securities transactions, investment companies, investment advisors
and anti-money laundering compliance programs. Changes in the regulatory
environment could have a material impact on operations and results. The
activities of the Insurance Group are subject to the supervision of the
insurance regulators of each of the 50 states, the District of Columbia and
Puerto Rico. See "Business - Regulation" contained herein.
7-13
PART II, ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
AXA Financial's businesses are subject to financial, market, political and
economic risks, as well as to risks inherent in its business operations. The
discussion that follows provides additional information on market risks arising
from its insurance asset/liability management and asset management activities.
Such risks are evaluated and managed by each business on a decentralized basis.
Primary market risk exposure results from interest rate fluctuations, equity
price movements and changes in credit quality.
INVESTMENT MANAGEMENT
Alliance's investments are divided into two portfolios: trading and available
for sale investments and other investments. Alliance's trading and available for
sale portfolio primarily includes U.S. Treasury bills, equity and fixed income
mutual funds and money market investments. The carrying value of money market
investments approximates fair value. Although the available for sale assets are
purchased for long-term investment, the portfolio strategy considers them
available for sale due to changes in market interest rates, equity prices and
other relevant factors. Other investments include Alliance's hedge fund
investments. At December 31, 2002, Alliance's estimates of its interest rate,
equity price, derivative and credit quality risks related to its investment
portfolios were not material to AXA Financial.
At December 31, 2002, Alliance's fixed rate debt had an aggregate fair value of
$422.3 million. The potential fair value would increase to $451.3 million in
response to an immediate 100 basis point decrease in interest rates from those
prevailing at the end of 2002. For further information on Alliance's market
risk, see Alliance Holding's and Alliance's Annual Reports on Form 10-K for the
year ended December 31, 2002.
INSURANCE AND HOLDING COMPANY GROUPS
Insurance Group results significantly depend on profit margins between
investment results from assets held in the General Account associated with the
continuing operations ("General Account Investment Assets") and discontinued
operations of the Insurance Group and interest credited on individual insurance
and annuity products. Management believes its fixed rate liabilities should be
supported by a portfolio principally composed of fixed rate investments that
generate predictable, steady rates of return. Although these assets are
purchased for long-term investment, the portfolio management strategy considers
them available for sale in response to changes in market interest rates, changes
in prepayment risk, changes in relative values of asset sectors and individual
securities and loans, changes in credit quality outlook and other relevant
factors. See the "Investments" section of Note 2 of Notes to Consolidated
Financial Statements for the accounting policies for the investment portfolios.
The objective of portfolio management is to maximize returns, taking into
account interest rate and credit risks. Insurance asset/liability management
includes strategies to minimize exposure to loss as interest rates and economic
and market conditions change. As a result, the fixed maturity portfolio has
modest exposure to call and prepayment risk and the vast majority of mortgage
holdings are fixed rate mortgages that carry yield maintenance and prepayment
provisions.
Insurance Group assets with interest rate risk include fixed maturities and
mortgage loans that make up 84.2% of the carrying value of General Account
Investment Assets at December 31, 2002. As part of its asset/liability
management, quantitative analyses are used to model the impact various changes
in interest rates have on assets with interest rate risk. The table that follows
shows the impact an immediate 100 basis point increase in interest rates at
December 31, 2002 and 2001 would have on the fair value of fixed maturities and
mortgage loans:
7A-1
INTEREST RATE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------------------------- ------------------------------------
BALANCE AFTER BALANCE AFTER
FAIR +100 BASE FAIR +100 BASIS
VALUE POINT CHANGE VALUE POINT CHANGE
------------------- ------------------- ---------------- -------------------
Continuing Operations:
Fixed maturities:
Fixed rate........................ $ 25,485.2 $ 24,234.9 $ 22,932.6 $ 21,813.0
Floating rate..................... 1,206.6 1,206.6 738.4 738.4
Mortgage loans...................... 4,070.0 4,054.6 4,438.5 4,265.8
Other Discontinued Operations:
Fixed maturities:
Fixed rate........................ $ 722.7 $ 687.8 $ 559.6 $ 527.3
Mortgage loans...................... 94.7 92.8 171.6 167.8
Holding Company Group:
Fixed maturities:
Fixed rate........................ $ 56.6 $ 56.3 $ 88.7 $ 85.6
Floating rate..................... 1.2 1.1 1.7 1.7
A 100 basis point fluctuation in interest rates is a hypothetical rate scenario
used to demonstrate potential risk; it does not represent management's view of
future market changes. While these fair value measurements provide a
representation of interest rate sensitivity of fixed maturities and mortgage
loans, they are based on various portfolio exposures at a particular point in
time and may not be representative of future market results. These exposures
will change as a result of ongoing portfolio activities in response to
management's assessment of changing market conditions and available investment
opportunities.
The investment portfolios also have direct holdings of public and private equity
securities. In addition, the General Account is exposed to equity price risk
from the excess of Separate Accounts assets over Separate Accounts liabilities.
The following table shows the potential exposure from those equity security
investments, measured in terms of fair value, to an immediate 10% drop in equity
prices from those prevailing at December 31, 2002 and 2001:
EQUITY PRICE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------------------------------- ------------------------------------
BALANCE AFTER BALANCE AFTER
FAIR -10% EQUITY FAIR -10% EQUITY
VALUE PRICE CHANGE VALUE PRICE CHANGE
------------------ --------------------- -------------- ---------------------
Insurance Group:
Continuing operations.............. $ 37.2 $ 33.5 $ 61.4 $ 55.3
Discontinued Operations............ .9 .8 1.2 1.1
Excess of Separate Accounts assets
over Separate Accounts
liabilities...................... 128.3 115.5 71.7 64.5
Holding Company Group................ $ 27.0 $ 24.3 $ 5.0 $ 4.5
A 10% decrease in equity prices is a hypothetical scenario used to calibrate
potential risk and does not represent management's view of future market
changes. The fair value measurements shown are based on the equity securities
portfolio exposures at a particular point in time and these exposures will
change as a result of ongoing portfolio activities in response to management's
assessment of changing market conditions and available investment opportunities.
7A-2
At years end 2002 and 2001, the aggregate carrying value of policyholders
liabilities were $37,922.7 million and $35,414.7 million, respectively,
including $14,542.6 million and $12,245.9 million of liabilities, respectively,
related to the General Account's investment contracts. The aggregate fair value
of those investment contracts at years end 2002 and 2001 were $15,092.0 million
and $12,498.8 million, respectively. The impact of a relative 1% decrease in
interest rates would be an increase in the fair value of those investment
contracts to $15,751.6 million and $12,636.5 million, respectively. Those
investment contracts represent only a portion of total policyholders
liabilities. As such, meaningful assessment of net market risk exposure cannot
be made by comparing the results of the invested assets sensitivity analyses
presented herein to the potential exposure from the policyholders liabilities
quantified in this paragraph.
Asset/liability management is integrated into many aspects of the Insurance
Group's operations, including investment decisions, product development and
determination of crediting rates. As part of its risk management process,
numerous economic scenarios are modeled, including cash flow testing required
for insurance regulatory purposes, to determine if existing assets would be
sufficient to meet projected liability cash flows. Key variables include
policyholder behavior, such as persistency, under differing crediting rate
strategies. On the basis of these more comprehensive analyses, management
believes there is no material solvency risk to Equitable Life with respect to
interest rate movements up or down of 100 basis points from year end 2002 levels
or with respect to a 10% drop in equity prices from year end 2002 levels.
As more fully described in Notes 2 and 16 of Notes to Consolidated Financial
Statements, various traditional derivative financial instruments are used to
manage exposure to fluctuations in interest rates, including interest rate caps
and floors to hedge crediting rates on interest-sensitive products, and interest
rate futures to offset a decline in interest rates between receipt of funds and
purchase of appropriate assets. To minimize credit risk exposure associated with
its derivative transactions, each counterparty's credit is appraised and
approved and risk control limits and monitoring procedures are applied. Credit
limits are established and monitored on the basis of potential exposures which
take into consideration current market values and estimates of potential future
movements in market values given potential fluctuations in market interest
rates.
While notional amount is the most commonly used measure of volume in the
derivatives market, it is not used by the Insurance Group as a measure of risk
because the notional amount greatly exceeds the possible credit and market loss
that could arise from such transactions. Mark to market exposure is a
point-in-time measure of the value of a derivative contract in the open market.
A positive value indicates existence of credit risk for the Insurance Group
because the counterparty would owe money to the Insurance Group if the contract
were closed. Alternatively, a negative value indicates the Insurance Group would
owe money to the counterparty if the contract were closed. If there is more than
one derivative transaction outstanding with a counterparty, a master netting
arrangement exists with the counterparty. In that case, the market risk
represents the net of the positive and negative exposures with the single
counterparty. In management's view, the net potential exposure is the better
measure of credit risk.
At years end 2002 and 2001, the net market value exposures of the Insurance
Group's derivatives were $11.9 million and $6.9 million, respectively. There
were no swaps outstanding at either year-end. The table that follows shows the
interest rate sensitivity of those derivatives, measured in terms of fair value.
These exposures will change as a result of ongoing portfolio and risk management
activities.
7A-3
INSURANCE GROUP - DERIVATIVE FINANCIAL INSTRUMENTS
(IN MILLIONS, EXCEPT FOR WEIGHTED AVERAGE TERM)
WEIGHTED
AVERAGE BALANCE AFTER BALANCE AFTER
NOTIONAL TERM -100 BASIS FAIR +100 BASIS
AMOUNT (YEARS) POINT CHANGE VALUE POINT CHANGE
--------------- -------------- ----------------- ---------------- -------------------
DECEMBER 31, 2002
Options:
Caps................... $ 5,050.0 .89 $ 0.0 $ 0.0 $ 0.5
Floors................. 4,000.0 3.81 10.0 8.7 0.7
Futures ................. 49.8 .22 3.2 3.2 3.2
----------- -------------- ------------- --------------
Total.................... $ 9,099.8 2.17 $ 13.2 $ 11.9 $ 4.4
=========== ==== ============== ============= ==============
December 31, 2001
Options:
Caps................... $ 6,675.0 1.65 $ 2.7 $ 7.0 $ 17.8
Floors................. 20.4 .24 (.1) (.1) (.1)
----------- -------------- ------------- --------------
Total.................... $ 6,695.4 1.65 $ 2.6 $ 6.9 $ 17.7
=========== ==== ============== ============= ==============
In addition to the traditional derivatives discussed above, the Insurance Group
has purchased reinsurance contracts to mitigate the risk associated with the
impact of potential market fluctuations on future policyholder elections of GMIB
features contained in certain annuity contracts. These reinsurance contracts are
considered derivatives under SFAS No. 133 and were reported at their fair values
of $120.0 million at December 31, 2002. The potential fair value exposure to an
immediate 10% drop in equity prices from those prevailing at December 31, 2002
would increase the balance of these reinsurance contracts to $177.0 million.
At the end of 2002 and of 2001, the aggregate fair values of long-term debt
issued by Equitable Life and the Holding Company Group were $2.54 billion and
$2.51 billion, respectively. The table below shows the potential fair value
exposure to an immediate 100 basis point decrease in interest rates from those
prevailing at the end of 2002 and of 2001.
INTEREST RATE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2002 DECEMBER 31, 2001
-------------------------------------- --------------------------------------
BALANCE AFTER BALANCE AFTER
FAIR -100 BASIS FAIR -100 BASIS
VALUE POINT CHANGE VALUE POINT CHANGE
----------------- -------------------- ------------------ -------------------
Continuing Operations:
Fixed rate........................ $ 657.6 $ 690.0 $ 629.6 $ 663.4
Floating rate..................... 248.3 248.3 248.3 248.3
Other Discontinued Operations:
Floating rate..................... $ 101.7 $ 101.7 $ 101.7 $ 101.7
Holding Company Group:
Fixed rate...................... $ 1,533.4 $ 1,634.5 $ 1,529.3 $ 1,630.4
7A-4
PART II, ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
AXA FINANCIAL, INC.
Report of Independent Accountants......................................................................... F-1
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2002 and 2001................................................. 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
Report of Independent Accountants on Consolidated Financial Statement Schedules........................... F-51
Consolidated Financial Statement Schedules:
Schedule I - Summary of Investments - Other than Investments in Related Parties,
December 31, 2002....................................................................................... F-52
Schedule II - Balance Sheets (Parent Company), December 31, 2002 and 2001................................. F-53
Schedule II - Statements of Earnings (Parent Company),
Years Ended December 31, 2002, 2001 and 2000............................................................ F-54
Schedule II - Statements of Cash Flows (Parent Company),
Years Ended December 31, 2002, 2001 and 2000............................................................ F-55
Schedule III - Supplementary Insurance Information,
Years Ended December 31, 2002, 2001 and 2000............................................................ F-56
Schedule IV - Reinsurance, Years Ended December 31, 2002, 2001 and 2000................................... F-59
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................................ $ (283.6) $ 1,462.5 $ 331.0
================= ================= =================
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.
F-9
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.
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 is 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
F-10
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
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.
F-11
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.
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
F-12
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
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.
F-13
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.
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.
F-14
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.
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
F-15
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.
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 lock-out 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 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.
F-16
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".
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
================= ================ =================
F-19
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.
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 $315.3 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.
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)
================= ================ =================
F-22
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) (2.2) (31.6)
----------------- ---------------- -----------------
Earnings from Other
Discontinued Operations.......................... $ 5.6 $ 43.9 $ 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
=====================
F-27
The GMIB reinsurance contracts are considered derivatives and are reported
at fair value (see Note 14). 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
revolving credit facility with a group of commercial banks and other
lenders that replaced three 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 funding of the payments of sales commissions to
financial intermediaries. 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 has 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 shares 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
F-31
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
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.
F-34
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 $17.9 million and $18.4 million in 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. Substantially 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.
F-35
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.
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
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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.
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 guaranteed various obligations of SCB LLC incurred in the
ordinary course of its business up to $125.0 million in the event SCB
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LLC is unable to meet these obligations. At December 31, 2002, Alliance
was not required to perform under the agreement and had no liability
outstanding in connection with the agreement.
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
F-41
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
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
F-42
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
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.
F-43
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 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 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 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 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 substantially 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 amended complaint 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 and AXA Financial's management is
unable to estimate the impact, if any, that the outcome of these actions
may have on its consolidated results of operations or financial
position.
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] on 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 Alliance's results of operations or financial
F-44
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 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 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 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.
F-45
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
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
F-46
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
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)
<c>
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 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 from Continuing
Operations, as Restated......................... $ 127.6 $ 204.0 $ 262.6
================= ================ ======================
Net earnings, 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, 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
REPORT OF INDEPENDENT ACCOUNTANTS ON
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
AXA Financial, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 4, 2003 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the financial statement schedules listed in Item
15(A)(2) of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 4, 2003
F-51
AXA FINANCIAL, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2002
ESTIMATED CARRYING
TYPE OF INVESTMENT COST (A) FAIR VALUE VALUE
---------------- ----------------- -----------------
(IN MILLIONS)
Fixed maturities:
U.S. government, agencies and authorities........... $ 895.5 $ 979.6 $ 979.6
State, municipalities and political subdivisions.... 197.6 215.5 215.5
Foreign governments................................. 231.8 268.4 268.4
Public utilities.................................... 2,579.8 2,704.6 2,704.6
All other corporate bonds........................... 19,977.0 21,177.5 21,177.5
Redeemable preferred stocks......................... 923.7 991.0 991.0
---------------- ----------------- -----------------
Total fixed maturities.............................. 24,805.4 26,336.6 26,336.6
---------------- ----------------- -----------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............ 76.7 72.4 72.4
Mortgage loans on real estate.......................... 3,746.2 4,070.1 3,746.2
Real estate............................................ 334.0 XXX 334.0
Real estate acquired in satisfaction of debt........... 268.8 XXX 268.8
Real estate joint ventures............................. 114.5 XXX 114.5
Policy loans........................................... 4,035.6 4,728.2 4,035.6
Other limited partnership interests.................... 679.0 679.0 679.0
Other invested assets.................................. 1,331.6 1,331.6 1,331.6
---------------- ----------------- -----------------
Total Investments...................................... $ 35,391.8 $ 37,217.9 $ 36,918.7
================ ================= =================
(A) Cost for fixed maturities represents original cost, reduced by repayments
and writedowns and adjusted for amortization of premiums or accretion of
discount; cost for equity securities represents original cost reduced by
writedowns; cost for other limited partnership interests represents
original cost adjusted for equity in earnings and reduced by distributions.
F-52
AXA FINANCIAL, INC.
SCHEDULE II
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 2002 AND 2001
2002 2001
----------------- ----------------
(IN MILLIONS)
ASSETS
Investment in consolidated subsidiaries................................ $ 8,627.9 $ 7,983.2
Fixed maturities available for sale, at estimated fair value
(amortized costs, $43.3 and $79.5)................................. 47.3 81.0
Other invested assets.................................................. 33.6 11.7
----------------- ----------------
Total investments................................................ 8,708.8 8,075.9
Cash and cash equivalents.............................................. 144.3 136.8
Loans to affiliates.................................................... 6.9 9.9
Intangible assets, net................................................. 564.1 558.2
Federal income taxes receivable........................................ 185.7 362.4
Other assets........................................................... 464.3 421.5
----------------- ----------------
TOTAL ASSETS........................................................... $ 10,074.1 $ 9,564.7
================= ================
LIABILITIES
Short-term and long-term debt.......................................... $ 1,451.0 $ 1,506.6
Liability for employee benefit plans................................... 916.6 905.6
Accrued liabilities.................................................... 213.4 327.9
----------------- ----------------
Total liabilities................................................ 2,581.0 2,740.1
----------------- ----------------
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............................. $ 10,074.1 $ 9,564.7
================= ================
The financial information of AXA Financial, Inc. (Parent Company) should be read
in conjunction with the Consolidated Financial Statements and Notes thereto. For
information regarding Capital Stock, see Note 12 of Notes to Consolidated
Financial Statements.
F-53
AXA FINANCIAL, INC.
SCHEDULE II
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------------- ----------------- ---------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES
Equity in earnings (loss) from continuing operations
of consolidated subsidiaries before cumulative
effect of accounting change........................... $ 663.7 $ 546.9 $ (195.7)
Net investment income (loss)............................. 24.2 20.0 (76.4)
Investment (losses) gains, net........................... (9.1) (.8) 78.8
----------------- ----------------- -----------------
Total revenues..................................... 678.8 566.1 (193.3)
----------------- ----------------- -----------------
EXPENSES
Interest expense......................................... 121.1 132.4 135.6
Expenses related to AXA's minority interest acquisition.. - - 48.7
Amortization of goodwill and intangible assets........... 3.1 27.9 14.2
General and administrative expenses...................... 23.7 42.7 29.1
----------------- ----------------- -----------------
Total expenses..................................... 147.9 203.0 227.6
----------------- ----------------- -----------------
Earnings (loss) from continuing operations before
Federal income taxes ................................. 530.9 363.1 (420.9)
Federal income tax benefit............................... 25.2 21.3 83.6
----------------- ----------------- -----------------
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......................... - - 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
================= ================= =================
F-54
AXA FINANCIAL, INC.
SCHEDULE II
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
----------------- ----------------- ---------------
(DOLLARS IN MILLIONS)
Net earnings............................................. $ 528.6 $ 424.8 $ 2,415.4
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Equity in net earnings of subsidiaries.............. (636.2) (587.3) (239.1)
Gain on disposal of the discontinued Investment
Banking and Brokerage segment..................... - - (2,317.9)
Dividends from subsidiaries......................... 584.8 1,802.4 288.5
Investment losses (gains), net...................... 9.1 .8 (78.8)
Change in accrued liability for AXA minority
interest acquisition.............................. - (349.9) 349.9
Change in Federal income tax receivable............. 174.7 (1,028.1) (215.5)
Other............................................... (170.0) 33.0 (90.0)
----------------- ----------------- -----------------
Net cash provided by operating activities................ 491.0 295.7 112.5
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments.............................. 8.4 24.0 47.1
Sales.................................................. 1.0 .1 2,048.4
Proceeds from sale of equity investee.................. - - 1,880.5
Loans to affiliates.................................... 3.0 - (3,000.0)
Purchase of Alliance Units............................. (1.3) - (1,600.0)
Other purchases........................................ (1.0) - (11.0)
Net change in short-term investments................... (2.4) 16.1 (14.1)
Contribution to subsidiaries........................... (119.8) - -
Other.................................................. 5.8 (5.2) (10.1)
------------- -------------- -------------
Net cash (used) provided by investing activities......... (106.3) 35.0 (659.2)
----------------- ----------------- -----------------
Cash flows from financing activities:
Additions to long-term debt............................ - - 476.2
Repayment of long-term debt............................ (56.2) (46.0) -
(Decrease) increase in short-term debt................. (.6) (250.3) 230.6
Dividends paid to shareholders......................... (325.0) (200.0) (43.4)
Proceeds from issuance of common stock................. - - 176.0
Purchase of treasury stock............................. - - (138.7)
Other.................................................. 4.6 9.7 -
----------------- ----------------- -----------------
Net cash (used) provided by financing activities......... (377.2) (486.6) 700.7
----------------- ----------------- -----------------
Change in cash and cash equivalents...................... 7.5 (155.9) 154.0
Cash and cash equivalents, beginning of year............. 136.8 292.7 138.7
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year................... $ 144.3 $ 136.8 $ 292.7
================= ================= =================
Supplemental cash flow information
Interest Paid.......................................... $ 114.7 $ 125.0 $ 118.2
================= ================= =================
Income Taxes (Refunded) Paid........................... $ (144.0) $ 938.3 $ 294.3
================= ================= =================
F-55
AXA FINANCIAL, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2002
FUTURE POLICY POLICY AMORTIZATION
DEFERRED BENEFITS CHARGES (1) POLICYHOLDERS' OF DEFERRED (2)
POLICY POLICYHOLDERS' AND OTHER AND NET BENEFITS AND POLICY OTHER
ACQUISITION ACCOUNT POLICYHOLDERS' PREMIUM INVESTMENT INTEREST ACQUISITION OPERATING
SEGMENT COSTS BALANCE FUNDS REVENUE INCOME CREDITED COST EXPENSE
- ---------------------- ------------- -------------- ---------------- --------- ----------- -------------- -------------- ---------
(IN MILLIONS)
Financial Advisory/
Insurance........... $ 5,801.0 $ 23,037.5 $ 13,975.7 $ 2,260.7 $ 2,351.2 $ 3,006.5 $ 296.7 $1,226.3
Investment
Management......... - - - - 19.4 - - 2,222.3
Consolidation/
Elimination......... - - - - 23.1 - - (76.2)
---------- ---------- ----------- --------- --------- ---------- --------- --------
Total................. $ 5,801.0 $ 23,037.5 $ 13,975.7 $ 2,260.7 $ 2,393.7 $ 3,006.5 $ 296.7 $3,372.4
========== ========== =========== ========= ========= ========== ========= ========
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-56
AXA FINANCIAL, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2001
FUTURE POLICY POLICY AMORTIZATION
DEFERRED BENEFITS CHARGES (1) POLICYHOLDERS' OF DEFERRED (2)
POLICY POLICYHOLDERS' AND OTHER AND NET BENEFITS AND POLICY OTHER
ACQUISITION ACCOUNT POLICYHOLDERS' PREMIUM INVESTMENT INTEREST ACQUISITION OPERATING
SEGMENT COSTS BALANCE FUNDS REVENUE INCOME CREDITED COST EXPENSE
- -------------------- ------------- -------------- ---------------- -------- ----------- ------------- ------------- ---------
(IN MILLIONS)
Financial Advisory/
Insurance.......... $ 5,513.7 $ 20,939.1 $ 13,542.7 $ 2,362.2 $ 2,349.8 $ 2,868.6 $ 287.9 $ 1,354.4
Investment
Management........ - - - - 46.6 - - 2,507.6
Consolidation/
Elimination........ - - - - 26.7 - - (90.0)
---------- ---------- ----------- --------- ---------- ---------- --------- ---------
Total................ $ 5,513.7 $ 20,939.1 $ 13,542.7 $ 2,362.2 $ 2,423.1 $ 2,868.6 $ 287.9 $ 3,772.0
========== ========== =========== ========= ========== ========== ========= =========
(1) Net investment income is based upon specific identification of
portfolios within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-57
AXA FINANCIAL, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2000
POLICY AMORTIZATION
CHARGES (1) POLICYHOLDERS' OF DEFERRED (2)
AND NET BENEFITS AND POLICY OTHER
PREMIUM INVESTMENT INTEREST ACQUISITION OPERATING
SEGMENT REVENUE INCOME CREDITED COST EXPENSE
- --------------------------------------- --------------- --------------- ---------------- ----------------- ----------------
(IN MILLIONS)
Financial Advisory/Insurance........... $ 2,588.3 $ 2,585.3 $ 3,108.8 $ 309.0 $ 1,978.6
Investment Management.................. - 58.3 - - 1,980.8
Consolidation/Elimination.............. - 24.6 - - (120.3)
--------------- --------------- ---------------- ------------------ ----------------
Total.................................. $ 2,588.3 $ 2,668.2 $ 3,108.8 $ 309.0 $ 3,839.1
=============== =============== ================ ================= ================
(1) Net investment income is based upon specific identification of
portfolios within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-58
AXA FINANCIAL, INC.
SCHEDULE IV
REINSURANCE (A)
AT AND FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------------- ---------------- ----------------- --------------- ---------------
(DOLLARS IN MILLIONS)
2002
Life Insurance In-force...... $ 264,465.6 $ 89,413.1 $ 42,228.6 $ 217,281.1 19.44%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities............... $ 803.3 $ 86.8 $ 145.7 $ 862.2 16.90%
Accident and health....... 151.3 104.0 35.7 83.0 43.01%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 954.6 $ 190.8 $ 181.4 $ 945.2 19.19%
================= ================ ================= ===============
2001
Life Insurance In-force...... $ 263,375.6 $ 75,190.5 $ 42,640.4 $ 230,825.5 18.47%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities............... $ 830.2 $ 63.6 $ 138.5 $ 905.1 15.30%
Accident and health....... 159.8 109.5 64.5 114.8 56.18%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 990.0 $ 173.1 $ 203.0 $ 1,019.9 19.90%
================= ================ ================= ===============
2000
Life Insurance In-force...... $ 260,762.0 $ 54,418.0 $ 42,588.0 $ 248,932.0 17.11%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities............... $ 939.2 $ 52.6 $ 130.8 $ 1,017.4 12.86%
Accident and health....... 164.6 70.4 63.4 157.6 40.23%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 1,103.8 $ 123.0 $ 194.2 $ 1,175.0 16.53%
================= ================ ================= ===============
(A) Includes amounts related to the discontinued group life and health business.
F-59
PART II, ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
9-1
PART III, ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I to Form 10-K.
10-1
PART III, ITEM 11.
EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I to Form 10-K.
11-1
PART III, ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Omitted pursuant to General Instruction I to Form 10-K.
12-1
PART III, ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I to Form 10-K.
13-1
PART III, ITEM 14.
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of AXA Financial's
disclosure controls and procedures as of December 31, 2002. Based on that
evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that AXA Financial's disclosure controls and
procedures are effective. There have been no significant changes in AXA
Financial's internal controls or in other factors that could significantly
affect internal controls subsequent to December 31, 2002.
14-1
PART IV, ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Consolidated
Financial Statements and Schedules on page FS-1.
2. Consolidated Financial Statement Schedules
The consolidated financial statement schedules are listed in the Index
to Consolidated Financial Statements and Schedules on page FS-1.
3. Exhibits:
The exhibits are listed in the Index to Exhibits that begins on page E-1.
(B) Reports on Form 8-K
1. On August 14, 2002, the Holding Company furnished a current report on
Form 8-K relating to the certifications made by its Chief Executive
Officer and Chief Financial Officer as required by Section 906 of the
Sarbanes-Oxley Act of 2002.
2. On September 4, 2002, the Holding Company furnished a current report on
Form 8-K relating to a discussion of DAC amortization by Vice Chairman
of the Board and Chief Financial Officer, Stanley B. Tulin, to security
analysts on September 3, 2002.
3. On November 13, 2002, the Holding Company furnished a current report on
Form 8-K relating to the certifications made by its Chief Executive
Officer and Chief Financial Officer as required by Section 906 and
Section 302 of the Sarbanes-Oxley Act of 2002.
4. On November 15, 2002, the Holding Company furnished a current report on
Form 8-K relating to a discussion on GMDB features of certain of the
Insurance Group's variable annuity products by Vice Chairman of the
Board and Chief Financial Officer, Stanley B. Tulin, to security
analysts on November 14, 2002.
5. On February 27, 2003, the Holding Company furnished a current report on
Form 8-K relating to a discussion on DAC amortization and GMDB and GMIB
reserves by Vice Chairman of the Board and Chief Financial Officer,
Stanley B. Tulin, to security analysts on February 27, 2003.
15-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, AXA Financial, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 20, 2003 AXA FINANCIAL, INC.
By: /s/ Christopher M. Condron
-----------------------------------------------
Name: Christopher M. Condron
President and Chief Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Chairman of the Board, Director March , 2003
- --------------------------------------------
Henri de Castries
/s/ Christopher M. Condron President and Chief Executive Officer, March 20, 2003
- -------------------------------------------- Director
Christopher M. Condron
/s/ Stanley B. Tulin Vice Chairman of the Board and March 20, 2003
- -------------------------------------------- Chief Financial Officer
Stanley B. Tulin
/s/ Alvin H. Fenichel Senior Vice President and Controller March 20, 2003
- --------------------------------------------
Alvin H. Fenichel
Director March , 2003
- --------------------------------------------
Claude Bebear
Director March , 2003
- --------------------------------------------
Bruce W. Calvert
Director March , 2003
- --------------------------------------------
John S. Chalsty
/s/ Francoise Colloc'h Director March 20, 2003
- --------------------------------------------
Francoise Colloc'h
/s/ Claus-Michael Dill Director March 20, 2003
- --------------------------------------------
Claus-Michael Dill
/s/ Joseph L. Dionne Director March 20, 2003
- --------------------------------------------
Joseph L. Dionne
Director March , 2003
- --------------------------------------------
Jean-Rene Fourtou
/s/ John C. Graves Director March 20, 2003
- --------------------------------------------
John C. Graves
/s/ Donald J. Greene Director March 20, 2003
- --------------------------------------------
Donald J. Greene
S-1
/s/ Anthony J. Hamilton Director March 20, 2003
- -------------------------------------------
Anthony J. Hamilton
/s/ Nina Henderson Director March 20, 2003
- -------------------------------------------
Nina Henderson
/s/ James F. Higgins Director March 20, 2003
- -------------------------------------------
James F. Higgins
/s/ W. Edwin Jarmain Director March 20, 2003
- -------------------------------------------
W. Edwin Jarmain
/s/ Christina Johnson Director March 20, 2003
- -------------------------------------------
Christina Johnson
/s/ Scott D. Miller Director March 20, 2003
- -------------------------------------------
Scott D. Miller
/s/ Joseph H. Moglia Director March 20, 2003
- -------------------------------------------
Joseph H. Moglia
/s/ Peter J. Tobin Director March 20, 2003
- -------------------------------------------
Peter J. Tobin
S-2
CERTIFICATIONS
I, Christopher M. Condron, President and Chief Executive Officer of AXA
Financial, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of AXA Financial, Inc. (the
"Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have identified
for the Registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003 /s/ Christopher M. Condron
------------------------------------------
Christopher M. Condron
President and Chief Executive Officer
C-1
I, Stanley B. Tulin, Vice Chairman of the Board and Chief Financial Officer of
AXA Financial, Inc., certify that:
1) I have reviewed this annual report on Form 10-K of AXA Financial, Inc. (the
"Registrant");
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4) The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5) The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of Registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have identified
for the Registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6) The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003
/s/ Stanley B. Tulin
-----------------------------------------
Stanley B. Tulin
Vice Chairman of the Board and
Chief Financial Officer
C-2
INDEX TO EXHIBITS
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
2.1 Purchase Agreement dated April 10, 1997, Filed as Exhibit 2 to the registrant's Form
between Equitable Life and Lend Lease 10-Q for the quarter ended March 31, 1997
Corporation Limited and incorporated herein by reference
2.2 Acquisition Agreement dated as of June 20, Filed as Exhibit 2.1 to Alliance's annual
2000, amended and restated as of October report on Form 10-K for the year ended
2, 2000, among Alliance, Alliance Holding, December 31, 2000 and incorporated herein by
Alliance Capital Management LLC, reference
Bernstein, Bernstein Technologies Inc.,
SCB Partners Inc., Sanford C. Bernstein &
Co., LLC, and SCB LLC
2.3 Purchase Agreement dated as of June 20, Filed as Exhibit 10.18 to Alliance's annual
2000 by and among Alliance, the Holding report on Form 10-K for the year ended
Company and Bernstein December 31, 2000 and incorporated herein by
reference
2.4 Financing Agreement dated as of June 20, Filed as Exhibit 10.19 to Alliance's
2000 between the Holding Company and Alliance annual report on Form 10-K for
the year ended December 31, 2000
and incorporated herein by reference
2.5 Letter Agreement dated as of June 20, 2000 Filed as Exhibit 10.20 to Alliance's annual
between the Holding Company and Bernstein report on Form 10-K for the year ended
December 31, 2000 and incorporated herein by
reference
2.6 Stock Purchase Agreement dated as of Filed as Exhibit 2.1 to the registrant's Current
August 30, 2000 among CSG, AXA, Report on Form 8-K dated November 14, 2000
Equitable Life, AXA Participations Belgium and incorporated herein by reference
and the Holding Company
2.7 Letter Agreement dated as of October 6, Filed as Exhibit 2.2 to the registrant's Current
2000 to the Stock Purchase Agreement Report on Form 8-K dated November 14, 2000
among CSG, AXA, Equitable Life, AXA and incorporated herein by reference
Participations Beligium and the Holding
Company
2.8 Agreement and Plan of Merger dated as of Filed as Exhibit 2.1 to AXA's Form F-4
October 17, 2000 among AXA, AXA Registration Statement (No. 333-50438),
Merger Corp. and the Holding Company included as Annex A thereto, dated November
21, 2000 and incorporated herein by reference
2.9 Certificate of Merger of AXA Merger Corp. Filed as Exhibit 2.1 to the registrant's
with and into the Holding Company dated annual report on Form 10-K for the year ended
January 2, 2001 December 31, 2000
3.1 Restated Certificate of Incorporation of Filed as Exhibit 4.01(a) to Post-Effective
the Holding Company Amendment No. 1 to the registrant's
Form S-3 Registration Statement
(No. 333-03224), dated May 29, 1997 and
incorporated herein by reference
E-1
TAG
NUMBER DESCRIPTION METHOD OF FILING VALUE
- ------------ -------------------------------------------- ------------------------------------------------ ----------
3.2 Amendment to Restated Certificate of Filed as Exhibit 4.01(g) to Post-Effective
Incorporation of the Holding Company Amendment No. 1 to the registrant's
Form S-3 Registration Statement
(No. 333-03224), dated May 27, 1997 and
incorporated herein by reference
3.3 Corrected Certificate of Amendment of Filed as Exhibit 3 to the registrant's Current
Restated Certificate of Incorporation of Report on Form 8-K dated September 1, 1999 and
the Holding Company incorporated herein by reference
3.4 Amendment to the Restated Certificate of Filed as Exhibit 3.4 to the registrant's
Incorporation of the Holding Company dated Form 10-Q for the quarter ended June 30, 2000
May 19, 2000 and incorporated herein by reference
3.5 By-laws of the Holding Company, as amended Filed as Exhibit 3.3 to the registrant's
effective March 23, 2000 annual report on Form 10-K for the year ended
December 31, 1999 and incorporated herein by
reference
4.1 Form of Certificate for the Holding Filed as Exhibit 4(c) to the registrant's
Company's Common Stock, par value $.01 per Form S-1 Registration Statement
share (No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
4.2 Indenture, dated as of December 1, 1993, Filed as Exhibit 4.02 to the registrant's
from the Holding Company to Chemical Bank, Form S-4 Registration Statement
as Trustee (No. 33-73102), dated December 17, 1993 and
incorporated herein by reference
4.3 First Supplemental Indenture, dated as of Filed as Exhibit 4.03 to the registrant's
December 1, 1993, from the Holding Company Form S-4 Registration Statement
to Chemical Bank, as Trustee (No. 33-73102), dated December 17, 1993 and
incorporated herein by reference
4.4 Form of Second Supplemental Indenture Filed as Exhibit 4.04 to the registrant's
Form S-4 Registration Statement
(No. 33-73102), dated December 17, 1993 and
incorporated herein by reference
4.5 Form of Third Supplemental Indenture, Filed as Exhibit 4.05 to the registrant's
dated as of December 8, 1994 from the Current Report on Form 8-K dated December 1,
Holding Company to Chemical Bank, as 1994 and incorporated herein by reference
Trustee
4.6 Fourth Supplemental Indenture, dated Filed as Exhibit 4.18(a) to
April 1, 1998, from the Holding Company to Current Report on Form 8-K dated April 7,
The Chase Manhattan Bank (formerly 1998 and incorporated herein by reference
known as Chemical Bank), as Trusteee,
together with forms of global Senior Note
and global Senior Indenture
E-2
TAG
NUMBER DESCRIPTION METHOD OF FILING VALUE
- ------------ -------------------------------------------- ------------------------------------------------ ----------
4.7 Subordinated Indenture, dated as of Filed as Exhibit 4.10 to the registrant's
October 22, 1994, between the Holding Current Report on Form 8-K dated December 19,
Company and Shawmut Bank Connecticut, 1994 and incorporated herein by reference
National Association, as Trustee
4.8 First Supplemental Indenture, dated as of Filed as Exhibit 4.11 to the registrant's Current
October 22, 1994, between the Holding Report on Form 8-K dated December 19, 1994
Company and Shawmut Bank Connecticut, and incorporated herein by reference
National Association, as Trustee
4.9 Fifth Supplemental Indenture, dated July Filed as Exhibit 4.18(d) to the registrant's
28, 2000, from the Holding Company to The Current Report on Form 8-K dated July 31, 2000
Chase Manhattan Bank (formerly known as and incorporated herein by reference
Chemical Bank), as Trustee, together with
the form of global Senior Note
9.1(a) Voting Trust Agreement dated as of May 12, Filed as Exhibit 9 to the registrant's
1992, among AXA, Claude Bebear, Patrice Form S-1 Registration Statement
Garnier and Henri de Clermont-Tonnerre (No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
9.1(b) First Amendment dated January 22, 1997 to Filed as Exhibit 9(b) to the registrant's
the Voting Trust Agreement dated as of annual report on Form 10-K for the year ended
May 12, 1992 December 31, 1997 and incorporated herein by
reference
9.1(c) Amended and Restated Voting Trust Filed herewith
Agreement dated May 12, 2002
10.1 Cooperation Agreement, dated as of July Filed as Exhibit 10(d) to the registrant's
18, 1991, as amended among Equitable Life, Form S-1 Registration Statement
the Holding Company and AXA (No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.2 Letter Agreement, dated May 12, 1992, Filed as Exhibit 10(e) to the registrant's
among Equitable Life, the Holding Company Form S-1 Registration Statement
and AXA (No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.3 Amended and Restated Reinsurance Filed as Exhibit 10(o) to the registrant's
Agreement, dated as of March 29, 1990, Form S-1 Registration Statement
between Equitable Life and First Equicor (No. 33-48115), dated May 26, 1992 and
Life Insurance Company incorporated herein by reference
10.4 The Amended and Restated Transfer Filed as Exhibit 19 to the registrant's
Agreement dated as of February 23, 1993, Statement on Schedule 13D dated July 29, 1993
as amended and restated on May 28, 1993, and incorporated herein by reference
among Alliance, Equitable Capital and
Equitable Investment Corporation
E-3
TAG
NUMBER DESCRIPTION METHOD OF FILING VALUE
- ------------ -------------------------------------------- ------------------------------------------------ ----------
10.5+ Management Compensation Arrangements with Filed as Exhibit 10.22 to the registrant's
Messrs. Bebear and de Castries and Ms. annual report on Form 10-K for the year ended
Colloc'h December 31, 1997 and incorporated herein by
reference
10.6 Exchange Agreement dated as of Filed as Exhibit 10.01 to registrant's Form
September 27, 1994, between AXA and the S-4 Registration Statement (No. 33-84462),
Holding Company dated September 28, 1994 and incorporated
herein by reference
10.7(a) Lease, dated as of July 20, 1995, between Filed as Exhibit 10.26(a) to the registrant's
1290 Associates, L.L.C. and Equitable Life annual report on Form 10-K for the year ended
December 31, 1996 and incorporated herein by
reference
10.7(b) First Amendment of Lease Agreement, dated Filed as Exhibit 10.26(b) to the registrant's
as of December 28, 1995, between 1290 annual report on Form 10-K for the year ended
Associates, L.L.C. and Equitable Life December 31, 1996 and incorporated herein by
reference
10.7(c) Amended and Restated Company Lease Filed as Exhibit 10.26(c) to the registrant's
Agreement (Facility Realty), made as of annual report on Form 10-K for the year ended
May 1, 1996, by and between Equitable Life December 31, 1996 and incorporated herein
by and the IDA reference
10.7(d) Amended and Restated Company Lease Filed as Exhibit 10.26(d) to the registrant's
Agreement (Project Property), made and annual report on Form 10-K for the year ended
entered into as of May 1, 1996, by and December 31, 1996 and incorporated herein by
between the IDA, Equitable Life and EVLICO reference
10.7(e) Second Amendment of Lease, dated as of Filed as Exhibit 10.1 to the registrant's
May 1, 1997, between 1290 Partners L.P. and Form 10-Q for the quarter ended June 30, 1997
Equitable Life and incorporated herein by reference
10.8 Agreement dated April 24, 1996, between Filed as Exhibit 10.27 to the registrant's
Equitable Life and Mr. Stanley B. Tulin Form 10-Q for the quarter ended March 31, 1997
and incorporated herein by reference
10.9 Employment Agreement dated May 11, 2001 Filed as Exhibit 10.16 to the registrant's
between the Holding Company, Equitable Form 10-Q for the quarter ended June 30, 2001
Life and Christopher M. Condron and incorporated by reference herein
10.10 Restated Employment Agreement dated as of Filed as Exhibit 10.17 to the registrant's
July 5, 2001 between the Holding Company, Form 10-Q for the quarter ended September 30,
Equitable Life and Stanley B. Tulin 2001 and incorporated herein by reference
E-4
TAG
NUMBER DESCRIPTION METHOD OF FILING VALUE
- ------------ -------------------------------------------- ------------------------------------------------ ----------
18 Preferability Letter from Filed herewith
PricewaterhouseCoopers LLP
21 Subsidiaries of the registrant Omitted pursuant to General Instruction I of
Form 10-K
23 Consent of PricewaterhouseCoopers LLP Filed herewith
99.1 Section 906 Certification made by the Filed herewith
registrant's Chief Executive Officer
99.2 Section 906 Certification made by the Filed herewith
registrant's Chief Financial Officer
+ Denotes executive compensation plans and arrangements.
E-5