UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2003 Commission File No. 0-25280
- ------------------------------------------- ---------------------------------
The Equitable Life Assurance Society of the United States
(Exact name of registrant as specified in its charter)
New York 13-5570651
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
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None
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
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Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
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Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at November 14, 2003
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Common Stock, $1.25 par value 2,000,000
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction H (1) (a) and
(b) of Form 10-Q and is therefore filing this form with the Reduced Disclosure
Format.
Page 1 of 33
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
o Consolidated Balance Sheets, September 30, 2003
and December 31, 2002.................................... 3
o Consolidated Statements of Earnings, Three Months
and Nine Months Ended September 30, 2003 and 2002........ 4
o Consolidated Statements of Shareholder's Equity,
Nine Months Ended September 30, 2003 and 2002............ 5
o Consolidated Statements of Cash Flows,
Nine Months Ended September 30, 2003 and 2002............ 6
o Notes to Consolidated Financial Statements................ 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations ("Management Narrative")......... 25
Item 3: Quantitative and Qualitative Disclosures About Market Risk*... 31
Item 4: Controls and Procedures....................................... 31
PART II OTHER INFORMATION
Item 1: Legal Proceedings............................................. 32
Item 2: Changes in Securities......................................... 32
Item 3: Defaults Upon Senior Securities............................... 32
Item 4: Submission of Matters to a Vote of Security Holders........... 32
Item 5: Other Information............................................. 32
Item 6: Exhibits and Reports on Form 8-K.............................. 32
SIGNATURES............................................................. 33
*Omitted pursuant to General Instruction H to Form 10-Q.
2
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, December 31,
2003 2002
---- ----
(In Millions)
ASSETS
Investments:
Fixed maturities available for sale,
at estimated fair value................... $ 28,874.5 $ 26,278.9
Mortgage loans on real estate .............. 3,534.5 3,746.2
Equity real estate ......................... 710.9 717.3
Policy loans ............................... 3,971.2 4,035.6
Other equity investments ................... 762.1 720.3
Other invested assets ...................... 1,013.8 1,327.6
------------- ------------
Total investments ...................... 38,867.0 36,825.9
Cash and cash equivalents .................... 1,623.6 269.6
Cash and securities segregated,
at estimated fair value .................. 1,368.6 1,174.3
Broker-dealer related receivables ............ 1,952.1 1,446.2
Deferred policy acquisition costs ............ 6,160.7 5,801.0
Goodwill and other intangible assets, net .... 3,519.7 3,503.8
Amounts due from reinsurers .................. 2,456.5 2,351.7
Loans to affiliates, at estimated fair value . 419.7 413.0
Other assets ................................. 3,830.6 4,028.7
Separate Accounts assets ..................... 48,583.8 39,012.1
------------ ------------
Total Assets ................................. $ 108,782.3 $ 94,826.3
============ ============
LIABILITIES
Policyholders' account balances .............. $ 25,308.1 $ 23,037.5
Future policy benefits and other
policyholders liabilities .................. 14,006.5 13,975.7
Broker-dealer related payables ............... 1,151.2 731.0
Customers related payables ................... 2,022.6 1,566.8
Amounts due to reinsurers .................... 919.3 867.5
Short-term and long-term debt ................ 1,448.1 1,274.7
Federal income taxes payable ................. 2,257.0 2,006.4
Other liabilities ............................ 1,951.3 1,751.8
Separate Accounts liabilities ................ 48,459.9 38,883.8
Minority interest in equity of consolidated
subsidiaries ............................. 1,753.6 1,816.6
Minority interest subject to redemption
rights ................................... 517.8 515.4
------------ ------------
Total liabilities ...................... 99,795.4 86,427.2
------------ ------------
Commitments and contingencies (Note 12)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value, 2.0 million
shares authorized, issued and outstanding... 2.5 2.5
Capital in excess of par value................ 4,837.9 4,812.8
Retained earnings............................. 3,133.7 2,902.7
Accumulated other comprehensive income........ 1,012.8 681.1
------------ ------------
Total shareholder's equity.............. 8,986.9 8,399.1
------------ ------------
Total Liabilities and Shareholder's Equity.... $ 108,782.3 $ 94,826.3
============ ============
See Notes to Consolidated Financial Statements.
3
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(In Millions)
REVENUES
Universal life and investment-type
product policy fee income................. $ 347.8 $ 323.0 $ 997.8 $ 994.2
Premiums.................................... 203.5 227.8 661.5 699.7
Net investment income....................... 597.6 595.2 1,773.3 1,766.5
Investment gains (losses), net.............. 3.4 (73.0) (92.8) (85.8)
Commissions, fees and other income.......... 705.5 787.9 2,019.5 2,442.3
---------- ---------- --------- ----------
Total revenues........................ 1,857.8 1,860.9 5,359.3 5,816.9
---------- ---------- --------- ----------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits..................... 391.9 582.5 1,271.1 1,632.0
Interest credited to policyholders'
account balances.......................... 245.0 244.6 723.0 739.7
Compensation and benefits................... 317.4 347.1 967.0 932.2
Commissions................................. 270.6 185.4 756.5 584.3
Distribution plan payments.................. 94.7 95.0 275.7 304.0
Amortization of deferred sales commissions.. 52.5 56.2 157.8 174.0
Interest expense............................ 21.7 29.6 62.9 79.9
Amortization of deferred policy
acquisition costs......................... 106.7 72.3 282.3 213.6
Capitalization of deferred policy
acquisition costs......................... (272.8) (184.7) (754.9) (556.4)
Rent expense................................ 44.2 42.8 126.6 126.4
Amortization of other
intangible assets, net.................... 5.5 5.3 16.5 15.8
Other operating costs and expenses.......... 369.8 150.1 761.2 586.0
---------- ---------- --------- ----------
Total benefits and other deductions...... 1,647.2 1,626.2 4,645.7 4,831.5
---------- ---------- --------- ----------
Earnings from continuing operations before
Federal income taxes and minority
interest.................................. 210.6 234.7 713.6 985.4
Federal income tax (expense) benefit........ (64.3) 111.9 (177.1) (68.8)
Minority interest in net income of
consolidated subsidiaries................. (11.5) (79.5) (156.3) (280.5)
---------- ---------- --------- ----------
Earnings from continuing operations......... 134.8 267.1 380.2 636.1
Earnings from discontinued operations, net
of Federal income taxes................... .7 19.4 .8 19.0
Cumulative effect of accounting changes,
net of Federal income taxes............... - - - (33.1)
---------- ---------- --------- ----------
Net Earnings................................ $ 135.5 $ 286.5 $ 381.0 $ 622.0
========== ========== ========= ==========
See Notes to Consolidated Financial Statements.
4
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---- ----
(In Millions)
SHAREHOLDER'S EQUITY
Common stock, at par value, beginning of year
and end of period ................................... $ 2.5 $ 2.5
--------- ---------
Capital in excess of par value, beginning of year as
previously reported................................... 4,753.8 4,694.6
Prior period adjustment related to deferred Federal
income taxes ......................................... 59.0 59.0
--------- ---------
Capital in excess of par value, beginning of year as
restated ............................................. 4,812.8 4,753.6
Increase in additional paid in capital in excess
of par value ......................................... 25.1 5.8
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Capital in excess of par value, end of period ......... 4,837.9 4,759.4
--------- ---------
Retained earnings, beginning of year as previously
reported ............................................. 2,740.6 2,653.2
Prior period adjustment related to deferred Federal
income taxes ......................................... 162.1 162.1
--------- ---------
Retained earnings, beginning of year as restated ...... 2,902.7 2,815.3
Net earnings .......................................... 381.0 622.0
Shareholder dividends paid ............................ (150.0) (250.0)
--------- ---------
Retained earnings, end of period ...................... 3,133.7 3,187.3
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Accumulated other comprehensive income,
beginning of year .................................... 681.1 215.4
Other comprehensive income ............................ 331.7 316.8
--------- ---------
Accumulated other comprehensive income, end of period.. 1,012.8 532.2
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Total Shareholder's Equity, End of Period ............. $8,986.9 $8,481.4
========= =========
See Notes to Consolidated Financial Statements.
5
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
2003 2002
---- ----
(In Millions)
Net earnings......................................... $ 381.0 $ 622.0
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Interest credited to policyholders'
account balances............................... 723.0 739.7
Universal life and investment-type product
policy fee income.............................. (997.8) (994.2)
Net change in broker-dealer and customer related
receivables/payables........................... 238.4 (257.5)
Investment losses, net........................... 92.8 85.8
Change in segregated cash and securities, net.... (194.2) 267.2
Change in deferred policy acquisition costs...... (472.6) (342.8)
Change in future policy benefits................. (84.5) 283.4
Change in property and equipment................. (40.5) (57.4)
Change in Federal income tax payable............. 74.3 (47.7)
Change in accounts payable and accrued expenses.. 91.1 68.3
Minority interest in net income of consolidated
subsidiaries................................... 156.3 280.5
Change in fair value of guaranteed minimum
income benefit reinsurance contract............ 58.0 (247.0)
Amortization of other intangible assets, net..... 16.5 15.8
Other, net....................................... 480.9 150.5
---------- ----------
Net cash provided by operating activities............ 522.7 566.6
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Cash flows from investing activities:
Maturities and repayments.......................... 3,335.4 2,048.3
Sales.............................................. 3,689.3 6,508.9
Purchases.......................................... (8,805.2) (9,735.6)
Change in short-term investments................... 354.4 (393.5)
Other, net......................................... 48.8 168.7
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Net cash used by investing activities................ (1,377.3) (1,403.2)
---------- ----------
Cash flows from financing activities:
Policyholders'account balances:
Deposits......................................... 4,615.1 3,308.2
Withdrawals and transfers to Separate Accounts... (2,240.2) (1,375.1)
Net change in short-term financings................ 183.6 61.0
Shareholder dividends paid......................... (150.0) (250.0)
Other, net......................................... (199.9) (279.0)
---------- ----------
Net cash provided by financing activities............ 2,208.6 1,465.1
---------- ----------
Change in cash and cash equivalents.................. 1,354.0 628.5
Cash and cash equivalents, beginning of year......... 269.6 680.0
---------- ----------
Cash and Cash Equivalents, End of Period............. $ 1,623.6 $ 1,308.5
========== ==========
Supplemental cash flow information
Interest Paid..................................... $ 59.9 $ 56.4
========== ==========
Income Taxes Paid................................. $ 92.5 $ 91.8
========== ==========
See Notes to Consolidated Financial Statements.
6
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The preparation of the accompanying unaudited consolidated financial statements
in conformity with U.S. GAAP requires management to make estimates and
assumptions (including normal, recurring accruals) that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. The accompanying unaudited interim consolidated financial
statements reflect all adjustments necessary in the opinion of management to
present fairly the consolidated financial position of the Company and its
consolidated results of operations and cash flows for the periods presented. All
significant intercompany transactions and balances except those with
discontinued operations (see Note 8) have been eliminated in consolidation.
These statements should be read in conjunction with the consolidated financial
statements of the Company for the year ended December 31, 2002. The results of
operations for the nine months ended September 30, 2003 are not necessarily
indicative of the results to be expected for the full year.
The terms "third quarter 2003" and "third quarter 2002" refer to the three
months ended September 30, 2003 and 2002, respectively. The terms "first nine
months of 2003" and "first nine months of 2002" refer to the nine months ended
September 30, 2003 and 2002, respectively.
Certain reclassifications have been made in the amounts presented for prior
periods to conform these periods with the current presentation.
2) MERGER AGREEMENT
On September 17, 2003, the Holding Company and The MONY Group Inc. ("MONY")
announced that their Boards of Directors had approved a transaction under which
the Holding Company would acquire 100% of MONY in a cash transaction valued at
approximately $1.5 billion. Under the terms of the merger agreement, MONY
shareholders will receive $31.00 for each share of MONY common stock. The
transaction is subject to MONY shareholder and certain regulatory approvals, and
certain other conditions, and is expected to close in first quarter 2004.
3) PRIOR PERIOD ADJUSTMENT
A review by the Company of Federal income tax assets and liabilities in second
quarter 2003 identified an overstatement of the deferred Federal income tax
liability related to the years ended December 31, 2000 and earlier. As a result,
the Federal income tax liability as of December 31, 2001 and 2002 has been
reduced by $221.1 million and the consolidated shareholder's equity as of such
dates has been increased by $221.1 million, with no impact on the consolidated
statements of earnings for the years ended December 31, 2000, 2001, and 2002, or
any prior period after the adoption on January 1, 1992 of SFAS No. 109,
"Accounting for Income Taxes". This adjustment has been reported in the
accompanying financial statements as an increase in consolidated shareholder's
equity as of January 1, 2002.
4) ACCOUNTING CHANGES
Effective January 1, 2002, the Company 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 the Company'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 decrease Earnings from continuing operations in third quarter
2002 by $78.6 million, net of Federal income taxes of $42.3 million, and
decrease Earnings from continuing operations in the first nine months of 2002 by
$156.7 million, net of Federal income taxes of $84.3 million.
7
The Company adopted SFAS No. 150, "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity," which is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. SFAS No. 150 establishes standards for classification and measurement
of certain financial instruments with characteristics of both liabilities and
equity in the statement of financial position. SFAS No. 150 had no material
impact on the Company's financial position upon adoption.
5) NEW ACCOUNTING PRONOUNCEMENTS
In July 2003, the AICPA issued SOP 03-1, "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts". SOP 03-1 provides guidance on separate account presentation,
accounting for an insurance enterprise's proportionate interest in a separate
account, and gains and losses on the transfer of assets from the general account
to a separate account. Additionally, SOP 03-1 provides guidance for determining
the balance that accrues to the contract holder for long-duration insurance or
investment contracts that are subject to SFAS No. 97, "Accounting and Reporting
by Insurance Enterprises for Certain Long-Duration Contracts and for Realized
Gains and Losses from the Sale of Investments". SOP 03-1 is effective for
financial statements for fiscal years beginning after December 15, 2003.
Management is currently assessing the impact of adoption of SOP 03-1 on the
Company's results of operations and financial position.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". It addresses when it is appropriate to consolidate financial
interests in any variable interest entity ("VIE"), a new term to define a
business structure that either (i) does not have equity investors with voting or
other similar rights or (ii) 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
No. 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.
Transition to the consolidation requirements of FIN No. 46 began in first
quarter 2003, with immediate application to all new VIEs created after January
31, 2003, and was expected to be followed by application beginning in third
quarter 2003 to all existing VIEs. However, in October 2003, the FASB deferred
the latter transition date to December 31, 2003 and, likewise, extended the
related transitional requirements to disclose 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 September 30, 2003, the Insurance Group's General Account had significant
variable interests totaling $98.2 million. Variable interests totaling $40.5
million and $57.7 million are reflected in the consolidated balance sheets as
fixed maturities (collaterialized debt obligations) and other equity investments
(principally, investment limited partnerships), respectively, and are subject to
ongoing review for impairment in value. These variable interests and
approximately $21.7 million of funding commitments to the investment limited
partnerships at September 30, 2003 represent the Insurance Group's maximum
exposure to loss from its direct involvement with these VIEs. The Insurance
Group has no further economic interests in these VIEs in the form of related
guarantees, derivatives or similar instruments and obligations. As a result of
management's review and the FASB's implementation guidance to date, it is not
likely that the Insurance Group will be required to consolidate these VIEs.
Management of Alliance has reviewed its investment management agreements, its
investments in and other financial arrangements with certain entities which hold
client assets under management of approximately $44 billion. These include
certain mutual fund products domiciled in Luxembourg, India, Japan, Singapore
8
and Australia (collectively "Offshore Funds"), hedge funds, structured products,
group trusts and joint ventures, to determine the entities that Alliance would
be required to consolidate under FIN No. 46. As a result of its review, which is
still ongoing, Alliance's management believes Alliance is not required to
consolidate any VIEs created after January 31, 2003, but it is reasonably
possible that Alliance will be required to consolidate one Offshore Fund, an
investment in a joint venture arrangement including the joint venture's funds
under management, and three hedge funds as of December 31, 2003. These entities
have client assets under management totaling approximately $725 million.
However, Alliance's total investment in these entities is approximately
$1 million and its maximum exposure to loss is limited to its investments and
prospective investment management fees. Consolidation of these entities would
result in increases in Alliance's assets, principally investments, and in its
liabilities, principally minority interests in consolidated entities, of
approximately $725 million at September 30, 2003. Alliance derives no direct
benefit from client assets under management other than investment management
fees and cannot utilize those assets in its operations.
Alliance has significant variable interests in certain other VIEs with
approximately $11 billion in client assets under management. However, these VIEs
do not require consolidation because it has been determined that Alliance is not
the primary beneficiary. Alliance's maximum exposure to loss to these entities
is limited to a nominal investment and prospective investment management fees.
At December 31, 2003, the Company is required by FIN No. 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. FIN No. 46 is highly complex and requires management to make
significant estimates and judgments as to its application. Management's review
is ongoing while the FASB is continuing to develop answers to implementation
issues. It is not presently known whether the Company will be required to
consolidate or provide any disclosure for any additional VIEs.
6) INVESTMENTS
Investment valuation allowances for mortgage loans and equity real estate and
changes thereto follow:
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
(In Millions)
Balances, beginning of year ............................. $ 55.0 $ 87.6
Additions charged to income ............................. 10.2 26.4
Deductions for writedowns and asset dispositions ........ (10.2) (9.1)
Deduction for transfer of held for sale real estate
to held for production of income real estate ......... (31.5) --
-------- ---------
Balances, End of Period ................................. $ 23.5 $ 104.9
======== =========
Balances, end of period comprise:
Mortgage loans on real estate ......................... $ 21.1 $ 23.0
Equity real estate .................................... 2.4 81.9
-------- ---------
Total ................................................... $ 23.5 $ 104.9
======== =========
For the third quarters and first nine months of 2003 and of 2002, investment
income is shown net of investment expenses of $44.6 million, $36.4 million,
$153.1 million and $137.6 million, respectively.
As of September 30, 2003 and December 31, 2002, respectively, fixed maturities
classified as available for sale had amortized costs of $26,653.1 million and
$24,751.8 million. Other equity investments included trading securities having
carrying values of $1.1 million and $1.1 million and costs of $2.4 million and
$3.3 million at September 30, 2003 and December 31, 2002, respectively, and
other equity securities with carrying values of $15.7 million and $36.2 million
and costs of $15.1 million and $37.6 million as of September 30, 2003 and
December 31, 2002, respectively.
9
In the third quarters and first nine months of 2003 and of 2002, respectively,
net unrealized and realized holding (losses) gains on trading account equity
securities of $0 million, $(.3) million, $2.3 million and $.3 million were
included in net investment income in the consolidated statements of earnings.
For the first nine months of 2003 and 2002, proceeds received on sales of fixed
maturities classified as available for sale amounted to $3,655.7 million and
$5,765.5 million, respectively. Gross gains of $82.7 million and $86.0 million
and gross losses of $33.0 million and $137.0 million were realized on these
sales for the first nine months of 2003 and 2002, respectively. Unrealized net
investment gains related to fixed maturities classified as available for sale
increased by $694.3 million during the first nine months of 2003, resulting in a
balance of $2,221.4 million at September 30, 2003.
Impaired mortgage loans along with the related investment valuation allowances
for losses follow:
September 30, December 31,
2003 2002
---- ----
(In Millions)
Impaired mortgage loans with investment
valuation allowances ...................... $ 166.8 $ 111.8
Impaired mortgage loans without investment
valuation allowances....................... 18.7 20.4
-------- ---------
Recorded investment in impaired
mortgage loans ............................ 185.5 132.2
Investment valuation allowances ............. (21.1) (23.4)
-------- ---------
Net Impaired Mortgage Loans ................. $ 164.4 $ 108.8
======== =========
During the first nine months of 2003 and 2002, respectively, the Company's
average recorded investment in impaired mortgage loans was $169.3 million and
$141.7 million. Interest income recognized on these impaired mortgage loans
totaled $8.8 million and $7.5 million for the first nine months of 2003 and
2002, 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 September 30, 2003 and December 31, 2002,
respectively, the carrying value of mortgage loans on real estate that had been
classified as nonaccrual loans was $147.6 million and $91.1 million.
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, the Company has developed an actuarial calculation of the expected timing
of the Closed Block earnings.
If the actual cumulative earnings from the Closed Block are greater than the
expected cumulative earnings, only the expected earnings will be recognized in
net income. Actual cumulative earnings in excess of expected cumulative earnings
at any point in time are recorded as a policyholder dividend obligation because
they will ultimately be paid to Closed Block policyholders as an additional
policyholder dividend unless offset by future performance that is less favorable
than originally expected. If a policyholder dividend obligation has been
previously established and the actual Closed Block earnings in a subsequent
period are less than the expected earnings for that period, the policyholder
dividend obligation would be reduced (but not below zero). If, over the period
the policies and contracts in the Closed Block remain in force, the actual
cumulative earnings of the Closed Block are less than the expected cumulative
earnings, only actual earnings would be recognized in income from continuing
operations. If the Closed Block has insufficient funds to make guaranteed policy
benefit payments, such payments will be made from assets outside the Closed
Block.
Many expenses related to Closed Block operations, including amortization of DAC,
are charged to operations outside of the Closed Block; accordingly, net revenues
10
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.
Summarized financial information for the Closed Block is as follows:
September 30, December 31,
2003 2002
---- ----
(In Millions)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account
balances and other..................................... $ 8,970.0 $ 8,997.3
Policyholder dividend obligation ........................ 300.6 213.3
Other liabilities ....................................... 139.6 134.6
---------- ----------
Total Closed Block liabilities .......................... 9,410.2 9,345.2
---------- ----------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities available for sale, at estimated
fair value (amortized cost of $5,032.9
and $4,794.0) ......................................... 5,465.5 5,098.4
Mortgage loans on real estate ........................... 1,343.3 1,456.0
Policy loans ............................................ 1,398.7 1,449.9
Cash and other invested assets .......................... 94.8 141.9
Other assets ............................................ 197.6 219.9
---------- ----------
Total assets designated to the Closed Block ............. 8,499.9 8,366.1
---------- ----------
Excess of Closed Block liabilities over assets
designated to the Closed Block ......................... 910.3 979.1
Amounts included in accumulated other comprehensive
comprehensive income:
Net unrealized investment gains, net of deferred
Federal income tax of $46.2 and $31.8 and
policyholder dividend obligation
of $300.6 and $213.3 ............................... 85.7 59.1
---------- ----------
Maximum Future Earnings To Be Recognized From
Closed Block Assets and Liabilities ................... $ 996.0 $ 1,038.2
========== ==========
11
Closed Block revenues and expenses were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(In Millions)
REVENUES:
Premiums and other income ............... $ 118.1 $ 126.8 $ 378.0 $ 404.2
Investment income (net of investment
expenses of $.3, $.9, $2.0
and $4.6) .............................. 138.1 144.8 416.6 436.8
Investment losses, net .................. (10.6) (12.4) (40.7) (32.2)
--------- --------- --------- ---------
Total revenues .......................... 245.6 259.2 753.9 808.8
--------- --------- --------- ---------
BENEFITS AND
OTHER DEDUCTIONS:
Policyholders' benefits and dividends ... 215.0 235.7 674.6 735.0
Other operating costs and expenses ...... 4.5 4.5 12.9 14.0
--------- --------- --------- ---------
Total benefits and other deductions ..... 219.5 240.2 687.5 749.0
--------- --------- --------- ---------
Net revenues before
Federal income taxes ................... 26.1 19.0 66.4 59.8
Federal income taxes .................... (9.4) (7.7) (24.2) (24.3)
--------- --------- --------- ---------
Net Revenues ............................ $ 16.7 $ 11.3 $ 42.2 $ 35.5
========= ========= ========= =========
Reconciliation of the policyholder dividend obligation is as follows:
Nine Months Ended
September 30,
-------------
2003 2002
---- ----
(In Millions)
Balances, beginning of year .................. $ 213.3 $ 47.1
Unrealized investment gains .................. 87.3 163.3
-------- ---------
Balances, End of Period ...................... $ 300.6 $ 210.4
======== =========
12
8) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
September 30, December 31,
2003 2002
---- ----
(In Millions)
BALANCE SHEETS
Fixed maturities available for sale,
at estimated fair value (amortized cost
$651.2 and $677.8) .......................... $ 727.9 $ 722.7
Equity real estate ........................... 198.1 203.7
Mortgage loans on real estate ................ 67.2 87.5
Other equity investments ..................... 8.1 9.4
Other invested assets ........................ .2 .2
--------- ---------
Total investments ....................... 1,001.5 1,023.5
Cash and cash equivalents .................... 50.7 31.0
Other assets ................................. 125.2 126.5
--------- ---------
Total Assets ................................. $ 1,177.4 $1,181.0
========= =========
Policyholders liabilities .................... $ 889.1 $ 909.5
Allowance for future losses .................. 183.4 164.6
Other liabilities ............................ 104.9 106.9
--------- ---------
Total Liabilities ............................ $ 1,177.4 $1,181.0
========= =========
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(In Millions)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $4.4, $4.3, $15.8
and $13.8) .............................. $ 18.1 $ 16.3 $ 54.2 $ 56.9
Investment gains, net ..................... 1.7 6.1 1.9 44.7
Policy fees, premiums and
other income ........................... -- -- -- .2
-------- --------- -------- ----------
Total revenues ............................ 19.8 22.4 56.1 101.8
Benefits and other deductions ............. 23.3 27.1 69.7 74.9
(Losses charged) earnings credited to
allowance for future losses.............. (3.5) (4.7) (13.6) 26.9
-------- --------- -------- ----------
Pre-tax results from operations ........... -- -- -- --
Pre-tax earnings from releasing the
allowance for future losses ............. 1.0 29.9 1.2 29.2
Federal income tax expense ................ (.3) (10.5) (.4) (10.2)
-------- --------- -------- ----------
Income from Discontinued
Operations ............................. $ .7 $ 19.4 $ .8 $ 19.0
======== ========= ======== ==========
The Company's quarterly process for evaluating the allowance for future losses
applies the current period's results of discontinued operations against the
allowance, re-estimates future losses and adjusts the allowance, if appropriate.
These updated assumptions and estimates resulted in a strengthening or release
of the allowance in each of the periods presented above.
Management believes the allowance for future losses at September 30, 2003 is
adequate to provide for all future losses; however, the determination of the
allowance involves numerous estimates and subjective judgments regarding the
expected performance of Discontinued Operations Investment Assets. There can be
no assurance the losses provided for will not differ from the losses ultimately
realized. To the extent actual results or future projections of discontinued
operations differ from management's current estimates and assumptions underlying
the allowance for future losses, the difference would be reflected in the
13
consolidated statements of earnings in discontinued operations. In particular,
to the extent income, sales proceeds and holding periods for equity real estate
differ from management's previous assumptions, periodic adjustments to the loss
allowance are likely to result.
Valuation allowances of $4.4 million and $4.9 million on mortgage loans on real
estate were held at September 30, 2003 and December 31, 2002, respectively.
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 or premiums paid (adjusted for withdrawals);
b)Ratchet: the benefit is the greatest of current account value,
premiums paid (adjusted for withdrawals), or the highest account
value on any anniversary up to contractually specified ages
(adjusted for withdrawals);
c)Roll-Up: the benefit is the greater of current account value or
premiums paid (adjusted for withdrawals) accumulated at
contractually specified interest rates up to specified ages; or
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 2003:
GMDB GMIB Total
---- ---- -----
(In Millions)
Balance at December 31, 2002 ............... $ 128.4 $ 117.5 $ 245.9
Paid guarantee benefits .................. (54.4) -- (54.4)
Other changes in reserve ................. 14.1 (33.2) (19.1)
---------- --------- ----------
Balance at September 30, 2003 .............. $ 88.1 $ 84.3 $ 172.4
========== ========= ==========
Related GMDB reinsurance ceded amounts were:
GMDB
---------------------
(In Millions)
Balance at December 31, 2002 ................... $ 21.5
Paid guarantee benefits ceded ................ (15.0)
Other changes in reserve ..................... 14.0
---------
Balance at September 30, 2003 .................. $ 20.5
=========
The GMIB reinsurance contracts are considered derivatives and are reported at
fair value. At September 30, 2003 the Company had the following variable
contracts with guarantees. Note that since the Company's variable contracts with
GMDB guarantees may also offer GMIB guarantees in each contract, the GMDB and
GMIB amounts listed are not mutually exclusive:
14
Return
of
Premium Ratchet Roll-Up Combo Total
------- ------- ------- ------ -----
(Dollars In Millions)
GMDB:
Account value (1) .................. $ 25,004 $ 4,817 $ 7,362 $ 4,894 $42,077
Net amount at risk, gross .......... $ 3,357 $ 1,248 $ 2,554 $ 36 $ 7,195
Net amount at risk, net of amounts
reinsured ........................ $ 3,352 $ 846 $ 1,571 $ 36 $ 5,805
Average attained age of
contractholders .................. 49.6 59.4 61.5 59.8 51.7
Percentage of contractholders
over age 70 ...................... 7.1% 20.6% 25.4% 20.2% 10.1%
Range of guaranteed minimum return
rates ............................ N/A N/A 3-6% 3-6% N/A
GMIB:
Account value (2) .................. N/A N/A $ 5,320 $ 6,861 $12,181
Net amount at risk, gross .......... N/A N/A $ 859 $ -- $ 859
Net amount at risk, net of amounts
reinsured ........................ N/A N/A $ 224 $ -- $ 224
Weighted average years remaining
until annuitization .............. N/A N/A 4.9 10.0 7.2
Range of guaranteed minimum
return rates ..................... N/A N/A 3-6% 3-6% 3-6%
<FN>
(1) Included General Account balances of $11,430 million, $204 million, $211
million and $480 million, respectively, for a total of $12,325 million.
(2) Included General Account balances of $3 million and $693 million,
respectively, for a total of $696 million.
</FN>
For contracts with the GMDB feature, the net amount at risk in the event of
death is the amount by which the GMDB benefits exceed related account values.
For contracts with the GMIB feature, the net amount at risk in the event of
annuitization is defined as the amount by which the present value of the GMIB
benefits exceeds related account values, taking into account the relationship
between current annuity purchase rates and the GMIB guaranteed annuity purchase
rates.
In third quarter 2003, Equitable Life initiated a program to hedge certain risks
associated with the GMDB feature of the Accumulator series of annuity products
sold beginning April 2002 with a total account value and net amount at risk of
$10,752 million and $57 million, respectively, at September 30, 2003. This
hedging program currently utilizes exchange-traded, equity-based futures
contracts and requires dynamic management of those positions to minimize the
economic impact of unfavorable changes in GMDB exposure attributable to
movements in the equity markets.
10) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an estimated
annual effective tax rate. This rate is revised, if necessary, at the end of
each successive interim period to reflect the current estimate of the annual
effective tax rate.
In third quarter 2002, the Company recorded a $144.3 million tax benefit
resulting from the favorable treatment of certain tax matters related to
Separate Account investment activity arising during the 1997-2001 tax years and
a settlement with the IRS with respect to such tax matters for the 1992-1996 tax
years.
15
11) STOCK APPRECIATION RIGHTS
Following completion of the merger of AXA Merger Corp. with and into the Holding
Company, certain employees exchanged AXA ADR options for tandem Stock
Appreciation Rights and at-the-money AXA ADR options of equivalent intrinsic
value. The maximum obligation for the Stock Appreciation Rights is $73.3
million, based upon the underlying price of AXA ADRs at January 2, 2001, the
closing date of the aforementioned merger. The Company recorded an increase
(reduction) in the related Stock Appreciation Rights liability of $.5 million
and $(1.7) million for the third quarters of 2003 and 2002, and of $.7 million
and $(10.2) million for the first nine months of 2003 and 2002, respectively,
reflecting the variable accounting for the Stock Appreciation Rights, based on
the change in the market value of AXA ADRs for the respective periods ended
September 30, 2003 and 2002.
12) LITIGATION AND REGULATION
LITIGATION
New material legal proceedings and material developments in specific litigations
previously reported in the Company's Notes to Consolidated Financial Statements
for the year ended December 31, 2002 are described below:
In MCEACHERN, in March 2003, the parties settled the individual claims of the
plaintiffs and the action was dismissed with prejudice.
In MALHOTRA, in April 2003, plaintiffs filed a second amended complaint alleging
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.
The action purports to be on behalf of a class consisting of all persons who on
or after October 3, 1997 purchased an individual variable deferred annuity
contract, received a certificate to a group variable deferred annuity contract
or made an additional investment through such a contract, which contract was
used to fund a contributory retirement plan or arrangement qualified for
favorable income tax treatment. In May 2003, the defendants filed a motion to
dismiss the second amended complaint and that motion is currently pending.
All of the Mississippi Actions, including the agents' cross-claims, have been
settled and dismissed with prejudice.
In FISCHEL, in May 2003, plaintiffs' motion for an award of additional legal
fees from the settled claim settlement fund was denied by the District Court. In
May 2003, plaintiffs filed a notice of appeal from that order.
In HIRT, in March 2003, plaintiffs filed an amended complaint elaborating on the
remaining claims in the original complaint and adding additional class and
individual claims alleging that the adoption and announcement of the cash
balance formula and the subsequent announcement of changes in the application of
the cash balance formula failed to comply with ERISA. The parties agreed that
the new individual claims of the five named plaintiffs regarding the delivery of
announcements to them would be excluded from the class certification. In April
2003, defendants filed an answer to the amended complaint. By order dated May
2003, the District Court, as requested by the parties, certified the case as a
class action, including a sub-class of all current and former Plan participants,
whether active, inactive or retired, their beneficiaries or estates, who were
subject to a 1991 change in application of the cash balance formula. In July
2003, defendants filed a motion for summary judgment on the grounds that
plaintiffs' claims are barred by applicable statutes of limitations. In October
2003, the District Court denied that motion.
In January 2003, a putative class action entitled BERGER ET AL. V. AXA NETWORK,
LLC AND THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES was commenced
in the United States District Court for the Northern District of Illinois by two
former agents on behalf of themselves and other similarly situated present,
former and retired agents who, according to the complaint, "(a) were discharged
by Equitable Life from `statutory employee status' after January 1, 1999,
because of Equitable Life's adoption of a new policy stating that in any given
year, those who failed to meet specified sales goals during the preceding year
would not be treated as `statutory employees,' or (b) remain subject to
discharge from `statutory employee' status based on the policy applied by
Equitable Life." The complaint alleges that the company improperly "terminated"
the agents' full-time life insurance salesman statutory employee status in or
after 1999 by requiring attainment of minimum production credit levels for 1998,
16
thereby making the agents ineligible for benefits and "requiring" them to pay
Self-Employment Contribution Act taxes. The former agents, who assert claims for
violations of ERISA and 26 U.S.C. 3121, and breach of contract, seek declaratory
and injunctive relief, plus restoration of benefits and an adjustment of their
benefit plan contributions and payroll tax withholdings. In March 2003,
Equitable Life filed a motion to dismiss the complaint. In July 2003, the United
States District Court for the Northern District of Illinois granted in part and
denied in part Equitable Life's motion to dismiss the complaint, dismissing
plaintiffs' claims for violation of 26 U.S.C. 3121 and breach of contract.
Equitable Life has answered plaintiffs' remaining claim for violation of ERISA.
The case is currently in discovery.
In May 2003, a putative class action complaint entitled ECKERT V. THE EQUITABLE
LIFE ASSURANCE SOCIETY OF THE UNITED STATES was filed against The Equitable Life
Assurance Society of the United States in the United States District Court for
the Eastern District of New York, as a case related to the MALHOTRA action
described above. The complaint asserts a single claim for relief under Section
47(b) of the Investment Company Act of 1940 based on Equitable Life's alleged
failure to register as an investment company. According to the complaint,
Equitable Life was required to register as an investment company because it was
allegedly issuing securities in the form of variable insurance products and
allegedly investing its assets primarily in other securities. The plaintiff
purports to act on behalf of all persons who purchased or made an investment in
variable insurance products from Equitable Life on or after May 7, 1998. The
complaint seeks declaratory judgment permitting putative class members to elect
to void their variable insurance contracts; restitution of all fees and
penalties paid by the putative class members on the variable insurance products,
disgorgement of all revenues received by Equitable Life on those products, and
an injunction against the payment of any dividends by Equitable Life to the
Holding Company. In June 2003, Equitable Life filed a motion to dismiss the
complaint and that motion is currently pending.
Between September and October 2003, ten substantially similar putative class
action lawsuits were filed against AXA Financial (and in some cases AIMA
Acquisition Co., a wholly owned subsidiary of AXA Financial ("AIMA")), The MONY
Group Inc. ("MONY") and MONY's directors in the Court of Chancery of the State
of Delaware in and for New Castle County, entitled BEAKOVITZ V. AXA FINANCIAL,
INC., ET AL.; BELODOFF V. THE MONY GROUP INC., ET AL.; BRIAN V. THE MONY GROUP
INC., ET AL.; BRICKLAYERS LOCAL 8 AND PLASTERERS LOCAL 233 PENSION FUND V. THE
MONY GROUP, INC., ET AL.; CANTOR V. THE MONY GROUP INC., ET AL.; E.M. CAPITAL,
INC. V. THE MONY GROUP INC., ET AL.; GARRETT V. THE MONY GROUP INC., ET AL.;
LEBEDDA V. THE MONY GROUP INC., ET AL.; MARTIN V. ROTH, ET AL.; and MUSKAL V.
THE MONY GROUP INC., ET AL.. The complaints in these actions, all of which
purport to be brought on behalf of a class consisting of all MONY stockholders,
excluding the defendants and their affiliates, challenge the proposed merger of
MONY into AIMA and allege, among other things, that the $31.00 cash price per
share to be paid to MONY stockholders in connection with the proposed merger is
inadequate and that MONY's directors breached their fiduciary duties in
negotiating and approving the merger agreement. The complaints also allege that
AXA Financial, and in some cases AIMA, aided and abetted the alleged breaches of
fiduciary duty by MONY's directors. The complaints seek various forms of relief,
including damages and injunctive relief that would, if granted, prevent
completion of the merger. In September 2003, a joint motion was filed on behalf
of plaintiffs in six of the Delaware actions seeking to consolidate all actions.
In November 2003, the Court of Chancery signed an order consolidating the
actions. Also in November 2003, plaintiffs served a consolidated amended
complaint. Pursuant to stipulation, defendants must answer or otherwise move
against the complaint within 20 days of service.
In addition, AXA Financial, MONY and MONY's directors have been named in two
putative class action lawsuits filed in New York State Supreme Court in
Manhattan, entitled LAUFER V. THE MONY GROUP, ET AL. and NORTH BORDER
INVESTMENTS V. BARRETT, ET AL.. The complaints in these actions contain
allegations substantially similar to those in the Delaware cases, and likewise
purport to assert claims for breach of fiduciary duty against MONY's directors
and for aiding and abetting a breach of fiduciary duty against AXA Financial.
The complaints in these actions also purport to be brought on behalf of a class
consisting of all MONY stockholders, excluding the defendants and their
affiliates, and seek various forms of relief, including damages and injunctive
relief that would, if granted, prevent the completion of the merger. The parties
in each of these actions have agreed to extend defendants' time to answer.
Although the outcome of litigation cannot be predicted with certainty, the
Company's management believes that the ultimate resolution of the matters
described above should not have a material adverse effect on the consolidated
financial position of the Company. The Company's management cannot make an
estimate of loss, if any, or predict whether or not such litigations will have a
material adverse effect on the Company's consolidated results of operations in
any particular period.
17
In MILLER, in July 2003, the parties filed a stipulation providing that
plaintiffs would not seek to certify the case as a class action. Also in July
2003, plaintiffs filed a motion for leave to file a third amended complaint
("Third Amended Complaint"). Named as individual plaintiffs in the proposed
Third Amended Complaint are shareholders of the Alliance Premier Growth Fund,
the Alliance Quasar Fund, the Alliance Growth and Income Fund, the
AllianceBernstein Corporate Bond Fund, the AllianceBernstein Growth Fund, the
AllianceBernstein Balanced Shares Fund, and the AllianceBernstein Americas
Government Income Trust. The allegations and relief sought in the Third Amended
Complaint are virtually identical to the Second Amended Complaint, except
plaintiffs now specifically seek recovery of excessive advisory and distribution
fees paid by these seven funds to Alliance and AllianceBernstein Investment
Research and Management, Inc. ("ABIRM"; formerly known as Alliance Fund
Distributors, Inc.), respectively, for the period commencing one year prior to
the filing of the Amended Complaint in April 2001 through the date of final
judgment after trial, a time period likely to exceed four years. In September
2003, Alliance and ABIRM moved to dismiss the Third Amended Complaint. The case
is currently in discovery. Alliance and ABIRM believe that plaintiffs'
allegations in the Third Amended Complaint are without merit and intend to
vigorously defend against these allegations. At the present time, management of
Alliance and ABIRM 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 the Company'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 ENRON, a First Amended Consolidated Complaint ("Amended Consolidated
Complaint"), with substantially identical allegations as to Alliance, was filed
in May 2003. Alliance filed its answer in June 2003. In May 2003, plaintiffs
filed an Amended Motion for class certification. In October 2003, following the
completion of class discovery, Alliance filed its opposition to class
certification. The case is currently in discovery. Alliance believes the
allegations in the Amended Consolidated Complaint as to it are without merit and
intends to vigorously defend against these allegations. At the present time,
management of Alliance is unable to estimate the impact, if any, that the
outcome of this action may have on Alliance's results of operations or financial
condition, and the Company'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 JAFFE, in October 2003, the plaintiffs filed a motion for leave to file an
amended complaint ("First Amended Complaint"). The proposed First Amended
Complaint seeks to drop plaintiff's claim under Section 36 (b) of the ICA and
seeks to add claims against Alliance and Alfred Harrison for negligence and
negligent misrepresentation. Alliance and Alfred Harrison believe that
plaintiff's allegations in the Jaffe Complaint and the proposed First Amended
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 the Company'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 the SBA Complaint, in November 2003, the SBA filed a motion for leave to file
an amended complaint ("Amended Complaint"). The Amended Complaint alleges that
Alliance breached its contract with the SBA by investing in or continuing to
hold stocks for the SBA's investment portfolio that were not rated "1 rated,"
the highest rating that Alliance's research analysis could assign. The SBA also
seeks to add claims for negligent supervision and common law fraud. The case is
currently in discovery. Alliance believes the SBA's allegations in the SBA
Complaint and the proposed Amended Complaint are without merit and intends to
vigorously defend against these allegations. At the present time, management of
Alliance is unable to estimate the impact, if any, that the outcome of this
action may have on Alliance's results of operations or financial condition, and
the Company'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 August 2003, the Securities and Exchange Board of India ("SEBI") ordered that
Samir C. Arora, a former research analyst/portfolio manager of Alliance, refrain
from buying, selling or dealing in Indian securities. Until August 4, 2003, when
Mr. Arora announced his resignation from Alliance, he served as head of Asian
emerging markets equities and a fund manager of Alliance Capital Asset
Management (India) Pvt. Ltd. ("ACAML"), a fund management company 75% owned by
Alliance. The order states that Mr. Arora relied on unpublished price sensitive
information in making certain investment decisions on behalf of certain clients
18
of ACAML and Alliance, that there were failures to make required disclosures
regarding the size of certain equity holdings, and that Mr. Arora tried to
influence the sale of Alliance's stake in ACAML. Mr. Arora contested the
findings in the order by filing objections and at a personal hearing held on
August 28, 2003. In September 2003, SEBI issued an order confirming its previous
order against Mr. Arora. In October 2003, Mr. Arora filed an appeal with the
Securities Appellate Tribunal. Alliance is reviewing this matter and, at the
present time, management of Alliance does not believe its outcome will have a
material impact on Alliance's results of operations or financial condition, and
the Company's management does not believe its outcome will have a material
impact on the Company's consolidated results of operations or financial
position.
In September 2003, SEBI issued to Alliance a show cause notice and finding of
investigation (the "Notice"). The Notice requires Alliance to explain its
failure to make a disclosure filing as to the acquisition of shares of five (5)
Indian equity securities held at various times by Alliance (through sub-accounts
under foreign institutional investor licenses), ACAML and Alliance's local
Indian mutual fund. Regulation 7 of SEBI Regulations, 1997, Regulation 13 of
SEBI and Regulation 1992 and Section 15A of the SEBI Act require that disclosure
be made when the holdings of an investor (or a group of investors acting in
concert) in an Indian security either exceeds five percent (5%) of the
outstanding shares or changes by more than two percent (2%). In October 2003,
Alliance responded to the Notice. At the present time, management of Alliance
does not believe the outcome of this matter will have a material impact on
Alliance's results of operations or financial condition and the Company's
management does not believe its outcome will have a material impact on the
Company's consolidated results of operations or financial position.
In October 2003, a purported class action complaint entitled ERB ET AL. V.
ALLIANCE CAPITAL MANAGEMENT L.P. ET AL. ("Erb Complaint") was filed in the
Circuit Court of St. Clair County, State of Illinois against Alliance.
Plaintiff, purportedly a shareholder in the AllianceBernstein Premier Growth
Fund ("Fund"), alleges that Alliance breached unidentified provisions of the
Fund's prospectus and subscription and confirmation agreements that allegedly
required that every security bought for the Fund's portfolio must be a "1-rated"
stock, the highest rating that Alliance's analysts could assign. Plaintiff
alleges that Alliance impermissibly purchased shares of stocks that were not
1-rated. Plaintiff seeks rescission of all purchases of any non-1-rated stocks
Alliance made for the Fund over the past ten years, as well as an unspecified
amount of damages. Alliance has not yet responded to the Erb Complaint. Alliance
believes the plaintiff's allegations in the Erb Complaint are without merit and
intends to vigorously defend against these allegations. At the present time,
management of Alliance is unable to estimate the impact, if any, that the
outcome of this action may have on Alliance's results of operations or financial
condition, and the Company's management is unable to estimate the impact, if
any, that the outcome of this litigation may have on its consolidated results of
operations or financial position.
In October 2003, a putative class action complaint entitled HINDO ET AL. V.
ALLIANCEBERNSTEIN GROWTH & INCOME FUND ET AL. ("Hindo Complaint") was filed
against Alliance, Alliance Holding, ACMC, AXA Financial, the Alliance Bernstein
family of mutual funds ("AllianceBernstein Funds"), Gerald Malone and Charles
Schaffran (the "Alliance defendants"), and certain other defendants not
affiliated with Alliance. The Hindo Complaint was filed in the United States
District Court for the Southern District of New York by alleged shareholders of
two of the AllianceBernstein Funds. The Hindo Complaint alleges that certain of
the Alliance defendants failed to disclose that they improperly allowed certain
hedge funds and other unidentified parties to engage in late trading and market
timing of AllianceBernstein Fund securities, violating Sections 11 and 15 of the
Securities Act, Sections 10(b) and 20(a) of the Exchange Act, and Sections 206
and 215 of the Investment Advisers Act of 1940 (the "Advisers Act"). Plaintiffs
seek an unspecified amount of compensatory damages and rescission of their
contracts with Alliance, including recovery of all fees paid to Alliance
pursuant to such contracts. Between October 3 and November 13, 2003, twenty-one
additional lawsuits making factual allegations generally similar to those in the
Hindo Complaint were filed against Alliance and certain other defendants. AXA
Financial is named as a defendant in twenty of the twenty-two lawsuits. These
lawsuits include the Hindo Complaint and the following lawsuits:
a) Fifteen of the lawsuits were brought as class actions filed in Federal
court (thirteen in the United States District Court for the Southern
District of New York, and two in the United States District Court for the
District of New Jersey). Certain of these additional lawsuits allege claims
under the Securities Act, the Exchange Act and the Advisers Act, as well as
claims under Sections 36(a) and 36(b) of the ICA and common law. All of
these lawsuits are brought on behalf of shareholders of AllianceBernstein
Funds, except two class actions, brought on behalf of persons who
participated in Alliance's Profit Sharing Plan, which alleges claims under
Sections 404, 405 and 406 of The Employee Retirement Income Security Act of
19
1974. AXA Financial is named as a defendant in thirteen of these lawsuits,
as follows: AXA Financial is named as a defendant in eleven of these
lawsuits as a control person of Alliance and the AllianceBernstein Funds,
pursuant to Section 15 of the Securities Act of 1933; and with respect to
the two class actions brought on behalf of persons who participated in
Alliance's Profit Sharing Plan, AXA Financial is named as a defendant as a
Plan fiduciary.
b) A sixteenth class action was brought in state court in New York by an
alleged shareholder of an AllianceBernstein Fund. This lawsuit alleges
claims under common law and names AXA Financial as a defendant as a control
person of Alliance.
c) Three lawsuits were brought as derivative actions filed in Federal court
alleging claims under Section 36(b) of the ICA, the Exchange Act or common
law. Two of these actions were filed in the United States District Court
for the Eastern District of New York, and one in the United States District
Court for the District of New Jersey. These actions were brought
derivatively on behalf of certain AllianceBernstein Funds, with the
broadest lawsuits being brought derivatively on behalf of all
AllianceBernstein Funds. AXA Financial is named as a defendant as a control
person of Alliance.
d) A fourth derivative action was brought in state court in New York by an
alleged unitholder of Alliance Holding. The action was brought derivatively
on behalf of Alliance Holding, alleging a claim for breach of fiduciary
duty based on allegations that defendants failed to prevent late trading
and market timing of AllianceBernstein Fund securities. AXA Financial is
named as a defendant as a control person of Alliance. Further, on October
17, 2003, Alliance Holding received a letter from counsel for a different
alleged Alliance Holding unitholder, alleging that certain directors and
officers of Alliance Holding breached their fiduciary duties by knowingly
participating in or approving market timing trades of shares of the
AllianceBernstein Technology Fund. The letter demands that the Board of
Directors of Alliance Holding take action to remedy these alleged breaches
by commencing a civil action against each of the officers and directors
named in the letter to recover damages sustained by Alliance Holding as a
result of the alleged breaches.
e) A lawsuit was filed in Superior Court for the State of California, County
of Los Angeles alleging claims under Sections 17200 and 17303 of the
California Business & Professional Code. Pursuant to these statutes, the
action was brought on behalf of members of the general public of the State
of California based on a claim that late trading and market timing activity
amounted to an unfair business practice. AXA Financial is named as a
defendant as a control person of Alliance.
All of these lawsuits seek an unspecified amount of damages. At the present
time, management of Alliance and Alliance Holding are unable to estimate the
impact, if any, that the outcome of these actions may have on Alliance's or
Alliance Holding's results of operations or financial condition and the
Company'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.
As discussed above, private plaintiffs have sued Alliance in lawsuits alleging
among other things that late trading and market timing damaged these plaintiffs.
More lawsuits making similar allegations against Alliance may be filed.
In addition to the matters previously reported and those described above, the
Holding Company and its subsidiaries are involved in various legal actions and
proceedings in connection with their businesses. Some of the actions and
proceedings have been brought on behalf of various alleged classes of claimants
and certain of these claimants seek damages of unspecified amounts. While the
ultimate outcome of such matters cannot be predicted with certainty, in the
opinion of management no such matter is likely to have a material adverse effect
on the Company's consolidated financial position or results of operations.
However, it should be noted that the frequency of large damage awards, including
large punitive damage awards that bear little or no relation to actual economic
damages incurred by plaintiffs in some jurisdictions, continues to create the
potential for an unpredictable judgment in any given matter.
Regulation
Mutual Fund Investigations.
As has been publicly reported, the SEC and the Office of the New York State
Attorney General ("NYAG") are investigating practices in the mutual fund
industry identified as "market timing" and "late trading" of mutual fund shares.
Alliance is currently under investigation by these regulators for matters
20
relating to market timing transactions in shares of certain mutual funds
sponsored by Alliance. Certain other regulatory authorities are also conducting
investigations into these practices within the industry and have requested that
Alliance provide information to them.
Alliance has been cooperating with all of these authorities and has been
conducting its own internal investigation into these matters.
In addition, as discussed in "Litigation" above, numerous private plaintiff
lawsuits have been filed against Alliance making a variety of allegations
relating to market timing and late trading.
Appointment of the Special Committee - On September 29, 2003, the board of
directors of ACMC, the general partner of Alliance, appointed a special
committee (the "Special Committee") consisting of all of ACMC's independent
directors to direct and oversee a comprehensive review of the facts and
circumstances relating to the issues being investigated by the SEC and the NYAG.
The Special Committee is authorized to retain such advisers as it deems
necessary to assist it in the performance of its duties, and it has retained its
own legal counsel to participate in the internal investigation and to report
separately to the Special Committee.
Status of SEC and NYAG Investigations - Since late August, 2003, Alliance has
received multiple requests for information concerning these matters from the
SEC, the NYAG and other regulatory authorities. Upon receiving the initial
request, Alliance commenced its own internal investigation. As the internal
investigation has proceeded, Alliance has provided to the SEC and NYAG a large
number of documents and other information developed in its internal
investigation and has produced firm personnel for interviews and testimony.
As part of the SEC's investigation, on October 31, 2003, Alliance received a
WELLS notice from the SEC informing it that the staff of the SEC intended to
recommend that an enforcement action be brought against Alliance based on
alleged violations of various provisions of the Federal securities laws in
connection with market timing transactions. On November 10, 2003, in the context
of the ongoing discussions between Alliance and the SEC and NYAG, the SEC staff
accepted a request from counsel to the Special Committee that the SEC suspend
its WELLS notice, subject to possible reinstatement on short notice. Although
discussions are continuing between Alliance (with active participation by the
Special Committee) and the SEC and the NYAG, the WELLS notice may be reinstated
and enforcement action may be brought by the SEC and the NYAG against Alliance
at any time.
Initial Results of Internal Investigation, Activities of the Special Committee
and other Remedial Actions - To date, Alliance's internal investigation has
revealed that Alliance maintained relationships with certain investors who were
permitted to engage in market timing trades in certain domestic mutual funds
sponsored by Alliance in return for or in connection with making investments
(which were not actively traded) in other Alliance products, including hedge
funds and mutual funds, for which it receives advisory fees ("Market Timing
Relationships"). Alliance believes that these Market Timing Relationships
created conflicts of interest and that certain of the trades made pursuant to
these relationships had an adverse effect on some of its mutual fund
shareholders. These matters are the subject of the ongoing internal
investigation.
In one Market Timing Relationship involving permission granted to a third party
to execute market timing transactions in the AllianceBernstein Technology Fund
(the "Technology Fund") in return for the third party's investment in an
Alliance hedge fund, a conflict of interest arose because the same portfolio
manager managed both the Technology Fund and the hedge fund. The portfolio
manager allowed the third party to continue market timing transactions in the
Technology Fund beyond the time when that portfolio manager recognized that such
transactions were disruptive and possibly causing harm to other shareholders,
and subsequently acknowledged that he believed that such market timing
transactions had adversely affected the performance of the Technology Fund. In
late September, 2003, Alliance suspended the Technology Fund portfolio manager
and a second employee who was involved in selling Alliance hedge fund products
and was aware of the Market Timing Relationship with the third party. Alliance
has since ended the employment of both individuals.
Since its appointment, the Special Committee has participated in numerous
meetings and discussions of these matters, has actively directed the internal
investigation, and has made recommendations which in each case have been
implemented. In addition, at a special meeting of Alliance's board of directors
held on November 9, 2003, the Special Committee requested, and was granted,
21
authority to direct and oversee a broad review of the corporate governance
structure, policies and practices of Alliance and its mutual fund business, and
an examination of the extent of harm to shareholders in Alliance mutual funds
arising from inappropriate market timing transactions allowed by Alliance and
the appropriate restitution of such harm.
Following the recommendation of the Special Committee, Alliance requested and
received, on November 10, 2003, the resignations of John D. Carifa from his
position as President, Chief Operating Officer and Director of Alliance and as
the Chairman of the Board of its sponsored mutual funds, and of Michael J.
Laughlin as Chairman of ABIRM. Resignations were requested from these
individuals because they had supervisory responsibility for Alliance's mutual
fund business and had sufficient knowledge of certain market timing activities
to conclude they were inappropriate and had the potential to adversely affect
the funds and failed to take appropriate supervisory action. Other employees of
ABIRM have been and will be asked to resign.
In addition to these personnel actions and the other activities of the Special
Committee, Alliance has undertaken additional remedial actions. These actions
include:
o The institution of a substantially strengthened program applicable to
Alliance sponsored mutual funds designed to detect and block material
market timing or short duration trading.
o The amendment of Alliance's dealer agreements to require each dealer to
represent that it has the necessary policies and procedures to ensure
that no trades are taken after the close of the stock market.
o The elevation of Alliance's Legal and Compliance Department to an
executive function, reporting directly to the chief executive officer.
o The engagement of special outside counsel to undertake a full-scale
review of Alliance's compliance systems, procedures and controls in its
asset management business.
The Special Committee is just beginning to review the corporate
governance structure, policies and practices of Alliance and its mutual
fund business. In addition, Alliance's internal investigation is ongoing
and may identify additional matters requiring remedial action. Alliance
may undertake further remedial action, either at the recommendation of
the Special Committee or upon its own initiative.
Possible Outcomes and Risks - Any resolution of Alliance's involvement in market
timing and the related SEC and NYAG investigations and private lawsuits is
likely to include, but not be limited to, sanctions, penalties, appropriate
restitution to mutual fund shareholders and structural changes in the governance
of Alliance's mutual fund business. Alliance is committed to full restitution of
the adverse effects that inappropriate market timing transactions allowed by
Alliance had on the shareholders of its sponsored mutual funds. As discussed
above, the board of directors of Alliance has authorized the Special
Committee to conduct a broad examination of such adverse effects and appropriate
restitution.
In the event that charges are filed against Alliance in connection with this
matter, there is a risk, depending on the nature of the charges and their
ultimate resolution, that Alliance and its affiliates (including Equitable Life,
AXA Advisors and AXA Distributors) could have their respective qualifications to
act as an investment adviser, and their broker-dealer and certain other of their
other licenses and registrations, revoked or suspended.
In addition, because most Alliance mutual fund transactions are cleared and
settled through financial intermediaries, it is likely that one or more of these
intermediaries submitted improper "late trade" transactions to Alliance.
Investors in Alliance's mutual funds may choose to redeem their investments from
funds or products managed by Alliance. This may require the funds to sell
investments held by those funds to provide for sufficient liquidity and could
also have an adverse effect on the investment performance of the funds.
In addition, Alliance's reputation could suffer as a result of the issues
related to the market timing of mutual fund shares. Alliance's business is based
on public trust and confidence and any damage to that trust and confidence could
cause assets under management to decline.
Increased redemptions of mutual fund shares or reductions in assets managed by
Alliance for institutional or private clients, whether caused by specific
concerns relating to market timing or by more general reputational damage, would
reduce the management fees Alliance earns and have an adverse effect on results
22
of operations. In addition, any increase in redemptions of back-end load shares
could contribute to the creation of an impairment condition as to Alliance's
deferred sales commission asset and the recognition of a loss.
Based on the latest information available to it, management of Alliance decided
to record a $190 million charge to income for third quarter 2003 in connection
with the matters discussed above under "Litigation" and "Regulation." Management
of Alliance, however, cannot determine at this time the eventual outcome, timing
or impact of these matters. Accordingly, it is possible that additional charges
in the future may be required.
13) BUSINESS SEGMENT INFORMATION
The following tables reconcile segment revenues and earnings from continuing
operations before Federal income taxes and minority interest to total revenues
and earnings as reported on the consolidated statements of earnings and segment
assets to total assets on the consolidated balance sheets, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(In Millions)
Segment revenues:
Insurance ......................... $ 1,176.4 $ 1,226.5 $ 3,442.5 $ 3,775.6
Investment Services ............... 700.0 650.9 1,968.5 2,096.4
Consolidation/elimination ......... (18.6) (16.5) (51.7) (55.1)
----------- ----------- ----------- -----------
Total Revenues .................... $ 1,857.8 $ 1,860.9 $ 5,359.3 $ 5,816.9
=========== =========== =========== ===========
Segment earnings from continuing
operations before Federal income
taxes and minority interest:
Insurance ......................... $ 192.6 $ 108.5 $ 444.4 $ 535.0
Investment Services ............... 18.0 126.2 269.2 450.4
----------- ----------- ----------- -----------
Total Earnings from Continuing
Operations before Federal Income
Taxes and Minority Interest .... $ 210.6 $ 234.7 $ 713.6 $ 985.4
=========== =========== =========== ===========
September 30, December 31,
2003 2002
---- ----
(In Millions)
Assets:
Insurance........................ $ 93,577.0 $ 80,638.7
Investment Services.............. 15,179.9 14,160.3
Consolidation/elimination........ 25.4 27.3
------------------- ------------------
Total Assets..................... $ 108,782.3 $ 94,826.3
=================== ==================
14) RELATED PARTY TRANSACTIONS
Beginning January 1, 2000, the Company reimburses the Holding Company for
expenses relating to the Excess Retirement Plan, Supplemental Executive
Retirement Plan and certain other employee benefit plans that provide
participants with medical, life insurance, and deferred compensation benefits.
Such reimbursement was based on the cost to the Holding Company of the benefits
provided which totaled $17.6 million, $48.1 million, $8.1 million and $24.8
million, respectively, for the third quarter and first nine months of
2003 and of 2002.
The Company paid $157.2 million, $475.0 million, $138.2 million and $451.0
million, respectively, of commissions and fees to AXA Distribution and its
subsidiaries for sales of insurance products for the third quarter and first
nine months of 2003 and of 2002. The Company charged AXA Distribution's
subsidiaries $72.5 million, $219.3 million, $91.4 million and $323.2 million,
23
respectively, for their applicable share of operating expenses for the third
quarter and first nine months of 2003 and of 2002, pursuant to the Agreements
for Services.
15) STOCK-BASED COMPENSATION
The Company continues 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 awards under the Holding Company's option plans been determined based on SFAS
No. 123's fair value based method:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(In Millions)
Net earnings as reported............ $ 135.5 $ 286.5 $ 381.0 $ 622.0
Less: Total stock-based
employee compensation expense
determined under fair value method
for all awards, net of Federal
income tax benefit................ (11.3) (10.0) (32.1) (26.9)
---------- --------- ---------- ---------
Pro Forma Net Earnings.............. $ 124.2 $ 276.5 $ 348.9 $ 595.1
========== ========= ========== =========
16) COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for third quarters 2003 and 2002
and the first nine months of 2003 and of 2002 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
(In Millions)
Net earnings ........................... $ 135.5 $ 286.5 $ 381.0 $ 622.0
-------- ------- ------- -------
Change in unrealized (losses) gains,
net of reclassification adjustment ... (195.1) 283.9 331.7 316.8
-------- ------- ------- -------
Other comprehensive (loss) income ...... (195.1) 283.9 331.7 316.8
-------- ------- ------- -------
Comprehensive (Loss) Income ............ $ (59.6) $ 570.4 $ 712.7 $ 938.8
======== ======= ======= =======
24
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is omitted pursuant to General Instruction
H of Form 10-Q. The management narrative for the Company that follows should be
read in conjunction with the Consolidated Financial Statements, the related
Notes to Consolidated Financial Statements and the information discussed under
Forward-Looking Statements included in this Form 10-Q, and with the management
narrative found in the Management's Discussion and Analysis ("MD&A") section
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2002 ("2002 Form 10-K").
CONSOLIDATED RESULTS OF OPERATIONS
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
Earnings from continuing operations before Federal income taxes and minority
interest were $713.6 million for the first nine months of 2003, a decrease of
$271.8 million from the 2002 period, with $90.6 million lower earnings reported
by the Insurance segment and $181.2 million lower earnings for the Investment
Services segment. Net earnings for the Company totaled $381.0 million for the
first nine months of 2003, down $241.0 million from the 2002 period.
Net earnings for the 2002 period included a $33.1 million cumulative
effect of the Company's change in the method of accounting for liabilities
associated with variable annuity contracts with GMDB/GMIB features and a $144.3
million benefit resulting from 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.
Revenues. Total revenues for the first nine months of 2003 decreased $457.6
million to $5.36 billion as revenues for both the Insurance and Investment
Services segments declined as compared to the first nine months of 2002.
Premiums declined $38.2 million to $661.5 million, reflecting a lower level of
renewal premiums on traditional insurance products. Policy fee income was $997.8
million, $3.6 million higher than for the first nine months of 2002, largely due
to higher average Separate Account balances resulting from positive net cash
flows substantially offset by market depreciation in 2002 and first quarter
2003.
Net investment income increased $6.8 million to $1.77 billion, reflecting a
higher level assets in the General Account partially offset by lower yields due
to lower reinvestment rates. Higher short-term investment positions in the
General Account were maintained during 2003 pending investment into longer-term
securities, meeting our investment parameters, which support underlying life and
annuity products.
Investment losses totaled $92.8 million in the 2003 period compared to $85.8
million in the first nine months of 2002 principally due to the absence of a
$96.8 million gain on the sale of one real estate property in 2002 substantially
offset by lower net losses on fixed maturities in the 2003 period. Net losses on
fixed maturities were $121.3 million for the first nine months of 2003 as
compared to $181.3 million in the 2002 period.
There was a $422.8 million decrease in commissions, fees and other income to
$2.02 billion in the first nine months of 2003 from $2.44 billion in the 2002
period. The $130.2 million lower fees in the Investment Services segment were
primarily due to the $73.1 million decrease in Alliance's investment advisory
and services fees to $1.34 billion resulting from lower average AUM and a
decrease in commissions due to lower brokerage transaction volume. Distribution
revenues at Alliance were $321.3 million in the first nine million of 2003,
$42.0 million lower than in the comparable 2002 period primarily due to lower
average mutual fund AUM. When compared to the first nine months of 2002, there
was a $26.8 million decrease in revenues from institutional research services
due generally to lower transaction volume and reduced prices paid for brokerage
transactions. The decrease of $295.1 million in the Insurance segment in the
first nine months of 2003 was primarily due to a decrease of $58.0 million in
the fair value of the GMIB reinsurance contracts in 2003 as compared with the
$247.0 million increase recorded in the 2002 period.
Benefits and Other Deductions. Total benefits and other deductions decreased
$185.8 million to $4.65 billion for the first nine months of 2003 as the
Insurance segment's decrease of $242.5 million was partially offset by the
Investment Services segment's $53.3 million increase.
25
The policyholders' benefits decrease of $360.9 million from $1.63 billion to
$1.27 billion in the first nine months of 2003 principally resulted from the
$72.0 million decline in GMDB/GMIB reserves in 2003 due to the recent
improvements in market conditions as compared to the $241.0 million increase in
reserves in the 2002 period and from more favorable life mortality partially
offset by higher benefits and reserves in the reinsurance assumed product lines.
Interest credited to policyholders' account balances decreased $16.7 million to
$723.0 million in the first nine months of 2003 as the impact of lower crediting
rates was substantially offset by higher General Account balances.
When compared to the first nine months of 2002, there was a $34.8 million
increase in compensation and benefits in the first nine months of 2003 as higher
expenses in the Insurance segment were offset by the $41.3 million decrease in
the Investment Services segment. The $75.7 million increase in compensation and
benefit costs in the Insurance segment was due in part to higher qualified
pension plan costs, including the impact of reducing the expected long-range
return on assets assumption for the qualified pension plan from 9.0% as of
January 1, 2002 to 8.5% as of January 1, 2003. Additionally, compensation and
benefits for the Insurance segment included $.7 million of expenses resulting
from changes in the Stock Appreciation Rights' liability in the 2003 period as
compared to credits of $10.2 million in the comparable 2002 period. The
Investment Services segment decrease in compensation and benefits in the 2003
period was principally due to lower commissions and base and incentive
compensation.
Commissions increased $172.2 million for the first nine months of 2003 due to
higher sales of variable annuity contracts in both the wholesale and retail
channels.
Distribution plan payments totaled $275.7 million for the first nine months of
2003, down $28.3 million from the comparable prior year's total due to lower
average retail AUM. Amortization of deferred sales commissions was $157.8
million, $16.2 million lower than in the first nine months of 2002 primarily due
to the decline in the underlying deferred sales commission asset which resulted
in lower amortization.
Interest expense decreased $17.0 million to $62.9 million in the first nine
months of 2003 principally due to lower short-term borrowings for both segments.
DAC amortization increased $68.7 million to $282.3 million for the first nine
months of 2003. The increase in DAC amortization was principally due to higher
margins in products that are DAC reactive.
Capitalization of DAC increased $198.5 million from $556.4 million in the first
nine months of 2002 due to higher commissions and deferrable operating expenses.
Other operating costs and expenses increased $175.2 million to $761.2 million
principally due to $145.9 million higher expenses for the Investment Services
segment. The Insurance segment's $26.3 million higher expenses were primarily
due to higher software expenses, premium and other taxes, licenses and fees,
audit and consultant fees and depreciation partially offset by lower
advertising, travel and equipment rental costs. Management of Alliance recorded
a $190.0 million accrual for legal matters in third quarter 2003 in
connection with matters discussed in "Litigation and Regulation," Note 12 of
Notes to Consolidated Financial Statements, herein. In addition, higher legal
fees incurred in connection with ongoing litigation at Alliance were partially
offset by lower printing, mailing, travel and entertainment, occupancy,
technology and portfolio related expenses.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products for the first nine months of 2003 increased from prior year levels by
$3.56 billion to $11.25 billion. This increase was primarily due to higher
premiums and deposits from variable annuities in both the retail and wholesale
channels, partially offset by lower premiums and deposits from individual
variable and interest-sensitive life policies. The variable annuity increase in
the 2003 period reflected strong sales of the Accumulator '02 variable annuity
product series which is being phased out and replaced with an updated version.
Surrenders and Withdrawals. When totals for the first nine months of 2003 are
compared to the comparable 2002 period, surrenders and withdrawals decreased
from $3.85 billion to $3.58 billion as a $335.2 million decline in annuities
surrenders and withdrawals was partially offset by $63.5 million higher
surrenders for life insurance products. The annualized annuities surrender rate
decreased to 8.5% in the 2003 period from 10.0% in the same period in 2002,
while the individual life surrender rates showed an increase to 4.3% from 3.8%.
The trends in surrender and withdrawal rates described above continue to fall
within the range of expected experience.
26
Assets Under Management. An analysis of assets under management follows:
Assets Under Management
(In Millions)
September 30,
-------------
2003 2002
---- ----
Third party .......................................... $383,367 $319,889
General Account, Holding Company Group and other ..... 40,245 38,874
Separate Accounts .................................... 48,584 35,975
-------- --------
Total Assets Under Management ........................ $472,196 $394,738
======== ========
Third party assets under management at September 30, 2003 increased $63.48
billion primarily due to increases at Alliance. General Account, Holding Company
Group and other assets under management increased $1.37 billion from the amounts
reported at September 30, 2002 due to higher sales of General Account based
products. The $12.61 billion increase in Separate Account assets under
management resulted from improving market conditions in the second and third
quarters of 2003 and net new deposits.
Alliance assets under management at the end of first nine months of 2003 totaled
$437.76 billion as compared to $368.65 billion at September 30, 2002, with
increases of $45.1 billion, $14.7 billion and $9.3 billion posted for
institutional, retail and private client AUM, respectively, principally due to
market appreciation. In the first nine months of 2003, net asset inflows in the
institutional investment management and private client distribution channels of
$7.8 billion and $3.1 billion, respectively, were partially offset by net
outflows of $4.6 million in the retail channel. Non-US clients accounted for
18.6% of Alliance's September 30, 2003 assets under management total.
LIQUIDITY AND CAPITAL RESOURCES
Equitable Life. The Company paid cash dividends of $150.0 million in the first
nine months of 2003. In first quarter 2003, Equitable Life amended the terms of
its $350.0 million credit facility. Included in the amendments was a change in
the maturity date to March 31, 2004 from June 30, 2005. At September 30, 2003,
no amounts were outstanding under Equitable Life's commercial paper program or
its revolving credit facility.
FORWARD-LOOKING STATEMENTS AND RISK CONSIDERATIONS
The Company's management has made in this report, and from time to time may make
in its public filings and press releases as well as in oral presentations and
discussions, forward-looking statements concerning the Company's operations,
economic performance and financial position. Forward-looking statements include,
among other things, discussions concerning the Company's potential exposure to
market risks, as well as statements expressing management's expectations,
beliefs, estimates, forecasts, projections and assumptions, as indicated by
words such as "believes," "estimates," "intends," "anticipates," "expects,"
"projects," "should," "probably," "risk," "target," "goals," "objectives," or
similar expressions. The Company claims the protection afforded by the safe
harbor for forward-looking statements contained in Section 21E of the Exchange
Act, and assumes no duty to update any forward-looking statement.
Forward-looking statements are based on management's expectations and beliefs
concerning future developments and their potential effects and are subject to
risks and uncertainties. Actual results could differ materially from those
anticipated by forward-looking statements due to a number of important factors
including those discussed elsewhere in this report and in the Company's other
public filings, press releases, oral presentations and discussions. The
following discussion highlights some of the more important risk and other
factors that could cause such differences and/or, if realized, could have a
material adverse effect on the Company's consolidated financial position and/or
results of operations.
Market Risk. The Company's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. The primary market risk exposures result from interest rate
fluctuations, equity price movements and changes in credit quality. The nature
of each of these risks is discussed under the caption "Quantitative and
Qualitative Disclosures About Market Risk" and in Note 14 of Notes to
Consolidated Financial Statements, both contained in the 2002 Form 10-K.
27
Increased volatility of equity markets can impact profitability of the Insurance
and Investment Services 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. Management has adopted certain hedging strategies that are designed
to further mitigate exposure to GMDB liabilities and expects to consider using
hedging strategies to further mitigate exposure to GMIB liabilities.
Equity market volatility also may impact DAC amortization on variable and
universal life insurance contracts, variable annuities and participating
traditional life contracts. To the extent that actual market trends, and
reasonable expectations as to future performance drawn from those trends, lead
to reductions in the investment return and/or other related estimates underlying
the DAC amortization rates, DAC amortization could be accelerated. Volatile
equity markets can also impact the level of contractholder surrender activity,
which, in turn, can impact future profitability.
Interest rate fluctuations, equity price movements and changes in credit quality
may also affect invested assets held in the qualified pension plan which could
impact future pension plan costs.
The effects of significant equity market fluctuations on the Insurance Group's
operating results can be complex and subject to a variety of estimates and
assumptions, such as assumed rates of long-term equity market performance,
making it difficult to reliably predict effects on operating earnings over a
broad range of equity markets performance alternatives. Further, these effects
may not always be proportional for market increases and market decreases.
Margins on interest-sensitive annuities and universal life insurance can be
affected by interest rate fluctuations. In a declining interest rate
environment, credited rates can generally be adjusted more quickly than the
related invested asset portfolio is affected by declining reinvestment rates,
tending to result in higher net interest margins on interest-sensitive products
in the short term. However, under scenarios in which interest rates fall and
remain at significantly lower levels, minimum guarantees on interest-sensitive
annuities and universal life insurance (generally 2.5% to 4.5%) could cause the
spread between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate.
For both interest-sensitive annuities and universal life insurance, a rapid and
sustained rise in interest rates poses risks of deteriorating spreads and high
surrenders. In such an 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 Services segment, significant changes in equity markets can
impact revenues and the recoverability of deferred costs. See "Other Risks of
the Investment Services Segment" below.
Other Risks of the 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 the Company'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. Recent legislative tax
changes have included, among other items, changes to the taxation of corporate
28
dividends and capital gains. Management cannot predict what other proposals may
be made, what legislation, if any, may be introduced or enacted or what the
effect of any other such legislation might be. See "Business - Regulation"
contained in the 2002 Form 10-K. The profitability of the Insurance Group
depends on a number of factors including: levels of gross operating expenses and
the amount which can be deferred as DAC and software capitalization; successful
implementation of expense-reduction initiatives; secular trends; the ability to
reach sales targets for key products; the Company'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, the impact of
related reinsurance and the effectiveness of the dynamic hedging program; 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 ability of
the Insurance Group to reach its sales targets will depend, in part, on the
market receptivity of its redesigned variable annuity product, Accumulator '04,
which was introduced in September 2003. 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 Services Segment. Alliance's revenues are largely
dependent on the total value and composition of assets under its management and
are, therefore, affected by the performance of financial markets, the investment
performance of sponsored investment products and separately managed accounts,
additions and withdrawals of assets, purchases and redemptions of mutual funds
and shifts of assets between accounts or products with different fee structures,
as well as general economic conditions, future acquisitions, competitive
conditions and government regulations, including tax rates. See "Results of
Continuing Operations by Segment - Investment Services" contained in the 2002
Form 10-K. Recently, regulators have focused attention on various practices in
or affecting the investment management and/or mutual fund industries, including
late trading and market timing. Inquiries and/or investigations are ongoing with
regard to various investment management firms, including Alliance. Future
developments in this regard could adversely affect the reputation of the
industry generally or Alliance specifically, which in turn could impact the
performance of Alliance and its value to the Holding Company and Equitable Life.
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 cash
recoveries are recorded as reductions of unamortized deferred sales commissions
when received. The recorded amount of the deferred sales commission asset was
$423.2 million at September 30, 2003.
Alliance's management tests the deferred sales commission asset for
recoverability quarterly, or monthly when events or changes in circumstances
occur that could significantly increase the risk of impairment of the asset.
Alliance's management determines recoverability by estimating undiscounted
future cash flows to be realized from this asset, as compared to its recorded
amount, as well as the estimated remaining life of the deferred sales commission
asset over which undiscounted future cash flows are expected to be received.
Undiscounted future cash flows consist of ongoing distribution fees and CDSC.
Distribution fees are calculated as a percentage of average assets under
management related to back-end load shares. CDSC is based on lower of cost or
current value, at the time of redemption, of back-end load shares redeemed and
the point at which redeemed during the applicable minimum holding period under
the mutual fund distribution system.
Significant assumptions utilized to estimate average assets under management of
back-end load shares include expected future market levels and redemption rates.
Market assumptions are selected using a long-term view of expected average
market returns based on historical returns of broad market indices. At September
30, 2003, Alliance's management used assumptions of 7% for fixed income and
ranging from 9% to 10% for equity to estimate annual market returns. Higher
29
actual average market returns would increase the undiscounted future cash flows,
while lower actual average market returns would decrease the undiscounted future
cash flows. Future redemption rate assumptions were determined by reference to
actual redemption experience over the three and five year periods ended
September 30, 2003. Alliance's management used a range of expected future
average annual redemption rates of 16% to 20% at September 30, 2003, calculated
as a percentage of average assets under management. An increase in the actual
rate of redemptions would decrease the undiscounted future cash flows, while a
decrease in the actual rate of redemptions would increase the undiscounted
future cash flows. These assumptions are reviewed and updated quarterly,
or monthly when events or changes in circumstances occur that could
significantly increase the risk of impairment of the asset. 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. As of
September the results of these analyses performed at various dates. As of
September 30, 2003, Alliance's management believed that the deferred sales
commission asset was not impaired. 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 the three month and nine month periods ended September 30, 2003, equity
markets increased by approximately 2% and 13%, respectively, as measured by the
change in the Standard & Poor's 500 Stock Index while fixed income markets
decreased and increased by approximately 0.2% and 4%, respectively, as measured
by the change in the Lehman Brothers' Aggregate Bond Index. The redemption rate
for domestic back-end load shares exceeded 19% and 20% during the three month
and nine month periods ended September 30, 2003, respectively. Declines in
financial markets or 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.
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 Discontinued
Operations differ from management's current best estimates underlying the
allowance, the difference would be reflected as earnings or loss from
discontinued operations within the consolidated statements of earnings. In
particular, to the extent income, sales proceeds and holding periods for equity
real estate differ from management's previous assumptions, periodic adjustments
to the allowance are likely to result.
Disclosure and Internal Control System. There are inherent limitations in the
effectiveness of any system of disclosure and internal controls, including the
possibilities of faulty judgments in decision-making, simple error or mistake,
fraud, the circumvention of controls by individual acts or the collusion of two
or more people, or management override of controls. Accordingly, even an
effective disclosure and internal control system can provide only reasonable
assurance with respect to disclosure and financial statement preparation.
Further, because of changes in conditions, the effectiveness of a disclosure and
internal control system may vary over time.
Technology and Information Systems. The Company's information systems are
central to, among other things, designing and pricing products, marketing and
selling products and services, processing policyholder and investor
transactions, client recordkeeping, communicating with retail sales associates,
employees and clients, and recording information for accounting and management
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 the Company's results of operations and,
ultimately, its ability to achieve its strategic goals.
Legal Environment. A number of lawsuits have been filed against life and health
insurers involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents and other matters. Some of the lawsuits have
resulted in the award of substantial judgments against other insurers, including
material amounts of punitive damages, or in substantial settlements. In some
states, juries have substantial discretion in awarding punitive damages. The
Holding Company's insurance subsidiaries, including Equitable Life, like other
life and health insurers, are involved in such litigation. While no such lawsuit
30
has resulted in an award or settlement of any material amount against the
Company 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. Beginning in September 2003,
Equitable Life, AXA Advisors, and AXA Distributors have received various
requests for information and documents from the SEC and the NASD regarding
practices relating to market timing, late trading, pricing and valuation of
portfolio securities that trade in non-US markets and oversight of such
activities by the mutual fund boards of directors. Each of the requests has
either been responded to, or is in the process of being responded to, and the
requested documents have been, or will be, provided. The SEC has advised in
November 2003 it will conduct an onsite examination of EQAT, AXA Premier Funds
Trust, AXA Premier VIP Trust and Equitable Life, as the adviser to the trusts.
At this time, management cannot predict what other actions the SEC and/or the
NASD may take or what the impact of such actions might be. For further
information, see "Business - Regulation" and "Legal Proceedings," contained in
the 2002 Form 10-K and herein.
Future Accounting Pronouncements. In the future, new accounting pronouncements,
as well as new interpretations of accounting pronouncements, may have material
effects on the Company's consolidated statements of earnings and shareholder's
equity. See Note 2 of Notes to Consolidated Financial Statements contained in
the 2002 Form 10-K for pronouncements issued but not effective at December 31,
2002 and Note 4 herein.
Regulation. The businesses conducted by the Holding Company's subsidiaries,
including Equitable Life, are subject to extensive regulation and supervision by
state insurance departments and Federal and state agencies regulating, among
other things, insurance and annuities, securities transactions, investment
companies, 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 in the 2002
Form 10-K.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H to Form 10-Q.
Item 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of September 30, 2003. Based on that
evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures are effective.
There has been no change in the Company's internal control over financial
reporting that occurred during the period covered by this report or subsequent
to September 30, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting,
except as noted below.
As previously reported in Form 10-Q for the quarter ended June 30, 2003 and as
described in Note 3 of Notes to the Consolidated Financial Statements, a review
of deferred Federal income taxes identified a deficiency in our tax financial
reporting process related to the determination of deferred Federal income tax
assets and liabilities resulting in an overstatement of the deferred Federal
income tax liability related to the years ended December 31, 2000 and earlier.
Due to other effective internal control processes, this matter had no impact on
consolidated net earnings reported in any period. The adjustment also had no
material impact on shareholder's equity in any period, and has been reported in
the accompanying consolidated financial statements as an increase in
consolidated shareholder's equity as of January 1, 2002. To address this
deficiency, which constitutes a significant deficiency under proposed standards
submitted by the Auditing Standards Board of the AICPA to the Public Companies
Accounting Oversight Board, management has implemented procedures and controls
to enhance the effectiveness of the Company's processes for reconciling on a
regular basis the deferred Federal income tax assets and liabilities.
31
PART II OTHER INFORMATION
Item 1. Legal Proceedings.
See "Litigation and Regulation," Note 12 of Notes to Consolidated Financial
Statements, herein.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
On September 17, 2003, the Holding Company and The MONY Group Inc.
("MONY") announced that their Boards of Directors had approved a
transaction under which the Holding Company would acquire 100% of
MONY in a cash transaction valued at approximately $1.5 billion.
Under the terms of the merger agreement, MONY shareholders will
receive $31.00 for each share of MONY common stock. The transaction
is subject to MONY shareholder and certain regulatory approvals, and
certain other conditions, and is expected to close in first quarter
2004. The Holding Company intends to obtain the funds necessary to
finance the merger from its parent, AXA, in the form of either debt
or equity.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Number Description and Method of Filing
------- --------------------------------------------------------
31.1 Section 302 Certification made by the Registrant's Chief
Executive Officer, filed herewith
31.2 Section 302 Certification made by the Registrant's Chief
Financial Officer, filed herewith
32.1 Section 906 Certification made by the Registrant's Chief
Executive Officer, filed herewith
32.2 Section 906 Certification made by the Registrant's Chief
Financial Officer, filed herewith
(b) Reports on Form 8-K
None
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Life Assurance Society of the United States has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 14, 2003 THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By: /s/ Stanley B. Tulin
-------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: November 14, 2003 /s/ Alvin H. Fenichel
-------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President
and Controller
33