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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
|X| OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
| | SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25280
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
(Exact name of registrant as specified in its charter)
New York 13-5570651
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- -------------------------------------------- ---------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $1.25 Per Share)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicted by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes | | No |X|
No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of March 30, 2004.
As of March 30, 2004, 2,000,000 shares of the registrant's Common Stock were
outstanding.
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction I (1)(a)
and (b) of Form 10-K and is therefore filing this form with the Reduced
Disclosure Format.
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TABLE OF CONTENTS
Part I Page
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Item 1. Business........................................................................ 1-1
Overview........................................................................ 1-1
Recent Events................................................................... 1-1
Segment Information............................................................. 1-2
Assets under Management and Fees................................................ 1-6
Other Discontinued Operations................................................... 1-6
General Account Investment Portfolio............................................ 1-6
Employees and Financial Professionals........................................... 1-7
Competition..................................................................... 1-7
Regulation...................................................................... 1-8
Parent Company.................................................................. 1-12
Other Information............................................................... 1-13
Item 2. Properties...................................................................... 2-1
Item 3. Legal Proceedings............................................................... 3-1
Item 4. Submission of Matters to a Vote of Security Holders*............................ 4-1
Part II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........... 5-1
Item 6. Selected Financial Data*........................................................ 6-1
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ("Management Narrative")................................ 7-1
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................... 7A-1
Item 8. Financial Statements and Supplementary Data..................................... FS-1
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure.......................................................... 9-1
Item 9A Controls and Procedures......................................................... 9A-1
Part III
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Item 10. Directors and Executive Officers of the Registrant*............................. 10-1
Item 11. Executive Compensation*......................................................... 11-1
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters*.................................................. 12-1
Item 13. Certain Relationships and Related Transactions*................................. 13-1
Item 14. Principal Accountant Fees and Services.......................................... 14-1
Part IV
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Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K................. 15-1
Signatures ................................................................................ S-1
Index to Exhibits ................................................................................ E-1
*Omitted pursuant to General Instruction I to Form 10-K
PART I, ITEM 1.
BUSINESS(1)
OVERVIEW
Equitable Life, which was established in the State of New York in 1859, is among
the largest life insurance companies in the United States, with approximately
2.9 million policy and contractholders as of December 31, 2003. Equitable Life,
through its ownership of an approximate 42.6% economic interest in Alliance at
December 31, 2003 and its affiliation with the Holding Company, AXA Advisors,
AXA Distributors and AXA Network, is part of a diversified financial services
organization offering a broad spectrum of financial advisory, insurance and
investment management services. The Company is one of the world's largest asset
managers, with total assets under management of approximately $508.31 billion at
December 31, 2003, of which approximately $474.8 billion are assets under
management at Alliance (as defined below). Equitable Life's insurance business,
conducted principally by Equitable Life and its subsidiaries, EOC and AXA
Distributors, is reported in the Insurance segment. The investment management
business conducted by Alliance Capital Management L.P., a Delaware limited
partnership, and its subsidiaries ("Alliance"), is reported in the Investment
Services segment. Alliance is a leading global investment management firm. For
additional information on Equitable Life's business segments, see "Results Of
Continuing Operations By Segment" included in the management narrative
("Management Narrative") provided in lieu of "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 19 of Notes
to Consolidated Financial Statements. Since Equitable Life's demutualization in
1992, it has been a wholly owned subsidiary of the Holding Company. AXA, a
French holding company for an international group of insurance and related
financial services companies, is the Holding Company's sole shareholder. AXA is
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and files annual reports on Form 20-F. For
additional information regarding AXA, see "Parent Company".
RECENT EVENTS
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
stockholders will receive $31.00 for each share of MONY common stock. On
February 22, 2004, the merger agreement was amended to permit MONY to declare a
dividend of $0.10 on each share of MONY common stock in addition to the $0.23 to
$0.25 dividend that MONY announced on February 5, 2004. The amended merger
agreement also made certain modifications to the appraisal rights closing
condition. Subject to the receipt of MONY stockholder and certain regulatory
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(1) As used in this Form 10-K, the term "Equitable Life" refers to The Equitable
Life Assurance Society of the United States, a New York stock life insurance
corporation, "Holding Company" refers to AXA Financial, Inc., a Delaware
corporation incorporated in 1991 formerly known as The Equitable Companies
Incorporated, "AXA Financial" refers to the Holding Company and its consolidated
subsidiaries, and the "Company" refers to Equitable Life and its consolidated
subsidiaries. The term "Insurance Group" refers collectively to Equitable
Life and certain of its affiliates engaged in insurance-related businesses,
including The Equitable of Colorado, Inc. ("EOC") and AXA Distributors, LLC and
its subsidiaries, successor to Equitable Distributors, Inc. (collectively, "AXA
Distributors"). The term "Financial Advisory/Insurance Group" refers
collectively to Equitable Life, EOC, AXA Distributors, AXA Advisors, LLC, a
Delaware limited liability company ("AXA Advisors"), and AXA Network, LLC, a
Delaware limited liability company and its subsidiaries (collectively, "AXA
Network"). The term "General Account" refers to the assets held in the
respective general accounts of Equitable Life and EOC and all of the investment
assets held in certain of Equitable Life's separate accounts on which the
Insurance Group bears the investment risk. The term "Separate Accounts" refers
to the Separate Account investment assets of Equitable Life excluding the assets
held in those separate accounts on which the Insurance Group bears the
investment risk. The term "General Account Investment Assets" refers to assets
held in the General Account associated with the Insurance Group's continuing
operations (which includes the Closed Block) and does not include assets held in
the General Account associated primarily with the Insurance Group's discontinued
Wind-Up Annuity line of business ("Other Discontinued Operations").
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approvals, and certain other conditions, it is anticipated that the transaction
would close in second quarter 2004. The Holding Company intends to obtain the
funds necessary to finance the merger from AXA in the form of either debt or
equity. For additional information, see "Management Narrative - General".
In 2001, AXA's management announced the implementation of a global cost
reduction program aimed at reducing administrative expenses by 10% groupwide. In
the United States in 2001, 2002 and 2003, the Company reduced staff levels and
other overhead costs and reorganized its field operations from 18 regions to
four divisions. These measures were designed to reduce costs and achieve greater
efficiencies.
The Company's losses, incurred in 2001, for insurance claims arising in
connection with the September 11, 2001 terrorist attacks were approximately
$14.2 million after reinsurance coverages, DAC amortization and taxes. In 2002,
the Company recognized a post-tax recovery of $9.0 million on catastrophic
coverage related to claims associated with the September 11, 2001 terrorist
attacks. These terrorist attacks and the responsive actions had significantly
adversely affected general economic, market and political conditions. For
additional information, see "General Account Investment Portfolio".
On January 2, 2001, the Holding Company became a wholly owned subsidiary of AXA.
In October 2000, Alliance acquired (the "Bernstein Acquisition") SCB Inc.,
formerly known as Sanford C. Bernstein, Inc. ("Bernstein"). In November 2002,
pursuant to Bernstein and SCB Partners Inc.'s exercise of their rights to sell
limited partnership interests in Alliance ("Alliance Units") to AXA Financial or
an entity designated by AXA Financial (the "Bernstein Put"), an indirectly
wholly owned subsidiary of AXA Financial purchased 8.16 million Alliance Units
at a purchase price of approximately $250.0 million. At December 31, 2003, AXA
Financial's consolidated economic interest in Alliance was approximately 55.5%
after giving effect to consummation of the Bernstein Acquisition and the
November 2002 acquisition of Alliance Units, and included the 42.6% held by the
Company. On March 5, 2004, a wholly owned subsidiary of the Company, designated
by the Holding Company, purchased 8.16 million Alliance Units at a purchase
price of approximately $308.7 million pursuant to the Bernstein Put. As a
result, AXA Financial's consolidated economic interest in Alliance increased to
approximately 58.4%, including the 45.6% held by the Company. For additional
information, see "Management Narrative - Liquidity and Capital Resources" and
Notes 1 and 2 of Notes to Consolidated Financial Statements.
SEGMENT INFORMATION
INSURANCE
The Insurance Group offers a variety of traditional, variable and
interest-sensitive life insurance products and variable and fixed-interest
annuity products to individuals, small groups, small and medium-size businesses,
state and local governments and not-for-profit organizations. It also
administers traditional participating group annuity contracts with conversion
features, generally for corporate qualified pension plans, and association plans
which provide full service retirement programs for individuals affiliated with
professional and trade associations. The Insurance segment, which includes
Separate Accounts for individual and group insurance and annuity products,
accounted for approximately $4.73 billion (or 64.0% of total revenues, after
intersegment eliminations) for the year ended December 31, 2003.
Insurance segment products are offered on a retail basis in all 50 states, the
District of Columbia, Puerto Rico and the U.S. Virgin Islands by AXA Advisors, a
broker-dealer, and AXA Network, an insurance general agency, through a retail
sales force of approximately 6,100 financial professionals. In addition, AXA
Distributors, a broker-dealer subsidiary of Equitable Life, distributes
Equitable Life products on a wholesale basis in all 50 states, the District of
Columbia and Puerto Rico through major national securities firms, other
broker-dealers and banks. Association and corporate pension plans are marketed
directly to clients by the Insurance Group. For additional information on this
segment, see "Management Narrative - Results Of Continuing Operations By
Segment- Insurance", Note 19 of Notes to Consolidated Financial Statements, as
well as "Employees and Financial Professionals", "Competition" and "Regulation".
PRODUCTS AND SERVICES. The Insurance Group offers a portfolio of insurance,
annuity and investment products designed to meet a broad range of its customers'
needs throughout their financial life cycles. The Insurance Group is
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among the country's leading issuers of variable life insurance and variable
annuity products. In 2003, individual variable and interest-sensitive life
insurance policies and variable annuity contracts accounted for 11.4% and 75.2%,
respectively, of total premiums and deposits of life insurance and annuity
products. Variable life insurance products include Incentive Life(sm), Equitable
Life's flagship life insurance product, as well as a second-to-die policy and
products for the corporate owned life insurance ("COLI") market. Equitable Life
also offers traditional whole life insurance, universal life insurance and term
life insurance policies.
Variable annuity products include EQUI-VEST(R) and Accumulator(R), which are a
series of individual variable deferred annuities, and the Momentum(sm) series of
group annuities for the employer retirement plan market. Individual variable
deferred annuities may be purchased on either a single or flexible premium
basis; group annuities generally have recurring premium from the retirement
plans they fund. Most individual variable annuity products offer one or more
enhanced features, which may include an extra-credit to the initial account
value, dollar cost averaging programs, enhanced death benefits and a guaranteed
minimum income benefit. In addition, in fourth quarter 2003, Equitable Life
launched an updated Accumulator(R) series of annuities, and a revised version of
its variable life insurance product for the COLI market, currently available in
states where approved.
Equitable Life also offers individual single premium deferred annuities
including Guaranteed Growth Annuity, introduced in September 2001, which credit
an initial and subsequent annually declared interest rates, and payout annuity
products, including traditional immediate annuities and variable immediate
annuities, that provide lifetime periodic payments, which payments in the case
of variable immediate annuities, fluctuate with the performance of underlying
investment portfolios, and the Income Manager(sm), which provides guaranteed
lifetime payments with cash values during an initial period.
The continued growth of third-party assets under management remains a strategic
objective of the Insurance Group, which seeks to increase the percentage of its
income that is fee-based and derived from managing funds, including Separate
Account assets, for its clients (who bear the investment risk and reward upon
surrender). Over the past five years, Separate Account assets for individual
variable life and variable annuities have increased by $14.47 billion to $47.52
billion at December 31, 2003. Of this amount, approximately $37.5 billion was
invested through EQ Advisors Trust ("EQAT"), and approximately $7.7 billion was
invested through AXA Premier VIP Trust (discussed below).
EQAT is a mutual fund offering variable life and annuity contractholders 30
investment portfolios, each with its own investment strategy, and features 26
equity investment portfolios, three bond investment portfolios and one money
market portfolio. Alliance, including its Bernstein Investment Research and
Management unit, provides the day-to-day advisory services to 10 investment
portfolios, representing approximately 67% of the total assets in EQAT at
December 31, 2003. Unaffiliated investment advisers advise the other 20
investment portfolios.
In January 2002, Equitable Life launched the AXA Premier VIP Trust ("VIP
Trust"), a family of multi-manager, sub-advised investment portfolios, which are
available in Equitable Life's variable life and annuity products. VIP Trust is
comprised of 16 investment portfolios, each with its own investment strategy,
and features nine equity investment portfolios, two bond investment portfolios
and five allocation portfolios ("Allocation Portfolios"). The Allocation
Portfolios are "fund-of-funds" investment portfolios and pursue their investment
objective by investing exclusively in other funds managed by EQAT and VIP Trust.
Equitable Life, as the investment manager, reserves the right from time to time
to change the asset allocation targets established for each Allocation
Portfolio. With the exception of the Allocation Portfolios, each investment
option in the VIP Trust is advised by two or more sub-advisers. Alliance,
including its Bernstein Investment Research and Management unit, and AXA
Rosenberg Investment Management LLC provide the day-to-day advisory services to
seven allocated portions of the investment portfolios, representing
approximately 30% of the total assets of VIP Trust at December 31, 2003. Fifteen
unaffiliated investment advisers advise the other allocated portions of the
investment portfolios.
Also in January 2002, Equitable Life launched the AXA Premier Funds Trust
("Premier Trust"), a retail multi-manager mutual fund. Premier Trust is
comprised of 10 investment portfolios, each with its own investment strategy,
and features eight equity investment portfolios, one bond investment portfolio
and one money market portfolio, which are offered directly to investors. At
December 31, 2003, Premier Trust had total assets of $145 million. Alliance,
including its Bernstein Investment Research and Management unit, and AXA
Rosenberg Investment Management LLC provide day-to-day advisory services to
eight allocated portions of the investment portfolios, representing
approximately 25% of the total assets of Premier Trust at December
31, 2003. Fifteen unaffiliated investment advisers advise the other allocated
portions of the investment portfolios. Equitable Life serves as the Investment
Manager and Administrator of EQAT, VIP Trust and Premier Trust.
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Equitable Life issues certain variable annuity products that offer a guaranteed
minimum income benefit ("GMIB") feature, guaranteed principal benefit ("GPB")
features, guaranteed minimum death benefit ("GMDB") features and the "Protection
Plus" feature. The GMIB feature, if elected by the contractholder and after a
stipulated waiting period from contract issuance, guarantees a minimum lifetime
annuity based on predetermined annuity purchase rates that may be in excess of
what the contract account value can purchase at then-current annuity purchase
rates. The GPB features, if one is elected by the contractholder, ensure that
the account value will, at a minimum, equal the contributions on a specified
date, adjusted for withdrawals and transfers. The GMDB features guarantee a
minimum death benefit, that may be in excess of the contract account value and
the "Protection Plus" feature provides an additional death benefit equal to the
greater of the account value or any applicable death benefit increased by 40% of
such death benefit, less total net contributions. Charges are associated with
certain of these features. For additional information, see Notes 2, 9 and 12 of
Notes to Consolidated Financial Statements.
During periods of sustained market downturns demand for variable products like
the ones emphasized by Equitable Life typically declines relative to fixed
products. As a result, Equitable Life is placing increased emphasis on the
development and sale of fixed products to diversify its product offerings.
In addition to products issued by the Insurance Group, financial professionals
affiliated with AXA Advisors and AXA Network have access to products and
services from unaffiliated insurers and from other financial service providers,
including life, health and long-term care insurance products, annuity products
and mutual funds and other investment products and services.
MARKETS. Targeted customers for the Company's products include affluent and
emerging affluent individuals, such as professionals and owners of small
businesses, as well as employees of public schools, universities, not-for-profit
entities and certain other tax-exempt organizations, and existing customers.
Variable and universal life insurance is targeted at the middle-to-upper income
life markets. Life insurance products are also used in the estate planning,
business continuation and executive benefit markets. Target markets for variable
annuities include, in addition to the personal retirement savings market, the
tax-exempt markets (particularly retirement plans for educational and
not-for-profit organizations), corporate pension plans (particularly 401(k)
defined contribution plans for small to mid-size groups) and the IRA retirement
planning market. Mutual funds and other investment products are intended for a
broad spectrum of clients and add breadth and depth to the range of products the
Insurance Group is able to provide.
DISTRIBUTION. Retail distribution of products and services is accomplished by
approximately 6,100 financial professionals of AXA Advisors and/or AXA Network,
approximately 2,500 of who are credentialed to offer a broad array of
insurance and investment products and who account for the substantial majority
of the Insurance Group's production. Field operations are organized into four
divisions across the United States.
Wholesale distribution of products is undertaken through AXA Distributors, which
at year end 2003 had 663 selling agreements, including arrangements with four
major national securities firms, 91 banks or similar financial institutions, and
568 broker-dealers and financial planners. In 2003, three major national
securities firms were responsible for approximately 18.9%, 10.0% and 7.1%,
respectively, of AXA Distributors' 2003 premiums and deposits down from
approximately 25.4%, 14.4% and 9.1%, respectively, of AXA Distributors' 2002
premiums and deposits, reflecting AXA Distributors' efforts to diversify its
distribution channels. In 2002, AXA Distributors was responsible for
approximately 47.8% of the Financial Advisory/Insurance Group's total premiums
and deposits compared to approximately 34.3% in 2002.
Equitable Life has entered into agreements pursuant to which it compensates AXA
Advisors and AXA Network for distributing and servicing Equitable Life's
products. The agreements provide that compensation will not exceed any
limitations imposed by applicable law. Under these agreements, Equitable Life
provides to each of AXA Advisors and AXA Network personnel, property, and
services reasonably necessary for their operations. AXA Advisors and AXA Network
pay Equitable Life their actual costs (direct and indirect) and expenses under
the respective agreements.
REINSURANCE AND HEDGING. During the first quarter of 2003, the Insurance Group
began to transition to excess of retention reinsurance on most new variable
life, universal life and term life policies. The Insurance Group will retain
mortality risk up to a maximum of $15.0 million on single-life policies and
$20.0 million on second-to-die policies with the excess 100.0% reinsured.
Previously, the Insurance Group ceded 90.0% of mortality risk on substantially
all new variable life, universal life and term life policies, with risk retained
to a maximum of $5.0 million on single-life policies, and $15.0 million on
second-to-die policies. In addition to the above reinsurance arrangements, the
Insurance Group also
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reinsures 90.0% of its level premium term and 90.0% of the lapse protection
benefit on many universal life contracts with a recently formed affiliate, AXA
Financial (Bermuda) Ltd. For amounts applied for in excess of those limits,
reinsurance from unaffiliated third parties is sought. A contingent liability
exists with respect to reinsurance ceded should the reinsurers be unable to meet
their obligations. Therefore, the Insurance Group carefully evaluates the
financial condition of its reinsurers to minimize its exposure to significant
losses from reinsurer insolvencies. The Insurance Group is not party to any risk
reinsurance arrangement with any reinsurer pursuant to which the amount of
reserves on reinsurance ceded to such reinsurer equals more than 3.8% of the
total policy life reserves of the Insurance Group (including Separate Accounts).
The Insurance Group also reinsures a percentage of its exposure on variable
annuity products that offer a GMIB feature and/or GMDB features. At December 31,
2003, Equitable Life had reinsured, subject to certain maximum amounts or caps
in any one period, approximately 75.0% of its net amount at risk resulting from
the GMIB feature and approximately 22.0% of its net amount at risk to the GMDB
obligation on annuity contracts in force as of December 31, 2003. The Insurance
Group has adopted certain hedging strategies that are designed to further
mitigate exposure to GMDB liabilities and plans to implement hedging strategies
to further mitigate exposure to GMIB liabilities. In addition, the Holding
Company also employs other hedging strategies, including interest rate caps and
floors, interest rate futures and interest rate swaps. For additional
information about reinsurance and hedging, see "Quantitative and Qualitative
Disclosures about Market Risk" and Notes 2, 9 and 12 of Notes to Consolidated
Financial Statements.
The Insurance Group acts as a retrocessionaire by assuming life reinsurance from
reinsurers. Mortality risk through reinsurance assumed is managed under the same
corporate retention amounts noted above, although lower internal retention
limits currently apply to life reinsurance assumed.
INVESTMENT SERVICES
GENERAL. The Investment Services segment is principally comprised of the
operations of Alliance, which provides diversified investment management and
related services to the Insurance Group and globally to a broad range of other
clients, including (a) institutional investors, consisting of unaffiliated
entities such as corporate and public employee pension funds, endowment funds,
domestic and foreign institutions and governments, and affiliates such as AXA
and its insurance company subsidiaries, by means of separately managed accounts,
sub-advisory relationships, structured products, group trusts, mutual funds and
other investment vehicles, (b) private clients, consisting of high net worth
individuals, trusts and estates, charitable foundations, partnerships, private
and family corporations and other entities, by means of separately managed
accounts, hedge funds, and other investment vehicles, (c) individual investors
by means of retail mutual funds sponsored by Alliance, its subsidiaries and
affiliated joint venture companies including cash management products such as
money market funds and deposit accounts, sub-advisory relationships in
respect of mutual funds sponsored by third parties and other investment vehicles
("Alliance Mutual Funds") and "managed account" products, and (d) institutional
investors desiring institutional research services by means of in-depth
research, portfolio strategy, trading and brokerage-related services. Alliance
and its subsidiaries also provide investment management, distribution and
shareholder and administrative services to the Alliance Mutual Funds.
Alliance provides a broad offering of investment products with expertise in both
growth and value oriented strategies, the two predominant equity investment
styles with a fixed income capability in both taxable and tax exempt securities.
The product line includes international, global and emerging markets services,
as well as local and regional services in major markets around the world.
Alliance uses internal fundamental and quantitative research as the key to its
investment process across all investment disciplines.
The Investment Services segment in 2003 accounted for approximately $2.74
billion (or 37.0%) of total revenues, after intersegment eliminations. As of
December 31, 2003, Alliance had approximately $474.80 billion in assets under
management including approximately $269.50 billion from institutional investors,
$51.51 billion from private clients and approximately $153.79 billion from
retail mutual fund accounts. As of December 31, 2003, assets of AXA, the Holding
Company and the Insurance Group, including investments in EQAT, VIP Trust and
Premier Trust represented approximately 16.2% of Alliance's total assets under
management, and fees and other charges for the management of those assets
accounted for approximately 6.3% of Alliance's total revenues.
INTEREST IN ALLIANCE. At December 31, 2003, AXA Financial's consolidated
economic interest in Alliance was approximately 55.5% and included the 42.6%
held by the Company. At March 5, 2004, following the acquisition of an
additional 8.16 million Alliance Units (described under "Recent Events" above),
the Holding Company, Equitable Life and certain subsidiaries had combined
holdings equaling an approximate 58.4% economic interest in Alliance's
operations, including the general partnership interest held indirectly by
Equitable Life as the sole shareholder of the general partner of Alliance
Capital Management Holding L.P. ("Alliance Holding") and Alliance. Alliance
Holding is subject to an annual 3.5% Federal tax on its proportionate share of
the gross business income of Alliance. Alliance, as a private partnership, is
not subject to this 3.5% tax. Alliance Holding and Alliance are generally not
subject to state and local income taxes, with the exception of the New York City
unincorporated business tax of 4.0%.
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For additional information about Alliance, including its results of operations,
see "Regulation" and "Management Narrative - Results Of Continuing Operations By
Segment - Investment Services" and Alliance's Annual Report on Form 10-K for the
year ended December 31, 2003.
ASSETS UNDER MANAGEMENT AND FEES
The Company continues to pursue its strategy of increasing third-party assets
under management. The Investment Services segment continues to add third-party
assets under management, and to provide asset management services to the
Insurance Group. Of the $508.31 billion of assets under management at December
31, 2003, $468.40 billion (or 92.1%) were managed for third parties, including
$413.96 billion from unaffiliated third parties and $54.44 billion for the
Separate Accounts, and $39.91 billion were managed principally for the General
Account and include invested assets of non-life subsidiaries. Of the $1.88
billion of fees for assets under management for the year ended December 31,
2003, $1.84 billion were received from third parties, including $1.77 billion
from unaffiliated third parties and $70.48 million in respect of Separate
Accounts, and $37.63 million in respect of the General Account. For additional
information on assets under management, see "Management Narrative - Results Of
Continuing Operations By Segment" and "Management Narrative - Assets Under
Management".
OTHER DISCONTINUED OPERATIONS
Other Discontinued Operations includes primarily Wind-Up Annuity products, the
terms of which were fixed at issue, which were sold to corporate sponsors of
terminating qualified defined benefit plans. At December 31, 2003, $880.3
million of contractholder liabilities were outstanding. For additional
information about Other Discontinued Operations, see Notes 2 and 8 of Notes to
Consolidated Financial Statements.
GENERAL ACCOUNT INVESTMENT PORTFOLIO
General. The General Account consists of a diversified portfolio of principally
fixed-income investments.
The following table summarizes General Account Investment Assets by asset
category at December 31, 2003:
GENERAL ACCOUNT INVESTMENT ASSETS
NET AMORTIZED COST (1)
(DOLLARS IN MILLIONS)
Amount % of Total
------------------ ------------------
Fixed maturities (2)................... $ 27,896.1 73.7%
Mortgages.............................. 3,530.5 9.3
Equity real estate..................... 652.2 1.7
Other equity investments............... 1,008.4 2.7
Policy loans........................... 4,016.9 10.6
Cash and short-term investments (3).... 758.6 2.0
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Total.................................. $ 37,862.7 100.0%
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(1) Net Amortized Cost is the cost of the General Account Investment Assets
(adjusted for impairments in value deemed to be other than temporary, if
any) less depreciation and amortization, where applicable, and less
valuation allowances on mortgage and real estate portfolios.
(2) Excludes net unrealized gains of $1.94 billion on fixed maturities
classified as available for sale. Fixed maturities includes approximately
$1.28 billion net amortized cost of below investment grade securities.
(3) Comprised of "Cash and cash equivalents" and short-term investments
included within the "Other invested assets" caption on the consolidated
balance sheet.
The Insurance Group has developed an asset/liability management approach with
separate investment objectives for specific classes of product liabilities, such
as insurance, annuity and group pension. As part of this approach, the Insurance
Group develops investment guidelines for each product line which form the basis
for investment strategies to manage such product line's investment return and
liquidity requirements, consistent with management's overall investment
objectives for the General Account Investment Portfolio. Investments frequently
meet the investment objectives of more than one class of product liabilities;
each such class may be allocated a pro rata interest in such investments and the
returns therefrom.
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The General Account's investment portfolio includes securities issued by
companies in the commercial airlines, hotels and property and casualty and
reinsurance industries. These industries were among those disproportionately
affected by the events of September 11, 2001 and could be expected to be among
those disproportionately affected by future terrorist acts and any responsive
actions. As of December 31, 2003, directly held investments in fixed income or
equities involving companies in the above-mentioned industries represented
approximately 1.4% of the General Account investment portfolio.
INVESTMENT SURVEILLANCE. As part of the Insurance Group's investment management
process, management, with the assistance of its investment advisors, constantly
monitors General Account investment performance. This internal review process
culminates with a quarterly review of certain assets by the Insurance Group's
Surveillance Committee which evaluates whether any investments are other than
temporarily impaired and whether specific investments should be put on an
interest non-accrual basis.
EMPLOYEES AND FINANCIAL PROFESSIONALS
As of December 31, 2003, the Insurance Group had approximately 4,576
full-time employees and Alliance had approximately 4,060 full-time employees. In
addition, the Financial Advisory/Insurance Group had a sales force of
approximately 6,100 financial professionals, including approximately 368 field
force managers, reflecting a decline in approximately 1,000 financial
professionals in 2003. This decline was principally due to a buyout program
offered to members of its senior sales force (i.e. sales force members who were
receiving retirement benefits from Equitable Life) as well as the implementation
of minimum production standards for financial professionals generally. Such
initiatives were undertaken in an effort to enhance the profitability and
productivity of the sales force and to improve customer service. The Company
anticipates continuing such initiatives in the future.
COMPETITION
INSURANCE GROUP. There is strong competition among insurers, banks, brokerage
firms and other financial institutions and providers seeking clients for the
types of products and services provided by the Insurance Group, including
insurance, annuity and other investment products and services. Competition is
particularly intense among a broad range of financial institutions and other
financial service providers for retirement and other savings dollars. The
principal competitive factors affecting the Insurance Group's business are
price, financial and claims-paying ratings, size, strength, professionalism and
objectivity of the sales force, range of product lines, crediting rates on fixed
products, product quality, reputation and customer service, visibility and brand
recognition in the marketplace,
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quality of service and, with respect to variable insurance and annuity products,
mutual funds and other investment products, investment management performance.
As noted above, ratings are an important factor in establishing the competitive
position of insurance companies. As of March 30, 2004, the financial strength or
claims-paying rating of Equitable Life was AA- from Standard & Poor's
Corporation (4th highest of 20 ratings; with stable outlook), Aa3 from Moody's
Investors Service (4th highest of 21 ratings), A+ from A.M. Best Company, Inc.
(2nd highest of 15 ratings), and AA from Fitch Investors Service, L.P. (3rd
highest of 24 ratings). As of March 30, 2004, AXA Financial's long-term debt
rating was A from Standard & Poor's Corporation (6th highest of 20 ratings; with
outlook), A3 from Moody's Investors Services (7th highest of 21 ratings; with
stable outlook) and A+ from Fitch Investors Service, L.P. (5th highest of 24
ratings).
INVESTMENT SERVICES. The financial services industry is highly competitive and
new entrants continually are attracted to it. No single competitor, or any small
group of competitors, is dominant in the industry. Alliance is subject to
substantial competition in all aspects of its business from numerous investment
management, stock brokerage and investment banking firms, insurance companies,
banks, savings and loan associations and other financial institutions. These
competitors offer a wide range of financial and investment management services
to the same retail investors, institutional clients and high net worth customers
that Alliance seeks to attract. Many of these financial institutions have
substantially greater resources than Alliance. Alliance competes with other
providers of institutional investment products primarily on the basis of the
range of investment products offered, the investment performance of such
products and the services provided to clients. More recently, reputation has
become an increasingly important competitive factor among investment management
firms. See "Regulation". AXA and its subsidiaries are not obligated to provide
resources to Alliance.
AXA, AXA Financial, Equitable Life and certain of their direct and indirect
subsidiaries provide financial products and services, some of which are
competitive with those offered by Alliance. Alliance's partnership agreement
specifically allows Equitable Life and its subsidiaries (other than the general
partner of Alliance) to compete with Alliance and to exploit opportunities that
may be available to Alliance. In addition, Alliance provides investment
management services to unaffiliated insurance companies, some or all of which
compete with Equitable Life.
REGULATION
STATE SUPERVISION. Members of the Insurance Group are licensed to transact
insurance business in, and are subject to extensive regulation and supervision
by, insurance regulators in all 50 states of the United States, the District of
Columbia, Puerto Rico, the U.S. Virgin Islands and nine of Canada's twelve
provinces and territories. Equitable Life is domiciled in New York and is
primarily regulated by the Superintendent (the "Superintendent") of the New York
Insurance Department (the "NYID"). EOC is domiciled in Colorado and is primarily
regulated by the Commissioner of Insurance of the Colorado Division of
Insurance. The extent of state regulation varies, but most jurisdictions have
laws and regulations governing sales practices, standards of solvency, levels of
reserves, risk-based capital, permitted types and concentrations of investments,
and business conduct to be maintained by insurance companies as well as agent
licensing, approval of policy forms and, for certain lines of insurance,
approval or filing of rates. Additionally, the New York Insurance Law limits
sales commissions and certain other marketing expenses that may be incurred by
Equitable Life. Each of Equitable Life and EOC is required to file detailed
annual financial statements, prepared on a statutory accounting basis, with
supervisory agencies in each of the jurisdictions in which it does business.
Such agencies may conduct regular or targeted examinations of Equitable Life's
and EOC's operations and accounts, and make occasional requests for particular
information from the Insurance Group.
In January 1998, the Florida Attorney General and the Florida Office of
Insurance Regulation (formerly known as the Florida Department of Insurance)
("OIR") issued subpoenas to Equitable Life, and in December 1999, the Florida
Attorney General issued an additional subpoena to Equitable Life, in each case
requesting, among other things, documents relating to various sales practices.
Equitable Life cooperated fully with the Florida Attorney General and OIR and in
July 2003 executed a settlement agreement with the Florida Attorney General and
a consent order with the OIR. Pursuant to the settlement agreement and the
consent order, Equitable Life paid the costs of the investigation and
implemented an Outreach Plan in Florida. The purpose of the Outreach Plan is to
identify those customers, if any, who have questions or concerns about their
life insurance policies involving certain sales practices. Based on the results
of the Outreach Plan to date, Equitable Life does not believe that there were
any widespread or systemic deficiencies with regard to such sales practices.
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A number of states, including New York, California and Florida have enacted
legislation requiring disclosure of extensive information concerning Holocaust
era insurance policies sold in Europe prior to and during the Second World War.
While these statutes vary and certain of them provide exemption for companies
such as AXA that participate in the International Commission on Holocaust Era
Insurance Claims, the ultimate sanction under certain of these statutes for
failure to disclose the required information is revocation of an insurer's
license to engage in the insurance business in the concerned state. Although
Equitable Life intends to comply with these laws with respect to its own
activities, the ability of AXA and its European affiliates to comply may be
impacted by various factors including the availability of relevant information
after the passage of more than 50 years and privacy laws in effect in various
European countries. Any failure to comply with these laws could result in state
regulatory authorities seeking to take enforcement actions against AXA and its
U.S. affiliates, including Equitable Life, even though Equitable Life does not
control AXA.
HOLDING COMPANY AND SHAREHOLDER DIVIDEND REGULATION. Several states, including
New York, regulate transactions between an insurer and its affiliates under
insurance holding company acts. These acts contain certain reporting
requirements and restrictions on provision of services and on transactions, such
as intercompany service agreements, asset transfers, loans and shareholder
dividend payments by insurers. Depending on their size, such transactions and
payments may be subject to prior notice to, or approval by, the NYID. Equitable
Life has agreed with the NYID that similar approval requirements also apply to
transactions between (i) material subsidiaries of Equitable Life and (ii) the
Holding Company (and certain affiliates, including AXA). In 2003, Equitable Life
paid an aggregate of $400.0 million in shareholder dividends, and expects to pay
dividends in 2004.
STATUTORY SURPLUS AND CAPITAL. Insurance regulators have the discretionary
authority to limit or prohibit new issuances of business to policyholders within
their jurisdiction when, in their judgment, such regulators determine that the
issuing company is not maintaining adequate statutory surplus or capital.
FEDERAL TAX INITIATIVES. Although the Federal government generally does not
directly regulate the insurance business, many Federal tax laws affect the
business in a variety of ways. There are a number of existing, newly enacted or
recently proposed Federal tax initiatives that may significantly affect the
Insurance Group. In June 2001, legislation was enacted which, among other
things, provides several years of lower rates for estate, gift and generation
skipping taxes ("GST") as well as one year of estate and GST repeal (in 2010)
before a return to 2001 law for the year 2011 and thereafter. Other provisions
of the legislation increased amounts which may be contributed to tax qualified
retirement plans and could have a positive impact on funding levels of tax
qualified retirement products. In 2003, reductions in income tax rates on
long-term capital gains and qualifying corporate dividends were enacted which
could adversely impact the relative attractiveness of cash value life insurance
and annuity products (and may adversely impact the sales of such products)
relative to other investment alternatives which may qualify for these lower
rates. Recently, legislation has been proposed regarding accelerating and making
permanent the repeal of the estate and generation skipping taxes. If enacted,
this legislation would have an adverse impact on sales of life insurance in
connection with estate planning. Other provisions of the proposed legislation
and provisions of recently issued Treasury regulations relate to the business
use of life insurance, split-dollar arrangements, creation of new tax favored
savings accounts and modifications to qualified plan rules. These provisions
could adversely affect the sale of life insurance to businesses, as well as the
attractiveness of qualified plan arrangements, cash value life insurance and
annuities. Management cannot predict what other proposals may be made, what
legislation, if any, may be introduced or enacted or what the effect of any such
legislation might be.
SECURITIES LAWS. Equitable Life, EOC and certain policies and contracts offered
by the Insurance Group are subject to regulation under the Federal securities
laws administered by the Securities and Exchange Commission (the "SEC") and
under certain state securities laws. The SEC conducts regular examinations of
the Insurance Group's operations,
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and from time to time makes requests for particular information from the
Insurance Group. Certain Separate Accounts of Equitable Life are registered as
investment companies under the Investment Company Act of 1940, as amended (the
"Investment Company Act"). Separate Account interests under certain annuity
contracts and insurance policies issued by Equitable Life are also registered
under the Securities Act of 1933, as amended (the "Securities Act"). EQAT,
Premier Trust, and VIP Trust are registered as investment companies under the
Investment Company Act and shares offered by these investment companies are also
registered under the Securities Act. AXA Advisors, AXA Distributors,
AllianceBernstein Investment Research and Management Inc. (formerly known as
Alliance Fund Distributors, Inc.) ("ABIRM"), Sanford C. Bernstein & Co., LLC and
certain other subsidiaries of AXA Financial are registered as broker-dealers
(collectively the "Broker-Dealers") under the Exchange Act. The Broker-Dealers
are subject to extensive regulation by the SEC, and are members of, and subject
to regulation by, the National Association of Securities Dealers, Inc. ("NASD").
The Broker-Dealers are also subject to regulation by state securities
administrators in those states in which they conduct business.
The SEC, other governmental regulatory authorities, including state securities
administrators, and the NASD may institute administrative or judicial
proceedings which may result in censure, fines, the issuance of cease-and-desist
orders, the suspension or expulsion of a broker-dealer or member, its officers
or employees or other similar consequences. In February 2004, without admitting
or denying the allegations, AXA Advisors entered into an agreement with the NASD
to resolve charges that AXA Advisors failed to inform investors that they were
entitled to the waiver of certain sales charges and certain related matters.
Under the terms of the settlement agreement, AXA Advisors paid fines totaling
$300,000, agreed to provide restitution to those customers who paid such sales
charges from February 2002 to February 2004, and agreed to retain an independent
consultant to review and recommend revisions to its supervisory and compliance
procedures and systems.
As broker-dealers registered with the SEC, the Broker-Dealers are subject to the
capital requirements of the SEC and/or NASD. These capital requirements specify
minimum levels of capital, computed in accordance with regulatory requirements
("net capital"), that the Broker-Dealers are required to maintain and also limit
the amount of leverage that the Broker-Dealers are able to obtain in their
businesses.
Equitable Life, AXA Advisors, Alliance and certain affiliates of Alliance also
are registered as investment advisers under the Investment Advisers Act of 1940,
as amended (the "Investment Advisers Act"). Many of the investment companies
managed by Alliance, including a variety of mutual funds and other pooled
investment vehicles, are registered with the SEC under the Investment Company
Act. The investment advisory activities of Equitable Life, AXA
Advisors and Alliance are subject to various Federal and state laws and
regulations and to the laws in those foreign countries in which they conduct
business. These laws and regulations generally grant supervisory agencies broad
administrative powers, including the power to limit or restrict the carrying on
of business for failure to comply with such laws and regulations. In case of
such an event, the possible sanctions that may be imposed include the suspension
of individual employees, limitations on engaging in business for specific
periods, revocation of registration as an investment adviser, censures and
fines.
Recently, regulators, including the SEC, the NASD and state attorneys general,
have focused attention on various practices in or affecting the investment
management and/or mutual fund industries, including market timing and late
trading. The SEC defines market timing as the practice of short-term buying and
selling of mutual fund shares in a manner that exploits pricing inefficiencies
and market movements. Rule 22c-1 of the Investment Company Act (often referred
to as the "forward pricing" rule) requires mutual funds to sell and redeem fund
shares at a price based on current net asset value ("NAV") which is computed
after receipt of an order to buy or redeem. This rule also requires mutual funds
to calculate their NAV at least once a day, and most mutual funds do so when the
major U.S. stock exchanges close at 4 p.m. Eastern Time. Late trading refers to
the illegal practice of permitting a purchase or redemption order received after
the 4 p.m. pricing time to receive the share price calculated as of 4 p.m.,
thereby allowing the late trader to take advantage of news or events that occur
after 4 p.m. but which are not yet reflected in the day's price. Equitable Life,
EQAT, Premier Trust, VIP Trust, AXA Advisors and AXA Distributors have received
various requests for information and documents from the SEC and the NASD
regarding these practices. Each of the requests has been responded to and the
requested documents have been provided. In January 2004, the SEC completed an
onsite examination of EQAT, Premier Trust, VIP Trust, Equitable Life, as the
investment adviser to the Trusts, and the Trusts' distributors. The SEC has
advised Equitable Life that no deficiencies or violations came to the SEC's
attention during the examination. For additional information, see "Management
Narrative -- Forward-Looking Statements and Risk Considerations".
Sales of variable insurance and annuity products are regulated by the SEC and
NASD. Currently, the SEC and NASD are investigating certain sales practices
involving certain sales of variable annuities in the context of a replacement
or "Section 1035 exchange" transaction. A Section 1035 exchange permits the
exchange of one variable annuity or life insurance contract for another without
paying any tax on the income and investment gains of the original contract. The
NASD has recently requested from a number of broker-dealers, including AXA
Advisors, information and documents regarding the replacement of variable
annuities. AXA Advisors has complied with this request.
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In addition, the SEC has requested from a number of entities, including
Equitable Life, AXA Advisors, AXA Distributors, EQAT, VIP Trust and Premier
Trust information relating to certain practices often referred to as "revenue
sharing" and the use of fund portfolio brokerage commissions. Such request has
been responded to.
Alliance Market Timing Investigations - As noted above, certain regulators
including the SEC and state attorneys general (including, in the case of
Alliance, the Office of the New York State Attorney General ("NYAG")), have been
investigating practices in the mutual fund industry identified as "market
timing" and "late trading" of mutual fund shares. 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 cooperated with all of these authorities. In connection with investigations
by the SEC and NYAG, the board of directors of the general partner of Alliance
(the "Alliance Board") appointed a special committee (the "Special Committee"),
consisting of all of the independent directors of the Alliance Board to direct
and oversee a comprehensive review of the facts and circumstances relating to
the issues being investigated by the SEC, the NYAG and other interested
authorities. The Alliance Board authorized the Special Committee 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 so assist it. Information about the
initial results of the internal investigation and the activities of the Special
Committee are set forth in Alliance's Form 10-Q for the quarter ended September
30, 2003.
On December 18, 2003, Alliance reached terms with the SEC for the
resolution of regulatory claims against Alliance with respect to market timing.
The agreement with the SEC is reflected in an Order Instituting Administrative
and Cease-and-Desist Proceedings pursuant to Sections 203(e) and 203(k) of the
Investment Advisers Act and Sections 9(b) and 9(f) of the Investment Company
Act, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist
Order of the Commission (as amended on January 15, 2004, the "Order"). The Order
found 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"). The Order also stated that the SEC determined to accept an
Offer of Settlement submitted by Alliance. Alliance concurrently reached an
agreement in principle with the NYAG, which is subject to final, definitive
documentation.
These and related matters are the subject of an ongoing investigation by the
Special Committee and its counsel.
On February 10, 2004, Alliance received (i) a subpoena duces tecum from the
Office of the Attorney General of the State of West Virginia and (ii) a request
for information from the Office of the State Auditor, Securities Commission, for
the State of West Virginia (together, the "Information Requests"). Both
Information Requests call for Alliance to produce documents concerning, among
other things, any market timing or late trading in Alliance sponsored mutual
funds.
Terms of Order and NYAG Agreement. Among the key provisions of the Order and the
agreement with the NYAG (each, an "Agreement") are the following: Under both
Agreements, Alliance must establish a $250.0 million fund to compensate fund
shareholders for the adverse effect of market timing. Of the $250.0 million
fund, the Agreements characterize $150.0 million as disgorgement and $100.0
million as a penalty. The Agreement with the NYAG requires a weighted average
reduction in fees of 20.0% with respect to investment advisory agreements with
Alliance's sponsored U.S. long-term open-end retail funds for a minimum of five
years, which commenced January 1, 2004. This reduction in fees is expected to
reduce Alliance revenues by approximately $70.0 million in 2004.
Under the Agreements, the boards of the U.S. Funds, all of which have already
moved to elect independent chairmen from among their independent directors, will
also have independent directors that comprise at least 75.0% of each board, and
will add a senior officer and any needed staff to assist the boards in their
oversight of compliance, fiduciary issues and conflicts of interest.
Alliance has retained the services of an Independent Distribution Consultant,
who is subject to the approval of the staff of the SEC and to the independent
directors of the U.S. Funds. The Independent Distribution Consultant has been
retained to create a plan for the distribution of the $250.0 million fund to
mutual fund shareholders. To the extent the Independent Distribution Consultant
concludes that the harm to mutual fund shareholders caused by market timing
exceeds $200.0 million, Alliance will be required to contribute additional
monies to the restitution fund. The plan will be submitted to the SEC and
Alliance for approval. After the SEC and management of Alliance agree on the
distribution plan, it will be published and the public will be afforded an
opportunity to
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comment. After the comment period has ended, the SEC will issue an order
approving the final plan. Restitution payments under the plan are not likely to
be made prior to the fall of 2004.
The terms and conditions of the Agreements also include, among others: formation
of a Code of Ethics Oversight Committee, composed of senior executives of
Alliance's operating businesses, to oversee all matters relating to issues
arising under the Alliance Capital Code of Ethics; establishment of an Internal
Compliance Controls Committee, chaired by Alliance's Chief Compliance Officer,
which shall review compliance issues throughout Alliance, endeavor to develop
solutions to those issues as they may arise from time to time, and oversee
implementation of those solutions; establishment of a company ombudsman to whom
Alliance employees may convey concerns about Alliance business matters that they
believe involve matters of ethics or questionable practices; engagement of an
Independent Compliance Consultant who shall conduct a comprehensive review of
Alliance's supervisory, compliance, and other policies and procedures designed
to prevent and detect conflicts of interest, breaches of fiduciary duty,
breaches of the Code of Ethics and Federal securities law violations by Alliance
and its employees; and commencing in 2005, and biannually thereafter, Alliance
shall undergo a compliance review by an independent third party.
Alliance recorded a pre-tax charge to income of $190.0 million for the quarter
ended September 30, 2003 to cover restitution, litigation and other costs
associated with these investigations and other litigation. Alliance recorded an
additional $140.0 million pre-tax charge against its fourth quarter 2003
earnings in connection with these matters. As a result of these charges, the
board of directors of the general partner of Alliance and Alliance Holding
determined not to pay a distribution to their respective unitholders for fourth
quarter 2003. Distributions are expected to resume for first quarter 2004, with
payout policy returning to traditional levels in relation to cash flow for the
second quarter 2004. For more information about the effect of the $250.0 million
fund, the related charges and the fee reduction on Alliance's results of
operations, financial condition and distributions, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Item 7 of
Alliance's Form 10-K for the year ended December 31, 2003.
Revenue Sharing. Alliance and approximately twelve other investment management
firms were publicly mentioned in connection with the settlement by the SEC of
charges that Morgan Stanley violated Federal securities laws relating to its
receipt of compensation for selling specific mutual funds and the disclosure of
such compensation. The SEC has indicated publicly that, among other things, it
is considering enforcement action in connection with mutual funds' disclosure of
such arrangements and in connection with the practice of considering mutual fund
sales in the direction of brokerage commissions from fund portfolio
transactions. The SEC has issued subpoenas to Alliance in connection with this
matter and Alliance has provided documents and other information to the SEC and
is cooperating fully with its investigation.
PRIVACY OF CUSTOMER INFORMATION. Federal and state law and regulation require
financial institutions to protect the security and confidentiality of customer
information and to notify customers about their policies and practices relating
to their collection, disclosure and protection of customer information. Federal
and state laws also regulate disclosures of customer information. Congress and
state legislatures are expected to consider additional regulation relating to
privacy and other aspects of customer information.
PARENT COMPANY
AXA, the sole shareholder of the Holding Company, is the holding company for an
international group of insurance and related financial services companies
engaged in the financial protection and wealth management business. AXA is the
largest French insurance group and one of the largest insurance groups in the
world. AXA operates primarily in Western Europe, North America, Asia/Pacific
region and, to a lesser extent, in other regions including the Middle East,
Africa and South America. AXA has five operating business segments: life and
savings, property and casualty, international insurance (including reinsurance),
asset management, and other financial services.
Neither AXA nor any affiliate of AXA has any obligation to provide additional
capital or credit support to the Holding Company or any of its subsidiaries.
VOTING TRUST. In connection with AXA's application to the Superintendent for
approval of its acquisition of capital stock of the Holding Company, AXA and the
initial Trustees of the Voting Trust entered into a Voting Trust Agreement,
dated as of May 12, 1992 (as amended by the First Amendment, dated January 22,
1997, and as amended and restated by the Amended and Restated Voting Trust
Agreement, dated May 12, 2002, the "Voting Trust Agreement"). Pursuant to the
Voting Trust Agreement, AXA and its affiliates ("AXA Parties") have deposited
the shares of the Holding Company's Common Stock held by them in the Voting
Trust. The purpose of the Voting Trust is to ensure
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for insurance regulatory purposes that certain indirect minority shareholders of
AXA will not be able to exercise control over the Holding Company or Equitable
Life.
AXA and any other holder of voting trust certificates will remain the beneficial
owner of the shares deposited by it, except that the Trustees will be entitled
to exercise all voting rights attaching to the deposited shares so long as such
shares remain subject to the Voting Trust. In voting the deposited shares, the
Trustees must act to protect the legitimate economic interests of AXA and any
other holders of voting trust certificates (but with a view to ensuring that
certain indirect minority shareholders of AXA do not exercise control over the
Holding Company or Equitable Life). All dividends and distributions (other than
those which are paid in the form of shares required to be deposited in the
Voting Trust) in respect of deposited shares will be paid directly to the
holders of voting trust certificates. If a holder of voting trust certificates
sells or transfers deposited shares to a person who is not an AXA Party and is
not (and does not, in connection with such sale or transfer, become) a holder of
voting trust certificates, the shares sold or transferred will be released from
the Voting Trust. The initial term of the Voting Trust ended in 2002 and the
term of the Voting Trust has been extended, with the prior approval of the
Superintendent, until May 12, 2012. Future extensions of the term of the Voting
Trust remain subject to the prior approval of the Superintendent.
OTHER INFORMATION
All of the Company's officers and employees, including its chief executive
officer, chief financial officer and controller, are subject to the Policy
Statement on Ethics (the "Code"), a code of ethics as defined under
Regulation S-K.
The Code complies with Section 406 of the Sarbanes-Oxley Act of 2002 and is
available on the Company's website at www.equitable.com. The Company intends
to satisfy the disclosure requirements under Item 10 of Form S-K regarding
certain amendments to or waivers from provisions of the Code that apply to its
chief executive officer, chief financial officer and controller by posting such
information on its website at the above address.
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Part I, Item 2
PROPERTIES
INSURANCE
Equitable Life leases on a long-term basis approximately 810,000 square feet of
office space located at 1290 Avenue of the Americas, New York, NY, which serves
as the Holding Company's and Equitable Life's headquarters. Additionally,
Equitable Life leases an aggregate of approximately 40,000 square feet of office
space at two other locations in New York, NY, substantially all of which has
been subleased. Equitable Life also has the following significant office space
leases: 244,000 square feet in Secaucus, NJ, under a lease that expires in 2011
for its Annuity Operations; 185,000 square feet in Charlotte, NC, under a lease
that expires in 2013 for use by its National Operations Center; 113,000 square
feet in Alpharetta, GA, under a lease that expires in 2006 for its Distribution
Organizations' training and support use; and 67,800 square feet in Leonia, NJ,
under a lease that expires in 2009 for its Information Technology processing
use. Equitable Life owns an office building of approximately 22,000 square feet
in Harrisburg, PA that house AXA Network personnel. In addition, Equitable Life
leases property both domestically and abroad, the majority of which houses sales
and distribution operations. Management believes its facilities are adequate for
its present needs in all material respects. For additional information, see Note
19 of Notes to Consolidated Financial Statements.
Equitable Life subleases its office space at 1290 Avenue of the Americas to the
New York City Industrial Development Agency (the "IDA"), and sub-subleases that
space back from the IDA, in connection with the IDA's granting of sales tax
benefits to Equitable Life.
INVESTMENT SERVICES
Alliance's principal executive offices at 1345 Avenue of the Americas, New York,
NY are occupied pursuant to a lease that extends until 2019. Alliance currently
occupies approximately 568,500 square feet of space at this location. Alliance
also occupies approximately 114,097 square feet of space at 135 West 50th
Street, New York, NY, and approximately 75,630 square feet of space at 767 Fifth
Avenue, New York, NY, under leases expiring in 2016 and 2005, respectively.
Alliance also occupies approximately 21,057 square feet of space at 925
Westchester Avenue, White Plains, NY, 4,341 square feet of space at One North
Broadway, White Plains, NY, and 141,002 square feet of space at One North
Lexington, White Plains, NY, under leases expiring in 2008. Alliance and its
subsidiaries, ABIRM and Alliance Global Investor Services, Inc., occupy
approximately 134,261 square feet of space in Secaucus, NJ, approximately 92,067
square feet of space in San Antonio, TX, and approximately 60,653 square feet of
space in Scranton, PA, under leases expiring in 2016, 2009, and 2005,
respectively.
Alliance also leases space in 11 cities in the United States and its
subsidiaries and affiliates lease space in London, England under leases expiring
in 2010, 2015 and 2021, in Tokyo, Japan under leases expiring in 2004, 2006 and
2007 and in 25 other cities outside the United States.
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PART I, ITEM 3.
LEGAL PROCEEDINGS
The matters set forth in Note 16 of Notes to the Company's Consolidated
Financial Statements for the year ended December 31, 2003 (Item 8 of this
report) are incorporated herein by reference, with the following additional
information.
In MAHOLTRA, in February 2004, the District Court issued a decision withdrawing
without prejudice defendants' motion to dismiss the second amended complaint
with leave to refile because the parties did not comply with the court's
Individual Motion Practices. In March 2004, defendants filed a renewed motion to
dismiss the second amended complaint in accordance with the court's Individual
Motion Practices.
In THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES V. AMERICAN
NATIONAL BANK AND TRUST COMPANY OF CHICAGO, AS TRUSTEE F/B/O EMERALD
INVESTMENTS LP AND EMERALD INVESTMENTS LP, in March 2004, the District Court
granted defendant's motion for summary judgment dismissing Equitable Life's
complaint. Equitable Life has filed a notice of appeal from this decision.
In FISCHEL, in February 2004, the District Court allowed Equitable Life to file
a motion for reconsideration of the May 2002 order and scheduled a hearing on
reconsideration for April 2004.
In BERGER, in March 2004, the United States District Court for the Northern
District of Illinois entered an order certifying a class consisting of "[a]ll
present, former, and retired Equitable Life agents who (a) lost eligibility for
benefits under any Equitable Life ERISA plan during any period on or after
January 1, 1999 because of the application of the policy adopted by Equitable
Life of using compliance with specified sales goals to determine who was a `full
time life insurance salesman' and thereby eligible for benefits under any such
plan, or (b) remain subject to losing such benefits in the future because of the
potential application to them of that policy."
In the MONY STOCKHOLDER LITIGATION, on January 16, 2004, after the filing and
mailing on January 8, 2004 of the definitive proxy statement for the proposed
merger, plaintiffs sought and were granted leave to amend their complaint to
include additional allegations relating to the accuracy and completeness of
information disclosed by MONY in the definitive proxy statement. On January 20,
2004, the Court of Chancery granted plaintiffs' request to schedule a hearing on
a motion for a preliminary injunction to enjoin the MONY shareholder vote on the
proposed merger, which had been scheduled to occur at a special meeting on
February 24, 2004. A hearing on plaintiffs' motion for a preliminary injunction
was held on February 13, 2004. In an opinion dated February 17, 2004, Vice
Chancellor Lamb denied plaintiffs' motion for a preliminary injunction on all
but one of plaintiffs' grounds. Vice Chancellor Lamb granted plaintiffs' motion
to the extent of enjoining MONY from proceeding with the special meeting to vote
on the merger until MONY first disclosed additional information relating to the
benefits to be received by senior executives under change in control agreements.
An order to that effect was entered on March 1, 2004. On March 9, 2004, the
Court of Chancery granted plaintiffs leave to file a second amended complaint
that alleges, among other things, that the MONY directors breached their
fiduciary duties based on plaintiffs' allegations that (i) MONY is attempting to
manipulate the shareholder vote on the proposed merger by rescheduling the
special meeting and setting a new record date for the shares to be voted, (ii)
MONY selectively communicated its intent to change the record date to certain
investors so as to enable them to acquire voting power, and (iii) MONY's press
release announcing its board's decision to reschedule the meeting and record
dates was materially false and misleading. The second amended complaint seeks an
order directing MONY to reinstate the record date of January 2, 2004 or,
alternatively, denying certain MONY shareholders the power to vote shares
allegedly purchased by them based on selective disclosure that the record date
would be reset. In a telephonic conference held on March 19, 2004, the Court of
Chancery scheduled a hearing for April 6, 2004 on plaintiffs' second preliminary
injunction motion, to be brought on the basis of the new allegations in the
second amended complaint. The preliminary injunction sought by plaintiffs, if
granted, would invalidate all votes which may be cast at the May 18, 2004
shareholders' meeting by MONY shareholders who did not hold their shares on the
original record date, January 2, 2004.
3-1
PART I, ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K.
4-1
PART II, ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
At December 31, 2003, all of Equitable Life's common equity is owned by AXA
Financial Services, LLC, a wholly owned direct subsidiary of AXA Financial,
Inc., which is a wholly owned subsidiary of AXA. Consequently, there is no
established public market for Equitable Life's common equity. In 2003 and 2002,
respectively, Equitable Life paid shareholder dividends of $400.0 million and
$500.0 million. For information on Equitable Life's present and future ability
to pay dividends, see Note 18 of Notes to Consolidated Financial Statements
(Item 8 of this report).
5-1
PART II, ITEM 6.
SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I to Form 10-K.
6-1
PART II, ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is omitted pursuant to General Instruction
I(2)(a) of Form 10-K. The management narrative for the Company that follows
should be read in conjunction with the consolidated financial statements and
related notes to consolidated financial statements and information discussed
under forward-looking statements included elsewhere in this Form 10-K.
GENERAL
On December 18, 2003, Alliance confirmed settlement agreements with the SEC and
the NYAG to resolve regulatory claims relating to market timing transactions in
shares of certain mutual funds sponsored by Alliance. Key provisions of the
settlement agreements included:
o The establishment of a $250 million fund to compensate fund shareholders
for the adverse effects of market timing in some of its mutual funds, of
which $150 million is characterized as disgorgement and $100 million as
a penalty, and
o A weighted average reduction in fees of 20% on Alliance sponsored U.S.
long-term open-end retail funds, commencing January 1, 2004, for a
minimum of 5 years.
In connection with the settlements, Alliance accrued a pre-tax total charge of
$330 million in the second half of 2003 for mutual fund matters and legal
proceedings. The post-tax effect of this settlement on the Company's net
earnings after reflecting its impact on incentive compensation, income taxes and
minority interest was $90.1 million. As a result of the settlement charges,
Alliance suspended distributions to its unitholders in fourth quarter 2003.
Distributions are expected to resume for first quarter 2004, with payout policy
returning to traditional levels in relation to cash flow for second quarter
2004. Alliance's aggregate management fee reduction related to the settlement
agreements for 2004 is expected to be approximately $70 million, based on year
end 2003 assets under management. At December 31, 2003, the Company had a 42.6%
economic interest in Alliance: when combined with the Holding Company's
interest, the consolidated economic interest in Alliance increases to 55.5%.
A review by the Company in 2003 of Federal income tax assets and liabilities
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, 2002 has been reduced by $221.1 million,
and the consolidated shareholder's equity as of December 31, 2002 and 2001 has
been increased by $221.1 million, with no impact on the consolidated statements
of earnings for the years ended December 31, 2002 and 2001 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,
2001.
On September 17, 2003, the Holding Company and 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 stockholders will receive $31.00
for each share of MONY common stock. On February 22, 2004, the merger agreement
was amended to permit MONY to declare a dividend of $0.10 on each share of MONY
common stock in addition to the $0.23 to $0.25 dividend that MONY announced on
February 5, 2004. The amended merger agreement also made certain modifications
to the appraisal rights closing condition. Subject to the receipt of MONY
stockholder and certain regulatory approvals, and certain other conditions, and
is anticipated that the transaction would close in second quarter 2004. The
Holding Company intends to obtain the funds necessary to finance the merger from
AXA in the form of either debt or equity.
In December 2003, the Holding Company bought and subsequently exercised warrants
to purchase 2,228,574 shares of MONY common stock from GS Mezzanine Partners,
L.P. and affiliated investment funds managed by Goldman Sachs & Co. at a price
of $30.80 a share less the warrant strike price of $23.50 a share. These shares
of MONY common stock were included in Other equity investments in the
consolidated Balance Sheets, included elsewhere herein, while unrealized
appreciation of $1.1 million ($0.7 million, net of tax) was included in
Comprehensive income and consolidated shareholders' equity.
The consolidated and segment earnings narratives that follow discuss the results
for 2003 compared to the 2002 results.
7-1
CONSOLIDATED RESULTS OF OPERATIONS
Earnings from continuing operations before Federal income taxes and minority
interest were $950.2 million for 2003, a decrease of $78.4 million from the
$1.03 billion reported in 2002. The decrease resulted from a $272.1 million
decrease in the Investment Services segment principally due to the Alliance
charge for mutual fund matters and legal proceedings discussed above partially
offset by a $193.7 million increase for the Insurance segment.
Total revenues increased $55.5 million to $7.40 billion in 2003 from $7.35
billion in 2002 as the $61.0 million increase in the Insurance segment was
partially offset by a $6.4 million decline in the Investment Services segment.
The 2003 Insurance segment increase principally resulted from lower investment
losses and higher policy fee income partially offset by lower premiums and lower
commissions, fees and other income primarily due to the decline in the fair
value of derivative reinsurance contracts in the Insurance segment. Lower
distribution and institutional research services revenues contributed to the
decline in Investment Services segment revenues.
Total benefits and other deductions were $6.45 billion in 2003, a $133.9 million
increase as compared to $6.32 billion 2002. The increase resulted from the $330
million charge related to the Alliance charge for mutual fund matters and legal
proceedings as well as higher compensation and benefits in both segments and
higher DAC amortization in the Insurance segment in 2003, partially offset by
lower policyholders' benefits in the Insurance segment related to the decrease
in GMDB/GMIB reserves due to the improvement in equity market conditions in
2003.
Federal income tax expense totaled $240.5 million in 2003 as compared to the
$50.9 million reported in 2002. The 2003 tax increase resulted principally from
increased earnings in the Insurance segment and the absence of the 2002 tax
benefit of $144.3 million related to the favorable treatment of certain tax
matters associated with 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.
In 2002, the Company reported the cumulative effect of an accounting change of
$(33.1) million (net of Federal income tax benefits of $17.9 million). The 2002
amount resulted from the Company's change in the method of accounting for
liabilities associated with variable annuity contracts with GMDB/GMIB features.
For further information, see "Accounting Changes" in Note 2 of Notes to
Consolidated Financial Statements.
Net earnings were $524.4 million for 2003 compared to $587.4 million for 2002
resulting principally from $77.0 million lower net earnings in the Investment
Services segment in 2003 principally due to the $90.1 million effect of the
Alliance charge for mutual fund matters and litigation on the Company, partially
offset by $14.0 million higher net earnings in the Insurance segment.
7-2
RESULTS OF CONTINUING OPERATIONS BY SEGMENT
INSURANCE.
INSURANCE - RESULTS OF OPERATIONS
(IN MILLIONS)
2003 2002
----------------- ------------------
Universal life and investment-type product policy fee income...................... $ 1,376.7 $ 1,315.5
Premiums.......................................................................... 889.4 945.2
Net investment income............................................................. 2,340.8 2,331.2
Investment losses, net............................................................ (66.4) (279.0)
Commissions, fees and other income................................................ 193.9 360.5
------------------------------------
Total revenues............................................................... 4,734.4 4,673.4
------------------------------------
Policyholders' benefits........................................................... 1,708.2 2,036.0
Interest credited to policyholders' account balances.............................. 969.7 972.5
Compensation and benefits......................................................... 391.7 314.6
Commissions....................................................................... 991.9 788.8
Deferred policy acquisition costs, net............................................ (556.1) (458.1)
Rent expense ..................................................................... 67.9 66.7
Interest expense ................................................................. 58.9 72.5
All other operating costs and expenses............................................ 470.6 442.5
------------------------------------
Total benefits and other deductions.......................................... 4,102.8 4,235.5
------------------------------------
Earnings from Continuing Operations before Federal Income Taxes................... $ 631.6 $ 437.9
====================================
In 2003, pre-tax earnings from continuing operations in the Insurance segment
increased $193.7 million to $631.6 million as compared to $437.9 million in
2002, principally due to lower policyholders' benefits resulting from a decrease
in reserves related to variable annuity products with GMDB/GMIB features, higher
policy fee income and lower investment losses partially offset by the decrease
in commissions, fees and other income, higher compensation and benefits and
higher DAC amortization.
Segment revenues increased $61.0 million over the prior year period as $61.2
million higher policy fee income and $212.6 million lower investment losses, net
were partially offset by a $166.6 million decrease in commissions, fees and
other income due to the decrease in the fair value of derivative reinsurance
contracts and a $55.8 million decline in premiums.
Policy fee income totaled $1.38 billion in 2003, as compared to $1.32 billion in
the prior year, reflecting higher average Separate Account balances resulting
from positive net cash flows and market appreciation.
Premiums decreased $55.8 million in 2003 reflecting a lower level of renewal
premiums on traditional life products due to the Insurance segment's continuing
focus on sales of variable and interest-sensitive life and annuity products
whose revenues are not reported as premiums and lower reinsurance assumed on
accident and health pools in runoff.
Net investment income increased $9.6 million as $92.5 million higher earnings on
equity securities, due to equity market improvements, and slightly higher income
on fixed maturities, that resulted from lower yields on a higher General Account
asset base, were offset by lower income on mortgages and real estate of $35.7
million and $20.8 million, respectively, $34.4 million of net losses on equity
futures contracts related to the program to hedge certain risks associated with
the GMDB feature and higher management fees. In addition, management plans to
implement hedging strategies to further mitigate exposure to GMIB liabilities.
Investment losses, net were $66.4 million in 2003, $212.6 million lower than in
2002, principally as a result of net gains on sales of fixed maturities of $92.5
million as compared to net losses of $61.5 million in 2002 and writedowns of
$193.2 million on fixed maturities, down $119.6 million from 2002. The 2003
fixed maturity writedowns occurred principally in the airline, materials and
other industrials sectors and on collateralized bond obligations ("CBOs"). The
2002 losses were partially offset by a $96.8 million gain on the sale of a
single real estate property in
7-3
second quarter 2002. The 2002 fixed maturity writedowns occurred primarily on
securities in the telecommunications, airline, utilities and energy sectors
while the losses on fixed maturity sales included $97.2 million and $32.5
million of losses on telecommunications and utilities securities, respectively.
In fourth quarter 2002, writedowns of $170.3 million were taken, principally on
securities in the utilities, airline, energy and telecommunications industries,
while losses on fixed maturities sales totaling $20.2 million were primarily due
to losses on utilities and telecommunications securities.
Commissions, fees and other income decreased $166.6 million to $193.9 million in
2003 as compared to 2002 principally due to the $91.0 million decrease in the
fair value of the GMIB reinsurance contracts accounted for as derivatives as
compared with the $120.0 million increase recorded in 2002.
Total benefits and other deductions in 2003 decreased $132.7 million from 2002
as lower policyholders' benefits were partially offset by higher compensation
and benefits and higher DAC amortization.
The $327.8 million decrease in policyholders' benefits was principally due to
the $86.3 million decrease in reserves primarily related to the GMDB/GMIB
features contained in certain variable annuity contracts due to the recent
improvement in market conditions in 2003 as compared to the $173.0 million
increase reported in 2002 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 declined $2.8 million in
2003 as the impact of lower crediting rates was substantially offset by higher
General Account balances.
Compensation and benefits for the Insurance segment increased $77.1 million to
$391.7 million in 2003 as compared to $314.6 million in 2002 due in part to
higher qualified pension expenses, including the impact of reducing the
long-range return on assets assumption for the qualified pension plan from 9.0%
as of January 2002 to 8.5% as of January 2003. Additionally, the 2003 total
included $12.0 million of expenses resulting from the changes in the Stock
Appreciation Rights' liability as compared to credits of $10.2 million in 2002.
Commissions increased $203.1 million in 2003 from $788.8 million in 2002 due to
higher sales of variable annuity contracts in both the wholesale and retail
channels.
DAC amortization increased to $434.6 million in 2003, up $137.9 million from
$296.7 million in 2002. This increase in DAC amortization was principally due to
higher margins in products that are DAC reactive.
DAC for universal life, investment-type and participating traditional life
policies is amortized over the expected total life of the contract group as a
constant percentage of estimated gross profits (for universal life and
investment-type contracts) or margins (for participating traditional life
policies). Estimates and assumptions underlying these DAC amortization rates are
reassessed and updated at the end of each reporting period ("DAC unlocking").
The effect of DAC unlocking is reflected in earnings in the period such
estimated gross profits are revised. A decrease in expected gross profits would
accelerate DAC amortization. Conversely, an increase in expected gross profits
would slow DAC amortization.
Expected gross profits for variable and interest-sensitive life insurance and
variable annuities arise principally from investment results, Separate Account
fees, mortality and expense margins and surrender charges. A significant
assumption in the development of expected gross profits and, therefore, the
amortization of DAC on these products relates to projected future Separate
Account performance. Expected future gross profit assumptions related to
Separate Account performance are set by management using a long-term view of
expected average market returns by applying a reversion to the mean approach. In
applying this approach to develop estimates of future returns, it is assumed
that the market will return to an average gross long-term return estimate,
developed with reference to historical long-term equity market performance and
subject to assessment of the reasonableness of resulting estimates of future
return assumptions. For purposes of making this reasonableness assessment,
management has set limitations as to maximum and minimum future rate of return
assumptions, as well as a limitation on the duration of use of these maximum or
minimum rates of return. Currently, the average gross long-term annual return
estimate is 9.0% (7.05% net of product weighted average Separate Account fees),
and the gross maximum and minimum annual rate of return limitations are 15%
(13.05% net of product weighted average Separate Account fees) and 0% (-1.95%
net of product weighted average Separate Account fees), respectively. The
maximum duration over which these rate limitations may be applied is 5 years.
This approach will continue to be applied in future periods. If actual market
returns continue at levels that would result in assuming future market returns
of 15% for more than 5 years in order
7-4
to reach the average gross long-term return estimate, the application of the 5
year maximum duration limitation would result in an acceleration of DAC
amortization. Conversely, actual market returns resulting in assumed future
market returns of 0% for more than 5 years would result in a required
deceleration of DAC amortization. As of December 31, 2003, current projections
of future average gross market returns for purposes of this approach assume a
4.7% return for 2004 which is within the maximum and minimum limitations and
assume a reversion to the mean of 9.0% after one year.
In addition, projections of future mortality assumptions related to variable and
interest-sensitive life products are based on a long-term average of actual
experience. This assumption is updated quarterly to reflect recent experience as
it emerges. Improvement of life mortality in future periods from that currently
projected would result in future deceleration of DAC amortization. Conversely,
deterioration of life mortality in future periods from that currently projected
would result in future acceleration of DAC amortization. Generally, life
mortality experience has improved in recent periods.
DAC capitalization increased $235.9 million from $754.8 million in 2002 to
$990.7 million in 2003 due to higher commissions and deferrable operating
expenses.
Interest expense decreased $13.6 million to $58.9 million in 2003 principally
due to lower short-term borrowings.
Premiums and Deposits. First year premiums and deposits for insurance and
annuity products in 2003 increased from prior year levels by $3.83 billion to
$10.42 billion while total premiums and deposits increased $3.87 billion to
$14.65 billion. The increases were primarily due to $3.93 billion higher first
year sales of individual annuities in both the wholesale and retail channels.
The variable annuity increase in 2003 reflected strong sales of the
Accumulator(R)'02 annuity product series that is being phased out and replaced
with an updated version. While the features of the updated version are
substantially similar to the Accumulator(R)'02 product, there can be no
assurance as to the comparability of sales of the updated version to those of
the product that it is replacing.
Surrenders and Withdrawals. Policy and contract surrenders and withdrawals
decreased $207.1 million to $4.94 billion during 2003 compared to $5.15 billion
in 2002. The annuity surrender rates decreased from 10.1% in 2002 to 8.4% in
2003. Excluding a single large pension plan contract that surrendered in second
quarter 2002, which totaled $123.8 million, the 2002 surrender rate decreased to
9.8%. The individual life surrender rate increased to 4.4% from 4.0% in the
prior year. The trends in surrenders and withdrawals continue to fall within the
range of expected experience.
7-5
INVESTMENT SERVICES.
The table that follows presents the operating results of the Investment Services
segment, consisting principally of Alliance's operations.
INVESTMENT SERVICES - RESULTS OF OPERATIONS
(IN MILLIONS)
2003 2002
--------------- ----------------
Revenues:
Investment advisory and services fees (1)............................. $ 1,882.4 $ 1,847.9
Distribution revenues................................................. 436.0 467.5
Institutional research services....................................... 267.9 294.9
Shareholder servicing fees............................................ 94.3 101.6
Other revenues, net (1)............................................... 57.9 33.0
--------------- ----------------
Total revenues.................................................... 2,738.5 2,744.9
--------------- ----------------
Expenses:
Alliance employee compensation and benefits........................... 914.5 907.1
Promotion and servicing:
Distribution plan payments......................................... 370.6 392.8
Amortization of deferred sales commissions......................... 208.6 229.0
Other promotion and servicing expenses............................. 165.0 193.3
Alliance interest expense............................................. 25.3 27.4
Amortization of goodwill and intangibles.............................. 25.1 24.2
Other operating expenses.............................................. 380.8 380.4
Charge for mutual fund matters and legal proceedings.................. 330.0
--------------- ----------------
Total expenses.................................................... 2,419.9 2,154.2
--------------- ----------------
Earnings from Continuing Operations before
Federal Income Taxes and Minority Interest........................... $ 318.6 $ 590.7
=============== ================
(1) Includes fees earned by Alliance totaling $37.6 million and $36.2 million
in 2003 and 2002, respectively, for services provided to the Insurance
Group.
Investment Services' pre-tax earnings from continuing operations for 2003 were
$318.6 million, a decrease of $272.1 million from the prior year. Revenues
totaled $2.74 billion in 2003, a slight decrease of $6.4 million from 2002, as
$31.4 million lower distribution revenues, $27.0 million lower institutional
research services revenues and $7.3 million lower shareholder servicing fees due
to shareholder account terminations were offset by a $34.5 million increase in
investment advisory and services fees and $24.9 million increase in other
revenues, net. The decrease in distribution revenues was principally due to
lower average daily mutual fund assets under management ("AUM"). The decrease in
institutional research services revenues was generally due to lower NYSE
transaction volume and lower domestic price realization partially offset by
higher market share of addressable non-program trading NYSE volume and higher
Sanford C. Bernstein Limited revenues in Europe. Investment advisory and
services fees include brokerage transaction charges for SCB LLC. The increase in
investment advisory and services fees primarily resulted from an increase in
performance fees from $54.1 million in 2002 to $81.8 million in 2003, market
appreciation of AUM and net asset inflows partially offset by $10.1 million
lower commissions due to lower brokerage transaction volume. Higher performance
fees in 2003 were earned primarily by certain hedge funds due to an improved
market environment for value and growth equity stocks. The 2002 performance fees
were primarily related to lower investment returns, caused by adverse equity and
fixed income markets, earned by certain hedge funds investing in value stocks
and certain growth investment advisory contracts, partially offset by higher
performance fees in certain value investment advisory contracts. The increase in
other revenues, net in 2003 was principally a result of mark to market gains on
investments in Alliance mutual funds.
The segment's total expenses were $2.42 billion in 2003, compared to $2.15
billion in 2002, an increase of $265.7 million. The 2003 total included the
$330.0 million charge related to Alliance's charge for mutual fund matters and
legal proceedings. When this charge is excluded, the Investment Services
segment's total expenses would have decreased $64.3 million in 2003 primarily
due to a $70.9 million decrease in promotion and servicing expenses. Lower
distribution plan payments, lower amortization of deferred sales commissions and
a decrease in all other promotion and servicing expenses due to lower printing
and mailing expense as a result of cost containment initiatives contributed to
the promotion and servicing expense decline in 2003. There was a $7.4 million
increase in
7-6
Alliance employee compensation and benefits in 2003 as compared to 2002 as a
result of higher incentive compensation expense partially offset by lower
commission expense. Base compensation and fringes and other compensation
decreased in 2003 primarily due to lower base compensation resulting from lower
average headcount. Incentive compensation increased in 2003 as a result of
higher deferred compensation amortization due to vesting, partially offset by
lower short-term incentive compensation expense reflecting the decrease in net
income caused by the charge to income for mutual fund matters and legal
proceedings. Commission expense was lower in 2003 as a result of lower retail
sales and the implementation of a new deferred sales substitution plan.
ASSETS UNDER MANAGEMENT
A breakdown of the Company's and the Holding Company's AUM follows:
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
December 31,
--------------------------------------
2003 2002
------------------ ------------------
Third party (1).......................................................... $ 413,956 $ 337,984
Equitable Life General Account, the Holding Company
and its other affiliates (2).......................................... 39,913 38,315
Separate Accounts........................................................ 54,438 39,012
------------------ ------------------
Total Assets Under Management........................................ $ 508,307 $ 415,311
================== ==================
(1) Includes $15.97 billion and $7.83 billion of assets managed on behalf of
AXA affiliates at December 31, 2003 and 2002, respectively. Also included
in 2003 and 2002 are $10.0 billion and $8.7 billion, respectively, in
assets related to an Australian joint venture between Alliance and an AXA
affiliate. Third party AUM includes 100% of the estimated fair value of
real estate owned by joint ventures in which third party clients own an
interest.
(2) Includes invested assets of the Company, the Holding Company and its other
affiliates not managed by Alliance, principally cash and short-term
investments and policy loans, totaling approximately $8.24 billion and
$8.66 billion at December 31, 2003 and 2002, respectively, as well as
mortgages and equity real estate totaling $4.49 billion and $4.83 billion
at December 31, 2003 and 2002, respectively.
Third party AUM increased $75.97 billion to $413.96 billion in 2003 primarily
due to increases at Alliance. Equitable Life General Account, Holding Company
and its other affiliates AUM increased $1.60 billion from the total reported in
2002 due to higher sales of General Account based products. The $15.43 billion
increase in Separate Accounts AUM in 2003 resulted from $11.12 billion in
appreciation due to improving market conditions in the last nine months of the
year and $4.31 billion in net new deposits.
Alliance's AUM increased $88.2 billion to $474.8 billion in 2003 from $386.6
billion in 2002; $80.5 billion of the increase resulted from significant market
appreciation due to global equity market increases and $7.7 billion to net asset
inflows. Active equity and balanced account AUM, which comprise 59.4% of
Alliance's total AUM at December 31, 2003, increased by 36%, while active fixed
income account AUM increased by 5.5%. Net inflows of $10.4 million and $4.0
million, respectively, in the institutional investment management and the
private client categories were partially offset by net outflows of $6.7 million
in the retail channel.
OTHER DISCONTINUED OPERATIONS
Earnings from Other Discontinued Operations of $3.4 million in 2003 as compared
to $5.6 million in 2002 reflect releases of the allowance for future losses due
primarily to improved actual and projected investment results.
7-7
LIQUIDITY AND CAPITAL RESOURCES
EQUITABLE LIFE
The principal sources of Equitable Life's cash flows are premiums, deposits and
charges on policies and contracts, investment income, repayments of principal
and proceeds from sales of fixed maturities, sales of other General Account
Investment Assets and dividends and distributions from subsidiaries.
Equitable Life's liquidity requirements principally relate to the liabilities
associated with its various life insurance, annuity and group pension products
in its continuing operations; the liabilities of discontinued operations;
shareholder dividends to AXA Financial; and operating expenses, including debt
service. Equitable Life's liabilities include the payment of benefits under life
insurance, annuity and group pension products, as well as cash payments in
connection with policy surrenders, withdrawals and loans.
Sources of Liquidity. Equitable Life's primary source of short-term liquidity to
support continuing and discontinued insurance operations is a pool of highly
liquid, high quality short-term instruments structured to provide liquidity in
excess of the expected cash requirements. At December 31, 2003, this asset pool
included an aggregate of $826.3 million in highly liquid short-term investments,
as compared to $767.4 million at December 31, 2002. In addition, a substantial
portfolio of public bonds including U.S. Treasury and agency securities and
other investment grade fixed maturities is available to meet Equitable Life's
liquidity needs.
Other liquidity sources include dividends and distributions from Alliance. In
2003, Equitable Life received cash distributions from Alliance and Alliance
Holding of $241.9 million as compared to $259.3 million in 2002. Cash
distributions in 2004 are expected to be lower as a result of the market timing
settlements at Alliance.
Management believes there is sufficient liquidity in the form of short-term
assets and its bond portfolio together with cash flows from operations,
scheduled maturities of fixed maturities and borrowings available under its
commercial paper program and bank credit facilities to satisfy Equitable Life's
liquidity needs.
Liquidity Requirements. Equitable Life's liquidity needs are affected by
fluctuations in mortality and other benefit payments and in the level of
surrenders and withdrawals previously discussed in "Results of Continuing
Operations by Segment - Insurance," as well as by dividends to its shareholder.
In 2003 and 2002, respectively, Equitable Life paid shareholder dividends
totaling $400.0 million and $500.0 million.
Management from time to time explores selective acquisition opportunities in
insurance and investment services businesses.
Management believes the Insurance Group has adequate internal sources of funds
for its presently anticipated needs.
Bernstein Put. In connection with Alliance's acquisition of Bernstein, the
Holding Company agreed to provide liquidity to the former Bernstein shareholders
after a two-year lock-out period which ended October 2002. In fourth quarter
2002, a subsidiary of Equitable Life, as designee of the Holding Company,
acquired 8.16 million of these Alliance Units at the aggregate market price of
$249.7 million; there were no additional acquisitions in 2003. On March 5, 2004,
a subsidiary of Equitable Life acquired 8.16 million Alliance Units for an
aggregate market price of $308.7 million, increasing the Company's economic
interest in Alliance to 45.6% and AXA Financial's economic interest to 58.4%.
The remaining 24.5 million Alliance Units outstanding at March 5, 2004 may be
sold to the Holding Company or its designee at the prevailing market price over
the remaining five years ending in 2009. Generally, not more than 20% of the
original Units issued to the former Bernstein shareholders may be put to the
Holding Company in any one annual period.
ALLIANCE
Alliance's principal sources of liquidity have been cash flows from operations
and proceeds from the issuance, both publicly and privately, of debt and
Alliance Units. Alliance requires financial resources to fund commissions paid
on certain back-end load mutual fund sales, to fund distributions to
Unitholders, to fund capital expenditures and for general working capital
purposes.
Alliance has an $800.0 million five-year revolving credit facility entered into
in September 2002 with a group of commercial banks and other lenders. Of the
total, $425 million provides back-up liquidity for Alliance's $425
7-8
million commercial paper program, with the balance available for general
purposes, including capital expenditures and funding payment of deferred sales
commissions to financial intermediaries. The facility's interest rate, at
Alliance's option, is a floating rate generally based on a defined prime rate, a
rate related to LIBOR or the Federal funds rate. To supplement its commercial
paper program, Alliance maintains a $100 million Extendible Commercial Notes
("ECN") program. ECNs are short-term uncommitted debt instruments that do not
require back-up liquidity support. No amounts were outstanding at December 31,
2003 under any of these programs.
In January 2004, Alliance paid $250 million in respect of the restitution fund
plus additional amounts in respect of other litigation of the $330 million
charge for mutual fund matters and legal proceedings.
Certain of Alliance's deferred and other compensation plans provide for the
election by participants to receive Alliance Holding units or Alliance sponsored
mutual funds. From time to time, Alliance will fund participant elections.
During the first two months of 2004, Alliance made purchases of Alliance
sponsored mutual funds totaling $108.0 million. Alliance expects to purchase
Alliance Holding units with an aggregate value of approximately $31 million
during March 2004. In 2003 and 2002, respectively, subsidiaries of Alliance
purchased Alliance Holding units totaling $72.4 million and $73.1 million for
such plans.
Management believes Alliance's substantial equity base, its access to public and
private debt and its cash flows from operations will provide the financial
resources to meet its capital and general business requirements. For further
information, see Alliance's Annual Report on Form 10-K for the year ended
December 31, 2003.
SUPPLEMENTARY INFORMATION
The Company is involved in a number of ventures and transactions with AXA and
certain of its affiliates. At December 31, 2003, Equitable Life had a $400.0
million, 5.89% loan outstanding with AXA Insurance Holding Co., Ltd., a Japanese
subsidiary of AXA. All payments, including interest, are guaranteed by AXA.
Alliance provides investment management and related services to AXA, the Holding
Company and Equitable Life and certain of their subsidiaries and affiliates. In
2001, Alliance entered into joint ventures with an Australian affiliate of AXA
and recognized management fees of $16.2 million, $14.1 million and $12.3 million
in 2003, 2002 and 2001, respectively. The Holding Company, Equitable Life and
Alliance, along with other AXA affiliates, participate in certain cost sharing
and servicing agreements which include technology and professional development
arrangements. Payments by Equitable Life to AXA totaled approximately $16.7
million, $16.3 million and $13.7 million in 2003, 2002 and 2001, respectively,
while Alliance's share of such costs were approximately $0.6 million, $1.6
million and $0.9 million, respectively. See Notes 19 and 22 of Notes to the
Consolidated Financial Statements and Alliance's Report on Form 10-K for the
year ended December 31, 2003 for information on related party transactions.
A schedule of future payments under certain of the Company's consolidated
contractual obligations follows:
CONTRACTUAL OBLIGATIONS - DECEMBER 31, 2003
(IN MILLIONS)
Payments Due by Period
----------------------------------------------------------------
Less than Over
Total 1 year 1 - 3 years 4 - 5 years 5 years
--------------- ----------------- ------------ ------------- -------------------
Contractual obligations:
Long-term debt.................. $ 1,006.6 $ - $ 806.5 $ - $ 200.1
Operating leases................ 1,312.8 125.8 235.1 187.9 764.0
--------------- ----------------- ------------ ------------- -------------------
Total Contractual
Obligations................. $ 2,319.4 $ 125.8 $ 1,041.6 $ 187.9 $ 964.1
=============== ================= ============ ============== ==================
The Company also has contractual obligations to the policy and contractholders
of its various life insurance and annuity products and/or their designated
beneficiaries. These obligations include paying death claims and making annuity
payments. The timing of such payments depends upon such factors as the mortality
and persistency of its customer base.
Alliance has a $165.7 million accrual for compensation and benefits, of which
$71.8 million is expected to be paid in 2005-2006, $27.2 million in 2007-2008
and the rest thereafter. Further, Alliance expects to make contributions to its
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qualified profit sharing plan of approximately $2.3 million in each of the next
four years. Alliance is required to contribute additional amounts to its
qualified noncontributory defined retirement plan by December 15, 2005. The
current estimate of this payment is $1.4 million; Alliance expects to make this
contribution during 2004.
In addition, the Company has obligations under contingent commitments at
December 31, 2003, including: Equitable Life's and Alliance's respective
revolving credit facilities and commercial paper programs; Alliance's $100.0
million ECN program; the Insurance Group's $169.9 million letters of credit;
Alliance's $125.0 million guarantee on behalf of SCB LLC; and the Company's
guarantees or commitments to provide equity financing to certain limited
partnerships of $342.6 million. Information on these contingent commitments can
be found in Notes 10, 15 and 22 of Notes to Consolidated Financial Statements.
Further, the Company is exposed to potential risk related to its own ceded
reinsurance agreements with other insurers and to insurance guaranty fund laws
in all 50 states, the District of Columbia and Puerto Rico. Under these laws,
insurers doing business in these states can be assessed amounts up to prescribed
limits to protect policyholders of companies that become impaired or insolvent.
In the aftermath of the September 11, 2001 terrorist attacks, while traditional
indicators continue to be used to monitor insurers' financial position, the
ability of otherwise fiscally healthy insurers, or even the insurance industry,
to absorb further catastrophic losses of such a nature cannot be predicted.
CRITICAL ACCOUNTING ESTIMATES
The Company's management narrative is based upon the Company's consolidated
financial statements that have been prepared in accordance with GAAP. The
preparation of these financial statements requires management to make estimates
and assumptions (including normal, recurring accruals) that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the period. On an on-going basis, the Company
evaluates its estimates, including those related to investments, recognition of
insurance income and related expenses, DAC, future policy benefits, recognition
of Investment Services revenues and related expenses and pension cost. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. The
results of such factors form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results could differ from those estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Investments - The Company records an investment impairment charge when it
believes an investment has experienced a decline in fair value that is other
than temporary. Identifying those situations requires management's careful
consideration of the facts and circumstances, including but not limited to the
duration and extent to which the fair value has been depressed, the financial
position, cash flows, and near-term earnings potential of the issuer, as well as
the Company's ability and intent to retain the investment to allow sufficient
time for any anticipated recovery in fair value. The basis for measuring fair
value may require utilization of investment valuation methodologies, such as
discounted cash flow analysis, if quoted market prices are not readily
available.
Recognition of Insurance Income and Related Expenses - Profits on
non-participating traditional life policies and annuity contracts with life
contingencies emerge from the matching of benefits and other expenses against
the related premiums. Profits on participating traditional life, universal life
and investment-type contracts emerge from the matching of benefits and other
expenses against the related contract margins. This matching is accomplished by
means of the provision for liabilities for future policy benefits and the
deferral, and subsequent amortization, of policy acquisition costs. Secular
trends and the Company's own mortality, morbidity, persistency and claims
experience have a direct impact on the benefits and expenses reported in any
given period.
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DAC - The level of operating expenses of the Insurance Group that can be
deferred is another significant factor in that business' reported profitability
in any given period. Additionally, for universal life and investment-type
contracts and participating traditional life policies, DAC amortization may be
affected by changes in estimated gross profits and margins principally related
to investment results, Separate Account fees, mortality and expense margins,
lapse rates and anticipated surrender charges. Should revisions to estimated
gross profits or margins be required, the effect is reflected in earnings in the
period such estimated gross profits are revised.
Future Policy Benefits - Future policy benefit liabilities for traditional
policies are based on actuarial assumptions as to such factors as mortality,
morbidity, persistency, interest and expenses and, in the case of participating
policies, expected annual and terminal dividends. Determination of the GMDB/GMIB
liabilities is based on models that involve numerous estimates and subjective
judgments, including those regarding expected market rates of return and
volatility, contract surrender rates, mortality experience and, for GMIB, GMIB
election rates. Premium deficiency reserves are based upon estimates of future
gross premiums, expected policy benefits and other expenses. The allowance for
future losses for the discontinued Wind-Up Annuities is based upon numerous
estimates and subjective judgments regarding the expected performance of the
related invested assets, future asset reinvestment rates and future benefit
payments.
Recognition of Investment Services Revenues and Related Expenses - The
Investment Services segment's revenues are largely dependent on the total value
and composition of assets under management. The most significant factors that
could affect segment results include, but are not limited to, the performance of
the financial markets and the investment performance and composition of
sponsored investment products and separately managed accounts.
Performance fees are recorded as revenue at the end of the specified period and
will generally be higher in favorable markets and lower in unfavorable markets,
which may increase the volatility of the segment's revenues and earnings.
Capitalized sales commissions paid to financial intermediaries in connection
with the sale of shares of open-end mutual funds sold without a front-end sales
charge are expected to be recovered from distribution plan payments received
from those funds and from contingent deferred sales charges received from
shareholders of those funds upon redemption of their shares. The recoverability
of these commissions is estimated based on management's assessment of these
future revenue flows.
Pension Cost - Net periodic pension cost is the aggregation of the compensation
cost of benefits promised, interest cost resulting from deferred payment of
those benefits, and investment results of assets dedicated to fund those
benefits. Each cost component is based on the Company's best estimate of
long-term actuarial and investment return assumptions. Actual experience
different from that assumed generally is recognized prospectively over future
periods; however, significant variances could result in immediate recognition if
they exceed certain prescribed thresholds or in conjunction with a
reconsideration of the related assumptions.
Consolidation - The Company includes in its consolidated financial statements
the accounts and activities of Equitable Life, those of its subsidiaries engaged
in insurance related businesses; other subsidiaries, principally Alliance; and
those investment companies, partnerships and joint ventures in which the Company
has control and a majority economic interest as well as those VIEs that meet the
requirements for consolidation. All significant intercompany transactions and
balances except those with discontinued operations have been eliminated in
consolidation.
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
7-11
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 herein.
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.
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 1.5% to 4.5%) could cause the
spread between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate and in some cases, potentially, to become negative.
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
7-12
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 provide effective financial planning
services that meet its customers' expectations; 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 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 herein.
The profitability of the Insurance Group depends on a number of factors
including: levels of gross operating expenses and the amount which can be
deferred as DAC and software capitalization; successful implementation of
expense-reduction initiatives; secular trends; 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 any program to hedge certain risks
associated with the GMDB and GMIB features; 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 the 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(R) '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 herein.
Recently, a number of regulators have been focusing attention on various
practices in or affecting the investment management and/or mutual fund
industries, including, among others, late trading, market timing and revenue
sharing. In December 2003, Alliance resolved regulatory claims with the SEC and
NYAG related to market timing in certain of its mutual funds. Alliance's
involvement in the market timing investigations and related matters may have an
adverse effect on the Company's and Alliance's assets under management,
including an increase in mutual fund redemptions, and may cause general
reputational damage, both of which could adversely affect the Company's
and Alliance's results of operations.
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
$387.2 million at December 31, 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
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time of redemption, of back-end load shares redeemed and the point at which
redeemed during the applicable minimum holding period under the mutual fund
distribution system.
Significant assumptions utilized to estimate average assets under
management of back-end load shares include expected future market levels and
redemption rates. Market assumptions are selected using a long-term view of
expected average market returns based on historical returns of broad market
indices. At December 31, 2003, Alliance's management used average market return
assumptions of 5% for fixed income and 8% for equity to estimate annual market
returns. Higher 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 December 31, 2003. Alliance's management used a range of
expected average annual redemption rates of 16% to 20% at December 31, 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
December 31, 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 2003, equity markets increased by approximately 29% as measured by the
change in the Standard & Poor's 500 Stock Index while fixed income markets
increased by approximately 4% as measured by the change in the Lehman Brothers'
Aggregate Bond Index. The redemption rate for domestic back-end load shares was
approximately 22% in 2003. 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 might occur. Should an
impairment occur, any loss would reduce materially the recorded amount of the
asset with a corresponding charge to expense.
Other Discontinued Operations. The determination of the allowance for future
losses for the discontinued Wind-Up Annuities continues to involve numerous
estimates and subjective judgments including those regarding expected
performance of investment assets, asset reinvestment rates, ultimate mortality
experience and other factors which affect investment and benefit projections.
There can be no assurance the losses provided for will not differ from the
losses ultimately realized. To the extent actual results or future projections
of Other Discontinued Operations differ from management's current best estimates
underlying the allowance, the difference would be reflected as earnings or loss
from discontinued operations within the consolidated statements of earnings. In
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.
7-14
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
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, EQAT, Premier Trust, VIP Trust, 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, replacement of variable annuities, revenue sharing and related matters.
Each of the requests has been responded to and the requested documents have been
provided. In January 2004, the SEC completed an onsite examination of EQAT,
Premier Trust, VIP Trust, Equitable Life, as the investment adviser to the
Trusts, and the Trusts' distributors. The SEC has advised Equitable Life that no
deficiencies or violations came to the SEC's attention during the examination.
At this time, management cannot predict what other actions the SEC, NASD and/or
other regulators may take or what the impact of such actions might be. For
further information, see "Business - Regulation" and "Legal Proceedings"
contained herein.
Future Accounting Pronouncements. In the future, new accounting pronouncements,
as well as new interpretations of accounting pronouncements, may have material
effects on the Company's consolidated statements of earnings and shareholder's
equity. See Note 2 of Notes to Consolidated Financial Statements for
pronouncements issued but not effective at December 31, 2003.
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 herein.
7-15
PART II, ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company's businesses are subject to financial, market, political and
economic risks, as well as to risks inherent in its business operations. The
discussion that follows provides additional information on market risks arising
from its insurance asset/liability management and asset management activities.
Such risks are evaluated and managed by each business on a decentralized basis.
Primary market risk exposure results from interest rate fluctuations, equity
price movements and changes in credit quality.
Insurance Group
Insurance Group results significantly depend on profit margins between
investment results from assets held in the General Account associated with the
continuing operations ("General Account Investment Assets") and Other
Discontinued Operations of the Insurance Group and interest credited on
individual insurance and annuity products. Management believes its fixed rate
liabilities should be supported by a portfolio principally composed of fixed
rate investments that generate predictable, steady rates of return. Although
these assets are purchased for long-term investment, the portfolio management
strategy considers them available for sale in response to changes in market
interest rates, changes in prepayment risk, changes in relative values of asset
sectors and individual securities and loans, changes in credit quality outlook
and other relevant factors. See the "Investments" section of Note 2 of Notes to
Consolidated Financial Statements for the accounting policies for the investment
portfolios. The objective of portfolio management is to maximize returns, taking
into account interest rate and credit risks. Insurance asset/liability
management includes strategies to minimize exposure to loss as interest rates
and economic and market conditions change. As a result, the fixed maturity
portfolio has modest exposure to call and prepayment risk and the vast majority
of mortgage holdings are fixed rate mortgages that carry yield maintenance and
prepayment provisions.
Insurance Group assets with interest rate risk include fixed maturities and
mortgage loans that make up 85.1% of the carrying value of General Account
Investment Assets at December 31, 2003. As part of its asset/liability
management, quantitative analyses are used to model the impact various changes
in interest rates have on assets with interest rate risk. The table that follows
shows the impact an immediate 100 basis point increase in interest rates at
December 31, 2003 and 2002 would have on the fair value of fixed maturities and
mortgage loans:
Interest Rate Risk Exposure
(In Millions)
December 31, 2003 December 31, 2002
------------------------------------ -----------------------------------------
Balance After Balance After
Fair +100 Base Fair +100 Basis
Value Point Change Value Point Change
------------------- --------------- --------------------- -------------------
Continuing Operations:
Fixed maturities:
Fixed rate........................ $ 29,144.7 $ 27,690.1 $ 25,485.2 $ 24,234.9
Floating rate..................... 350.8 349.9 1,206.6 1,206.6
Mortgage loans...................... 3,761.7 3,614.2 4,070.0 4,054.6
Other Discontinued Operations:
Fixed maturities:
Fixed rate........................ $ 716.4 $ 685.8 $ 722.7 $ 687.8
Mortgage loans...................... 69.4 68.0 94.7 92.8
A 100 basis point fluctuation in interest rates is a hypothetical rate scenario
used to demonstrate potential risk; it does not represent management's view of
future market changes. While these fair value measurements provide a
representation of interest rate sensitivity of fixed maturities and mortgage
loans, they are based on various portfolio exposures at a particular point in
time and may not be representative of future market results. These exposures
will change as a result of ongoing portfolio activities in response to
management's assessment of changing market conditions and available investment
opportunities.
7A-1
The investment portfolios also have direct holdings of public and private equity
securities. In addition, the General Account is exposed to equity price risk
from the excess of Separate Accounts assets over Separate Accounts liabilities.
The following table shows the potential exposure from those equity security
investments, measured in terms of fair value, to an immediate 10% drop in equity
prices from those prevailing at December 31, 2003 and 2002:
Equity Price Risk Exposure
(In Millions)
December 31, 2003 December 31, 2002
---------------------------------------- ------------------------------------
Balance After Balance After
Fair -10% Equity Fair -10% Equity
Value Price Change Value Price Change
------------------ --------------------- -------------- ---------------------
Insurance Group:
Continuing operations.............. $ 13.5 $ 12.2 $ 37.3 $ 33.5
Other Discontinued Operations...... .5 .5 .9 .8
Excess of Separate Accounts assets
over Separate Accounts
liabilities...................... 137.5 123.8 128.3 115.5
A 10% decrease in equity prices is a hypothetical scenario used to calibrate
potential risk and does not represent management's view of future market
changes. The fair value measurements shown are based on the equity securities
portfolio exposures at a particular point in time and these exposures will
change as a result of ongoing portfolio activities in response to management's
assessment of changing market conditions and available investment opportunities.
At years end 2003 and 2002, the aggregate carrying value of policyholders
liabilities were $40,122.7 million and $37,922.7 million, respectively,
including $16,802.1 million and $14,542.6 million of liabilities, respectively,
related to the General Account's investment contracts. The aggregate fair value
of those investment contracts at years end 2003 and 2002 were $17,219.9 million
and $15,092.0 million, respectively. The impact of a relative 1% decrease in
interest rates would be an increase in the fair value of those investment
contracts to $17,891.8 million and $15,751.6 million, respectively. Those
investment contracts represent only a portion of total policyholders
liabilities. As such, meaningful assessment of net market risk exposure cannot
be made by comparing the results of the invested assets sensitivity analyses
presented herein to the potential exposure from the policyholders liabilities
quantified in this paragraph.
Asset/liability management is integrated into many aspects of the Insurance
Group's operations, including investment decisions, product development and
determination of crediting rates. As part of its risk management process,
numerous economic scenarios are modeled, including cash flow testing required
for insurance regulatory purposes, to determine if existing assets would be
sufficient to meet projected liability cash flows. Key variables include
policyholder behavior, such as persistency, under differing crediting rate
strategies. On the basis of these more comprehensive analyses, management
believes there is minimal solvency risk to Equitable Life from interest rate
movements of 100 basis points and from equity price changes of 10% from year end
2003 levels.
The Insurance Group primarily uses derivatives for asset/liability risk
management, for hedging individual securities and to reduce the Insurance
Group's exposure to interest rate fluctuations. As more fully described in Notes
2 and 14 of Notes to Consolidated Financial Statements, various traditional
derivative financial instruments are used to achieve these objectives, including
interest rate caps and floors to hedge crediting rates on interest-sensitive
individual annuity contracts, interest rate futures to protect against declines
in interest rates between receipt of funds and purchase of appropriate assets,
and interest rate swaps to modify the duration and cash flows of fixed maturity
investments and long-term debt. In addition, the Company periodically enters
into forward and futures contracts to hedge certain equity exposures, including
the program to hedge certain risks associated with the GMDB feature of the
Accumulator series of annuity products. To minimize credit risk exposure
associated with its derivative, transactions, each counterparty's credit is
appraised and approved and risk control limits and monitoring procedures are
applied. Credit limits are established and monitored on the basis of potential
exposures which take into
7A-2
consideration current market values and estimates of potential future movements
in market values given potential fluctuations in market interest rates.
While notional amount is the most commonly used measure of volume in the
derivatives market, it is not used by the Insurance Group as a measure of risk
because the notional amount greatly exceeds the possible credit and market loss
that could arise from such transactions. Mark to market exposure is a
point-in-time measure of the value of a derivative contract in the open market.
A positive value indicates existence of credit risk for the Insurance Group
because the counterparty would owe money to the Insurance Group if the contract
were closed. Alternatively, a negative value indicates the Insurance Group would
owe money to the counterparty if the contract were closed. If there is more than
one derivative transaction outstanding with a counterparty, a master netting
arrangement exists with the counterparty. In that case, the market risk
represents the net of the positive and negative exposures with the single
counterparty. In management's view, the net potential exposure is the better
measure of credit risk.
At years end 2003 and 2002, the fair values of the Insurance Group's derivatives
were $9.7 million and $8.7 million, respectively. The table that follows shows
the interest rate or equity sensitivities of those derivatives, measured in
terms of fair value. These exposures will change as a result of ongoing
portfolio and risk management activities.
INSURANCE GROUP - DERIVATIVE FINANCIAL INSTRUMENTS
(IN MILLIONS, EXCEPT FOR WEIGHTED AVERAGE TERM)
Interest Rate Sensitivity
--------------------------------------------------------
Weighted
Average Balance After Balance After
Notional Term -100 Basis Fair +100 Basis
Amount (Years) Point Change Value Point Change
--------------- --------------- ----------------- ---------------- ------------------
December 31, 2003
Options:
Floors.............. $ 12,000.0 3.61 $ 20.1 $ 9.7 $ .5
=============== ================== ================ ==================
December 31, 2002
Options:
Caps................ $ 5,050.0 .89 $ - $ - $ 0.5
Floors.............. 4,000.0 3.81 10.0 8.7 0.7
--------------- ------------------ ---------------- ------------------
Total.................... $ 9,050.0 2.18 $ 10.0 $ 8.7 $ 1.2
=============== ================== ================ ==================
Equity Sensitivity
--------------------------------------
Balance after
Fair -10% Equity
Value Price Shift
------------------ -------------------
December 31, 2003
Futures .............. $ 274.8 .22 $ - $ 27.5
=============== ================== ===================
December 31, 2002 ....... $ - $ - $ -
=============== ================== ===================
In addition to the traditional derivatives discussed above, the Insurance Group
has entered into reinsurance contracts to mitigate the risk associated with the
impact of potential market fluctuations on future policyholder elections of GMIB
features contained in certain annuity contracts. These reinsurance contracts are
considered derivatives under SFAS No. 133 and were reported at their fair values
of $29.0 million and $120.0 million at December 31, 2003 and 2002, respectively.
The potential fair value exposure to an immediate 10% drop in equity prices from
those prevailing at December 31, 2003 and 2002, respectively, would increase the
balances of these reinsurance contracts to $94.4 million and $177.0 million.
At the end of 2003 and of 2002, the aggregate fair values of long-term debt
issued by Equitable Life were $673.4 million and $657.6 million, respectively.
The table below shows the potential fair value exposure to an immediate 100
basis point decrease in interest rates from those prevailing at the end of 2003
and of 2002.
7A-3
Interest Rate Risk Exposure
(In Millions)
December 31, 2003 December 31, 2002
-------------------------------------- --------------------------------------
Balance After Balance After
Fair -100 Basis Fair -100 Basis
Value Point Change Value Point Change
----------------- -------------------- ------------------ ------------------
Continuing Operations:
Fixed rate........................ $ 673.4 $ 701.8 $ 657.6 $ 690.0
Investment Services
Alliance's investments consist of investments, trading and available-for-sale,
and other investments. Alliance's investments, trading and available-for-sale,
include U.S. Treasury bills, equity and fixed income mutual funds and money
market investments. The carrying value of money market investments approximates
fair value. Trading investments are purchased for short-term investments.
Although investments, available-for-sale, are purchased for long-term
investment, the portfolio strategy considers them available-for-sale from time
to time due to changes in market interest rates, equity prices and other
relevant factors. Other investments include Alliance's investments in hedge
funds sponsored by Alliance. The following table presents Alliance's potential
exposure from its investments in equity mutual funds and equity hedge funds,
measured in terms of fair value, to an immediate 10% drop in equity prices from
those prevailing at December 31, 2003 and 2002:
Equity Price Risk Exposure
(In Millions)
December 31, 2003 December 31, 2002
---------------------------------------- ------------------------------------
Balance After Balance After
Fair -10% Equity Fair -10% Equity
Value Price Change Value Price Change
------------------ --------------------- -------------- ---------------------
Equity Investments:
Trading............................ $ 43.7 $ 39.3 $ 15.6 $ 14.0
Non-trading........................ 87.0 78.3 40.1 36.1
A 10% decrease in equity prices is a hypothetical scenario used to calibrate
potential risk and does not represent Alliance management's view of future
market changes. These measurements are based on Alliance's exposure at a
particular point in time and may not be representative of future market results.
These exposures will change as a result of ongoing portfolio activities in
response to Alliance management's assessment of changing market conditions and
available investment opportunities. At December 31, 2003, management believes
Alliance's estimates of its interest rate, derivative and credit quality risks
related to Alliance's investment portfolios were not material to the Company.
At December 31, 2003, Alliance's fixed rate debt had an aggregate fair value of
$432.4 million. The potential fair value would increase to $451.9 million in
response to an immediate 100 basis point decrease in interest rates from those
prevailing at the end of 2003. For further information on Alliance's market
risk, see Alliance Holding's and Alliance's Annual Reports on Form 10-K for the
year ended December 31, 2003.
7A-4
PART II, ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
Report of Independent Auditors ........................................................................... F-1
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2003 and 2002................................................. F-2
Consolidated Statements of Earnings, Years Ended December 31, 2003, 2002 and 2001...................... F-3
Consolidated Statements of Shareholder's Equity, Years Ended
December 31, 2003, 2002 and 2001...................................................................... F-4
Consolidated Statements of Cash Flows, Years Ended December 31, 2003, 2002 and 2001..................... F-5
Notes to Consolidated Financial Statements.............................................................. F-7
Report of Independent Auditors on Financial Statement Schedules........................................... F-56
Consolidated Financial Statement Schedules:
Schedule I - Summary of Investments - Other than Investments in Related Parties,
December 31, 2003..................................................................................... F-57
Schedule II - Balance Sheets (Parent Company), December 31, 2003 and 2002.............................. F-58
Schedule II - Statements of Earnings (Parent Company), Years Ended
December 31, 2003, 2002 and 2001...................................................................... F-59
Schedule II - Statements of Cash Flows (Parent Company), Years Ended
December 31, 2003, 2002 and 2001...................................................................... F-60
Schedule III - Supplementary Insurance Information, Years Ended
December 31, 2003, 2002 and 2001...................................................................... F-61
Schedule IV - Reinsurance, Years Ended December 31, 2003, 2002 and 2001................................ F-64
FS-1
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholder of
The Equitable Life Assurance Society of the United States
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statement of earnings, of shareholder's equity and comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of The Equitable Life Assurance Society of the United States and its
subsidiaries ("Equitable Life") at December 31, 2003 and December 31, 2002, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of Equitable Life's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 9, 2004
F-1
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
December 31, December 31,
2003 2002
----------------- -----------------
(In Millions)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 29,095.5 $ 26,278.9
Mortgage loans on real estate............................................. 3,503.1 3,746.2
Equity real estate, held for the production of income..................... 656.5 717.3
Policy loans.............................................................. 3,894.3 4,035.6
Other equity investments.................................................. 789.1 720.3
Other invested assets..................................................... 1,101.6 1,327.6
----------------- -----------------
Total investments..................................................... 39,040.1 36,825.9
Cash and cash equivalents................................................... 722.7 269.6
Cash and securities segregated, at estimated fair value..................... 1,285.8 1,174.3
Broker-dealer related receivables........................................... 2,284.7 1,446.2
Deferred policy acquisition costs........................................... 6,290.4 5,801.0
Goodwill and other intangible assets, net................................... 3,513.4 3,503.8
Amounts due from reinsurers................................................. 2,460.4 2,351.7
Loans to affiliates, at estimated fair value................................ 400.0 413.0
Other assets................................................................ 3,829.7 4,028.7
Separate Accounts' assets................................................... 54,438.1 39,012.1
----------------- -----------------
Total Assets................................................................ $ 114,265.3 $ 94,826.3
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 25,307.7 $ 23,037.5
Future policy benefits and other policyholders liabilities.................. 13,934.7 13,975.7
Broker-dealer related payables.............................................. 1,261.8 731.0
Customers related payables.................................................. 1,897.5 1,566.8
Amounts due to reinsurers................................................... 936.5 867.5
Short-term and long-term debt............................................... 1,253.2 1,274.7
Federal income taxes payable................................................ 2,362.8 2,006.4
Other liabilities........................................................... 2,006.9 1,751.8
Separate Accounts' liabilities.............................................. 54,300.6 38,883.8
Minority interest in equity of consolidated subsidiaries.................... 1,744.9 1,816.6
Minority interest subject to redemption rights.............................. 488.1 515.4
----------------- -----------------
Total liabilities..................................................... 105,494.7 86,427.2
----------------- -----------------
Commitments and contingencies (Notes 12, 14, 15, 16 and 17)
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.............................................. 4,848.2 4,812.8
Retained earnings........................................................... 3,027.1 2,902.7
Accumulated other comprehensive income...................................... 892.8 681.1
----------------- -----------------
Total shareholder's equity............................................ 8,770.6 8,399.1
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 114,265.3 $ 94,826.3
================= =================
See Notes to Consolidated Financial Statements.
F-2
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
----------------- ----------------- -----------------
(In Millions)
REVENUES
Universal life and investment-type product
policy fee income........................................... $ 1,376.7 $ 1,315.5 $ 1,342.3
Premiums...................................................... 889.4 945.2 1,019.9
Net investment income......................................... 2,386.9 2,377.2 2,404.3
Investment losses, net........................................ (62.3) (278.5) (207.3)
Commissions, fees and other income............................ 2,811.8 2,987.6 3,108.5
----------------- ----------------- -----------------
Total revenues.......................................... 7,402.5 7,347.0 7,667.7
----------------- ----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits....................................... 1,708.2 2,036.0 1,888.8
Interest credited to policyholders' account balances.......... 969.7 972.5 981.7
Compensation and benefits..................................... 1,327.0 1,244.3 1,307.1
Commissions................................................... 991.9 788.8 742.1
Distribution plan payments.................................... 370.6 392.8 429.1
Amortization of deferred sales commissions.................... 208.6 229.0 230.8
Interest expense.............................................. 82.3 95.7 102.6
Amortization of deferred policy acquisition costs............. 434.6 296.7 287.9
Capitalization of deferred policy acquisition costs........... (990.7) (754.8) (746.4)
Rent expense.................................................. 165.8 168.8 157.5
Amortization of goodwill and other intangible assets, net..... 21.9 21.2 178.2
Alliance charge for mutual fund matters and legal
proceedings................................................. 330.0 - -
Other operating costs and expenses............................ 832.4 827.4 815.4
----------------- ----------------- -----------------
Total benefits and other deductions..................... 6,452.3 6,318.4 6,374.8
----------------- ----------------- -----------------
Earnings from continuing operations before Federal
income taxes and minority interest.......................... 950.2 1,028.6 1,292.9
Federal income tax expense.................................... (240.5) (50.9) (316.2)
Minority interest in net income of consolidated subsidiaries.. (188.7) (362.8) (370.1)
----------------- ----------------- -----------------
Earnings from continuing operations........................... 521.0 614.9 606.6
Earnings from discontinued operations, net of Federal
income taxes.............................................. 3.4 5.6 43.9
Cumulative effect of accounting changes, net of Federal
income taxes.............................................. - (33.1) (3.5)
----------------- ----------------- -----------------
Net Earnings.................................................. $ 524.4 $ 587.4 $ 647.0
================= ================= =================
See Notes to Consolidated Financial Statements.
F-3
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
----------------- ---------------- ----------------
(In Millions)
Common stock, at par value, beginning and end of year......... $ 2.5 $ 2.5 $ 2.5
----------------- ---------------- ----------------
Capital in excess of par value, beginning of year as previously
reported................................................... 4,753.8 4,694.6 4,723.8
Prior period adjustment related to deferred Federal
income taxes.............................................. 59.0 59.0 59.0
----------------- ---------------- ----------------
Capital in excess of par value, beginning of year as restated. 4,812.8 4,753.6 4,782.8
Increase (decrease) in paid in capital in excess of par value. 35.4 59.2 (29.2)
----------------- ---------------- ----------------
Capital in excess of par value, end of year................... 4,848.2 4,812.8 4,753.6
----------------- ---------------- ----------------
Retained earnings, beginning of year as previously reported... 2,740.6 2,653.2 3,706.2
Prior period adjustment related to deferred Federal
income taxes............................................... 162.1 162.1 162.1
----------------- ---------------- ----------------
Retained earnings, beginning of year as restated.............. 2,902.7 2,815.3 3,868.3
Net earnings.................................................. 524.4 587.4 647.0
Shareholder dividends paid.................................... (400.0) (500.0) (1,700.0)
----------------- ---------------- ----------------
Retained earnings, end of year................................ 3,027.1 2,902.7 2,815.3
----------------- ---------------- ----------------
Accumulated other comprehensive income ,
beginning of year........................................... 681.1 215.4 12.8
Other comprehensive income.................................... 211.7 465.7 202.6
----------------- ---------------- ----------------
Accumulated other comprehensive income, end of year........... 892.8 681.1 215.4
----------------- ---------------- ----------------
Total Shareholder's Equity, End of Year....................... $ 8,770.6 $ 8,399.1 $ 7,786.8
================= ================ ================
COMPREHENSIVE INCOME
Net earnings.................................................. $ 524.4 $ 587.4 $ 647.0
----------------- ---------------- ----------------
Change in unrealized gains (losses), net of reclassification
adjustments................................................ 211.7 465.6 202.6
Minimum pension liability adjustment.......................... - .1 -
----------------- ---------------- ----------------
Other comprehensive income.................................... 211.7 465.7 202.6
----------------- ---------------- ----------------
Comprehensive Income.......................................... $ 736.1 $ 1,053.1 $ 849.6
================= ================ ================
See Notes to Consolidated Financial Statements.
F-4
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
----------------- ----------------- -----------------
(In Millions)
Net earnings.................................................. $ 524.4 $ 587.4 $ 647.0
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Interest credited to policyholders' account balances........ 969.7 972.5 981.7
Universal life and investment-type product
policy fee income......................................... (1,376.7) (1,315.5) (1,342.3)
Net change in broker-dealer and customer related
receivables/payables...................................... 22.5 (237.3) 181.0
Investment losses, net...................................... 62.3 278.5 207.3
Change in deferred policy acquisition costs................. (556.1) (458.1) (458.5)
Change in future policy benefits............................ (97.4) 218.0 (15.1)
Change in property and equipment............................ (55.8) (76.6) (229.2)
Change in Federal income tax payable........................ 246.3 93.3 (231.5)
Change in accounts payable and accrued expenses............. 276.8 (8.9) (36.8)
Change in segregated cash and securities, net............... (111.5) 240.8 (108.8)
Minority interest in net income of consolidated
subsidiaries............................................. 188.7 362.8 370.1
Change in fair value of guaranteed minimum income
benefit reinsurance contracts............................ 91.0 (120.0) -
Amortization of deferred sales commissions.................. 208.6 229.0 230.8
Amortization of goodwill and other intangible assets, net... 21.9 21.2 178.2
Other, net.................................................. 272.6 (114.2) 121.9
----------------- ----------------- -----------------
Net cash provided by operating activities..................... 687.3 672.9 495.8
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................... 4,216.4 2,996.0 2,454.6
Sales....................................................... 4,818.2 8,035.9 9,285.2
Purchases................................................... (11,457.9) (12,709.0) (11,833.0)
Change in short-term investments............................ 334.3 (568.9) 211.8
Acquisition of subsidiary .................................. - (249.7) -
Loans to affiliates......................................... - - (400.0)
Other, net.................................................. 89.3 126.6 (80.3)
----------------- ----------------- -----------------
Net cash used by investing activities......................... (1,999.7) (2,369.1) (361.7)
----------------- ----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................. 5,639.1 4,328.5 3,198.8
Withdrawals and transfers to Separate Accounts........... (3,181.1) (2,022.9) (2,458.1)
Net change in short-term financings......................... (22.1) (201.2) (552.8)
Additions to long-term debt................................. - - 398.1
Shareholder dividends paid.................................. (400.0) (500.0) (1,700.0)
Other, net.................................................. (270.4) (318.6) (456.9)
----------------- ----------------- -----------------
Net cash provided (used) by financing activities.............. 1,765.5 1,285.8 (1,570.9)
----------------- ----------------- -----------------
Change in cash and cash equivalents........................... 453.1 (410.4) (1,436.8)
Cash and cash equivalents, beginning of year.................. 269.6 680.0 2,116.8
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year........................ $ 722.7 $ 269.6 $ 680.0
================= ================= =================
F-5
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
CONTINUED
2003 2002 2001
----------------- ----------------- -----------------
(In Millions)
Supplemental cash flow information:
Interest Paid............................................... $ 91.0 $ 80.5 $ 82.1
================= ================= =================
Income Taxes (Refunded) Paid................................ $ (45.7) $ (139.6) $ 524.2
================= ================= =================
See Notes to Consolidated Financial Statements.
F-6
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
The Equitable Life Assurance Society of the United States ("Equitable
Life") is an indirect, wholly owned subsidiary of AXA Financial, Inc.
(the "Holding Company," and collectively with its consolidated
subsidiaries, "AXA Financial"). Equitable Life's insurance business is
conducted principally by Equitable Life and its wholly owned life
insurance subsidiary, Equitable of Colorado ("EOC"). Equitable Life's
investment management business, which comprises the Investment Services
segment, is principally conducted by Alliance Capital Management L.P.
("Alliance").
In October 2000, Alliance acquired substantially all of the assets and
liabilities of SCB Inc., formerly known as Sanford C. Bernstein, Inc.
("Bernstein"). In the fourth quarter of 2002, Equitable Life and its
consolidated subsidiaries (collectively, the "Company") acquired 8.16
million units in Alliance ("Alliance Units") at the aggregate market
price of $249.7 million from SCB Inc. and SCB Partners, Inc. under a
preexisting agreement (see Note 2). Upon completion of this transaction
the Company's beneficial ownership in Alliance increased by
approximately 3.2%. The Company's consolidated economic interest in
Alliance was 42.6% at December 31, 2003, and together with the Holding
Company's economic interest in Alliance was approximately 55.5%.
AXA, a French holding company for an international group of insurance
and related financial services companies, has been the Holding Company's
largest shareholder since 1992. In 2000, AXA acquired the approximately
40% of outstanding Holding Company common stock ("Common Stock") it did
not already own. On January 2, 2001, AXA Merger Corp. ("AXA Merger"), a
wholly owned subsidiary of AXA, was merged with and into the Holding
Company, resulting in AXA Financial becoming a wholly owned subsidiary
of AXA.
2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
-----------------------------------------------------
The preparation of the accompanying consolidated financial statements in
conformity with U.S. generally accepted accounting principles ("GAAP")
requires management to make estimates and assumptions (including normal,
recurring accruals) that affect the reported amounts of assets and
liabilities and the 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 these estimates. The accompanying 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.
The accompanying consolidated financial statements include the accounts
of Equitable Life and its subsidiary engaged in insurance related
businesses (collectively, the "Insurance Group"); other subsidiaries,
principally Alliance; and those investment companies, partnerships and
joint ventures in which Equitable Life or its subsidiaries has control
and a majority economic interest as well as those variable interest
entities ("VIEs") that meet the requirements for consolidation.
All significant intercompany transactions and balances except those with
discontinued operations have been eliminated in consolidation. The years
"2003," "2002" and "2001" refer to the years ended December 31, 2003,
2002 and 2001, respectively. Certain reclassifications have been made in
the amounts presented for prior periods to conform those periods with
the current presentation.
Prior Period Adjustment
-----------------------
A review by Equitable Life in 2003 of Federal income tax assets and
liabilities identified an overstatement of the deferred Federal income
tax liability related to the years ended December 31, 2000 and earlier.
As a
F-7
result, the Federal income tax liability as of December 31, 2002 has
been reduced by $221.1 million, and the consolidated shareholder's
equity as of December 31, 2002 and 2001 has been increased by $221.1
million, with no impact on the consolidated statements of earnings for
the years ended December 31, 2002 and 2001 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, 2001.
Closed Block
------------
When it demutualized on July 22, 1992, Equitable Life established a
Closed Block for the benefit of certain individual participating
policies which were in force on that date. The assets allocated to the
Closed Block, together with anticipated revenues from policies included
in the Closed Block, were reasonably expected to be sufficient to
support such business, including provision for the payment of claims,
certain expenses and taxes, and for continuation of dividend scales
payable in 1991, assuming the experience underlying such scales
continues.
Assets allocated to the Closed Block inure solely to the benefit of the
Closed Block policyholders and will not revert to the benefit of the
Holding Company. No reallocation, transfer, borrowing or lending of
assets can be made between the Closed Block and other portions of
Equitable Life's General Account, any of its Separate Accounts or any
affiliate of Equitable Life without the approval of the New York
Superintendent of Insurance (the "Superintendent"). Closed Block assets
and liabilities are carried on the same basis as similar assets and
liabilities held in the General Account. The excess of Closed Block
liabilities over Closed Block assets represents the expected future
post-tax contribution from the Closed Block which would be recognized in
income over the period the policies and contracts in the Closed Block
remain in force.
Other Discontinued Operations
-----------------------------
In 1991, management discontinued the business of certain pension
operations ("Other Discontinued Operations"). Other Discontinued
Operations at December 31, 2003 principally consists of the group
non-participating wind-up annuities ("Wind-Up Annuities"), for which a
premium deficiency reserve has been established. Management reviews the
adequacy of the allowance for future losses each quarter and makes
adjustments when necessary. Management believes the allowance for future
losses at December 31, 2003 is adequate to provide for all future
losses; however, the quarterly allowance review continues to involve
numerous estimates and subjective judgments regarding the expected
performance of invested assets ("Discontinued Operations Investment
Assets") held by Other Discontinued Operations. There can be no
assurance the losses provided for will not differ from the losses
ultimately realized. To the extent actual results or future projections
of the Other Discontinued Operations differ from management's current
best estimates and assumptions underlying the allowance for future
losses, the difference would be reflected in the consolidated statements
of earnings in Other Discontinued Operations. See Note 8.
Accounting Changes
------------------
In January 2003, the Financial Accounting Standards Board (the "FASB")
issued Interpretation ("FIN") No. 46, "Consolidation of Variable
Interest Entities". FIN No. 46 addresses when it is appropriate to
consolidate financial interests in a 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 ("SPEs"), FIN No. 46 imposes a consolidation
standard that focuses on the relative exposures of the participants to
the economic risks and rewards from the net assets of the VIE rather
than on ownership of its voting interests, if any, to determine whether
a parent-subsidiary relationship exists. Under FIN No. 46, the party
with a majority of the economic risks or rewards associated with a VIE's
activities, including those conveyed by guarantees, commitments,
derivatives, credit enhancements, and similar instruments or
obligations, 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
F-8
interest in a VIE when the consolidation requirements become effective.
On December 24, 2003, the FASB issued FIN No. 46(Revised) ("FIN No.
46(R)"), containing significant modifications to the original
interpretation issued in January 2003 and delaying the requirement to
consolidate all VIEs for which the company's financial interest therein
constitutes a primary beneficiary relationship until March 31, 2004.
Although the consolidation requirements of FIN No. 46(R) generally begin
in first quarter 2004, no delay was afforded to consolidation of SPEs.
However, at December 31, 2003, no entities in which the Company had
economic interests were identified as SPEs under the rules previously in
effect.
While FIN No. 46(R) supports the same underlying principle put forth in
the original interpretation, it addresses issues that arose as companies
analyzed the potential impact of adopting FIN No. 46's consolidation
requirements and resolves some of those issues in a manner expected to
make implementation less onerous for certain entities with financial
interests in VIEs. The most notable departure of FIN No. 46(R) from the
original interpretation is the revised treatment of "decision maker"
fees (such as asset management fees) to include only their variability
in the calculation of a VIE's expected residual returns. Prior to this
change, inclusion of decision maker fees on a gross basis created a bias
towards consolidation by a decision maker as the recipient of a majority
of a VIE's economic rewards unless another party absorbed a majority of
the VIE's economic risks.
At December 31, 2003, the Insurance Group's General Account had VIEs
deemed to be significant under FIN No. 46 totaling $105.8 million. VIEs
totaling $45.5 million and $60.3 million are reflected in the
consolidated balance sheets as fixed maturities (collateralized debt
obligations) and other equity investments (principally, investment
limited partnerships), respectively, and are subject to ongoing review
for impairment in value. These VIEs and approximately $17.1 million of
funding commitments to the investment limited partnerships at December
31, 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, commitments, derivatives, credit enhancements or similar
instruments and obligations. As a result of management's review and the
FASB's implementation guidance to date, these VIEs are not expected to
require consolidation because management has determined that the
Insurance Group is not the primary beneficiary.
Management of Alliance has reviewed its investment management
agreements, its investments in and other financial arrangements with
certain entities that hold client assets under management of
approximately $48 billion. These include certain mutual fund products
domiciled in Luxembourg, India, Japan, Singapore 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(R).
As a result of its review, which is still ongoing, Alliance's management
believes it is reasonably possible that Alliance will be required to
consolidate an investment in a joint venture arrangement including the
joint venture's funds under management, and one hedge fund as of March
31, 2004. These entities have client assets under management totaling
approximately $231 million. However, Alliance's total investment in
these entities is approximately $.4 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 $231 million.
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 $1.1 billion in client assets under management. However,
these VIEs do not require consolidation because Alliance's management
has 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.
FIN No. 46(R) is highly complex and requires significant estimates and
judgments as to its application. Since implementation of the
consolidation of VIEs under FIN No. 46(R) generally has been deferred to
reporting periods ending after March 15, 2004 and the FASB is continuing
to develop guidance on implementation issues, management's assessment of
the effect of FIN No. 46(R) is ongoing and its initial conclusions
regarding the consolidation of VIEs may change.
F-9
On January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," SFAS No.
142, "Goodwill and Other Intangible Assets," and SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-lived Assets". SFAS
No. 142 embraced an entirely new approach to accounting for goodwill by
eliminating the long-standing requirement for systematic amortization
and instead imposing periodic impairment testing to determine whether
the fair value of the reporting unit to which the goodwill is ascribed
supports its continued recognition. Concurrent with its adoption of SFAS
No. 142, the Company ceased to amortize goodwill. Amortization of
goodwill and other intangible assets for the year ended December 31,
2001 was approximately $73.4 million, net of minority interest of $104.7
million, of which $7.6 million, net of minority interest of $13.6
million, related to other intangible assets. Net income, excluding
goodwill amortization expense, for the year ended December 31, 2001
would have been $712.8 million. The carrying amount of goodwill was
$3,140.6 million and $3,112.2 million, respectively, at December 31,
2003 and 2002 and relates solely to the Investment Services segment. No
losses resulted in 2003 and 2002 from the annual impairment testing of
goodwill and indefinite-lived intangible assets. Amounts presently
estimated to be recorded in each of the succeeding five years ending
December 31, 2008 for amortization of other intangible assets are not
expected to vary significantly from the amount for the full year
December 31, 2003 of $9.3 million, net of minority interest of $12.6
million. Amortization of other intangible assets for the year ended
December 31, 2002 was $8.6 million, net of minority interest of $12.6
million. The gross carrying amount and accumulated amortization of other
intangible assets were $534.8 million and $162.0 million, respectively,
at December 31, 2003 and $531.7 million and $140.1 million,
respectively, at December 31, 2002. SFAS No. 144 retains many of the
fundamental recognition and measurement provisions previously required
by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to
be Disposed of," except for the removal of goodwill from its scope,
inclusion of specific guidance on cash flow recoverability testing and
the criteria that must be met to classify a long-lived asset as
held-for-sale. SFAS No. 141 and No. 144 had no material impact on the
results of operations or financial position of the Company upon their
adoption on January 1, 2002.
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 reduce Earnings from continuing operations in 2002 by
$113.0 million, net of Federal income taxes of $61.0 million. The
pro-forma effect of retroactive application of this change on 2001
results of operations was not material.
On January 1, 2001, the Company adopted SFAS No. 133, as amended, that
established new accounting and reporting standards for all derivative
instruments, including certain derivatives embedded in other contracts,
and for hedging activities. With respect to free-standing derivative
positions, at January 1, 2001, the Company recorded a
cumulative-effect-type charge to earnings of $3.5 million to recognize
the difference between the carrying values and fair values. With respect
to embedded derivatives, the Company elected a January 1, 1999
transition date, thereby effectively "grandfathering" existing
accounting for derivatives embedded in hybrid instruments. As a
consequence of this election, coupled with interpretive guidance
specifically related to insurance contracts and features, adoption of
the new requirements for embedded derivatives had no material impact on
the Company's results of operations or its financial position. None of
the Company's derivatives were designated as qualifying hedges under
SFAS No. 133 and, consequently, required mark-to-market accounting
through earnings for changes in their fair values beginning January 1,
2001. Upon its adoption of SFAS No. 133, the Company reclassified $256.7
million of held-to-maturity securities as available-for-sale. This
reclassification resulted in an after-tax cumulative-effect-type
adjustment of $8.9 million in other comprehensive income, representing
the after-tax unrealized gain on these securities at January 1, 2001.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 established
financial accounting and reporting standards for costs associated with
exit or disposal activities initiated after December 31, 2002 and
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring)".
SFAS No. 146 requires that a liability for a
F-10
cost associated with an exit or disposal activity is recognized only
when the liability is incurred and measured initially at fair value.
However, the cost of termination benefits provided under the terms of an
ongoing benefit arrangement, such as a standard severance offering based
on years of service, continues to be covered by other accounting
pronouncements and is unchanged by SFAS No. 146. No material impact on
the results of operations or financial position of the Company resulted
in 2003 from compliance with these new recognition and measurement
provisions.
In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". FIN No. 45 addresses the
disclosures made by a guarantor in its interim and annual financial
statements about obligations under guarantees. FIN No. 45 also clarifies
the requirements related to the recognition of a liability by a
guarantor at the inception of a guarantee for the obligations that the
guarantor has undertaken in issuing that guarantee. The fair value
reporting provisions of FIN No. 45 were applied on a prospective basis
to guarantees issued or modified after December 31, 2002. The disclosure
requirements were effective for financial statements of interim or
annual periods ending after December 15, 2002 (see Note 15). The initial
recognition and initial measurement provisions were applied only on a
prospective basis to guarantees issued or modified after December 31,
2002 and had no material impact on the Company's results of operations
or financial position upon adoption.
The Company adopted SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity," which
was effective for financial instruments entered into or modified after
May 31, 2003, and otherwise was 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 results of operations or financial position upon adoption.
New Accounting Pronouncements
-----------------------------
In July 2003, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts". SOP 03-1 is
effective as of January 1, 2004, and will require a change in the
Company's accounting policies relating to (a) general account interests
in separate accounts, (b) assets and liabilities associated with market
value-adjusted annuities, (c) liabilities related to group pension
participating contracts, and (d) liabilities related to certain
mortality and annuitization benefits, such as the no lapse guarantee
feature contained in variable and universal life contracts. The method
of accounting that the Company adopted in 2002 for GMDB and GMIB
liabilities is consistent with the requirements of SOP 03-1. Management
expects that the impact of adopting SOP 03-1 on January 1, 2004 will
result in a one-time decrease to net earnings of approximately $(1.0)
million related to the cumulative effect of the required changes in
accounting. Approximately $12.5 million of the cumulative effect
adjustment represents a reclassification of investment income previously
reported in the consolidated statements of earnings to unrealized gains
included in other comprehensive income. Therefore, shareholders' equity
is expected to increase approximately $11.5 million as a result of the
implementation of SOP 03-1. The determination of liabilities associated
with group pension participating contracts and mortality and
annuitization benefits, as well as related impacts on deferred
acquisition costs, is based on models that involve numerous estimates
and subjective judgments. There can be no assurance that the ultimate
actual experience will not differ from management's estimates.
Investments
-----------
The carrying values of fixed maturities identified as available for sale
are reported at estimated fair value. Changes in estimated fair value
are reported in comprehensive income. The amortized cost of fixed
maturities is adjusted for impairments in value deemed to be other than
temporary.
Mortgage loans on real estate are stated at unpaid principal balances,
net of unamortized discounts and valuation allowances. Valuation
allowances are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or on its
collateral value if the loan is collateral dependent. However, if
foreclosure is or becomes probable, the collateral value measurement
method is used.
Impaired mortgage loans without provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment.
F-11
Interest income earned on loans where the collateral value is used to
measure impairment is recorded on a cash basis. Interest income on loans
where the present value method is used to measure impairment is accrued
on the net carrying value amount of the loan at the interest rate used
to discount the cash flows. Changes in the present value attributable to
changes in the amount or timing of expected cash flows are reported as
investment gains or losses.
Real estate held for the production of income, including real estate
acquired in satisfaction of debt, is stated at depreciated cost less
valuation allowances. At the date of foreclosure (including in-substance
foreclosure), real estate acquired in satisfaction of debt is valued at
estimated fair value. Impaired real estate is written down to fair value
with the impairment loss being included in investment gains (losses),
net.
Depreciation of real estate held for production of income is computed
using the straight-line method over the estimated useful lives of the
properties, which generally range from 40 to 50 years.
Real estate investments meeting the following criteria are classified as
real estate held-for-sale:
o Management having the authority to approve the action commits
the organization to a plan to sell the property.
o The property is available for immediate sale in its present
condition subject only to terms that are usual and customary for
the sale of such assets.
o An active program to locate a buyer and other actions required
to complete the plan to sell the asset have been initiated and
are continuing.
o The sale of the asset is probable and transfer of the asset is
expected to qualify for recognition as a completed sale within
one year.
o The asset is being actively marketed for sale at a price that is
reasonable in relation to its current fair value.
o Actions required to complete the plan indicate that it is
unlikely that significant changes to the plan will be made or
that the plan will be withdrawn.
Real estate held-for-sale is stated at depreciated cost less valuation
allowances. Valuation allowances on real estate held-for-sale are
computed using the lower of depreciated cost or current estimated fair
value, net of disposition costs. Depreciation is discontinued on real
estate held-for-sale.
In the fourth quarter of 2003, three real estate investments met the
criteria of real estate held-for-sale. As a result, the Company
transferred these investments with a total carrying value of $56.9
million from real estate held for the production of income to real
estate held-for-sale. This amount is included in the Other assets line
in the 2003 consolidated balance sheet. The results of operations for
these properties in each of the three years ended December 31, 2003 were
not significant.
Valuation allowances are netted against the asset categories to which
they apply.
Policy loans are stated at unpaid principal balances.
Partnerships, investment companies and joint venture interests in which
the Company has control and a majority economic interest (that is,
greater than 50% of the economic return generated by the entity) or
those that meet FIN No. 46(R) requirements for consolidation are
consolidated; those in which the Company does not have control and a
majority economic interest and those that do not meet FIN No. 46(R)
requirements for consolidation are reported on the equity basis of
accounting and are included either with equity real estate or other
equity investments, as appropriate.
Equity securities include common stock and non-redeemable preferred
stock classified as either trading or available for sale securities, are
carried at estimated fair value and are included in other equity
investments.
Short-term investments are stated at amortized cost which approximates
fair value and are included with other invested assets.
Cash and cash equivalents includes cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity
of three months or less.
F-12
All securities owned as well as United States government and agency
securities, mortgage-backed securities, futures and forwards
transactions are recorded in the consolidated financial statements on a
trade date basis.
Net Investment Income, Investment Gains (Losses), Net and Unrealized
--------------------------------------------------------------------
Investment Gains (Losses)
------------------------
Net investment income and realized investment gains (losses), net
(together "investment results") related to certain participating group
annuity contracts which are passed through to the contractholders are
offset by amounts reflected as interest credited to policyholders'
account balances.
Realized investment gains (losses) are determined by identification with
the specific asset and are presented as a component of revenue. Changes
in the valuation allowances are included in investment gains or losses.
Realized and unrealized holding gains (losses) on trading securities are
reflected in net investment income.
Unrealized investment gains and losses on fixed maturities and equity
securities available for sale held by the Company are accounted for as a
separate component of accumulated comprehensive income, net of related
deferred Federal income taxes, amounts attributable to Other
Discontinued Operations, Closed Block policyholders dividend obligation,
participating group annuity contracts and deferred policy acquisition
costs ("DAC") related to universal life and investment-type products and
participating traditional life contracts.
Recognition of Insurance Income and Related Expenses
----------------------------------------------------
Premiums from universal life and investment-type contracts are reported
as deposits to policyholders' account balances. Revenues from these
contracts consist of amounts assessed during the period against
policyholders' account balances for mortality charges, policy
administration charges and surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the
period in excess of related policyholders' account balances.
Premiums from participating and non-participating traditional life and
annuity policies with life contingencies generally are recognized as
income when due. Benefits and expenses are matched with such income so
as to result in the recognition of profits over the life of the
contracts. This match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period
over which benefits are provided, premiums are recorded as income when
due with any excess profit deferred and recognized in income in a
constant relationship to insurance in-force or, for annuities, the
amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
Deferred Policy Acquisition Costs
---------------------------------
Acquisition costs that vary with and are primarily related to the
acquisition of new and renewal insurance business, including
commissions, underwriting, agency and policy issue expenses, are
deferred. DAC is subject to recoverability testing at the time of policy
issue and loss recognition testing at the end of each accounting period.
For universal life products and investment-type products, DAC is
amortized over the expected total life of the contract group as a
constant percentage of estimated gross profits arising principally from
investment results, Separate Account fees, mortality and expense margins
and surrender charges based on historical and anticipated future
experience, updated at the end of each accounting period. The effect on
the amortization of DAC of revisions to estimated gross profits is
reflected in earnings in the period such estimated gross profits are
revised. A decrease in expected gross profits would accelerate DAC
amortization. Conversely, an increase in expected gross profits would
slow DAC amortization. The effect on the DAC asset that would result
from realization of unrealized gains (losses) is recognized with an
offset to accumulated comprehensive income in consolidated shareholders'
equity as of the balance sheet date.
F-13
A significant assumption in the amortization of DAC on variable and
interest-sensitive life insurance and variable annuities relates to
projected future Separate Account performance. Expected future gross
profit assumptions related to Separate Account performance are set by
management using a long-term view of expected average market returns by
applying a reversion to the mean approach. In applying this approach to
develop estimates of future returns, it is assumed that the market will
return to an average gross long-term return estimate, developed with
reference to historical long-term equity market performance and subject
to assessment of the reasonableness of resulting estimates of future
return assumptions. For purposes of making this reasonableness
assessment, management has set limitations as to maximum and minimum
future rate of return assumptions, as well as a limitation on the
duration of use of these maximum or minimum rates of return. Currently,
the average gross long-term annual return estimate is 9.0% (7.05% net of
product weighted average Separate Account fees), and the gross maximum
and minimum annual rate of return limitations are 15.0% (13.05% net of
product weighted average Separate Account fees) and 0% (-1.95% net of
product weighted average Separate Account fees), respectively. The
maximum duration over which these rate limitations may be applied is 5
years. This approach will continue to be applied in future periods. If
actual market returns continue at levels that would result in assuming
future market returns of 15% for more than 5 years in order to reach the
average gross long-term return estimate, the application of the 5 year
maximum duration limitation would result in an acceleration of DAC
amortization. Conversely, actual market returns resulting in assumed
future market returns of 0% for more than 5 years would result in a
required deceleration of DAC amortization. As of December 31, 2003,
current projections of future average gross market returns assume a 4.7%
return for 2004 which is within the maximum and minimum limitations and
assume a reversion to the mean of 9.0% after 1 year.
In addition, projections of future mortality assumptions related to
variable and interest-sensitive life products are based on a long-term
average of actual experience. This assumption is updated quarterly to
reflect recent experience as it emerges. Improvement of life mortality
in future periods from that currently projected would result in future
deceleration of DAC amortization. Conversely, deterioration of life
mortality in future periods from that currently projected would result
in future acceleration of DAC amortization. Generally, life mortality
experience has improved in recent periods.
Other significant assumptions underlying gross profit estimates relate
to contract persistency and general account investment spread.
For participating traditional life policies (substantially all of which
are in the Closed Block), DAC is amortized over the expected total life
of the contract group as a constant percentage based on the present
value of the estimated gross margin amounts expected to be realized over
the life of the contracts using the expected investment yield. At
December 31, 2003, the average rate of assumed investment yields,
excluding policy loans, was 7.9% grading to 7.3% over 7 years. Estimated
gross margin includes anticipated premiums and investment results less
claims and administrative expenses, changes in the net level premium
reserve and expected annual policyholder dividends. The effect on the
amortization of DAC of revisions to estimated gross margins is reflected
in earnings in the period such estimated gross margins are revised. The
effect on the DAC asset that would result from realization of unrealized
gains (losses) is recognized with an offset to accumulated comprehensive
income in consolidated shareholders' equity as of the balance sheet
date.
For non-participating traditional life policies, DAC is amortized in
proportion to anticipated premiums. Assumptions as to anticipated
premiums are estimated at the date of policy issue and are consistently
applied during the life of the contracts. Deviations from estimated
experience are reflected in earnings in the period such deviations
occur. For these contracts, the amortization periods generally are for
the total life of the policy.
Policyholders' Account Balances and Future Policy Benefits
----------------------------------------------------------
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account
values represent an accumulation of gross premium payments plus credited
interest less expense and mortality charges and withdrawals.
Equitable Life issues certain variable annuity products with a GMDB
feature. Equitable Life also issues certain variable annuity products
that contain a GMIB feature which, if elected by the policyholder after
a stipulated waiting period from contract issuance, guarantees a minimum
lifetime annuity based on predetermined annuity purchase rates that may
be in excess of what the contract account value can purchase
F-14
at then-current annuity purchase rates. This minimum lifetime annuity is
based on predetermined annuity purchase rates applied to a guaranteed
minimum income benefit base. The risk associated with the GMDB and GMIB
features is that a protracted under-performance of the financial markets
could result in GMDB and GMIB benefits being higher than what
accumulated policyholder account balances would support. Reserves for
GMDB and GMIB obligations are calculated on the basis of actuarial
assumptions related to projected benefits and related contract charges
generally over the lives of the contracts using assumptions consistent
with those used in estimating gross profits for purposes of amortizing
DAC. The determination of this estimated liability is based on models
which involve numerous estimates and subjective judgments, including
those regarding expected market rates of return and volatility, contract
surrender rates, mortality experience, and, for GMIB, GMIB election
rates. Assumptions regarding Separate Account performance used for
purposes of this calculation are set using a long-term view of expected
average market returns by applying a reversion to the mean approach,
consistent with that used for DAC amortization. There can be no
assurance that ultimate actual experience will not differ from
management's estimates.
The GMIB reinsurance contracts are considered derivatives under SFAS No.
133 and, therefore, are required to be reported in the balance sheet at
their fair value. GMIB fair values are reported in the consolidated
balance sheets in Other assets. Changes in GMIB fair values are
reflected in Commissions, fees and other income in the consolidated
statements of earnings. Since there is no readily available market for
GMIB reinsurance contracts, the determination of their fair values is
based on models which involve numerous estimates and subjective
judgments including those regarding expected market rates of return and
volatility, GMIB election rates, contract surrender rates and mortality
experience. There can be no assurance that ultimate actual experience
will not differ from management's estimates.
For reinsurance contracts other than those covering GMIB exposure,
reinsurance recoverable balances are calculated using methodologies and
assumptions that are consistent with those used to calculate the direct
liabilities.
For participating traditional life policies, future policy benefit
liabilities are calculated using a net level premium method on the basis
of actuarial assumptions equal to guaranteed mortality and dividend fund
interest rates. The liability for annual dividends represents the
accrual of annual dividends earned. Terminal dividends are accrued in
proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy
benefit liabilities are estimated using a net level premium method on
the basis of actuarial assumptions as to mortality, persistency and
interest established at policy issue. Assumptions established at policy
issue as to mortality and persistency are based on the Insurance Group's
experience that, together with interest and expense assumptions,
includes a margin for adverse deviation. When the liabilities for future
policy benefits plus the present value of expected future gross premiums
for a product are insufficient to provide for expected future policy
benefits and expenses for that product, DAC is written off and
thereafter, if required, a premium deficiency reserve is established by
a charge to earnings. Benefit liabilities for traditional annuities
during the accumulation period are equal to accumulated contractholders'
fund balances and, after annuitization, are equal to the present value
of expected future payments. Interest rates used in establishing such
liabilities range from 2.0% to 10.9% for life insurance liabilities and
from 2.25% to 8.63% for annuity liabilities.
Individual health benefit liabilities for active lives are estimated
using the net level premium method and assumptions as to future
morbidity, withdrawals and interest. Benefit liabilities for disabled
lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
While management believes its disability income ("DI") reserves have
been calculated on a reasonable basis and are adequate, there can be no
assurance reserves will be sufficient to provide for future liabilities.
Claim reserves and associated liabilities net of reinsurance ceded for
individual DI and major medical policies were $69.9 million and $86.0
million at December 31, 2003 and 2002, respectively. At December 31,
2003 and 2002, respectively, $1,109.3 million and $1,088.9 million of DI
reserves and associated liabilities were ceded through an indemnity
reinsurance agreement principally with a single reinsurer (see Note 12).
Incurred benefits (benefits paid plus changes in claim reserves) and
benefits paid for individual DI and major medical policies are
summarized as follows:
F-15
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Incurred benefits related to current year.......... $ 33.8 $ 36.6 $ 44.0
Incurred benefits related to prior years........... (2.8) (6.3) (10.6)
----------------- ---------------- -----------------
Total Incurred Benefits............................ $ 31.0 $ 30.3 $ 33.4
================= ================ =================
Benefits paid related to current year.............. $ 12.1 $ 11.5 $ 10.7
Benefits paid related to prior years............... 34.9 37.2 38.8
----------------- ---------------- -----------------
Total Benefits Paid................................ $ 47.0 $ 48.7 $ 49.5
================= ================ =================
Policyholders' Dividends
------------------------
The amount of policyholders' dividends to be paid (including dividends
on policies included in the Closed Block) is determined annually by
Equitable Life's board of directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity and expense experience for the year and judgment as to the
appropriate level of statutory surplus to be retained by Equitable Life.
At December 31, 2003, participating policies, including those in the
Closed Block, represent approximately 18.7% ($34.7 billion) of directly
written life insurance in-force, net of amounts ceded.
Separate Accounts
-----------------
Generally, Separate Accounts established under New York State Insurance
Law generally are not chargeable with liabilities that arise from any
other business of the Insurance Group. Separate Accounts assets are
subject to General Account claims only to the extent Separate Accounts
assets exceed Separate Accounts liabilities. Assets and liabilities of
the Separate Accounts represent the net deposits and accumulated net
investment earnings less fees, held primarily for the benefit of
contractholders, and for which the Insurance Group does not bear the
investment risk. Separate Accounts' assets and liabilities are shown on
separate lines in the consolidated balance sheets. The Insurance Group
bears the investment risk on assets held in one Separate Account;
therefore, such assets are carried on the same basis as similar assets
held in the General Account portfolio. Assets held in the other Separate
Accounts are carried at quoted market values or, where quoted values are
not readily available, at estimated fair values as determined by the
Insurance Group.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate
Accounts liabilities and are not reported in revenues in the
consolidated statements of earnings. For 2003, 2002 and 2001, investment
results of such Separate Accounts were losses of $(466.2) million,
$(4,740.7) million and $(2,214.4) million, respectively.
Deposits to Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges on all Separate Accounts are
included in revenues.
Recognition of Investment Management Revenues and Related Expenses
------------------------------------------------------------------
Commissions, fees and other income principally include Investment
Management advisory and service fees. Investment Management advisory and
services base fees, generally calculated as a percentage, referred to as
"basis points", of assets under management for clients, are recorded as
revenue as the related services are performed; they include brokerage
transactions charges of Sanford C. Bernstein & Co., LLC ("SCB LLC"), a
wholly owned subsidiary of Alliance, for substantially all private
client transactions and certain institutional investment management
client transactions. Certain investment advisory contracts provide for a
performance fee, in addition to or in lieu of a base fee, that is
calculated as either a percentage of absolute investment results or a
percentage of the related investment results in excess of a stated
benchmark over a specified period of time. Performance fees are recorded
as revenue at the end of the measurement period. Transaction charges
earned and related expenses are recorded on a trade date basis.
Distribution revenues and shareholder servicing fees are accrued as
earned.
F-16
Institutional research services revenue consists of brokerage
transaction charges received by SCB LLC and Sanford C. Bernstein
Limited, a wholly owned subsidiary of Alliance, for in-depth research
and other services provided to institutional investors. Brokerage
transaction charges earned and related expenses are recorded on a trade
date basis.
Sales commissions paid to financial intermediaries in connection with
the sale of shares of open-end Alliance mutual funds sold without a
front-end sales charge are capitalized 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 generally
recovered from distribution services fees received from those funds and
from contingent deferred sales charges ("CDSC") received from
shareholders of those funds upon the redemption of their shares. CDSC
cash recoveries are recorded as reductions in unamortized deferred sales
commissions when received. At December 31, 2003 and 2002, respectively,
net deferred sales commissions totaled $387.2 million and $500.9 million
and are included within Other assets. The estimated amortization expense
of deferred sales commission, based on December 31, 2003 net balance for
each of the next five years is approximately $386.0 million.
Alliance's management tests the deferred sales commission asset for
recoverability quarterly, or more often when events or changes in
circumstances occur that could significantly increase the risk of
impairment of the asset. Alliance's management determines recoverability
by estimating undiscounted future cash flows to be realized from this
asset, as compared to its recorded amount, as well as the estimated
remaining life of the deferred sales commission asset over which
undiscounted future cash flows are expected to be received. Undiscounted
future cash flows consist of ongoing distribution services fees and
CDSC. Distribution services fees are calculated as a percentage of
average assets under management related to back-end load shares. CDSC is
based on the 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 future 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. Future redemption rate assumptions are determined
by reference to actual redemption experience over the last five years.
These assumptions are updated periodically. Estimates of undiscounted
future cash flows and the remaining life of the deferred sales
commission asset are made from these assumptions. Alliance's management
considers the results of these analyses performed at various dates. 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's management's best estimate of future cash
flows discounted to a present value amount. As such, given the
volatility and uncertainty of capital markets and future redemption,
Alliance's management believes these to be critical accounting
estimates.
Other Accounting Policies
-------------------------
In accordance with regulations of the Securities and Exchange Commission
("SEC"), securities with a fair value of $1.29 billion and $1.17 billion
have been segregated in a special reserve bank custody account at
December 31, 2003 and 2002, respectively for the exclusive benefit of
securities broker-dealer or brokerage customers under Rule 15c3-3 under
the Securities Exchange Act of 1934, as amended.
Intangible assets include costs assigned to contracts of businesses
acquired. These costs continue to be amortized on a straight-line basis
over estimated useful lives of twenty years.
Capitalized internal-use software is amortized on a straight-line basis
over the estimated useful life of the software.
The Holding Company and certain of its consolidated subsidiaries,
including the Company, file a consolidated Federal income tax return.
Current Federal income taxes are charged or credited to operations based
upon amounts estimated to be payable or recoverable as a result of
taxable operations for the current year. Deferred income tax assets and
liabilities are recognized based on the difference between financial
F-17
statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
Minority interest subject to redemption rights represents the remaining
32.6 million of private Alliance Units issued to former Bernstein
shareholders in connection with Alliance's acquisition of Bernstein. The
Holding Company agreed to provide liquidity to these former Bernstein
shareholders after a two-year lock-out period which ended October 2002.
The Company acquired 8.16 million of the former Bernstein shareholders'
Alliance Units in 2002. The outstanding 32.6 million Alliance Units may
be sold to the Holding Company at the prevailing market price over the
remaining six years ending in 2009. Generally, not more than 20% of the
original Alliance Units issued to the former Bernstein shareholders may
be put to the Holding Company in any one annual period.
The Company accounts for its stock option plans and other stock-based
compensation plans in accordance with the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. In accordance with the opinion,
stock option awards result in compensation expense only if the current
market price of the underlying stock exceeds the option strike price at
the grant date. See Note 22 for the pro forma disclosures required by
SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No.
148, "Accounting for Stock-Based Compensation-Transition and
Disclosure".
F-18
3) INVESTMENTS
The following tables provide additional information relating to fixed
maturities and equity securities:
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- ----------------- ----------------- ---------------
(In Millions)
December 31, 2003
-----------------
Fixed Maturities:
Available for Sale:
Corporate..................... $ 20,653.7 $ 1,726.2 $ 84.7 $ 22,295.2
Mortgage-backed............... 3,837.0 57.0 17.4 3,876.6
U.S. Treasury, government
and agency securities....... 812.3 58.7 .5 870.5
States and political
subdivisions................ 188.2 14.1 2.0 200.3
Foreign governments........... 248.4 45.9 .3 294.0
Redeemable preferred stock.... 1,412.0 151.1 4.2 1,558.9
----------------- ----------------- ----------------- ----------------
Total Available for Sale.... $ 27,151.6 $ 2,053.0 $ 109.1 $ 29,095.5
================= ================= ================= ================
Equity Securities:
Available for sale.............. $ 11.6 $ 1.2 $ .2 $ 12.6
Trading securities.............. 1.9 .6 1.5 1.0
----------------- ----------------- ----------------- ----------------
Total Equity Securities........... $ 13.5 $ 1.8 $ 1.7 $ 13.6
================= ================= ================= ================
December 31, 2002
-----------------
Fixed Maturities:
Available for Sale:
Corporate..................... $ 20,084.0 $ 1,491.0 $ 269.0 $ 21,306.0
Mortgage-backed............... 2,419.2 99.2 - 2,518.4
U.S. Treasury, government
and agency securities....... 895.5 84.1 - 979.6
States and political
subdivisions................ 197.6 17.9 - 215.5
Foreign governments........... 231.8 37.4 .8 268.4
Redeemable preferred stock.... 923.7 71.4 4.1 991.0
----------------- ----------------- ----------------- ----------------
Total Available for Sale.... $ 24,751.8 $ 1,801.0 $ 273.9 $ 26,278.9
================= ================= ================= ================
Equity Securities:
Available for sale.............. $ 37.6 $ 2.0 $ 3.4 $ 36.2
Trading securities.............. 3.3 .8 3.0 1.1
----------------- ----------------- ----------------- ----------------
Total Equity Securities........... $ 40.9 $ 2.8 $ 6.4 $ 37.3
================= ================= ================= ================
For publicly-traded fixed maturities and equity securities, estimated
fair value is determined using quoted market prices. For fixed
maturities without a readily ascertainable market value, the Company
determines estimated fair values using a discounted cash flow approach,
including provisions for credit risk, generally based on the assumption
such securities will be held to maturity. Such estimated fair values do
not necessarily represent the values for which these securities could
have been sold at the dates of the consolidated balance sheets. At
December 31, 2003 and 2002, securities without a readily ascertainable
market value having an amortized cost of $4,462.1 million and $4,899.8
million, respectively, had estimated fair values of $4,779.6 million and
$5,137.2 million, respectively.
F-19
The contractual maturity of bonds at December 31, 2003 is shown below:
Available for Sale
------------------------------------
Amortized Estimated
Cost Fair Value
---------------- -----------------
(In Millions)
Due in one year or less................................................ $ 495.5 $ 514.8
Due in years two through five.......................................... 4,981.3 5,386.0
Due in years six through ten........................................... 9,760.8 10,595.8
Due after ten years.................................................... 6,665.0 7,163.4
Mortgage-backed securities............................................. 3,837.0 3,876.6
---------------- -----------------
Total.................................................................. $ 25,739.6 $ 27,536.6
================ =================
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Company's management, with the assistance of its investment
advisors, monitors the investment performance of its portfolio. This
review process culminates with a quarterly review of certain assets by
the Insurance Group's Investments Under Surveillance Committee that
evaluates whether any investments are other than temporarily impaired.
The review considers an analysis of individual credit metrics of each
issuer as well as industry fundamentals and the outlook for the future.
Based on the analysis, a determination is made as to the ability of the
issuer to service its debt obligations on an ongoing basis. If this
ability is deemed to be impaired, then the appropriate provisions are
taken.
The following table discloses fixed maturities (598 fixed maturities)
that have been in a continuous unrealized loss position for less than a
twelve month period and greater than a twelve month period as of
December 31, 2003:
Less than 12 Months 12 Months or Longer Total
------------------------------- ---------------------------- ----------------------------
Gross Gross Gross
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Losses Fair Value Losses Fair Value Losses
------------- ------------- ------------- ------------- ------------- -------------
(In Millions)
Fixed Maturities:
Corporate................. $ 2,342.9 $ 77.6 $ 81.0 $ 7.1 $ 2,423.9 $ 84.7
Mortgage-backed........... 1,406.0 17.4 - - 1,406.0 17.4
U.S. Treasury,
government and agency
securities.............. 28.3 .5 - - 28.3 .5
States and political
subdivisions............ 24.2 2.0 - - 24.2 2.0
Foreign governments....... 7.4 .3 1.0 - 8.4 .3
Redeemable
preferred stock......... 58.5 3.2 14.0 1.0 72.5 4.2
-------------- ------------- ------------- -------------- ------------- ---------------
Total Temporarily
Impaired Securities ...... $ 3,867.3 $ 101.0 $ 96.0 $ 8.1 $ 3,963.3 $ 109.1
============== ============= ============= ============== ============= ===============
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting of public high yield bonds,
redeemable preferred stocks and directly negotiated debt in leveraged
buyout transactions. The Insurance Group seeks to minimize the higher
than normal credit risks associated with such securities by monitoring
concentrations in any single issuer or a particular industry group.
These corporate high yield securities are classified as other than
investment grade by the various rating agencies, i.e., a rating below
Baa3/BBB- or National Association of Insurance Commissioners ("NAIC")
designation of 3 (medium grade), 4 or 5 (below investment grade) or 6
(in or near default). At December 31, 2003, approximately
F-20
$1,366.2 million or 5.3% of the $25,739.6 million aggregate amortized
cost of bonds held by the Company was considered to be other than
investment grade.
At December 31, 2003, the carrying value of fixed maturities which are
non-income producing for the twelve months preceding the consolidated
balance sheet date was $53.0 million.
The Insurance Group holds equity in limited partnership interests and
other equity method investments that primarily invest in securities
considered to be other than investment grade. The carrying values at
December 31, 2003 and 2002 were $775.5 million and $683.0 million,
respectively.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage
loans on real estate, based on amortized cost, amounted to $122.4
million and $75.3 million at December 31, 2003 and 2002, respectively.
Gross interest income on these loans included in net investment income
aggregated $7.8 million, $5.3 million and $3.2 million in 2003, 2002 and
2001, respectively. Gross interest income on restructured mortgage loans
on real estate that would have been recorded in accordance with the
original terms of such loans amounted to $10.0 million, $6.8 million and
$4.2 million in 2003, 2002 and 2001, respectively.
Impaired mortgage loans along with the related investment valuation
allowances for losses follow:
December 31,
----------------------------------------
2003 2002
------------------- -------------------
(In Millions)
Impaired mortgage loans with investment valuation allowances....... $ 149.4 $ 111.8
Impaired mortgage loans without investment valuation allowances.... 29.1 20.4
------------------- -------------------
Recorded investment in impaired mortgage loans..................... 178.5 132.2
Investment valuation allowances.................................... (18.8) (23.4)
------------------- -------------------
Net Impaired Mortgage Loans........................................ $ 159.7 $ 108.8
=================== ===================
During 2003, 2002 and 2001, respectively, the Company's average recorded
investment in impaired mortgage loans was $180.9 million, $138.1 million
and $141.7 million. Interest income recognized on these impaired
mortgage loans totaled $12.3 million, $10.0 million and $7.2 million for
2003, 2002 and 2001, respectively.
Mortgage loans on real estate are placed on nonaccrual status once
management believes the collection of accrued interest is doubtful. Once
mortgage loans on real estate are classified as nonaccrual loans,
interest income is recognized under the cash basis of accounting and the
resumption of the interest accrual would commence only after all past
due interest has been collected or the mortgage loan on real estate has
been restructured to where the collection of interest is considered
likely. At December 31, 2003 and 2002, respectively, the carrying value
of mortgage loans on real estate that had been classified as nonaccrual
loans was $143.2 million and $91.1 million.
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At
December 31, 2003 and 2002, the carrying value of equity real estate
held-for-sale amounted to $56.9 million and $107.7 million,
respectively. For 2003, 2002 and 2001, respectively, real estate of $2.8
million, $5.6 million and $64.8 million was acquired in satisfaction of
debt. At December 31, 2003 and 2002, the Company owned $275.8 million
and $268.8 million, respectively, of real estate acquired in
satisfaction of debt of which $3.6 million and $2.7 million,
respectively, are held as real estate joint ventures.
Accumulated depreciation on real estate was $189.6 million and $163.6
million at December 31, 2003 and 2002, respectively. Depreciation
expense on real estate totaled $38.8 million, $18.0 million and $16.1
million for 2003, 2002 and 2001, respectively.
F-21
Investment valuation allowances for mortgage loans and equity real
estate and changes thereto follow:
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Balances, beginning of year........................... $ 55.0 $ 87.6 $ 126.2
Additions charged to income........................... 12.2 32.5 40.0
Deductions for writedowns and
asset dispositions.................................. (15.2) (65.1) (78.6)
Deduction for transfer of real estate held-for-sale
to real estate held for the production of income.... (31.5) - -
----------------- ---------------- -----------------
Balances, End of Year................................. $ 20.5 $ 55.0 $ 87.6
================= ================ =================
Balances, end of year comprise:
Mortgage loans on real estate....................... $ 18.8 $ 23.4 $ 19.3
Equity real estate.................................. 1.7 31.6 68.3
----------------- ---------------- -----------------
Total................................................. $ 20.5 $ 55.0 $ 87.6
================= ================ =================
4) EQUITY METHOD INVESTMENTS
Included in equity real estate or other equity investments, as
appropriate, is the Company's interest in real estate joint ventures,
limited partnership interests and investment companies accounted for
under the equity method with a total carrying value of $896.9 million
and $801.7 million, respectively, at December 31, 2003 and 2002. The
Company's total equity in net earnings (losses) for these real estate
joint ventures and limited partnership interests was $4.3 million,
$(18.3) million and $(111.1) million, respectively, for 2003, 2002 and
2001.
Summarized below is the combined financial information only for those
real estate joint ventures and for those limited partnership interests
accounted for under the equity method in which the Company has an
investment of $10.0 million or greater and an equity interest of 10% or
greater (6 and 7 individual ventures at December 31, 2003 and 2002,
respectively) and the Company's carrying value and equity in net
earnings for those real estate joint ventures and limited partnership
interests:
December 31,
------------------------------------
2003 2002
---------------- -----------------
(In Millions)
BALANCE SHEETS
Investments in real estate, at depreciated cost........................ $ 551.6 $ 550.0
Investments in securities, generally at estimated fair value........... 204.8 237.5
Cash and cash equivalents.............................................. 37.6 27.9
Other assets........................................................... 22.8 32.2
---------------- -----------------
Total Assets........................................................... $ 816.8 $ 847.6
================ =================
Borrowed funds - third party........................................... $ 259.7 $ 264.7
Other liabilities...................................................... 19.5 19.2
---------------- -----------------
Total liabilities...................................................... 279.2 283.9
---------------- -----------------
Partners' capital...................................................... 537.6 563.7
---------------- -----------------
Total Liabilities and Partners' Capital................................ $ 816.8 $ 847.6
================ =================
The Company's Carrying Value in These Entities Included Above.......... $ 168.8 $ 172.3
================ =================
F-22
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures............. $ 95.6 $ 98.4 $ 95.6
Net revenues (losses) of
other limited partnership interests.............. 26.0 (23.2) 29.8
Interest expense - third party..................... (18.0) (19.8) (11.5)
Interest expense - the Company..................... - - (.7)
Other expenses..................................... (61.7) (59.3) (58.2)
----------------- ---------------- -----------------
Net Earnings (Losses).............................. $ 41.9 $ (3.9) $ 55.0
================= ================ =================
The Company's Equity in Net Earnings of These
Entities Included Above.......................... $ 5.0 $ 12.8 $ 13.2
================= ================ =================
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income follows:
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Fixed maturities................................... $ 1,792.6 $ 1,755.4 $ 1,662.4
Mortgage loans on real estate...................... 279.5 314.8 361.6
Equity real estate................................. 136.9 153.7 166.2
Other equity investments........................... 49.3 (45.4) (53.6)
Policy loans....................................... 260.1 269.4 268.2
Other investment income............................ 66.8 114.1 216.6
----------------- ---------------- -----------------
Gross investment income.......................... 2,585.2 2,562.0 2,621.4
Investment expenses.............................. (198.3) (184.8) (217.1)
----------------- ---------------- -----------------
Net Investment Income.............................. $ 2,386.9 $ 2,377.2 $ 2,404.3
================= ================ =================
Investment (losses) gains including changes in the valuation allowances
follow:
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Fixed maturities................................... $ (100.7) $ (374.3) $ (225.2)
Mortgage loans on real estate...................... 1.3 3.7 (11.4)
Equity real estate................................. 26.8 101.5 34.5
Other equity investments........................... 2.0 3.3 (13.0)
Issuance and sales of Alliance Units............... - .5 (2.3)
Other.............................................. 8.3 (13.2) 10.1
----------------- ---------------- -----------------
Investment Losses, Net........................... $ (62.3) $ (278.5) $ (207.3)
================= ================ =================
Writedowns of fixed maturities amounted to $193.2 million, $312.8
million and $287.5 million for 2003, 2002 and 2001, respectively.
Writedowns of mortgage loans on real estate and equity real estate
amounted to $5.2 million and zero, respectively, for 2003 and $5.5
million and $5.8 million, respectively, for 2002.
For 2003, 2002 and 2001, respectively, proceeds received on sales of
fixed maturities classified as available for sale amounted to $4,773.5
million, $7,176.3 million and $7,372.3 million. Gross gains of $105.1
million, $108.4 million and $156.2 million and gross losses of $39.5
million, $172.9 million and $115.9 million, respectively, were realized
on these sales. The change in unrealized investment gains (losses)
related to fixed
F-23
maturities classified as available for sale for 2003, 2002 and 2001
amounted to $416.8 million, $1,047.8 million and $429.5 million,
respectively.
Net investment income in 2001 included realized gains of $27.1 million
on sales of Credit Suisse Group common stock, which was designated as
trading account securities and acquired in conjunction with the sale of
Donaldson, Lufkin & Jenrette, Inc., formerly a majority owned
subsidiary, in 2000.
In 2003, 2002 and 2001, respectively, net unrealized holding gains
(losses) on trading account equity securities of $2.1 million, $.5
million, and $25.0 million were included in net investment income in the
consolidated statements of earnings. These trading securities had a
carrying value of $1.0 million and $1.1 million and costs of $1.9
million and $3.3 million at December 31, 2003 and 2002, respectively.
For 2003, 2002 and 2001, investment results passed through to certain
participating group annuity contracts as interest credited to
policyholders' account balances amounted to $76.5 million, $92.1 million
and $96.7 million, respectively.
Net unrealized investment gains (losses) included in the consolidated
balance sheets as a component of accumulated other comprehensive income
and the changes for the corresponding years, including Other
Discontinued Operations on a line-by-line basis, follow:
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Balance, beginning of year......................... $ 681.1 $ 215.5 $ 12.9
Changes in unrealized investment gains (losses).... 440.8 1,049.9 436.0
Changes in unrealized investment (gains) losses
attributable to:
Participating group annuity contracts,
Closed Block policyholder dividend
obligation and other........................ (53.0) (157.3) (48.6)
DAC............................................ (65.7) (174.1) (71.6)
Deferred Federal income taxes.................. (110.4) (252.9) (113.2)
----------------- ---------------- -----------------
Balance, End of Year............................... $ 892.8 $ 681.1 $ 215.5
================= ================ =================
2003 2002 2001
------------- --------------- --------------
(In Millions)
Balance, end of year comprises:
Unrealized investment gains (losses) on:
Fixed maturities............................... $ 2,015.7 $ 1,572.0 $ 496.0
Other equity investments....................... 1.5 (1.5) 4.3
Other.......................................... (28.1) (22.2) (1.9)
----------------- ------------------ -----------------
Total........................................ 1,989.1 1,548.3 498.4
Amounts of unrealized investment (gains) losses
attributable to:
Participating group annuity contracts,
Closed Block policyholder dividend
obligation and other....................... (274.2) (221.2) (63.9)
DAC.......................................... (339.7) (274.0) (99.9)
Deferred Federal income taxes................ (482.4) (372.0) (119.1)
----------------- ------------------ -----------------
Total.............................................. $ 892.8 $ 681.1 $ 215.5
================= ================== =================
Changes in unrealized gains (losses) reflect changes in fair value of
only those fixed maturities and equity securities classified as
available for sale and do not reflect any changes in fair value of
policyholders' account balances and future policy benefits.
F-24
6) ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income represents cumulative gains and
losses on items that are not reflected in earnings. The balances for the
past three years follow:
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Unrealized gains on investments.................... $ 892.8 $ 681.1 $ 215.5
Minimum pension liability.......................... - - (.1)
----------------- ---------------- -----------------
Total Accumulated Other
Comprehensive Income............................. $ 892.8 $ 681.1 $ 215.4
================= ================ =================
The components of other comprehensive income for the past three years
follow:
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Net unrealized gains (losses) on investments:
Net unrealized gains arising during
the period..................................... $ 416.6 $ 1,008.9 $ 525.2
Losses (gains) reclassified into net earnings
during the period.............................. 24.2 41.0 (89.2)
----------------- ---------------- -----------------
Net unrealized gains on investments................ 440.8 1,049.9 436.0
Adjustments for policyholders liabilities,
DAC and deferred Federal income taxes.......... (229.1) (584.3) (233.4)
----------------- ---------------- -----------------
Change in unrealized gains, net of
adjustments.................................... 211.7 465.6 202.6
Change in minimum pension liability................ - .1 -
----------------- ---------------- -----------------
Total Other Comprehensive Income................... $ 211.7 $ 465.7 $ 202.6
================= ================ =================
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 of the Closed Block do not represent the
actual profitability of the Closed Block operations. Operating costs and
expenses outside of the Closed Block are, therefore, disproportionate to
the business outside of the Closed Block.
F-25
Summarized financial information for the Closed Block is as follows:
December 31, December 31,
2003 2002
----------------- -----------------
(In Millions)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances
and other........................................................... $ 8,972.1 $ 8,997.3
Policyholder dividend obligation....................................... 242.1 213.3
Other liabilities...................................................... 129.5 134.6
----------------- -----------------
Total Closed Block liabilities......................................... 9,343.7 9,345.2
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $5,061.0 and $4,794.0)............................ 5,428.5 5,098.4
Mortgage loans on real estate.......................................... 1,297.6 1,456.0
Policy loans........................................................... 1,384.5 1,449.9
Cash and other invested assets......................................... 143.3 141.9
Other assets........................................................... 199.2 219.9
----------------- -----------------
Total assets designated to the Closed Block........................... 8,453.1 8,366.1
----------------- -----------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................... 890.6 979.1
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred Federal income
tax of $43.9 and $31.8 and policyholder dividend obligation of
$242.1 and $213.3................................................. 81.6 59.1
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities.............................................. $ 972.2 $ 1,038.2
================= =================
Closed Block revenues and expenses were as follows:
2003 2002 2001
---------------- ---------------- --------------------
(In Millions)
REVENUES:
Premiums and other income.......................... $ 508.5 $ 543.8 $ 571.5
Investment income (net of investment
expenses of $2.4, $5.4, and $3.0)............... 559.2 582.4 583.5
Investment losses, net............................. (35.7) (47.0) (42.3)
---------------- ---------------- --------------------
Total revenues..................................... 1,032.0 1,079.2 1,112.7
---------------- ---------------- --------------------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits and dividends.............. 924.5 980.2 1,009.3
Other operating costs and expenses................. 4.0 4.4 4.7
---------------- ---------------- --------------------
Total benefits and other deductions................ 928.5 984.6 1,014.0
---------------- ---------------- --------------------
Net revenues before Federal income taxes........... 103.5 94.6 98.7
Federal income taxes............................... (37.5) (34.7) (36.2)
---------------- ---------------- --------------------
Net Revenues....................................... $ 66.0 $ 59.9 $ 62.5
================ ================ ====================
F-26
Reconciliation of the policyholder dividend obligation is as follows:
December 31,
------------------------------------
2003 2002
---------------- -----------------
(In Millions)
Balance at beginning of year........................................... $ 213.3 $ 47.1
Unrealized investment gains............................................ 28.8 166.2
---------------- -----------------
Balance at End of Year ................................................ $ 242.1 $ 213.3
================ =================
Impaired mortgage loans along with the related investment valuation
allowances follows:
December 31,
------------------------------------
2003 2002
---------------- -----------------
(In Millions)
Impaired mortgage loans with investment valuation allowances........... $ 58.3 $ 18.6
Impaired mortgage loans without investment valuation allowances........ 5.8 .9
---------------- -----------------
Recorded investment in impaired mortgages.............................. 64.1 19.5
Investment valuation allowances........................................ (3.7) (4.0)
---------------- -----------------
Net Impaired Mortgage Loans............................................ $ 60.4 $ 15.5
================ =================
During 2003, 2002 and 2001, the Closed Block's average recorded
investment in impaired mortgage loans was $51.9 million, $26.0 million
and $30.8 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $2.7 million, $2.1 million and $1.2
million for 2003, 2002 and 2001, respectively.
Valuation allowances amounted to $3.6 million and $3.9 million on
mortgage loans on real estate and $.1 million and $.1 million on equity
real estate at December 31, 2003 and 2002, respectively. Writedowns of
fixed maturities amounted to $37.8 million, $40.0 million and $30.8
million for 2003, 2002 and 2001, respectively, including $23.3 million
in fourth quarter 2001.
8) OTHER DISCONTINUED OPERATIONS
Summarized financial information for Other Discontinued Operations
follows:
December 31,
--------------------------------------
2003 2002
----------------- -----------------
(In Millions)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $644.7 and $677.8).............................. $ 716.4 $ 722.7
Equity real estate................................................... 198.2 203.7
Mortgage loans on real estate........................................ 63.9 87.5
Other equity investments............................................. 7.5 9.4
Other invested assets................................................ .2 .2
----------------- -----------------
Total investments.................................................. 986.2 1,023.5
Cash and cash equivalents............................................ 63.0 31.0
Other assets......................................................... 110.9 126.5
----------------- -----------------
Total Assets......................................................... $ 1,160.1 $ 1,181.0
================= =================
Policyholders liabilities............................................ $ 880.3 $ 909.5
Allowance for future losses.......................................... 173.4 164.6
Other liabilities.................................................... 106.4 106.9
----------------- -----------------
Total Liabilities.................................................... $ 1,160.1 $ 1,181.0
================= =================
F-27
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $21.0, $18.1 and $25.3).............. $ 70.6 $ 69.7 $ 91.6
Investment gains (losses), net..................... 5.4 34.2 33.6
Policy fees, premiums and other income............. - .2 .2
----------------- ---------------- -----------------
Total revenues..................................... 76.0 104.1 125.4
Benefits and other deductions...................... 89.4 98.7 100.7
(Losses charged) earnings credited to allowance
for future losses................................ (13.4) 5.4 24.7
----------------- ---------------- -----------------
Pre-tax loss from operations....................... - - -
Pre-tax earnings from releasing the allowance
for future losses................................ 5.2 8.7 46.1
Federal income tax expense......................... (1.8) (3.1) (2.2)
----------------- ---------------- -----------------
Earnings from Discontinued Operations.............. $ 3.4 $ 5.6 $ 43.9
================= ================ =================
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. Additionally, as part of the Company's annual
planning process, investment and benefit cash flow projections are
prepared. These updated assumptions and estimates resulted in a release
of allowance in each of the three years presented.
Valuation allowances of $2.5 million and $4.9 million on mortgage loans
on real estate were held at December 31, 2003 and 2002, respectively.
During 2003, 2002 and 2001, discontinued operations' average recorded
investment in impaired mortgage loans was $16.2 million, $25.3 million
and $32.2 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $1.3 million, $2.5 million and $2.5
million for 2003, 2002 and 2001, respectively.
In 2001, Federal Income tax expense for discontinued operations
reflected a $13.8 million reduction in taxes due to settlement of open
tax years.
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:
F-28
GMDB GMDB Total
----------------- ---------------- -----------------
(In Millions)
Balance at January 1, 2003......................... $ 128.4 $ 117.5 $ 245.9
Paid guarantee benefits.......................... (65.6) - (65.6)
Other changes in reserve......................... 6.5 (31.9) (25.4)
----------------- ---------------- -----------------
Balance at December 31, 2003....................... $ 69.3 $ 85.6 $ 154.9
================= ================ =================
Related GMDB reinsurance ceded amounts were:
GMDB
---------------------
(In Millions)
Balance at December 31, 2002....................... $ 21.5
Paid guarantee benefits ceded.................... (18.5)
Other changes in reserve......................... 14.2
---------------------
Balance at December 31, 2003....................... $ 17.2
=====================
The GMIB reinsurance contracts are considered derivatives and are
reported at fair value; see Note 16.
The December 31, 2003 values for those variable contracts with GMDB and
GMIB features are presented in the following table. Since variable
contracts with GMDB guarantees may also offer GMIB guarantees in each
contract, the GMDB and GMIB amounts listed are not mutually exclusive:
Return
of
Premium Ratchet Roll-Up Combo Total
-------------- ------------- -------------- ------------- --------------
(Dollars In Millions)
GMDB:
Account value (1)................... $ 26,849 $ 5,332 $ 8,030 $ 6,160 $ 46,371
Net amount at risk, gross........... $ 2,108 $ 942 $ 2,112 $ 10 $ 5,172
Net amount at risk, net of amounts
reinsured......................... $ 2,104 $ 631 $ 1,281 $ 10 $ 4,026
Average attained age of
Contractholders................... 49.5 59.6 61.7 59.8 51.7
Percentage of contractholders
over age 70....................... 7.1 20.9 25.8 20.3 10.3
Range of guaranteed minimum return
rates............................ N/A N/A 3%-6% 3%-6% N/A
GMIB:
Account value (2)................... N/A N/A $ 5,763 $ 8,589 $ 14,352
Net amount at risk, gross........... N/A N/A $ 442 $ - $ 442
Net amount at risk, net of amounts
reinsured......................... N/A N/A $ 110 $ - $ 110
Weighted average years remaining
until annuitization.............. N/A N/A 4.6 9.8 7.2
Range of guaranteed minimum return
rates............................ N/A N/A 3%-6% 3%-6% 3%-6%
(1) Included General Account balances of $11,379 million, $199 million,
$182 million and $380 million, respectively, for a total of $12,140
million.
(2) Included General Account balances of $3 million and $568 million,
respectively, for a total of $571 million.
F-29
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. At December 31, 2003,
contracts with these features had a total account value and net amount
at risk of $13,008 million and $17 million, respectively. This program
currently utilizes exchange-traded, equity-based futures contracts that
are dynamically managed in an effort to reduce the economic impact of
unfavorable changes in GMDB exposure attributable to movements in the
equity markets.
10) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
December 31,
--------------------------------------
2003 2002
----------------- -----------------
(In Millions)
Short-term debt:
Promissory note, 1.53% .............................................. $ 248.3 $ 248.3
Other................................................................ - 22.0
----------------- -----------------
Total short-term debt................................................ 248.3 270.3
----------------- -----------------
Long-term debt:
Equitable Life:
Surplus notes, 6.95%, due 2005..................................... 399.8 399.8
Surplus notes, 7.70%, due 2015..................................... 199.8 199.7
----------------- -----------------
Total Equitable Life........................................... 599.6 599.5
----------------- -----------------
Alliance:
Senior Notes, 5.625%, due 2006..................................... 398.8 398.4
Other.............................................................. 6.5 6.5
----------------- -----------------
Total Alliance................................................. 405.3 404.9
----------------- -----------------
Total long-term debt................................................. 1,004.9 1,004.4
----------------- -----------------
Total Short-term and Long-term Debt.................................. $ 1,253.2 $ 1,274.7
================= =================
Short-term Debt
---------------
Equitable Life has a $350.0 million 5 year bank credit facility. The
interest rates are based on external indices dependent on the type of
borrowing ranging from 1.34% to 4.0%. No amounts were outstanding under
this credit facility at December 31, 2003.
Equitable Life has a commercial paper program with an issue limit of
$500.0 million. This program is available for general corporate purposes
used to support Equitable Life's liquidity needs and is supported by
Equitable Life's $350.0 million bank credit facility. At December 31,
2003, no amounts were outstanding under this program.
Equitable Life has a $350.0 million, one year promissory note, of which
$101.7 million is included within Other Discontinued Operations. The
promissory note, which matures in March 2004, is related to wholly owned
real estate. Certain terms of the promissory note, such as interest rate
and maturity date, are negotiated annually.
F-30
At December 31, 2003 and 2002, respectively, the Company had pledged
real estate of $309.8 million and $322.9 million as collateral for
certain short-term debt.
Since 1998, Alliance has had a $425.0 million commercial paper program.
In September 2002, Alliance entered into an $800.0 million five-year
revolving credit facility with a group of commercial banks and other
lenders that replaced three credit facilities aggregating
$875.0 million.Of the $800.0 million total, $425.0 million is intended
to provide back-up liquidity for Alliance's commercial paper program,
with the balance available for general purposes, including capital
expenditures and funding the payments of sales commissions to
financial intermediaries. The interest rate, at the option of Alliance,
is a floating rate generally based upon a defined prime rate, a rate
related to the London Interbank Offered Rate ("LIBOR") or the Federal
funds rate. The credit facility also provides for a facility fee payable
on the total facility. In addition, a utilization rate fee is payable in
the event the average aggregate daily outstanding balance exceeds $400.0
million for each calendar quarter. The revolving credit facility
contains covenants that, among other things, require Alliance to meet
certain financial ratios. Alliance was in compliance with the covenants
at December 31, 2003. At December 31, 2003, no borrowings were
outstanding under Alliance's commercial paper program or revolving
credit facilities.
Since December 1999, Alliance has maintained a $100.0 million extendible
commercial notes ("ECN") program as a supplement to its $425.0 million
commercial paper program. ECNs are short-term uncommitted debt
instruments that do not require back-up liquidity support. At December
31, 2003, no borrowings were outstanding under the ECN program.
Long-term Debt
-------------
At December 31, 2003, the Company was in compliance with all debt
covenants.
At December 31, 2003, aggregate maturities of the long-term debt based
on required principal payments at maturity were $400.0 million for 2005,
$406.5 million for 2006, zero for 2007, zero for 2008 and $200.1 million
thereafter.
Under its shelf registration, Alliance may issue up to $600.0 million in
senior debt securities. In August 2001, Alliance issued $400.0 million
5.625% notes in a public offering. These Alliance notes mature in 2006
and are redeemable at any time. The proceeds from the Alliance notes
were used to reduce commercial paper and credit facility borrowings and
for other general partnership purposes.
11) FEDERAL INCOME TAXES
A summary of the Federal income tax expense in the consolidated
statements of earnings follows:
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Federal income tax expense:
Current expense (benefit)........................ $ 112.5 $ (400.0) $ (38.2)
Deferred expense................................. 128.0 450.9 354.4
----------------- ---------------- -----------------
Total.............................................. $ 240.5 $ 50.9 $ 316.2
================= ================ =================
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings before
Federal income taxes and minority interest by the expected Federal
income tax rate of 35%. The sources of the difference and their tax
effects follow:
F-31
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Expected Federal income tax expense................ $ 332.6 $ 360.0 $ 452.5
Minority interest.................................. (58.7) (128.3) (126.9)
Separate Account investment activity............... (29.1) (159.3) -
Non-taxable investment income...................... (20.8) 3.4 (1.6)
Non deductible penalty............................. 14.8 - -
Adjustment of tax audit reserves................... (9.9) (34.2) (28.2)
Other.............................................. 11.6 9.3 20.4
----------------- ---------------- -----------------
Federal Income Tax Expense......................... $ 240.5 $ 50.9 $ 316.2
================= ================ =================
The components of the net deferred Federal income taxes are as follows:
December 31, 2003 December 31, 2002
--------------------------------- ---------------------------------
Assets Liabilities Assets Liabilities
--------------- ---------------- --------------- ---------------
(In Millions)
Compensation and related benefits...... $ - $ 271.8 $ - $ 244.2
Reserves and reinsurance............... 801.9 - 646.2 -
DAC.................................... - 1,855.6 - 1,680.5
Unrealized investment gains............ - 482.4 - 372.0
Investments............................ - 525.3 - 138.6
Other.................................. 6.7 - - 68.2
--------------- ---------------- --------------- ---------------
Total.................................. $ 808.6 $ 3,135.1 $ 646.2 $ 2,503.5
=============== ================ =============== ===============
In 2002, the Company recorded a $144.3 million benefit resulting from
the favorable treatment of certain tax matters related to Separate
Account investment activity arising during the 1997-2001 tax years and a
settlement with the Internal Revenue Service (the "IRS") with respect to
such tax matters for the 1992-1996 tax years.
In January 2003, the IRS commenced an examination of the AXA Financial's
consolidated Federal income tax returns, which includes the Company, for
the years 1997 through 2001. Management believes this audit will have no
material adverse effect on the Company's consolidated results of
operations or financial position.
12) REINSURANCE AGREEMENTS
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Ceded reinsurance does not relieve the originating insurer
of liability.
The effect of reinsurance (excluding group life and health) is
summarized as follows:
F-32
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Direct premiums.................................... $ 913.8 $ 954.6 $ 990.0
Reinsurance assumed................................ 153.2 181.4 203.0
Reinsurance ceded.................................. (177.6) (190.8) (173.1)
----------------- ---------------- -----------------
Premiums........................................... $ 889.4 $ 945.2 $ 1,019.9
================= ================ =================
Universal Life and Investment-type Product
Policy Fee Income Ceded.......................... $ 100.3 $ 96.6 $ 86.9
================= ================ =================
Policyholders' Benefits Ceded...................... $ 390.9 $ 346.3 $ 370.3
================= ================ =================
Interest Credited to Policyholders' Account
Balances Ceded................................... $ 49.7 $ 54.6 $ 50.4
================= ================ =================
During the first quarter of 2003, the Insurance Group began to
transition to excess of retention reinsurance on most new variable life,
universal life and term life policies whereby mortality risk will be
retained up to a maximum of $15 million on single-life policies and $20
million on second-to-die policies with the excess 100% reinsured.
Previously the Insurance Group ceded 90% of mortality risk on
substantially all new variable life, universal life and term life
policies, with risk retained to a maximum of $5 million on single-life
policies, and $15 million on second-to-die policies. Substantially all
other in-force business above the joint survivorship and single life
policies retention limit is reinsured. The Insurance Group also
reinsures the entire risk on certain substandard underwriting risks and
in certain other cases.
At December 31, 2003, Equitable Life had reinsured in the aggregate
approximately 22% of its current exposure to the GMDB obligation on
annuity contracts in-force and, subject to certain maximum amounts or
caps in any one period, approximately 75% of its current liability
exposure resulting from the GMIB feature.
At December 31, 2003 and 2002, respectively, reinsurance recoverables
related to insurance contracts amounted to $2,460.4 million and $2,351.7
million, of which $1,069.8 million and $1,049.2 million relates to one
specific reinsurer. Reinsurance payables related to insurance contracts
amounting to $936.5 million and $867.5, respectively million are
included in Other liabilities in the consolidated balance sheets.
Based on management's estimates of future contract cash flows and
experience, the estimated fair values of the GMIB reinsurance contracts,
considered derivatives under SFAS No. 133, at December 31, 2003 and 2002
were $29.0 million and $120.0 million, respectively. The (decrease)
increase in estimated fair value of $(91.0) million and $120.0 million
for the years ended December 31, 2003 and 2002, respectively, were due
primarily to significant equity market increases in 2003 and declines
during 2002.
The Insurance Group cedes 100% of its group life and health business to
a third party insurer. Insurance liabilities ceded totaled $389.7
million and $410.9 million at December 31, 2003 and 2002, respectively.
In addition to the sale of insurance products, the Insurance Group acts
as a professional retrocessionaire by assuming life and annuity
reinsurance from professional reinsurers. The Insurance Group also
assumes accident, health, aviation and space risks by participating in
various reinsurance pools. Reinsurance assumed reserves at December 31,
2003 and 2002 were $587.5 million and $572.8 million, respectively.
13) EMPLOYEE BENEFIT PLANS
The Company sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified
part-time employees), managers and certain agents. The pension plans are
non-contributory. Equitable Life's benefits are based on a cash balance
formula or years of service and final average earnings, if greater,
under certain grandfathering rules in the plans. Alliance's benefits are
based on years of credited service, average final base salary and
primary social security benefits. The Company uses a December 31
measurement date for its plans.
Generally, the Company's funding policy is to make the minimum
contribution required by the Employee Retirement Income Security Act of
1974 ("ERISA"). The Company made cash contributions in 2002 to the
F-33
qualified plans of $348.2 million. The Company's cash contributions to
the qualified plans for the year ended 2004 is estimated to be $1.4
million, reflecting the amount needed to satisfy its minimum funding
requirements.
Components of net periodic pension expense (credit) follow:
2003 2002 2001
----------------- ---------------- ------------------
(In Millions)
Service cost....................................... $ 31.8 $ 32.1 $ 32.1
Interest cost on projected benefit obligations..... 122.6 125.3 128.8
Expected return on assets.......................... (173.9) (181.8) (218.7)
Net amortization and deferrals..................... 53.4 6.4 .1
----------------- ---------------- ------------------
Net Periodic Pension Credit........................ $ 33.9 $ (18.0) $ (57.7)
================= ================ ==================
The projected benefit obligations under the pension plans were comprised
of:
December 31,
------------------------------------
2003 2002
---------------- -----------------
(In Millions)
Benefit obligations, beginning of year................................. $ 1,883.9 $ 1,812.3
Service cost........................................................... 26.8 27.1
Interest cost.......................................................... 122.6 125.3
Actuarial losses....................................................... 113.5 42.5
Benefits paid.......................................................... (133.5) (123.3)
---------------- -----------------
Benefit Obligation, End of Year........................................ $ 2,013.3 $ 1,883.9
================ =================
The change in plan assets and the funded status of the pension plans
were as follows:
December 31,
------------------------------------
2003 2002
---------------- -----------------
(In Millions)
Plan assets at fair value, beginning of year........................... $ 1,785.4 $ 1,845.3
Actual return on plan assets........................................... 359.7 (278.2)
Contributions.......................................................... 10.0 348.2
Benefits paid and fees................................................. (140.0) (129.9)
---------------- -----------------
Plan assets at fair value, end of year................................. 2,015.1 1,785.4
Projected benefit obligations.......................................... 2,013.3 1,883.9
---------------- -----------------
Excess of plan assets over projected benefit obligations............... 1.8 (98.5)
Unrecognized prior service cost........................................ (34.8) (40.0)
Unrecognized net loss from past experience different
from that assumed.................................................... 904.3 1,033.9
Unrecognized net asset at transition................................... (1.3) (1.5)
---------------- -----------------
Prepaid Pension Cost, Net.............................................. $ 870.0 $ 893.9
================ =================
The aggregate accumulated benefit obligation and fair value of plan
assets for pension plans with accumulated benefit obligations in excess
of plan assets were $51.1 million and $37.3 million, respectively, at
December 31, 2003 and $42.0 million and $24.2 million, respectively, at
December 31, 2002.
The following table discloses the estimated fair value of plan assets
and the percentage of estimated fair value to total plan assets:
F-34
December 31,
-----------------------------------------------------------
2003 2002
-----------------------------------------------------------
(In Millions)
Estimated Estimated
Fair Value % Fair Value %
------------------------ ------- ----------------- ------
Corporate and government debt securities....... $ 438.2 21.7 $ 551.3 30.9
Equity securities.............................. 1,387.4 68.9 793.9 44.5
Equity real estate ............................ 184.8 9.2 180.2 10.1
Short-term investments......................... 2.1 .1 258.6 14.5
Other.......................................... 2.6 .1 1.4 -
------------------------ -------------------
Total Plan Assets.................. $ 2,015.1 $ 1,785.4
======================== ===================
The asset mix is designed to meet, and, if possible, exceed the
long-term rate-of-return assumptions for benefit obligations. The asset
allocation is designed with a long-term investment horizon, based on
target investment of 65% equities, 25% fixed income and 10% real estate.
Emphasis is given to equity investments, given their high expected rate
of return. Fixed income investments are included to provide less
volatile return. Real Estate investments offer diversity to the total
portfolio and long-term inflation protection.
The primary investment objective of the plan is to maximize return on
assets, giving consideration to prudent risk, in order to minimize net
periodic cost. A secondary investment objective is to minimize variation
in annual net periodic pension cost over the long term and to fund as
much of the future liability growth as practical. Specifically, a
reasonable total rate of return is defined as income plus realized and
unrealized capital gains and losses such that the growth in projected
benefit obligation is less than the return on investments plus the
Company's contributions.
The following table discloses the weighted-average assumptions used to
determine the pension benefit obligations and net periodic pension cost
at and for the years ended December 31, 2003 and 2002:
Equitable Life
--------------------------------
2003 2002
---- ----
Discount rate:
Benefit obligation................................................. 6.25% 6.75%
Periodic cost...................................................... 6.75% 7.25%
Rate of compensation increase:
Benefit obligation and periodic cost............................... 5.78% 6.73%
Expected long-term rate of return on plan assets (periodic cost)... 8.5% 9.0%
As noted above, the pension plan's target asset allocation is 65%
equities, 25% fixed maturities, and 10% real estate. The Company
reviewed the historical investment returns for these asset classes.
Based on that analysis, management concluded that a long-term expected
rate of return of 8.5% is reasonable.
Prior to 1987, the qualified plan funded participants' benefits through
the purchase of non-participating annuity contracts from Equitable Life.
Benefit payments under these contracts were approximately $24.5 million,
$26.0 million and $27.3 million for 2003, 2002 and 2001, respectively.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the "2003 Medicare Act") was signed into law.
It introduces a prescription drug benefit under Medicare Part D as well
as a Federal subsidy to employers whose plans provide an "actuarially
equivalent" prescription drug benefit. While the Company expects its
postretirement prescription drug benefit program will qualify for this
subsidy, detailed regulations necessary to implement and administer the
2003 Medicare Act have not yet been issued. Similarly, certain
accounting issues raised by the Medicare Act are pending further
discussion and resolution by the FASB, thereby further reducing the
likelihood at this time of producing a sufficiently reliable measure of
the effects of the 2003 Medicare Act. Consequently, and in accordance
with FASB Staff Position FAS 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003," measures of the accumulated postretirement
benefits obligation and net periodic postretirement benefits costs, as
presented in the consolidated financial statements
F-35
and accompanying notes thereto, at and for the year ended December 31,
2003, do not reflect the effects of the 2003 Medicare Act on the plan.
This election to defer accounting for the effects of the 2003 Medicare
Act generally will continue to apply until authoritative guidance on the
accounting for the Federal subsidy is issued, at which time transition
could result in a change to previously reported information.
Alliance maintains several unfunded deferred compensation plans for the
benefit of certain eligible employees and executives. The Capital
Accumulation Plan was frozen on December 31, 1987 and no additional
awards have been made. For the active plans, benefits vest over a period
ranging from 3 to 8 years and are amortized as compensation and benefit
expense. ACMC, Inc. ("ACMC"), a subsidiary of the Company, is obligated
to make capital contributions to Alliance in amounts equal to benefits
paid under the Capital Accumulation Plan and the contractual unfunded
deferred compensation arrangements. In connection with the acquisition
of Bernstein, Alliance agreed to invest $96.0 million per annum for
three years to fund purchases of Alliance Holding units or an Alliance
sponsored money market fund in each case for the benefit of certain
individuals who were stockholders or principals of Bernstein or were
hired to replace them. The Company has recorded compensation and benefit
expenses in connection with these deferred compensation plans totaling
$127.3 million, $101.4 million and $58.3 million for 2003, 2002 and
2001, respectively (including $83.4 million and $63.7 million and $34.5
million for 2003, 2002 and 2001, respectively, relating to the Bernstein
deferred compensation plan).
14) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Insurance Group primarily uses derivatives for asset/liability risk
management, for hedging individual securities and to reduce the
Insurance Group's exposure to interest rate fluctuations. Similarly, the
Holding Company utilizes derivatives to reduce the fixed interest cost
of its long-term debt obligations. Various derivative financial
instruments are used to achieve these objectives, including interest
rate caps and floors to hedge crediting rates on interest-sensitive
individual annuity contracts, interest rate futures to protect against
declines in interest rates between receipt of funds and purchase of
appropriate assets, and interest rate swaps to modify the duration and
cash flows of fixed maturity investments and long-term debt. In
addition, the Company periodically enters into forward and futures
contracts to hedge certain equity exposures, including the program to
hedge certain risks associated with the GMDB feature of the Accumulator
series of annuity products. At December 31, 2003, the Company's
outstanding equity-based futures contracts were exchange-traded and net
settled each day. Also, the Company has purchased reinsurance contracts
to mitigate the risks associated with the impact of potential market
fluctuations on future policyholder elections of GMIB features contained
in certain annuity contracts issued by the Company. See Note 12.
As described in Note 2, the Company adopted SFAS No. 133, as amended, on
January 1, 2001. Consequently, all derivatives outstanding at December
31, 2003 and 2002 are recognized on the balance sheet at their fair
values. These amounts principally consist of interest rate floors that
have a total fair value at December 31, 2003 of $9.7 million, excluding
the estimated fair value of the GMIB reinsurance contracts. The
outstanding notional amounts of derivative financial instruments
purchased and sold were:
December 31,
------------------------------------
2003 2002
---------------- -----------------
(In Millions)
Notional Amount by Derivative Type::
Options:
Caps............................................................ $ - $ 5,050
Floors.......................................................... 12,000 4,000
Equity-based futures................................................ 275 50
---------------- -----------------
Total............................................................... $ 12,275 $ 9,100
================ =================
At December 31, 2003 and during the year then ended, there were no
hybrid instruments that required bifurcation of an embedded derivative
component under the provisions of SFAS No. 133.
All gains and losses on derivative financial instruments utilized by the
Company in 2003 and 2002 are reported in earnings. None of the
derivatives were designated as qualifying hedges under SFAS No. 133. For
2003 and 2002, respectively, investment results, principally in net
investment income, included gross gains of
F-36
$.6 million and $24.3 million and gross losses of $42.6 million and $7.7
million that were recognized on derivative positions.
Fair Value of Financial Instruments
-----------------------------------
The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases
where quoted market prices are not available, fair values are estimated
using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument,
including estimates of the timing and amount of expected future cash
flows and the credit standing of counterparties. Such estimates do not
reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates
cannot be substantiated by comparison to independent markets, nor can
the disclosed value be realized in immediate settlement of the
instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts.
Fair market values of off-balance-sheet financial instruments of the
Insurance Group were not material at December 31, 2003 and 2002.
Fair values for mortgage loans on real estate are estimated by
discounting future contractual cash flows using interest rates at which
loans with similar characteristics and credit quality would be made.
Fair values for foreclosed mortgage loans and problem mortgage loans are
limited to the estimated fair value of the underlying collateral if
lower.
Fair values of policy loans are estimated by discounting the face value
of the loans from the time of the next interest rate review to the
present, at a rate equal to the excess of the current estimated market
rates over the current interest rate charged on the loan.
The estimated fair values for the Company's association plan contracts,
supplementary contracts not involving life contingencies ("SCNILC") and
annuities certain, which are included in policyholders' account
balances, and guaranteed interest contracts are estimated using
projected cash flows discounted at rates reflecting expected current
offering rates.
The fair values for variable deferred annuities and single premium
deferred annuities, included in policyholders' account balances, are
estimated as the discounted value of projected account values. Current
account values are projected to the time of the next crediting rate
review at the current crediting rates and are projected beyond that date
at the greater of current estimated market rates offered on new policies
or the guaranteed minimum crediting rate. Expected cash flows and
projected account values are discounted back to the present at the
current estimated market rates.
Fair values for long-term debt are determined using published market
values, where available, or contractual cash flows discounted at market
interest rates. The estimated fair values for non-recourse mortgage debt
are determined by discounting contractual cash flows at a rate which
takes into account the level of current market interest rates and
collateral risk. The estimated fair values for recourse mortgage debt
are determined by discounting contractual cash flows at a rate based
upon current interest rates of other companies with credit ratings
similar to the Company. The Company's carrying value of short-term
borrowings approximates their estimated fair value.
The carrying value and estimated fair value for financial instruments
not previously disclosed in Notes 3, 7, 8 and 10 are presented below:
F-37
December 31,
--------------------------------------------------------------------
2003 2002
--------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------- ---------------- --------------- ---------------
(In Millions)
Consolidated:
------------
Mortgage loans on real estate.......... $ 3,503.1 $ 3,761.7 $ 3,746.2 $ 4,070.1
Other limited partnership interests.... 775.5 775.5 683.0 683.0
Policy loans........................... 3,894.3 4,481.9 4,035.6 4,728.2
Policyholders liabilities:
Investment contracts................. 16,817.0 17,245.9 14,555.0 15,114.9
Long-term debt......................... 1,004.9 1,105.7 1,004.4 1,086.4
Closed Block:
------------
Mortgage loans on real estate.......... $ 1,297.6 $ 1,386.0 $ 1,456.0 $ 1,572.6
Other equity investments............... 14.2 14.2 16.4 16.4
Policy loans........................... 1,384.5 1,626.7 1,449.9 1,740.9
SCNILC liability....................... 14.8 14.9 16.5 16.6
Other Discontinued Operations:
-----------------------------
Mortgage loans on real estate.......... $ 63.9 $ 69.5 $ 87.5 $ 94.7
Other equity investments............... 7.5 7.5 9.4 9.4
Guaranteed interest contracts.......... 17.8 16.3 18.3 17.0
Long-term debt......................... 101.7 101.7 101.7 101.7
15) COMMITMENTS AND CONTINGENT LIABILITIES
In addition to its debt and lease commitments discussed in Notes 10 and
17, from time to time, the Company has provided certain guarantees or
commitments to affiliates, investors and others. At December 31, 2003,
these arrangements included commitments by the Company to provide equity
financing of $342.6 million to certain limited partnerships under
certain conditions. Management believes the Company will not incur
material losses as a result of these commitments.
Equitable Life is the obligor under certain structured settlement
agreements it had entered into with unaffiliated insurance companies and
beneficiaries. To satisfy its obligations under these agreements,
Equitable Life owns single premium annuities issued by previously wholly
owned life insurance subsidiaries. Equitable Life has directed payment
under these annuities to be made directly to the beneficiaries under the
structured settlement agreements. A contingent liability exists with
respect to these agreements should the previously wholly owned
subsidiaries be unable to meet their obligations. Management believes
the need for Equitable Life to satisfy those obligations is remote.
The Company had $169.9 million of letters of credit related to
reinsurance of which no amounts were outstanding at December 31, 2003.
In February 2002, Alliance signed a $125.0 million agreement with a
commercial bank under which it guaranteed certain obligations of SCB LLC
incurred in the ordinary course of its business in the event SCB LLC is
unable to meet these obligations. At December 31, 2003, Alliance was not
required to perform under the agreement and had no liability outstanding
in connection with the agreement.
16) LITIGATION
A number of lawsuits have been filed against life and health insurers in
the jurisdictions in which Equitable Life and its subsidiaries do
business involving insurers' sales practices, alleged agent misconduct,
alleged failure to properly supervise agents, and other matters. Some of
the lawsuits have resulted in the award of substantial judgments against
other insurers, including material amounts of punitive damages, or in
substantial settlements. In some states, juries have substantial
discretion in awarding punitive damages. Equitable Life,
F-38
Equitable Variable Life Insurance Company ("EVLICO," which was merged
into Equitable Life effective January 1, 1997, but whose existence
continues for certain limited purposes, including the defense of
litigation) and EOC, like other life and health insurers, from time to
time are involved in such litigations. Among litigations against
Equitable Life, EVLICO and EOC of the type referred to in this paragraph
are the litigations described in the following two paragraphs.
In October 2000, an action entitled SHAM MALHOTRA, ET AL. V. THE
EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, AXA ADVISORS, LLC
AND EQUITABLE DISTRIBUTORS, INC. was commenced in the Supreme Court of
the State of New York, County of Nassau. The action was brought by two
individuals who purchased Equitable Life deferred annuity products. The
action purports to be on behalf of a class consisting of all persons who
purchased an individual deferred annuity contract or who received a
certificate to a group deferred annuity contract, sold by one of the
defendants, which was used to fund a contributory retirement plan or
arrangement qualified for favorable income tax treatment; excluded from
the class are officers, directors and agents of the defendants. The
complaint alleges that the defendants engaged in fraudulent and
deceptive practices in connection with the marketing and sale of
deferred annuity products to fund tax-qualified contributory retirement
plans. The complaint asserts claims for: deceptive business acts and
practices in violation of the New York General Business Law ("GBL"); use
of misrepresentations and misleading statements in violation of the New
York Insurance Law; false or misleading advertising in violation of the
GBL; fraud, fraudulent concealment and deceit; negligent
misrepresentation; negligence; unjust enrichment and imposition of a
constructive trust; declaratory and injunctive relief; and reformation
of the annuity contracts. The complaint seeks injunctive and declaratory
relief, an unspecified amount of compensatory and punitive damages,
restitution for all members of the class, and an award of attorneys'
fees, costs and expenses. In October 2000, the defendants removed the
action to the United States District Court for the Eastern District of
New York, and thereafter filed a motion to dismiss. Plaintiffs filed a
motion to remand the case to state court. In September 2001, the
District Court issued a decision granting defendants' motion to dismiss
and denying plaintiffs' motion to remand, and judgment was entered in
favor of the defendants. In October 2001, plaintiffs filed a motion
seeking leave to reopen the case for the purpose of filing an amended
complaint. In addition, plaintiffs filed a new complaint in the District
Court, alleging a similar class and similar facts. The new complaint
asserts causes of action for violations of Federal securities laws in
addition to the state law causes of action asserted in the previous
complaint. In January 2002, plaintiffs amended their new complaint in
response to defendants' motion to dismiss and, subsequently, in March
2002, defendants filed a motion to dismiss the amended complaint. In
March 2003, the United States District Court for the Eastern District of
New York: (i) granted plaintiffs' motion, filed October 2001, seeking
leave to reopen their original case for the purpose of filing an amended
complaint and accepted plaintiffs' proposed amended complaint, (ii)
appointed the named plaintiffs as lead plaintiffs and their counsel as
lead counsel for the putative class, (iii) consolidated plaintiffs'
original action with their second action, which was filed in October
2001, and (iv) ruled that the court would apply Equitable Life's motion
to dismiss the amended complaint in the second action to the plaintiffs'
amended complaint from the original action. 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, as amended
(the "Exchange Act"). 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.
The previously disclosed lawsuit, BRENDA MCEACHERN V. THE EQUITABLE LIFE
ASSURANCE SOCIETY OF THE UNITED STATES AND GARY RAYMOND, JR., has been
settled and dismissed with prejudice. In addition, all of the
Mississippi Actions, including the agents' cross-claims, have been
settled and dismissed with prejudice.
In October 2000, an action entitled AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO, AS TRUSTEE F/B/O EMERALD INVESTMENTS LP AND EMERALD
INVESTMENTS LP V. AXA CLIENT SOLUTIONS, LLC; THE EQUITABLE LIFE
ASSURANCE SOCIETY OF THE UNITED STATES; AND AXA FINANCIAL, INC. was
commenced in the United States District Court for the Northern District
of Illinois. The complaint alleges that the defendants (i) in connection
with certain annuities issued by Equitable Life breached an agreement
with the plaintiffs involving the execution of mutual fund transfers,
and (ii) wrongfully withheld withdrawal charges in connection with the
termination of such annuities. Plaintiffs seek substantial lost profits
and injunctive relief, punitive damages and attorneys' fees. Plaintiffs
also seek return of the withdrawal charges. In February 2001, the
District Court granted in part and denied in part defendants' motion to
dismiss the complaint. In March 2001,
F-39
plaintiffs filed an amended complaint. The District Court granted
defendants' motion to dismiss AXA Client Solutions and the Holding
Company from the amended complaint, and dismissed the conversion claims
in June 2001. The District Court denied defendants' motion to dismiss
the remaining claims. Equitable Life has answered the amended complaint.
While the monetary damages sought by plaintiffs, if awarded, could have
a material adverse effect on the consolidated financial position and
results of operations of the Company, management believes that the
ultimate resolution of this litigation should not have a material
adverse on the Company's consolidated financial position.
After the District Court denied defendants' motion to assert certain
defenses and counterclaims in AMERICAN NATIONAL BANK, Equitable Life
commenced an action, in December 2001, entitled THE EQUITABLE LIFE
ASSURANCE SOCIETY OF THE UNITED STATES V. AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO, AS TRUSTEE F/B/O EMERALD INVESTMENTS LP AND
EMERALD INVESTMENTS LP, in the United States District Court for the
Northern District of Illinois. The complaint arises out of the same
facts and circumstances as described in AMERICAN NATIONAL BANK.
Equitable Life's complaint alleges common law fraud and equitable
rescission in connection with certain annuities issued by Equitable
Life. Equitable Life seeks unspecified money damages, rescission,
punitive damages and attorneys' fees. In March 2002, defendants filed an
answer to Equitable Life's complaint and asserted counterclaims.
Defendants' counterclaims allege common law fraud, violations of the
Federal and Illinois Securities Acts and violations of the Illinois and
New York Consumer Fraud Acts. Defendants seek unspecified money damages,
punitive damages and attorneys' fees. In May 2002, the District Court
granted in part and denied in part Equitable Life's motion to dismiss
defendants' counterclaims, dismissing defendants' Illinois Securities
Act and New York Consumer Fraud Act claims. Equitable Life has answered
defendants' remaining counterclaims. In November 2003, Emerald filed a
motion for summary judgment; Equitable Life filed its opposition to this
motion in December 2003.
In January 2004, DH2, Inc., an entity related to Emerald Investments
L.P., filed a lawsuit in the United States District Court for the
Northern District of Illinois, against Equitable Life and Equitable
Advisors Trust, asserting claims for breach of contract and breach of
fiduciary duty, claims under the Federal securities laws, and
misappropriation of trade secrets. The complaint alleges that Equitable
Life and Equitable Advisors Trust wrongfully misappropriated DH2, Inc.'s
confidential and proprietary information to implement fair value pricing
of securities within the subaccounts of DH2, Inc.'s variable annuity,
which diminished the profitability of its proprietary trading strategy.
The complaint also alleges that Equitable Life and Equitable Advisors
Trust implemented fair value pricing for an improper purpose and without
adequate disclosure. The complaint further alleges that Equitable Life
and Equitable Advisors Trust are not permitted to implement fair value
pricing of securities. The complaint has not been served upon either
Equitable Life or Equitable Advisors Trust.
In November 1997, an amended complaint was filed in PETER FISCHEL, ET
AL. V. THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
alleging, among other things, that Equitable Life violated ERISA by
eliminating certain alternatives pursuant to which agents of Equitable
Life could qualify for health care coverage. In March 1999, the United
States District Court for the Northern District of California entered an
order certifying a class consisting of "[a]ll current, former and
retired Equitable agents, who while associated with Equitable satisfied
[certain alternatives] to qualify for health coverage or contributions
thereto under applicable plans." Plaintiffs allege various causes of
action under ERISA, including claims for enforcement of alleged promises
contained in plan documents and for enforcement of agent bulletins,
breach of a unilateral contract, breach of fiduciary duty and promissory
estoppel. In May 2001, plaintiffs filed a second amended complaint
which, among other things, alleges that Equitable Life failed to comply
with plan amendment procedures and deletes the promissory estoppel
claim. In September 2001, Equitable Life filed a motion for summary
judgment on all of plaintiffs' claims, and plaintiffs filed a motion for
partial summary judgment on all claims except their claim for breach of
fiduciary duty. In May 2002, the District Court issued an order granting
plaintiffs' motion for partial summary judgment, granting Equitable
Life's motion for summary judgment on plaintiffs' claim for breach of
fiduciary duty and otherwise denying Equitable Life's motion for summary
judgment. The court ruled that Equitable Life is liable to plaintiffs on
their contract claims for subsidized benefits under ERISA. The court has
deferred addressing the relief to which plaintiffs are entitled in light
of the May 2002 order. In June 2000, plaintiffs appealed to the Court of
Appeals for the Ninth Circuit contesting the District Court's award of
F-40
legal fees to plaintiffs' counsel in connection with a previously
settled count of the complaint unrelated to the health benefit claims.
In that appeal, plaintiffs challenged the District Court's subject
matter jurisdiction over the health benefit claims. A decision was
rendered in October 2002 on that appeal. The Court of Appeals denied
plaintiffs' challenge to the District Court's subject matter
jurisdiction over the settled claim, affirmed the method that the
District Court used to calculate the award of legal fees to plaintiffs'
counsel and remanded for further consideration of the fee award. In May
2003, plaintiffs' motion for an award of additional legal fees from the
settled claim settlement fund was denied by the District Court.
Plaintiffs have appealed that order.
A putative class action entitled STEFANIE HIRT, ET AL. V. THE EQUITABLE
RETIREMENT PLAN FOR EMPLOYEES, MANAGERS AND AGENTS, ET AL. was filed in
the District Court for the Southern District of New York in August 2001
against The Equitable Retirement Plan for Employees, Managers and Agents
(the "Retirement Plan") and The Officers Committee on Benefit Plans of
Equitable Life, as Plan Administrator. The action was brought by five
participants in the Retirement Plan and purports to be on behalf of "all
Plan participants, whether active or retired, their beneficiaries and
Estates, whose accrued benefits or pension benefits are based on the
Plan's Cash Balance Formula." The complaint challenges the change,
effective January 1, 1989, in the pension benefit formula from a final
average pay formula to a cash balance formula. Plaintiffs allege that
the change to the cash balance formula violates ERISA by reducing the
rate of accruals based on age, failing to comply with ERISA's notice
requirements and improperly applying the formula to retroactively reduce
accrued benefits. The relief sought includes a declaration that the cash
balance plan violates ERISA, an order enjoining the enforcement of the
cash balance formula, reformation and damages. Defendants answered the
complaint in October 2001. In April 2002, plaintiffs filed a motion
seeking to certify a class of "all Plan participants, whether active or
retired, their beneficiaries and Estates, whose accrued benefits or
pension benefits are based on the Plan's Cash Balance Formula." Also in
April 2002, plaintiffs agreed to dismiss with prejudice their claim that
the change to the cash balance formula violates ERISA by improperly
applying the formula to retroactively reduce accrued benefits. That
claim has been dismissed. 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, 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. In
July 2003, plaintiffs filed a motion for class certification. In
November 2003, Equitable Life filed its opposition to the motion for
class certification; that motion is currently pending and 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 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, as amended 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
F-41
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. (collectively, the MONY Stockholder
Litigation). 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 and plaintiffs served a consolidated
complaint. Pursuant to stipulation, in December 2003 defendants have
contested the complaint. In January 2004, the Court of Chancery granted
plaintiffs leave to amend their complaint. Plaintiffs have stated that
they intend to file a motion for a preliminary injunction seeking to
prevent completion of the merger. Defendants will oppose a motion for a
preliminary injunction. The Court of Chancery has scheduled the hearing
on plaintiffs' planned motion for February 17, 2004 and the parties are
engaged in discovery.
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. In December 2003, defendants
contested the claims in the LAUFER and NORTH BORDER complaints. The
parties in each of these actions are engaged in discovery.
Although the outcome of litigation generally cannot be predicted with
certainty, the Company's management believes that, subject to the
foregoing, (i) the settlement of the MCEACHERN litigation and the
Mississippi Actions, including the agents' cross-claims, will not have a
material adverse effect on the consolidated financial position or
results of operations of the Company and (ii) the ultimate resolution of
the other litigations 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 any of such other litigations described above will have a
material adverse effect on the Company's consolidated results of
operations in any particular period.
Alliance Litigations
--------------------
In April 2001, an amended class action complaint entitled MILLER, ET AL.
V. MITCHELL HUTCHINS ASSET MANAGEMENT, INC., ET AL. was filed in the
United States District Court for the Southern District of Illinois
against Alliance, Alliance Fund Distributors, Inc. (now known as
AllianceBernstein Investment Research and Management, Inc., "ABIRM"), a
wholly owned subsidiary of Alliance, and other defendants alleging
violations of the Investment Company Act of 1940, as amended ("ICA"),
and breaches of common law
F-42
fiduciary duty. The principal allegations of the amended complaint were
that the advisory and distribution fees for certain mutual funds managed
by Alliance were excessive and in violation of the ICA and the common
law. Plaintiffs subsequently amended their compliant to include, as
plaintiffs, shareholders of the AllianceBernstein Premier Growth Fund
("Premier Growth Fund"), the AllianceBernstein Quasar Fund (now known as
AllianceBernstein Small Cap Growth Fund), the AllianceBernstein 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. In
December 2003, the parties entered into a settlement agreement resolving
the matter and the matter has been dismissed by the court.
In December 2001, a complaint entitled BENAK V. ALLIANCE CAPITAL
MANAGEMENT L.P. AND ALLIANCE PREMIER GROWTH FUND ("Benak Complaint") was
filed in the United States District Court for the District of New Jersey
against Alliance and Premier Growth Fund alleging that defendants
violated Section 36(b) of the ICA. The principal allegations of the
Benak Complaint are that Alliance breached its duty of loyalty to
Premier Growth Fund because one of the directors of the general partner
of Alliance served as a director of Enron Corp. ("Enron") when Premier
Growth Fund purchased shares of Enron, and as a consequence thereof, the
investment advisory fees paid to Alliance by Premier Growth Fund should
be returned as a means of recovering for Premier Growth Fund the losses
plaintiff alleges were caused by the alleged breach of the duty of
loyalty. Subsequently, between December 2001 and July 2002, five
complaints making substantially the same allegations and seeking
substantially the same relief as the Benak Complaint were filed against
Alliance and Premier Growth Fund. All of those actions were consolidated
in the United States District Court for the District of New Jersey. In
January 2003, a consolidated amended complaint entitled BENAK V.
ALLIANCE CAPITAL MANAGEMENT L.P. ("Benak Consolidated Amended
Complaint") was filed containing allegations similar to those in the
individual complaints although it does not name the Premier Growth Fund
as a defendant. In February 2003, the court granted with prejudice
Alliance's motion to dismiss the Benak Consolidated Amended Complaint,
holding that plaintiffs' allegations failed to state a claim under
Section 36(b). Plaintiffs have thirty days from the entry of the
dismissal order to appeal the court's decision dismissing the action.
Alliance believes that plaintiffs' allegations in the Benak Consolidated
Amended Complaint were without merit and intends to vigorously defend
against any appeal that may be taken from the dismissal with prejudice
of the action.
In April 2002, a consolidated complaint entitled IN RE ENRON CORPORATION
SECURITIES LITIGATION ("Enron Complaint") was filed in the United States
District Court for the Southern District of Texas, Houston Division,
against numerous defendants, including Alliance. The principal
allegations of the Enron Complaint, as they pertain to Alliance, are
that Alliance violated Sections 11 and 15 of the Securities Act of 1933,
as amended ("Securities Act") with respect to a registration statement
filed by Enron and effective with the SEC on July 18, 2001, which was
used to sell $1.9 billion Enron Corp. Zero Coupon Convertible Notes due
2021. Plaintiffs allege that Frank Savage, who was at that time an
employee of Alliance and who was and remains a director of the general
partner of Alliance, signed the registration statement at issue.
Plaintiffs allege that the registration statement was materially
misleading. Plaintiffs further allege that Alliance was a controlling
person of Frank Savage. Plaintiffs therefore assert that Alliance is
itself liable for the allegedly misleading registration statement.
Plaintiffs seek recission or a recissionary measure of damages. In June
2002, Alliance moved to dismiss the Enron Complaint as the allegations
therein pertain to it. In March 2003, that motion was denied. In May
2003, a First Amended Consolidated Complaint ("Enron Amended
Consolidated Complaint"), with substantially identical allegations as to
Alliance, was filed. 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. Alliance's motion is
pending. The case is currently in discovery. Alliance believes that
plaintiffs' allegations in the Enron Amended Consolidated Complaint as
to it are without merit and intends to vigorously defend against these
allegations.
In May 2002, a complaint entitled THE FLORIDA STATE BOARD OF
ADMINISTRATION V. ALLIANCE CAPITAL MANAGEMENT L.P. ("SBA Complaint") was
filed in the Circuit Court of the Second Judicial Circuit, in and for
Leon County, Florida against Alliance. The SBA Complaint alleges breach
of contract relating to the Investment Management Agreement between The
Florida State Board of Administration ("SBA") and Alliance, breach of
the covenant of good faith and fair dealing contained in the Investment
Management Agreement, breach of fiduciary duty, negligence, gross
negligence and violation of the Florida Securities and Investor
Protection Act, in connection with purchases and sales of Enron common
stock for the SBA investment account. The SBA seeks more than $300
million in compensatory damages and an unspecified
F-43
amount of punitive damages. In June 2002, Alliance moved to dismiss the
SBA Complaint; in September 2002, the court denied Alliance's motion to
dismiss the SBA Complaint in its entirety. In November 2003, the SBA
filed an amended complaint ("Amended SBA Complaint"). While the Amended
SBA Complaint contains the Enron claims, the Amended SBA Complaint also
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 "1 rated," the highest rating that Alliance's research analysts
could assign. The SBA also added claims for negligent supervision and
common law fraud. In December 2003, Alliance moved to dismiss the fraud
and breach of fiduciary duty claims in the Amended SBA Complaint. In
January 2004, the court denied that motion. The case is currently in
discovery. Alliance believes the SBA's allegations in the Amended SBA
Complaint are without merit and intends to vigorously defend against
these allegations.
In September 2002, a complaint entitled LAWRENCE E. JAFFE PENSION PLAN,
LAWRENCE E. JAFFE TRUSTEE U/A 1198 V. ALLIANCE CAPITAL MANAGEMENT L.P.,
ALFRED HARRISON AND ALLIANCE PREMIER GROWTH FUND, INC. ("Jaffe
Complaint") was filed in the United States District Court for the
Southern District of New York against Alliance, Alfred Harrison and
Premier Growth Fund alleging violation of the ICA. Plaintiff seeks
damages equal to Premier Growth Fund's losses as a result of Premier
Growth Fund's investment in shares of Enron and a recovery of all fees
paid to Alliance beginning November 1, 2000. In March 2003, the court
granted Alliance's motion to transfer the Jaffe Complaint to the United
States District Court for the District of New Jersey to be consolidated
with the Benak Consolidated Amended Complaint already pending there. In
December 2003, plaintiff filed an amended complaint ("Amended Jaffe
Complaint") in the United States District Court for the District of New
Jersey. The Amended Jaffe Complaint alleges violations of Section 36(a)
of the ICA, common law negligence, and negligent misrepresentation.
Specifically, the Amended Jaffe Complaint alleges that (i) the
defendants breached their fiduciary duties of loyalty, care and good
faith to Premier Growth Fund by causing Premier Growth Fund to invest in
the securities of Enron, (ii) the defendants were negligent for
investing in securities of Enron, and (iii) through prospectuses and
other documents, defendants misrepresented material facts related to
Premier Growth Fund's investment objective and policies. In January
2004, defendants moved to dismiss the Amended JAFFE COMPLAINT. Alliance
and Alfred Harrison believe that plaintiff's allegations in the Amended
JAFFE COMPLAINT are without merit and intend to vigorously defend
against these allegations.
In December 2002, a putative class action complaint entitled PATRICK J.
GOGGINS ET AL. V. ALLIANCE CAPITAL MANAGEMENT L.P. ET AL. ("Goggins
Complaint") was filed in the United States District Court for the
Southern District of New York against Alliance, Premier Growth Fund and
individual directors and certain officers of Premier Growth Fund. In
August 2003, the court granted Alliance's motion to transfer the Goggins
Complaint to the United States District Court for the District of New
Jersey. In December 2003, plaintiffs filed an amended complaint
("Amended Goggins Compliant") in the United States District Court for
the District of New Jersey. The Amended Goggins Complaint alleges that
defendants violated Sections 11, 12(a)(2) and 15 of the Securities Act
because Premier Growth Fund's registration statements and prospectuses
contained untrue statements of material fact and omitted material facts.
More specifically, the Amended Goggins Complaint alleges that the
Premier Growth Fund's investment in Enron was inconsistent with the
fund's stated strategic objectives and investment strategies. Plaintiffs
seek rescissory relief or an unspecified amount of compensatory damages
on behalf of a class of persons who purchased shares of Premier Growth
Fund during the period October 31, 2000 through February 14, 2002. In
January 2004, Alliance moved to dismiss the Amended Goggins Complaint.
Alliance, Premier Growth Fund and the other defendants believe the
plaintiffs' allegations in the Amended Goggins Complaint are without
merit and intend to vigorously defend against these allegations.
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 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 in August 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 ("SAT")
seeking certain interim reliefs. Mr.
F-44
Arora's appeal was heard by the SAT on December 15, 2003. The SAT passed
an order on January 12, 2004 wherein it did not grant any interim
reliefs to Mr. Arora since SEBI had stated that the investigations in
the matter were in progress. However, the SAT has directed SEBI to
complete the investigations by February 28, 2004 and to pass final
orders in the matter by March 31, 2004. 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 disclosure filings 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 as required
under the SEBI (Insider Trading) Regulations, 1992, and the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 when
the holdings of the said entities in the Relevant Scrips crossed five
percent (5%) which could make Alliance liable to pay penalties
prescribed under Section 15A of the SEBI Act, 1992, which requires that
disclosure be made when the holdings of an investor (or group of
investors acting in concert) in an Indian security exceeds either five
percent (5%) of the outstanding shares or changes by more than two
percent (2%). In October 2003 and November 2003, Alliance filed its
reply and written submissions, respectively. Alliance also had a
personal hearing before the SEBI on October 21, 2003 and the decision of
SEBI in relation to the Notice is pending. 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 Premier Growth
Fund, alleges that Alliance breached unidentified provisions of Premier
Growth Fund's prospectus and subscription and confirmation agreements
that allegedly required that every security bought for Premier Growth
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 Premier Growth Fund over the past ten years, as well
as an unspecified amount of damages. In November 2003, Alliance removed
the Erb Complaint to the United States District Court for the Southern
District of Illinois on the basis that plaintiff's alleged breach of
contract claims are preempted under the Securities Litigation Uniform
Standards Act. In December 2003, plaintiff filed a motion for remand. In
February 2004, the court granted that motion and remanded the action to
state court. Alliance believes that plaintiff's allegations in the Erb
Complaint are without merit and intends to vigorously defend against
these allegations.
In October 2003, a purported 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
AllianceBernstein family of mutual funds ("AllianceBernstein Funds"),
the registrants and issuers of those funds, certain officers of Alliance
(the "Alliance defendants"), and certain other defendants not affiliated
with Alliance, as well as unnamed Doe defendants. 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 January 29, 2004, forty additional
lawsuits making factual allegations generally similar to those in the
Hindo Complaint were filed against Alliance and certain other
defendants, and others may be filed. These forty additional lawsuits are
as follows:
a) Federal Court Class Actions: Twenty-five of the lawsuits were
brought as class actions filed in Federal court (twenty-one in the
United States District Court for the Southern District of New York,
two in the United States District Court for the District of New
Jersey, one in the United States District Court for the Northern
District of California, and one in the United States District
Court for the District of Connecticut). Certain of these additional
lawsuits allege claims under the Securities Act, the Exchange Act,
the Advisers Act, the ICA and common law. All of
F-45
these lawsuits are brought on behalf of shareholders of
AllianceBernstein Funds, except three. Of these three, one was
brought on behalf of a unitholder of Alliance Holding and two were
brought on behalf of participants in the Profit Sharing Plan for
Employees of Alliance Capital ("Plan"). The latter two lawsuits
allege claims under Sections 404, 405 and 406 of ERISA, on the
grounds that defendants violated fiduciary obligations to the Plan
by failing to disclose the alleged market timing and late trading
activities in AllianceBernstein Funds, and by permitting the Plan to
invest in funds subject to those activities. One of these ERISA
actions has been voluntarily dismissed. AXA Financial is named as a
defendant, primarily as a control person of Alliance, in all but two
of these cases (two of the twenty-five cases pending before the
United States District Court for the Southern District of New York).
b) Federal Court Derivative Actions: Eight of the lawsuits were brought
as derivative actions in Federal court (one in the United States
District Court for the Southern District of New York, five in the
United States District Court for the Eastern District of New York,
and two in the United States District Court for the District of New
Jersey). These lawsuits allege claims under the Exchange Act,
Section 36(b) of the ICA and/or common law. Six of the lawsuits were
brought derivatively on behalf of certain AllianceBernstein Funds,
with the broadest lawsuits being brought derivatively on behalf of
all AllianceBernstein Funds, generally alleging that defendants
violated fiduciary obligations to the AllianceBernstein Funds and/or
fund shareholders by permitting select investors to engage in market
timing activities and failing to disclose those activities. Two of
the lawsuits were brought derivatively on behalf of Alliance
Holding, generally alleging that defendants breached fiduciary
obligations to Alliance Holding or its unitholders by failing to
prevent the alleged undisclosed market timing and late trading
activities from occurring. AXA Financial is named as a defendant,
primarily as a control person of Alliance, in all but two of these
cases (the one case pending before the United States District Court
for the Southern District of New York and one of the two cases
pending before the United States District Court for the District of
New Jersey).
c) State Court Representative Actions: Two lawsuits were brought as
class actions in the Supreme Court of the State of New York, County
of New York, by alleged shareholders of an AllianceBernstein Fund on
behalf of shareholders of the AllianceBernstein Funds. The lawsuits
allege that defendants allowed certain parties to engage in late
trading and market timing transactions in the AllianceBernstein
Funds and that such arrangements breached defendants' fiduciary duty
to investors, and purport to state a claim for breach of fiduciary
duty. One of the complaints also purports to state claims for breach
of contract and tortious interference with contract. AXA Financial
is named as a defendant, primarily as a control person of Alliance,
in one of these two lawsuits.
d) A lawsuit was filed in Superior Court for the State of California,
County of Los Angeles, alleging that defendants violated fiduciary
responsibilities and disclosure obligations by permitting certain
favored customers to engage in market timing and late trading
activities in the AllianceBernstein Funds, and purports to state
claims of unfair business practices 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. AXA Financial is named as a
defendant, primarily as a control person of Alliance.
e) State Court Derivative Actions: Three lawsuits were brought as
derivative actions in state court (one in the Supreme Court of the
State of New York, County of New York, and two in the Superior Court
of the State of Massachusetts, County of Suffolk). The New York
action was brought derivatively on behalf of Alliance Holding and
alleges that, in connection with alleged market timing and late
trading transactions, defendants breached their fiduciary duties to
Alliance Holding and its unitholders by failing to maintain adequate
controls and employing improper practices in managing unspecified
AllianceBernstein Funds. AXA Financial is named as a defendant,
primarily as a control person of Alliance in the New York lawsuit.
The Massachusetts actions were brought derivatively on behalf of
certain AllianceBernstein Funds and allege state common law claims
for breach of fiduciary duty, abuse of control, gross mismanagement,
waste and unjust enrichment. Both Massachusetts actions attempt to
name AXA Financial as a defendant.
f) State Court Individual Action: A lawsuit was filed in the District
Court of Johnson County, Kansas, Civil Court Department, alleging
that defendants were negligent and breached their fiduciary duties
by knowingly entering into a number of illegal and improper
arrangements with institutional investors for the purpose of
engaging in late trading and market timing in AllianceBernstein
Funds to the detriment of
F-46
plaintiff and failing to disclose such arrangements in the
AllianceBernstein Fund prospectuses, and purports to state claims
under Sections 624 and 626 of the Kansas Consumer Protection Act,
and Section 1268 of the Kansas Securities Act. The lawsuit also
purports to state claims of negligent misrepresentation,
professional negligence and breach of fiduciary duty under common
law. AXA Financial is not named as a defendant in this lawsuit.
All of these lawsuits seek an unspecified amount of damages. All of the
Federal actions discussed above (i.e., the Hindo Complaint, Federal
Court Class Actions and Federal Court Derivative Actions) are the
subject of a petition or tag-along notices filed by Alliance before the
Judicial Panel on Multidistrict Litigation ("MDL Panel") seeking to have
all of the actions centralized in a single forum for pre-trial
proceedings. On January 29, 2004, the MDL Panel held a hearing on these
petitions. On February 20, 2004, the MDL Panel transferred all of the
actions to the United States District Court for the District of
Maryland. Pursuant to agreements among the parties, the Alliance
defendants' and AXA Financial's responses to the Federal actions that
have been served on Alliance and AXA Financial are stayed pending a
decision on consolidation by the MDL Panel and the filing of an amended
or operative complaint. The various plaintiffs seeking appointment to
serve as lead plaintiffs have stipulated to stay the lead plaintiff
decision until after the MDL Panel makes a decision on the MDL petitions
pending before it. In addition, discovery has not commenced in any of
these cases. In most of them, discovery is stayed under the Private
Securities Litigation Reform Act of 1995 or pursuant to an agreement
among the parties.
Defendants have removed each of the State Court Representative Actions
discussed above, and thereafter submitted the actions to the MDL Panel
in a notice of tag-along actions. Plaintiff in each of these actions has
moved to remand the action back to state court or has indicated an
intention to do so. Where defendants have responded to the complaints,
defendants have moved to stay proceedings pending transfer by the MDL
Panel.
Defendants have not yet responded to the complaints filed in the State
Court Derivative Actions.
Alliance recorded charges to income totaling $330.0 million in 2003 in
connection with establishing the $250.0 million restitution fund (which
is discussed in detail under "Business - Regulation" in this Form 10-K)
and certain other matters discussed above under "Alliance Litigations".
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.
With respect to the matters discussed above under "Alliance Litigations"
(other than those referred to in the preceding paragraph and those
related to SEBI), management of Alliance is unable to estimate the
impact, if any, that the outcome of these matters may have on Alliance'
results of operations or financial condition and the Company's
management is unable to estimate the impact, if any, that the outcome of
these matters may have on the Company's results of operations or
financial position.
In addition to the matters previously reported and those described
above, the Holding Company and its subsidiaries are involved in various
legal actions and proceedings in connection with their businesses. Some
of the actions and proceedings have been brought on behalf of various
alleged classes of claimants and certain of these claimants seek damages
of unspecified amounts. While the ultimate outcome of such matters
cannot be predicted with certainty, in the opinion of management no such
matter is likely to have a material adverse effect on 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.
17) LEASES
The Company has entered into operating leases for office space and
certain other assets, principally information technology equipment and
office furniture and equipment. Future minimum payments under
noncancelable operating leases for 2004 and the four successive years
are $125.8 million, $123.6 million, $111.5 million, $97.8 million, $90.1
million and $764.0 million thereafter. Minimum future sublease rental
income on these noncancelable operating leases for 2004 and the four
successive years is $13.0 million, $9.2 million, $2.9 million, $2.7
million, $2.3 million and $16.1 million thereafter.
F-47
At December 31, 2003, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 2004
and the four successive years is $80.7 million, $79.4 million, $78.4
million, $69.8 million, $62.2 million and $497.7 million thereafter.
The Company has entered into capital leases for certain information
technology equipment. Future minimum payments under noncancelable
capital leases for 2004 and 2005 are $2.0 million and $1.9 million,
respectively.
18) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Equitable Life is restricted as to the amounts it may pay as dividends
to the Holding Company. Under the New York Insurance Law, a domestic
life insurer may, without prior approval of the Superintendent; pay a
dividend to its shareholders not exceeding an amount calculated based on
a statutory formula. This formula would permit Equitable Life to pay
shareholder dividends not greater than $413.2 million during 2004.
Payment of dividends exceeding this amount requires the insurer to file
notice of its intent to declare such dividends with the Superintendent
who then has 30 days to disapprove the distribution. For 2003, 2002 and
2001, the Insurance Group statutory net income totaled $549.4 million,
$451.6 million and $547.7 million, respectively. Statutory surplus,
capital stock and Asset Valuation Reserve ("AVR") totaled $4,476.6
million and $4,281.0 million at December 31, 2003 and 2002,
respectively. In 2003, 2002 and 2001, respectively, $400.0 million,
$500.0 million and $1.7 billion in shareholder dividends were paid by
Equitable Life.
At December 31, 2003, the Insurance Group, in accordance with various
government and state regulations, had $27.2 million of securities
deposited with such government or state agencies.
In 1998, the NAIC approved a codification of statutory accounting
practices ("Codification"), which provides regulators and insurers with
uniform statutory guidance, addresses areas where statutory accounting
previously was silent and changes certain existing statutory positions.
Equitable Life and Equitable of Colorado became subject to Codification
rules for all state filings upon adoption of Codification by the
respective states.
On December 27, 2000, an emergency rule was issued by the New York
Insurance Department (NYID), which adopted Codification in New York
effective on January 1, 2001 except where the guidance conflicted with
New York Law. Differences in the New York regulation adopted in 2000
from Codification were in accounting for deferred taxes and goodwill,
which are required to be disclosed in the notes to the Annual Statement,
as well as the Annual Audited Report. On September 24, 2002, the bill
authorizing the admissibility of deferred taxes by New York insurers was
signed into law and was effective as of January 1, 2002. The impact of
adopting the accounting for deferred taxes at January 1, 2002 was a
$363.6 million decrease to surplus.
The implementation of Codification in 2001 resulted in a $1,630.9
million increase to surplus and capital stock, principally due to the
$1,660.8 million valuation adjustment related to Alliance.
The application of the Codification rules as adopted by the State of
Colorado had no significant effect on Equitable Life or Equitable of
Colorado.
At December 31, 2003 and for the year then ended, there were no
differences in net income and capital and surplus resulting from
practices prescribed and permitted by the State of New York and those
prescribed by NAIC Accounting Practices and Procedures effective at
December 31, 2003.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The differences between statutory surplus and
capital stock determined in accordance with Statutory Accounting
Principles ("SAP") and total shareholders' equity under GAAP are
primarily: (a) the inclusion in SAP of an AVR intended to stabilize
surplus from fluctuations in the value of the investment portfolio; (b)
future policy benefits and policyholders' account balances under SAP
differ from GAAP due to differences between actuarial assumptions and
reserving methodologies; (c) certain policy acquisition costs are
expensed under SAP but deferred under GAAP and amortized over future
periods to achieve a matching of revenues and expenses; (d) under SAP,
Federal income taxes are provided on the basis of amounts currently
payable with provisions made for deferred
F-48
amounts that reverse within one year while under GAAP, deferred taxes
are recorded for temporary differences between the financial statements
and tax basis of assets and liabilities where the probability of
realization is reasonably assured, (e) the valuation of assets under SAP
and GAAP differ due to different investment valuation and depreciation
methodologies, as well as the deferral of interest-related realized
capital gains and losses on fixed income investments; (f) the valuation
of the investment in Alliance and Alliance Holding under SAP reflects a
portion of the market value appreciation rather than the equity in the
underlying net assets as required under GAAP; (g) the provision for
future losses of the discontinued Wind-Up Annuities business is only
required under GAAP; (h) reporting the surplus notes as a component of
surplus in SAP but as a liability in GAAP; (i) computer software
development costs are capitalized under GAAP but expensed under SAP; and
(j) certain assets, primarily pre-paid assets, are not admissible under
SAP but are admissible under GAAP.
The following reconciles the Insurance Group's statutory change in
surplus and capital stock and statutory surplus and capital stock
determined in accordance with accounting practices prescribed by the
NYID with net earnings and equity on a GAAP basis.
2003 2002 2001
----------------- ---------------- -----------------
(In Millions)
Net change in statutory surplus and
capital stock.................................... $ 43.4 $ (1,354.7) $ 104.1
Change in AVR...................................... 152.2 (464.7) (230.2)
----------------- ---------------- -----------------
Net change in statutory surplus, capital stock
and AVR.......................................... 195.6 (1,819.4) (126.1)
Adjustments:
Future policy benefits and policyholders'
account balances............................... (245.7) 255.2 270.8
DAC.............................................. 556.1 458.1 458.5
Deferred Federal income taxes.................... 30.9 (634.6) (354.8)
Valuation of investments......................... 39.6 (74.8) 67.9
Valuation of investment subsidiary............... (321.6) 1,399.4 (1,507.9)
Change in fair value of guaranteed minimum income
benefit reinsurance contracts.................. (91.0) 120.0 -
Shareholder dividends paid...................... 400.0 500.0 1,700.0
Changes in non-admitted assets................... (35.1) 384.2 138.3
Other, net....................................... (2.1) (23.7) 5.4
GAAP adjustments for Other Discontinued
Operations..................................... (2.3) 23.0 (5.1)
----------------- ---------------- -----------------
Net Earnings of the Insurance Group................ $ 524.4 $ 587.4 $ 647.0
================= ================ =================
F-49
December 31,
---------------------------------------------------------
2003 2002 2001
----------------- ---------------- ------------------
(In Millions)
Statutory surplus and capital stock................ $ 4,134.7 $ 4,091.3 $ 5,446.0
AVR................................................ 341.9 189.7 654.4
----------------- ---------------- ------------------
Statutory surplus, capital stock and AVR........... 4,476.6 4,281.0 6,100.4
Adjustments:
Future policy benefits and policyholders'
account balances............................... (1,483.3) (1,237.6) (1,492.8)
DAC.............................................. 6,290.4 5,801.0 5,513.7
Deferred Federal income taxes.................... (1,729.8) (1,835.8) (1,252.2)
Valuation of investments......................... 2,196.3 1,629.6 635.9
Valuation of investment subsidiary............... (1,513.0) (1,191.4) (2,590.8)
Fair value of guaranteed minimum income benefit
reinsurance contracts.......................... 29.0 120.0 -
Non-admitted assets.............................. 1,130.2 1,162.3 778.1
Issuance of surplus notes........................ (599.6) (599.6) (539.4)
Other, net....................................... 77.7 157.2 536.6
GAAP adjustments for Other Discontinued
Operations..................................... (103.9) (108.7) (123.8)
----------------- ---------------- ------------------
Equity of the Insurance Group...................... $ 8,770.6 $ 8,178.0 $ 7,565.7
================= ================ ==================
19) ALLIANCE CHARGE FOR MUTUAL FUND MATTERS AND LEGAL PROCEEDINGS
On December 18, 2003, Alliance reached terms with the SEC for the
resolution of regulatory claims against Alliance with respect to market
timing. The SEC accepted an Offer of Settlement submitted by Alliance.
Alliance concurrently reached an agreement in principle with the New
York Attorney General ("NYAG"), which is subject to final definitive
documentation.
The key provisions of the settlement with the SEC and NYAG are that
Alliance must establish a $250 million fund to compensate fund
shareholders for the adverse effect of market timing. Of the $250
million fund, $150 million is characterized as disgorgement and $100
million is characterized as a penalty. In addition, the agreement with
the NYAG requires a weighted average reduction in fees of 20% on
Alliance's U.S. long-term open-end retail funds for a minimum of five
years, which commenced January 1, 2004. This reduction in fees is
expected to reduce Alliance Capital revenues by approximately $70
million in 2004.
Alliance recorded pre-tax charges to income of $190 million and a $140
million for the quarters ended September 30, 2003 and December 31, 2003,
respectively, or $330 million for the year 2003, to cover restitution,
litigation and other costs associated with these investigations and
other litigation. The effect of this settlement on the Company's 2003
net earnings after reflecting its impact on incentive compensation,
income taxes and minority interest was $90.1 million.
20) BUSINESS SEGMENT INFORMATION
The Company's operations consist of Insurance and Investment Services
segments. The Company's management evaluates the performance of each of
these segments independently and allocates resources based on current
and future requirements of each segment.
The Insurance segment offers a variety of traditional, variable and
interest-sensitive life insurance products, disability income, annuity
products, mutual funds, and other investment products to individuals and
small groups. It also administers traditional participating group
annuity contracts with conversion features, generally for corporate
qualified pension plans, and association plans which provide full
service retirement programs for individuals affiliated with professional
and trade associations. This segment includes Separate Accounts for
individual insurance and annuity products.
F-50
The Investment Services segment principally includes Alliance. Alliance
provides diversified investment management and related services globally
to a broad range of clients including: (a) institutional clients,
including pension funds, endowment funds and domestic and foreign
financial institutions and governments, (b) private clients, including
high net worth individuals, trusts and estates, charitable foundations
and other entities, by means of separately managed accounts, hedge funds
and other investment vehicles, (c) individual investors, principally
through a broad line of mutual funds, and (d) institutional investors by
means of in-depth research, portfolio strategy, trading and other
services. This segment also includes institutional Separate Accounts
that provide various investment options for large group pension clients,
primarily defined benefit and contribution plans, through pooled or
single group accounts.
Intersegment investment advisory and other fees of approximately $103.0
million, $102.2 million and $116.6 million for 2003, 2002 and 2001,
respectively, are included in total revenues of the Investment Services
segment.
The following tables reconcile segment revenues and earnings from
continuing operations before Federal income taxes to total revenues and
earnings as reported on the consolidated statements of earnings and
segment assets to total assets on the consolidated balance sheets,
respectively.
2003 2002 2001
----------------- ---------------- ------------------
(In Millions)
Segment revenues:
Insurance.......................................... $ 4,734.4 $ 4,673.4 $ 4,763.3
Investment Services................................ 2,738.5 2,744.9 2,994.4
Consolidation/elimination.......................... (70.4) (71.3) (90.0)
----------------- ---------------- ------------------
Total Revenues..................................... $ 7,402.5 $ 7,347.0 $ 7,667.7
================= ================ ==================
Segment earnings (loss) from continuing operations
before Federal income taxes
and minority interest:
Insurance.......................................... $ 631.6 $ 437.9 $ 707.5
Investment Services................................ 318.6 590.7 585.4
----------------- ---------------- ------------------
Total Earnings from Continuing Operations
before Federal Income Taxes
and Minority Interest........................... $ 950.2 $ 1,028.6 $ 1,292.9
================= ================ ==================
December 31,
2003 2002 2001
----------------- ---------------- ------------------
(In Millions)
Assets:
Insurance.......................................... $ 98,822.1 $ 80,638.7 $ 84,572.2
Investment Services................................ 15,410.1 14,160.3 15,808.8
Consolidation/elimination.......................... 33.1 27.3 (94.4)
----------------- ---------------- ------------------
Total Assets....................................... $ 114,265.3 $ 94,826.3 $ 100,286.6
================= ================ ==================
F-51
21) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 2003 and 2002 are summarized
below:
Three Months Ended
------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- ----------------- ------------------ ------------------
(In Millions)
2003
Total Revenues................ $ 1,674.7 $ 1,826.8 $ 1,857.8 $ 2,043.2
================= ================= ================== ==================
Earnings from
Continuing Operations....... $ 35.7 $ 209.7 $ 134.8 $ 140.8
================= ================= ================== ==================
Net Earnings.................. $ 35.7 $ 209.8 $ 135.5 $ 143.4
================= ================= ================== ==================
2002
Total Revenues................ $ 1,883.9 $ 2,072.1 $ 1,860.9 $ 1,530.1
================= ================= ================== ==================
Earnings from Continuing
Operations.................. $ 162.6 $ 206.5 $ 267.1 $ (21.3)
================= ================= ================== ==================
Net Earnings.................. $ 130.4 $ 205.1 $ 286.5 $ (34.6)
================= ================= ================== ==================
22) ACCOUNTING FOR STOCK-BASED COMPENSATION
The Holding Company sponsors a stock incentive plan for employees of
Equitable Life. Alliance sponsors its own stock option plans for certain
employees. The Company has elected to continue to account for
stock-based compensation using the intrinsic value method prescribed in
APB No. 25. Stock-based employee compensation expense is not reflected
in the statement of earnings as all options granted under those plans
had an exercise price equal to the market value of the underlying common
stock on the date of the grant. The following table illustrates the
effect on net income had compensation expense as related to options
awarded under the Company's Stock Incentive Plans been determined based
on SFAS No. 123's fair value based method, including the cost of the
amendments and modifications made in connection with AXA's acquisition
of the minority interest in the Holding Company:
2003 2002 2001
----------------- ---------------- -------------------
(In Millions)
Net income, as reported............................ $ 524.4 $ 587.4 $ 647.0
Less: total stock-based employee compensation
expense determined under fair value method for
all awards, net of Federal income tax benefit... (35.8) (36.0) (22.2)
----------------- ---------------- -------------------
Pro Forma Net Earnings............................. $ 488.6 $ 551.4 $ 624.8
================= ================ ===================
In conjunction with approval of the agreement for AXA's acquisition of
the minority interest in the Holding Company's Common Stock, generally
all outstanding options awarded under the 1997 and 1991 Stock Incentive
Plans were amended to become immediately and fully exercisable pursuant
to their terms upon expiration of the initial tender offer. In addition,
the agreement provided that at the effective time of the merger, the
terms of all outstanding options granted under those Plans would be
further amended and converted into options of equivalent intrinsic value
to acquire a number of AXA ordinary shares in the form of ADRs. Also
pursuant to the agreement, holders of non-qualified options were
provided with an alternative to elect cancellation of those options at
the effective time of the merger in exchange for a cash payment from the
Holding Company. For the year ended December 31, 2000, the Company
recognized compensation expense of $493.9 million, representing the cost
of these Plan amendments and modifications offset by an addition to
capital in excess of par value.
F-52
Beginning in 2001, under the 1997 Stock Incentive Plan, the Holding
Company can grant AXA ADRs and options to purchase AXA ADRs. The
options, which include Incentive Stock Options and Nonstatutory Stock
Options, are issued at the fair market value of the AXA ADRs on the date
of grant. Generally, one-third of stock options granted vest and become
exercisable on each of the first three anniversaries of the date such
options were granted. Options are currently exercisable up to 10 years
from the date of grant.
Following completion of the merger of AXA Merger Corp. with and into the
Holding Company, certain employees exchanged AXA ADR options for tandem
Stock Appreciation Rights 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 Stock Appreciation
Rights liability of $12.0 million and $(10.2) million for 2003 and 2002,
respectively, reflecting the variable accounting for the Stock
Appreciation Rights, based on the change in the market value of AXA ADRs
in 2003 and 2002.
The Black-Scholes option pricing model was used in determining the fair
values of option awards used in the pro-forma disclosures above. The
option pricing assumptions for 2003, 2002 and 2001 follow:
Holding Company Alliance
----------------------------------------- -------------------------------
2003 2002 2001 2003 2002 2001
------------- ------------- ------------ -------------------- ----------
Dividend yield.... 2.48% 2.54% 1.52% 6.1% 5.80% 5.80%
Expected
volatility...... 46% 46% 29% 32% 32% 33%
Risk-free interest
rate............ 2.72% 4.04% 4.98% 3.0% 4.2% 4.5%
Expected life
in years........ 5 5 5 7.0 7.0 7.2
Weighted average
fair value per
option at
grant-date...... $4.39 $6.30 $9.42 $5.96 $5.89 $9.23
A summary of the activity in the option shares of the Holding Company
and Alliance's option plans follows, including information about options
outstanding and exercisable at December 31, 2003. Outstanding options at
January 2, 2001 to acquire AXA ADRs reflect the conversion of 11.5
million share options of the Holding Company that remained outstanding
following the above-described cash settlement made pursuant to the
agreement for AXA's acquisition of the minority interest in the Holding
Company's Common Stock. All information presented below as related to
options to acquire AXA ADRs gives appropriate effect to AXA's May 2001
four-for-one stock split and the related changes in ADR parity for each
Holding Company share option:
F-53
Holding Company Alliance
------------------------------------ ---------------------------------
Weighted Weighted
Average Average
AXA ADRs Exercise Units Exercise
(In Millions) Price (In Millions) Price
------------------- ---------------- --------------- -----------------
:
Balance at January 2, 2001 18.3 $21.65 15.4 $28.73
Granted........................ 17.0 $31.55 2.5 $50.34
Exercised...................... (2.2) $11.57 (1.7) $13.45
Forfeited...................... (3.1) $32.02 (.3) $34.51
------------------- ---------------
Balance at December 31, 2001..... 30.0 $31.55 15.9 $33.58
Granted........................ 6.7 $17.24 2.4 $33.32
Exercised...................... (.2) $10.70 (1.4) $14.83
Forfeited...................... (1.2) $27.12 (.5) $42.99
------------------- ---------------
Balance at December 31, 2002 35.3 $25.14 16.4 $34.92
Granted......................... 9.1 $12.60 .1 $35.01
Exercised....................... (1.7) $7.85 (1.2) $17.26
Forfeited....................... (1.8) $25.16 (1.5) $43.26
------------------- ---------------
Balance at December 31, 2003 40.9 $23.04 13.8 $35.55
=================== ===============
Information about options outstanding and exercisable at December 31,
2003 follows:
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (In Millions) Life (Years) Price (In Millions) Price
--------------------------------------- ---------------- --------------- ------------------ ----------------
AXA ADRs
----------------------
$ 6.325 - $ 9.01 .4 1.86 $ 7.64 .4 $ 7.63
$10.195 - $15.20 11.8 8.35 $12.73 2.1 $13.23
$15.995 - $22.84 9.9 6.82 $18.50 6.3 $18.66
$26.095 - $33.025 13.8 4.63 $30.85 9.6 $30.48
$36.031 5.0 5.48 $36.03 5.0 $36.03
----------------- ------------------
$ 6.325 - $36.031 40.9 6.31 $23.04 23.4 $26.52
================= ==================
Alliance
----------------------
$ 8.81 - $18.47 2.6 2.48 $13.19 2.6 $13.19
$24.84 - $30.25 3.2 5.35 $27.90 2.9 $27.69
$30.94 - $48.50 4.3 7.76 $40.63 1.8 $44.85
$50.15 - $50.56 2.0 7.92 $50.25 .8 $50.25
$51.10 - $58.50 1.7 6.95 $53.77 1.0 $53.76
----------------- ------------------
$ 8.81 - $58.50 13.8 6.13 $35.55 9.1 $31.89
================= ==================
The Company's ownership interest in Alliance will continue to be reduced
upon the exercise of unit options granted to certain Alliance employees.
Options are exercisable over periods of up to ten years.
In 1997, Alliance Holding established a long-term incentive compensation
plan under which grants are made to key employees for terms established
by Alliance Holding at the time of grant. These awards include options,
restricted Alliance Holding units and phantom restricted Alliance
Holding units, performance awards, other Alliance Holding unit based
awards, or any combination thereof. At December 31, 2003, approximately
13.0 million Alliance Holding units of a maximum 41.0 million units were
subject to options granted and 103,262 Alliance Holding units were
subject to awards made under this plan.
F-54
23) 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 $57.6 million and
$39.7 million, respectively, for 2003 and 2002.
The Company paid $639.1 million and $596.6 million, respectively, of
commissions and fees to AXA Distribution and its subsidiaries for sales
of insurance products for 2003 and 2002. The Company charged AXA
Distribution's subsidiaries $304.4 million and $411.9 million,
respectively, for their applicable share of operating expenses for 2003
and 2002, pursuant to the Agreements for Services.
In September 2001, Equitable Life loaned $400.0 million to AXA Insurance
Holding Co. Ltd., a subsidiary of AXA. This investment has an interest
rate of 5.89% and matures on June 15, 2007. All payments, including
interest payable semi-annually, are guaranteed by AXA.
Both Equitable Life and Alliance, along with other AXA affiliates,
participate in certain intercompany cost sharing and service agreements
which include technology and professional development arrangements.
Payments by Equitable Life and Alliance to AXA under such agreements
totaled approximately $16.7 million and $17.9 million in 2003 and 2002,
respectively. Payments by AXA and AXA affiliates to Equitable Life under
such agreements totaled $32.5 million and $17.6 million in 2003 and
2002, respectively.
In 2003, Equitable Life entered into a reinsurance agreement with AXA
Financial Reinsurance Company (Bermuda), LTD ("AXA Bermuda"), an
indirect wholly owned subsidiary of the Holding Company, to cede certain
term insurance policies written after December 2002. Equitable Life
ceded $9.0 million of premiums and $2.8 million of reinsurance reserves
to AXA Bermuda in 2003.
Commissions, fees and other income includes certain revenues for
services provided to mutual funds managed by Alliance described below:
2003 2002 2001
----------------- ---------------- ------------------
(In Millions)
Investment advisory and services fees.............. $ 824.6 $ 854.5 $ 997.1
Distribution revenues.............................. 436.0 467.5 544.6
Shareholder servicing fees......................... 82.3 89.7 87.2
Other revenues..................................... 11.4 10.2 11.0
Brokerage.......................................... 3.6 7.0 5.7
F-55
REPORT OF INDEPENDENT AUDITORS ON
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
The Equitable Life Assurance Society of the United States
Our audits of the consolidated financial statements referred to in our report
dated March 9, 2004 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the financial statement schedules listed in Item
15(a)2 of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
/s/PricewaterhouseCoopers LLP
New York, New York
March 9, 2004
F-56
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2003
Estimated Carrying
Type of Investment Cost (A) Fair Value Value
- ------------------- ----------------- ---------------- ---------------
(In Millions)
Fixed maturities:
U.S. government, agencies and authorities.............. $ 812.3 $ 870.5 $ 870.5
State, municipalities and political subdivisions....... 188.2 200.3 200.3
Foreign governments.................................... 248.4 294.0 294.0
Public utilities....................................... 2,994.1 3,214.1 3,214.1
All other corporate bonds.............................. 21,496.6 22,957.7 22,957.7
Redeemable preferred stocks............................ 1,412.0 1,558.9 1,558.9
----------------- ---------------- ---------------
Total fixed maturities.................................... 27,151.6 29,095.5 29,095.5
----------------- ---------------- ---------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............... 13.5 13.6 13.6
Mortgage loans on real estate............................. 3,503.1 3,761.7 3,503.1
Real estate............................................... 310.8 XXX 310.8
Real estate acquired in satisfaction of debt.............. 275.8 XXX 275.8
Real estate joint ventures................................ 69.9 XXX 69.9
Policy loans.............................................. 3,894.3 4,481.9 3,894.3
Other limited partnership interests....................... 775.5 775.5 775.5
Other invested assets..................................... 1,101.6 1,101.6 1,101.6
----------------- ---------------- ---------------
Total Investments......................................... $ 37,096.1 $ 39,229.8 $ 39,040.1
================= ================ ===============
(A) Cost for fixed maturities represents original cost, reduced by repayments
and writedowns and adjusted for amortization of premiums or accretion of
discount; for equity securities, cost represents original cost reduced by
writedowns; for other limited partnership interests, cost represents
original cost adjusted for equity in earnings and distributions.
F-57
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 2003 AND 2002
2003 2002
----------------- -----------------
(In Millions)
ASSETS
Investment:
Fixed maturities:
Available for sale, at estimated fair value (amortized
cost of $26,874.1 and $24,480.4, respectively)........................ $ 28,787.4 $ 25,981.9
Mortgage loans on real estate............................................. 3,503.1 3,746.2
Equity real estate........................................................ 656.4 717.3
Policy loans.............................................................. 3,670.4 3,805.8
Investments in and loans to affiliates.................................... 1,246.9 1,359.3
Other equity investments.................................................. 789.0 720.2
Other invested assets..................................................... 590.7 892.4
----------------- -----------------
Total investments..................................................... 39,243.9 37,223.1
Cash and cash equivalents................................................... 402.4 15.3
Deferred policy acquisition costs........................................... 6,248.6 5,749.8
Amounts due from reinsurers................................................. 1,510.8 1,482.4
Other assets................................................................ 2,228.8 2,289.2
Loans to affiliates......................................................... 400.0 413.0
Prepaid pension asset....................................................... 838.3 865.1
Separate Accounts assets.................................................... 54,438.1 39,012.1
----------------- -----------------
Total Assets................................................................ $ 105,310.9 $ 87,050.0
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 24,907.5 $ 22,630.6
Future policy benefits and other policyholders liabilities.................. 13,831.4 13,892.5
Short-term and long-term debt............................................... 847.9 847.8
Federal income taxes payable................................................ 1,775.9 1,474.2
Other liabilities........................................................... 877.0 922.0
Separate Accounts liabilities............................................... 54,300.6 38,883.8
----------------- -----------------
Total liabilities..................................................... 96,540.3 78,650.9
----------------- -----------------
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.............................................. 4,848.2 4,812.8
Retained earnings........................................................... 3,027.1 2,902.7
Accumulated other comprehensive income...................................... 892.8 681.1
----------------- -----------------
Total shareholder's equity............................................ 8,770.6 8,399.1
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 105,310.9 $ 87,050.0
================= =================
The financial information of The Equitable Life Assurance Society of the United
States (Parent Company) should be read in conjunction with the Consolidated
Financial Statements and Notes thereto. For information regarding capital in
excess of par value refer to Note 1 of Notes to Consolidated Financial
Statements.
F-58
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2003, 2002, 2001
2003 2002 2001
----------------- ----------------- ---------------
(In Millions)
REVENUES
Universal life and investment-type product policy fee
income........................................................ $ 1,373.1 $ 1,312.3 $ 1,337.4
Premiums........................................................ 882.8 936.7 1,010.0
Net investment income........................................... 2,338.3 2,321.7 2,301.9
Investment losses, net.......................................... (70.6) (264.1) (201.4)
Equity in earnings of subsidiaries ............................. 44.3 113.1 134.2
Commissions, fees and other income.............................. 163.2 337.6 244.1
----------------- ----------------- ----------------
Total revenues............................................ 4,731.1 4,757.3 4,826.2
----------------- ----------------- ----------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits......................................... 1,691.0 2,025.7 1,878.9
Interest credited to policyholders' account balances............ 946.6 945.5 957.1
Compensation and benefits....................................... 379.1 310.2 371.3
Commissions..................................................... 1,072.4 835.5 825.0
Interest expense................................................ 58.8 72.5 71.5
Amortization of deferred policy acquisition costs............... 424.9 292.6 284.0
Capitalization of deferred policy acquisition costs............. (990.0) (753.2) (743.4)
Rent expense.................................................... 67.9 66.7 62.8
Amortization and depreciation................................... 98.1 88.0 92.1
Premium taxes................................................... 35.7 36.3 36.9
Other operating costs and expenses.............................. 242.7 248.0 159.0
----------------- ----------------- ----------------
Total benefits and other deductions....................... 4,027.2 4,167.8 3,995.2
----------------- ----------------- ----------------
Earnings from continuing operations before
Federal income taxes.......................................... 703.9 589.5 831.0
Federal income tax (expense) benefit............................ (182.9) 25.4 (224.4)
----------------- ----------------- ----------------
Earnings from continuing operations............................. 521.0 614.9 606.6
Earnings from discontinued operations, net of
Federal income taxes......................................... 3.4 5.6 43.9
Cumulative effect of accounting changes, net of
Federal income taxes......................................... - (33.1) (3.5)
----------------- ----------------- ----------------
Net Earnings.................................................... $ 524.4 $ 587.4 $ 647.0
================= ================= ================
F-59
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE II
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
----------------- ----------------- ----------------
(In Millions)
Net earnings.................................................... $ 524.4 $ 587.4 $ 647.0
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Interest credited to policyholders' account balances.......... 946.6 945.5 957.1
Universal life and investment-type policy fee income.......... (1,373.1) (1,312.3) (1,337.4)
Investment losses net......................................... 70.6 264.1 201.4
Equity in net earnings of subsidiaries........................ (44.3) (113.1) (134.2)
Dividends from subsidiaries................................... 181.8 213.6 1,289.4
Change in deferred policy acquisition costs................... (565.1) (460.6) (459.4)
Change in future policy benefits and other policyholder
funds....................................................... (98.7) 216.1 (15.6)
Change in prepaid pension asset............................... 26.8 (363.0) (56.7)
Change in fair value of guaranteed minimum income
benefit reinsurance contract.............................. 91.0 (120.0) -
Change in property and equipment.............................. (23.9) (23.2) (121.7)
Change in Federal income tax payable.......................... 193.0 93.2 573.9
Amortization and depreciation................................. 98.1 88.0 92.1
Other, net.................................................... 187.2 118.2 57.9
----------------- ----------------- -----------------
Net cash provided by operating activities....................... 214.4 133.9 1,693.8
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments..................................... 4,180.6 2,973.1 2,429.1
Sales......................................................... 4,778.7 7,624.4 7,470.3
Purchases..................................................... (11,403.4) (12,609.2) (11,775.1)
Increase in loans to discontinued operations.................. 2.5 38.1 14.7
Change in short-term investments.............................. 357.0 (570.9) 123.1
Change in policy loans........................................ 135.6 71.5 (52.2)
Loans to affiliates........................................... - - (400.0)
Other, net.................................................... (61.7) 97.5 (60.3)
----------------- ----------------- -----------------
Net cash used by investing activities........................... (2,010.7) (2,375.5) (2,250.4)
----------------- ----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................... 5,689.6 4,384.9 3,252.1
Withdrawals and transfers to Separate Accounts.............. (3,141.6) (1,995.9) (2,445.4)
Net decrease in short-term financings......................... (.2) (.2) (.2)
Shareholder dividends paid.................................... (400.0) (500.0) (1,700.0)
Other, net.................................................... 35.6 59.1 (29.3)
----------------- ----------------- -----------------
Net cash provided (used) by financing activities................ 2,183.4 1,947.9 (922.8)
----------------- ----------------- -----------------
Change in cash and cash equivalents............................. 387.1 (293.7) (1,479.4)
Cash and cash equivalents, beginning of year.................... 15.3 309.0 1,788.4
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year.......................... $ 402.4 $ 15.3 $ 309.0
================= ================= =================
Supplemental cash flow information
Interest Paid................................................. $ 43.2 $ 43.6 $ 43.4
================= ================= =================
Income Taxes (Refunded) Paid.................................. $ (58.8) $ (153.6) $ 517.0
================= ================= =================
F-60
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2003
Future Policy Policy
Deferred Benefits Charges (1)
Policy Policyholders' and Other and Net
Acquisition Account Policyholders' Premium Investment
Segment Costs Balance Funds Revenue Income
- -------------------------- --------------- ------------------ ----------------- -------------- ---------------
(In Millions)
Insurance.............. $ 6,290.4 $ 25,307.7 $ 13,934.7 $ 2,266.1 $ 2,340.8
Investment
Services............. - - - - 16.9
Consolidation/
elimination.......... - - - - 29.2
--------------- ------------------ ----------------- -------------- ---------------
Total.................. $ 6,290.4 $ 25,307.7 $ 13,934.7 $ 2,266.1 $ 2,386.9
=============== ================== ================= ============== ===============
Amortization
Policyholders' of Deferred (2)
Benefits and Policy Other
Interest Acquisition Operating
Segment Credited Cost Expense
- -------------------------- ----------------- ------------------ ---------------
Insurance.............. $ 2,677.9 $ 434.6 $ 990.3
Investment
Services............. - - 2,419.9
Consolidation/
elimination.......... - - (70.4)
----------------- ------------------ ---------------
Total.................. $ 2,677.9 $ 434.6 $ 3,339.8
================= ================== ===============
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-61
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2002
Future Policy Policy
Deferred Benefits Charges (1)
Policy Policyholders' and Other and Net
Acquisition Account Policyholders' Premium Investment
Segment Costs Balance Funds Revenue Income
- -------------------------- -------------- ------------------- ----------------- -------------- ---------------
(In Millions)
Insurance.............. $ 5,801.0 $ 23,037.5 $ 13,975.7 $ 2,260.7 $ 2,331.2
Investment
Services............. - - - - 18.0
Consolidation/
elimination.......... - - - - 28.0
-------------- ------------------- ----------------- -------------- ---------------
Total.................. $ 5,801.0 $ 23,037.5 $ 13,975.7 $ 2,260.7 $ 2,377.2
============== =================== ================= ============== ===============
Amortization
Policyholders' of Deferred (2)
Benefits and Policy Other
Interest Acquisition Operating
Segment Credited Cost Expense
- -------------------------- ----------------- ------------------ ---------------
Insurance.............. $ 3,008.5 $ 296.7 $ 930.3
Investment
Services............. - - 2,154.2
Consolidation/
elimination.......... - - (71.3)
----------------- ------------------ ---------------
Total.................. $ 3,008.5 $ 296.7 $ 3,013.2
================= ================== ===============
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-62
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 2001
Policy
Charges (1) Policyholders'
and Net Benefits and
Premium Investment Interest
Segment Revenue Income Credited
- --------------------------------------------------------------- --------------- ----------------- ----------------------
(In Millions)
Insurance................................................... $ 2,362.2 $ 2,337.9 $ 2,870.5
Investment
Services.................................................. - 39.9 -
Consolidation/
elimination............................................... - 26.5 -
--------------- ----------------- ----------------------
Total....................................................... $ 2,362.2 $ 2,404.3 $ 2,870.5
=============== ================= ======================
Amortization
of Deferred (2)
Policy Other
Acquisition Operating
Cost Expense
-------------------- --------------------
Insurance................................................... $ 287.9 $ 897.4
Investment
Services.................................................. - 2,409.0
Consolidation/
elimination............................................... - (90.0)
-------------------- --------------------
Total....................................................... $ 287.9 $ 3,216.4
===================== ====================
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-63
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
SCHEDULE IV
REINSURANCE (A)
AT AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
----------------- ---------------- ----------------- --------------- ---------------
(Dollars In Millions)
2003
- ----
Life Insurance In-Force...... $ 266,115.8 $ 90,031.1 $ 41,078.1 $ 217,162.8 18.92%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 769.0 $ 70.2 $ 140.9 $ 839.7 16.78%
Accident and health.......... 144.8 98.2 12.1 58.7 20.61%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 913.8 $ 168.4 $ 153.0 $ 898.4 17.03%
================= ================ ================= ===============
2002
- ----
Life Insurance In-Force...... $ 264,456.6 $ 89,413.1 $ 42,228.6 $ 217,281.1 19.44%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 803.3 $ 86.8 $ 145.7 $ 862.2 16.90%
Accident and health.......... 151.3 104.0 35.7 83.0 43.01%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 954.6 $ 190.8 $ 181.4 $ 945.2 19.19%
================= ================ ================= ===============
2001
- ----
Life Insurance In-Force...... $ 263,375.6 $ 75,190.5 $ 42,640.4 $ 230,825.5 18.47%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 830.2 $ 63.6 $ 138.5 $ 905.1 15.30%
Accident and health.......... 159.8 109.5 64.5 114.8 56.18%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 990.0 $ 173.1 $ 203.0 $ 1,019.9 19.90%
================= ================ ================= ===============
(A) Includes amounts related to the discontinued group life and health business.
F-64
PART II, ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
9-1
PART II, ITEM 9A.
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Office and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of December 31, 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 have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to December 31, 2003.
As previously reported in the Registrant's Form 10-Q for the quarter ended June
30, 2003, 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, 2001. To
address this deficiency, which constitutes a significant deficiency under final
standards issued by the Public Companies Accounting Oversight Board, management
has implemented procedures and controls to enhance the effectiveness of the
Registrant's processes for reconciling on a regular basis the deferred Federal
income tax assets and liabilities.
9A-1
Part III, Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I to Form 10-K.
10-1
PART III, ITEM 11.
EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I to Form 10-K.
11-1
PART III, ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Omitted pursuant to General Instruction I to Form 10-K.
12-1
PART III, ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I to Form 10-K.
13-1
PART III, ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional audit services rendered by
PricewaterhouseCoopers LLP ("PwC") for the audit of the Company's annual
financial statements for 2003 and 2002, and fees for other services rendered by
PwC:
2003 2002
------------- --------------
(In Thousands)
Principal Accountant Fees and Services:
Audit(1)......................................... $ 4,687.1 $ 3,383.8
Audit related(2)................................. 1,150.0 -
Tax(3)........................................... 640.3 583.0
All other(4)..................................... 7.0 996.8
------------- --------------
Total............................................ $ 6,484.4 $ 4,963.6
============= ==============
(1) The audit fees for the Holding Company and the Company are paid pursuant
to a single engagement letter with PwC.
(2) Audit related fees in 2003 consist of fees for Sarbanes-Oxley Section
404 implementation and internal control reviews.
(3) Tax fees consist of fees for tax preparation and tax consultation services.
(4) All other fees consist of fees for miscellaneous non-audit services.
The Company's audit committee has determined that all services to be
provided by PwC must be reviewed and approved by the audit committee on a
case-by-case basis, and therefore has not adopted policies or procedures to
pre-approve engagements. The audit committee has delegated to its chairman the
ability to approve any non-audit engagement where the fees are expected to be
less than or equal to $100,000.
14-1
PART IV, ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Consolidated
Financial Statements and Schedules on page FS-1.
2. Consolidated Financial Statement Schedules
The consolidated financial statement schedules are listed in the Index
to Consolidated Financial Statements and Schedules on page FS-1.
3. Exhibits:
The exhibits are listed in the Index to Exhibits that begins on
page E-1.
(B) Reports on Form 8-K
1. On December 18, 2003, Equitable Life furnished a Current Report on Form
8-K, relating to a press release issued by Alliance and Alliance Holding
regarding Alliance's resolution with the SEC and NYAG of regulatory
claims with respect to market timing in some of its mutual funds.
15-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 2004 THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE
UNITED STATES
By: /s/ Christopher M. Condron
------------------------------------------------------
Name: Christopher M. Condron
Chairman of the Board, President and Chief
Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Christopher M. Condron Chairman of the Board, President and Chief March 30, 2004
- -------------------------------------------- Executive Officer, Director
Christopher M. Condron
/s/ Stanley B. Tulin Vice Chairman of the Board and March 30, 2004
- -------------------------------------------- Chief Financial Officer, Director
Stanley B. Tulin
/s/ Alvin H. Fenichel Senior Vice President and Controller March 30, 2004
- --------------------------------------------
Alvin H. Fenichel
/s/ Henri de Castries Director March 22, 2004
- --------------------------------------------
Henri de Castries
/s/ Bruce W. Calvert Director March 22, 2004
- --------------------------------------------
Bruce W. Calvert
/s/ Claus-Michael Dill Director March 22, 2004
- --------------------------------------------
Claus-Michael Dill
/s/ Joseph L. Dionne Director March 22, 2004
- --------------------------------------------
Joseph L. Dionne
/s/ Denis Duverne Director March 22, 2004
- --------------------------------------------
Denis Duverne
/s/ Jean-Rene Fourtou Director March 22, 2004
- --------------------------------------------
Jean-Rene Fourtou
/s/ John C. Graves Director March 22, 2004
- --------------------------------------------
John C. Graves
/s/ Donald J. Greene Director March 22, 2004
- --------------------------------------------
Donald J. Greene
S-1
/s/ Nina Henderson Director March 22, 2004
- --------------------------------------------
Nina Henderson
/s/ James F. Higgins Director March 22, 2004
- --------------------------------------------
James F. Higgins
/s/ W. Edwin Jarmain Director March 22, 2004
- --------------------------------------------
W. Edwin Jarmain
/s/ Christina Johnson-Wolff Director March 22, 2004
- --------------------------------------------
Christina Johnson-Wolff
/s/ Scott D. Miller Director March 22, 2004
- --------------------------------------------
Scott D. Miller
/s/ Joseph H. Moglia Director March 22, 2004
- --------------------------------------------
Joseph H. Moglia
/s/ Peter J. Tobin Director March 22, 2004
- --------------------------------------------
Peter J. Tobin
S-2
INDEX TO EXHIBITS (TO BE UPDATED)
Tag
Number Description Method of Filing Value
- ---------- ----------------------------------------- --------------------------------------------- ----------
2.1 Stock Purchase Agreement dated as of Filed as Exhibit 2.1 to the Holding
August 30, 2000 among CSG, AXA, Equitable Company's Current Report on Form 8-K
Life, AXA Participations Belgium and the dated November 14, 2000 and incorporated
Holding Company herein by reference
2.2 Letter Agreement dated as of October 6, Filed as Exhibit 2.2 to the Holding
2000 to the Stock Purchase Agreement Company's Current Report on Form 8-K
among CSG, AXA, Equitable Life, dated November 14, 2000 and incorporated
AXA Participations Belgium and herein by reference
the Holding Company
3.1 Restated Charter of Equitable Life, as Filed as Exhibit 3.1(a) to registrant's
amended January 1, 1997 Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated
herein by reference
3.2 Restated By-laws of Equitable Life, as Filed as Exhibit 3.2(a) to registrant's
amended November 21, 1996 Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated
herein by reference
10.1 Cooperation Agreement, dated as of July Filed as Exhibit 10(d) to the Holding
18, 1991, as amended among Equitable Company's Form S-1 Registration Statement
Life, the Holding Company and AXA (No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.2 Letter Agreement, dated May 12, 1992, Filed as Exhibit 10(e) to the Holding
among the Holding Company, Equitable Company's Form S-1 Registration Statement
Life and AXA (No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.3 Amended and Restated Reinsurance Filed as Exhibit 10(o) to the Holding
Agreement, dated as of March 29, 1990, Company's Form S-1 Registration Statement
between Equitable Life and First (No. 33-48115), dated May 26, 1992 and
Equicor Life Insurance Company incorporated herein by reference
10.4 Fiscal Agency Agreement between Filed as Exhibit 10.5 to registrant's
Equitable Life and The Chase Manhattan Annual Report on Form 10-K for the year
Bank, N.A. ended December 31, 1995 and incorporated
herein by reference
10.5(a) Lease, dated as of July 20, 1995, Filed as Exhibit 10.26(a) to the Holding
between 1290 Associates, L.L.C. and Company's Annual Report on Form 10-K for
Equitable Life the year ended December 31, 1996 and
incorporated herein by reference
10.5(b) First Amendment of Lease Agreement, Filed as Exhibit 10.26(b) to the Holding
dated as of December 28, 1995, between Company's Annual Report on Form 10-K for
1290 Associates, L.L.C. and Equitable the year ended December 31, 1996 and
Life incorporated herein by reference
E-1
Tag
Number Description Method of Filing Value
- ---------- ----------------------------------------- --------------------------------------------- ----------
10.5(c) Amended and Restated Company Lease Filed as Exhibit 10.26(c) to the Holding
Agreement (Facility Realty), made as of Company's Annual Report on Form 10-K for
May 1, 1996, by and between Equitable the year ended December 31, 1996 and
Life and the IDA incorporated herein by reference
10.5(d) Amended and Restated Company Lease Filed as Exhibit 10.26(d) to the Holding
Agreement (Project Property), made and Company's Annual Report on Form 10-K for
entered into as of May 1, 1996, by and the year ended December 31, 1996 and
between the IDA, Equitable Life and incorporated herein by reference
EVLICO
10.6 Distribution and Servicing Agreement Filed as Exhibit 10.7 to the registrant's
between AXA Advisors (as successor to Annual Report on Form 10-K for the year
Equico Securities, Inc.) and Equitable ended December 31, 1999 and incorporated
Life dated as of May 1, 1994 herein by reference
10.7 Agreement for Cooperative and Joint Use Filed as Exhibit 10.8 to the registrant's
of Personnel, Property and Services Annual Report on Form 10-K for the year
between Equitable Life and AXA ended December 31, 1999 and incorporated
Advisors dated as of September 21, herein by reference
1999
10.8 General Agent Sales Agreement between Filed as Exhibit 10.9 to the registrant's
Equitable Life and AXA Network dated as Annual Report on Form 10-K for the year
of January 1, 2000 ended December 31, 1999 and incorporated
herein by reference
10.9 Agreement for Services by Equitable Filed as Exhibit 10.10 to the registrant's
Life to AXA Network dated as of Annual Report on Form 10-K for the year
January 1, 2000 ended December 31, 1999 and incorporated
herein by reference
21 Subsidiaries of the registrant Omitted pursuant to General Instruction I
of Form 10-K
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
E-2