UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 2004 Commission File No. 0-25280
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THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
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(Exact name of registrant as specified in its charter)
New York 13-5570651
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
(212) 554-1234
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Registrant's telephone number, including area code
None
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(Former name, former address, and former fiscal year if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes | | No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at May 14, 2004
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Common Stock, $1.25 par value 2,000,000
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this form with the Reduced Disclosure
Format.
Page 1 of 32
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2004
TABLE OF CONTENTS
Page #
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PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
o Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003................. 3
o Consolidated Statements of Earnings for the Quarter Ended March 31, 2004 and 2003...... 4
o Consolidated Statements of Shareholder's Equity and Comprehensive Income for the
Quarter Ended March 31, 2004 and 2003.................................................. 5
o Consolidated Statements of Cash Flows for the Quarter Ended March 31, 2004 and 2003.... 6
o Notes to Consolidated Financial Statements............................................. 7
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
("Management Narrative")................................................................ 21
Item 3: Quantitative and Qualitative Disclosures About Market Risk*............................. 28
Item 4: Controls and Procedures................................................................. 28
PART II OTHER INFORMATION
Item 1: Legal Proceedings....................................................................... 29
Item 2: Changes in Securities................................................................... 31
Item 3: Defaults Upon Senior Securities......................................................... 31
Item 4: Submission of Matters to a Vote of Security Holders..................................... 31
Item 5: Other Information....................................................................... 31
Item 6: Exhibits and Reports on Form 8-K........................................................ 31
SIGNATURES.............................................................................................. 32
*Omitted pursuant to General Instruction H to Form 10-Q.
-2-
PART I FINANCIAL INFORMATION
ITEM 1: UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, December 31,
2004 2003
----------------- -----------------
(IN MILLIONS)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 30,333.2 $ 29,095.5
Mortgage loans on real estate............................................. 3,321.6 3,503.1
Equity real estate, held for the production of income..................... 650.4 656.5
Policy loans.............................................................. 3,869.1 3,894.3
Other equity investments.................................................. 909.6 789.1
Other invested assets..................................................... 1,162.0 1,101.6
----------------- -----------------
Total investments..................................................... 40,245.9 39,040.1
Cash and cash equivalents................................................... 1,341.5 722.7
Cash and securities segregated, at estimated fair value..................... 1,233.7 1,285.8
Broker-dealer related receivables........................................... 2,334.9 2,284.7
Deferred policy acquisition costs........................................... 6,298.0 6,290.4
Goodwill and other intangible assets, net................................... 3,709.0 3,513.4
Amounts due from reinsurers................................................. 2,480.8 2,460.4
Loans to affiliates at estimated fair value................................. 400.0 400.0
Other assets................................................................ 3,623.3 3,829.7
Separate Accounts' assets................................................... 56,586.5 54,438.1
----------------- -----------------
TOTAL ASSETS................................................................ $ 118,253.6 $ 114,265.3
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 25,931.5 $ 25,307.7
Future policy benefits and other policyholders liabilities.................. 14,075.3 13,934.7
Broker-dealer related payables.............................................. 1,353.7 1,261.8
Customers related payables.................................................. 2,176.9 1,897.5
Amounts due to reinsurers................................................... 939.5 936.5
Short-term and long-term debt............................................... 1,480.6 1,253.2
Federal income taxes payable................................................ 2,432.3 2,362.8
Other liabilities........................................................... 1,636.2 2,006.9
Separate Accounts' liabilities.............................................. 56,586.5 54,300.6
Minority interest in equity of consolidated subsidiaries.................... 1,998.5 1,744.9
Minority interest subject to redemption rights.............................. 381.9 488.1
----------------- -----------------
Total liabilities..................................................... 108,992.9 105,494.7
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Commitments and contingencies (Note 11)
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.............................................. 4,852.0 4,848.2
Retained earnings........................................................... 3,253.7 3,027.1
Accumulated other comprehensive income...................................... 1,152.5 892.8
----------------- -----------------
Total shareholder's equity............................................ 9,260.7 8,770.6
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TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................................. $ 118,253.6 $ 114,265.3
================= =================
See Notes to Consolidated Financial Statements.
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THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
QUARTER ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
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(IN MILLIONS)
REVENUES
Universal life and investment-type product policy fee income................ $ 372.6 $ 316.0
Premiums.................................................................... 231.3 243.7
Net investment income....................................................... 652.2 586.1
Investment gains (losses), net.............................................. 44.6 (125.0)
Commissions, fees and other income.......................................... 823.5 653.9
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Total revenues........................................................ 2,124.2 1,674.7
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BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits..................................................... 453.3 484.1
Interest credited to policyholders' account balances........................ 272.0 235.8
Compensation and benefits................................................... 371.2 320.5
Commissions................................................................. 245.4 234.1
Distribution plan payments.................................................. 97.1 89.1
Amortization of deferred sales commissions.................................. 48.5 53.0
Interest expense............................................................ 21.4 20.5
Amortization of deferred policy acquisition costs........................... 122.7 87.2
Capitalization of deferred policy acquisition costs......................... (226.8) (222.2)
Rent expense................................................................ 46.5 41.6
Amortization of other intangible assets, net................................ 5.6 5.5
Other operating costs and expenses.......................................... 220.9 199.6
----------------- -----------------
Total benefits and other deductions................................... 1,677.8 1,548.8
----------------- -----------------
Earnings from continuing operations before income taxes
and minority interest..................................................... 446.4 125.9
Income tax expense.......................................................... (123.6) (27.8)
Minority interest in net income of consolidated subsidiaries................ (95.4) (62.4)
----------------- -----------------
Earnings from continuing operations......................................... 227.4 35.7
Earnings from discontinued operations, net of income tax expense............ 2.1 -
Cumulative effect of accounting changes, net of income tax benefit.......... (2.9) -
----------------- -----------------
Net Earnings................................................................ $ 226.6 $ 35.7
================= =================
See Notes to Consolidated Financial Statements.
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THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
AND COMPREHENSIVE INCOME
QUARTER ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
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(IN MILLIONS)
SHAREHOLDER'S EQUITY
Common stock, at par value, beginning of year and end of period............. $ 2.5 $ 2.5
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Capital in excess of par value, beginning of year........................... 4,848.2 4,753.8
Other changes in capital in excess of par value............................. 3.8 14.5
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Capital in excess of par value, end of period............................... 4,852.0 4,768.3
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Retained earnings, beginning of year........................................ 3,027.1 2,740.6
Net earnings................................................................ 226.6 35.7
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Retained earnings, end of period............................................ 3,253.7 2,776.3
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Accumulated other comprehensive income, beginning of year................... 892.8 681.1
Other comprehensive income.................................................. 259.7 170.4
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Accumulated other comprehensive income, end of period....................... 1,152.5 851.5
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TOTAL SHAREHOLDER'S EQUITY, END OF PERIOD................................... $ 9,260.7 $ 8,398.6
================= =================
COMPREHENSIVE INCOME
Net earnings................................................................ $ 226.6 $ 35.7
Cumulative effect of accounting changes..................................... 12.4 -
Change in unrealized gains net of reclassification adjustments.............. 247.3 170.4
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Other comprehensive income.................................................. 259.7 170.4
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COMPREHENSIVE INCOME........................................................ $ 486.3 $ 206.1
================= =================
See Notes to Consolidated Financial Statements.
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THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
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(IN MILLIONS)
Net earnings................................................................ $ 226.6 $ 35.7
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Interest credited to policyholders' account balances.................... 272.0 235.8
Universal life and investment-type product policy fee income............ (372.6) (316.0)
Net change in broker-dealer and customer related receivables/payables... 4.9 (84.3)
Investment (gains) losses, net.......................................... (44.6) 125.0
Change in income tax payable............................................ 101.1 29.1
Change in future policy benefits........................................ 76.0 (2.4)
Change in property and equipment........................................ (12.8) (12.2)
Change in deferred policy acquisition costs............................. (104.1) (135.0)
Decrease in segregated cash and securities, net......................... 52.2 119.8
Minority interest in net income of consolidated subsidiaries............ 95.4 62.4
Change in fair value of guaranteed minimum income
benefit reinsurance contracts........................................ 15.0 (21.0)
Amortization of deferred sales commissions.............................. 48.5 53.0
Amortization of other intangible assets, net............................ 5.6 5.5
Change in accounts payable and accrued expenses......................... (287.3) (72.5)
Other, net.............................................................. (66.9) 74.8
----------------- -----------------
Net cash provided by operating activities................................... 9.0 97.7
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Cash flows from investing activities:
Maturities and repayments................................................. 904.6 983.7
Sales.................................................................... 1,104.4 1,167.8
Purchases................................................................. (1,721.7) (2,040.5)
Change in short-term investments.......................................... 284.7 (313.7)
Purchase of minority interest in consolidated subsidiary.................. (308.7) -
Other, net................................................................ 66.2 40.9
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Net cash provided (used) by investing activities............................ 329.5 (161.8)
----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 828.3 1,355.2
Withdrawals and transfers to Separate Accounts.......................... (809.6) (562.4)
Net increase in short-term financings..................................... 238.9 256.3
Other, net................................................................ 22.7 (81.1)
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Net cash provided by financing activities................................... 280.3 968.0
----------------- -----------------
Change in cash and cash equivalents......................................... 618.8 903.9
Cash and cash equivalents, beginning of year................................ 722.7 269.6
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Cash and Cash Equivalents, End of Period.................................... $ 1,341.5 $ 1,173.5
================= =================
Supplemental cash flow information
Interest Paid............................................................. $ 16.7 $ 18.0
================= =================
Income Taxes Paid (Refunded).............................................. $ 49.0 $ (10.0)
================= =================
See Notes to Consolidated Financial Statements.
-6-
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The preparation of the accompanying unaudited consolidated financial
statements in conformity with U.S. GAAP requires management to make
estimates and assumptions (including normal, recurring accruals) that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. The accompanying
unaudited interim consolidated financial statements reflect all
adjustments necessary in the opinion of management to present fairly the
consolidated financial position of the Company and its consolidated
results of operations and cash flows for the periods presented. All
significant intercompany transactions and balances except those with other
discontinued operations (see Note 6) have been eliminated in
consolidation. These statements should be read in conjunction with the
audited consolidated financial statements of the Company for the year
ended December 31, 2003. The results of operations for the three months
ended March 31, 2004 are not necessarily indicative of the results to be
expected for the full year.
The terms "first quarter 2004" and "first quarter 2003" refer to the three
months ended March 31, 2004 and 2003, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
2) PURCHASE OF MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
In March 2004, a wholly owned subsidiary of the Company, designated by the
Holding Company, acquired 8.16 million Alliance Units at the aggregated
market price of $308.7 million from SCB Inc. and SCB Partners, Inc. under
a preexisting agreement. As a result of the transaction, the Company
recorded goodwill of $162.1 million and other intangible assets of $20.0
million. Other intangible assets are amortized on a straight-line basis
over their estimated useful lives of twenty years. Upon completion of this
transaction, the Company's economic interest in Alliance increased to
approximately 45.6% and, when combined with the Holding Company, their
total economic interest in Alliance increased to approximately 58.4%.
3) ACCOUNTING CHANGES
At March 31, 2004, the Company completed its transition to the
consolidation and disclosure requirements of FIN No. 46(R),
"Consolidation of Variable Interest Entities, Revised".
At March 31, 2004, the Insurance Group's General Account held $99.1
million of investment assets issued by VIEs and determined to be
significant variable interests under FIN No. 46(R). As reported in
the consolidated balance sheet, these investments included $45.5 million
of fixed maturities (collateralized debt and loan obligations) and $53.6
million of other equity investments (principally, investment limited
partnership interests) and are subject to ongoing review for impairment
in value. These VIEs do not require consolidation because management has
determined that the Insurance Group is not the primary beneficiary. These
variable interests and approximately $17.1 million of funding commitments
to the investment limited partnerships at March 31, 2004 represent the
Insurance Group's maximum exposure to loss from its direct involvement
with the VIEs. The Insurance Group has no further economic interest in
these VIEs in the form of related guarantees, commitments, derivatives,
credit enhancements or similar instruments and obligations.
Management of Alliance has reviewed its investment management agreements
and its investments in and other financial arrangements with certain
entities that hold client assets under management to determine the
entities that Alliance is required to consolidate under FIN No. 46(R).
These included the Offshore Funds, hedge funds, structured products, group
trusts and joint ventures.
-7-
As a result of its review, Alliance consolidated an investment in a joint
venture and two of the joint venture's mezzanine funds as of March 31,
2004. The joint venture and mezzanine funds have client assets under
management totaling approximately $211 million. Alliance's maximum
exposure to loss is limited to its investments and prospective investment
management fees earned from these entities. Consolidation of these
entities resulted in increases in the Company's assets, principally
investments, and in its liabilities, principally minority interest in
consolidated entities, of approximately $158.1 million, respectively, at
March 31, 2004.
Alliance has significant variable interests in certain other VIEs with
approximately $1.0 billion in client assets under management. However,
these VIEs do not require consolidation because management has determined
that Alliance is not the primary beneficiary. Alliance's maximum exposure
to loss in these entities is limited to its nominal investments in and
prospective investment management fees earned from these entities.
Alliance derives no direct benefit from client assets under management of
these entities other than investment management fees and cannot utilize
those assets in its operations.
Effective January 1, 2004, the Company adopted SOP 03-1, "Accounting and
Reporting by Insurance Enterprises for Certain Nontraditional
Long-Duration Contracts and for Separate Accounts". SOP 03-1 required 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 fixed rate investment options
available in certain variable annuity contracts issued by Equitable Life,
(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
interest-sensitive life policies.
The adoption of SOP 03-1 required changes in several of the Company's
accounting policies relating to separate account assets and liabilities.
The Company now reports the General Account's interests in separate
accounts as trading account securities within Other equity investments in
the consolidated balance sheet; prior to the, adoption of SOP 03-1, such
interests were included in Separate Accounts' assets. Also, the assets and
liabilities of two Separate Accounts are now presented and accounted for
as General Account assets and liabilities, effective January 1, 2004.
Investment assets in these Separate Accounts principally consist of fixed
maturities that are classified as available for sale in the accompanying
2004 consolidated financial statements. These two Separate Accounts hold
assets and liabilities associated with market value adjusted fixed rate
investment options available in certain variable annuity contracts. In
addition, liabilities associated with the market value adjustment feature
are now reported at the accrued account balance. Prior to the adoption of
SOP 03-1, such liabilities had been reported at market adjusted value.
Prior to the adoption of SOP 03-1, the liabilities for group pension
participating contracts were adjusted only for changes in the fair value
of certain related investment assets that were reported at fair value in
the balance sheet (including fixed maturities and equity securities
classified as available for sale, but not equity real estate nor mortgage
loans) with changes in the liabilities recorded directly in accumulated
other comprehensive income to offset the unrealized gains and losses on
the related assets. SOP 03-1 also required an adjustment to the
liabilities for group pension participating contracts to reflect the fair
value of all the assets on which those contracts' returns are based,
regardless of whether those assets are reported at fair value in the
balance sheet. Changes in the liability related to fluctuations in asset
fair values are now reported as Interest credited to policyholders'
account balances in the consolidated statements of earnings.
In addition, the adoption of SOP 03-1 resulted in a change in the method
of determining liabilities associated with the no lapse guarantee feature
contained in variable and interest-sensitive life contracts. While both
the Company's previous method of establishing the no lapse guarantee
reserve and the SOP 03-1 method are based on accumulation of a portion of
the charges for the no lapse guarantee feature, SOP 03-1 specifies a
different approach for identifying the portion of the fee to be accrued
and establishing the related reserve.
The adoption of SOP 03-1 as of January 1, 2004 resulted in a decrease in
first quarter 2004 net earnings of $2.9 million and an increase in other
comprehensive income of $12.4 million related to the cumulative effect of
the required changes in accounting. 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.
-8-
4) INVESTMENTS
Investment valuation allowances for mortgage loans and equity real estate
and changes thereto follow:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2004 2003
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(IN MILLIONS)
Balances, beginning of year............................................... $ 20.5 $ 55.0
Additions charged to income............................................... .5 3.0
Deductions for writedowns and asset dispositions.......................... (.7) (1.7)
--------------- ---------------
Balances, End of Period................................................... $ 20.3 $ 56.3
=============== ===============
Balances, end of period comprise:
Mortgage loans on real estate........................................... $ 18.2 $ 22.3
Equity real estate...................................................... 2.1 34.0
--------------- ---------------
Total..................................................................... $ 20.3 $ 56.3
=============== ===============
For the first quarters of 2004 and 2003, investment income is shown net of
investment expenses of $43.3 million and $51.6 million, respectively.
As of March 31, 2004 and December 31, 2003, fixed maturities classified as
available for sale had amortized costs of $27,761.2 million and $27,151.6
million. Also at March 31, 2004 and December 31, 2003, respectively, Other
equity investments included the General Account's investments in Separate
Accounts and other trading securities having carrying values of $124.7
million and $1.0 million and costs of $122.4 million and $1.9 million and
other equity securities with carrying values of $15.5 million and $12.6
million and costs of $12.9 million and $11.6 million.
In the first quarters of 2004 and 2003, respectively, net unrealized and
realized holding gains on trading account equity securities of $3.3
million and $.1 million were included in Net investment income in the
consolidated statements of earnings.
For the first quarters of 2004 and 2003, proceeds received on sales of
fixed maturities classified as available for sale amounted to $1,092.3 and
$1,165.5 million, respectively. Gross gains of $29.9 million and $35.1
million and gross losses of $1.6 million and $21.5 million were realized
on these sales for the first quarters of 2004 and 2003, respectively.
Unrealized net investment gains related to fixed maturities classified as
available for sale increased by $628.1 million during the first three
months of 2004, resulting in a balance of $2,572.0 million at March 31,
2004.
Impaired mortgage loans along with the related investment valuation
allowances for losses follow:
MARCH 31, December 31,
2004 2003
--------------- -----------------
(IN MILLIONS)
Impaired mortgage loans with investment valuation allowances............ $ 148.0 $ 149.4
Impaired mortgage loans without investment valuation allowances......... 28.0 29.1
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 176.0 178.5
Investment valuation allowances......................................... (18.2) (18.8)
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 157.8 $ 159.7
=============== =================
During the first quarters of 2004 and 2003, respectively, the Company's
average recorded investment in impaired mortgage loans was $178.2 million
and $145.6 million. Interest income recognized on these impaired mortgage
loans totaled $2.6 million and $2.4 million for the first quarters of 2004
and 2003, 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
-9-
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
March 31, 2004 and December 31, 2003, respectively, the carrying values of
mortgage loans on real estate that had been classified as nonaccrual loans
were $141.6 million and $143.2 million.
5) CLOSED BLOCK
The excess of Closed Block liabilities over Closed Block assets (adjusted
to exclude the impact of related amounts in accumulated other
comprehensive income) represents the expected maximum future post-tax
earnings from the Closed Block which would be recognized in income from
continuing operations over the period the policies and contracts in the
Closed Block remain in force. As of January 1, 2001, 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.
-10-
Summarized financial information for the Closed Block follows:
MARCH 31, December 31,
2004 2003
----------------- -----------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances and other.... $ 8,936.9 $ 8,972.1
Policyholder dividend obligation..................................... 396.1 242.1
Other liabilities.................................................... 159.1 129.5
----------------- -----------------
Total Closed Block liabilities....................................... 9,492.1 9,343.7
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $5,077.5 and $5,061.0).......................... 5,560.4 5,428.5
Mortgage loans on real estate........................................ 1,257.6 1,297.6
Policy loans......................................................... 1,374.3 1,384.5
Cash and other invested assets....................................... 240.7 143.3
Other assets......................................................... 184.9 199.2
----------------- -----------------
Total assets designated to the Closed Block......................... 8,617.9 8,453.1
----------------- -----------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................. 874.2 890.6
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred income tax
expense of $30.8 and $43.9 and policyholder dividend obligation
of $396.1 and $242.1............................................ 57.2 81.6
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities............................................ $ 931.4 $ 972.2
================= =================
Closed Block revenues and expenses follow:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2004 2003
---------------- ---------------
(IN MILLIONS)
REVENUES:
Premiums and other income................................................ $ 122.6 $ 131.6
Investment income (net of investment expenses of $.2 and $1.7)........... 141.8 141.5
Investment gains (losses), net........................................... 13.1 (18.8)
--------------- ---------------
Total revenues........................................................... 277.5 254.3
--------------- ---------------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits and dividends.................................... 213.3 233.3
Other operating costs and expenses....................................... 1.1 1.2
--------------- ----------------
Total benefits and other deductions...................................... 214.4 234.5
--------------- ----------------
Net revenues before income tax expense................................... 63.1 19.8
Income tax expense....................................................... (22.3) (7.3)
--------------- ----------------
Net Revenues............................................................. $ 40.8 $ 12.5
=============== ================
-11-
Reconciliations of the policyholder dividend obligation follow:
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2004 2003
---------------- ----------------
(IN MILLIONS)
Balance at beginning of year............................................ $ 242.1 $ 213.3
Unrealized investment gains............................................. 154.0 34.1
---------------- ----------------
Balance at End of Period................................................ $ 396.1 $ 247.4
================ ================
6) OTHER DISCONTINUED OPERATIONS
Summarized financial information for Other Discontinued Operations
follows:
MARCH 31, December 31,
2004 2003
----------------- -----------------
(IN MILLIONS)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $634.9 and $644.7).............................. $ 715.5 $ 716.4
Equity real estate................................................... 195.6 198.2
Mortgage loans on real estate........................................ 62.0 63.9
Other equity investments............................................. 7.3 7.5
Other invested assets................................................ .2 .2
----------------- -----------------
Total investments.................................................. 980.6 986.2
Cash and cash equivalents............................................ 62.5 63.0
Other assets......................................................... 112.9 110.9
----------------- -----------------
Total Assets......................................................... $ 1,156.0 $ 1,160.1
================= =================
Policyholders liabilities............................................ $ 869.3 $ 880.3
Allowance for future losses.......................................... 176.5 173.4
Other liabilities.................................................... 110.2 106.4
----------------- -----------------
Total Liabilities.................................................... $ 1,156.0 $ 1,160.1
================= =================
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2004 2003
----------------- -----------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Investment income (net of investment expenses of $4.3 and $6.4)........... $ 17.3 $ 18.9
Investment gains, net..................................................... 2.5 .6
----------------- -----------------
Total revenues............................................................ 19.8 19.5
Benefits and other deductions............................................. 25.7 23.0
Losses charged to allowance for future losses............................. (5.9) (3.5)
----------------- -----------------
Pre-tax results from operations........................................... - -
Pre-tax earnings from releasing the allowance for future losses........... 3.2 -
Income tax expense........................................................ (1.1) -
----------------- -----------------
Income from Other Discontinued Operations................................. $ 2.1 $ -
================= =================
The Company's quarterly process for evaluating the allowance for future
losses applies the current period's results of Other Discontinued
Operations against the allowance, re-estimates future losses and adjusts
the allowance, if appropriate. These updated assumptions and estimates
resulted in a strengthening or release of allowance in each of the periods
presented above.
-12-
Management believes the allowance for future losses at March 31, 2004 is
adequate to provide for all future losses; however, the determination of
the allowance involves numerous estimates and subjective judgments
regarding the expected performance of Discontinued Operations Investment
Assets. There can be no assurance the losses provided for will not differ
from the losses ultimately realized. To the extent actual results or
future projections of discontinued operations differ from management's
current estimates and assumptions underlying the allowance for future
losses, the difference would be reflected in the consolidated statements
of earnings in discontinued operations. In particular, to the extent
income, sales proceeds and holding periods for equity real estate differ
from management's previous assumptions, periodic adjustments to the loss
allowance are likely to result.
Valuation allowances of $2.4 million and $2.5 million on mortgage loans on
real estate were held at March 31, 2004 and December 31, 2003,
respectively.
7) GMDB, GMIB, AND NO LAPSE GUARANTEE FEATURES
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 2004:
GMDB GMIB TOTAL
--------------- ---------------- ----------------
(IN MILLIONS)
Balance at December 31, 2003....................... $ 69.3 $ 85.6 $ 154.9
Paid guarantee benefits.......................... (12.4) - (12.4)
Other changes in reserve......................... 8.3 13.7 22.0
--------------- ---------------- ----------------
Balance at March 31, 2004.......................... $ 65.2 $ 99.3 $ 164.5
=============== ================ ================
Related GMDB reinsurance ceded amounts were:
GMDB
--------------------
(IN MILLIONS)
Balance at December 31, 2003....................... $ 17.2
Paid guarantee benefits ceded.................... (3.1)
Other changes in reserve......................... 1.2
--------------------
Balance at March 31, 2004.......................... $ 15.3
====================
The GMIB reinsurance contracts are considered derivatives and are reported
at fair value.
The March 31, 2004 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:
-13-
RETURN
OF
PREMIUM RATCHET ROLL-UP COMBO TOTAL
-------------- ------------- ------------- -------------- --------------
(DOLLARS IN MILLIONS)
GMDB:
Account value (1)................... $ 27,700 $ 5,549 $ 8,151 $ 7,271 $ 48,671
Net amount at risk, gross........... $ 1,690 $ 850 $ 2,024 $ 19 $ 4,583
Net amount at risk, net of amounts
reinsured......................... $ 1,686 $ 569 $ 1,226 $ 19 $ 3,500
Average attained age of
contractholders................... 49.6 59.7 61.9 59.9 51.8
Percentage of contractholders
over age 70....................... 7.2 21.1 26.4 20.2 10.4
Range of guaranteed minimum return
rates............................. N/A N/A 3%-6% 3%-6% N/A
GMIB:
Account value (2)................... N/A N/A $ 5,809 $ 10,010 $ 15,819
Net amount at risk, gross........... N/A N/A $ 455 $ -- $ 455
Net amount at risk, net of amounts
reinsured......................... N/A N/A $ 113 $ -- $ 113
Weighted average years remaining
until earliest annuitization...... N/A N/A 4.4 9.7 7.3
Range of guaranteed minimum return
rates............................. N/A N/A 3%-6% 3%-6% 3%-6%
(1) Included General Account balances of $11,327 million, $200 million,
$156 million and $370 million, respectively, for a total of $12,053
million.
(2) Included General Account balances of $2 million and $543 million,
respectively, for a total of $545 million.
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(R) series of
annuity products sold beginning April 2002. At March 31, 2004, contracts
with these features had a total account value and net amount at risk of
$14,817 million and $27 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.
The aggregate fair value of assets, by major investment fund option, held
by Separate Accounts that are subject to GMDB and GMIB benefits and
guarantees, were as follows:
-14-
INVESTMENT IN VARIABLE INSURANCE TRUST MUTUAL FUNDS
MARCH 31, December 31,
---------------- ------------------
2004 2003
---------------- ------------------
(IN MILLIONS)
GMDB:
Equity............................................................... $ 27,948.0 $ 26,159.0
Fixed income......................................................... 4,001.0 3,815.0
Balanced............................................................. 3,206.0 2,761.0
Other................................................................ 1,464.0 1,497.0
---------------- ------------------
Total................................................................ 36,619.0 34,232.0
================ ==================
GMIB:
Equity............................................................... $ 11,083.0 $ 10,025.0
Fixed income......................................................... 2,446.0 2,319.0
Balanced............................................................. 1,025.0 725.0
Other................................................................ 720.0 711.0
---------------- ------------------
Total................................................................ 15,274.0 13,780.0
================ ==================
Variable and Interest-Sensitive Life Insurance Policies - No Lapse
Guarantee
The no lapse guarantee feature contained in variable and
interest-sensitive life insurance policies keeps them in force in
situations where the policy value is not sufficient to cover monthly
charges then due. The no lapse guarantee remains in effect so long as
the policy meets a contractually specified premium funding test and
certain other requirements.
The following table summarizes the no lapse guarantee liabilities
reflected in the General Account in future policy benefits and other
policyholders liabilities, and related reinsurance ceded:
DIRECT REINSURANCE
LIABILITY CEDED NET
---------------- ----------------- -----------------
(IN MILLIONS)
Balance at December 31, 2003....................... $ 37.4 $ - $ 37.4
Impact of adoption of SOP 03-1................... (23.4) (1.7) (25.1)
Paid guarantee benefits.......................... - - -
Other changes in reserve......................... 1.3 (.6) .7
---------------- ----------------- -----------------
Balance at March 31, 2004.......................... $ 15.3 $ (2.3) $ 13.0
================ ================= =================
8) 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.
-15-
Components of net periodic pension expense (credit) follow:
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2004 2003
---------------- ------------------
(IN MILLIONS)
Service cost............................................................ $ 9.4 $ 8.6
Interest cost on projected benefit obligation........................... 30.5 31.4
Expected return on assets............................................... (42.1) (43.7)
Net amortization and deferrals.......................................... 18.7 10.5
---------------- ------------------
Net Periodic Pension Expense ........................................... $ 16.5 $ 6.8
================ ==================
9) STOCK APPRECIATION RIGHTS
Following completion of the merger of AXA Merger Corp. with and into the
Holding Company, certain employees exchanged AXA ADR options for tandem
Stock Appreciation Rights 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. For first quarter
2004, the Company recorded a decrease in the Stock Appreciation Rights
liability of $2.0 million reflecting the variable accounting for Stock
Appreciation Rights, based on the change in the market value of AXA ADRs
for the period ended March 31, 2004. At March 31, 2004, the Stock
Appreciation Rights liability was $10.0 million.
10) INCOME TAXES
Income taxes for interim periods have been computed using an estimated
annual effective tax rate. This rate is revised, if necessary, at the end
of each successive interim period to reflect the current estimate of the
annual effective tax rate.
11) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in the Company's
Notes to Consolidated Financial Statements for the year ended December 31,
2003, except as described below:
In FISCHEL, in April 2004, the District Court denied Equitable Life's
motion for reconsideration. In May 2004, the Ninth Circuit entered an
order directing the District Court to award plaintiffs' counsel certain of
their attorneys' fees.
In AMERICAN NATIONAL BANK, in April 2004, Emerald filed a motion for
summary judgment on liability. Also in April 2004, Emerald filed a motion
to amend its complaint to attempt to cure a defect in diversity
jurisdiction. In April 2004, Equitable Life filed its opposition to this
motion and Emerald has filed its reply.
In the MONY STOCKHOLDER LITIGATION, on April 6, 2004, the Delaware Court
of Chancery heard plaintiffs' second preliminary injunction motion,
brought on the basis of the new allegations in their second amended
complaint. In their motion, plaintiffs sought an order (i) enjoining AXA
Financial and MONY's directors and officers from voting their shares at
the May 18, 2004 MONY Shareholder Meeting, (ii) compelling additional
disclosure by MONY, and (iii) enjoining MONY from counting the votes cast
by shareholders on proxy cards submitted in connection with the original
February 24, 2004 Shareholder Meeting date (the "original proxies"). On
April 9, 2004, Vice Chancellor Lamb denied plaintiffs' motion and granted
summary judgment to defendants on the issue regarding the legal validity
of the original proxies. On April 14, 2004, plaintiffs filed a motion to
expedite the proceedings and to schedule a hearing on a third motion for a
preliminary injunction regarding the use by MONY of the original proxies.
The court has not ruled on plaintiffs' motion to expedite proceedings, and
has not scheduled a hearing on the third motion for a preliminary
injunction.
In April 2004, a purported nationwide class action lawsuit was filed in
the Circuit Court for Madison County, Illinois entitled MATTHEW WIGGENHORN
V. EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES. The lawsuit
alleges that Equitable Life uses stale prices of the foreign securities
within the investment divisions of its variable insurance products. The
complaint further alleges that Equitable Life's use of stale pricing
diluted the returns of the purported class. The complaint also alleges
that Equitable Life breached its fiduciary duty to the class by allowing
market timing in general within Equitable Life's variable insurance
products, thereby diluting the returns of the class. The lawsuit asserts
causes of action for negligence, gross negligence, breach of contract, and
breach of fiduciary duty and seeks unspecified compensatory and punitive
damages, plus prejudgment interest, attorneys' fees and costs.
Although the outcome of litigation cannot be predicted with certainty, the
Company's management believes that, subject to the foregoing, the ultimate
resolution of the matters described above should not have a material
adverse effect on the consolidated financial position of the Company. The
Company's management cannot make an estimate of
-16-
loss, if any, or predict whether or not such litigations will have a
material adverse effect on the Company's consolidated results of
operations in any particular period.
ALLIANCE LITIGATIONS
In BENAK, plaintiffs have not filed a notice of appeal.
In the SEBI case, in March 2004, SEBI issued a final order against Mr.
Arora barring him from dealing directly or indirectly in the Indian
securities markets for a period of five years from August 9, 2003.
Alliance understands that Mr. Arora intends to appeal the order.
In the MUTUAL FUND TRADING LITIGATIONS, three additional lawsuits making
factual allegations generally similar to those in the HINDO COMPLAINT have
been filed against Alliance and certain other defendants. As a result,
between October 3 and April 29, 2004, forty-three lawsuits, in addition to
the HINDO COMPLAINT, have been filed. The three new lawsuits are as
follows:
Federal Court Class Actions: Two of the three new lawsuits have been
brought as class actions filed in Federal court, increasing the total
number of such lawsuits to twenty-seven (twenty-three 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 Investment
Advisers Act, the Investment Company Act and common law. All of these
lawsuits are brought on behalf of shareholders of AllianceBernstein
Funds, except four. Of these four, one was brought on behalf of a
unitholder of Alliance Holding and three 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 The Employee Retirement Income Security
Act of 1974, as amended ("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 three of these
cases.
State Court Derivative Actions: The third new lawsuit has been
brought as a derivative action in state court, increasing the total
number of such actions to four (one in the Supreme Court of the State
of New York, County of New York and three 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. All of the Massachusetts actions attempt
to name AXA Financial.
All of these lawsuits seek an unspecified amount of damages. All of the
Federal actions discussed above as well as those described in Note 18 of
Notes to Consolidated Financial Statements contained in the 2003 Form 10-K
(i.e., the HINDO COMPLAINT, Federal Court Class Actions and Federal Court
Derivative Actions) were the subject of a petition of 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 February 20, 2004, the MDL Panel
transferred all of the actions to the United States District Court for the
District of Maryland ("Mutual Fund MDL"). On April 2, 2004, a case
management conference was held in the Mutual Fund MDL before the District
of Maryland. At the conference, the court requested that consolidated
complaints be filed by May 28, 2004. The court also scheduled oral
arguments on motions to dismiss the consolidated complaints for October
24, 2004, but requested that the parties agree to a briefing schedule for
these motions.
Defendants have removed each of the State Court Representative Actions and
the State Court Individual Action (discussed in Note 18 of Notes to
Consolidated Financial Statements contained in the 2003 Form 10-K), and
thereafter submitted the actions to the MDL Panel in a notice of tag-along
actions. On March 3, 2004 and April 6, 2004, the MDL Panel issued orders
conditionally transferring these cases and numerous others to the District
of Maryland. One of the plaintiffs in the State Court Representative
Actions is opposing transfer, while the other two plaintiffs in these
actions and the plaintiff in the State Court Individual Action have waived
any objections to transfer. The plaintiffs in three of these four
-17-
actions have moved to remand the actions back to state court. Where
defendants have responded to the complaints in these actions, defendants
have moved to stay proceedings pending transfer by the MDL Panel. Stays
have been granted in one of the State Court Representative Actions and in
the State Court Individual Action.
Alliance recorded charges to income totaling $330 million in the second
half of 2003 in connection with establishing a $250 million restitution
fund, as described in Note 16 of Notes to Consolidated Financial
Statements contained in the 2003 Form 10-K. During first quarter 2004,
Alliance paid $285 million related to these matters and has cumulatively
paid $291 million. Alliance's management, however, cannot determine at
this time the eventual outcome, timing or impact of this matter.
Accordingly, it is possible that additional charges in the future may be
required.
With respect to certain other matters discussed in Note 16 of Notes to
Consolidated Financial Statements contained in the 2003 Form 10-K under
"Alliance Litigations" (other than those referred to in the preceding
paragraphs and those related to the SEBI case), management of Alliance is
unable to estimate the impact, if any, that the outcome of these matters
may have on Alliance's results of operations or financial condition and
AXA Financial's management is unable to estimate the impact, if any, that
the outcome of these matters may have on AXA Financial'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.
12) BUSINESS SEGMENT INFORMATION
The following tables reconcile segment revenues and earnings from
continuing operations before Federal income taxes and minority interest to
total revenues and earnings as reported on the consolidated statements of
earnings and segment assets to total assets on the consolidated balance
sheets, respectively.
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
2004 2003
------------------ ------------------
(IN MILLIONS)
SEGMENT REVENUES:
Insurance......................................................... $ 1,398.6 $ 1,089.4
Investment Services............................................... 745.9 602.6
Consolidation/elimination......................................... (20.3) (17.3)
------------------ ------------------
Total Revenues.................................................... $ 2,124.2 $ 1,674.7
================== ==================
SEGMENT EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST:
Insurance......................................................... $ 272.2 $ 22.3
Investment Services............................................... 174.2 103.6
------------------ ------------------
Total Earnings from Continuing Operations before
Income Taxes and Minority Interest............................ $ 446.4 $ 125.9
================== ==================
-18-
MARCH 31, December 31,
2004 2003
--------------- -----------------
(IN MILLIONS)
ASSETS:
Insurance......................................................... $ 102,022.2 $ 98,822.1
Investment Services............................................... 16,257.8 15,410.1
Consolidation/elimination......................................... (26.4) 33.1
------------------ ------------------
Total Assets...................................................... $ 118,253.6 $ 114,265.3
================== ==================
13) 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 $15.4 million and $16.9 million,
respectively, for first quarter 2004 and 2003.
The Company paid $169.6 million and $159.4 million, respectively, of
commissions and fees to AXA Distribution and its subsidiaries for sales of
insurance products for first quarter 2004 and 2003. The Company charged
AXA Distribution's subsidiaries $71.2 million and $73.9 million,
respectively, for their applicable share of operating expenses for first
quarter 2004 and 2003, pursuant to the Agreements for Services.
14) STOCK-BASED COMPENSATION
The Company accounts 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 the Holding Company's Stock Incentive 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 those
plans been determined based on SFAS No.123's fair value based method:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------------
2004 2003
------------------ -------------------
(IN MILLIONS)
Net earnings as reported...................................... $ 226.6 $ 35.7
Less: Total stock-based employee compensation expense
determined under fair value method for all awards, net of
income tax benefit........................................ (7.4) (7.7)
------------------ -------------------
Pro Forma Net Earnings........................................ $ 219.2 $ 28.0
================== ===================
-19-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is omitted pursuant to General Instruction
H of Form 10-Q. The management narrative for the Company that follows should be
read in conjunction with the Consolidated Financial Statements and the related
Notes to Consolidated Financial Statements included elsewhere herein, and with
the management narrative found in the Management's Discussion and Analysis
("MD&A") section included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2003 ("2003 Form 10-K").
CONSOLIDATED RESULTS OF OPERATIONS
FIRST QUARTER 2004 COMPARED TO FIRST QUARTER 2003
Earnings from continuing operations before income taxes and minority interest
were $446.4 million for first quarter 2004, an increase of $320.5 million from
the year earlier quarter. The Insurance and the Investment Services segments'
earnings increased $249.9 million and $70.6 million, respectively. In first
quarter 2004, the Company recorded a $2.9 million charge (net of related income
taxes of $1.6 million) for the cumulative effect of the January 1, 2004 adoption
of SOP 03-1. Net earnings for the Company totaled $226.6 million for first
quarter 2004, $190.9 million higher than the $35.7 million reported for the 2003
quarter.
Revenues. In first quarter 2004, total revenues increased $449.5 million to
$2.12 billion as revenues for both the Insurance and Investment Services
segments increased.
Premiums decreased by $8.9 million to $234.8 million for first quarter 2004,
principally 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. Policy fee income was $372.6 million, $56.6 million higher than first
quarter 2003 primarily due to higher average Separate Account balances resulting
from positive net cash flows and market appreciation.
Net investment income increased $66.1 million to $652.2 million primarily as a
result of higher income on fixed maturities and other equity investments of
$40.8 million and $42.3 million, respectively, partially offset by $11.3 million
lower income on mortgages in the Financial Advisory/Insurance segment's General
Account portfolio. The increase in fixed maturities income resulted from higher
balances due to increased sales of General Account products and higher
prepayment penalties partially offset by lower yields due to lower reinvestment
rates. The higher income from other equity investments was related to
improvement in the equity markets. The mortgage income decrease was principally
due to a smaller asset base.
Investment gains totaled $44.6 million in first quarter 2004, as compared to
$125.0 million of investment losses in first quarter 2003. The improvement in
the 2004 quarter reflected the significant decline in writedowns on fixed
maturities, $5.1 million in first quarter 2004 as compared to $137.1 million in
first quarter 2003 and $21.6 million higher gains from sales of fixed maturity
securities. The writedowns in the 2003 period were primarily on securities in
the airline industry as well as other specific securities.
Commissions, fees and other income increased $169.6 million to $823.5 million
with higher income in both the Investment Services and Insurance segments. The
$141.2 million Investment Services segment increase was principally due to the
$98.7 million increase in investment advisory and services fees and the $21.5
million increase in institutional research services revenues at Alliance. The
23.9% increase to $511.0 million in investment advisory and services fees was
primarily due to an approximately 25.7% increase in average assets under
management ("AUM") resulting from market appreciation partially offset by net
asset outflows and slightly lower performance fees in the 2004 quarter.
Alliance's higher retail investment advisory and services fees were also offset
by approximately $18 million in revenue reductions as a result of the weighted
average reductions in advisory fees implemented for Alliance-sponsored U.S.
long-term open-end retail mutual funds in connection with the settlement of
mutual fund market timing matters. Institutional research revenues increased to
$79.4 million in first quarter 2004 due to higher market share of addressable
(non-program trading) NYSE volume and higher revenues from growth in UK
operations. In addition, there was a $16.3 million increase in distribution
revenues, primarily due to higher average daily mutual fund AUM. The Insurance
segment increase was due to higher gross investment management fees received
from EQAT and VIP Trust due to a higher asset base.
-20-
Benefits and Other Deductions. Total benefits and other deductions increased
$129.0 million with increases of $59.3 million and $72.7 million reported in the
Insurance and the Investment Services segments, respectively.
Policyholders benefits were $453.3 million in first quarter 2004, a $30.8
million decrease from first quarter 2003. The decrease principally resulted from
lower reinsurance assumed claims in first quarter 2004 and lower policyholder
dividends due to reductions in the dividend scale.
The $36.2 million increase in interest credited to policyholders' account
balances to $272.0 million in first quarter 2004 was principally due to higher
account balances and the pass through of changes in the fair value of the
investment asset portfolio supporting group pension participating annuity
contracts that resulted from the implementation of SOP 03-1, partially offset by
the impact of lower crediting rates.
Total compensation and benefits increased $50.7 million to $371.2 million in
first quarter 2004 principally due to a $55.5 million increase for the
Investment Services segment. This increase was due to higher incentive
compensation from higher earnings and higher commissions reflecting higher sales
in institutional research services and Alliance's private client distribution
channel, as well as the impact of new business activity in the second half of
2003 in institutional investment management.
For first quarter 2004, commissions in the Insurance segment totaled $245.4
million, an increase of $11.3 million from first quarter 2003, as a higher
commission rate on renewal life premiums in the 2004 period and higher
commissions on higher life product sales were partially offset by declines in
first year annuity commissions.
There was an $8.0 million increase in distribution plan payments by Alliance due
to higher average mutual fund AUM. Amortization of deferred sales commissions
was $48.5 million, $4.5 million lower than in the year earlier period.
Interest expense was virtually unchanged, totaling $21.4 million and $20.5
million in the first quarters of 2004 and 2003, respectively.
DAC amortization increased to $122.7 million in first quarter 2004, up $35.5
million. The increase in amortization was principally due to higher margins in
products that are DAC reactive.
DAC capitalization totaled $226.8 million; the increase of $4.6 million from
$222.2 million reported in first quarter 2003 primarily resulted from higher
commissions and deferrable operating expenses.
The $4.9 million increase in rent expense to $46.5 million in first quarter 2004
was due to a $7.0 million increase for the Insurance segment partially offset by
a $2.1 million decline in the Investment Services segment. Amortization of
intangible assets remained level from first quarter 2003 to first quarter 2004.
Both segments contributed to the $21.3 million increase in other operating costs
and expenses to $220.9 million in the current year period. The $8.6 million
increase in the Insurance segment was principally due to higher sub-advisory
fees at EQAT and VIP Trust due to higher average asset balances. The Investment
Services segment increase resulted from higher travel and entertainment costs,
as well as unrealized foreign currency losses and higher legal fees for
litigation.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products for first quarter 2004 were $3.33 billion, basically unchanged from the
2003 quarter as higher first year individual life sales were offset by lower
reinsurance assumed premiums. Premiums and deposits on the annuity lines
remained relatively flat as increases in the retail channel offset decreases in
the wholesale channel.
Surrenders and Withdrawals. Surrenders and withdrawals were up, from $1.15
billion in first quarter 2003 to $1.53 billion for first quarter 2004 with
increases of $294.4 million and $90.3 million reported for individual annuities
and the variable and interest-sensitive life insurance line, partially offset by
a $5.2 million decline in traditional life surrenders and withdrawals. Though
the dollar amount of annuity surrenders and withdrawals increased because of
higher aggregate account balances as a result of significant net sales and very
positive market performance in 2003, the annualized annuities surrender rate
declined to 8.3 % in first quarter 2004 from 8.9% in first quarter 2003. The
individual life surrender rates increased to 5.5% from 4.7% for the same
respective periods. The individual life surrender rate increase in first quarter
2004 was principally due to the surrender of a single large COLI contract.
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When the effect of this surrender is excluded, the first quarter 2004 life
surrender rate was 4.4%. The trends in surrender and withdrawal rates
described above continue to fall within the range of expected experience.
Assets Under Management. Breakdowns of assets under management follow:
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
MARCH 31,
-----------------------------------
2004 2003
--------------- ---------------
Third party..................................................................... $ 425,214 $ 335,370
Equitable Life General Account, the Holding Company
and its other affiliates..................................................... 40,055 39,008
Separate Accounts (1)........................................................... 57,387 39,632
--------------- ---------------
Total Assets Under Management................................................... $ 522,656 $ 414,010
=============== ===============
(1) Includes $784.4 million of Separate Account assets reported as General
Account assets in the consolidated balance sheet at March 31, 2004, as
required by the adoption of SOP 03-1 at January 1, 2004.
Third party assets under management at March 31, 2004 increased $89.84 billion
primarily due to increases at Alliance. Equitable Life General Account, the
Holding Company and its other affiliates' assets under management increased
$1.05 billion from first quarter 2003 totals. The increase in Separate Account
assets under management resulted from market appreciation and net new deposits.
Alliance assets under management at the end of first quarter 2004 totaled
$483.62 billion as compared to $386.3 billion at March 31, 2003 as a result of
significant market appreciation due to global equity market increases. Non-US
clients accounted for 20.8% of the March 31, 2004 total.
LIQUIDITY AND CAPITAL RESOURCES
Equitable Life. In first quarter 2004, Equitable Life amended the terms of its
$350.0 million credit facility to extend its March 31, 2004 maturity date to
October 15, 2004; no other agreement terms were affected. At March 31, 2004, no
amounts were outstanding under Equitable Life's commercial paper program or its
revolving credit facility.
Alliance. Cash flows included inflows of $28.4 million representing proceeds
from options for Alliance Units exercised that were more than offset by
purchases of Alliance Units totaling $38.4 million by subsidiaries of Alliance
to fund deferred compensation plans. During first quarter 2004, available cash
flow for cash distributions from Alliance totaled $76.7 million, compared to
$108.7 million in the 2003 quarter. As a result of charges for mutual fund
matters and legal proceedings recorded in the second half of 2003, Alliance made
no cash distributions in first quarter 2004. During first quarter 2004, Alliance
paid $285 million related to these matters and has cumulatively paid $291
million.
At March 31, 2004, Alliance had $6.5 million of short-term debt outstanding;
there were no amounts outstanding under either its commercial paper program or
its revolving credit facility.
FORWARD-LOOKING STATEMENTS
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 the Private Securities
Litigation Reform Act of 1995, and assumes no duty to update any forward-looking
statement. Forward-looking statements are based on management's expectations and
beliefs concerning future developments and their potential effects and are
subject to risks and uncertainties. Actual
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results could differ materially from those anticipated by forward-looking
statements due to a number of important factors including those discussed
elsewhere in this report and in the Company's other public filings, press
releases, oral presentations and discussions. The following discussion
highlights some of the more important risk and other factors that could cause
such differences and/or, if realized, could have a material adverse effect on
the Company's consolidated financial position and/or results of operations.
Market Risk. The Company's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. The primary market risk exposures result from interest rate
fluctuations, equity price movements and changes in credit quality. The nature
of each of these risks is discussed under the caption "Quantitative and
Qualitative Disclosures About Market Risk" and in Note 14 of Notes to
Consolidated Financial Statements, both contained in the 2003 Form 10-K.
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 market 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 existing
and additional channels; the financial and claims-paying ratings of Equitable
Life; its reputation and visibility in the market place; its ability to develop,
distribute and administer competitive products and services in a timely,
cost-effective manner; its ability to provide effective financial planning
services that meet
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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 in the 2003 Form 10-K.
The profitability of the Insurance Group depends on a number of factors
including: levels of gross operating expenses and the amount which can be
deferred as DAC and software capitalization; successful implementation of
expense-reduction initiatives; secular trends; the ability to reach sales
targets for key products including the continuing market receptivity of its
variable annuity product, Accumulator(R) `04; 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 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 performance of General
Account Investment Assets depends, among other things, on levels of interest
rates and the markets for equity securities and real estate, the need for asset
valuation allowances and writedowns, and the performance of equity investments
which have created, and in the future may create, significant volatility in
investment income.
Other Risks of the Investment Services Segment. Alliance's revenues are largely
dependent on the total value and composition of assets under its management and
are, therefore, affected by the performance of financial markets, the investment
performance of sponsored investment products and separately managed accounts,
additions and withdrawals of assets, purchases and redemptions of mutual funds
and shifts of assets between accounts or products with different fee structures,
as well as general economic conditions, future acquisitions, competitive
conditions and government regulations, including tax rates. See "Results of
Continuing Operations by Segment - Investment Services" contained in the 2003
Form 10-K. 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
$353.6 million at March 31, 2004. Payments of sales commissions made to
financial intermediaries in connection with the sale of back-end load shares
under Alliance's mutual fund distribution system, net of CDSC received, totaled
approximately $14.9 million and $21.4 million during first quarter 2004 and
first quarter 2003, respectively.
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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. As
of March 31, 2004, Alliance's management determined 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 first quarter 2004, equity markets increased by approximately 2% as
measured by the change in the Standard & Poor's 500 Stock Index and fixed income
markets increased by approximately 3% as measured by the change in the Lehman
Brothers' Aggregate Bond Index. The redemption rate for domestic back-end load
shares approximated 25.6% during first quarter 2004. 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 that 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 disclosures and financial statement preparation.
Furthermore, because of changes in conditions, the effectiveness of a disclosure
and internal control system may vary over time.
Technology and Information Systems. The Company's information systems are
central to, among other things, designing and pricing products, marketing and
selling products and services, processing policyholder and investor
transactions, client recordkeeping, communicating with retail sales associates,
employees and clients, and recording information for accounting and management
purposes in a secure and timely manner. These systems are maintained to provide
customer privacy and are tested to ensure the viability of business resumption
plans. Any significant difficulty associated with the operation of such systems,
or any material delay or inability to develop needed system capabilities, could
have a material adverse effect on the Company's results of operations and,
ultimately, its ability to achieve its strategic goals.
Legal Environment. A number of lawsuits have been filed against life and health
insurers involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents and other matters. Some of the lawsuits have
resulted in the award of substantial judgments against other insurers, including
material amounts of punitive damages, or in substantial settlements. In some
states, juries have substantial discretion in awarding punitive damages. The
Holding Company's insurance subsidiaries, including Equitable Life, like other
life and health insurers, are involved in such litigation and the Holding
Company's or such subsidiaries' 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, as investment adviser to the Trusts, EQAT, Premier Trust,
VIP Trust, AXA Advisors, and AXA Distributors (collectively, the "Equitable
Complex of Funds") have received various requests for information and documents
from the SEC and 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
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2004, the SEC completed an on-site examination of the Equitable Complex of
Funds. The SEC has advised Equitable Life that no deficiencies or violations
came to the SEC's attention during the examination. In addition, in January
2004, the SEC had requested from a number of entities, including the Equitable
Complex of Funds, information and documents relating to investment company
"revenue sharing" arrangements, directed brokerage arrangements and fund
portfolio brokerage commissions. The request has been responded to and the
requested documents have been provided. In May 2004, the SEC's Office of
Compliance, Inspections and Examinations advised Equitable Life that it would be
conducting an on-site examination of the directed brokerage arrangements of the
Equitable Complex of Funds. It is anticipated that the on-site examination will
occur in the second quarter of 2004. 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 in the 2003 Form 10-K and herein.
Future Accounting Pronouncements. In the future, new accounting pronouncements,
as well as new interpretations of accounting pronouncements, may have material
effects on the Company's consolidated statements of earnings and shareholder's
equity. See Note 2 of Notes to Consolidated Financial Statements in the 2003
Form 10-K 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 in the 2003
Form 10-K.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H to Form 10-Q.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of March 31, 2004. Based on that
evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures are effective. There has been no change in the Company's internal
control over financial reporting that occurred during first quarter 2004 that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
-27-
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
There have been no new material legal proceedings and no material developments
in matters which were previously reported in the Registrant's Form 10-K for the
year ended December 31, 2003, except as described below:
In AMERICAN NATIONAL BANK, in April 2004, Emerald filed a motion for summary
judgment on liability. Also in April 2004, Emerald filed a motion to amend its
complaint to attempt to cure a defect in diversity jurisdiction. In April 2004,
Equitable Life filed its opposition to this motion and Emerald has filed its
reply.
In FISCHEL, in April 2004, the District Court denied Equitable Life's motion for
reconsideration. In May 2004, the Ninth Circuit entered an order directing the
District Court to award plaintiffs' counsel certain of their attorneys' fees.
In the MONY STOCKHOLDER LITIGATION, on April 6, 2004, the Delaware Court of
Chancery heard plaintiffs' second preliminary injunction motion, brought on the
basis of the new allegations in their second amended complaint. In their motion,
plaintiffs sought an order (i) enjoining AXA Financial and MONY's directors and
officers from voting their shares at the May 18, 2004 MONY Shareholder Meeting,
(ii) compelling additional disclosure by MONY, and (iii) enjoining MONY from
counting the votes cast by shareholders on proxy cards submitted in connection
with the original February 24, 2004 Shareholder Meeting date (the "original
proxies"). On April 9, 2004, Vice Chancellor Lamb denied plaintiffs' motion and
granted summary judgment to defendants on the issue regarding the legal validity
of the original proxies. On April 14, 2004, plaintiffs filed a motion to
expedite the proceedings and to schedule a hearing on a third motion for a
preliminary injunction regarding the use by MONY of the original proxies. The
court has not ruled on plaintiffs' motion to expedite proceedings and has not
scheduled a hearing on the third motion for a preliminary injunction.
In April 2004, a purported nationwide class action lawsuit was filed in the
Circuit Court for Madison County, Illinois entitled MATTHEW WIGGENHORN V.
EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES. The lawsuit alleges that
Equitable Life uses stale prices of the foreign securities within the investment
divisions of its variable insurance products. The complaint further alleges that
Equitable Life's use of stale pricing diluted the returns of the purported
class. The complaint also alleges that Equitable Life breached its fiduciary
duty to the class by allowing market timing in general within Equitable Life's
variable insurance products, thereby diluting the returns of the class. The
lawsuit asserts causes of action for negligence, gross negligence, breach of
contract, and breach of fiduciary duty and seeks unspecified compensatory and
punitive damages, plus prejudgment interest, attorneys' fees and costs.
Although the outcome of litigation cannot be predicted with certainty, the
Company's management believes that, subject to the foregoing, the ultimate
resolution of the matters described above should not have a material adverse
effect on the consolidated financial position of the Company. The Company's
management cannot make an estimate of loss, if any, or predict whether or not
such litigations will have a material adverse effect on the Company's
consolidated results of operations in any particular period.
ALLIANCE LITIGATIONS
In BENAK, plaintiffs have not filed a notice of appeal.
In the SEBI case, in March 2004, SEBI issued a final order against Mr. Arora
barring him from dealing directly or indirectly in the Indian securities markets
for a period of five years commencing from August 9, 2003. Alliance understands
that Mr. Arora intends to appeal the order.
In the MUTUAL FUND TRADING LITIGATIONS, three additional lawsuits making factual
allegations generally similar to those in the HINDO COMPLAINT have been filed
against Alliance and certain other defendants. As a result, between October 3
and April 29, 2004, forty-three lawsuits, in addition to the HINDO COMPLAINT,
have been filed. The three new lawsuits are as follows:
Federal Court Class Actions: Two of the three new lawsuits have been
brought as class actions filed in Federal court, increasing the total
number of such lawsuits to twenty-seven (twenty-three 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 Investment Advisers Act, the
Investment Company Act and common law. All of these lawsuits are
brought on behalf of shareholders of AllianceBernstein Funds, except
four. Of these four, one was brought on behalf of a unitholder of
Alliance Holding and three 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
The Employee Retirement Income Security Act of 1974, as amended
("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 three of these cases.
State Court Derivative Actions: The third new lawsuit has been brought
as a derivative action in state court, increasing the total number of
such actions to four (one in the Supreme Court of the State of New
York, County of New York and three 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
-28-
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. All of the
Massachusetts actions attempt to name AXA Financial.
All of these lawsuits seek an unspecified amount of damages. All of the Federal
actions discussed above as well as those described in Note 18 of Notes to
Consolidated Financial Statements contained in the 2003 Form 10-K (i.e., the
HINDO COMPLAINT, Federal Court Class Actions and Federal Court Derivative
Actions) were the subject of a petition of 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 February 20, 2004, the MDL Panel transferred all of the actions to the United
States District Court for the District of Maryland ("Mutual Fund MDL"). On April
2, 2004, a case management conference was held in the Mutual Fund MDL before the
District of Maryland. At the conference, the court requested that consolidated
complaints be filed by May 28, 2004. The court also scheduled oral arguments on
motions to dismiss the consolidated complaints for October 24, 2004, but
requested that the parties agree to a briefing schedule for these motions.
Defendants have removed each of the State Court Representative Actions and
the State Court Individual Action (discussed in Note 18 of Notes to Consolidated
Financial Statements contained in the 2003 Form 10-K), and thereafter submitted
the actions to the MDL Panel in a notice of tag-along actions. On March 3, 2004
and April 6, 2004, the MDL Panel issued orders conditionally transferring these
cases and numerous others to the District of Maryland. One of the plaintiffs in
the State Court Representative Actions is opposing transfer, while the other two
plaintiffs in these actions and the plaintiff in the State Court Individual
Action have waived any objections to transfer. The plaintiffs in three of these
four actions have moved to remand the actions back to state court. Where
defendants have responded to the complaints in these actions, defendants have
moved to stay proceedings pending transfer by the MDL Panel. Stays have been
granted in one of the State Court Representative Actions and in the State Court
Individual Action.
Alliance recorded charges to income totaling $330 million in the second
half of 2003 in connection with establishing a $250 million restitution fund, as
described in Note 16 of Notes to Consolidated Financial Statements contained in
the 2003 Form 10-K. During first quarter 2004, Alliance paid $285 million
related to these matters and has cumulatively paid $291 million. Alliance's
management, however, cannot determine at this time the eventual outcome, timing
or impact of this matter. Accordingly, it is possible that additional charges in
the future may be required.
With respect to certain other matters discussed in Note 16 of Notes to
Consolidated Financial Statements contained in the 2003 Form 10-K under
"Alliance Litigations" (other than those referred to in the preceding paragraphs
and those related to the SEBI case), management of Alliance is unable to
estimate the impact, if any, that the outcome of these matters may have on
Alliance's results of operations or financial condition and AXA Financial's
management is unable to estimate the impact, if any, that the outcome of these
matters may have on AXA Financial'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.
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ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Number Description and Method of Filing
------ ------------------------------------------------------------
31.1 Section 302 Certification made by the Registrant's Chief
Executive Officer, filed herewith
31.2 Section 302 Certification made by the Registrant's Chief
Financial Officer, filed herewith
32.1 Section 906 Certification made by the Registrant's Chief
Executive Officer, filed herewith
32.2 Section 906 Certification made by the Registrant's Chief
Financial Officer, filed herewith
(b) Reports on Form 8-K
None
-30-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Life Insurance Society of the United States has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 14, 2004 THE EQUITABLE LIFE INSURANCE SOCIETY
OF THE UNITED STATES
By: /s/Stanley B. Tulin
-------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: May 14, 2004 /s/Alvin H. Fenichel
-------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and
Controller
-31-