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, 2005 Commission File No. 333-45415
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AXA FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3623351
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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 Exchange Act). Yes [ ] No [X]
No voting or non-voting common equity of the registrant is held by
non-affiliates of the registrant as of May 11, 2005.
At May 11, 2005, 436,192,949 shares of the registrant's Common Stock were
outstanding.
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 30
AXA FINANCIAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated GAAP Financial Statements
o Consolidated Balance Sheets, March 31, 2005 and December 31, 2004.................. 3
o Consolidated Statements of Earnings, Quarters Ended
March 31, 2005 and 2004.......................................................... 4
o Consolidated Statements of Shareholders' Equity and Comprehensive
(Loss) Income, Quarters Ended March 31, 2005 and 2004............................ 5
o Consolidated Statements of Cash Flows, Quarters Ended
March 31, 2005 and 2004.......................................................... 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 *........................... 29
Item 4: Controls and Procedures................................................................ 29
PART II OTHER INFORMATION
Item 1: Legal Proceedings...................................................................... 29
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds............................ 29
Item 3: Defaults Upon Senior Securities........................................................ 29
Item 4: Submission of Matters to a Vote of Security Holders.................................... 29
Item 5: Other Information...................................................................... 29
Item 6: Exhibits............................................................................... 29
SIGNATURES ..................................................................................... 30
*Omitted pursuant to General Instruction H to Form 10-Q.
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PART I FINANCIAL INFORMATION
ITEM 1: UNAUDITED CONSOLIDATED GAAP FINANCIAL STATEMENTS
AXA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, December 31,
2005 2004
----------------- -----------------
(IN MILLIONS)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 38,786.1 $ 39,301.6
Mortgage loans on real estate............................................. 4,828.3 4,909.8
Equity real estate, held for the production of income..................... 789.4 835.1
Policy loans.............................................................. 4,949.8 4,968.0
Other equity investments.................................................. 1,296.6 1,219.8
Other invested assets..................................................... 1,868.9 1,682.7
----------------- -----------------
Total investments..................................................... 52,519.1 52,917.0
Cash and cash equivalents................................................... 2,437.6 2,574.9
Cash and securities segregated, at estimated fair value..................... 1,690.3 1,489.0
Broker-dealer related receivables........................................... 2,352.2 2,187.7
Deferred policy acquisition costs........................................... 7,076.2 6,908.6
Goodwill and other intangible assets, net................................... 5,235.1 5,242.4
Value of business acquired.................................................. 823.8 817.4
Amounts due from reinsurers................................................. 3,176.4 3,149.2
Loans to affiliates......................................................... 400.0 400.0
Other assets................................................................ 4,226.6 3,930.1
Separate Accounts' assets................................................... 65,474.7 66,411.7
----------------- -----------------
TOTAL ASSETS................................................................ $ 145,412.0 $ 146,028.0
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 30,461.6 $ 30,367.3
Future policy benefits and other policyholders liabilities.................. 22,700.9 22,888.6
Broker-dealer related payables.............................................. 1,537.1 1,222.8
Customers related payables.................................................. 2,656.5 2,658.7
Short-term and long-term debt............................................... 3,453.5 3,263.4
Loans from affiliates....................................................... 1,568.9 1,568.9
Income taxes payable........................................................ 1,905.0 2,010.2
Other liabilities........................................................... 4,939.6 4,884.9
Separate Accounts' liabilities.............................................. 65,474.7 66,411.7
Minority interest in equity of consolidated subsidiaries.................... 1,426.7 1,421.1
Minority interest subject to redemption rights.............................. 262.8 266.6
----------------- -----------------
Total liabilities..................................................... 136,387.3 136,964.2
----------------- -----------------
Commitments and contingencies (Note 11)
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 500 million shares authorized, 436.2 million
shares issued and outstanding........................................... 3.9 3.9
Capital in excess of par value.............................................. 1,031.0 1,054.1
Retained earnings........................................................... 7,416.1 7,139.7
Accumulated other comprehensive income...................................... 573.7 866.1
----------------- -----------------
Total shareholders' equity............................................ 9,024.7 9,063.8
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................. $ 145,412.0 $ 146,028.0
================= =================
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
QUARTER ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
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(IN MILLIONS)
REVENUES
Universal life and investment-type product policy fee income................ $ 499.5 $ 372.6
Premiums.................................................................... 411.9 234.8
Net investment income....................................................... 869.7 664.8
Investment gains, net....................................................... 7.7 48.6
Commissions, fees and other income.......................................... 1,049.1 877.1
----------------- -----------------
Total revenues........................................................ 2,837.9 2,197.9
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BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits..................................................... 730.7 455.8
Interest credited to policyholders' account balances........................ 287.8 272.0
Compensation and benefits................................................... 598.9 477.3
Commissions................................................................. 258.0 188.5
Distribution plan payments.................................................. 91.4 97.1
Amortization of deferred sales commissions.................................. 36.5 48.5
Interest expense............................................................ 64.7 48.1
Amortization of deferred policy acquisition costs and value of business
acquired.................................................................. 202.1 122.7
Capitalization of deferred policy acquisition costs......................... (298.2) (226.8)
Rent expense................................................................ 62.6 48.0
Amortization of other intangible assets, net................................ 11.6 6.4
Other operating costs and expenses.......................................... 317.6 224.6
----------------- -----------------
Total benefits and other deductions................................... 2,363.7 1,762.2
----------------- -----------------
Earnings from continuing operations before income taxes
and minority interest..................................................... 474.2 435.7
Income tax expense.......................................................... (133.3) (129.2)
Minority interest in net income of consolidated subsidiaries................ (64.4) (73.9)
----------------- -----------------
Earnings from continuing operations......................................... 276.5 232.6
(Loss) earnings from discontinued operations, net of income tax expense.... (.1) 2.1
Cumulative effect of accounting changes, net of income tax benefit......... - (4.0)
----------------- -----------------
Net Earnings............................................................... $ 276.4 $ 230.7
================= =================
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE (LOSS) INCOME
QUARTER ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
----------------- -----------------
(IN MILLIONS)
SHAREHOLDERS' EQUITY
Common stock, at par value, beginning of year and at end of period.......... $ 3.9 $ 3.9
----------------- -----------------
Capital in excess of par value, beginning of year........................... 1,054.1 1,102.3
Other changes in capital in excess of par value............................. (23.1) 4.2
----------------- -----------------
Capital in excess of par value, end of period............................... 1,031.0 1,106.5
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Retained earnings, beginning of year........................................ 7,139.7 6,194.8
Net earnings................................................................ 276.4 230.7
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Retained earnings, end of period............................................ 7,416.1 6,425.5
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Accumulated other comprehensive income, beginning of year................... 866.1 872.7
Other comprehensive (loss) income........................................... (292.4) 264.9
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Accumulated other comprehensive income, end of period....................... 573.7 1,137.6
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TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD................................... $ 9,024.7 $ 8,673.5
================= =================
COMPREHENSIVE (LOSS) INCOME
Net earnings................................................................ $ 276.4 $ 230.7
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Change in unrealized (losses) gains, net of reclassification adjustment..... (292.4) 252.5
Cumulative effect of accounting changes..................................... - 12.4
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Other comprehensive (loss) income........................................... (292.4) 264.9
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COMPREHENSIVE (LOSS) INCOME................................................. $ (16.0) $ 495.6
================= =================
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
QUARTER ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
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(IN MILLIONS)
Net earnings................................................................ $ 276.4 $ 230.7
Adjustments to reconcile net earnings to net cash (used) provided
by operating activities:
Interest credited to policyholders' account balances.................... 287.8 272.0
Universal life and investment-type product policy fee income............ (499.5) (372.6)
Net change in broker-dealer customer related receivables/payables....... (6.1) 5.8
Investment gains, net................................................... (7.7) (48.6)
Change in segregated cash and securities, net........................... (201.3) 52.2
Change in deferred policy acquisition costs............................. (96.1) (104.1)
Change in future policy benefits........................................ 83.5 80.3
Change in property and equipment........................................ (17.1) (15.6)
Change in income tax payable............................................ 54.5 108.8
Other, net.............................................................. 111.3 (209.8)
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Net cash used by operating activities....................................... (14.3) (.9)
------------------ ------------------
Cash flows from investing activities:
Maturities and repayments of fixed maturities and mortgage loans.......... 936.1 907.8
Sales..................................................................... 543.9 1,144.6
Purchases................................................................. (1,952.4) (1,722.8)
Change in short-term investments.......................................... (27.1) 284.7
Purchase of minority interest in consolidated subsidiary.................. - (308.7)
Other, net................................................................ .8 30.5
------------------ ------------------
Net cash (used) provided by investing activities........................... (498.7) 336.1
------------------ ------------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 952.8 828.3
Withdrawals and transfers to Separate Accounts.......................... (685.0) (809.6)
Net increase in short-term financings..................................... 198.6 246.7
Other, net................................................................ (90.7) 26.1
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Net cash provided by financing activities................................... 375.7 291.5
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Change in cash and cash equivalents......................................... (137.3) 626.7
Cash and cash equivalents, beginning of year................................ 2,574.9 1,018.3
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Cash and Cash Equivalents, End of Period.................................... $ 2,437.6 $ 1,645.0
=============== ================
Supplemental cash flow information:
Interest Paid............................................................... $ 81.2 $ 35.3
================== ==================
Income Taxes Paid........................................................... $ 97.1 $ 49.0
================== ==================
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The preparation of the accompanying unaudited consolidated financial
statements in conformity with 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 for a fair statement of
the consolidated financial position of AXA Financial 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 AXA Financial for the year
ended December 31, 2004. The results of operations for the three months
ended March 31, 2005 are not necessarily indicative of the results to be
expected for the full year.
The terms "first quarter 2005" and "first quarter 2004" refer to the three
months ended March 31, 2005 and 2004, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
On July 8, 2004, the Holding Company completed its acquisition of MONY.
AXA Financial's consolidated balance sheets at March 31, 2005 and December
31, 2004 and its related consolidated statements of earnings, of
shareholders' equity and comprehensive (loss) income and of cash flows for
first quarter 2005 include the accounts of the MONY Companies.
2) PURCHASE OF MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
In March 2004, AXA Financial 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, AXA
Financial 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, AXA Financial's economic interest in Alliance
increased to approximately 58.4%. As a result of other transactions in the
year ended December 31, 2004, AXA Financial's economic interest in
Alliance at March 31, 2005 was 61.2%.
3) ACCOUNTING CHANGES
Effective January 1, 2004, AXA Financial 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 AXA Financial'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 contracts.
The adoption of SOP 03-1 required changes in several of AXA Financial's
accounting policies relating to separate account assets and liabilities.
AXA Financial 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
-7-
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
AXA Financial'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 $4.0 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.
New Accounting Pronouncements
-----------------------------
On December 16, 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment". SFAS No. 123(R) eliminates the alternative to apply the
intrinsic value method of accounting for employee stock-based compensation
awards that was provided in SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") as originally issued. SFAS No. 123(R)
requires the cost of all share-based payments to employees, including
stock options, stock appreciation rights, and most tax-qualified employee
stock purchase plans, to be recognized in the financial statements based
on the fair value of those awards. Under SFAS No. 123(R) the cost of
equity-settled awards generally is based on fair value at date of grant,
adjusted for subsequent modifications of terms or conditions, while
cash-settled awards require remeasurement of fair value at the end of each
reporting period. SFAS No. 123(R) does not prescribe or specify a
preference for a particular valuation technique or model for estimating
the fair value of employee stock options and similar awards but instead
requires consideration of certain factors in selecting one that is
appropriate for the unique substantive characteristics of the instruments
awarded. SFAS No. 123(R) generally requires adoption using a modified
version of prospective application. Under "modified prospective"
application, SFAS No. 123(R) applies to new awards granted and to awards
modified, repurchased, or cancelled after the required effective date.
Additionally, compensation cost for unvested awards outstanding as of the
required effective date must be recognized prospectively over the
remaining requisite service/vesting period based on the fair values of
those awards as already calculated under SFAS No. 123. Entities may
further elect to apply SFAS No. 123(R) on a "modified retrospective" basis
to give effect to the fair value based method of accounting for awards
granted, modified, or settled in cash in earlier periods. The cumulative
effect of initial application, if any, is recognized as of the required
effective date. On April 14, 2005, the SEC adopted a new rule allowing
companies to implement SFAS No. 123(R) at the beginning of their next
fiscal year, instead of the next reporting period, that begins after June
15, 2005.
AXA Financial elected under SFAS No. 123 to continue to account for
stock-based compensation using the intrinsic value method and to provide
only pro forma disclosure of the effect on net earnings from applying the
fair value based method. Consequently, adoption of SFAS No. 123(R) would
be expected to result in recognition of compensation expense for certain
types of AXA Financial's equity-settled awards, such as options to
purchase AXA ADRs and AXA ordinary share options, for which no cost
previously would have been charged to net earnings under the intrinsic
value method. Similarly, certain types of AXA Financial's cash-settled
awards, such as stock appreciation rights, may be expected to result
either in different amounts of compensation expense or different patterns
-8-
of expense recognition under SFAS No. 123(R) as compared to the intrinsic
value method. Management of AXA Financial currently is assessing the
impact of adoption of SFAS No. 123(R), including measurement and reporting
of related income tax effects, selection of an appropriate valuation model
and determination of assumptions, as well as consideration of plan design
issues.
On May 19, 2004, the FASB approved the issuance of FASB Staff Position
("FSP") No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003",
effective for the first interim or annual period beginning after June 15,
2004. FSP 106-2 provides guidance on the accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003
("MMA") for employers that sponsor postretirement health care plans that
provide prescription drug benefits. MMA introduced a new prescription drug
benefit under Medicare that will go into effect in 2006 and also includes
a Federal subsidy payable to plan sponsors equal to 28% of certain
prescription drug benefits payable to Medicare-eligible retirees. The
subsidy only is available to an employer that sponsors a retiree medical
plan that includes a prescription drug benefit that is at least as
valuable as (i.e., actuarially equivalent to) the new Medicare coverage.
The subsidy is not subject to Federal income tax.
Clarifying regulations are expected to be issued by the Centers for
Medicare and Medicaid Services to address the interpretation and
determination of actuarial equivalency under MMA. In accordance with the
provisions of FSP 106-2, management and its actuarial advisors will
re-evaluate actuarial equivalency as new information about its
interpretation or determination becomes available. Management and its
actuarial advisors have not as yet been able to conclude whether the
prescription drug benefits provided under AXA Financial's and MONY's
retiree medical plans are actuarially equivalent to the new Medicare
prescription drug benefits for 2006 and future years. Consequently,
measurements of the accumulated postretirement benefit obligation and net
periodic postretirement benefit cost for these plans at and for the period
ended March 31, 2005 do not reflect any amount associated with enactment
of MMA, including the subsidy.
4) INVESTMENTS
Investment valuation allowances for mortgage loans and equity real estate
and changes thereto follow:
THREE MONTHS ENDED
MARCH 31,
-----------------------------------
2005 2004
--------------- ---------------
(IN MILLIONS)
Balances, beginning of year............................................... $ 11.8 $ 20.5
Additions charged to income............................................... - .5
Deductions for writedowns and asset dispositions.......................... (.4) (.7)
--------------- ---------------
Balances, End of Period................................................... $ 11.4 $ 20.3
=============== ===============
Balances, end of period comprise:
Mortgage loans on real estate........................................... $ 11.4 $ 18.2
Equity real estate...................................................... - 2.1
--------------- ---------------
Total..................................................................... $ 11.4 $ 20.3
=============== ===============
For the first quarters of 2005 and 2004, investment income is shown net of
investment expenses of $69.4 million and $44.4 million, respectively.
As of March 31, 2005 and December 31, 2004, fixed maturities classified as
available for sale had amortized costs of $37,441.5 million and $37,168.0
million, respectively. Also at March 31, 2005 and December 31, 2004,
respectively, Other equity investments included the General Account's
investments in Separate Accounts and other trading securities having
carrying values of $115.1 million and $118.0 million and costs of $108.1
million and $107.8 million and other equity securities with carrying
values of $49.7 million and $51.3 million and costs of $47.0 million and
$49.4 million.
In the first quarters of 2005 and 2004, net unrealized and realized
holding (losses) gains on trading account equity securities of $(3.3)
million and $3.3 million were included in Net investment income in the
consolidated statements of earnings.
-9-
For the first quarters of 2005 and 2004, proceeds received on sales of
fixed maturities classified as available for sale amounted to $525.4
million and $1,092.3 million, respectively. Gross gains of $9.8 million
and $29.9 million and gross losses of $7.3 million and $1.6 million were
realized on these sales for the first quarters of 2005 and 2004,
respectively. Unrealized net investment gains related to fixed maturities
classified as available for sale decreased by $789.7 million during the
first three months of 2005, resulting in a balance of $1,343.9 million at
March 31, 2005.
Impaired mortgage loans along with the related investment valuation
allowances for losses follow:
MARCH 31, December 31,
2005 2004
--------------- -----------------
(IN MILLIONS)
Impaired mortgage loans with investment valuation allowances............ $ 89.4 $ 94.3
Impaired mortgage loans without investment valuation allowances......... 21.7 22.6
---------------- -----------------
Recorded investment in impaired mortgage loans.......................... 111.1 116.9
Investment valuation allowances......................................... 11.4 11.8
---------------- -----------------
Net Impaired Mortgage Loans............................................. $ 99.7 $ 105.1
================ =================
During the first quarters of 2005 and 2004, respectively, AXA Financial's
average recorded investment in impaired mortgage loans was $122.6 million
and $178.2 million. Interest income recognized on these impaired mortgage
loans totaled $1.8 million and $2.6 million for the first quarters of 2005
and 2004, respectively.
Mortgage loans on real estate are placed on nonaccrual status once
management believes the collection of accrued interest is doubtful. Once
mortgage loans on real estate are classified as nonaccrual loans, interest
income is recognized under the cash basis of accounting and the resumption
of the interest accrual would commence only after all past due interest
has been collected or the mortgage loan on real estate has been
restructured to where the collection of interest is considered likely. At
March 31, 2005 and December 31, 2004, respectively, the carrying values of
mortgage loans on real estate that had been classified as nonaccrual loans
were $83.8 million and $79.2 million.
5) CLOSED BLOCKS
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 that would be recognized in income from
continuing operations over the period the policies and contracts in the
Closed Block remain in force. As of January 1, 2001, AXA Financial had
developed an actuarial calculation of the expected timing of AXA
Equitable's Closed Block earnings. Further, in connection with the
acquisition of MONY, AXA Financial had developed an actuarial calculation
of the expected timing of MONY Life's Closed Block earnings as of July 1,
2004.
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 and VOBA, 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.
The operations of the AXA Equitable and MONY Life Closed Blocks are
managed separately.
-10-
AXA Equitable Closed Block
--------------------------
Summarized financial information for the Closed Block follows:
MARCH 31, December 31,
2005 2004
----------------- -------------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits, policyholders' account balances and other...... $ 8,895.8 $ 8,911.5
Policyholder dividend obligation....................................... 103.2 264.3
Other liabilities...................................................... 154.6 122.1
----------------- -------------------
Total Closed Block liabilities......................................... 9,153.6 9,297.9
----------------- -------------------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Fixed maturities available for sale,at fair value
(amortized cost $5,583.4 and $5,488.6).............................. 5,787.6 5,823.2
Mortgage loans on real estate.......................................... 1,084.8 1,098.8
Policy loans........................................................... 1,315.2 1,322.5
Cash and other invested assets......................................... 18.8 37.1
Other assets........................................................... 166.3 187.0
----------------- -------------------
Total assets designated to the Closed Block............................ 8,372.7 8,468.6
----------------- -------------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................... 780.9 829.3
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred income tax expense
of $35.4 and $24.6 and policyholder dividend obligation
of $103.2 and $264.3............................................. 65.7 45.7
----------------- -------------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities.............................................. $ 846.6 $ 875.0
================= ===================
Closed Block revenues and expenses were as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------------------------
2005 2004
------------------ -------------------
(IN MILLIONS)
REVENUES:
Premiums and other income............................................ $ 115.0 $ 122.6
Investment income.................................................... 131.9 141.8
Investment gains, net................................................ 8.2 13.1
------------------ -------------------
Total revenues...................................................... 255.1 277.5
------------------ -------------------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits and dividends................................ 210.4 213.3
Other operating costs and expenses................................... 1.0 1.1
------------------ -------------------
Total benefits and other deductions.................................. 211.4 214.4
------------------ -------------------
Net revenues before income taxes..................................... 43.7 63.1
Income tax expense................................................... (15.3) (22.3)
------------------ -------------------
Net Revenues......................................................... $ 28.4 $ 40.8
================== ===================
-11-
Reconciliation of the policyholder dividend obligation follows:
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2005 2004
---------------- --------------
(IN MILLIONS)
Balances, beginning of year.......................................... $ 264.3 $ 242.1
Unrealized investment (losses) gains................................. (161.1) 154.0
---------------- -----------------
Balances, End of Period.............................................. $ 103.2 $ 396.1
================ =================
MONY Life Closed Block
----------------------
Summarized financial information for the MONY Life Closed Block follows:
MARCH 31, December 31,
2005 2004
----------------- -------------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits, policyholders' account balances and other...... $ 7,348.2 $ 7,360.9
Policyholder dividend obligation....................................... 166.6 250.8
Other liabilities...................................................... 24.9 28.7
----------------- -------------------
Total Closed Block liabilities......................................... 7,539.7 7,640.4
----------------- -------------------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Fixed maturities available for sale, at fair value
(amortized cost $4,372.8 and $4,338.0).............................. 4,390.6 4,440.9
Mortgage loans on real estate.......................................... 586.6 592.5
Policy loans........................................................... 1,019.3 1,025.0
Cash and other invested assets......................................... 46.6 91.1
Other assets........................................................... 216.9 197.1
----------------- -------------------
Total assets designated to the Closed Block............................ 6,260.0 6,346.6
----------------- -------------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................... 1,279.7 1,293.8
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains,
net of policyholder dividend obligation of $17.8 and $102.9...... - -
----------------- -------------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities.............................................. $ 1,279.7 $ 1,293.8
================= ===================
-12-
MONY Life Closed Block revenues and expenses follow:
THREE MONTHS
ENDED MARCH 31,
2005
-------------------------
(IN MILLIONS)
REVENUES:
Premiums and other income............................................ $ 96.9
Investment income (net of investment expenses of $1.2)............... 82.7
Investment gains , net............................................... .3
-------------------------
Total revenues....................................................... 179.9
-------------------------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits and dividends................................ 157.3
Other operating costs and expenses................................... .9
-------------------------
Total benefits and other deductions.................................. 158.2
-------------------------
Net revenues before income tax expense............................... 21.7
Income tax expense.................................................. (7.6)
-------------------------
Net Revenues......................................................... $ 14.1
=========================
Reconciliation of the MONY Life policyholder dividend obligation follows:
THREE MONTHS
ENDED MARCH 31,
2005
------------------------
(IN MILLIONS)
Balance, beginning of year.............................................. $ 250.8
Applicable to net revenues ............................................. .9
Unrealized investment losses............................................ (85.1)
------------------------
Balance, End of Period.................................................. $ 166.6
========================
6) OTHER DISCONTINUED OPERATIONS
Summarized financial information for Other Discontinued Operations
follows:
MARCH 31, December 31,
2005 2004
----------------- -------------------
(IN MILLIONS)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost $708.0 and $643.6).................................. $ 747.5 $ 702.1
Equity real estate..................................................... 188.7 190.1
Mortgage loans on real estate.......................................... 21.0 21.4
Other equity investments............................................... 4.0 4.4
Other invested assets.................................................. .4 .3
----------------- -------------------
Total investments................................................... 961.6 918.3
Cash and cash equivalents.............................................. 90.4 150.2
Other assets........................................................... 14.0 33.3
----------------- -------------------
Total Assets........................................................... $ 1,066.0 $ 1,101.8
================= ===================
Policyholders liabilities.............................................. $ 837.8 $ 844.6
Allowance for future losses............................................ 108.6 132.7
Other liabilities...................................................... 119.6 124.5
----------------- -------------------
Total Liabilities...................................................... $ 1,066.0 $ 1,101.8
================= ===================
-13-
THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2005 2004
----------------- -----------------
(In Millions)
STATEMENTS OF EARNINGS
Investment income (net of investment expenses of $4.6 and $4.3)........... $ 16.3 $ 17.3
Investment (losses) gains net............................................. (.1) 2.5
----------------- -----------------
Total revenues............................................................ 16.2 19.8
Benefits and other deductions............................................. 21.2 25.7
Losses charged to allowance for future losses............................. (5.0) (5.9)
----------------- -----------------
Pre-tax results from operations........................................... - -
Pre-tax (loss) earnings from strengthening/releasing the allowance
for future losses....................................................... (.2) 3.2
Income tax benefit (expense).............................................. .1 (1.1)
----------------- -----------------
(Loss) Earnings from Other Discontinued Operations........................ $ (.1) $ 2.1
================= =================
AXA Financial's quarterly process for evaluating the allowance for future
losses applies the current period's results of Other Discontinued
Operations against the allowance, re-estimates future losses, and adjusts
the allowance, if appropriate. These updated assumptions and estimates
resulted in a strengthening or release of allowance in each of the periods
presented above.
Management believes the allowance for future losses at March 31, 2005 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 Other 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 Other 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.
7) GMDB, GMIB AND NO LAPSE GUARANTEE FEATURES
A) Variable Annuity Contracts - GMDB and GMIB
-------------------------------------------
AXA Equitable, MONY Life and MLOA issue certain variable annuity contracts
with GMDB and GMIB features that guarantee either:
o Return of Premium: the benefit is the greater of current account
value or premiums paid (adjusted for withdrawals);
o 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);
o 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
o Combo: the benefit is the greater of the ratchet benefit or the
roll-up benefit.
-14-
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 2005:
GMDB GMIB TOTAL
---------------- ----------------- -----------------
(IN MILLIONS)
Balance at December 31, 2004....................... $ 68.5 $ 117.7 $ 186.2
Paid guarantee benefits.......................... (10.8) 0 (10.8)
Other changes in reserve......................... 26.2 17.1 43.3
---------------- ----------------- -----------------
Balance at March 31, 2005.......................... $ 83.9 $ 134.8 $ 218.7
================ ================= =================
Related GMDB reinsurance ceded amounts were:
GMDB
--------------------
(IN MILLIONS)
Balance at December 31, 2004....................... $ 11.3
Paid guarantee benefits ceded.................... (2.0)
Other changes in reserve......................... 9.2
--------------------
Balance at March 31, 2005.......................... $ 18.5
====================
The GMIB reinsurance contracts are considered derivatives and are reported
at fair value.
The March 31, 2005 values for those variable annuity contracts with GMDB
and GMIB features are presented in the following table. 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 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. Since variable annuity contracts with
GMDB guarantees may also offer GMIB guarantees in each contract, the GMDB
and GMIB amounts listed are not mutually exclusive:
RETURN
OF
PREMIUM RATCHET ROLL-UP COMBO TOTAL
-------------- -------------- ------------- -------------- -------------
(DOLLARS IN MILLIONS)
GMDB:
Account value (1)................... $ 31,198 $ 8,499 $ 7,872 $ 11,755 $ 59,324
Net amount at risk, gross........... $ 1,268 $ 1,002 $ 2,065 $ 118 $ 4,453
Net amount at risk, net of amounts
reinsured........................ $ 1,266 $ 761 $ 1,252 $ 106 $ 3,385
Average attained age of
contractholders................... 50.0 60.1 62.6 60.2 52.6
Percentage of contractholders
over age 70....................... 7.6% 21.7% 28.2% 18.2 10.9
Range of guaranteed minimum
return rates.................... N/A N/A 3%-6% 3%-6% N/A
GMIB:
Account value (2)................... N/A N/A $ 5,735 $ 15,768 $ 21,503
Net amount at risk, gross........... N/A N/A $ 511 $ - $ 511
Net amount at risk, net of amounts
reinsured........................ N/A N/A $ 129 $ - $ 129
Weighted average years remaining
until earliest annuitization.... N/A N/A 3.8 9.2 7.3
Range of guaranteed minimum
return rates.................... N/A N/A 3%-6% 3%-6% 3%-6%
-15-
(1) Included General Account balances of $12,011 million, $614 million,
$130 million and $477 million, respectively, for a total of $13,233
million.
(2) Included General Account balances of $35 million and $639 million,
respectively, for a total of $674 million.
B) Separate Account Investments by Investment Category Underlying GMDB and
-----------------------------------------------------------------------
GMIB Features
-------------
The total account values of variable annuity contracts with GMDB and GMIB
features include amounts allocated to the guaranteed interest option which
is part of the General Account and variable investment options which invest
through Separate Accounts in variable insurance trusts. The following table
presents the aggregate fair value of assets, by major investment category,
held by Separate Accounts that support variable annuity contracts with GMDB
and GMIB benefits and guarantees. The investment performance of the assets
impacts the related account values and, consequently, the net amount of
risk associated with the GMDB and GMIB benefits and guarantees. Since
variable annuity contracts with GMDB benefits and guarantees may also offer
GMIB benefits and guarantees in each contract, the GMDB and GMIB amounts
listed are not mutually exclusive:
INVESTMENT IN VARIABLE INSURANCE TRUST MUTUAL FUNDS
MARCH 31, December 31,
---------------- ------------------
2005 2004
---------------- ------------------
(IN MILLIONS)
GMDB:
Equity............................................................... $ 33,652 $ 34,574
Fixed income......................................................... 4,721 4,713
Balanced............................................................. 5,990 5,415
Other................................................................ 1,727 1,678
---------------- ------------------
Total................................................................ $ 46,090 $ 46,380
================ ==================
GMIB:
Equity............................................................... $ 14,216 $ 14,453
Fixed income......................................................... 2,611 2,463
Balanced............................................................. 3,021 2,772
Other................................................................ 981 569
---------------- ------------------
Total................................................................ $ 20,829 $ 20,257
================ ==================
C) Hedging Programs for GMDB and GMIB Features
-------------------------------------------
In 2003, AXA Equitable initiated a program intended to hedge certain risks
associated with the GMDB feature of the Accumulator(R) series of annuity
products sold beginning April 2002. In 2004, the program was expanded to
include hedging for certain risks associated with the GMIB feature of the
Accumulator(R) series of annuity products sold beginning 2004. This
program currently utilizes exchange-traded futures contracts that are
dynamically managed in an effort to reduce the economic impact of
unfavorable changes in GMDB and GMIB exposures attributable to movements
in the equity and fixed income markets. At March 31, 2005, the total
account value and net amount at risk of contracts were $21,971 million and
$133 million, respectively, for the GMDB hedge program and $7,379 million
and zero, respectively, for the GMIB hedge program.
D) 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:
-16-
DIRECT REINSURANCE
LIABILITY CEDED NET
---------------- ----------------- -----------------
(IN MILLIONS)
Balance at December 31, 2004....................... $ 21.0 $ - $ 21.0
Paid guarantee benefits.......................... - - -
Other changes in reserve......................... 4.1 - 4.1
---------------- ----------------- -----------------
Balance at March 31, 2005.......................... $ 25.1 $ - $ 25.1
================ ================= =================
8) EMPLOYEE BENEFIT PLANS
AXA Financial sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified
part-time employees) managers and certain agents.
Components of net periodic pension expense for the qualified and
non-qualified plans follow:
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2005 2004
---------------- ------------------
(IN MILLIONS)
Service cost............................................................ $ 14.1 $ 11.2
Interest cost on projected benefit obligation........................... 44.2 36.8
Expected return on assets............................................... (51.3) (42.2)
Net amortization and deferrals.......................................... 22.8 22.4
---------------- ------------------
Net Periodic Pension Expense............................................ $ 29.8 $ 28.2
================ ==================
AXA Financial provides certain postretirement benefits for qualifying
employees, managers and agents retiring from AXA Financial.
Components of net postretirement benefits costs follow:
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2005 2004
---------------- ------------------
(IN MILLIONS)
Service cost............................................................ $ 1.9 $ 1.4
Interest cost on accumulated postretirement benefit obligation.......... 9.7 8.8
Net amortization and deferrals.......................................... 2.1 2.9
---------------- ------------------
Net Periodic Postretirement Benefits Costs.............................. $ 13.7 $ 13.1
================ ==================
AXA Financial sponsors a postemployment health and life insurance
continuation plan for disabled former employees.
Components of net postemployment benefits costs follow:
THREE MONTHS ENDED
MARCH 31,
------------------------------------
2005 2004
---------------- ------------------
(IN MILLIONS)
Service cost............................................................ $ 1.8 $ 2.4
Interest cost on projected benefit obligations.......................... .5 .7
---------------- ------------------
Net Periodic Postemployment Costs....................................... $ 2.3 $ 3.1
================ ==================
-17-
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 $86.1 million, based upon the underlying price of AXA ADRs at January
2, 2001, the closing date of the aforementioned merger. For first quarter
2005, AXA Financial recorded an increase in the Stock Appreciation Rights
liability of $8.9 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, 2005. At March 31, 2005, the Stock
Appreciation Rights liability was $38.6 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 AXA
Financial's Notes to Consolidated Financial Statements for the year ended
December 31, 2004, except as described below:
In MAHOLTRA, in March 2005, the District Court granted defendants' motion
to dismiss the second amended complaint, but permitted one of the
plaintiffs leave to file a third amended complaint.
In DH2, in April 2005, DH2 filed a Second Amended Complaint, which alleges
claims substantially similar to those included in the original amended
complaint.
In HIRT, in April 2005, the Court denied the cross motions for summary
judgment without prejudice and has set a proof hearing for August 2005.
In BERGER, in May 2005, the Court granted AXA Equitable's motion for
summary judgment and dismissed the remaining claim of violation of ERISA.
In WIGGENHORN, in April 2005, the U.S. Court of Appeals for the Seventh
Circuit ruled in favor of Putnam Funds in the case in which the Holding
Company is not a party. Based upon this decision, in April 2005, AXA
Equitable filed a motion to either grant its motion to dismiss or set a
briefing schedule on its motion to dismiss.
In GOSHEN, in April 2005, plaintiffs filed a motion for leave to appeal
with the Court of Appeals.
In MCLEAN, in April 2005, claims of the individual Illinois plaintiffs
were settled and the case has been dismissed.
In ECKERT, in April 2005, one of the plaintiffs was granted the right to
intervene and filed a complaint entitled CERRA V. THE EQUITABLE LIFE
ASSURANCE SOCIETY OF THE UNITED STATES in the United States District Court
for the Eastern District of New York with the same allegations as in
ECKERT. The defendants expect to move to dismiss plaintiffs complaint.
ALLIANCE LITIGATION
In the SBA COMPLAINT, in April 2005, Alliance and the SBA entered into an
Agreement Regarding Litigation pursuant to which, among other things, a
jury verdict in favor of Alliance on all claims would prevent both parties
from seeking to retry or appeal the case and from seeking costs or
attorneys' fees, and would prevent Alliance from seeking to recover its
claim for unpaid investment management fees. In April 2005, the jury found
in favor of Alliance on all claims.
-18-
In February 2004, Alliance received (i) a subpoena duces tecum from the
Office of the Attorney General of the State of West Virginia and (ii) a
request for information from the Office of the State Auditor, Securities
Commission, for the State of West Virginia (together, the "Information
Requests"). Both Information Requests require Alliance to produce
documents concerning, among other things, any market timing or late
trading in its sponsored mutual funds. Alliance responded to the
Information Requests and has been cooperating fully with the
investigation.
In April 2005, a complaint entitled THE ATTORNEY GENERAL OF THE STATE OF
WEST VIRGINIA V. AIM ADVISORS, INC., ET AL. ("WVAG Complaint") was filed
against Alliance, Alliance Holding, and various other defendants not
affiliated with Alliance. The WVAG Complaint was filed in the Circuit
Court of Marshall County, West Virginia by the Attorney General of the
State of West Virginia. The WVAG Complaint makes factual allegations
generally similar to those in the HINDO Complaint.
In connection with its market timing-related matters, Alliance recorded
charges totaling $330 million during the second half of 2003 in connection
with establishing the $250 million restitution fund and certain other
matters. Alliance paid $1 million during first quarter 2005 and has
cumulatively paid $303 million related to these matters.
In connection with directed brokerage matters, in March 2005, Alliance
commenced discussions with the NASD regarding the directed brokerage
investigations by the SEC and the NASD. Accordingly, Alliance recorded a
$5.0 million charge against 2004 earnings; approximately $1.0 million of
this charge was reversed in first quarter 2005 to reflect the final amount
of approximately $4.0 million agreed upon between Alliance and the NASD.
In connection with proof of claim-related matters, in April 2005, the
court signed an order dismissing the DAVIDSON Complaint with prejudice.
Plaintiffs have a limited right to re-open the case within 90 days of the
order.
Although the outcome of litigation generally cannot be predicted with
certainty, management believes that, except as otherwise noted above or in
AXA Financial's Notes to Consolidated Financial Statements for the year
ended December 31, 2004, the ultimate resolution of the litigations
described above involving the Holding Company and/or its subsidiaries
should not have a material adverse effect on the consolidated financial
position of AXA Financial. Except as previously noted, management cannot
make an estimate of loss, if any, or predict whether or not any of such
other litigations described above or in AXA Financial's Notes to
Consolidated Financial Statements for the year ended December 31, 2004
will have a material adverse effect on AXA Financial's consolidated
results of operations in any particular period.
In addition to the matters previously reported and those described above,
the Holding Company and its subsidiaries are involved in various legal
actions and proceedings in connection with their businesses. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on AXA Financial's consolidated
financial position 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.
-19-
12) BUSINESS SEGMENT INFORMATION
The following tables reconcile segment revenues and earnings from
continuing operations before 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,
------------------------------------
2005 2004
---------------- ------------------
(IN MILLIONS)
SEGMENT REVENUES:
Financial Advisory/Insurance............................................ $ 2,113.5 $ 1,461.3
Investment Management................................................... 750.2 756.9
Consolidation/elimination............................................... (25.8) (20.3)
---------------- ------------------
Total Revenues.......................................................... $ 2,837.9 $ 2,197.9
================ ==================
SEGMENT EARNINGS FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST:
Financial Advisory/Insurance............................................ $ 318.2 $ 273.3
Investment Management................................................... 156.0 162.4
---------------- ------------------
Total Earnings from Continuing Operations before Income Taxes
and Minority Interest................................................ $ 474.2 $ 435.7
================ ==================
MARCH 31, December 31,
2005 2004
---------------- ------------------
(IN MILLIONS)
ASSETS:
Financial Advisory/Insurance............................................ $ 130,618.0 $ 131,432.7
Investment Management................................................... 15,013.5 14,575.4
Consolidation/elimination............................................... (219.5) 19.9
---------------- ------------------
Total Assets............................................................ $ 145,412.0 $ 146,028.0
================ ==================
13) STOCK-BASED COMPENSATION
AXA Financial 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 AXA Financial'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,
------------------------------------
2005 2004
---------------- ------------------
(IN MILLIONS)
Net earnings as reported................................................ $ 276.4 $ 230.7
Less: Total stock-based employee compensation expense determined
under fair value method for all awards, net of income tax benefit... (5.7) (5.2)
---------------- ------------------
Pro Forma Net Earnings.................................................. $ 270.7 $ 225.5
================ ==================
-20-
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 AXA Financial 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 AXA Financial's Annual Report on Form 10-K
for the year ended December 31, 2004 ("2004 Form 10-K").
CONSOLIDATED RESULTS OF OPERATIONS
FIRST QUARTER 2005 COMPARED TO FIRST QUARTER 2004
Earnings from continuing operations before income taxes and minority interest
were $474.2 million for first quarter 2005, an increase of $38.5 million from
the year earlier quarter. There was a $44.9 million increase in the Financial
Advisory/Insurance segment primarily due to the contribution of the MONY
Companies and related integration expense savings both for AXA Equitable and the
MONY Companies. The Investment Management segment's earnings were down slightly
when compared to first quarter 2004. In first quarter 2004, AXA Financial
recorded a $4.0 million charge (net of related income taxes of $2.2 million) for
the cumulative effect of the January 1, 2004 adoption of SOP 03-1. Net earnings
for AXA Financial totaled $276.4 million for first quarter 2005, $45.7 million
higher than the $230.7 million reported for the 2004 quarter.
Revenues. In first quarter 2005, revenues increased $640.0 million to $2.84
billion. A revenue increase of $652.2 million for the Financial
Advisory/Insurance segment, $548.6 million of which was due to the MONY
Companies, was partially offset by $6.7 million lower revenues for the
Investment Management segment.
Premiums increased by $177.1 million to $411.9 million for first quarter 2005
with the MONY Companies' premiums totaling $176.3 million in first quarter 2005.
Policy fee income was $499.5 million, $126.9 million higher than first quarter
2004 with the MONY Companies contributing $57.3 million. When that contribution
is excluded, the remaining $69.6 million policy fee income increase was
primarily due to higher average Separate Account balances resulting from
positive net cash flows and market appreciation.
Net investment income increased $204.9 million to $869.7 million of which $189.3
million relates to the MONY Companies' income in first quarter 2005. When this
income is excluded, the remaining $15.6 million increase was primarily the
result of $36.2 million in net investment income related to derivative
instruments including those related to hedging programs implemented to mitigate
certain risks associated with the GMDB/GMIB features of certain contracts and
interest rate swap and floor contracts partially offset by lower income on AXA
Equitable's investment portfolio. Lower income from fixed maturities, equity
real estate, policy loans and other equity investments was partially offset by
slightly higher income on cash and short-term investments.
Investment gains totaled $7.7 million in first quarter 2005, as compared to
$48.6 million in first quarter 2004. The decline in the 2005 quarter resulted
from $31.2 million lower gains from sales of fixed maturity securities and
losses of $1.8 million on other equity investments as compared to $6.4 million
of gains in first quarter 2004 partially offset by lower writedowns on General
Account fixed maturities, $1.3 million in first quarter 2005 as compared to $5.1
million in first quarter 2004.
Commissions, fees and other income increased $172.0 million to $1.05 billion
with higher income in the Financial Advisory/Insurance segment partially offset
by a $4.3 million decrease in the Investment Management segment. The Financial
Advisory/Insurance segment increase of $175.0 million in first quarter 2005
included the MONY Companies' addition of $140.1 million. Of the remaining $34.9
million of the Financial Advisory/Insurance increase, $11.6 million was due to
higher gross investment management fees received from EQAT and VIP Trust due to
a higher asset base. Additionally, $25.1 million of the increase was due to the
change in the fair value of the GMIB reinsurance contracts. As required by SFAS
No. 133, the GMIB reinsurance contracts are considered derivatives and are
reported at fair value. The increase in fair value for first quarter 2005 was
$40.1 million as compared to $15.0 million in first quarter 2004. The Investment
Management segment decrease was principally due to declines in distribution
revenues, shareholder servicing fees, institutional research services and other
revenues, partially offset by the $25.2 million increase in investment advisory
and services fees at Alliance. There was an $8.5 million decrease in
distribution revenues, primarily due to lower daily average retail AUM. Other
revenues at Alliance declined by $8.5 million from the $14.3 million reported in
first quarter 2004 principally due to unrealized
-21-
mark-to-market losses on investments held for deferred compensation plan
obligations. Shareholder servicing fees decreased $6.1 million to $25.2 million
in first quarter 2005 primarily as the result of the reduction in the number
of shareholder accounts due to redemptions and of fee reductions. Institutional
research revenues decreased $4.2 million to $75.2 million in first quarter 2005
due to a decrease in NYSE market share and pricing partially offset by an
increase in NYSE daily trading volume. The 4.9% increase to $536.2 million in
investment advisory and services fees was primarily due to a 10.7% increase
in average assets under management ("AUM") resulting from market appreciation
and net asset inflows and performance fees of $7.8 million in the 2005 quarter
as compared to $3.6 million in first quarter 2004, partially offset by lower
transaction volume, one less trading day in the quarter and the partial
introduction of a new pricing structure that will eliminate transaction charges
for most private clients with a corresponding increase in asset-based fees.
Benefits and Other Deductions. Total benefits and other deductions increased
$601.5 million with increases of $607.3 million reported in the Financial
Advisory/Insurance segment being partially offset by $0.3 million decrease in
the Investment Management segments. The MONY Companies total benefits and other
deductions in first quarter 2005 were $519.0 million.
Policyholders benefits were $730.7 million in first quarter 2005, a $274.9
million increase from first quarter 2004, of which $254.1 million was due to the
MONY Companies. The net increase, when the MONY Companies' impact is excluded,
principally resulted from higher GMDB/GMIB benefits and reserves due to the
growth in business and higher benefits and reserves in the reinsurance assumed
product line partially offset by lower individual life death claims.
The $15.8 million increase in interest credited to policyholders' account
balances to $287.8 million in first quarter 2005 was due to the $29.3 million in
first quarter 2005 interest credited for MONY Companies. When the MONY
Companies' amount is excluded, interest credited declined $13.5 million
principally due to unrealized investment losses charged to Pension Par contracts
pursuant to SOP 03-1.
Total compensation and benefits increased $121.6 million to $598.9 million in
first quarter 2005 principally due to a $110.8 million increase for the
Financial Advisory/Insurance segment, of which $96.5 million was attributed to
the MONY Companies. When the MONY Companies' compensation and benefits amount in
first quarter 2005 is excluded, the $14.3 million increase for the Financial
Advisory/Insurance segment was primarily due to the $12.0 million change related
to increases in the Stock Appreciation Rights liability. The $10.8 million
increase for the Investment Management segment was primarily a result of annual
merit increases at Alliance.
For first quarter 2005, commissions in the Financial Advisory/Insurance segment
totaled $258.0 million, an increase of $69.5 million from first quarter 2004,
principally due to the $66.5 million of MONY Companies' commissions in first
quarter 2005.
There was a $5.7 million decrease in distribution plan payments by Alliance due
to lower amortization of deferred sales commissions as a result of lower
back-end load shares and lower distribution plan payments.
Interest expense totaled $64.7 million in first quarter 2005, a $16.6 million
increase from the $48.1 million in the prior year's comparable quarter. The
increase was principally related to Holding Company debt incurred and assumed in
connection with the MONY acquisition in third quarter 2004 and the purchase of
AXA ADR call options and Alliance Units in fourth quarter 2004.
DAC and VOBA amortization increased to $202.1 million in first quarter 2005, up
$79.4 million, including the $17.8 million attributed to the MONY Companies in
the 2005 period. When the MONY Companies' impact is excluded, the remaining
$61.6 million increase in amortization was principally due to higher margins on
products that are DAC reactive.
DAC capitalization totaled $298.2 million, an increase of $71.4 million from
$226.8 million reported in first quarter 2004. When the $39.2 million in MONY
Companies' DAC capitalization in first quarter 2005 is excluded, the $32.2
million increase in the 2005 period primarily resulted from higher sales of
interest sensitive life products.
The first quarter 2005 increases in rent expense and amortization of intangible
assets of $14.6 million and $5.2 million, respectively, were principally due to
the related MONY Companies totals of $13.7 million and $4.7 million for those
expense categories in that same quarter.
-22-
The Financial Advisory/Insurance segment was the principal contributor to the
$93.0 million increase in other operating costs and expenses, with the MONY
Companies accounting for $66.5 million of the segment's $92.6 million increase
in first quarter 2005. When the MONY Companies portion is excluded, the
remaining $26.1 million increase in the Financial Advisory/Insurance segment was
principally due to higher sub-advisory fees at EQAT and VIP Trust due to higher
average asset balances.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products for first quarter 2005 were $3.80 billion, an increase of $409.2
million from the 2004 quarter while total first year premiums increased $134.0
million to $2.35 billion in first quarter 2005. The MONY Companies' total and
first year premiums and deposits for these product lines were $429.5 million and
$158.3 million, respectively, in first quarter 2005. When the MONY Companies'
totals are excluded from the comparison, first year premiums and deposits for
the life products increased $26.0 million due to higher sales in the retail
channel while the annuity lines' premiums and deposits declined $46.6 million
primarily due to lower sales in the retail distribution channel. There was a
$419.8 million increase to $1.38 billion in mutual fund and fee based assets
sales in first quarter 2005, of which $416.6 million was attributed to the MONY
Companies.
Surrenders and Withdrawals. Surrenders and withdrawals increased, from $1.53
billion in first quarter 2004 to $1.81 billion for first quarter 2005 with
$243.9 million of the increase attributed to the MONY Companies. When this
amount is excluded, there was an increase of $37.4 million as decreases of $78.5
million and $5.8 million reported for the variable and interest-sensitive life
and traditional life insurance lines, respectively, were more than offset by a
$121.7 million increase in individual annuities surrenders and withdrawals. When
the MONY Companies' impact is excluded, the annualized annuities surrender rate
declined to 8.0 % in first quarter 2005 from 8.3% in first quarter 2004.
Similarly, the individual life surrender rates decreased to 4.1% from 5.5% for
the same respective periods. The individual life surrender rate was higher in
first quarter 2004 principally due to the surrender of a single large COLI
contract. When the effect of this surrender is excluded, the first quarter 2004
life surrender rate was 4.4%. The 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,
-----------------------------------
2005 2004
--------------- ---------------
Third party..................................................................... $ 471,157 $ 425,214
General Account and other....................................................... 54,590 42,701
Insurance Group Separate Accounts............................................... 64,977 57,387
--------------- ---------------
Total Assets Under Management................................................... $ 590,724 $ 525,302
=============== ===============
Third party assets under management at March 31, 2005 increased $45.94 billion
primarily due to increases at Alliance. General Account and other assets under
management increased $11.89 billion from first quarter 2004 totals. The $7.59
billion increase in Insurance Group Separate Account assets under management
resulted from market appreciation and net new deposits.
Alliance assets under management at the end of first quarter 2005 totaled $533.9
billion as compared to $486.4 billion at March 31, 2004 as market appreciation
and net inflows of $17.7 million and $5.3 million in the Institutional
Investment Management and Private Client distribution channels were offset by
net outflows of $3.4 million in the Retail distribution channel and $5.7 million
in net cash management distributions. Non-US clients accounted for 26.5% of the
March 31, 2005 total.
The initial closing in Federated's acquisition of Alliance's cash management
services unit occurred on March 7, 2005. As of March 31, 2005, approximately $1
billion of client AUM were transferred to Federated. It is anticipated that the
remaining cash management assets will be transferred during second quarter 2005.
-23-
LIQUIDITY AND CAPITAL RESOURCES
AXA Equitable. At March 31, 2005, AXA Equitable had $193.6 million of short-term
debt outstanding; there were no commercial paper or borrowings under the
revolving credit facility outstanding at that date.
Alliance. For the three months ended March 31, 2005 and 2004, respectively, cash
flows included inflows of $16.7 million and $28.4 million representing proceeds
from the exercise of options for Alliance Units offset by outflows related to
purchases of Alliance Units totaling $6.4 million and $38.4 million by
subsidiaries of Alliance to fund deferred compensation plans. Capital
expenditures at Alliance were $23.7 million in first quarter 2005 compared to
$6.9 million in first quarter 2004. Available cash flow for cash distributions
from Alliance totaled $162.0 million and $76.7 million for first quarter 2005
and 2004, respectively. 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.
At March 31, 2005, Alliance had $8.1 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 AND RISK CONSIDERATIONS
AXA Financial's management has made in this report, and from time to time may
make in its public filings and press releases as well as in oral presentations
and discussions, forward-looking statements concerning AXA Financial's
operations, economic performance and financial position. Forward-looking
statements include, among other things, discussions concerning AXA Financial's
potential exposure to market risks, as well as statements expressing
management's expectations, beliefs, estimates, forecasts, projections and
assumptions, as indicated by words such as "believes," "estimates," "intends,"
"anticipates," "expects," "projects," "should," "probably," "risk," "target,"
"goals," "objectives," or similar expressions. AXA Financial claims the
protection afforded by the safe harbor for forward-looking statements contained
in Section 21E of the Exchange Act, and assumes no duty to update any
forward-looking statement. Forward-looking statements are based on management's
expectations and beliefs concerning future developments and their potential
effects, and are subject to risks and uncertainties. Actual results could differ
materially from those anticipated by forward-looking statements due to a number
of important factors including those discussed elsewhere in this report and in
AXA Financial's other public filings, press releases, oral presentations and
discussions. The following discussion highlights some of the more important risk
and other factors that could cause such differences and/or, if realized, could
have a material adverse effect on AXA Financial's consolidated financial
position and/or results of operations.
Market Risk. AXA Financial's businesses are subject to market risks arising from
its insurance asset/liability management, investment management and trading
activities. The primary market risk exposures result from interest rate
fluctuations, equity price movements and changes in credit quality. The nature
of each of these risks is discussed under the caption "Quantitative and
Qualitative Disclosures About Market Risk" and in Note 18 of Notes to
Consolidated Financial Statements, both contained in the 2004 Form 10-K.
Increased volatility of equity markets can impact profitability of the Financial
Advisory/Insurance and Investment Management segments. For the Insurance Group,
in addition to impacts on equity securities held in the General Account,
significant changes in equity markets impact asset-based policy fees charged on
variable life and annuity products. Moreover, for variable life and annuity
products with GMDB/GMIB and other guaranteed 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 or hedging) 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 and VOBA 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 and VOBA amortization rates, DAC and VOBA 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.
-24-
The effects of significant equity market fluctuations on the Insurance Group's
operating results can be complex and subject to a variety of estimates and
assumptions, such as assumed rates of long-term equity market performance,
making it difficult to reliably predict effects on operating earnings over a
broad range of equity markets performance alternatives. Further, these effects
may not always be proportional for market increases and market decreases.
Margins on interest-sensitive annuities and universal life insurance can be
affected by interest rate fluctuations. In a declining interest rate
environment, credited rates can generally be adjusted more quickly than the
related invested asset portfolio is affected by declining reinvestment rates,
tending to result in higher net interest margins on interest-sensitive products
in the short term. However, under scenarios in which interest rates fall and
remain at significantly lower levels, minimum guarantees on interest-sensitive
annuities and universal life insurance (generally 1.5% to 4.5%) could cause the
spread between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate and in some cases, potentially, to become negative.
For both interest-sensitive annuities and universal life insurance, a rapid and
sustained rise in interest rates poses risks of deteriorating spreads and high
surrenders. In such an environment, there is pressure to increase credited rates
on interest-sensitive products to match competitors' new money rates. However,
such changes in credited rates generally occur more quickly than the earned
rates on the related invested asset portfolios reflect changes in market yields.
The greater and faster the rise in interest rates, the more the earned rates
will tend to lag behind market rates.
For the Investment Management segment, significant changes in equity markets can
impact revenues and the recoverability of deferred costs. See "Other Risks of
the Investment Management Segment" below.
Other Risks of the Financial Advisory/Insurance Segment. The Insurance Group's
future sales of life insurance and annuity products and financial planning
services are dependent on numerous factors including: successful implementation
of AXA Financial's strategy; the intensity of competition from other insurance
companies, banks and other financial institutions; conditions in the securities
markets; the strength and professionalism of distribution channels; the
continued development of existing and additional channels; the financial and
claims-paying ratings of AXA Equitable, MONY Life and MLOA; 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 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. Management cannot predict what proposals may be made, what
legislation, if any, may be introduced or enacted or what the effect of any such
legislation might be. See "Business - Regulation" contained in the 2004 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; including those anticipated from the integration
of the businesses of AXA Financial and the MONY Companies; secular trends;
increased costs and impact of compliance, regulatory examinations and oversight;
the ability to reach sales targets for key products including the continuing
market receptivity of its variable annuity product, Accumulator(R) `04; AXA
Financial's mortality, morbidity, persistency and claims experience; margins
between investment results from General Account Investment Assets and interest
credited on individual insurance and annuity products, which are subject to
contractual minimum guarantees; the level of claims and reserves on contracts
with GMDB/GMIB and other guaranteed features, the impact of related reinsurance
and the effectiveness of any program to hedge certain risks associated with such
features; the account balances against which policy fees are assessed on
universal and variable life insurance and variable annuity products; the pattern
of DAC and VOBA 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 or the war on terrorism. With regard to
terrorism generally, in August 2004, the Federal government announced a
heightened threat level for financial institutions. In establishing the amount
of the liabilities and reserves of the Insurance Group associated with the risks
assumed in connection with reinsurance pools and arrangements, the Insurance
Group relies on the accuracy and timely delivery of data and other information
from ceding companies.
-25-
Recoverability of DAC and VOBA 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 that have created, and in the future may create, significant
volatility in investment income.
Other Risks of the Investment Management Segment. Alliance's revenues are
largely dependent on the total value and composition of assets under its
management and are, therefore, affected by the performance of financial markets,
the investment performance of sponsored investment products and separately
managed accounts, additions and withdrawals of assets, purchases and redemptions
of mutual funds and shifts of assets between accounts or products with different
fee structures, as well as general economic conditions, future acquisitions,
competitive conditions and government regulations, including tax rates. See
"Results of Continuing Operations by Segment - Investment Management" contained
in the 2004 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,
revenue sharing and directed brokerage. 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
ongoing litigation relating thereto, as well as other litigation, may have an
adverse effect on AXA Financial's and Alliance's assets under management,
including an increase in mutual fund redemptions, and may cause or prolong
general reputational damage, both of which could adversely affect AXA
Financial's and Alliance's results of operations.
Payments of sales commissions by Alliance 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 the deferred sales commission asset is expected to be recovered.
Contingent deferred sales charges ("CDSC") cash recoveries are recorded as
reductions of unamortized deferred sales commissions when received. The amount
recorded for the net deferred sales commission asset was $233.6 million at March
31, 2005. 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 of $6.1 million and $10.2 million,
totaled approximately $15.7 million and $14.9 million during the three months
ended March 31, 2005 and 2004, respectively.
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, 2005, 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
future cash flows discounted to a present value amount.
During the three months ended March 31, 2005, equity markets decreased by
approximately 2% as measured by the change in the Standard & Poor's 500 Stock
Index and fixed income markets remained flat as measured by the change in the
Lehman Brothers' Aggregate Bond Index. The redemption rate for domestic back-end
load shares, adjusted for the closing of certain funds in conjunction with
Alliance's fund rationalization program, was approximately 25.6% during the
three months ended March 31, 2005. 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. Any
impairment would reduce materially the recorded amount of the deferred sales
commission asset with a corresponding charge to earnings.
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 that affect investment and benefit projections.
There can be no assurance the losses provided for will not differ from the
losses ultimately realized. To the extent actual results or future projections
of Other Discontinued Operations differ from management's current best estimates
underlying the allowance, the difference would be reflected as earnings or loss
from discontinued operations within the consolidated statements of earnings. In
particular, to the extent income, sales proceeds and holding periods for equity
real estate differ from management's previous assumptions, periodic adjustments
to the allowance are likely to result.
-26-
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. AXA Financial's information systems are
central to, among other things, designing and pricing products, marketing and
selling products and services, processing policyholder and investor
transactions, client recordkeeping, communicating with retail sales associates,
employees and clients, and recording information for accounting and management
purposes in a secure and timely manner. These systems are maintained to provide
customer privacy and are tested to ensure the viability of business resumption
plans. Any significant difficulty associated with the operation of such systems,
or any material delay or inability to develop needed system capabilities, could
have a material adverse effect on AXA Financial's results of operations and,
ultimately, its ability to achieve its strategic goals.
Legal Environment. A number of lawsuits have been filed against life and health
insurers and affiliated distribution companies involving insurers' sales
practices, alleged agent misconduct, failure to properly supervise agents and
other matters. Some of the lawsuits have resulted in the award of substantial
judgments against other insurers, including material amounts of punitive
damages, or in substantial settlements. In some states, juries have substantial
discretion in awarding punitive damages. AXA Financial's insurance subsidiaries
and related companies, like other life and health insurers, are involved in such
litigation and the results of operations and financial position of AXA Financial
and such insurance subsidiaries and related companies 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 them.
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 and other regulatory and related agencies including, among
others, state attorneys general and insurance and securities regulators could
result in adverse publicity, sanctions and fines. In the last year, AXA
Equitable, EQAT, MONY Life, MLOA, MSC, Multimanager Trust, VIP Trust, AXA
Advisors, AXA Distributors and other AXA Financial subsidiaries have provided,
or are in the process of providing, information and documents to the SEC, the
NASD and state attorneys general and insurance and securities regulators on a
wide variety of issues, including supervisory issues, market timing, late
trading, valuation, suitability, replacements and exchanges of variable life
insurance and annuities, finite risk reinsurance, collusive bidding and other
inappropriate solicitation activities, "revenue sharing" and directed brokerage
arrangements, investment company directed brokerage arrangements, fund portfolio
brokerage commissions, mutual fund sales and marketing and "networking
arrangements". At this time, management cannot predict what other actions the
SEC, the NASD and/or other regulators may take or what the impact of such
actions might be. Fines and other sanctions could result from pending regulatory
matters. For further information, see "Business - Regulation" and "Legal
Proceedings," contained in the 2004 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 AXA Financial's consolidated statements of earnings and shareholders'
equity. See Note 3 of Notes to Consolidated Financial Statements in the 2004
Form 10-K for pronouncements issued but not effective at December 31, 2004.
Regulation. The businesses conducted by AXA Financial's subsidiaries are subject
to extensive regulation and supervision by state insurance departments and
Federal and state agencies regulating, among other things, insurance and
annuities, securities transactions, investment companies, investment advisors
and anti-money laundering compliance programs. Changes in the regulatory
environment, including increased activism by state attorneys general and
insurance commissioners, 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, Puerto
Rico, Guam, the U.S. Virgin Islands and nine of Canada's twelve provinces and
territories. See "Business - Regulation" contained in the 2004 Form 10-K.
-27-
In addition to the foregoing, Federal and state authorities are continuing to
investigate various practices of insurers, principally in the property and
casualty and related businesses (including general insurance lines), as well as
the purchase or sale of nontraditional insurance products including finite risk
reinsurance. While AXA Financial's insurance company subsidiaries do not have
any material non-life insurance operations, other subsidiaries and affiliates of
AXA Financial's parent, AXA, are involved in these areas and have received
various inquiries and requests for information from Federal and state
authorities, to which they are in the process of responding. The concerned
subsidiaries and affiliates of AXA intend to fully cooperate with these Federal
and state authorities. While, at this time, AXA Financial is unable to predict
what actions, if any, regulators may take against any of these affiliated
entities, any negative publicity associated with the AXA brand name generated by
these inquiries (or by any actions or sanctions that may arise in connection
with them) may result in general reputational damage to AXA Financial, which
could adversely affect AXA Financial's results of operations.
-28-
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 AXA Financial's
disclosure controls and procedures as of March 31, 2005. Based on that
evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that AXA Financial's disclosure controls and
procedures are effective. Except for the enhancements described below, there has
been no change in AXA Financial's internal control over financial reporting that
occurred during the period covered by this report that has materially affected,
or is reasonably likely to materially affect, AXA Financial's internal control
over financial reporting.
In connection with the continuing integration process associated with the
Holding Company's recent acquisition of MONY, management has enhanced, and
continues to enhance, the overall internal control environment of MONY Life,
MLOA and USFL by implementing new procedures and controls, including increasing
and re-allocating staffing in the accounting department, instituting additional
account reconciliations and upgrading the investment accounting computer
systems.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 11 of Notes to Consolidated Financial Statements contained herein.
Except as disclosed in Note 11 of Notes to Consolidated Financial Statements,
there have been no new material legal proceedings and no new material
developments in legal proceedings previously reported in the 2004 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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
Number Description and Method of Filing
------ ---------------------------------------------------------
31.1 Section 302 Certification made by the Registrant's Chief
Executive Officer
31.2 Section 302 Certification made by the Registrant's Chief
Financial Officer
32.1 Section 906 Certification made by the Registrant's Chief
Executive Officer
32.2 Section 906 Certification made by the Registrant's Chief
Financial Officer
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, AXA
Financial, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 13, 2005 AXA FINANCIAL, INC.
By: /s/ Stanley B. Tulin
-------------------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: May 13, 2005 /s/ Alvin H. Fenichel
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Name: Alvin H. Fenichel
Title: Senior Vice President and Controller
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