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 June 30, 2005 Commission File No. 333-45415
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AXA FINANCIAL, INC.
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(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|
Indicate by check mark whether the registrant is a shell company (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 August 15, 2005.
At August 15, 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 36
AXA FINANCIAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2005
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated GAAP Financial Statements
o Consolidated Balance Sheets, June 30, 2005 and December 31, 2004.................... 3
o Consolidated Statements of Earnings, Three Months and Six Months Ended
June 30, 2005 and 2004............................................................ 4
o Consolidated Statements of Shareholders' Equity,
Six Months Ended June 30, 2005 and 2004........................................... 5
o Consolidated Statements of Cash Flows, Six Months Ended
June 30, 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")......................................... 23
Item 3: Quantitative and Qualitative Disclosures About Market Risk*............................ 31
Item 4: Controls and Procedures................................................................ 31
PART II OTHER INFORMATION
Item 1: Legal Proceedings...................................................................... 31
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds............................ 31
Item 3: Defaults Upon Senior Securities........................................................ 31
Item 4: Submission of Matters to a Vote of Security Holders.................................... 31
Item 5: Other Information...................................................................... 31
Item 6: Exhibits............................................................................... 31
SIGNATURES ...................................................................................... 32
*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)
JUNE 30, December 31,
2005 2004
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(In Millions)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 39,520.8 $ 39,301.6
Mortgage loans on real estate............................................. 4,696.1 4,909.8
Equity real estate, held for the production of income..................... 789.0 835.1
Policy loans.............................................................. 4,934.9 4,968.0
Other equity investments.................................................. 1,347.0 1,219.8
Other invested assets..................................................... 2,301.1 1,682.7
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Total investments..................................................... 53,588.9 52,917.0
Cash and cash equivalents................................................... 2,398.2 2,574.9
Cash and securities segregated, at estimated fair value..................... 1,229.2 1,489.0
Broker-dealer related receivables........................................... 2,729.6 2,187.7
Deferred policy acquisition costs........................................... 7,232.8 6,908.6
Goodwill and other intangible assets, net................................... 5,224.3 5,242.4
Value of business acquired.................................................. 785.8 817.4
Amounts due from reinsurers................................................. 3,192.3 3,149.2
Loans to affiliates, at estimated fair value................................ 400.0 400.0
Other assets................................................................ 3,986.9 3,930.1
Separate Accounts' assets................................................... 67,805.5 66,411.7
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TOTAL ASSETS................................................................ $ 148,573.5 $ 146,028.0
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LIABILITIES
Policyholders' account balances............................................. $ 30,757.8 $ 30,367.3
Future policy benefits and other policyholders liabilities.................. 22,998.0 22,888.6
Broker-dealer related payables.............................................. 1,713.5 1,222.8
Customers related payables.................................................. 2,178.0 2,658.7
Short-term and long-term debt............................................... 3,254.2 3,263.4
Loans from affiliates....................................................... 1,480.0 1,568.9
Income taxes payable........................................................ 2,172.5 2,010.2
Other liabilities........................................................... 4,881.8 4,884.9
Separate Accounts' liabilities.............................................. 67,805.5 66,411.7
Minority interest in equity of consolidated subsidiaries.................... 1,431.0 1,421.1
Minority interest subject to redemption rights.............................. 266.0 266.6
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Total liabilities..................................................... 138,938.3 136,964.2
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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.............................................. 1,040.7 1,054.1
Retained earnings........................................................... 7,713.8 7,139.7
Accumulated other comprehensive income...................................... 876.8 866.1
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Total shareholders' equity............................................ 9,635.2 9,063.8
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................. $ 148,573.5 $ 146,028.0
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See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
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(In Millions)
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 496.3 $ 374.5 $ 995.8 $ 747.1
Premiums............................................. 395.3 227.1 807.2 461.9
Net investment income................................ 762.5 611.6 1,632.2 1,276.4
Investment gains, net................................ 50.0 8.9 57.7 57.5
Commissions, fees and other income................... 1,064.4 829.4 2,113.8 1,713.9
--------------- ---------------- --------------- ---------------
Total revenues................................. 2,768.8 2,051.5 5,606.7 4,256.8
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BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits.............................. 731.7 454.8 1,462.4 910.6
Interest credited to policyholders' account balances. 300.1 239.9 587.9 511.9
Compensation and benefits............................ 603.9 459.1 1,202.8 936.4
Commissions.......................................... 278.4 203.8 536.4 392.3
Distribution plan payments........................... 71.4 92.8 162.8 189.9
Amortization of deferred sales commissions........... 34.5 46.7 71.0 95.2
Interest expense..................................... 68.0 48.1 132.7 96.2
Amortization of deferred policy acquisition costs and
value of business acquired........................ 138.5 57.6 340.6 180.3
Capitalization of deferred policy acquisition costs.. (337.6) (256.3) (635.8) (483.1)
Rent expense......................................... 62.0 49.6 124.6 97.6
Amortization of other intangible assets, net......... 9.9 6.6 21.5 13.0
Other operating costs and expenses................... 277.4 231.4 595.0 463.4
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Total benefits and other deductions............ 2,238.2 1,634.1 4,601.9 3,403.7
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
income taxes and minority interest................. 530.6 417.4 1,004.8 853.1
Income tax expense................................... (155.9) (110.6) (289.2) (239.8)
Minority interest in net income of
consolidated subsidiaries.......................... (77.1) (62.2) (141.5) (136.1)
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Earnings from continuing operations.................. 297.6 244.6 574.1 477.2
Earnings from other discontinued operations,
net of income tax expense......................... .1 1.2 - 3.3
Gain on disposal of the discontinued Investment
Banking and Brokerage segment, net of income
taxes............................................ - 53.2 - 53.2
Cumulative effect of accounting changes, net of
income tax benefit................................ - - - (4.0)
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Net Earnings......................................... $ 297.7 $ 299.0 $ 574.1 $ 529.7
=============== ================ =============== ===============
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
2005 2004
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(In Millions)
SHAREHOLDERS' EQUITY
Common stock, at par value, beginning of year and end of period............. $ 3.9 $ 3.9
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Capital in excess of par value, beginning of year........................... 1,054.1 1,102.3
Other changes in additional capital in excess of par value.................. (13.4) .4
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Capital in excess of par value, end of period............................... 1,040.7 1,102.7
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Retained earnings, beginning of year........................................ 7,139.7 6,194.8
Net earnings................................................................ 574.1 529.7
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Retained earnings, end of period............................................ 7,713.8 6,724.5
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Accumulated other comprehensive income, beginning of year................... 866.1 872.7
Other comprehensive income (loss)........................................... 10.7 (348.4)
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Accumulated other comprehensive income, end of period....................... 876.8 524.3
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TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD................................... $ 9,635.2 $ 8,355.4
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See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(UNAUDITED)
2005 2004
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(In Millions)
Net earnings................................................................ $ 574.1 $ 529.7
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Interest credited to policyholders' account balances.................... 587.9 511.9
Universal life and investment-type product policy fee income............ (995.8) (747.1)
Net change in broker-dealer customer related receivables/payables...... (578.7) (40.6)
Investment gains, net................................................... (57.7) (57.5)
Increase in segregated cash and securities, net......................... 259.8 89.7
Change in deferred policy acquisition costs............................. (295.2) (302.8)
Change in future policy benefits........................................ 21.2 83.9
Change in property and equipment........................................ (28.6) (27.9)
Change in income tax payable............................................ 149.4 85.6
Change in fair value of guaranteed minimum income benefit
reinsurance contracts................................................ (84.2) (8.0)
Gain on disposal of Investment Banking and Brokerage segment............ - (53.2)
Minority interest in net income of consolidated subsidiaries............ 141.5 136.1
Other, net.............................................................. 180.2 (9.5)
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Net cash (used) provided by operating activities............................ (126.1) 190.3
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Cash flows from investing activities:
Maturities and repayments................................................. 2,219.4 1,826.4
Sales.................................................................... 1,437.1 2,646.1
Purchases................................................................. (3,826.1) (4,250.8)
Change in short-term investments.......................................... (485.9) 261.4
Purchase of minority interest in consolidated subsidiary.................. - (308.7)
Other, net................................................................ 9.7 64.6
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Net cash (used) provided by investing activities............................ (645.8) 239.0
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Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 2,190.3 1,872.9
Withdrawals and transfers to Separate Accounts.......................... (1,426.1) (1,431.8)
Net increase in short-term financings..................................... .7 1.3
Other, net................................................................ (169.7) (36.4)
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Net cash provided by financing activities................................... 595.2 406.0
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Change in cash and cash equivalents......................................... (176.7) 835.3
Cash and cash equivalents, beginning of year................................ 2,574.9 1,018.3
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Cash and Cash Equivalents, End of Period.................................... $ 2,398.2 $ 1,853.6
================= =================
Supplemental cash flow information
Interest Paid............................................................. $ 145.0 $ 98.1
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Income Taxes Paid ........................................................ $ 122.2 $ 222.5
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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 six months
ended June 30, 2005 are not necessarily indicative of the results to be
expected for the full year.
The terms "second quarter 2005" and "second quarter 2004" refer to the
three months ended June 30, 2005 and 2004, respectively. The terms "first
half of 2005" and "first half of 2004" refer to the six months ended June
30, 2005 and 2004 respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods to the current presentation.
On July 8, 2004, AXA Financial completed its acquisition of MONY. AXA
Financial's consolidated balance sheets at June 30, 2005 and December 31,
2004 and its related consolidated statements of earnings, shareholders'
equity and comprehensive (loss) income and cash flows for second quarter
2005 and the first half of 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 an
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 a similar transaction
completed later in 2004, AXA Financial's economic interest in Alliance at
June 30, 2005 was 61.1%.
3) ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS
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 AXA Equitable,
(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
-7-
available for sale in the accompanying consolidated financial statements.
These two Separate Accounts hold assets and liabilities associated with
market value adjusted fixed rate investment options available in certain
variable annuity contracts. In addition, liabilities associated with the
market value adjustment feature are now reported at the accrued account
balance. Prior to the adoption of SOP 03-1, such liabilities had been
reported at market adjusted value.
Prior to the adoption of SOP 03-1, the liabilities for group pension
participating contracts were adjusted only for changes in the fair value
of certain related investment assets that were reported at fair value in
the balance sheet (including fixed maturities and equity securities
classified as available for sale, but not equity real estate or 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 May 30, 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections," a replacement of APB No. 20, "Accounting Changes," and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial
Statements". SFAS No. 154 applies to all voluntary changes in accounting
principle as well as to changes required by an accounting pronouncement
that does not include transition provisions. To enhance comparability,
this statement requires retrospective application to prior periods'
financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the
cumulative effect of the change. The cumulative effect of the change is
reported in the carrying value of assets and liabilities as of the first
period presented, with the offset applied to opening retained earnings.
Each period presented is adjusted to show the period specific effects of
the change. Only direct effects of the change will be retrospectively
recognized; indirect effects will be recognized in the period of change.
SFAS No. 154 carries forward without change APB No. 20's guidance for
reporting the correction of an error and a change in accounting estimate
as well as SFAS No. 3's provisions governing reporting accounting changes
in interim financial statements. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after
December 15, 2005.
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," 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
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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
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 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
No. 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 is available only 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 No. 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 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 periods ended
June 30, 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:
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
2005 2004
--------------- ---------------
(IN MILLIONS)
Balances, beginning of year............................................... $ 11.8 $ 20.5
Additions charged to income............................................... .7 2.8
Deductions for writedowns and asset dispositions.......................... (.6) (4.7)
--------------- ---------------
Balances, End of Period................................................... $ 11.9 $ 18.6
=============== ===============
Balances, end of period comprise:
Mortgage loans on real estate........................................... $ 11.9 $ 18.1
Equity real estate...................................................... - .5
--------------- ---------------
Total..................................................................... $ 11.9 $ 18.6
=============== ===============
-9-
For the second quarter and first half of 2005 and of 2004, investment
income is shown net of investment expenses of $70.3 million, $44.2
million, $139.7 million and $88.6 million, respectively.
As of June 30, 2005 and December 31, 2004, fixed maturities classified as
available for sale had amortized costs of $37,347.6 million and $37,168.0
million. Also at June 30, 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 $135.3
million and $118.0 million and costs of $126.4 million and $107.8 million
and other equity securities with carrying values of $78.2 million and
$51.3 million and costs of $76.5 million and $49.4 million.
In the second quarter and first half of 2005 and of 2004, respectively,
net unrealized and realized holding gains (losses) on trading account
equity securities of $1.9 million, $.9 million, $(1.4) million and $4.2
million were included in net investment income in the consolidated
statements of earnings.
For the first half of 2005 and of 2004, proceeds received on sales of
fixed maturities classified as available for sale amounted to $1,360.4
million and $2,511.0 million, respectively. Gross gains of $24.2 million
and $35.3 million and gross losses of $12.1 million and $7.4 million were
realized on these sales for the first half of 2005 and of 2004,
respectively. Unrealized net investment gains (losses) related to fixed
maturities classified as available for sale increased by $41.6 million
during the first half of 2005, resulting in a balance of $2,173.1 million
at June 30, 2005.
Impaired mortgage loans along with the related investment valuation
allowances for losses follow:
JUNE 30, December 31,
2005 2004
--------------- -----------------
(In Millions)
Impaired mortgage loans with investment valuation allowances............ $ 89.0 $ 94.3
Impaired mortgage loans without investment valuation allowances......... 12.9 22.6
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 101.9 116.9
Investment valuation allowances......................................... 11.9 11.8
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 90.0 $ 105.1
=============== =================
During the first half of 2005 and 2004, respectively, AXA Financial's
average recorded investment in impaired mortgage loans was $114.5 million
and $176.3 million. Interest income recognized on these impaired mortgage
loans totaled $3.5 million and $6.1 million for the first half 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 the point that the collection of interest is considered
likely. At June 30, 2005 and December 31, 2004, respectively, the carrying
value of mortgage loans on real estate that had been classified as
nonaccrual loans was $83.0 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 has
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.
-10-
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 were 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.
AXA EQUITABLE CLOSED BLOCK
Summarized financial information for the AXA Equitable Closed Block is as
follows:
JUNE 30, December 31,
2005 2004
----------------- -----------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances and other.... $ 8,893.1 $ 8,911.5
Policyholder dividend obligation..................................... 255.6 264.3
Other liabilities.................................................... 141.8 122.1
----------------- -----------------
Total Closed Block liabilities....................................... 9,290.5 9,297.9
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $5,546.3 and $5,488.6).......................... 5,888.5 5,823.2
Mortgage loans on real estate........................................ 1,013.5 1,098.8
Policy loans......................................................... 1,309.7 1,322.5
Cash and other invested assets....................................... 135.6 37.1
Other assets......................................................... 175.5 187.0
----------------- -----------------
Total assets designated to the Closed Block......................... 8,522.8 8,468.6
----------------- -----------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................. 767.7 829.3
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred income tax
expense of $30.3 and $24.6 and policyholder dividend obligation
of $255.6 and $264.3............................................ 56.3 45.7
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities............................................ $ 824.0 $ 875.0
================= =================
-11-
AXA Equitable's Closed Block revenues and expenses were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- ---------------- --------------- ---------------
(IN MILLIONS)
REVENUES:
Premiums and other income............... $ 115.2 $ 119.7 $ 230.2 $ 242.3
Net investment income................... 132.8 136.0 264.7 277.8
Investment gains, net................... 3.5 3.4 11.7 16.5
--------------- ---------------- --------------- ---------------
Total revenues.......................... 251.5 259.1 506.6 536.6
--------------- ---------------- --------------- ---------------
BENEFITS AND
OTHER DEDUCTIONS:
Policyholders' benefits and dividends... 216.0 224.5 426.4 437.8
Other operating costs and expenses...... .8 .7 1.8 1.8
--------------- ---------------- --------------- ---------------
Total benefits and other deductions..... 216.8 225.2 428.2 439.6
--------------- ---------------- --------------- ---------------
Net revenues before income taxes........ 34.7 33.9 78.4 97.0
Income tax expense...................... (12.1) (12.2) (27.4) (34.5)
--------------- ---------------- --------------- ---------------
Net Revenues............................ $ 22.6 $ 21.7 $ 51.0 $ 62.5
=============== ================ =============== ===============
Reconciliation of the AXA Equitable policyholder dividend obligation is as
follows:
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
2005 2004
---------------- ----------------
(IN MILLIONS)
Balances, beginning of year............................................. $ 264.3 $ 242.1
Unrealized investment losses ........................................... (8.7) (91.4)
---------------- ----------------
Balances, End of Period................................................. $ 255.6 $ 150.7
================ ================
-12-
MONY LIFE CLOSED BLOCK
----------------------
Summarized financial information for the MONY Life Closed Block follows:
JUNE 30, December 31,
2005 2004
----------------- -------------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES
Future policy benefits, policyholders' account balances and other...... $ 7,346.8 $ 7,360.9
Policyholder dividend obligation....................................... 270.1 250.8
Other liabilities...................................................... 22.8 28.7
----------------- -------------------
Total Closed Block liabilities......................................... 7,639.7 7,640.4
----------------- -------------------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Fixed maturities available for sale, at fair value
(amortized cost $4,336.4 and $4,338.0).............................. 4,461.9 4,440.9
Mortgage loans on real estate.......................................... 537.2 592.5
Policy loans........................................................... 1,011.9 1,025.0
Cash and other invested assets......................................... 180.4 91.1
Other assets........................................................... 182.6 197.1
----------------- -------------------
Total assets designated to the Closed Block............................ 6,374.0 6,346.6
----------------- -------------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................... 1,265.7 1,293.8
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains,
net of policyholder dividend obligation of $125.4 and $102.9..... - -
----------------- -------------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities.............................................. $ 1,265.7 $ 1,293.8
================= ===================
MONY Life Closed Block revenues and expenses follow:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2005 JUNE 30, 2005
----------------- -------------------
(IN MILLIONS)
REVENUES:
Premiums and other income.............................................. $ 102.0 $ 199.0
Investment income (net of investment expenses of $1.5 and $2.7)........ 84.9 167.6
Investment (losses) gains, net......................................... (1.5) (1.2)
----------------- -------------------
Total revenues......................................................... 185.5 365.4
----------------- -------------------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits and dividends.................................. 163.3 320.6
Other operating costs and expenses..................................... .6 1.5
----------------- -------------------
Total benefits and other deductions................................. 163.9 322.1
----------------- -------------------
Net revenues before income taxes....................................... 21.7 43.3
Income tax expense..................................................... (7.6) (15.2)
----------------- -------------------
Net Revenues........................................................... $ 14.1 $ 28.1
================= ===================
-13-
Reconciliation of the MONY Life policyholder dividend obligation follows:
SIX MONTHS
ENDED JUNE 30, 2005
------------------------
(IN MILLIONS)
Balance, beginning of year.............................................. $ 250.8
Applicable to net revenues ............................................. (3.2)
Unrealized investment gains, net........................................ 22.5
------------------------
Balance, End of Period.................................................. $ 270.1
========================
6) OTHER DISCONTINUED OPERATIONS
Summarized financial information for Other Discontinued Operations
follows:
JUNE 30, December 31,
2005 2004
----------------- -----------------
(IN MILLIONS)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $807.6 and $643.6).............................. $ 859.4 $ 702.1
Equity real estate................................................... 189.2 190.1
Mortgage loans on real estate........................................ 13.4 21.4
Other equity investments............................................. 4.0 4.4
Other invested assets................................................ .2 .3
----------------- -----------------
Total investments.................................................. 1,066.2 918.3
Cash and cash equivalents............................................ - 150.2
Other assets......................................................... 16.5 33.3
----------------- -----------------
Total Assets......................................................... $ 1,082.7 $ 1,101.8
================= =================
Policyholders liabilities............................................ $ 830.4 $ 844.6
Allowance for future losses.......................................... 116.9 132.7
Other liabilities.................................................... 135.4 124.5
----------------- -----------------
Total Liabilities.................................................... $ 1,082.7 $ 1,101.8
================= =================
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $4.9, $4.3, $9.5
and $8.6).............................. $ 17.5 $ 17.2 $ 33.8 $ 34.5
Investment (losses) gains, net........... (.1) .8 (.2) 3.3
--------------- -------------- --------------- ---------------
Total revenues........................... 17.4 18.0 33.6 37.8
--------------- --------------- ------------- ---------------
Benefits and other deductions............ 21.5 24.6 42.7 50.3
Losses charged to the allowance for
future losses.......................... (4.1) (6.6) (9.1) (12.5)
--------------- --------------- --------------- ---------------
Pre-tax results from operations.......... - - - -
Pre-tax earnings from
releasing the allowance for
future losses.......................... .2 1.8 - 5.0
Income tax expense....................... (.1) (.6) - (1.7)
--------------- --------------- --------------- ---------------
Income from Other Discontinued
Operations............................ $ .1 $ 1.2 $ - $ 3.3
=============== =============== =============== ===============
-14-
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 release of the allowance in each of the periods presented
above.
Management believes the allowance for future losses at June 30, 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 have certain variable annuity contracts
with GMDB and GMIB features in-force 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.
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.......................... (22.2) - (22.2)
Other changes in reserve......................... 47.9 59.3 107.2
---------------- ----------------- -----------------
Balance at June 30, 2005........................... $ 94.2 $ 177.0 $ 271.2
================ ================= =================
Related GMDB reinsurance ceded amounts were:
GMDB
--------------------
(IN MILLIONS)
Balance at December 31, 2004....................... $ 9.3
Paid guarantee benefits ceded.................... (6.1)
Other changes in reserve......................... 13.8
--------------------
Balance at June 30, 2005........................... $ 17.0
====================
The GMIB reinsurance contracts are considered derivatives and are reported
at fair value.
-15-
The June 30, 2005 values for those variable annuity contracts currently
in-force 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 values invested in:
General Account............... $ 12,098 $ 626 $ 124 $ 537 $ 13,385
Separate Accounts............. $ 19,870 $ 8,098 $ 7,693 $ 12,435 $ 48,096
Net amount at risk, gross........ $ 1,066 $ 937 $ 2,030 $ 120 $ 4,153
Net amount at risk, net of
amounts reinsured.............. $ 1,063 $ 687 $ 1,235 $ 92 $ 3,077
Average attained age of
contractholders................ 50.0 60.5 63.0 60.5 52.7
Percentage of contractholders
over age 70.................... 7.8% 19.5% 29.6% 20.5% 11.3%
Range of guaranteed minimum
return rates................... N/A N/A 3%-6% 3%-6% N/A
GMIB:
-----
Account values invested in:
General Account............... N/A N/A $ 35 $ 718 $ 753
Separate Accounts............. N/A N/A $ 5,644 $ 16,768 $ 22,412
Net amount at risk, gross........ N/A N/A $ 654 $ - $ 654
Net amount at risk, net of
amounts reinsured.............. N/A N/A $ 167 $ - $ 167
Weighted average years
remaining until earliest
annuitization.................. N/A N/A 3.6 9.1 7.3
Range of guaranteed minimum
return rates................... N/A N/A 3%-6% 3%-6% N/A
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:
-16-
INVESTMENT IN VARIABLE INSURANCE TRUST MUTUAL FUNDS
JUNE 30, December 31,
2005 2004
---------------- ------------------
(IN MILLIONS)
GMDB:
Equity............................................................... $ 34,504 $ 34,574
Fixed income......................................................... 4,841 4,713
Balanced............................................................. 6,953 5,415
Other................................................................ 1,798 1,678
---------------- ------------------
Total................................................................ $ 48,096 $ 46,380
================ ==================
GMIB:
Equity............................................................... $ 15,136 $ 14,453
Fixed income......................................................... 2,588 2,463
Balanced............................................................. 4,052 2,772
Other................................................................ 636 569
---------------- ------------------
Total................................................................ $ 22,412 $ 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 variable
annuity products sold beginning in 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 variable annuity products sold
beginning in 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 June 30, 2005, the
total account value and net amount at risk of the hedged Accumulator(R)
series of variable annuity contracts were $24,034 million and $112
million, respectively, with the GMDB feature and $10,044 million and zero,
respectively, with the GMIB feature.
Although these programs are designed to provide economic protection
against the impact adverse market conditions may have with respect to GMDB
and GMIB guarantees, they do not qualify for hedge accounting treatment
under SFAS No. 133. Therefore, SFAS No. 133 requires gains or losses on
the futures contracts used in these programs, including current period
changes in fair value, to be recognized in investment income in the period
in which they occur, and may contribute to earnings volatility.
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:
DIRECT REINSURANCE
LIABILITY CEDED NET
----------------- ----------------- -----------------
(IN MILLIONS)
Balance at December 31, 2004....................... $ 21.0 $ - $ 21.0
Other changes in reserve......................... 6.2 - 6.2
----------------- ----------------- -----------------
Balance at June 30, 2005........................... $ 27.2 $ - $ 27.2
================= ================= =================
-17-
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 (credit) for the qualified and
non-qualified plans follow:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(IN MILLIONS)
Service cost................................. $ 14.1 $ 10.8 $ 28.1 $ 22.0
Interest cost on projected benefit
obligation................................. 44.2 37.1 88.5 73.9
Expected return on assets.................... (51.3) (43.3) (102.5) (85.5)
Net amortization and deferrals............... 22.8 17.3 45.6 39.7
--------------- --------------- --------------- ---------------
Net Periodic Pension Expense................. $ 29.8 $ 21.9 $ 59.7 $ 50.1
=============== =============== =============== ===============
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(In Millions)
Service cost................................. $ 1.9 $ 1.0 $ 4.0 $ 2.4
Interest cost on accumulated postretirement
benefit obligation........................ 9.7 8.0 19.3 16.8
Net amortization and deferrals............... 2.1 (.2) 4.2 2.7
--------------- --------------- --------------- ---------------
Net Periodic Postretirement Benefits Costs... $ 13.7 $ 8.8 $ 27.5 $ 21.9
=============== =============== =============== ===============
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(IN MILLIONS)
Service cost................................. $ 1.3 $ 2.3 $ 3.0 $ 4.7
Interest cost projected benefit obligation... .5 .8 1.0 1.5
--------------- --------------- --------------- ---------------
Net Periodic Postemployment Benefits
Costs..................................... $ 1.8 $ 3.1 $ 4.0 $ 6.2
=============== =============== =============== ===============
9) STOCK APPRECIATION RIGHTS
Following completion of the merger of AXA Merger Corp. with and into AXA
Financial, Inc. (the legal entity), 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. AXA Financial recorded a decrease in the Stock
Appreciation Rights liability of $8.7 million and $5.5
-18-
million for the second quarter of 2005 and 2004, and an increase of $.2
million and $3.2 million for the first half of 2005 and 2004,
respectively, reflecting the variable accounting for Stock Appreciation
Rights, based on the changes in the market value of AXA ADRs for the
periods then ended. At June 30, 2005, the Stock Appreciation Rights
liability was $30.0 million.
10) INCOME TAXES
Income taxes for interim periods have been computed using an estimated
annual effective tax rate. This rate is revised, if necessary, at the end
of each successive interim period to reflect the current estimate of the
annual effective tax rate.
11) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in AXA
Financial's Notes to Consolidated Financial Statements for the year ended
December 31, 2004, except as described below:
In EMERALD, in July 2005, EMERALD filed a motion for summary judgment on
liability for three of its claims.
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 August 2005, the
case was settled on an individual basis.
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 June 2005, defendants moved to dismiss the Second Amended
Complaint. In August 2005, DH2 filed opposition to the motion.
In HIRT, in April 2005, the Court denied the cross motions for summary
judgment without prejudice. In July 2005, the parties refiled cross
motions for summary judgment, and an evidentiary hearing was held in
August 2005 on one of the claims.
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 May 2005, the plaintiffs filed an appeal to the 7th Circuit Court of
Appeals.
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 AXA Financial
is not a party. Based upon this decision, in April 2005, AXA Equitable
filed a motion to either grant or to set a briefing on its motion to
dismiss. In June 2005, this case was transferred by the Judicial Panel on
Multidistrict Litigation to the U.S. District Court in Maryland, where
other market-timing litigation is pending. In June 2005, plaintiff filed
an amended complaint. In July 2005, AXA Equitable filed a motion to
dismiss the amended complaint.
In GOSHEN, in April 2005, plaintiffs filed a motion for leave to appeal
with the Court of Appeals. In June 2005, the Court of Appeals denied
plaintiffs' motion.
In MCLEAN, in April 2005, claims of the individual Illinois plaintiffs
(Brown) were settled and their case has been dismissed. In June 2005, the
court denied a motion for reargument filed by the putative class
representatives in May 2005 related to a dismissal of their case in
November 2003. In July 2005, plaintiffs filed a notice of appeal.
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 moved to dismiss plaintiff's complaint in May 2005.
In August 2005, the case was settled on an individual basis.
In June 2005, without admitting or denying the allegations, AXA Advisors
entered into an agreement with the NASD, and paid a $900,000 fine, to
resolve charges related to its receipt of directed brokerage fees from
certain mutual fund companies during the period 2001 through the date of
discontinuance of the practice in late 2003.
-19-
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.
In JAFFE, in May 2005, the court granted defendants' motion and dismissed
the case.
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
May 2005, defendants removed the WVAG COMPLAINT to the United States
District Court for the Northern District of West Virginia. In July 2005,
plaintiff moved to remand. That motion is pending.
In connection with its market timing-related matters (other than the WVAG
COMPLAINT), 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 $4 million
during second quarter 2005 and has cumulatively paid $307 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 the AUCOIN COMPLAINT, in February 2005, plaintiffs filed a consolidated
amended class action complaint ("AUCOIN CONSOLIDATED AMENDED COMPLAINT")
that asserts claims substantially similar to the AUCOIN COMPLAINT and
nine additional lawsuits that also make factual allegations substantially
similar to those in the AUCOIN COMPLAINT. In April 2005, defendants moved
to dismiss the AUCOIN CONSOLIDATED AMENDED COMPLAINT. That motion is
pending.
In connection with proof of claim-related matters, in April 2005, the
court signed an order dismissing the DAVIDSON COMPLAINT with prejudice.
Plaintiffs have not exercised their limited right to re-open the case
within 90 days of the order.
In July 2005, the NASD notified Sanford C. Bernstein & Co., LLC, a
wholly-owned subsidiary of Alliance ("SCB LLC") and an SCB LLC research
analyst that the NASD enforcement staff was recommending that enforcement
actions be commenced against SCB LLC and the analyst (this notification
typically is called a "Wells Notice"). The analyst had written research
reports that announced the suspension of SCB LLC's and the analyst's
coverage of certain securities, and the analyst subsequently sold personal
holdings in the same securities. Prior to joining SCB LLC, the analyst
received the securities as compensation while employed by the issuers of
those securities. The NASD claims that SCB LLC and the analyst violated
NASD rules that restrict personal trading by research analysts.
In July 2005, the NYSE issued a Wells Notice to each of approximately 20
member firms, including SCB LLC, claiming that the firms violated NYSE
rules by failing to properly identify certain short sale transactions as
short sales in Electronic Blue Sheet submissions. For SCB LLC, this issue
was the result of a coding problem in an electronic reporting system. That
problem was corrected in 2003.
Although the outcome of litigation generally cannot be predicted with
certainty, management believes that, except as otherwise noted 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 AXA Financial should not have a material adverse effect on
the consolidated financial position of AXA Financial. Except as previously
noted,
-20-
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,
AXA Financial is involved in various legal actions and proceedings in
connection with its 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.
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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ----------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ----------------
(IN MILLIONS)
SEGMENT REVENUES:
Financial Advisory/Insurance............ $ 2,012.7 $ 1,335.6 $ 4,126.2 $ 2,796.9
Investment Management................... 781.7 736.7 1,531.9 1,486.0
Consolidation/elimination............... (25.6) (20.8) (51.4) (41.1)
--------------- --------------- --------------- ----------------
Total Revenues.......................... $ 2,768.8 $ 2,051.5 $ 5,606.7 $ 4,241.8
=============== =============== =============== ================
SEGMENT EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST:
Financial Advisory/Insurance............ $ 329.6 $ 272.5 $ 647.8 $ 545.8
Investment Management................... 201.0 145.4 357.0 307.8
Consolidation/elimination............... - (.5) - (.5)
--------------- --------------- --------------- ----------------
Total Earnings from Continuing
Operations before Income Taxes
and Minority Interest................ $ 530.6 $ 417.4 $ 1,004.8 $ 853.1
=============== =============== =============== ================
JUNE 30, December 31,
2005 2004
---------------- ------------------
(IN MILLIONS)
ASSETS:
Financial Advisory/Insurance............................................ $ 133,647.2 $ 131,432.7
Investment Management................................................... 15,113.4 14,575.4
Consolidation/elimination............................................... (187.1) 19.9
---------------- ------------------
Total Assets............................................................ $ 148,573.5 $ 146,028.0
================ ==================
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13) STOCK-BASED COMPENSATION
AXA Financial accounts for stock-based compensation using the intrinsic
value method prescribed in APB No. 25. Compensation expense is not
reflected in the statement of earnings for options granted under AXA's
and AXA Financial's stock incentive plans as all had an exercise price
equal to the market value of the underlying common stock on the date of
the grant and vest solely with the passage of time. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- --------------------------------
2005 2004 2005 2004
----------------- --------------- ---------------- -------------
(IN MILLIONS)
Net earnings as reported............... $ 297.7 $ 299.0 $ 574.1 $ 529.7
Less: Total stock-based employee
compensation expense determined
under fair value method for all
awards, net of income tax benefit... (6.9) (4.5) (12.6) (12.0)
----------------- --------------- ---------------- -------------
Pro Forma Net Earnings................. $ 290.8 $ 294.5 $ 561.5 $ 517.7
================= =============== ================ =============
14) COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) for second quarter 2005 and
2004 and the first half of 2005 and of 2004 are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
(IN MILLIONS)
Net earnings............................. $ 297.6 $ 299.0 $ 574.1 $ 529.7
--------------- --------------- --------------- ---------------
Change in unrealized gains (losses),
net of reclassification adjustment..... 303.1 (613.3) 10.7 (360.8)
Cumulative effect of accounting
changes .............................. - - - 12.4
Minimum pension liability adjustment..... - - - -
--------------- --------------- --------------- ---------------
Other comprehensive income (loss)........ 303.1 (613.3) 10.7 (348.4)
--------------- --------------- --------------- ---------------
Comprehensive Income (Loss).............. $ 600.7 $ (314.3) $ 584.8 $ 181.3
=============== =============== =============== ===============
15) DISCONTINUED INVESTMENT BANKING AND BROKERAGE SEGMENT
In June 2004, AXA Financial recorded a gain on disposal of the
discontinued Investment Banking and Brokerage segment of $53.2 million,
net of income taxes of $28.7 million. The gain resulted from the reduction
of state tax liabilities related to the 2000 sale of Donaldson, Lufkin &
Jenrette, Inc.
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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, the related
Notes to Consolidated Financial Statements and the information discussed under
Forward-Looking Statements and Risk Considerations included in this Form 10-Q,
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
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
Net earnings for AXA Financial were $574.1 million for the first half of 2005,
an increase of $44.4 million over the first half of 2004. Net earnings for the
2004 period included a $53.2 million net gain related to a reduction of certain
state tax liabilities associated with the 2000 sale of Donaldson, Lufkin and
Jenrette, Inc., reported as discontinued operations, and a $4.0 million charge
related to the adoption as of January 1, 2004 of SOP 03-1. Net earnings for the
first half of 2005 did not include any earnings or losses from discontinued
operations.
Earnings from continuing operations were $574.1 million for the first half of
2005, an increase of $96.9 million over the first half of 2004. Earnings from
continuing operations for the first half of 2005 included approximately $78
million (after income taxes) related to the incremental impact of the MONY
Companies' operations acquired on July 7, 2004. The incremental impact of the
MONY Companies' operations included management's estimate of the expense savings
of the Financial Advisory/Insurance segment resulting from the integration of
MONY's operations and excluded the cost of funding the acquisition.
Earnings from continuing operations before income taxes and minority interest
were $1.00 billion for the first six months of 2005, an increase of $151.7
million from the year earlier period. The $102.0 million increase in the
Financial Advisory/Insurance segment was primarily due to the contribution of
MONY Companies as discussed above. The references to the MONY Companies in the
explanations in the Management Narrative, below, reflect the contribution of the
MONY Companies to the consolidated results on a legal entity basis. The
Investment Management segment's earnings were $49.2 million higher when compared
to the first half of 2004 and included the $12.5 million gain from Alliance's
second quarter 2005 sale of its cash management business to Federated.
Revenues. In the first six months of 2005, revenues increased $1.35 billion to
$5.61 billion. Both segments posted increases: $1.33 billion for the Financial
Advisory/Insurance segment, $1.08 billion of which was due to the MONY
Companies, and $30.9 million for the Investment Management segment.
Premiums increased by $345.3 million to $807.2 million for the first six months
of 2005 with the MONY Companies' premiums totaling $346.5 million in the first
six months of 2005. Policy fee income was $995.8 million, $248.7 million higher
than the first six months of 2004, with the MONY Companies contributing $99.5
million. When that contribution is excluded, the remaining $149.2 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 $355.8 million to $1.63 billion of which $338.1
million relates to the MONY Companies' investment income in the first six months
of 2005. When this income is excluded, the remaining $17.7 million increase was
primarily the result of $14.5 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
variable annuity contracts and interest rate swap and floor contracts as
compared to $28.7 million of losses on derivatives in the comparable 2004 period
partially offset by lower income on AXA Equitable's investment portfolio. While
total investment assets grew by approximately $763.2 million from June 30, 2004,
AXA Equitable's investment income on its portfolio decreased due to lower yields
on the fixed maturity portfolio, lower prepayment fees and lower income on other
equity investments.
Investment gains totaled $57.7 million in the first six months of 2005, as
compared to $57.5 million in the first six months of 2004 as the $17.6 million
higher gains in the Investment Management segment were offset by $17.4 million
lower gains in the Financial Advisory/Insurance segment. The higher gains for
the Investment Management
-23-
segment were primarily due to the gain on the sale of Alliance's cash management
business to Federated in second quarter 2005. When the $10.8 million of MONY
Companies related investment gains are excluded, the $28.2 million decline in
the Financial Advisory/Insurance segment's investment gains resulted from $10.2
million lower gains from sales of fixed maturity securities and the absence of
$25.0 million of gains on the sale of other equity investments in the first six
months of 2004 partially offset by lower writedowns on AXA Equitable's General
Account fixed maturities, $13.6 million in the first six months of 2005 as
compared to $20.3 million in the first six months of 2004.
Commissions, fees and other income increased $399.9 million to $2.11 billion
with higher income in both the Financial Advisory/Insurance and the Investment
Management segments. The Financial Advisory/Insurance segment increase of $393.6
million in the first six months of 2005 included the MONY Companies' addition of
$282.7 million. Of the remaining $110.9 million of the Financial
Advisory/Insurance increase, $59.1 million was due to higher gross investment
management fees received from EQAT and VIP Trust due to a higher asset base.
Additionally, $76.2 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 the first six months of 2005 was $84.2 million as
compared to $8.0 million in the first six months of 2004. The Investment
Management segment's $7.5 million increase was principally due to $47.2 million
higher investment advisory and services fees, including higher performance fees,
partially offset by $22.6 million lower distribution revenues and $10.7 million
shareholder servicing fees at Alliance.
Benefits and Other Deductions. Total benefits and other deductions increased
$1.20 billion with increases of $1.23 billion reported in the Financial
Advisory/Insurance segment being partially offset by an $18.3 million decrease
in the Investment Management segment. The MONY Companies' total benefits and
other deductions in the first six months of 2005 were $982.2 million.
Policyholders' benefits were $1.46 billion in the first six months of 2005, a
$551.8 million increase from the first six months of 2004, of which $493.4
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 $76.0 million increase in interest credited to policyholders' account
balances to $587.9 million in the first six months of 2005 was due to the $52.2
million of interest credited for MONY Companies in the first six months of 2005.
When the MONY Companies' amount is excluded, interest credited increased $23.8
million as the impact of lower crediting rates was more than offset by higher
policyholder account balances.
Total compensation and benefits increased $266.4 million to $1.20 billion in the
first six months of 2005 principally due to a $208.4 million increase for the
Financial Advisory/Insurance segment, $184.4 million of which was attributed to
the MONY Companies. When the MONY Companies' compensation and benefits amount in
the first six months of 2005 is excluded, the $24.0 million increase for the
Financial Advisory/Insurance segment was primarily due to higher employee and
agents salaries, an increase in taxes and benefits principally related to FICA
tax and agents benefits and temporary staff costs related to MONY integration
activities partially offset by the $2.2 million change related to changes in the
Stock Appreciation Rights liability. The $57.9 million increase for the
Investment Management segment resulted from Alliance's higher incentive
compensation due to higher earnings, higher base compensation and fringe
benefits due to annual merit increases and higher commission expense primarily
due to higher sales volume.
For the first six months of 2005, commissions in the Financial
Advisory/Insurance segment totaled $536.4 million, an increase of $144.1 million
from the first six months of 2004, principally due to the $124.5 million of MONY
Companies' commissions in the first six months of 2005, higher sales of life and
annuity products and higher asset-based commissions.
There was a $27.1 million decrease in distribution plan payments by Alliance
largely due to the sale of the cash management services unit in second quarter
2005.
Amortization of deferred sales commissions totaled $71.0 million for the first
half of 2005, $24.2 million lower than in the 2004 period as a result of lower
back-end load shares sales.
-24-
Interest expense totaled $132.7 million in the first six months of 2005, a $36.5
million increase from the $96.2 million in the prior year's comparable period.
The increase was principally related to 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 $340.6 million in the first six months of
2005, up $160.3 million from the comparable 2004 period, including the $38.6
million attributed to the MONY Companies in the 2005 period. When the MONY
Companies' impact is excluded, the remaining $121.7 million increase in
amortization was principally due to higher current margins in products that are
DAC reactive, and lower favorable DAC unlocking in 2005 compared to 2004. In
2004, DAC unlocking resulted from the recognition of higher estimated future
margins driven by higher fees related to variable life insurance and annuity
contracts. In 2005, DAC unlocking related primarily to higher estimated future
margins due to revised expectations regarding lapses on certain variable annuity
contracts based upon the completion of a comprehensive lapse study. Both years
also reflect DAC unlocking associated with higher estimated future margins due
to expectations of life mortality improvement based on emerging experience,
which resulted in a deceleration of DAC amortization. However, the deceleration
of DAC amortization resulting from these revised mortality projections was lower
in 2005 than in 2004.
DAC capitalization totaled $635.8 million, an increase of $152.7 million from
$483.1 million reported in the first six months of 2004. When the $80.5 million
in MONY Companies' DAC capitalization in the first six months of 2005 is
excluded, the $72.2 million increase in the 2005 period primarily resulted from
higher sales of interest sensitive life products and variable annuities.
The increases in rent expense and amortization of intangible assets of $27.0
million and $8.5 million, respectively, in the first six months of 2005 were
principally due to the related MONY Companies totals of $26.0 million and $7.4
million for those expense categories in the 2005 period.
The $131.6 million increase in other operating costs and expenses was due to
Financial Advisory/Insurance segment, with the MONY Companies accounting for
$115.9 million of the segment's $165.9 million increase in the first six months
of 2005. When the MONY Companies portion is excluded, the remaining $50.0
million increase in the Financial Advisory/Insurance segment was principally due
to higher technology and software costs, higher sub-advisory fees at EQAT and
VIP Trust due to higher average asset balances, and higher travel expenditures.
The $32.7 million decrease in the Investment Management segment's other
operating expenses to $224.8 million in the first half of 2005 was primarily due
to lower losses on disposal of fixed assets and lower legal expenses partially
offset by higher costs associated with compliance with Section 404 of the
Sarbanes-Oxley Act of 2002.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products for the first six months of 2005 were $7.72 billion, an increase of
$930.1 million from the comparable 2004 period while total first year premiums
increased $397.5 million to $4.89 billion in the first six months of 2005. The
MONY Companies' total and first year premiums and deposits for these product
lines were $845.6 million and $319.0 million, respectively, in the first six
months of 2005. When the MONY Companies' totals are excluded from the
comparison, first year premiums and deposits for the life products increased
$21.5 million due to higher sales in the retail channel while the annuity lines'
premiums and deposits increased $55.8 million primarily due to higher sales in
both the retail and wholesale distribution channels. There was a $871.9 million
increase to $2.70 billion in mutual fund and fee based assets sales in the first
six months of 2005, of which $766.6 million was attributed to the MONY
Companies.
Surrenders and Withdrawals. Surrenders and withdrawals increased, from $2.91
billion in the first six months of 2004 to $3.76 billion for the first six
months of 2005 with $475.3 million of the increase attributed to the MONY
Companies. When this amount is excluded, there was an increase of $371.2 million
as decreases of $62.2 million and $5.2 million reported for the variable and
interest-sensitive life and traditional life insurance lines, respectively, were
more than offset by a $438.6 million increase in individual annuities surrenders
and withdrawals. When the MONY Companies' impact is excluded, the annualized
annuities surrender rate increased to 8.4% in the first six months of 2005 from
8.1% in the first six months of 2004. The individual life surrender rates
decreased to 4.1% from 4.7% for the same respective periods. The individual life
surrender rate was higher in the first six months of 2004 principally due to the
surrender of a single large COLI contract. When the effect of this surrender is
excluded, the life surrender rate for the first six months of 2004 was 4.2%. The
surrender and withdrawal rates described above continue to fall within the range
of expected experience.
-25-
Assets Under Management. Breakdowns of assets under management follow:
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
JUNE 30,
-----------------------------------
2005 2004
--------------- ---------------
Third party..................................................................... $ 452,186 $ 423,902
General Account and other....................................................... 54,796 41,446
Insurance Group Separate Accounts............................................... 67,919 56,405
--------------- ---------------
Total Assets Under Management................................................... $ 574,901 $ 521,753
=============== ===============
Third party assets under management at June 30, 2005 increased $28.28 billion
primarily due to increases at Alliance. General Account and other assets under
management increased $13.35 billion from the total reported for the first six
months of 2004, of which $12.68 billion is attributable to the MONY Companies.
When the $4.63 billion of MONY Companies' Separate Account assets are excluded,
the remaining $6.88 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 the first six months of 2005
totaled $516.0 billion as compared to $482.2 billion at June 30, 2004 as market
appreciation and net inflows of $47.4 million, $10.2 million and $5.7 million in
the Institutional Investment Management, Private Client and Retail distribution
channels, respectively, were offset by the $29.5 million in net asset outflows
resulting from the sale of Alliance's cash management services. Non-US clients
accounted for 28.3% of the June 30, 2005 total.
During June 2005, Alliance and Federated completed the transaction under which
Federated acquired Alliance's cash management services. In the transaction,
$19.6 billion in assets under management from 22 of its third-party distributed
money market funds were transitioned into Federated money market funds. The
transaction included an initial cash payment of $25.0 million received prior to
June 30, 2005, and additional payments consisting of annual contingent purchase
price payments payable over five years and a final contingent $10 million
payment. In the first six months of 2005, Alliance recognized a $12.5 million
pre-tax net gain from this transaction.
LIQUIDITY AND CAPITAL RESOURCES
AXA Financial, Inc. (the Legal Entity). AXA Financial paid no cash dividends to
AXA in the first half of 2005 or 2004.
During the first half of 2005 and 2004, respectively, AXA Financial purchased
309,435 and 302,481 AXA ADRs for approximately $8.0 million and $6.7 million.
These shares were used for AXA Financial's restricted stock plan.
AXA Equitable. In the second quarters of 2005 and 2004, AXA Equitable paid cash
dividends of $250.0 million.
At June 30, 2005, AXA Equitable had no short-term debt, commercial paper or
borrowings under the revolving credit facility outstanding.
Alliance. For the six months ended June 30, 2005 and 2004, respectively, cash
flows included inflows of $27.5 million and $33.2 million representing proceeds
from the exercise of options for Alliance Units offset by outflows related to
purchases of Alliance Units totaling $6.9 million and $38.4 million by
subsidiaries of Alliance to fund deferred compensation plans. Capital
expenditures at Alliance were $46.7 million in the first six months of 2005
compared to $16.8 million in the comparable 2004 period. Available cash flow for
cash distributions from Alliance totaled $357.9 million and $231.9 million for
the first six months of 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 June 30, 2005, Alliance had $7.9 million of short-term debt outstanding;
there were no amounts outstanding under either its commercial paper program or
its revolving credit facility.
-26-
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/or 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 and equity-traded futures
contracts as part of hedging programs for GMDB/GMIB features.
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.
The effects of significant equity market fluctuations on the Insurance Group's
operating results can be complex and subject to a variety of estimates and
assumptions, such as assumed rates of long-term equity market performance,
making it difficult to reliably predict effects on operating earnings over a
broad range of equity market performance alternatives. Further, these effects
may not always be proportional for market increases and market decreases.
Margins on interest-sensitive annuities and universal life insurance can be
affected by interest rate fluctuations. In a declining interest rate
environment, credited rates can generally be adjusted more quickly than the
related invested asset portfolio is affected by declining reinvestment rates,
tending to result in higher net interest margins on interest-sensitive products
in the short term. However, under scenarios in which interest rates fall and
remain at significantly lower levels, minimum guarantees on interest-sensitive
annuities and universal life insurance (generally 1.5% to 4.5%) could cause the
spread between the yield on the portfolio and the interest rate credited to
policyholders to deteriorate and in some cases, potentially, to become negative.
For both interest-sensitive annuities and universal life insurance, a rapid and
sustained rise in interest rates poses risks of deteriorating spreads and high
surrenders. In such an environment, there is pressure to increase credited rates
on interest-sensitive products to match competitors' new money rates. However,
such changes in credited rates
-27-
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; the impact of changes in
regulatory requirements or enforcement policies; 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 Insurance Group's
business may be adversely affected to the extent that some or all of the
third-party firms that distribute the Insurance Group's products face heightened
regulatory scrutiny and/or increased regulation, particularly in connection with
the types of products issued by the Insurance Group. In this regard, regulators
in Massachusetts have recently taken action against subsidiaries of two banking
organizations which are not part of AXA Financial in connection with the sale of
annuities to senior citizens.
In addition, the nature and extent of competition and the markets for products
sold by the Insurance Group may be materially affected by changes in laws and
regulations, including changes relating to savings, retirement funding and
taxation. Recent years' legislative tax changes have included, among other
items, changes to the taxation of corporate dividends and capital gains.
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 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/or 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. 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.
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
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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 $213.8 million at June
30, 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 $11.5 million and $19.2 million,
totaled approximately $30.4 million and $24.6 million during the six months
ended June 30, 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 June 30, 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.
Equity markets increased by approximately 1% during the three months ended June
30, 2005 and decreased by approximately 1% during the six months ended June 30,
2005, as measured by the change in the Standard & Poor's 500 Stock Index. Fixed
income markets increased by approximately 3% during both the three and six
months ended June 30, 2005 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 27.4% and 26.5% during the three and
six month periods ended June 30, 2005, respectively. Declines in financial
markets or higher redemption levels, or both, as compared to the assumptions
used to estimate undiscounted future cash flows, could result in the impairment
of the deferred sales commission asset. Due to the volatility of the capital
markets and changes in redemption rates, Alliance's management is unable to
predict whether or when a future impairment of the deferred sales commission
asset 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.
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.
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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. 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. Changes in the regulatory
environment, including increased activism by state attorneys general, insurance
commissioners and securities regulators, could have a material impact on
operations and results. See "Business - Regulation" contained in the 2004 Form
10-K.
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. These AXA
subsidiaries and affiliates 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.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Omitted pursuant to General Instruction H to Form 10-Q.
Item 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of AXA Financial's
disclosure controls and procedures as of June 30, 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, no change
in AXA Financial's internal control over financial reporting 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 AXA
Financial's 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, filed herewith
31.2 Section 302 Certification made by the Registrant's
Chief Financial Officer, filed herewith
32.1 Section 906 Certification made by the Registrant's
Chief Executive Officer, filed herewith
32.2 Section 906 Certification made by the Registrant's
Chief Financial Officer, filed herewith
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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: August 15, 2005 AXA FINANCIAL, INC.
By: /s/ Stanley B. Tulin
---------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: August 15, 2005 /s/ Alvin H. Fenichel
-----------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and
Controller
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