UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2006
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________
Commission File No. 1-11166
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
Not applicable
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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 a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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]
As of August 10, 2006, 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 33
AXA FINANCIAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1: Financial Statements
o Consolidated Balance Sheets, June 30, 2006 and December 31, 2005.............. 4
o Consolidated Statements of Earnings, Three Months and Six Months Ended
June 30, 2006 and 2005...................................................... 5
o Consolidated Statements of Shareholder's Equity,
Six Months Ended June 30, 2006 and 2005..................................... 6
o Consolidated Statements of Cash Flows, Six Months Ended
June 30, 2006 and 2005...................................................... 7
o Notes to Consolidated Financial Statements.................................... 8
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations ("Management Narrative")................................ 27
Item 3: Quantitative and Qualitative Disclosures About Market Risk*...................... 31
Item 4: Controls and Procedures.......................................................... 31
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................................ 32
Item 1A: Risk Factors..................................................................... 32
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds...................... 32
Item 3: Defaults Upon Senior Securities.................................................. 32
Item 4: Submission of Matters to a Vote of Security Holders.............................. 32
Item 5: Other Information................................................................ 32
Item 6: Exhibits......................................................................... 32
SIGNATURES ................................................................................. 33
*Omitted pursuant to General Instruction H to Form 10-Q.
2
FORWARD-LOOKING STATEMENTS
Some of the statements made in this report, including statements made in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", may constitute forward-looking statements. Forward-looking
statements include, among other things, discussions concerning potential
exposure of AXA Financial, Inc. and its subsidiaries 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," "plans," "expects," "projects," "should,"
"probably," "risk," "target," "goals," "objectives," or similar expressions. AXA
Financial, Inc. claims the protection afforded by the safe harbor for
forward-looking statements contained in Section 21E of the Securities Exchange
Act of 1934, 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. Forward-looking statements are not a guarantee of
future performance. Actual results could differ materially from those
anticipated by forward-looking statements due to a number of important factors,
including those discussed under "Risk Factors" in Part I, Item 1A of AXA
Financial, Inc.'s Annual Report on Form 10-K for the year ended December 31,
2005 and elsewhere in this report.
3
PART I FINANCIAL INFORMATION
Item 1: Financial Statements
AXA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, December 31,
2006 2005
----------------- -----------------
(In Millions)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 37,527.8 $ 38,902.8
Mortgage loans on real estate............................................. 4,562.8 4,702.5
Equity real estate, held for the production of income..................... 578.4 632.2
Policy loans.............................................................. 4,955.8 4,946.5
Other equity investments.................................................. 1,911.6 1,620.6
Other invested assets..................................................... 1,209.7 1,203.7
----------------- -----------------
Total investments..................................................... 50,746.1 52,008.3
Cash and cash equivalents................................................... 2,099.4 1,905.6
Cash and securities segregated, at estimated fair value..................... 1,861.5 1,720.8
Broker-dealer related receivables........................................... 3,152.5 2,929.1
Deferred policy acquisition costs........................................... 8,431.9 7,781.9
Goodwill and other intangible assets, net................................... 4,986.0 4,993.7
Value of business acquired.................................................. 797.4 780.4
Amounts due from reinsurers................................................. 3,283.9 3,277.2
Loans to affiliates......................................................... 400.0 400.0
Other assets................................................................ 4,055.5 4,084.9
Separate Accounts' assets................................................... 78,188.7 74,458.8
----------------- -----------------
Total Assets................................................................ $ 158,002.9 $ 154,340.7
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 30,588.1 $ 30,817.4
Future policy benefits and other policyholders liabilities.................. 22,586.1 22,677.2
Broker-dealer related payables.............................................. 1,318.3 1,233.1
Customers related payables.................................................. 3,418.9 2,924.3
Short-term and long-term debt............................................... 2,273.9 2,569.9
Loans from affiliates....................................................... 1,590.0 1,580.0
Income taxes payable........................................................ 2,134.4 2,220.9
Other liabilities........................................................... 4,788.6 4,873.8
Separate Accounts' liabilities.............................................. 78,188.7 74,458.8
Minority interest in equity of consolidated subsidiaries.................... 1,506.6 1,467.8
Minority interest subject to redemption rights.............................. 274.2 271.6
----------------- -----------------
Total liabilities..................................................... 148,667.8 145,094.8
----------------- -----------------
Commitments and contingent liabilities (Note 10)
SHAREHOLDER'S 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.............................................. 1,047.2 1,047.8
Retained earnings........................................................... 8,868.0 8,213.5
Accumulated other comprehensive (loss) income............................... (292.3) 345.5
Treasury shares, at cost.................................................... (291.7) (364.8)
----------------- -----------------
Total shareholder's equity............................................ 9,335.1 9,245.9
----------------- -----------------
Total Liabilities and Shareholder's Equity.................................. $ 158,002.9 $ 154,340.7
================= =================
See Notes to Consolidated Financial Statements.
4
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2006 2005 2006 2005
--------------- ---------------- --------------- ---------------
(In Millions)
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 602.1 $ 504.1 $ 1,181.0 $ 995.8
Premiums............................................. 385.1 395.3 778.4 807.2
Net investment income................................ 907.1 767.2 1,635.7 1,625.2
Investment gains, net................................ 14.8 50.0 53.7 57.7
Commissions, fees and other income................... 1,205.3 969.8 2,237.2 1,941.1
--------------- ---------------- --------------- ---------------
Total revenues................................. 3,114.4 2,686.4 5,886.0 5,427.0
--------------- ---------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits.............................. 742.6 731.3 1,451.7 1,447.8
Interest credited to policyholders' account balances. 277.6 308.2 583.5 602.5
Compensation and benefits............................ 622.9 548.0 1,214.9 1,091.2
Commissions.......................................... 322.8 278.4 641.9 536.4
Distribution plan payments........................... 72.8 71.4 143.8 162.8
Amortization of deferred sales commissions........... 23.6 34.5 50.0 71.0
Interest expense..................................... 71.8 65.7 135.4 127.0
Amortization of deferred policy acquisition costs
and value of business acquired.................... 290.0 138.5 396.7 340.6
Capitalization of deferred policy acquisition costs.. (364.2) (337.6) (704.4) (635.8)
Rent expense......................................... 60.1 56.6 117.4 114.6
Amortization of other intangible assets.............. 9.3 9.0 18.5 19.8
Other operating costs and expenses................... 303.7 256.6 625.5 553.1
--------------- ---------------- --------------- ---------------
Total benefits and other deductions............ 2,433.0 2,160.6 4,674.9 4,431.0
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
income taxes and minority interest................. 681.4 525.8 1,211.1 996.0
Income taxes......................................... (207.1) (154.2) (374.4) (286.1)
Minority interest in net income of
consolidated subsidiaries.......................... (101.8) (77.1) (191.0) (141.5)
--------------- ---------------- --------------- ---------------
Earnings from continuing operations ................. 372.5 294.5 645.7 568.4
Earnings from discontinued operations, net of
income taxes...................................... .4 3.2 4.7 5.7
Gain on disposal of discontinued operations, net of
income taxes...................................... - - 4.1 -
--------------- ---------------- --------------- ---------------
Net Earnings......................................... $ 372.9 $ 297.7 $ 654.5 $ 574.1
=============== ================ =============== ===============
See Notes to Consolidated Financial Statements.
5
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
2006 2005
----------------- -----------------
(In Millions)
SHAREHOLDER'S EQUITY
Common stock, at par value, beginning of year and end of period............. $ 3.9 $ 3.9
----------------- -----------------
Capital in excess of par value, beginning of year........................... 1,047.8 1,073.5
Other changes in additional capital in excess of par value.................. (.6) (18.9)
----------------- -----------------
Capital in excess of par value, end of period............................... 1,047.2 1,054.6
----------------- -----------------
Retained earnings, beginning of year........................................ 8,213.5 7,139.7
Net earnings................................................................ 654.5 574.1
----------------- -----------------
Retained earnings, end of period............................................ 8,868.0 7,713.8
----------------- -----------------
Accumulated other comprehensive income, beginning of year................... 345.5 866.1
Other comprehensive (loss) income........................................... (637.8) 10.7
----------------- -----------------
Accumulated other comprehensive (loss) income, end of period................ (292.3) 876.8
----------------- -----------------
Treasury shares of cost, beginning of year.................................. (364.8) (19.4)
Changes in treasury shares.................................................. 73.1 5.5
----------------- -----------------
Treasury shares of cost, end of period...................................... (291.7) (13.9)
----------------- -----------------
Total Shareholder's Equity, End of Period................................... $ 9,335.1 $ 9,635.2
================= =================
See Notes to Consolidated Financial Statements.
6
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(UNAUDITED)
2006 2005
----------------- -----------------
(In Millions)
Net earnings................................................................ $ 654.5 $ 574.1
Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities:
Interest credited to policyholders' account balances.................... 583.5 602.5
Universal life and investment-type product policy fee income............ (1,181.0) (995.8)
Net change in broker-dealer customer related receivables/payables....... 332.8 (656.9)
Investment gains, net................................................... (53.7) (57.7)
Change in segregated cash and securities, net........................... (140.7) 259.8
Change in deferred policy acquisition costs............................. (307.7) (295.2)
Change in future policy benefits........................................ (64.0) 6.6
Change in property and equipment........................................ (25.5) (28.6)
Change in income tax payable............................................ 277.8 146.8
Change in accounts payable and accrued expenses......................... 107.0 127.9
Change in fair value of guaranteed minimum income benefit
reinsurance contracts................................................ (17.3) (84.2)
Minority interest in net income of consolidated subsidiaries............ 191.0 141.5
Other, net.............................................................. 9.0 (34.5)
----------------- -----------------
Net cash provided by (used in) operating activities......................... 365.7 (293.7)
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 2,115.4 2,219.4
Sales of investments ..................................................... 1,476.1 1,437.1
Purchases of investments ................................................. (3,699.0) (3,826.1)
Change in short-term investments.......................................... 18.7 (434.0)
Other, net................................................................ 22.8 9.7
----------------- -----------------
Net cash used in investing activities....................................... (66.0) (593.9)
----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 2,266.6 2,190.3
Withdrawals and transfers to Separate Accounts.......................... (1,966.0) (1,426.1)
Repayments of long-term debt ............................................. (300.0) -
Increase in loans to affiliates .......................................... 335.0 -
Decrease in loans to affiliates .......................................... (325.0) (88.9)
Other, net................................................................ (116.5) (80.1)
----------------- -----------------
Net cash (used in) provided by financing activities......................... (105.9) 595.2
----------------- -----------------
Change in cash and cash equivalents......................................... 193.8 (292.4)
Cash and cash equivalents, beginning of year................................ 1,905.6 2,626.8
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 2,099.4 $ 2,334.4
================= =================
Supplemental cash flow information
Interest Paid............................................................. $ 101.1 $ 105.7
================= =================
Income Taxes Paid ........................................................ $ 125.3 $ 122.2
================= =================
See Notes to Consolidated Financial Statements.
7
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, in the opinion
of management, all adjustments necessary to state fairly the consolidated
financial position of AXA Financial, Inc. and its consolidated results of
operations and cash flows for the periods presented. All significant
intercompany transactions and balances have been eliminated in
consolidation. These statements should be read in conjunction with the
audited consolidated financial statements of AXA Financial Group for the
year ended December 31, 2005. The results of operations for the six months
ended June 30, 2006 are not necessarily indicative of the results to be
expected for the full year.
The terms "second quarter 2006" and "second quarter 2005" refer to the
three months ended June 30, 2006 and 2005, respectively. The terms "first
half of 2006" and "first half of 2005" refer to the six months ended June
30, 2006 and 2005, respectively.
Certain reclassifications have been made in the amounts presented for prior
periods to conform those periods to the current presentation.
2) ACCOUNTING CHANGE AND NEW ACCOUNTING PRONOUNCEMENTS
On January 1, 2006, AXA Financial Group adopted SFAS No. 123(R). To effect
its adoption, AXA Financial Group elected the "modified prospective method"
of transition. Under this method, prior-period results were not restated.
Prior to the adoption of SFAS 123(R), AXA Financial Group had elected to
continue to account for stock-based compensation in accordance with APB No.
25, and, as a result, the recognition of stock-based compensation expense
generally was limited to amounts attributed to awards of restricted shares
and various cash-settled programs such as stock appreciation rights. SFAS
No. 123(R) requires the cost of all share-based payments to employees to be
recognized in the financial statements based on their fair values,
resulting in compensation expense for certain types of AXA Financial
Group's equity-classified award programs for which no cost previously would
have been charged to net earnings under APB No. 25, most notably for
employee options to purchase AXA American Depository Receipts ("ADRs") and
AXA ordinary shares and for employee stock purchase plans. As a result of
adopting SFAS No. 123(R) on January 1, 2006, consolidated earnings from
continuing operations before income taxes and minority interest for second
quarter 2006 and consolidated net earnings for second quarter 2006 were
$9.6 million and $6.5 million lower, respectively, and consolidated
earnings from continuing operations before income taxes and minority
interest and consolidated net earnings for first half of 2006 were $20.9
million and $14.1 million lower, respectively, than if these plans had
continued to be accounted for under APB No. 25.
Under the modified prospective method, AXA Financial Group applied the
measurement, recognition, and attribution requirements of SFAS No. 123(R)
to stock-based compensation awards granted, modified, repurchased or
cancelled on or after January 1, 2006. In addition, beginning in first
quarter 2006, costs associated with unvested portions of outstanding
employee stock option awards at January 1, 2006 that prior to adoption of
SFAS 123(R) would have been reflected by AXA Financial Group only in pro
forma disclosures, were recognized in the consolidated statement of
earnings over the awards' remaining future service-vesting periods.
Liability-classified awards outstanding at January 1, 2006, such as
performance units and stock appreciation rights, were remeasured to fair
value. The remeasurement resulted in no adjustment to their intrinsic value
basis, including the cumulative effect of differences between actual and
expected forfeitures, primarily due to the de minimis time remaining to
expected settlement of these awards.
Effective with its adoption of SFAS No. 123(R), AXA Financial Group elected
the "short-cut" transition alternative provided by FSP No. 123(R)-3 for
approximating the historical pool of windfall tax benefits available in
shareholder's equity at January 1, 2006. This historical pool represents
the cumulative tax benefits of tax deductions for employee share-based
payments in excess of compensation costs recognized under GAAP, either in
the financial statements or in the pro forma disclosures. In the event that
a shortfall of tax benefits occurs during a
8
reporting period (i.e. tax deductions are less than the related cumulative
compensation expense), the historical pool will be reduced by the amount of
the shortfall. If the shortfall exceeds the amount of the historical pool,
there will be a negative impact on the results of operations. In second
quarter and first half of 2006, additional windfall tax benefits resulted
from employee exercises of stock option awards.
On July 13, 2006, the FASB issued FIN No. 48, "Accounting for Uncertainty
in Income Taxes," to clarify the criteria used to recognize and measure the
economic benefits associated with tax positions taken or expected to be
taken in a tax return. Under FIN No. 48, a tax benefit is recognized only
if it is "more likely than not" to be sustained assuming examination by the
taxing authority, based on the technical merits of the position. Tax
positions meeting the recognition criteria are required to be measured at
the largest amount of tax benefit that is more than 50 percent likely of
being realized upon ultimate settlement and, accordingly, requires
consideration of the amounts and probabilities of potential settlement
outcomes. FIN No. 48 also addresses subsequent derecognition of tax
positions, changes in the measurement of recognized tax positions, accrual
and classification of interest and penalties, and accounting in interim
periods. FIN No. 48 is effective for fiscal years beginning after December
15, 2006, thereby requiring application of its provisions, including the
threshold criteria for recognition, to all positions of AXA Financial Group
as at January 1, 2007. The cumulative effect of applying FIN No. 48, if
any, is to be reported as an adjustment to the opening balance of retained
earnings. In addition, annual disclosures with respect to income taxes have
been expanded by FIN No. 48 and require inclusion of a tabular
reconciliation of the total amounts of unrecognized tax benefits at the
beginning and end of the reporting period. Management currently is
assessing the potential impacts of adoption of FIN No. 48.
3) INVESTMENTS
For the second quarter and first half of 2006 and of 2005, investment
income is shown net of investment expenses of $80.0 million, $170.0
million, $65.1 million and $127.4 million, respectively.
As of June 30, 2006 and December 31, 2005, respectively, fixed maturities
classified as available for sale had amortized costs of $38,139.8 million
and $37,993.2 million. Also at June 30, 2006 and December 31, 2005,
respectively, Other equity investments included the General Account's
investments in Separate Accounts and other trading securities having
carrying values of $591.2 million and $402.7 million and costs of $572.6
million and $386.5 million and other equity securities with carrying values
of $113.0 million and $90.8 million and costs of $106.1 million and $88.0
million.
In second quarter and the first half of 2006 and of 2005, respectively, net
unrealized and realized holding gains (losses) on trading account equity
securities of $(18.4) million, $12.9 million, $8.7 million and $(.3)
million were included in net investment income in the consolidated
statements of earnings.
For the first half of 2006 and 2005, proceeds received on sales of fixed
maturities classified as available for sale amounted to $1,236.3 million
and $1,360.4 million, respectively. Gross gains of $36.4 million and $24.2
million and gross losses of $23.8 million and $12.1 million were realized
on these sales for the first half of 2006 and of 2005, respectively.
Unrealized net investment gains related to fixed maturities classified as
available for sale decreased by $1,522.2 million during the first half of
2006, resulting in a net unrealized loss balance of $612.6 million at June
30, 2006.
Investment valuation allowances for mortgage loans and changes thereto
follow:
9
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
2006 2005
--------------- ---------------
(In Millions)
Balances, beginning of year............................................... $ 13.4 $ 11.8
Additions charged to income............................................... .2 .7
Deductions for writedowns and asset dispositions.......................... (.4) (.6)
--------------- ---------------
Balances, End of Period................................................... $ 13.2 $ 11.9
=============== ===============
Impaired mortgage loans along with the related investment valuation
allowances for losses follow:
JUNE 30, December 31,
2006 2005
--------------- -----------------
(In Millions)
Impaired mortgage loans with investment valuation allowances............ $ 92.5 $ 93.0
Impaired mortgage loans without investment valuation allowances......... 8.6 13.4
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 101.1 106.4
Investment valuation allowances......................................... (13.2) (13.4)
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 87.9 $ 93.0
=============== =================
During the first half of 2006 and 2005, respectively, AXA Financial Group's
average recorded investment in impaired mortgage loans was $103.0 million
and $114.5 million. Interest income recognized on these impaired mortgage
loans totaled $3.0 million and $3.5 million for the first half of 2006 and
2005, 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,
2006 and December 31, 2005, respectively, the carrying values of mortgage
loans on real estate that had been classified as nonaccrual loans were
$69.9 million and $74.8 million.
4) 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 Group had developed an
actuarial calculation of the expected timing of AXA Equitable's Closed
Block's earnings. Further, in connection with the acquisition of MONY, AXA
Financial Group has developed an actuarial calculation of the expected
timing of MONY Life Closed Block earnings as of July 1, 2004.
If the actual cumulative earnings from the Closed Block are greater than
the expected cumulative earnings, only the expected earnings will be
recognized in net income. Actual cumulative earnings in excess of expected
cumulative earnings at any point in time are recorded as a policyholder
dividend obligation because they will ultimately be paid to Closed Block
policyholders as an additional policyholder dividend unless offset by
future performance that is less favorable than originally expected. If a
policyholder dividend obligation has been previously established and the
actual Closed Block earnings in a subsequent period are less than the
expected earnings for that period, the policyholder dividend obligation
would be reduced (but not below zero). If, over the period the policies and
contracts in the Closed Block remain in force, the actual cumulative
earnings of the Closed Block are less than the expected cumulative
earnings, only actual earnings would be recognized in income from
continuing operations. If the Closed Block has insufficient funds to make
guaranteed policy benefit payments, such payments will be made from assets
outside the Closed Block.
10
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,
2006 2005
----------------- -----------------
(In Millions)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances and other.... $ 8,805.3 $ 8,866.1
Policyholder dividend obligation..................................... - 73.7
Other liabilities.................................................... 24.8 28.6
----------------- -----------------
Total Closed Block liabilities....................................... 8,830.1 8,968.4
----------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $5,862.0 and $5,761.5).......................... 5,762.0 5,908.7
Mortgage loans on real estate........................................ 824.9 930.3
Policy loans......................................................... 1,256.9 1,284.4
Cash and other invested assets....................................... 68.4 56.2
Other assets......................................................... 343.6 304.4
----------------- -----------------
Total assets designated to the Closed Block......................... 8,255.8 8,484.0
----------------- -----------------
Excess of Closed Block liabilities over assets designated to the
Closed Block...................................................... 574.3 484.4
Amounts included in accumulated other comprehensive income:
Net unrealized investment (losses) gains, net of deferred income
tax (benefit) expense of $(35.0) and $25.7 and policyholder
dividend obligation of $-0- and $73.7........................... (65.0) 47.8
----------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities............................................ $ 509.3 $ 532.2
================= =================
11
AXA Equitable's Closed Block revenues and expenses were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2006 2005 2006 2005
--------------- ---------------- --------------- ---------------
(In Millions)
REVENUES:
Premiums and other income............... $ 108.1 $ 115.2 $ 219.2 $ 230.2
Investment income (net of investment
expenses of $-0-, $-0-, $.1
and $-0-)............................ 126.2 132.8 257.2 264.7
Investment (losses) gains, net.......... (3.0) 3.5 (2.1) 11.7
--------------- ---------------- --------------- ---------------
Total revenues.......................... 231.3 251.5 474.3 506.6
--------------- ---------------- --------------- ---------------
BENEFITS AND
OTHER DEDUCTIONS:
Policyholders' benefits and dividends... 213.7 216.0 436.8 426.4
Other operating costs and expenses...... .8 .8 1.8 1.8
--------------- ---------------- --------------- ---------------
Total benefits and other deductions..... 214.5 216.8 438.6 428.2
--------------- ---------------- --------------- ---------------
Net revenues before income taxes........ 16.8 34.7 35.7 78.4
Income tax expense...................... (6.2) (12.1) (12.8) (27.4)
--------------- ---------------- --------------- ---------------
Net Revenues............................ $ 10.6 $ 22.6 $ 22.9 $ 51.0
=============== ================ =============== ===============
Reconciliation of the AXA Equitable policyholder dividend obligation is as
follows:
SIX MONTHS ENDED
JUNE 30,
-------------------------------------
2006 2005
---------------- ----------------
(In Millions)
Balances, beginning of year............................................. $ 73.7 $ 264.3
Unrealized investment losses............................................ (73.7) (8.7)
---------------- ----------------
Balances, End of Period................................................. $ - $ 255.6
================ ================
MONY LIFE CLOSED BLOCK
----------------------
Summarized financial information for the MONY Life Closed Block follows:
12
JUNE 30, December 31,
2006 2005
----------------- -------------------
(In Millions)
CLOSED BLOCK LIABILITIES
Future policy benefits, policyholders' account balances and other...... $ 7,272.3 $ 7,332.4
Policyholder dividend obligation....................................... 65.2 142.5
Other liabilities...................................................... 33.0 31.0
----------------- -------------------
Total Closed Block liabilities......................................... 7,370.5 7,505.9
----------------- -------------------
ASSETS DESIGNATED TO THE CLOSED BLOCK
Fixed maturities available for sale, at fair value
(amortized cost $4,341.3 and $4.399.0).............................. 4,181.2 4,397.8
Mortgage loans on real estate.......................................... 598.4 560.1
Policy loans........................................................... 992.0 1,003.7
Cash and other invested assets......................................... 109.0 135.8
Other assets........................................................... 357.1 295.1
----------------- -------------------
Total assets designated to the Closed Block............................ 6,237.7 6,392.5
----------------- -------------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................... 1,132.8 1,113.4
Amounts included in accumulated other comprehensive income:
Net unrealized investment losses, net of deferred income
tax benefit of $25.5 and $-0- and policyholder dividend
obligation of $(87.2) and $(1.2)................................. (47.4) -
----------------- -------------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities.............................................. $ 1,085.4 $ 1,113.4
================= ===================
MONY Life Closed Block revenues and expenses follow:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
2006 2005 2006 2005
--------------- ---------------- --------------- ---------------
(In Millions)
REVENUES:
Premiums and other income............... $ 91.1 $ 102.1 $ 177.4 $ 199.0
Investment income (net of investment
expenses of $1.6, $1.5, $2.9 and
$2.7)................................ 84.8 84.9 167.3 167.6
Investment gains (losses), net.......... 3.9 (1.5) 1.9 (1.2)
--------------- ---------------- --------------- ---------------
Total revenues.......................... 179.8 185.5 346.6 365.4
--------------- ---------------- --------------- ---------------
BENEFITS AND
OTHER DEDUCTIONS:
Policyholders' benefits and dividends... 157.4 163.3 302.0 320.6
Other operating costs and expenses...... .9 0.6 1.5 1.5
--------------- ---------------- --------------- ---------------
Total benefits and other deductions..... 158.3 163.9 303.5 322.1
--------------- ---------------- --------------- ---------------
Net revenues before income taxes........ 21.5 21.7 43.1 43.3
Income tax expense...................... (7.5) (7.6) (15.1) (15.2)
--------------- ---------------- --------------- ---------------
Net Revenues............................ $ 14.0 $ 14.1 $ 28.0 $ 28.1
=============== ================ =============== ===============
Reconciliation of the MONY Life policyholder dividend obligation follows:
13
SIX MONTHS ENDED
JUNE 30,
---------------------------------------
2006 2005
------------------ -----------------
(In Millions)
Balance, beginning of year........................................ $ 142.5 $ 250.8
Applicable to net revenues........................................ 8.6 (3.2)
Unrealized investment (losses) gains, net......................... (85.9) 22.5
------------------ ------------------
Balance, End of Period............................................ $ 65.2 $ 270.1
================== ==================
5) DISCONTINUED OPERATIONS
Discontinued operations include certain pension operations principally
consisting of group non-participating wind-up annuity products ("Wind-up
Annuities"), equity real estate held-for-sale and Advest. In the first half
of 2006, three real estate properties with a book value of $159.8 million
that had been previously reported in equity real estate were reclassified
as real estate held-for-sale. Prior periods have been restated to reflect
these properties as discontinued operations. The following table reconciles
the earnings from discontinued operations, net of income taxes to the
amounts reflected in the consolidated statements of earnings for the second
quarter and first half of 2006 and 2005:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2006 2005 2006 2005
--------------- --------------- ---------------- ---------------
(In Millions)
Wind-up Annuities............................... $ .2 $ .1 $ - $ -
Real estate held-for-sale....................... .2 2.0 4.7 5.6
Advest.......................................... - 1.1 - .1
--------------- --------------- ---------------- ---------------
Earnings from Discontinued Operations,
Net of Income Taxes.......................... $ .4 $ 3.2 $ 4.7 $ 5.7
=============== =============== ================ ===============
In the first half of 2006, a pre-tax gain on the disposal of discontinued
operations of $6.3 million ($4.1 million post-tax) resulted from the
settlement of contingencies related to the 2005 sale of Advest.
Summarized financial information for Wind-up Annuities follows:
14
JUNE 30, December 31,
2006 2005
----------------- -----------------
(In Millions)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $762.9 and $643.6).............................. $ 760.5 $ 823.5
Equity real estate................................................... 165.2 197.5
Mortgage loans on real estate........................................ 6.2 6.7
Other invested assets................................................ 3.8 3.2
----------------- -----------------
Total investments.................................................. 935.7 1,030.9
Cash and cash equivalents............................................ 11.0 -
Other assets......................................................... 15.8 13.6
----------------- -----------------
Total Assets......................................................... $ 962.5 $ 1,044.5
================= =================
Policyholders liabilities............................................ $ 800.5 $ 817.2
Allowance for future losses.......................................... 32.5 60.1
Other liabilities.................................................... 129.5 167.2
----------------- -----------------
Total Liabilities.................................................... $ 962.5 $ 1,044.5
================= =================
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
2006 2005 2006 2005
--------------- -------------- --------------- --------------
(In Millions)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $4.5, $4.9, $9.1 and $9.5)........... $ 18.4 $ 17.5 $ 36.1 $ 33.8
Investment gains (losses), net..................... 4.8 (.1) 5.2 (.2)
--------------- -------------- --------------- --------------
Total revenues..................................... 23.2 17.4 41.3 33.6
--------------- -------------- --------------- --------------
Benefits and other deductions...................... 18.7 21.5 39.8 42.7
Earnings credited (losses charged) to the
allowance for future losses .................... 4.5 (4.1) 1.5 (9.1)
--------------- -------------- --------------- --------------
Pre-tax results from operations.................... - - - -
Pre-tax earnings from releasing the
allowance for future losses .................... .3 .2 - -
Income tax expense................................. (.1) (.1) - -
--------------- -------------- --------------- --------------
Income from Wind-up Annuities...................... $ .2 $ .1 $ - $ -
=============== ============== =============== ==============
AXA Financial Group's quarterly process for evaluating the allowance for
future losses applies the current period's results of Wind-up Annuities
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, 2006 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 invested assets held by Wind-up
Annuities. 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 Wind-up Annuities 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
Wind-up Annuities. 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.
15
6) GMDB, GMIB AND NO LAPSE GUARANTEE FEATURES
A) VARIABLE ANNUITY CONTRACTS - GMDB AND GMIB
------------------------------------------
AXA Equitable, MONY Life and MLOA issue certain variable annuity contracts
with GMDB and GMIB features that guarantee one of the following:
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:
GMDB GMIB TOTAL
---------------- ----------------- -----------------
(In Millions)
Balance at December 31, 2005 ...................... $ 115.8 $ 173.8 $ 289.6
Paid guarantee benefits.......................... (18.8) (1.6) (20.4)
Other changes in reserve......................... 42.0 (1.1) 40.9
---------------- ----------------- -----------------
Balance at June 30, 2006........................... $ 139.0 $ 171.1 $ 310.1
================ ================= =================
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, 2005....................... $ 22.9
Paid guarantee benefits ceded.................... (5.3)
Other changes in reserve......................... 6.9
--------------------
Balance at June 30, 2006........................... $ 24.5
====================
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.
The June 30, 2006 values for those variable annuity contracts in-force on
such date 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 the same contract, the GMDB
and GMIB amounts listed are not mutually exclusive:
16
RETURN
OF
PREMIUM RATCHET ROLL-UP COMBO TOTAL
------------- ------------- ------------- ------------- -------------
(Dollars In Millions)
GMDB:
Account values invested in:
General Account............. $ 11,809 $ 787 $ 316 $ 705 $ 13,617
Separate Accounts........... $ 23,333 $ 8,743 $ 7,332 $ 18,642 $ 58,050
Net amount at risk, gross...... $ 545 $ 676 $ 1,791 $ 317 $ 3,329
Net amount at risk, net of
amounts reinsured........... $ 544 $ 490 $ 1,101 $ 277 $ 2,412
Average attained age of
contractholders............. 49.9 60.7 63.9 60.8 52.8
Percentage of contractholders
over age 70................. 7.7% 20.0% 32.3% 20.8% 11.6%
Range of contractually
specified interest rates.... N/A N/A 3%-6% 3%-6%
GMIB:
Account values invested in:
General Account............. N/A N/A $ 124 $ 908 $ 1,032
Separate Accounts........... N/A N/A $ 5,305 $ 25,426 $ 30,731
Net amount at risk, gross...... N/A N/A $ 307 $ - $ 307
Net amount at risk, net of
amount reinsured............ N/A N/A $ 78 $ - $ 78
Weighted average years
remaining until
annuitization............... N/A N/A 3.1 8.8 7.3
Range of contractually
specified interest rates ... N/A N/A 3%-6% 3%-6%
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:
17
INVESTMENT IN VARIABLE INSURANCE TRUST MUTUAL FUNDS
JUNE 30, December 31,
2006 2005
---------------- ------------------
(In Millions)
GMDB:
Equity............................................................... $ 39,912 $ 38,207
Fixed income......................................................... 4,634 4,817
Balanced............................................................. 11,508 9,193
Other................................................................ 1,996 1,919
---------------- ------------------
Total................................................................ $ 58,050 $ 54,136
================ ==================
GMIB:
Equity............................................................... $ 19,376 $ 17,668
Fixed income......................................................... 2,626 2,642
Balanced............................................................. 7,857 5,852
Other................................................................ 872 685
---------------- ------------------
Total................................................................ $ 30,731 $ 26,847
================ ==================
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, 2006, the
total account value and net amount at risk of the hedged Accumulator(R)
series of variable annuity contracts were $34,193 million and $340 million,
respectively, with the GMDB feature and $18,579 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 when 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, 2005....................... $ 35.0 $ - $ 35.0
Other changes in reserve......................... 13.5 - 13.5
----------------- ----------------- -----------------
Balance at June 30, 2006........................... $ 48.5 $ - $ 48.5
================= ================= =================
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
================= ================= =================
18
7) EMPLOYEE BENEFIT PLANS
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,
-------------------------------- --------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
(In Millions)
Service cost................................. $ 14.4 $ 14.1 $ 28.7 $ 28.1
Interest cost on projected benefit
obligation................................ 43.6 44.2 87.3 88.5
Expected return on assets.................... (54.4) (51.3) (108.8) (102.5)
Net amortization and deferrals............... 25.2 22.8 50.3 45.6
--------------- --------------- --------------- ---------------
Net Periodic Pension Expense................. $ 28.8 $ 29.8 $ 57.5 $ 59.7
=============== =============== =============== ===============
Components of net postretirement benefits costs follow:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
(In Millions)
Service cost................................. $ 1.6 $ 1.9 $ 3.3 $ 4.0
Interest cost on accumulated postretirement
benefit obligation........................ 8.9 9.7 17.8 19.3
Net amortization and deferrals 2.7 2.1 4.1 4.2
Curtailment gain............................. - - (45.4) -
Other ....................................... (12.9) - (12.9) -
--------------- --------------- --------------- ---------------
Net Periodic Postretirement Benefits Costs... $ .3 $ 13.7 $ (33.1) $ 27.5
=============== =============== =============== ===============
On March 16, 2006, AXA Financial announced that, effective December 31,
2006, active participants no longer will earn additional age and/or service
credits toward the cost sharing rules for retiree health coverage. New
hires on or after March 16, 2006 will not be eligible for any company
subsidy towards retiree health coverage. As a result, AXA Financial
recognized a one-time curtailment gain of $45.4 million in first quarter
2006 and a reduction in the aggregate accumulated postretirement benefits
obligation of its retiree medical plans of approximately $13.4 million.
This reduction resulted from remeasurement of the benefits obligations
coincident with the announcement of the changes in benefits entitlements
and is accounted for prospectively as unrecognized prior service cost in a
manner similar to a plan amendment. In second quarter 2006, AXA Financial
recognized a $12.9 million reduction in the net liability for retiree life
insurance for claim payments not previously reflected. There was no change
in the projected benefit obligation.
Components of net postemployment benefits costs follow:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ---------------
(In Millions)
Service cost.................................. $ 1.9 $ 1.8 $ 3.0 $ 3.5
Interest cost projected benefit obligation.... .3 .5 .7 1.0
Net amortization and deferrals ............... (3.0) - (6.1) -
--------------- --------------- --------------- ---------------
Net Periodic Postemployment Benefits
Costs...................................... $ (.8) $ 2.3 $ (2.4) $ 4.5
=============== =============== =============== ===============
19
8) CAPITAL STOCK AND OTHER SHARE - BASED PROGRAMS
For second quarter and the first half of 2006, AXA Financial Group
recognized $9.3 million and $20.3 million, respectively, of compensation
costs under SFAS No. 123(R) for employee stock options, including $6.2
million and $14.9 million, respectively, resulting from unvested awards at
January 1, 2006. A summary of the activity in the AXA, AXA Financial and
AllianceBernstein option plans follows, including the award made on March
31, 2006 of 3.8 million nonstatutory stock options to purchase AXA ordinary
shares. The cost of that award is attributed over the shorter of the
employees' 4-year service-vesting term or to the date at which retirement
eligibility is achieved and subsequent service no longer is required for
continued vesting of the award. Information about options outstanding and
exercisable at June 30, 2006 also is presented in the table below. The
number of AXA ADRs authorized to be issued pursuant to option grants and,
as further described below, restricted stock grants under the Stock
Incentive Plan was approximately 124.5 million less the number of shares
issued pursuant to option grants under The AXA Financial, Inc. 1991 Stock
Incentive Plan (the predecessor plan to the Stock Incentive Plan).
Options Outstanding
-----------------------------------------------------------------------------------------------------
AllianceBernstein
AXA Ordinary Shares AXA ADRs Holding Units
------------------------------------------------------------------ ----------------------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
Outstanding Exercise Outstanding Exercise Outstanding Exercise
(In Millions) Price (In Millions) Price (In Millions) Price
--------------- -------------- ----------------- -------------- --------------- -----------------
Options outstanding at
December 31, 2005... 3.5 (euro) 20.87 38.6 $ 24.06 7.5 $ 40.45
Options granted(1)..... 3.8 (euro) 29.22 - - - (3) $ 65.02
Options exercised...... - - (4.7) $ 19.83 (1.2) $ 38.55
Options forfeited...... (.2) (euro) 23.70 (2.8) $ 34.22 (.1) $ 38.54
Options expired........ - - - - - -
--------------- ----------------- ---------------
Options Outstanding at
June 30, 2006....... 7.1 (euro) 25.23 31.1 $ 23.75 6.2 $ 40.86
=============== ============== ================= ============== =============== =================
Aggregate Intrinsic
Value(2)............ (euro) 16.5 $ 255.3 $ 126.5
============== ============== =================
Weighted Average
Remaining
Contractual Term
(in years).......... 9.28 4.70 4.64
=============== ================= ===============
Options Exercisable at
June 30, 2006....... - 24.5 $ 24.12 5.2 $ 41.30
=============== ================= ============== =============== =================
Aggregate Intrinsic
Value(2)............ - $ 194.1 $ 103.9
============== ============== =================
Weighted Average
Remaining
Contractual Term
(in years).......... - 3.80 4.49
=============== ================= ===============
(1) Approximately 2.6 million of the 3.8 million AXA ordinary share
options granted on March 31, 2006 have a 4-year graded vesting
schedule, with one-third vesting on each of the second, third and
fourth anniversaries of the grant date. The remaining approximately
1.2 million options have a 4-year cliff-vesting term. All of the
options granted on March 31, 2006 have a 10-year contractual term.
(2) Intrinsic value, presented in millions, is calculated as the excess of
the closing market price on June 30, 2006 of the respective underlying
shares over the strike prices of the option awards.
(3) AllianceBernstein grants totaled 9,712 units in the first half of
2006.
Cash proceeds received from employee exercises of options to purchase AXA
ADRs in second quarter and the first half of 2006 were $50.8 million and
$93.0 million, respectively. The intrinsic value related to employee
exercises of options to purchase AXA ADRs during second quarter and the
first half of 2006 and of 2005 were $40.5 million, $71.9 million, $10.2
million and $32.4 million, respectively, resulting in amounts currently
deductible for tax
20
purposes of $13.9 million, $24.3 million, $3.4 million and $10.7 million,
respectively, for the periods then ended. Under SFAS No. 123(R), $11.4
million and $18.3 million windfall tax benefits resulted from employee
stock option exercises during second quarter and the first half of 2006,
respectively.
At December 31, 2005, AXA Financial held 14.6 million AXA ADRs in treasury
at a weighted average cost of approximately $24.00 per ADR, of which
approximately 14.3 million were designated to fund future exercises of
outstanding employee stock options. These AXA ADRs were obtained primarily
by exercise of call options that had been purchased by AXA Financial in
fourth quarter 2004 to mitigate the U.S. dollar price and foreign exchange
risks associated with funding exercises of employee stock options.
Remaining outstanding and unexercised at June 30, 2006 are call options to
purchase 8.7 million AXA ADRs at strike prices ranging from $31.00 to
$33.00, each having a cap equal to approximately 150% of its strike price,
at which time the option automatically would be exercised. These call
options expire on November 23, 2009. During the first half of 2006, AXA
Financial utilized approximately 2.9 million AXA ADRs from treasury to fund
exercises of employee stock options. At June 30, 2006, AXA Financial held
11.8 million AXA ADRs in treasury, of which approximately 11.5 million were
designated to fund future exercises of outstanding employee stock options
and the remainder of approximately 0.3 million units were available for
general corporate purposes, including funding other stock-based
compensation programs. Employee options outstanding at June 30, 2006 to
purchase AXA ordinary shares begin to become exercisable in March 2007 and
their future exercises are expected to be funded by newly issued AXA
ordinary shares.
Prior to adoption of SFAS No. 123(R), AXA Financial Group had elected to
continue accounting for employee stock option awards under APB No. 25 and,
therefore, no compensation cost for these awards was recognized in the
consolidated statement of earnings in second quarter and the first half of
2005. The following table illustrates the effect on net income had
compensation expense for employee stock option awards been measured and
recognized by AXA Financial Group under the fair-value-based method of SFAS
No. 123. These pro forma disclosures are not adjusted from amounts
previously reported and, therefore, retain the original grant-date fair
values of the underlying awards, continue to attribute cost over the
awards' service-vesting periods and do not include estimates of pre-vesting
forfeitures.
Three Months Six Months
Ended Ended
June 30, 2005 June 30, 2005
----------------- -----------------
(In Millions)
Net earnings as reported .......................................... $ 297.7 $ 574.1
Less: Total stock-based employee compensation expense
determined under fair value method, net of income tax benefit.... (6.7) (12.4)
------------------ ------------------
Pro Forma Net Earnings.............................................. $ 291.0 $ 561.7
================== ==================
For the purpose of estimating the fair value of employee stock option
awards granted on or after January 1, 2006, AXA Financial Group continues
to apply the Black-Scholes-Merton formula and the same methodologies for
developing the input assumptions as previously had been used to prepare the
pro forma disclosures required by SFAS No. 123. Shown below are the
relevant input assumptions used to derive the fair values of options
awarded in the first half of 2006 and of 2005, respectively. No grants of
options to purchase AXA ADRs were made to employees in the first half of
2006. For employee stock options with graded vesting terms and service
conditions granted on or after January 1, 2006, AXA Financial Group elected
under SFAS No. 123(R) to retain its practice of valuing these as singular
awards and to change to the graded-vesting method of attribution, whereby
the cost is recognized separately over the requisite service period for
each individual one-third of the options vesting on the second, third and
fourth anniversaries of the grant date.
21
AllianceBernstein
AXA Ordinary Shares AXA ADRs Holding Units
----------------------------------- --------------- -----------------------
Six months ended June 30, 2006 2005 2005 2006 2005
------------- ----------------- -------------- ------------ ----------
Dividend yield....................... 3.48% 3.15% 3.01% 6.00% 6.20%
Expected volatility.................. 28%
25% 25% 31% 31%
Risk-free interest rate.............. 3.77% 3.09% 4.27% 4.90% 3.70%
Expected life in years............... 5.0 5.0 5.0 6.5 3.0
Weighted average fair value per
option at grant date.............. $ 7.45 $ 5.01 $ 5.65 $ 12.35 $ 7.04
As of June 30, 2006, approximately $53.5 million of unrecognized
compensation cost related to unvested employee stock option awards, net of
estimated pre-vesting forfeitures, is expected to be recognized by AXA
Financial Group over a weighted average period of 2.3 years.
Under the Stock Incentive Plan, AXA Financial grants restricted AXA ADRs to
employees of its subsidiaries. AXA ADRs authorized to be issued pursuant to
restricted awards may not exceed 20% of the aggregate shares authorized
under the Stock Incentive Plan. Generally, all outstanding restricted AXA
ADR grants have a 7-year vesting schedule with potential accelerated
vesting based on performance. Under the Equity Plan, AXA Financial grants
non-officer directors restricted AXA ADRs and unrestricted AXA ADRs
annually. Similarly, AllianceBernstein awards restricted Holding Units to
independent directors of its General Partner. In addition, under its
Century Club Plan, awards of restricted Holding Units that vest ratably
over three years are made to eligible AllianceBernstein employees whose
primary responsibilities are to assist in the distribution of
company-sponsored mutual funds. For second quarter and first half of 2006
and of 2005, AXA Financial Group recognized compensation cost of $2.0
million and $5.7 million, respectively, under SFAS No. 123(R) and $2.3
million and $9.2 million, respectively, under APB No. 25 for awards
outstanding under these plans. Consistent with existing practice of AXA
Financial Group prior to adoption of SFAS No. 123(R), grant-date fair value
continues to be measured by the closing price of the shares awarded and the
result generally is attributed over the shorter of the performance period,
the requisite service period, or to the date at which retirement
eligibility is achieved and subsequent service no longer is required for
continued vesting of the award.
The following table summarizes unvested restricted AXA ADR activity for the
first half of 2006. In addition, at June 30, 2006, approximately 62,280
restricted AllianceBernstein Holding Units outstanding under the Century
Club Plan remain unvested. As of June 30, 2006, approximately $4.4 million
of unrecognized compensation cost related to these unvested awards, net of
estimated pre-vesting forfeitures, is expected to be recognized over a
weighted average period of 1.6 years. Restricted AXA ADRs vested in the
first half of 2006 and 2005 had aggregate vesting-date fair values of
approximately $13.5 million and $19.2 million, respectively. In the first
half of 2005, 244,790 restricted AXA ADRs were granted, having an aggregate
grant-date fair value of $6.6 million.
Weighted
Shares of Average
Restricted Grant Date
Stock Fair Value
--------------- ---------------
Unvested as of December 31, 2005.......................................... 867,387 $ 19.94
Granted................................................................... 78,865 $ 35.16
Vested.................................................................... 381,836 $ 16.98
Forfeited................................................................. 50,381 -
----------------
Unvested as of June 30, 2006.............................................. 514,035 $ 23.91
================
On March 31, 2006, under the terms of the AXA Performance Unit Plan 2006,
the AXA Management Board awarded 722,854 unearned performance units to
employees of AXA Financial subsidiaries. During each year that
22
the performance unit awards are outstanding, a pro-rata portion of the
units may be earned based on criteria measuring the performance of AXA and
AXA Financial Group. The extent to which performance targets are met
determines the number of performance units earned, which may vary between
0% and 130% of the number of performance units at stake. Performance units
earned under the 2006 plan cliff-vest on the second anniversary of their
date of award. When fully-vested, the performance units earned will be
settled in cash, or in some cases, a combination of cash (70%) and stock
(30%), the latter equity portion having transfer restrictions for a
two-year period. For 2006 awards, the price used to value the performance
units at settlement will be the average opening price of the AXA ordinary
share for the last 20 trading days of the vesting period converted to U.S.
dollars using the Euro to U.S. dollar exchange rate on March 28, 2008.
For second quarter and the first half of 2006 and of 2005, AXA Financial
Group recognized compensation cost of $5.2 million and $13.6 million,
respectively, under SFAS No. 123(R) and $1.4 million and $3.0 million,
respectively, under APB No. 25 for performance units earned to date.
Substantially similar to existing practice of AXA Financial Group prior to
adoption of SFAS No. 123(R), the change in fair value of these awards in
the first half of 2006 was measured by the closing price of the underlying
AXA ordinary shares or AXA ADRs and adjustment was made to reflect the
impact of expected and actual pre-vesting forfeitures. In addition, similar
to adoption of SFAS No. 123(R) for employee stock option awards, the cost
of performance units awarded on or after January 1, 2006, such as those
granted on March 31, 2006, were attributed over the shorter of the
cliff-vesting period or to the date at which retirement eligibility is
achieved. The value of performance units earned and reported in Other
liabilities in the consolidated balance sheets at June 30, 2006 and
December 31, 2005 was $22.7 million and $9.1 million, respectively,
including incremental awards earned under the 2005 and 2004 plans from
having exceeded the targeted performance criteria established in those
years by 14.6% and 11.1%, respectively. Approximately 720,691 outstanding
performance units are at risk to achievement of 2006 performance criteria,
including approximately 50% of the award granted on March 31, 2006.
Following completion of the merger of AXA Merger Corp. with and into AXA
Financial in January 2001, certain employees exchanged fully vested
in-the-money AXA ADR options for tandem Stock Appreciation Rights/AXA ADR
non-statutory options ("tandem SARs/NSOs") of then-equivalent intrinsic
value. AXA Financial recorded compensation (income)/expense for these
fully-vested awards of $(5.7) million, $1.3 million, $(8.7) million and
$0.8 million, for second quarter and the first half of 2006 and of 2005,
respectively, reflecting the impact in those periods of the change in the
market price of the AXA ADR on the cash-settlement value of the SARs
component of the outstanding tandem SARs/NSOs. The value of these tandem
SARs/NSOs at June 30, 2006 and December 31, 2005 was $21.5 million and
$57.5 million, respectively. At June 30, 2006, 1.8 million tandem SARs/NSOs
were outstanding, having weighted average remaining expected and
contractual terms of 1.3 and 2.7 years, respectively, and for which the
SARs component had maximum value of $28.8 million. During second quarter
and the first half of 2006 and of 2005, respectively, approximately 0.1
million, 2.5 million, 0.0 million and 0.1 million, of these awards were
exercised at an aggregate cash-settlement value of $2.0 million, $37.2
million, $0.2 million and $0.8 million.
On March 31, 2006, 59,644 Stock Appreciation Rights with a 4-year
cliff-vesting schedule were granted to certain associates of AXA Financial
subsidiaries. These Stock Appreciation Rights entitle the holder to a cash
payment equal to any appreciation in the value of the AXA ordinary share
over 29.22 Euros as of the date of exercise. Similar to the SARs component
of the tandem SARs/NSOs, awards remaining unexercised at expiry of their
10-year contractual term will be automatically exercised on the expiration
date. At June 30, 2006, 0.2 million Stock Appreciation Rights were
outstanding, having weighted average remaining contractual term of 6.3
years. The accrued value of Stock Appreciation Rights at June 30, 2006 and
December 31, 2005 was $1.7 million and $1.0 million, respectively, and
recorded as liabilities in the consolidated balance sheets. For second
quarter and the first half of 2006, AXA Financial Group recorded
compensation expense for Stock Appreciation Rights of $0.5 million and $0.7
million, respectively, under SFAS No. 123(R) reflecting the impact in those
periods of the changes in their fair values as determined by applying the
Black Scholes-Merton formula and assumptions used to price employee stock
option awards. For second quarter and the first half of 2005, AXA Financial
Group recorded compensation expense of $0.1 million and $0.1 million,
respectively, under APB. No. 25 reflecting the impact in those periods of
the change in the market price of the underlying AXA ordinary share or AXA
ADR on the value of the outstanding Stock Appreciation Rights.
Under SFAS No. 123(R), AXA Financial Group recognized compensation expense
for payroll deductions authorized and applied in second quarter and the
first half of 2006 under the terms of the AXA Financial, Inc. Qualified
Stock Purchase Plan to purchase AXA ADRs of 39,360 and 113,640,
respectively, at an aggregate discount of $0.3 million and $0.7 million,
respectively, representing a discount of 15% from the closing market value
of the AXA ADR at the purchase dates defined in the annual offering
document (generally the last trading day of each month). Prior to adoption
of SFAS No. 123(R), no compensation expense was recorded in connection
23
with this plan, including the aggregate discount of $0.2 million and $0.4
million, for second quarter and the first half of 2005, respectively. Under
the terms of the AXA Financial, Inc. Non-Qualified Stock Purchase Plan,
total AXA ADRs of 201,427 and 205,422 were purchased during the first half
of 2006 and of 2005, respectively, including those purchased with employer
matching contributions for which AXA Financial Group recorded compensation
expense of $0.3 million, $0.9 million, $0.3 million and $0.6 million in
second quarter and the first half of 2006 and of 2005, respectively.
9) 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.
10) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in AXA Financial
Group's Notes to Consolidated Financial Statements for the year ended
December 31, 2005, except as described below:
In AMERICAN NATIONAL BANK, in March 2006, AXA Equitable's motion for
reconsideration, filed in January 2006, was denied. In July 2006, the
parties reached an agreement in principle to settle the AMERICAN NATIONAL
BANK action and the DH2 action.
In HIRT, in July 2006, the district court ruled that (a) the cash balance
provisions of the Equitable Plan do not violate the age discrimination
provisions of ERISA, (b) the notice of plan changes provided to
participants in 1990 was not adequate and (c) the notice of plan changes
provided to participants in 1992 satisfied the ERISA notice requirements.
The court requested additional briefings on the issue of remedies.
In WIGGENHORN, in June 2006, AXA Equitable's motion to dismiss the amended
complaint was granted. In June 2006, the plaintiff filed a notice of
appeal.
In STOCKLER, in March 2006, the case was dismissed by agreement of the
parties. Of the other two similar putative class actions previously
disclosed, one remains pending.
ALLIANCE LITIGATION
-------------------
In the ENRON COMPLAINT, in April 2006, AllianceBernstein moved for summary
judgment dismissing the Enron Amended Consolidated Complaint as the
allegations therein pertain to AllianceBernstein. The motion is pending. In
July 2006, the court granted plaintiffs' amended motion for class
certification.
In ERB, in March 2006, the case was voluntarily dismissed with prejudice
pursuant to a settlement agreement.
In the MUTUAL FUND MDL, in April 21, 2006, AllianceBernstein and attorneys
for the plaintiffs in the mutual fund shareholder claims, mutual fund
derivative claims, and ERISA claims entered into a confidential memorandum
of understanding containing their agreement to settle these claims. The
agreement will be documented by a stipulation of settlement and will be
submitted for court approval at a later date. The derivative claims brought
on behalf of AllianceBernstein Holding remain pending. Plaintiff seeks an
unspecified amount of damages.
In the WV SECURITIES COMMISSIONERS SUMMARY ORDER MATTER, in April 2006,
defendants' petition for Writ of Prohibition and Order Suspending
Proceedings was denied. In May 2006, defendants appealed the court's
determination.
In AUCOIN, in May 2006, the District Court denied plaintiffs' motion for
leave to file their amended complaint. In July 2006, plaintiffs filed a
notice of appeal.
Although the outcome of litigation generally cannot be predicted with
certainty, management believes that, except as otherwise noted in AXA
Financial Group's Notes to Consolidated Financial Statements for the year
ended
24
December 31, 2005, the ultimate resolution of the litigations described
above involving AXA Financial and/or its subsidiaries should not have a
material adverse effect on the consolidated financial position of AXA
Financial Group. Except as previously noted, management cannot make an
estimate of loss, if any, or predict whether or not any of such other
litigations described above or in AXA Financial Group's Notes to
Consolidated Financial Statements for the year ended December 31, 2005 will
have a material adverse effect on AXA Financial Group's consolidated
results of operations in any particular period.
In addition to the matters previously reported and those described above,
AXA Financial and its subsidiaries are involved in various legal actions
and proceedings in connection with their businesses. Some of the actions
and proceedings have been brought on behalf of various alleged classes of
claimants and certain of these claimants seek damages of unspecified
amounts. While the ultimate outcome of such matters cannot be predicted
with certainty, in the opinion of management no such matter is likely to
have a material adverse effect on AXA Financial Group'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.
11) 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,
--------------------------------- ----------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ----------------
(In Millions)
SEGMENT REVENUES:
Financial Advisory/Insurance............ $ 2,192.0 $ 1,924.5 $ 4,049.5 $ 3,936.0
Investment Management (1)............... 944.7 781.7 1,881.0 1,531.9
Consolidation/elimination............... (22.3) (19.8) (44.5) (40.9)
--------------- --------------- --------------- ----------------
Total Revenues.......................... $ 3,114.4 $ 2,686.4 $ 5,886.0 $ 5,427.0
=============== =============== =============== ================
(1) Net of interest expense incurred on securities borrowed.
SEGMENT EARNINGS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST:
Financial Advisory/Insurance............ $ 429.3 $ 324.8 $ 700.4 $ 639.0
Investment Management................... 252.1 201.0 510.7 357.0
--------------- --------------- --------------- ----------------
Total Earnings from Continuing
Operations before Income Taxes
and Minority Interest................ $ 681.4 $ 525.8 $ 1,211.1 $ 996.0
=============== =============== =============== ================
JUNE 30, December 31,
2006 2005
---------------- ------------------
(In Millions)
SEGMENT ASSETS:
Financial Advisory/Insurance.............................................. $ 141,440.4 $ 138,416.0
Investment Management..................................................... 16,522.6 15,853.4
Consolidation/elimination ................................................ 39.9 71.3
---------------- ------------------
Total Assets.............................................................. $ 158,002.9 $ 154,340.7
================ ==================
In first quarter 2006, AllianceBernstein issued units to its employees
under long-term incentive plans. As a result of this transaction, AXA
Financial Group recorded a non-cash $37.4 million realized gain. At June
30, 2006 and
25
December 31, 2005, AXA Financial Group's beneficial ownership in
AllianceBernstein was approximately 60.6% and 61.1%, respectively.
12) COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ------------------------------
2006 2005 2006 2005
--------------- ------------- -------------- --------------
(In Millions)
Net earnings...................................... $ 372.9 $ 297.7 $ 654.5 $ 574.1
--------------- ------------- -------------- --------------
Change in unrealized (losses) gains,
net of reclassification adjustment.............. (277.9) 303.1 (637.8) 10.7
--------------- ------------- -------------- --------------
Other comprehensive (loss) income................. (277.9) 303.1 (637.8) 10.7
--------------- ------------- -------------- --------------
Comprehensive Income.............................. $ 95.0 $ 600.8 $ 16.7 $ 584.8
=============== ============= ============== ==============
26
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 Group that follows
should be read in conjunction with the Consolidated Financial Statements, the
related Notes to Consolidated Financial Statements included elsewhere herein,
with information provided under "Forward-looking Statements" included elsewhere
herein and with the management narrative found in the Management's Discussion
and Analysis ("MD&A") and the "Risk Factors" sections included in AXA Financial
Inc's Annual Report on Form 10-K for the year ended December 31, 2005 ("2005
Form 10-K").
CONSOLIDATED RESULTS OF OPERATIONS
Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005
Net earnings for AXA Financial Group were $654.5 million for the first half of
2006, an increase of $80.4 million over the first half of 2005. In first quarter
2006, a pre-tax gain on the disposal of discontinued operations of $6.3 million
($4.1 million post-tax) resulted from the release of reserves due to the
settlement of contingencies related to the 2005 sale of Advest. As a result of
the reclassification of certain real estate properties to the held for sale
category in first and second quarters of 2006, such properties and their related
income are now reported as discontinued operations in all periods presented.
Post-tax earnings from held for sale real estate were $4.7 million and $5.7
million for the first half of 2006 and 2005, respectively. Earnings from
continuing operations were $645.7 million for the first half of 2006, an
increase of $77.3 million over the first half of 2005.
Earnings from continuing operations before income taxes and minority interest
were $1.21 billion for the first six months of 2006, an increase of $215.1
million from the year earlier period. There was a $61.4 million increase in the
Financial Advisory/Insurance segment as lower premiums and investment results
and higher commission expense were more than offset by higher policy fee and
lower compensation and benefit costs in the first half of 2006. The Investment
Management segment's earnings were $510.7 million, $153.7 million higher than in
the first six months of 2005, principally due to higher earnings at
AllianceBernstein. The Investment Management segment's earnings included $13.2
million and $12.5 million in gains in the 2006 and 2005 periods, respectively,
related to AllianceBernstein's second quarter 2005 transfer of its cash
management business to Federated. In first quarter 2006, AXA Financial Group
adopted the provisions of SFAS No. 123(R) and recognized $11.3 million ($7.6
million after-tax) and $9.6 million ($6.5 million after tax) in compensation
cost for employee stock options during first and second quarters 2006,
respectively.
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.
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. Gains or losses on the futures contracts used in these programs, including
current period changes in fair value, are recognized in investment income in the
period in which they occur, and may contribute to earnings volatility. Unlike
the futures hedge contracts and the GMIB reinsurance contracts, GMDB/GMIB
reserve liabilities are not reported on a fair value basis. Instead, reserves
for GMDB/GMIB obligations are calculated on the basis of actuarial assumptions
related to projected benefits and related contract charges over the lives of the
contracts; they do not reflect the immediate impact of equity and interest rate
market fluctuations. In periods of rising equity and interest rate markets, the
fair value of the futures and GMIB reinsurance contracts will decline while the
GMDB/GMIB reserves will not reflect corresponding changes, resulting in a
decline in pre-tax earnings. Conversely, in periods of equity and interest rate
market declines, the fair value of the futures and GMIB reinsurance contracts
will increase while the GMDB/GMIB reserves will not reflect corresponding
changes, resulting in an increase in pre-tax earnings. Consequently, pre-tax
earnings from continuing operations in any particular period do not fully
reflect the economics of the GMDB/GMIB features and related futures hedge and
reinsurance risk management programs.
27
Revenues. In the first six months of 2006, revenues increased $459.0 million to
$5.89 billion. The $113.5 million increase in revenue for the Financial
Advisory/Insurance segment was principally due to higher policy fee income
partially offset by lower investment results and lower premiums while the $349.1
million increase in revenues for the Investment Management segment resulted
principally from higher investment advisory and services fees and higher
institutional research service revenues at AllianceBernstein.
Premiums decreased by $28.8 million to $778.4 million for the first six months
of 2006. Policy fee income was $1.18 billion, $185.2 million higher than in the
first six months of 2005. The policy fee income increase resulted from fees
earned on higher average Separate Account balances due to positive net cash
flows and market appreciation.
Net investment income increased $10.5 million to $1.64 billion in the first six
months of 2006 as the increase of $13.4 million for the Investment Management
segment was offset by the $1.8 million decrease in the Financial
Advisory/Insurance segment. The increase for the Investment Management segment
was related to changes in the market value of AllianceBernstein's trading
account securities. The decrease for the Financial Advisory/Insurance segment
was primarily due to the $44.3 million decrease in the fair value in the first
half of 2006 of derivative instruments related to hedging programs implemented
to mitigate certain risks associated with the GMDB/GMIB features of certain
contracts as compared to a $10.0 million increase in fair value in the first six
months of 2005. Conversely, investment income related to other derivatives
including interest rate swap, floor and future contracts increased $15.1 million
to $11.6 million in the first half of 2006 while income from other equity
investments increased $25.1 million in the first half of 2006 as compared to the
comparable 2005 period.
Investment gains totaled $53.7 million in the first six months of 2006, a
decrease of $4.0 million as compared to $57.7 million in the first six months of
2005 as the $30.6 million higher gains in the Investment Management segment were
offset by $34.6 million lower gains in the Financial Advisory/Insurance segment
in the first half of 2006 as compared to the 2005 period. The higher gains for
the Investment Management segment in the 2006 period were primarily due to gains
principally resulting from the increase in AllianceBernstein equity due to the
issuance of units to its employees under long-term incentive plans in first
quarter 2006. In the Financial Advisory/Insurance segment, the lower investment
gains in the 2006 period primarily resulted from lower gains from sales of fixed
maturity securities ($13.8 million in the 2006 period as compared to $44.8
million in comparable 2005 period) and higher writedowns on General Account
fixed maturities, $22.1 million in the first half of 2006 as compared to $16.3
million in first six months of 2005.
Commissions, fees and other income increased $296.1 million to $2.24 billion in
the first six months of 2006 with $305.1 million higher income in the Investment
Management segment being partially offset by a $6.5 million decrease in the
Financial Advisory/Insurance segment. The Investment Management segment increase
was principally due to the $270.7 million and $24.0 million increases in
investment advisory and services fees and institutional research services fees
at AllianceBernstein in the first six months of 2006 as compared to the
comparable 2005 period. The increase of $270.7 million to $1.32 billion in
investment advisory and services fees was primarily due to an increase in
average assets under management ("AUM") resulting from net asset inflows and
market appreciation experienced in the six-month period and from $17.6 million
higher performance fees. Institutional research services revenues at
AllianceBernstein increased $23.9 million as a $46.1 million increase due to an
increase in U.S. and Pan-European market share, partly offset by lower pricing,
was offset by a $22.1 million lower brokerage transaction charges. The Financial
Advisory/Insurance segment decrease of $6.5 million to $504.3 million in the
first half of 2006 was due to the lower increase in the fair value of the GMIB
reinsurance contracts, offset by higher gross investment management fees
received from EQAT and VIP Trust due to a higher asset base. As required by SFAS
No. 133, the GMIB reinsurance contracts are considered derivatives and are
reported at fair value. In the first six months of 2006, the fair value of these
contracts increased $17.3 million as compared to an $84.3 million increase in
fair value during the first half of 2005 due to market fluctuations.
Benefits and Other Deductions. Total benefits and other deductions increased
$243.9 million to $4.67 billion in the first half of 2006 with increases of
$195.4 million and $41.6 million reported for the Investment Management and the
Financial Advisory/Insurance segments, respectively.
Total compensation and benefits increased $123.7 million to $1.21 billion in the
first six months of 2006 as a $149.5 million increase for the Investment
Management segment was offset by a $25.9 million decrease for the Financial
Advisory/Insurance segment. The increase at AllianceBernstein in the first half
of 2006 reflected the $60.9 million increase in incentive compensation primarily
due to higher earnings, the $52.9 million increase in commission expense due to
higher sales volume across all distribution channels and Institutional Research
Services and the $36.6 million increase in base compensation, fringe benefits
and other employment costs due to increased headcounts, annual merit salary
increases and higher fringe benefits reflecting the increased compensation
levels at
28
AllianceBernstein. The $25.9 million decrease for the Financial
Advisory/Insurance segment in the first six months of 2006 was primarily due to
the $45.4 million decrease in other benefits due to the announced curtailment of
age and/or service credits toward the cost sharing rules for retiree health
coverage for active participants effective December 31, 2006, partially offset
by higher employee stock compensation expense of $38.7 million due to the
effects of implementing SFAS No. 123(R) in 2006.
For the first six months of 2006, commissions in the Financial
Advisory/Insurance segment totaled $641.9 million, an increase of $105.5 million
from the first six months of 2005, principally due to higher sales of annuity
products and higher asset-based commissions.
There was a $19.0 million decrease in distribution plan payments by
AllianceBernstein to $143.8 million in the first six months of 2006 due to the
disposition of cash management services.
Amortization of deferred sales commissions totaled $50.0 million for the first
half of 2006, $21.0 million lower than in the 2005 period as a result of lower
sales of back-end load shares.
DAC and VOBA amortization increased to $396.7 million in the first six months of
2006, $56.1 million higher than in the comparable 2005 period. This increase in
amortization was principally related to higher current margins on products that
are DAC reactive and lower favorable DAC unlocking in 2006 compared to 2005.
This increase was partially offset by reactivity to decreases in the first six
months of 2006 in the fair value of the derivative instruments related to the
GMDB/GMIB hedging programs and the lower increase in fair value of the GMIB
reinsurance asset. In 2006, the unlocking impact from recognition of higher
expected future margins driven by higher fees related to variable insurance and
annuity contracts in the 2006 period also offset the increase. In 2005, DAC
unlocking related to higher estimated future margins due to revised expectations
regarding lapses on certain variable annuity contracts based upon 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 2006 than in 2005.
DAC capitalization totaled $704.4 million for the first half of 2006, an
increase of $68.6 million from $635.8 million reported in the first six months
of 2005 primarily due to higher sales of annuity products.
The $72.4 million increase in other operating costs and expenses to $625.5
million in the first half of 2006 resulted from increases of $68.8 million and
$6.1 million, respectively, for Investment Management and the Financial
Advisory/Insurance segments. The Investment Management segment increase
primarily resulted from increases in other promotion and servicing expenses,
legal costs, market data services and data processing expenses at
AllianceBernstein in the first half of 2006. The increase in the Financial
Advisory/Insurance segment was principally due to higher sub-advisory fees at
EQAT and VIP Trust due to higher average asset balances, partially offset by
lower litigation expenses.
Premiums and Deposits. Total premiums and deposits for insurance and annuity
products for the first six months of 2006 were $9.15 billion, an increase of
$1.43 billion from the comparable 2005 period while total first year premiums
increased $1.29 billion to $6.18 billion in the first six months of 2006. First
year premiums and deposits for the life products increased $30.8 million as the
$71.0 million higher interest-sensitive life sales were offset by $21.8 million,
$16.9 million and $1.5 million lower sales of COLI, traditional and variable
life products, respectively. Annuity products' first year premiums and deposits
increased $1.26 billion as $1.42 billion higher variable annuity sales,
including the wholesale channel's $1.07 billion increase, were partially offset
by $151.9 million lower fixed annuity sales. There was a $399.0 million increase
to $3.10 billion in mutual fund and fee based assets sales in the first six
months of 2006. In July 2006, AXA Equitable launched its Accumulator(R) '06
variable annuity products with additional features, including a guaranteed
withdrawal benefit for life. Accumulator(R) '06 variable annuity products are
currently available for new sales in place of the prior Accumulator products in
most states and will be available in the remaining jurisdictions as applicable
regulatory approvals are received. The prior Accumulator products accounted for
73.8% and 66.5% of total annuity premiums and deposits for the Financial
Advisory/Insurance segment in the first half of 2006 and 2005, respectively.
Surrenders and Withdrawals. Surrenders and withdrawals increased, from $3.76
billion in the first six months of 2005 to $4.57 billion for the first six
months of 2006. There was a $757.8 million increase in individual annuities
surrenders and withdrawals with smaller increases of $31.7 million and $29.7
million reported for the traditional life and variable and interest-sensitive
life insurance lines, respectively. The annualized annuities surrender rate
increased to 9.2% in the first six months of 2006 from 8.6% in the first six
months of 2005. The individual life surrender rates increased to 4.3% from 4.1%
for the same respective periods. The surrender and withdrawal rates described
above continue to fall within the range of expected experience.
29
Assets Under Management. Breakdowns of assets under management follow:
Assets Under Management
(In Millions)
JUNE 30,
-----------------------------------
2006 2005
--------------- ---------------
Third party..................................................................... $ 561,455 $ 452,186
General Account and other....................................................... 53,969 54,796
Insurance Group Separate Accounts............................................... 78,259 67,919
--------------- ---------------
Total Assets Under Management................................................... $ 693,683 $ 574,901
=============== ===============
Third party assets under management at June 30, 2006 increased $109.27 billion
from the June 30, 2005 total primarily due to increases at AllianceBernstein.
General Account and other assets under management at June 30, 2006 decreased
$827 million from the total reported for June 30, 2005 primarily due to market
depreciation on the fixed maturity portfolio. The $10.34 billion increase in
Insurance Group Separate Account assets under management resulted from market
appreciation and net new deposits.
AllianceBernstein assets under management at June 30, 2006 totaled $625.2
billion as compared to $516.0 billion at June 30, 2005 as market appreciation of
$58.8 billion and inflows across all distribution channels totaling $104.7
billion were offset by $54.7 billion in dispositions and outflows, including the
approximately $12.1 billion reduction in client AUM during the second half of
2005 related to AllianceBernstein's three dispositions in that year. Non-US
clients accounted for 33.2% of the June 30, 2006 total.
LIQUIDITY AND CAPITAL RESOURCES
AXA Financial. On April 21, 2006, AXA Financial prepaid the MONY Holdings $300.0
million Insured Notes. AXA Financial paid $319.3 million, which included
principal, accrued interest, bond call premium and swap settlement payments. The
$319.3 million was funded with $260.0 million borrowed from AXA and available
cash. The AXA borrowing matures in April 2011 and has a floating rate of
interest that resets semi-annually. The current interest rate is 5.52%.
In June 2006, AXA Financial repaid $150.0 million of its $200.0 million
Subordinated Note to AXA. The maturity date of the remaining balance of this
note was extended for an additional 6-month term with the same interest rate
terms, with the interest rate being reset on June 20, 2006. Also in June 2006,
AXA Financial repaid its $100.0 million note issued in December 2005 and its
$75.0 million note issued in March 2006.
The Insurance Group. At June 30, 2006, AXA Equitable had no short-term debt
outstanding.
AllianceBernstein. For the six months ended June 30, 2006 and 2005,
respectively, cash flows included inflows of $45.6 million and $27.5 million
representing the additional investment by AllianceBernstein Holding with
proceeds from the exercise of options to acquire AllianceBernstein Holdings
units offset by outflows related to purchases of AllianceBernstein Holdings
units totaling $18.4 million and $6.9 million to fund deferred compensation
plans. Cash flows in the first half of 2006 were also impacted by the issuance
of AllianceBernstein Holding units in exchange for earnings-based awards
totaling $47.2 million made under an AllianceBernstein compensation plan and the
issuance of $5.4 million of commercial paper. Capital expenditures at
AllianceBernstein were $49.6 million in the first six months of 2006 compared to
$46.7 million in the comparable 2005 period while purchases of investments
totaled $42.0 million in the first half of 2006 as compared to $6.7 million in
the year earlier period. Available cash flow for cash distributions from
AllianceBernstein totaled $749.9 million and $243.5 million for the first six
months of 2006 and 2005, respectively, while distributions paid were $517.2
million and $393.1 million for the same respective periods.
At June 30, 2006, AllianceBernstein had $8.0 million of short-term debt and $7.0
million under its commercial paper program outstanding; no amount was
outstanding under its revolving credit facility at June 30, 2006. In February
2006, AllianceBernstein entered into an $800.0 million five-year revolving
credit facility with a group of commercial banks and other lenders, replacing an
$800.0 million five-year revolving credit facility that was due to
30
expire in September 2007. Both of these revolving credit facilities have
substantially the same terms. In March 2006, SCB LLC entered into four separate
uncommitted line of credit facility agreements with various banks, each for
$100.0 million. As of June 30, 2006, no amounts were outstanding under these
credit facilities. In May 2006, AllianceBernstein increased the credit available
under its commercial paper program from $425.0 million to $800.0 million,
reducing the amount available under its revolving credit facility to zero.
On May 2, 2006, AllianceBernstein purchased the remaining 50% interest in its
Hong Kong joint venture at a cost of $16.1 million net of cash acquired.
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
Group's disclosure controls and procedures (as defined in Rule 13a-15(e) of the
Securities Exchange Act of 1934, as amended) as of June 30, 2006. Based on
that evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that AXA Financial Group's disclosure controls and
procedures are effective. There has been no change in AXA Financial Group's
internal control over financial reporting that occurred during the period
covered by this report that has materially affected, or is reasonably likely to
materially affect, AXA Financial Group's internal control over financial
reporting.
31
PART II OTHER INFORMATION
Item 1. Legal Proceedings
See Note 10 of Notes to Consolidated Financial Statements contained
herein. Except as disclosed in Note 10 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 2005 Form 10-K.
Item 1A. Risk Factors
There have been no material changes to the risk factors described in
Part I, Item 1A, "Risk Factors," of the 2005 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 Certification of the Registrant's Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Registrant's Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Registrant's Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Registrant's Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32
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 11, 2006 AXA FINANCIAL, INC.
By: /s/ Stanley B. Tulin
---------------------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman of the Board and
Chief Financial Officer
Date: August 11, 2006 /s/ Richard S. Dziadzio
---------------------------------------------
Name: Richard S. Dziadzio
Title: Executive Vice President and
Deputy Chief Financial Officer
Date: August 11, 2006 /s/ Alvin H. Fenichel
---------------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and Controller
33