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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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(Mark One) FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-25280
AXA EQUITABLE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
New York 13-5570651
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ---------------------------------------- -------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (Par Value $1.25 Per Share)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes | | No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes | | No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
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 Act).
Yes | | No |X|
No voting or non-voting common equity of the registrant is held by non-
affiliates of the registrant as of June 30, 2006.
As of March 14, 2007, 2,000,000 shares of the registrant's Common Stock were
outstanding.
REDUCED DISCLOSURE FORMAT:
Registrant meets the conditions set forth in General Instruction (I)(1)(a)
and (b) of Form 10-K and is therefore filing this Form with the reduced
disclosure format.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of AllianceBernstein L.P.'s Annual Report on Form 10-K for the fiscal
year ended December 31, 2006 are incorporated by reference into Part I hereof.
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TABLE OF CONTENTS
Part I Page
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Item 1. Business................................................... 1-1
Overview................................................... 1-1
Segment Information........................................ 1-1
Employees.................................................. 1-7
Competition................................................ 1-7
Regulation................................................. 1-8
Parent Company............................................. 1-11
Other Information.......................................... 1-11
Item 1A. Risk Factors............................................... 1A-1
Item 1B. Unresolved Staff Comments.................................. 1B-1
Item 2. Properties................................................. 2-1
Item 3. Legal Proceedings.......................................... 3-1
Item 4. Submission of Matters to a Vote of Security Holders*....... 4-1
Part II
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Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities........ 5-1
Item 6. Selected Financial Data*................................... 6-1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ("Management
Narrative").............................................. 7-1
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk..................................................... 7A-1
Item 8. Financial Statements and Supplementary Data................ FS-1
Item 9. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure...................... 9-1
Item 9A Controls and Procedures.................................... 9A-1
Item 9B. Other Information.......................................... 9B-1
Part III
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Item 10. Directors and Executive Officers of the Registrant*........ 10-1
Item 11. Executive Compensation*.................................... 11-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters*.............. 12-1
Item 13. Certain Relationships and Related Transactions*............ 13-1
Item 14. Principal Accounting Fees and Services..................... 14-1
Part IV
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Item 15. Exhibits, Financial Statement Schedules ................... 15-1
Signatures ........................................................... S-1
Index to
Exhibits ........................................................... E-1
*Omitted pursuant to General Instruction I to Form 10-K
i
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 within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
include, among other things, discussions concerning potential exposure of AXA
Equitable Life Insurance Company 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 Equitable Life Insurance Company 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" and
elsewhere in this report.
ii
PART I, ITEM 1.
BUSINESS(1)
OVERVIEW
AXA Equitable, established in the State of New York in 1859, is among the
largest life insurance companies in the United States, with approximately 2.3
million insurance policies and contracts in force as of December 31, 2006. AXA
Equitable is part of a diversified financial services organization offering a
broad spectrum of financial advisory, insurance and investment management
services. Together with its affiliates, including AllianceBernstein, the Company
is one of the world's largest asset managers, with total assets under management
of approximately $795.01 billion at December 31, 2006, of which approximately
$716.90 billion were managed by AllianceBernstein. AXA Equitable is a wholly
owned subsidiary of AXA Financial, which is a wholly owned subsidiary of AXA, a
French holding company for an international group of insurance and related
financial services companies. AXA is subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and files
annual reports on Form 20-F. For additional information regarding AXA, see "-
Parent Company".
SEGMENT INFORMATION
AXA Equitable conducts operations in two business segments, the Insurance
segment and the Investment Management segment. The insurance business conducted
principally by AXA Equitable and its subsidiaries, AXA Life and AXA
Distributors, is reported in the Insurance segment. The investment management
business of AllianceBernstein, a leading global investment management firm, is
reported in the Investment Management segment. For additional information on AXA
Equitable's business segments, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Results Of Continuing Operations
By Segment" and Note 21 of Notes to Consolidated Financial Statements.
INSURANCE
The Insurance Group offers a variety of traditional, variable and
interest-sensitive life insurance products, variable and fixed-interest annuity
products, mutual funds and other investment products, asset management,
financial planning and other services principally to individuals, small and
medium-size businesses and professional and trade associations. The Insurance
segment, which also includes Separate Accounts for individual and group life
insurance and annuity products, accounted for approximately $5.97 billion (or
60.4%) of total revenues, after intersegment eliminations, for the year ended
December 31, 2006.
Insurance segment products are offered on a retail basis in all 50 states, the
District of Columbia and Puerto Rico by financial professionals associated with
AXA Advisors, an affiliated broker-dealer, and AXA Network, an affiliated
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(1) As used in this Form 10-K, the term "AXA Equitable" refers to AXA Equitable
Life Insurance Company (formerly The Equitable Life Assurance Society of the
United States), a New York stock life insurance corporation, "AXA Financial"
refers to AXA Financial, Inc., a Delaware corporation incorporated in 1991, "AXA
Financial Group" refers to AXA Financial and its consolidated subsidiaries, and
the "Company" refers to AXA Equitable and its consolidated subsidiaries. The
term "Insurance Group" refers collectively to AXA Equitable and AXA Life and
Annuity Company ("AXA Life"). The term "AXA Distributors" refers to AXA
Distributors, LLC and its subsidiaries, "AXA Advisors" refers to AXA Advisors,
LLC, a Delaware limited liability company, and "AXA Network" refers to AXA
Network, LLC, a Delaware limited liability company and its subsidiaries. The
term "AllianceBernstein" refers to AllianceBernstein L.P. (formerly Alliance
Capital Management L.P.), a Delaware limited partnership, and its subsidiaries.
The term "General Account" refers to the assets held in the respective general
accounts of AXA Equitable and AXA Life and all of the investment assets held in
certain of AXA Equitable's separate accounts on which the Insurance Group bears
the investment risk. The term "Separate Accounts" refers to the Separate Account
investment assets of AXA Equitable excluding the assets held in those separate
accounts on which the Insurance Group bears the investment risk. The term
"General Account Investment Assets" refers to assets held in the General Account
associated with the Insurance Group's continuing operations (which includes the
Closed Blocks described below) and does not include assets held in the General
Account associated primarily with the Insurance Group's discontinued Wind-up
Annuity line of business ("Wind-up Annuities").
1-1
insurance general agency. AXA Distributors, a broker-dealer and insurance
general agency subsidiary of AXA Equitable, distributes the Insurance Group's
products on a wholesale basis in all 50 states, the District of Columbia and
Puerto Rico through national and regional securities firms, independent
financial planning and other broker-dealers, banks and brokerage general
agencies.
For additional information on this segment, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results Of
Continuing Operations By Segment - Insurance", Note 21 of Notes to Consolidated
Financial Statements, as well as "- Employees", " - Competition" and "
- -Regulation".
PRODUCTS
VARIABLE ANNUITIES AND VARIABLE LIFE INSURANCE. The Insurance Group is among the
country's leading issuers of variable annuity and variable life insurance
products. Variable annuity and variable life insurance products offer purchasers
the opportunity to invest some or all of their account values in various
Separate Account investment options. The continued growth of Separate Account
assets under management remains a strategic objective of AXA Financial Group,
which seeks to increase the percentage of its income that is fee-based and
derived from managing funds for its clients (who bear the investment risk and
reward).
The sale of variable annuity products has become increasingly important to the
Insurance Group in recent years, with variable annuities accounting for 78.9% of
the Insurance Group's total premiums and deposits in 2006. Variable annuity
products offered by the Insurance Group principally include deferred variable
annuities sold in the individual (non-qualified) markets, as individual
retirement annuities, in public school systems as tax sheltered annuities and as
group annuities in the employer-sponsored retirement plan markets. A significant
portion of the variable annuities sold by the Insurance Group offer one or more
enhanced guarantee features in addition to the standard return of principal
death benefit guarantee. Such enhanced guarantee features may include an
enhanced guaranteed minimum death benefit ("GMDB") and/or guaranteed minimum
living benefits. Guaranteed minimum living benefits include guaranteed minimum
income benefits ("GMIB"), guaranteed minimum accumulation benefits and
guaranteed minimum withdrawal benefits for life ("WBL"). During 2006, GMIB
remained the predominant guaranteed minimum living benefit elected by the
Insurance Group's customers. For additional information regarding these
guaranteed minimum benefit features, see Notes 2, 8, and 9 of Notes to
Consolidated Financial Statements.
Variable life insurance products accounted for 7.1% of the Insurance Group's
total premiums and deposits in 2006. Variable life insurance products offered by
the Insurance Group include single-life products, second-to-die policies (which
pay death benefits following the death of both insureds) and products for the
corporate-owned life insurance "COLI" market.
As noted above, variable annuity and variable life products offer purchasers the
opportunity to direct the investment of their account values into various
Separate Account investment options. Over the past five years, Separate Account
assets for individual variable annuities and variable life insurance policies
have increased by $40.09 billion to $79.76 billion at December 31, 2006. Of the
2006 year-end amount, approximately $51.34 billion was invested through EQ
Advisors Trust ("EQAT") and approximately $25.68 billion was invested through
AXA Premier VIP Trust ("VIP Trust"). EQAT and VIP Trust are mutual funds for
which AXA Equitable serves as investment manager and administrator. The balance
of such Separate Account assets are invested through various other mutual funds
for which third parties serve as investment manager.
EQAT is a mutual fund offering variable life and annuity contractholders a
choice of single-advisor equity, bond and money market investment portfolios.
Day-to-day portfolio management services for each investment portfolio are
provided, on a subadvisory basis, by various affiliated and unaffiliated
investment subadvisors. AllianceBernstein and AXA Rosenberg Investment
Management ("AXA Rosenberg"), each an AXA affiliate, provided investment
advisory services to investment portfolios representing approximately 45.6% of
the total assets in EQAT portfolios at December 31, 2006 and unaffiliated
investment subadvisors provided investment advisory services in respect of the
balance of the assets in EQAT portfolios.
VIP Trust is a mutual fund offering variable life and annuity contractholders a
choice of multi-advisor equity and bond investment portfolios, as well as asset
allocation portfolios that invest exclusively in other portfolios of EQAT and/or
VIP Trust. Day-to-day portfolio management services for each investment
portfolio are provided, on a subadvisory basis, by various affiliated and
unaffiliated investment subadvisors. AllianceBernstein and AXA Rosenberg, each
an AXA affiliate, provided investment advisory services in respect of investment
portfolios
1-2
representing approximately 9.0% of the total assets in the VIP Trust portfolios
at December 31, 2006 and unaffiliated investment subadvisors provided investment
advisory services in respect of the balance of the assets in the VIP Trust
portfolios.
FIXED ANNUITIES AND FIXED LIFE INSURANCE. In addition to variable annuity and
variable life insurance products, the Insurance Group issues a variety of fixed
annuity products, including individual single premium deferred annuities, which
credit an initial and subsequent annually declared interest rate, and payout
annuity products, including traditional immediate annuities. Fixed annuity
products accounted for 0.5% of the Insurance Group's total premium and deposits
in 2006.
The Insurance Group also issues an array of traditional and interest-sensitive
life insurance products, including whole life, universal life and term life
insurance. Traditional and interest-sensitive life insurance products accounted
for 7.9% of the Insurance Group's total premium and deposits in 2006 and
continue to represent an increasingly significant product line for the Insurance
Group.
RETAIL MUTUAL FUNDS. The Insurance Group also sponsors various retail mutual
funds.
AXA Enterprise Multimanager Funds Trust (formerly AXA Premier Funds Trust)
("Multimanager Trust") is a retail multi-manager mutual fund consisting of
equity and bond investment portfolios, as well as asset allocation portfolios
that invest exclusively in other retail funds managed by AXA Equitable or
Enterprise Capital Management, Inc. ("Enterprise Capital"), a subsidiary of AXA
Financial. At December 31, 2006, Multimanager Trust had total assets of $559
million. AXA Equitable serves as the Investment Manager and Administrator of
Multimanager Trust. AXA Enterprise Funds Trust ("AEFT") is a retail mutual fund
consisting of equity, bond and money market funds. At December 31, 2006, AEFT
had total assets of $2.58 billion. AXA Equitable serves as investment manager
and administrator to AEFT. The Enterprise Group of Funds, Inc. ("EGF") is a
retail mutual fund comprised of two equity investment portfolios. At December
31, 2006, EGF portfolios had total assets of $1.73 billion. Enterprise Capital
serves as the investment manager and AXA Equitable serves as the administrator
to each EGF fund.
In October 2006, AXA Financial and its subsidiaries, AXA Equitable, Enterprise
Capital and Enterprise Fund Distributors, Inc. ("EFD"), entered into an
agreement contemplating the transfer to Goldman Sachs Asset Management L.P.
("GSAM") of assets relating to the business of serving as sponsor of and
investment manager to 27 of the 31 funds of AXA Enterprise Multimanager Funds
Trust, AXA Enterprise Funds Trust and The Enterprise Group of Funds, Inc.
(collectively, the "AXA Enterprise Funds") and the reorganization of such funds
into corresponding mutual funds managed by GSAM. These 27 funds had
approximately $4.2 billion in assets under management as of December 31, 2006.
The reorganization of the 27 funds is subject to regulatory and fund shareholder
approvals and is expected to close in the second quarter of 2007. Of the
remaining four funds not included in the GSAM reorganization, which together had
approximately $700 million in assets under management as of December 31, 2006,
one fund is being liquidated and AXA Financial is considering possible
alternatives for the dispositions of the other three funds, which alternatives
include a possible transaction with another investment advisor or liquidation.
For additional information on assets under management, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Results of Continuing Operations by Segment" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Assets Under
Management".
MARKETS. The Insurance Group targets primarily affluent and emerging affluent
individuals such as professionals and business owners, as well as employees of
public schools, universities, not-for-profit entities and certain other
tax-exempt organizations, and existing customers. Variable annuity products are
targeted at individuals saving for retirement, seeking retirement income (using
either qualified programs, such as individual retirement annuities, or
non-qualified investments) or seeking the enhanced guarantees offered in these
products, as well as employers (including, among others, educational and
not-for-profit entities, and small and medium-sized businesses) seeking to offer
retirement savings programs such as 401(k) or 403(b) plans. Variable and
interest-sensitive life insurance is targeted at individuals in middle-to-upper
income levels for protection and estate planning purposes, and at business
owners to assist in, among other things, business continuation planning and
funding for executive benefits. Mutual funds and other investment products are
intended for a broad spectrum of clients to meet a variety of asset accumulation
and investment needs. Mutual funds and their investment products add breadth and
depth to the range of needs-based services and products the Insurance Group is
able to provide.
DISTRIBUTION. The Insurance Group distributes its annuity, life insurance and
mutual fund products directly to the public through financial professionals
associated with AXA Advisors and AXA Network. These financial
1-3
professionals also have access to and can offer a broad array of annuity, life
insurance and investment products and services from unaffiliated insurers and
other financial service providers. As of December 31, 2006, approximately 5,968
financial professionals were associated with AXA Advisors and AXA Network.
AXA Equitable has entered into agreements pursuant to which it compensates AXA
Advisors and AXA Network for distributing and servicing AXA Equitable's
products. The agreements provide that compensation will not exceed any
limitations imposed by applicable law. Under these agreements, AXA Equitable
provides to each of AXA Advisors and AXA Network personnel, property, and
services reasonably necessary for their operations. AXA Advisors and AXA Network
reimburse AXA Equitable for their actual costs (direct and indirect) and
expenses under the respective agreements.
The Insurance Group also distributes its annuity and life insurance products on
a wholesale basis through AXA Distributors. AXA Distributors distributes the
Insurance Group's annuity products through third-party national and regional
securities firms, independent financial planning and other broker-dealers and
banks. AXA Distributors, through its AXA Partners division, also distributes the
Insurance Group's life insurance products through third-party brokerage general
agencies.
The continued growth of AXA Distributors' wholesale business has become
increasingly important to the Insurance Group. Annuities and life insurance
distributed by AXA Distributors accounted for 47.6% and 43.3% of the Insurance
Group's total annuity and life insurance premiums and deposits in 2006 and 2005,
respectively. Annuities distributed by AXA Distributors accounted for 63.1% and
60.4% of the Insurance Group's total first year annuity premiums and deposits in
2006 and 2005, respectively, and 54.2% and 50.9% of the Insurance Group's total
annuity premiums and deposits in 2006 and 2005, respectively. Similarly, life
insurance products distributed by the AXA Partners division of AXA Distributors
have accounted for a rising portion of the Insurance Group's overall life
insurance business, with life insurance products distributed by AXA Partners
accounting for 42.4% and 25.1% of the Insurance Group's total first year life
insurance premiums and deposits in 2006 and 2005, respectively, and 11.9% and
6.0% of the Insurance Group's total life insurance premiums and deposits in 2006
and 2005, respectively.
Management believes that a portion of the increase in sales of life insurance
through AXA Distributors may be attributable to certain sales of life insurance
policies instigated and/or financed by persons or entities with no relationship
to the insured, with the expectation that such persons or entities will
eventually acquire the policies from the insured as an investment. Due in part
to the potential for adverse selection in these circumstances, the profitability
of such sales may be lower than the Insurance Group might otherwise expect from
sales to traditional non-investor life insurance purchasers. The Insurance Group
has implemented changes to certain of its commission rates and underwriting
practices to reduce the possibility of sales to non-investor purchasers. Based
on periodic samplings of life insurance sales, however, management does not
believe that any sales to date to persons or entities with no relationship to
the insured will have a significant impact on the future profitability of the
Insurance Group.
EFD, an affiliate of AXA Equitable, serves as the principal underwriter of
retail mutual funds sponsored by the Insurance Group. EFD has selling agreements
with AXA Advisors as well as third-party national and regional securities firms,
independent financial planning and other broker-dealers and banks.
In December 2006, AXA Advisors entered into an outsourcing arrangement with
Linsco Private Ledger ("LPL") under which LPL will provide certain
administrative services, including clearing and transaction processing and
customer service, for the brokerage business of AXA Advisors. Under the terms of
related agreements, AXA Advisors' financial professionals will gain access to
certain LPL proprietary technology, including brokerage and advisory platforms
and research services. The related operational conversions are expected to
commence in the third quarter of 2007.
REINSURANCE AND HEDGING. The Insurance Group has in place reinsurance and
hedging programs to reduce its exposure to equity market declines, interest rate
fluctuations and mortality. In 2006, the Insurance Group retained up to a
maximum of $25 million of risk on single-life policies and $30 million of risk
on second-to-die policies. For amounts issued in excess of those limits, the
Insurance Group obtained reinsurance from unaffiliated third parties. The
reinsurance arrangements obligate the reinsurer to pay a portion of any death
claim in excess of the amount retained by the Insurance Group in exchange for an
agreed-upon premium. A contingent liability exists with respect to such
reinsurance should the reinsurers be unable to meet their obligations. The
Insurance Group evaluates the financial condition of its reinsurers in an effort
to minimize its exposure to significant losses from reinsurer insolvencies. The
Insurance Group is not a party to any risk reinsurance arrangement with any
reinsurer pursuant to
1-4
which the amount of reserves on reinsurance ceded to such reinsurer equals more
than one percent of the total policy reserves of the Insurance Group (including
Separate Accounts).
The Insurance Group also reinsures a percentage of its exposure on variable
annuity products that offer a GMIB feature and/or GMDB features. At December 31,
2006, the Insurance Group had reinsured, subject to certain maximum amounts or
caps in any one period, approximately 74.4% of its net amount at risk resulting
from the GMIB feature and approximately 31.3% of its net amount at risk to the
GMDB obligation on annuity contracts in force as of December 31, 2006. The
Insurance Group has adopted certain hedging strategies that are designed to
reduce exposure to GMIB, GMDB and WBL liabilities that have not been reinsured
for policies issued after April 2002.
For additional information about reinsurance and hedging strategies implemented
by the Insurance Group, see "Quantitative and Qualitative Disclosures about
Market Risk" and Notes 2, 5, 8 and 9 of Notes to Consolidated Financial
Statements.
The Insurance Group also acts as a retrocessionaire by assuming life reinsurance
from reinsurers. Mortality risk through reinsurance assumed is managed using the
same corporate retention limits noted above (i.e., $25 million on single-life
policies and $30 million on second-to-die policies), although, in practice, the
Insurance Group is currently using lower internal retention limits for life
reinsurance assumed. The Insurance Group has also assumed accident, health,
aviation and space risks by participating in or reinsuring various reinsurance
pools and arrangements. The Insurance Group generally discontinued its
participation in new accident, health, aviation and space reinsurance pools and
arrangements for years following 2000, but continues to be exposed to claims in
connection with pools it participated in prior to that time. The Insurance Group
audits or otherwise reviews the records of many of these reinsurance pools and
arrangements as part of its ongoing efforts to manage its claims risk.
GENERAL ACCOUNT INVESTMENT PORTFOLIO. The General Account consists of a
diversified portfolio of principally fixed-income investments.
The following table summarizes General Account Investment Assets of the
Insurance Group by asset category at December 31, 2006:
INSURANCE GROUP
GENERAL ACCOUNT INVESTMENT ASSETS
NET AMORTIZED COST (1)
(DOLLARS IN MILLIONS)
AMOUNT % OF TOTAL
---------------- ---------------
Fixed maturities (2)................... $ 29,256.4 75.0%
Mortgages.............................. 3,252.4 8.4
Equity real estate..................... 557.3 1.4
Other equity investments............... 1,331.4 3.4
Policy loans........................... 4,018.4 10.3
Cash and short-term investments (3).... 576.2 1.5
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Total.................................. $ 38,992.1 100.0%
================ ===============
(1) Net Amortized Cost is the cost of the General Account Investment Assets
(adjusted for impairments in value deemed to be other than temporary, if
any) less depreciation and amortization, where applicable, and less
valuation allowances on mortgage and real estate portfolios.
(2) To enhance comparability to other General Account investment assets,
excludes net unrealized gains of $552.2 million on fixed maturities
classified as available for sale. Reported in the consolidated balance
sheet at estimated fair value as required by generally accepted accounting
principles, fixed maturities include approximately $656.0 million net
amortized cost of securities considered to be "Other than investment grade"
securities.
(3) Comprised of "Cash and cash equivalents" and short-term investments
included within the "Other invested assets" caption on the consolidated
balance sheet.
The Insurance Group has an asset/liability management approach with separate
investment objectives for specific classes of product liabilities, such as
insurance, annuity and group pension. The Insurance Group has investment
1-5
guidelines for each product line that form the basis for investment strategies
to manage such product line's investment return and liquidity requirements,
consistent with management's overall investment objectives for the General
Account Investment Portfolio. Investments frequently meet the investment
objectives of more than one class of product liabilities; each such class may be
allocated a pro rata interest in such investments and the returns therefrom.
INVESTMENT SURVEILLANCE. As part of the Insurance Group's investment management
process, management, with the assistance of its investment advisors, constantly
monitors General Account investment performance. This internal review process
culminates with a quarterly review of assets by the Insurance Group's
Investments Under Surveillance Committee that evaluates whether any investments
are other than temporarily impaired and whether specific investments should be
put on an interest non-accrual basis.
WIND-UP ANNUITIES. Wind-up Annuities include certain pension operations
consisting of group non-participating wind-up annuity products. At December 31,
2006, approximately $788.2 million of contractholder liabilities were
outstanding. For additional information about Wind-up Annuities, see Notes 2 and
16 of Notes to Consolidated Financial Statements.
INVESTMENT MANAGEMENT
GENERAL. The Investment Management segment is principally comprised of the
investment management business of AllianceBernstein. AllianceBernstein offers a
broad range of investment products and services to its clients, including the
following: (a) to its institutional clients, AllianceBernstein offers separately
managed accounts, subadvisory relationships, structured products, group trusts,
mutual funds and other investment vehicles, (b) to its retail clients,
AllianceBernstein offers retail mutual funds sponsored by AllianceBernstein, its
subsidiaries and affiliated joint venture companies, subadvisory relationships
in respect of mutual funds sponsored by third parties, separately managed
account programs that are sponsored by various financial intermediaries
worldwide and other investment vehicles, (c) to its private clients,
AllianceBernstein offers separately managed accounts, hedge funds, mutual funds
and other investment vehicles, and (d) to its institutional investors,
AllianceBernstein offers in-depth independent, fundamental research, portfolio
strategy, trading and brokerage-related services.
AllianceBernstein's portfolio managers oversee a number of different types of
investment products within various vehicles and strategies. AllianceBernstein's
investment services include: (a) growth equities, generally targeting stocks
with under-appreciated growth potential; (b) value equities, generally targeting
stocks that are out of favor and that may trade at bargain prices; (c) fixed
income, including both taxable and tax-exempt securities; (d) passive
management, including both index and enhanced index strategies; and (e) blend
strategies, combining style pure components with systematic rebalancing.
The Investment Management segment in 2006 accounted for approximately $4.01
billion (or 40.5%) of total revenues, after intersegment eliminations. As of
December 31, 2006, AllianceBernstein had approximately $716.9 billion in assets
under management including approximately $455.1 billion from institutional
investors, approximately $166.9 billion from retail mutual fund accounts and
approximately $94.9 billion from private clients. As of December 31, 2006,
assets of AXA, AXA Financial and the Insurance Group, including investments in
EQAT, VIP Trust, Multimanager Trust and AEFT, represented approximately 16.5% of
AllianceBernstein's total assets under management, and fees and other charges
for the management of those assets accounted for approximately 4.7% of
AllianceBernstein's total revenues. The Investment Management segment continues
to add third-party assets under management, and to provide asset management
services to the Insurance Group.
INTEREST IN ALLIANCEBERNSTEIN. In October 2000, AllianceBernstein acquired SCB
Inc., formerly known as Sanford C. Bernstein, Inc. ("Bernstein"). In connection
with this acquisition (the "Bernstein Acquisition"), Bernstein and SCB Partners
Inc. were granted the right to sell limited partnership interests in
AllianceBernstein L.P ("AllianceBernstein Units") to AXA Financial or an entity
designated by AXA Financial (the "AllianceBernstein Put"). Since November 2002,
AXA Financial, either directly or indirectly through wholly owned subsidiaries,
has acquired a total of 32.64 million AllianceBernstein L.P. Units for an
aggregate purchase price of approximately $1.63 billion through several
purchases made pursuant to the AllianceBernstein Put, including, most recently,
AXA Financial's purchase on February 23, 2007 of 8.16 million AllianceBernstein
Units at a purchase price of approximately $745.7 million. After giving effect
to the Bernstein Acquisition and such subsequent purchases, AXA Financial
Group's consolidated economic interests in AllianceBernstein L.P. as of
March 1, 2007 and December 31, 2006 was approximately 63.3% and 60.3%,
respectively, including the general partnership interests held indirectly by AXA
Equitable as the sole shareholder of the general partner of AllianceBernstein
Holding L.P.
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("AllianceBernstein Holding"), and AllianceBernstein L.P. As of March 1, 2007,
on a stand-alone basis, the Company's economic interest in AllianceBernstein
L.P. was approximately 45.6%.
For additional information about AllianceBernstein, including its results of
operations, see "Business - Regulation" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Continuing Operations by Segment - Investment Management" and AllianceBernstein
L.P.'s Annual Report on Form 10-K for the year ended December 31, 2006 filed
with the Securities and Exchange Commission (the "SEC") on February 28, 2007.
EMPLOYEES
As of December 31, 2006, the Insurance Group had approximately 5,622 full-time
employees and AllianceBernstein had approximately 4,914 full-time employees.
COMPETITION
INSURANCE GROUP. There is strong competition among insurers, banks, brokerage
firms and other financial institutions and providers seeking clients for the
types of products and services provided by the Insurance Group, including
insurance, annuity and other investment products and services. Competition is
particularly intense among a broad range of financial institutions and other
financial service providers for retirement and other savings dollars. The
principal competitive factors affecting the Insurance Group's business are
financial and claims-paying ratings; access to diversified sources of
distribution; size and scale; product quality, range, features/functionality,
customization and price; crediting rates on fixed products; visibility and brand
recognition in the marketplace; reputation and quality of service; and, with
respect to variable insurance and annuity products, mutual funds and other
investment products, investment management performance.
As noted above, ratings are an important factor in establishing the competitive
position of insurance companies. As of March 14, 2007, the financial strength or
claims-paying rating of AXA Equitable was "AA-" from Standard & Poor's
Corporation (4th highest of 21 ratings; with positive outlook), "Aa3" from
Moody's Investors Service (4th highest of 21 ratings; with stable outlook), "A+"
from A.M. Best Company, Inc. (2nd highest of 15 ratings; with stable outlook),
and "AA" from Fitch Investors Service, L.P. (3rd highest of 24 ratings; with
stable outlook).
INVESTMENT MANAGEMENT. The financial services industry is intensely competitive
and new entrants are continually attracted to it. No single or small group of
competitors is dominant in the industry. AllianceBernstein competes in all
aspects of its business with numerous investment management firms, mutual fund
complexes, brokerage and investment banking firms, insurance companies, banks,
savings and loan associations, and other financial institutions that often
provide investment products that have similar features and objectives as those
AllianceBernstein offers. AllianceBernstein's competitors offer a wide range of
financial services to the same customers that AllianceBernstein seeks to serve.
Some of AllianceBernstein's competitors are larger, have a broader range of
product choices and investment capabilities, conduct business in more markets,
and have substantially greater resources than AllianceBernstein does. These
factors may place AllianceBernstein at a competitive disadvantage. To grow its
business, AllianceBernstein must be able to compete effectively for assets under
management. Key competitive factors include (i) AllianceBernstein's commitment
to place the interests of its clients first; (ii) the quality of
AllianceBernstein's research; (iii) AllianceBernstein's ability to attract,
retain and motivate highly skilled, and often highly specialized, personnel;
(iv) AllianceBernstein's investment performance; (v) the array of investment
products AllianceBernstein offers; (vi) the fees AllianceBernstein charges;
(vii) AllianceBernstein's operational effectiveness; (viii) AllianceBernstein's
ability to further develop and market its brand; and (ix) AllianceBernstein's
global presence.
AXA, AXA Equitable and certain of their direct and indirect subsidiaries offer
financial services, some of which compete with those offered by
AllianceBernstein. AllianceBernstein's partnership agreement specifically allows
AXA Equitable and its subsidiaries (other than the general partner of
AllianceBernstein L.P.) to compete with AllianceBernstein.
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REGULATION
INSURANCE SUPERVISION. Members of the Insurance Group are licensed to transact
insurance business in, and are subject to extensive regulation and supervision
by, insurance regulators in all 50 states of the United States, the District of
Columbia, Puerto Rico, the U.S. Virgin Islands and nine of Canada's twelve
provinces and territories. AXA Equitable is domiciled in New York and is
primarily regulated by the Superintendent (the "Superintendent") of the New York
Insurance Department (the "NYID"). AXA Life is domiciled in Colorado and is
primarily regulated by the Commissioner of Insurance of the Colorado Division of
Insurance. The extent of regulation varies, but most jurisdictions have laws and
regulations governing sales practices, standards of solvency, levels of
reserves, risk-based capital, permitted types and concentrations of investments,
and business conduct to be maintained by insurance companies as well as agent
licensing, approval of policy forms and, for certain lines of insurance,
approval or filing of rates. Insurance regulators have the discretionary
authority to limit or prohibit new issuances of business to policyholders within
their jurisdictions when, in their judgment, such regulators determine that the
issuing company is not maintaining adequate statutory surplus or capital.
Additionally, the New York Insurance Law limits sales commissions and certain
other marketing expenses that may be incurred by AXA Equitable. Each of AXA
Equitable and AXA Life is required to file detailed annual financial statements,
prepared on a statutory accounting basis, with supervisory agencies in each of
the jurisdictions in which it does business. Such agencies may conduct regular
or targeted examinations of the operations and accounts of members of the
Insurance Group, and make requests for particular information from them. For
example, the domestic insurance regulators of AXA Equitable and AXA Life are
currently conducting their periodic statutory examinations of the books, records
and accounts of these insurance companies. The companies have responded to
various information requests made during these examinations, including inquiries
relating to insurance replacement issues. A remediation program may be required
as a result of these examinations, but management does not believe such a
remediation program would have a material impact on the Insurance Group's
business. In recent years, the insurance industry has seen an increase in
inquiries from state attorneys general and insurance commissioners regarding
compliance with certain state insurance and securities laws. For example,
certain attorneys general and insurance commissioners have requested information
from the Insurance Group and other insurance companies regarding collusive
bidding, revenue sharing and market timing practices, suitability of annuity
sales and practices associated with replacements and exchanges of life insurance
and annuities.
HOLDING COMPANY AND SHAREHOLDER DIVIDEND REGULATION. Several states, including
New York, regulate transactions between an insurer and its affiliates under
insurance holding company acts. These acts contain certain reporting
requirements and restrictions on provision of services and on transactions, such
as intercompany service agreements, asset transfers, reinsurance, loans and
shareholder dividend payments by insurers. Depending on their size, such
transactions and payments may be subject to prior notice to, or approval by, the
insurance department of the applicable state. In 2006, AXA Equitable paid an
aggregate of $600.0 million in shareholder dividends.
STATUTORY SURPLUS AND CAPITAL. Insurance regulators have the discretionary
authority to limit or prohibit new issuances of business to policyholders within
their jurisdiction when, in their judgment, such regulators determine that the
issuing company is not maintaining adequate statutory surplus or capital.
FEDERAL TAX INITIATIVES. Although the Federal government generally does not
directly regulate the insurance business, many Federal tax laws affect the
business in a variety of ways. There are a number of existing, newly enacted or
recently proposed Federal tax initiatives that may significantly affect the
Insurance Group. In June 2001, legislation was enacted which, among other
things, provides several years of lower rates for estate, gift and generation
skipping taxes ("GST") as well as one year of estate and GST repeal (in 2010)
before returning to 2001 law for the year 2011 and thereafter. Legislation has
been proposed regarding extending or making permanent the repeal of the estate
and generation skipping taxes or significantly increasing exemption amounts and
lowering rates. If enacted, this legislation would have an adverse impact on
sales and surrenders of life insurance in connection with estate planning. Other
provisions of the 2001 legislation increased amounts which may be contributed to
tax qualified retirement plans and allowed increased funding levels for tax
qualified retirement products. These provisions, which were to expire after
2010, have now been made permanent. In 2003, reductions to income tax rates on
long-term capital gains and qualifying corporate dividends were enacted which
adversely impacted the attractiveness of cash value life insurance and annuity
products relative to other investment alternatives that may qualify for these
lower rates. While set to expire after 2010, there are proposals to extend or
make such reduced rates permanent. Recently proposed Federal legislation and
Treasury regulations relating to the creation of new tax-favored savings
accounts and modifications to nonqualified deferred compensation and qualified
plans (including tax sheltered annuities) could, to the extent enacted or
adopted, adversely affect certain sales of life insurance as well as the
attractiveness of certain qualified plan arrangements, cash value life insurance
and annuities. The U.S. Congress may also consider proposals for the
comprehensive overhaul of the Federal tax law which, if enacted,
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could adversely impact the attractiveness of cash value life insurance,
annuities and tax qualified retirement products. For example, in November 2005,
The President's Advisory Panel on Federal Tax Reform announced its tax reform
options that, if enacted by Congress, would make sweeping changes to many
longstanding tax rules. These changes would include the creation of new
tax-favored savings accounts that would replace many existing qualified plan
arrangements and would eliminate certain tax benefits currently available to
cash value life insurance and deferred annuity products by annually taxing any
withdrawable cash value build-up in such products. Management believes that the
enactment of these options into law in their current or similar form would
adversely affect sales, funding and persistency of cash value life insurance and
deferred annuity products. Management cannot predict what, if any, legislation
will actually be proposed or enacted based on these options or what other
proposals or legislation, if any, may be introduced or enacted relating to the
Company's business or what the effect of any such legislation might be.
SECURITIES LAWS. AXA Equitable, AXA Life and certain policies and contracts
offered by the Insurance Group are subject to regulation under the Federal
securities laws administered by the SEC and under certain state securities laws.
The SEC conducts regular examinations of the Insurance Group's operations, and
from time to time makes requests for particular information from the Insurance
Group.
AXA Advisors, AXA Distributors, AllianceBernstein Investments, Inc., Sanford C.
Bernstein & Co., LLC and EFD are registered as broker-dealers (collectively the
"Broker-Dealers") under the Exchange Act. The Broker-Dealers are subject to
extensive regulation by the SEC, and are members of, and subject to regulation
by, the National Association of Securities Dealers, Inc. (the "NASD"). As
broker-dealers registered with the SEC, the Broker-Dealers are subject to the
capital requirements of the SEC and/or the NASD. These capital requirements
specify minimum levels of capital, computed in accordance with regulatory
requirements ("net capital"), that the Broker-Dealers are required to maintain
and also limit the amount of leverage that the Broker-Dealers are able to obtain
in their businesses. The SEC and the NASD also regulate the sales practices of
the Broker-Dealers. In recent years, the SEC and the NASD have intensified their
scrutiny of sales practices relating to variable annuities, variable life
insurance and mutual funds, among other products. For example, the NASD recently
proposed increased suitability requirements and additional compliance procedures
relating to sales of variable annuities which, if enacted, could negatively
impact sales of annuity products. In addition, the Broker-Dealers are subject to
regulation by state securities administrators in those states in which they
conduct business.
The SEC, the NASD and other governmental regulatory authorities, including state
securities administrators, may institute administrative or judicial proceedings
that may result in censure, fines, the issuance of cease-and-desist orders, the
suspension or expulsion of a broker-dealer or member, its officers or employees
or other sanctions.
AXA Equitable and certain subsidiaries have provided, and in certain cases
continue to provide, information and documents to the SEC, the NASD, state
attorneys general, state insurance regulators and other regulators on a wide
range of issues, including supervisory issues, market timing, late trading,
valuation, suitability, email retention policies, replacements and exchanges of
variable life insurance and annuities, collusive bidding and other inappropriate
solicitation activities, "revenue sharing" and directed brokerage arrangements,
investment company directed brokerage arrangements, fund portfolio brokerage
commissions, mutual fund sales and marketing and "networking arrangements". For
example, AXA Equitable has provided information to the New York State Attorney
General (the "NYAG") in response to a subpoena and information requests relating
to possible market timing activities conducted through AXA Equitable's variable
insurance products. Ongoing or future regulatory investigations could result in
fines, other sanctions and/or other costs.
Certain Separate Accounts of AXA Equitable are registered as investment
companies under the Investment Company Act of 1940, as amended (the "Investment
Company Act"). Separate Account interests under certain annuity contracts and
insurance policies issued by AXA Equitable are also registered under the
Securities Act of 1933, as amended (the "Securities Act"). EQAT, Multimanager
Trust, VIP Trust, AEFT and EGF are registered as investment companies under the
Investment Company Act and shares offered by these investment companies are also
registered under the Securities Act. Many of the investment companies managed by
AllianceBernstein, including a variety of mutual funds and other pooled
investment vehicles, are registered with the SEC under the Investment Company
Act.
AXA Equitable, AXA Advisors, Enterprise Capital and certain affiliates and
AllianceBernstein and certain affiliates of AllianceBernstein also are
registered as investment advisors under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"). The investment advisory activities of
such registered investment
1-9
advisors are subject to various Federal and state laws and regulations and to
the laws in those foreign countries in which they conduct business. These laws
and regulations generally grant supervisory agencies broad administrative
powers, including the power to limit or restrict the carrying on of business for
failure to comply with such laws and regulations. In case of such an event, the
possible sanctions that may be imposed include the suspension of individual
employees, limitations on engaging in business for specific periods, revocation
of registration as an investment advisor, censures and fines.
Regulators, including the SEC, the NASD and state attorneys general, continue to
focus attention on various practices in or affecting the investment management
and/or mutual fund industries, including market timing, late trading and the use
of fund assets for distribution.
ALLIANCEBERNSTEIN REGULATORY MATTERS.
MARKET TIMING INVESTIGATIONS. On December 18, 2003, AllianceBernstein entered
into agreements with the SEC and the NYAG in connection with their
investigations into trading practices in shares of certain of
AllianceBernstein's sponsored mutual funds. AllianceBernstein's agreement with
the SEC was reflected in an Order of the Commission ("SEC Order") dated December
18, 2003 (amended and restated January 15, 2004), while AllianceBernstein's
final agreement with the NYAG was reflected in an Assurance of Discontinuance
("AoD") dated September 1, 2004.
AllianceBernstein has taken a number of important initiatives to resolve these
matters. Specifically, AllianceBernstein: (i) established a $250 million
restitution fund to compensate fund shareholders for the adverse effects of
market timing (the "Restitution Fund"); (ii) reduced by 20% (on a weighted
average basis) the advisory fees on U.S. long-term open-end retail mutual funds
by reducing its advisory fee rates (resulting in an approximate $66 million
reduction in 2006 advisory fees, a $63 million reduction in 2005 advisory fees
and a $70 million reduction in 2004 advisory fees), and AllianceBernstein will
maintain these reduced fee rates for at least the five-year period that
commenced January 1, 2004 and (iii) agreed to have an independent third party
perform a comprehensive compliance review biannually.
With the approval of the independent directors of AllianceBernstein's U.S.
registered mutual fund boards and the staff of the SEC, AllianceBernstein
retained an Independent Distribution Consultant ("IDC") to develop a plan for
the distribution of the Restitution Fund. To the extent it is determined that
the harm to mutual fund shareholders caused by market timing exceeds $200
million, AllianceBernstein will be required to contribute additional monies to
the Restitution Fund. In September 2005, the IDC submitted to the SEC staff the
portion of his report concerning his methodology for determining damages and a
proposed distribution plan, which addresses the mechanics of distribution. The
Restitution Fund proceeds will not be distributed until after the SEC has issued
an order approving the distribution plan. Until then, it is not possible to
predict the exact timing, method or amount of the distribution.
For additional information regarding market timing matters involving
AllianceBernstein, see "Alliance Litigation - Market Timing-Related Matters" in
Note 19 of Notes to Consolidated Financial Statements.
PRIVACY OF CUSTOMER INFORMATION. AXA Financial has adopted a privacy policy
outlining procedures and practices to be followed by members of the AXA
Financial Group relating to the collection, disclosure and protection of
customer information. Customer information may only be used to conduct company
business. AXA Financial Group companies may not disclose customer information to
third parties except as required or permitted by law. Customer information may
not be sold or rented to third parties. A copy of the privacy policy is mailed
to customers on an annual basis. Federal and state laws and regulations require
financial institutions to protect the security and confidentiality of customer
information and report breaches in which customer information is intentionally
or accidentally disclosed to third parties. Violation of these laws and
regulations may result in significant fines and remediation costs. Legislation
currently under consideration in the U.S. Congress and state legislatures could
create additional obligations relating to the use and protection of customer
information.
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PARENT COMPANY
AXA, the ultimate parent company of AXA Equitable, is the holding company for an
international group of insurance and related financial services companies
engaged in the financial protection and wealth management business. AXA is one
of the largest insurance groups in the world. AXA operates primarily in Western
Europe, North America, the Asia/Pacific region and, to a lesser extent, in other
regions including, in particular, the Middle East and Africa. AXA has five
operating business segments: life and savings, property and casualty,
international insurance (including reinsurance), asset management and other
financial services.
Neither AXA nor any affiliate of AXA has any obligation to provide additional
capital or credit support to AXA Financial or any of its subsidiaries.
VOTING TRUST. In connection with AXA's application to the Superintendent for
approval of its acquisition of capital stock of AXA Financial, AXA and the
initial Trustees of the Voting Trust entered into a Voting Trust Agreement dated
as of May 12, 1992 (as amended by the First Amendment, dated January 22, 1997,
and as amended and restated by the Amended and Restated Voting Trust Agreement,
dated May 12, 2002, the "Voting Trust Agreement"). Pursuant to the Voting Trust
Agreement, AXA and its affiliates ("AXA Parties") have deposited the shares of
AXA Financial's Common Stock held by them in the Voting Trust. The purpose of
the Voting Trust is to ensure for insurance regulatory purposes that certain
indirect minority shareholders of AXA will not be able to exercise control over
AXA Financial or AXA Equitable.
AXA and any other holder of voting trust certificates will remain the beneficial
owner of the shares deposited by it, except that the Trustees will be entitled
to exercise all voting rights attached to the deposited shares so long as such
shares remain subject to the Voting Trust. In voting the deposited shares, the
Trustees must act to protect the legitimate economic interests of AXA and any
other holders of voting trust certificates (but with a view to ensuring that
certain indirect minority shareholders of AXA do not exercise control over AXA
Financial or AXA Equitable). All dividends and distributions (other than those
which are paid in the form of shares required to be deposited in the Voting
Trust) in respect of deposited shares will be paid directly to the holders of
voting trust certificates. If a holder of voting trust certificates sells or
transfers deposited shares to a person who is not an AXA Party and is not (and
does not, in connection with such sale or transfer, become) a holder of voting
trust certificates, the shares sold or transferred will be released from the
Voting Trust. The initial term of the Voting Trust ended in 2002 and the term of
the Voting Trust has been extended, with the prior approval of the
Superintendent, until May 12, 2012. Future extensions of the term of the Voting
Trust remain subject to the prior approval of the Superintendent.
OTHER INFORMATION
All of the Company's officers and employees, including its chief executive
officer, chief financial officer and controller, are subject to the Policy
Statement on Ethics (the "Code"), a code of ethics as defined under Regulation
S-K.
The Code complies with Section 406 of the Sarbanes-Oxley Act of 2002 and is
available on AXA Financial's website at www.axa-financial.com. The Company
intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K
regarding certain amendments to or waivers from provisions of the Code that
apply to its chief executive officer, chief financial officer and controller by
posting such information on its website at the above address.
1-11
PART I, ITEM 1A.
RISK FACTORS
In the course of conducting our business operations, we could be exposed to a
variety of risks. This "Risk Factors" section provides a summary of some of the
significant risks that could affect our business, financial condition or results
of operations. In this section, the terms "we," "us" and "our" refer to the
Insurance Group.
EQUITY MARKET DECLINES AND VOLATILITY MAY ADVERSELY IMPACT OUR PROFITABILITY.
Declines or volatility in equity markets can negatively impact the investment
returns we earn in those markets as well as our business and profitability.
Examples of the effects of declines or volatility in equity markets include the
following:
o Sustained equity market declines that result in decreases in the account
values of our variable life and annuity contracts could reduce the amount
of revenue we derive from fees charged on those account and asset values;
o Sustained equity market declines that result in decreases in the account
values of our variable life and annuity contracts that provide guaranteed
benefits would increase the size of our potential obligations related to
such guaranteed benefits. This could result in an increase in claims and
reserves related to those contracts, net of any reinsurance reimbursements
or proceeds from our hedging program;
o Increased volatility of equity markets may result in changes to the fair
value of our GMIB reinsurance contracts, which could result in increased
volatility of our earnings;
o Increased volatility of equity markets may increase surrenders and
withdrawals of our variable life and annuity contracts, which could
negatively impact our future profitability;
o Equity market declines could negatively impact the value of equity
securities we hold for investment, thereby reducing our capital;
o Equity price declines may decrease the value of assets held to fund
payments to employees from our qualified pension plan, which could result
in increased pension plan costs; and
o Deferred acquisition costs, referred to as DAC, and value of business
acquired, referred to as VOBA, are accounting methods for amortizing the
sales costs related to the acquisition of new life insurance and annuity
business over the period in which that business will generate earnings for
us. DAC and VOBA amortization rates are based in part on investment return
and related estimates that, in turn, are based on actual market trends and
reasonable expectations as to future performance drawn from those trends.
Equity market declines could lead to reductions in these estimates that, in
turn, could accelerate our DAC and VOBA amortization and reduce our current
earnings.
INTEREST RATE FLUCTUATIONS MAY ADVERSELY AFFECT OUR MARGINS ON INTEREST-
SENSITIVE ANNUITY AND LIFE INSURANCE CONTRACTS AND INCREASE SURRENDERS AND
WITHDRAWALS FROM THOSE CONTRACTS.
Our margin or "spread" on interest-sensitive annuity and life insurance
contracts is the difference between the yield we derive from portfolio
investments that are intended to support our required payments under these
contracts and the interest rates we credit to holders of these contracts. This
spread is a significant part of our earnings.
If interest rates fall and remain at significantly lower levels, the minimum
interest rates that we guarantee on interest-sensitive annuity and life
insurance contracts would cause our spreads on these contracts to deteriorate
and possibly become negative, which could have a material adverse effect on our
profitability. Also, such a fall in interest rates could result in increased
reserve requirements for those contracts.
A rapid and sustained rise in interest rates poses risks of deteriorating
spreads and high surrenders of our interest-sensitive annuity and life insurance
contracts. In such an environment, we may face pressure to increase credited
rates on those contracts to match rates offered by our competitors on new
deposits. Such changes in our credited rates on these contracts generally occur
more quickly than corresponding changes to the rates we earn on related
portfolio investments, thereby reducing our spreads on such contracts. Also, a
high level of surrenders associated
1A-1
with a rapid and sustained rise in interest rates could require us to liquidate
portfolio investments to fund surrender payments at a time when the value of
those investments has decreased.
AN OVERALL ECONOMIC DOWNTURN COULD ADVERSELY AFFECT OUR REVENUES AND FINANCIAL
POSITION.
An overall economic downturn could negatively affect the value of our portfolio
investments, reduce new sales of our products and increase surrenders and
withdrawals from our existing life insurance and annuity contracts. In
particular, an overall economic downturn could significantly affect the value of
our portfolio investments since the majority of our portfolio is invested in
bonds and mortgage loans that may suffer an increased default rate and may cause
credit deterioration during such a downturn. Reductions in the value of our
portfolio investments and reduced sales of our products coupled with increased
surrenders and withdrawals from our existing contracts could adversely affect
our revenues and financial position.
An overall economic downturn could also result in higher financing costs and
could increase the cost of our hedging programs and other risk mitigation
techniques that could result in certain of our products becoming less
profitable. These circumstances may cause us to modify certain product features
or to cease offering these products
OUR RESERVES COULD BE INADEQUATE DUE TO DIFFERENCES BETWEEN OUR ACTUAL
EXPERIENCE AND MANAGEMENT'S ESTIMATES AND ASSUMPTIONS.
Our reserve requirements for our direct and reinsurance assumed business are
calculated based on a number of estimates and assumptions, including estimates
and assumptions related to future mortality, morbidity, persistency, interest
rates, claims experience and reinvestment rates. For a description of some of
these estimates, see "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Critical Accounting Estimates". Our
reserves could be inadequate if actual results differ significantly from our
estimates and assumptions. If so, we will be required to increase reserves
resulting in a charge to our earnings.
LOSSES DUE TO DEFAULTS, ERRORS OR OMISSIONS BY THIRD PARTIES, INCLUDING
OUTSOURCING RELATIONSHIPS, COULD ADVERSELY IMPACT OUR BUSINESS AND RESULTS OF
OPERATIONS.
We depend on third parties that owe us money, securities or other assets to pay
or perform under their obligations. These parties include the issuers whose
securities we hold in our investment portfolios, borrowers under the mortgage
loans we make, customers, trading counterparties, counterparties under swap and
other derivative contracts, clearing agents, exchanges, clearing houses and
other financial intermediaries. These parties may default on their obligations
to us due to bankruptcy, lack of liquidity, downturns in the economy or real
estate values, operational failure or other reasons.
We also depend on third parties in other contexts. For example, in establishing
the amount of the liabilities and reserves associated with the risks assumed in
connection with reinsurance pools and arrangements, we rely on the accuracy and
timely delivery of data and other information from ceding companies. In
addition, as investment manager and administrator of several mutual funds, we
rely on various affiliated and unaffiliated subadvisors to provide day-to-day
portfolio management services for each investment portfolio.
We also rely on third parties to whom we outsource certain technology platforms,
information systems and administrative functions. If we do not effectively
implement and manage our outsourcing strategy, third party vendor providers do
not perform as anticipated or we experience technological or other problems
associated with outsourcing transitions, we may not realize anticipated
productivity improvements or cost efficiencies and may experience operational
difficulties, increased costs and reputational damage. Furthermore, losses
associated with defaults or other failures by these third parties and
outsourcing partners upon whom we rely could adversely impact our business and
results of operations.
OUR HEDGING AND REINSURANCE PROGRAMS MAY BE INADEQUATE TO PROTECT US AGAINST
UNANTICIPATED LEVELS OF EXPOSURE OR LOSSES AND WE MAY INCUR LOSSES FROM OUR
REINSURERS' FAILURE TO MEET THEIR OBLIGATIONS.
In the normal course of business, we seek to reduce risk through our hedging and
reinsurance programs. Although our hedging programs are designed to reduce the
economic impact of unfavorable changes in GMDB and GMIB exposures due to
movements in the equity and fixed income markets, our hedging programs do not
eliminate all the risks associated with GMDB/GMIB product features. For example,
if there are extreme or unanticipated levels of volatility in the market we
could experience losses associated with product guarantee features.
Additionally, under
1A-2
our reinsurance arrangements, other insurers assume a portion of the claims and
related expenses on certain business we underwrite; however, we remain liable as
the direct insurer on all risks we reinsure. These reinsurance arrangements do
not eliminate our obligation to pay related claims and we are subject to our
reinsurers' credit risk with respect to our ability to recover amounts due from
them. Although we evaluate periodically the financial condition of our
reinsurers, our reinsurers may become financially unsound by the time their
financial obligation to us becomes due. The inability or unwillingness of any
reinsurer to meet its financial obligations to us could negatively impact our
results of operations. See "Business - Reinsurance and Hedging" and Note 9 of
Notes to Consolidated Financial Statements for additional information regarding
our reinsurance arrangements.
OUR EARNINGS ARE IMPACTED BY DAC CALCULATIONS THAT ARE BASED ON ESTIMATES
THAT ARE SUBJECT TO CHANGE.
Our earnings for any period depend in part on the amount of our life insurance
and annuity product acquisition costs (including commissions, underwriting,
agency and policy issue expenses) that can be deferred as DAC rather than
expensed immediately. They also depend in part on the pattern of DAC
amortization and the recoverability of DAC which is based on models involving
numerous estimates and subjective judgments, including those regarding
investment, mortality and expense margins, expected market rates of return,
lapse rates and anticipated surrender charges. Revisions to our estimates may
result in an acceleration in DAC amortization, which could negatively impact our
earnings for the period in which the estimates are revised.
A DOWNGRADE IN THE FINANCIAL STRENGTH AND CLAIMS-PAYING RATINGS OF OUR INSURANCE
COMPANIES COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Claims-paying and financial strength ratings are important factors in
establishing the competitive position of insurance companies. A downgrade in
these ratings could adversely affect our business and results of operations by
reducing new sales of our products or increasing surrenders and withdrawals from
our existing contracts. A downgrade in our ratings may also adversely affect our
cost of raising capital or limit our access to sources of capital. See "Business
- - Competition" for a full description of the ratings for our insurance
companies.
LEGAL AND REGULATORY ACTIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
BUSINESSES.
A number of lawsuits have been filed against life and health insurers and
affiliated distribution companies involving insurers' sales practices, alleged
agent misconduct, failure to properly supervise agents and other matters. Some
of these lawsuits have resulted in the award of substantial judgments against
other insurers, including material amounts of punitive damages, or in
substantial settlements. In some states, juries have substantial discretion in
awarding punitive damages.
Our insurance subsidiaries and related companies, like other life and health
insurers, are involved in such litigation and our results of operations and
financial position could be affected by defense and settlement costs and any
unexpected material adverse outcomes in such litigations as well as in other
material litigations pending against them. The frequency of large damage awards,
including large punitive damage awards that bear little or no relation to actual
economic damages incurred by plaintiffs in some jurisdictions, continues to
create the potential for an unpredictable judgment in any given matter.
In addition to the litigation described above, examinations by Federal and state
regulators and other governmental and self-regulatory agencies including, among
others, the SEC, state attorneys general, insurance and securities regulators
and the NASD could result in adverse publicity, sanctions, fines and other
costs. We have provided, and in certain cases, continue to provide, information
and documents to the SEC, the NASD, state attorneys general, state insurance
departments and other regulators on a wide range of issues, including,
supervisory issues, market timing, late trading, valuation, suitability, email
retention policies, replacements and exchanges of variable life insurance and
annuities, collusive bidding and other inappropriate solicitation activities,
"revenue sharing" and directed brokerage arrangements, investment company
directed brokerage arrangements, fund portfolio brokerage commissions, mutual
fund sales and marketing and "networking arrangements". At this time, management
cannot predict what other actions the SEC, NASD and/or other regulators may take
or what the impact of such actions might be. Fines, other sanctions and/or other
costs could result from ongoing or future regulatory matters. For further
information, see "Business - Regulation".
1A-3
OUR BUSINESSES MAY BE ADVERSELY AFFECTED TO THE EXTENT THAT WE, THIRD-PARTY
FIRMS THAT DISTRIBUTE OUR PRODUCTS OR UNAFFILIATED INSURERS FACE INCREASED
REGULATION, CHANGES IN REGULATIONS AND/OR HEIGHTENED REGULATORY SCRUTINY.
Our businesses are subject to extensive regulation and supervision by state
insurance departments and Federal and state agencies regulating, among other
things, insurance and annuities, securities transactions, investment companies,
investment advisors and anti-money laundering compliance programs. Federal and
state regulators regularly propose new regulations or amend existing
regulations, which may have a significant impact on our business operations or
may require significant change to our products or compliance procedures. The
activities of our insurance companies, in particular, are subject to the
supervision of the insurance regulators of each of the 50 states, the District
of Columbia, Puerto Rico, the U.S. Virgin Islands, Bermuda and nine of Canada's
twelve provinces and territories. These various insurance regulators can and
frequently do impose different requirements and standards which can place
insurers at a significant competitive disadvantage compared to other financial
services businesses that are primarily regulated on a national basis. Among
other things, disparate state insurance regulations complicate, delay and
increase the costs of designing, selling and administering new products, and
also add considerable complexity and cost to compliance programs.
To the extent that the amount of state and Federal regulation continues to
increase, our costs of compliance will continue to increase. Such increases in
our compliance obligations could materially increase our costs and adversely
affect our earnings. In addition, changes in the regulatory environment,
including increased activism by state attorneys general, insurance commissioners
and other regulators, could have a material adverse impact on our business and
results of operations. For additional information, see "Business - Regulation".
Our sales of insurance products could also be adversely affected to the extent
that some or all of the third-party firms that distribute our products or
unaffiliated insurance companies face heightened regulatory scrutiny and/or
increased regulation and thereby cause the types of products issued by our
insurance companies to become disfavored in the marketplace.
CHANGES IN U.S. TAX LAWS MAY ADVERSELY AFFECT SALES OF OUR PRODUCTS AND OUR
PROFITABILITY.
Currently, special US tax law provisions apply to life insurance and annuity
products. The nature and extent of competition and the markets for our life
insurance and annuity products and our profitability may be materially affected
by changes in tax laws and regulations, including changes relating to savings,
retirement funding and taxation. Adverse changes could include the introduction
of taxation of annual increases in the account value of life insurance and
annuity products, improved tax treatment of mutual funds or other investments as
compared to insurance products or repeal of the Federal estate tax. Management
cannot predict what proposals may be made, what legislation, if any, may be
introduced or enacted or what the effect of any such legislation might be. For
additional information, see "Business - Regulation - Federal Tax Initiatives".
WE FACE COMPETITION FROM OTHER INSURANCE COMPANIES, BANKS AND OTHER FINANCIAL
INSTITUTIONS, WHICH MAY ADVERSELY IMPACT OUR MARKET SHARE AND PROFITABILITY.
There is competition among insurers, banks, brokerage firms and other financial
institutions and providers seeking clients for the types of products and
services we provide, including insurance, annuity and other investment products
and services. Competition is intense among a broad range of financial
institutions and other financial service providers for specifically tailored
products for retirement and other savings dollars. This competition makes it
especially difficult to provide unique insurance products since, once such
products are made available to the public, they may be reproduced and offered by
our competitors. Also, this competition may adversely impact our market share
and profitability.
Our ability to compete is dependent on numerous factors including, among others,
the successful implementation of our strategy; our financial and claims-paying
ratings; our access to diversified sources of distribution; our size and scale;
our product quality, range, features/functionality and price; our ability to
bring customized products to the market quickly; our ability to explain
complicated products and features to our distribution channels and customers;
crediting rates on our fixed products; the visibility, recognition and
understanding of our brands in the marketplace; our reputation and quality of
service; and our investment management options and performance.
1A-4
AN INABILITY TO RECRUIT AND RETAIN EXPERIENCED AND PRODUCTIVE FINANCIAL
PROFESSIONALS AND KEY EMPLOYEES MAY ADVERSELY AFFECT OUR SALES.
Our sales force and key employees are key factors driving our sales. Intense
competition exists among insurers and other financial services companies for
financial professionals and key employees. We compete principally with respect
to compensation policies, products and support provided to financial
professionals. Competition is particularly intense in the hiring and retention
of experienced financial professionals. Although we believe that we offer
financial professionals and employees a strong value proposition, we cannot
provide assurances that we will be successful in our efforts to recruit and
retain top financial professionals and key employees.
THE ABILITY OF OUR FINANCIAL PROFESSIONALS TO SELL OUR COMPETITORS' PRODUCTS
COULD RESULT IN REDUCED SALES OF OUR PRODUCTS AND REVENUES.
Most of our financial professionals are not captive agents or employees and can
sell annuity and life insurance products of competing unaffiliated insurance
companies. To the extent our financial professionals sell our competitors'
products rather than our products, we will experience reduced sales and
revenues.
CHANGES IN STATUTORY RESERVE REQUIREMENTS AND ADVERSE MARKET CONDITIONS COULD
NEGATIVELY IMPACT OUR SALES.
Changes in statutory reserve requirements, increased costs of hedging, other
risk mitigation techniques and financing and other adverse market conditions
could result in certain products becoming less profitable. These circumstances
could cause us to modify certain features of these products or to cease offering
these products.
CHANGES IN ACCOUNTING STANDARDS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
RESULTS OF OPERATION AND/OR FINANCIAL POSITION.
Our financial statements are prepared in accordance with generally accepted
accounting principles that are revised from time to time. In the future, new
accounting pronouncements, as well as new interpretations of existing accounting
pronouncements, may have material adverse effects on our results of operations
and/or financial position. For information about recent accounting
pronouncements, see Note 2 of Notes to Consolidated Financial Statements.
OUR LOSSES PROVIDED FOR DISCONTINUED OPERATIONS MAY DIFFER FROM THE LOSSES
ULTIMATELY REALIZED.
The determination of the allowance for future losses from our discontinued
operations involves numerous estimates and subjective judgments, including those
regarding expected performance of investment assets, asset reinvestment rates,
ultimate mortality experience and other factors that affect investment and
benefit projections. In particular, significant estimates and judgments are made
with respect to the income, sales proceeds and holding periods for equity real
estate. To the extent actual results or future projections of discontinued
operations differ from management's current best estimates underlying the
allowance, the difference would be reflected as earnings or loss from
discontinued operations.
OUR DISCLOSURE AND INTERNAL CONTROL SYSTEM CANNOT GUARANTEE THAT OUR PUBLIC
DISCLOSURE AND FINANCIAL STATEMENTS DO NOT CONTAIN ERRORS.
There are inherent limitations in the effectiveness of any system of disclosure
and internal controls, including the possibilities of faulty judgments in
decision-making, simple error or mistake, fraud, the circumvention of controls
by individual acts or the collusion of two or more people, or management
override of controls. Accordingly, even an effective disclosure and internal
control system can provide only reasonable assurance with respect to disclosures
and financial statement preparation. Also, the effectiveness of a disclosure and
internal control system may vary over time due to changes in conditions.
WE COULD EXPERIENCE SIGNIFICANT DIFFICULTIES WITH RESPECT TO OUR PROPRIETARY
TECHNOLOGY AND INFORMATION SYSTEMS AS WELL AS THOSE PROVIDED BY VENDORS.
We utilize numerous technology and information systems in our businesses, some
of which are proprietary and some of which are provided by outside vendors
pursuant to outsourcing arrangements. These systems are central to, among other
things, designing and pricing products, marketing and selling products and
services, processing policyholder and investor transactions, client
recordkeeping, communicating with retail sales associates, employees
1A-5
and clients, and recording information for accounting and management purposes in
a secure and timely manner. The systems are maintained to provide customer
privacy and, although they are periodically tested to ensure the viability of
business resumption plans, these systems are subject to attack by viruses, spam,
spyware, worms and other malicious software programs, which could jeopardize the
security of information stored in a user's computer or in our computer systems
and networks.
We commit significant resources to maintain and enhance our existing information
systems that, in some cases, are advanced in age, and to develop new systems.
Any significant difficulty associated with the operation of our systems, or any
material delay, disruption or inability to develop needed system capabilities,
could have a material adverse effect on our results of operations and,
ultimately, our ability to achieve our strategic goals. We are unable to predict
with certainty all of the material adverse effects that could result from our
failure, or the failure of an outside vendor, to address these problems. The
material adverse effects could include the inability to perform or prolonged
delays in performing critical business operational functions or failure to
comply with regulatory requirements, which could lead to loss of client
confidence, harm to reputation or exposure to disciplinary action.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY THE OCCURRENCE OF A CATASTROPHE,
INCLUDING A NATURAL OR MAN-MADE DISASTER.
Any catastrophic event, such as pandemic diseases, terrorist attacks, floods,
severe storms or hurricanes, could have an adverse effect on our business in
several respects:
o We could experience long-term interruptions in our service due to the
vulnerability of our information and operation systems and those of our
significant vendors to the effects of catastrophic events. Some of our
operational systems are not fully redundant, and our disaster recovery and
business continuity planning cannot account for all eventualities.
o The occurrence of a pandemic disease such as the Avian Influenza Virus
(H5N1) could have a material adverse effect on our liquidity and the
operating results of the Insurance segment due to increased mortality
and, in certain cases, morbidity rates.
o The occurrence of any pandemic disease, natural disaster or terrorist
attacks or any catastrophic event which results in our workforce being
unable to be physically located at one of our facilities could result in
lengthy interruptions in our service.
o A terrorist attack on the financial services industry in the United States
could have severe negative effects on our investment portfolio and disrupt
our business operations. Any continuous and heightened threat of terrorist
attacks could also result in increased costs of reinsurance.
ASSUMPTIONS AND MODELS USED IN OUR BUSINESS MAY LEAVE US EXPOSED TO UNIDENTIFIED
OR UNANTICIPATED RISK.
Our business operations and risk management strategy rely on numerous
assumptions and models. We are subject to the risk that our assumptions and
models could be flawed or that errors in calculation could occur. As a result,
these assumptions and models may not accurately predict future exposures.
AXA EQUITABLE'S RESULTS OF OPERATION AND FINANCIAL POSITION DEPEND IN
SIGNIFICANT PART ON THE PERFORMANCE OF ALLIANCEBERNSTEIN'S BUSINESS.
AllianceBernstein L.P. is a principal subsidiary of Equitable and, consequently,
AXA Equitable's results of operations and financial position depend in
significant part on the performance of AllianceBernstein's business. For
information regarding risk factors associated with AllianceBernstein and its
business, see "Item 1A - Risk Factors" included in AllianceBernstein L.P.'s
Annual Report on Form 10-K for the fiscal year ended December 31, 2006, which
item is incorporated into this section by reference to Exhibit 13.1 filed with
this Report.
1A-6
PART I, ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
1B-1
PART I, ITEM 2
PROPERTIES
INSURANCE
AXA Equitable leases on a long-term basis approximately 810,000 square feet of
office space located at 1290 Avenue of the Americas, New York, NY, which serves
as AXA Equitable headquarters. AXA Equitable also has the following significant
office space leases: 185,000 square feet in Charlotte, NC, under a lease that
expires in 2013, for use as a life insurance operations and service center;
94,000 square feet in Secaucus, NJ, under a lease that expires in 2012, for use
as an annuity operations and service center; and AXA Equitable owns an office
building of approximately 22,000 square feet in Harrisburg, PA that houses AXA
Network personnel. Management believes its facilities are adequate for its
present needs in all material respects.
AXA Equitable subleases its office space at 1290 Avenue of the Americas to the
New York City Industrial Development Agency (the "IDA"), and sub-subleases that
space back from the IDA, in connection with the IDA's granting of sales tax
benefits to AXA Equitable.
INVESTMENT MANAGEMENT
AllianceBernstein's principal executive offices at 1345 Avenue of the Americas,
New York, NY are occupied pursuant to a lease that extends until 2029.
AllianceBernstein currently occupies approximately 837,270 square feet of space
at this location. AllianceBernstein also occupies approximately 226,374 square
feet of space at 135 West 50th Street, New York, NY under a lease expiring in
2029 and approximately 210,756 square feet of space at One North Lexington,
White Plains, NY under a lease expiring in 2031. AllianceBernstein also occupies
approximately 134,261 square feet of space in Secaucus, NJ and approximately
92,067 square feet of space in San Antonio, TX under leases expiring in 2007 and
2009, respectively. AllianceBernstein also leases other property domestically
and abroad for its operations.
2-1
PART I, ITEM 3.
LEGAL PROCEEDINGS
The matters set forth in Note 19 of Notes to Consolidated Financial Statements
for the year ended December 31, 2006 (Part II, Item 8 of this report) are
incorporated herein by reference.
3-1
PART I, ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted pursuant to General Instruction I to Form 10-K.
4-1
PART II, ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
At December 31, 2006, all of AXA Equitable's common equity was owned by AXA
Financial Services, LLC, a wholly owned direct subsidiary of AXA Financial,
Inc., which is a wholly owned subsidiary of AXA. Consequently, there is no
established public market for AXA Equitable's common equity. AXA Equitable paid
shareholder dividends of $600.0 million and $500.0 million in 2006 and 2005,
respectively. For information on AXA Equitable's present and future ability to
pay dividends, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" (Part II, Item 7 of
this report) and Note 20 of Notes to Consolidated Financial Statements.
5-1
PART II, ITEM 6.
SELECTED FINANCIAL DATA
Omitted pursuant to General Instruction I to Form 10-K.
6-1
PART II, ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is omitted pursuant to General Instruction
I(2)(a) of Form 10-K. The management narrative for AXA Equitable Life Insurance
Company and its consolidated subsidiaries that follows should be read in
conjunction with the consolidated financial statements and related notes to
consolidated financial statements and information discussed under
"Forward-looking Statements" and "Risk Factors" included elsewhere in this Form
10-K.
GENERAL
In October 2006, AXA Financial and certain of its subsidiaries, including AXA
Equitable, entered into an agreement contemplating the transfer to GSAM of
assets relating to the business of serving as sponsor of and investment manager
to 27 of the 31 funds of AXA Enterprise Multimanager Funds Trust, AXA Enterprise
Funds Trust and The Enterprise Group of Funds, Inc. (collectively, the "AXA
Enterprise Funds") and the reorganization of such funds into corresponding
mutual funds managed by GSAM. See Note 16 of Notes to Consolidated Financial
Statement contained elsewhere herein for more detailed information regarding
this reorganization. As a result of management's disposition plan, AXA
Enterprise Funds advisory contracts, previously part of the Insurance segment,
are now reported in Discontinued Operations. Unless otherwise indicated, amounts
in this management narrative exclude the effects of the AXA Enterprise Funds in
the periods presented.
The consolidated and segment earnings narratives that follow discuss the results
for 2006 compared to the 2005 results.
CONSOLIDATED RESULTS OF OPERATIONS
Net earnings for the Company totaled $1.08 billion for 2006 compared to $1.07
billion for 2005 as the $75.9 million higher net earnings reported for
Investment Management segment was offset by the $73.1 million lower net earnings
in the Insurance segment. Net earnings for 2006 and 2005 included the post-tax
results from discontinued operations detailed in the following schedule. For
further information, see Note 16 of Notes to Consolidated Financial Statements
included elsewhere herein.
2006 2005
----------- -----------
(IN MILLIONS)
EARNINGS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
Wind-up Annuities............................................................... $ 30.2 $ 15.2
Real estate held-for-sale....................................................... (4.0) .6
Disposal of business - Enterprise............................................... - (0.1)
----------- -----------
Total........................................................................... $ 26.2 $ 15.7
=========== ===========
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
Disposal of Business - Enterprise............................................... $ (1.9) $ -
=========== ===========
Earnings from continuing operations in 2006 were $1.05 billion, a decrease of
$5.6 million from 2005. Income taxes totaled $427.3 million in 2006 as compared
to the $519.2 million in 2005, as the $148.4 million tax decrease in the
Insurance segment was offset by the $56.5 increase for the Investment Management
segment. The Company recognized a net tax benefit in third quarter 2006 of
$117.7 million. This benefit was related to the settlement of an IRS audit of
the 1997-2001 tax years, partially offset by additional tax reserves established
for subsequent tax periods. Of the net tax benefit of $117.7, $111.9 million
related to continuing operations in the Insurance segment and $5.8 million to
the discontinued Wind-up Annuities.
Earnings from continuing operations before income taxes and minority interest
were $2.08 billion for 2006, an increase of $35.5 million from the $2.04 billion
reported in 2005. The increase resulted from the $265.8 million increase in the
Investment Management segment offset by the $230.3 million decrease in the
Insurance segment.
7-1
Total revenues increased $943.0 million to $9.89 billion in 2006 from $8.94
billion in 2005 due to revenue increases in both segments. The 2006 increase of
$210.6 million in the Insurance segment principally resulted from $363.4 million
higher policy fee income and $107.6 million higher commissions, fees and other
income offset by $196.5 million lower investment results in the Insurance
segment primarily due to changes in the fair value of derivative instruments.
The $630.8 million increase in investment advisory and services fees at
AllianceBernstein contributed to the $737.7 million increase in the Investment
Management segment's revenues.
Total benefits and other deductions were $7.81 billion in 2006, a $907.5 million
increase as compared to $6.90 billion in 2005 with expense increases reported by
both segments. The Insurance segment increase of $440.9 million was primarily
due to higher commission costs, higher benefits paid, higher DAC amortization
and an increase in other operating costs and expenses offset by higher DAC
capitalization. There was a $471.9 million increase in the Investment
Management segment's benefits and other deductions principally attributed to
higher compensation and benefits and higher other operating costs and expenses
at AllianceBernstein.
RESULTS OF CONTINUING OPERATIONS BY SEGMENT
INSURANCE.
INSURANCE - RESULTS OF OPERATIONS
(IN MILLIONS)
2006 2005
---------------- ---------------
Universal life and investment-type product policy fee income...................... $ 2,252.7 $ 1,889.3
Premiums.......................................................................... 817.8 881.7
Net investment income............................................................. 2,244.9 2,425.1
Investment gains (losses), net.................................................... (3.0) 13.3
Commissions, fees and other income................................................ 662.3 554.7
---------------- ---------------
Total revenues............................................................... 5,974.7 5,764.1
---------------- ---------------
Policyholders' benefits........................................................... 1,960.5 1,859.8
Interest credited to policyholders' account balances.............................. 1,082.5 1,065.5
Compensation and benefits......................................................... 520.6 522.6
Commissions....................................................................... 1,394.4 1,128.7
Amortization of DAC .............................................................. 689.3 601.3
Capitalization of DAC............................................................. (1,363.4) (1,199.3)
Rent expense ..................................................................... 48.4 51.3
Interest expense ................................................................. 47.6 52.8
All other operating costs and expenses............................................ 705.1 561.4
---------------- ---------------
Total benefits and other deductions.......................................... 5,085.0 4,644.1
---------------- ---------------
Earnings from Continuing Operations before Income Taxes........................... $ 889.7 $ 1,120.0
================ ===============
In 2006, pre-tax earnings from continuing operations in the Insurance segment
decreased $230.3 million to $889.7 million as compared to $1.12 billion in 2005.
The pre-tax earnings decrease resulted from higher commissions, policyholders'
benefits and all other operating costs and expenses and lower investment results
partially offset by higher policy fee income and commissions, fees and other
income.
Revenues. Segment revenues increased $210.6 million over the prior year as
higher policy fee income and commissions, fees and other income were partially
offset by lower investment results and lower premiums.
Policy fee income grew to $2.25 billion in 2006 as compared to $1.89 billion in
the prior year. This $363.4 million increase resulted from fees earned on higher
average Separate Account balances resulting from positive net cash flows and
market appreciation.
7-2
Premiums totaled $817.8 million for 2006, $63.9 million lower than in 2005,
principally due to the absence of a $30.8 million disability income ("DI")
reinsurance premium adjustment in 2005 and the $21.2 million decrease in
traditional life renewal premiums in the Closed Block.
Net investment income decreased $180.2 million to $2.24 billion in 2006. This
decrease was primarily related to the $302.4 million decline in the fair values
of derivative instruments including those related to economic hedging programs
implemented to mitigate certain risks associated with the GMDB/GMIB features of
certain variable annuity contracts and interest rate floor contracts as compared
to the $85.5 million decline in 2005. This decrease was partially offset by
$26.4 million higher income on other equity investments.
In 2006, investment losses totaled $3.0 million as compared to $13.3 million of
investment gains in 2005. The $16.3 million decrease was principally due to a
$26.3 million decrease in realized gains on sales of fixed maturities, $16.0
million in 2006 as compared to $42.3 million in 2005, partially offset by $3.8
million lower writedowns, $27.4 million in 2006 as compared to $31.2 million in
2005. The fixed maturity decrease was partially offset by a $4.9 million
increase in realized gains on equity real estate in 2006.
Commissions, fees and other income increased $107.6 million to $662.3 million in
2006 as compared to $554.7 million in 2005 principally due to higher gross
investment management fees received from EQAT and VIP Trust due to a higher
asset base partially offset by the change in the fair value of the GMIB
reinsurance contracts. As required by SFAS No. 133, the GMIB contracts are
considered derivatives and are reported at fair value. The 2006 decrease in fair
value was $14.8 million as compared to the $42.6 million increase in 2005.
Benefits and Other Deductions. Total benefits and other deductions for the
Insurance segment increased $440.9 million to $5.09 billion in 2006 as compared
to $4.64 billion in 2005. The increase was principally the result of $265.7
million higher commissions, a $143.7 million increase in all other operating
costs and expenses, a $100.7 million increase in policyholders' benefits and
$88.0 million higher DAC amortization partially offset by the $164.1 million
increase in DAC capitalization.
Policyholders' benefits were $1.96 billion in 2006, a $100.7 million increase
from 2005. The increase partially resulted from lower benefits and reserves in
the reinsurance assumed product line in 2005 due to the $16.8 million settlement
of outstanding issues with one life reinsurer in third quarter 2005 that
resulted in the release of $46.8 million of reserves in 2005 and higher
individual death claims in 2006.
Compensation and benefits for the Insurance segment decreased slightly to $520.6
million in 2006 as compared to $522.6 million in 2005. The decrease was
principally due to the $45.4 million impact in 2006 of 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 and the $28.5
million adjustment of the survivor income benefits liability reported in 2005
related to earlier periods. The decrease was partially offset by $46.9 million
higher employee stock compensation expense due to the effects of implementing
SFAS No. 123 (R).
For 2006, commission costs increased $265.7 million to $1.39 billion in 2006
from $1.13 billion in 2005 due to higher sales of life and annuity products.
DAC amortization increased to $689.3 million in 2006, up $88.0 million from
$601.3 million in 2005. This increase was primarily related to higher current
margins in products that are DAC reactive and lower favorable DAC unlocking in
2006 compared to 2005. This increase was partially offset by reactivity to the
decrease 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 during 2006. The unlocking impact in 2006 from the recognition
of higher expected future margins driven by higher fees related to variable life
insurance and annuity contracts in that year 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
the completion of a comprehensive lapse study. Both years also reflect DAC
unlocking associated with higher estimated future margins due to expectations of
life mortality improvement based on emerging experience, which resulted in a
deceleration of DAC amortization. However, the deceleration of DAC amortization
resulting from these revised mortality projections was lower in 2006 than in
2005.
DAC for universal life, investment-type and participating traditional life
policies is amortized over the expected total life of the contract group as a
constant percentage of estimated gross profits (for universal life and
investment-type contracts) or margins (for participating traditional life
policies). Estimates and assumptions underlying these DAC amortization rates are
reassessed and updated at the end of each reporting period ("DAC unlocking").
The effect of
7-3
DAC unlocking is reflected in earnings in the period such estimated gross
profits are revised. A decrease in expected gross profits would accelerate DAC
amortization. Conversely, an increase in expected gross profits would slow DAC
amortization.
Expected gross profits for variable and interest-sensitive life insurance and
variable annuities arise principally from investment results, Separate Account
fees, mortality and expense margins and surrender charges based on historical
and anticipated future experience. Other significant assumptions underlying
gross profit estimates relate to contract persistency and General Account
investment spread. A significant assumption in the development of expected gross
profits and, therefore, the amortization of DAC on these products relates to
projected future Separate Account performance. Management sets expected future
gross profit assumptions related to Separate Account performance using a
long-term view of expected average market returns by applying a reversion to the
mean approach. In applying this approach to develop estimates of future returns,
it is assumed that the market will return to an average gross long-term return
estimate, developed with reference to historical long-term equity market
performance and subject to assessment of the reasonableness of resulting
estimates of future return assumptions. For purposes of making this
reasonableness assessment, management has set limitations as to maximum and
minimum future rate of return assumptions, as well as a limitation on the
duration of use of these maximum or minimum rates of return. Currently, the
average gross long-term annual return estimate is 9.0% (6.8% net of product
weighted average Separate Account fees), and the gross maximum and minimum
annual rate of return limitations are 15% (12.8% net of product weighted average
Separate Account fees) and 0% (-2.2% net of product weighted average Separate
Account fees), respectively. The maximum duration over which these rate
limitations may be applied is 5 years. This approach will continue to be applied
in future periods. If actual market returns continue at levels that would result
in assuming future market returns of 15% for more than 5 years in order to reach
the average gross long-term return estimate, the application of the 5 year
maximum duration limitation would result in an acceleration of DAC amortization.
Conversely, actual market returns resulting in assumed future market returns of
0% for more than 5 years would result in a required deceleration of DAC
amortization. As of December 31, 2006, current projections of future average
gross market returns for purposes of this approach assume a 0.5% return for 2007
that is within the maximum and minimum limitations and assume a reversion to the
mean of 9.0% after 7 quarters.
In addition, projections of future mortality assumptions related to variable and
interest-sensitive life products are based on a long-term average of actual
experience. This assumption is updated quarterly to reflect recent experience as
it emerges. Improvement of life mortality in future periods from that currently
projected would result in future deceleration of DAC amortization. Conversely,
deterioration of life mortality in future periods from that currently projected
would result in future acceleration of DAC amortization. Generally, life
mortality experience has improved in recent periods.
DAC capitalization increased $164.1 million to $1.36 billion in 2006 from $1.20
billion in 2005 principally due to higher sales of annuity products.
All other operating costs and expenses totaled $705.1 million in 2006, an
increase of $143.7 million from the $561.4 million reported in 2005. The 2006
increase was primarily due to increases in EQAT and VIP Trust subadvisory fees
due to higher asset levels and additional increases in administrative service
fees, distribution expense allowance costs, outsourcing expenses and
miscellaneous general expenses.
Premiums and Deposits. Total year premiums and deposits for life insurance and
annuity products in 2006 were $16.80 billion, an increase of $2.77 billion from
prior year's level while first year premiums and deposits increased $2.59
billion to $12.16 billion. Annuity products' first year premiums and deposits
increased by $2.33 billion to $11.57 billion in 2006 with higher first year
sales of $799.7 million and $1.53 billion in the retail and wholesale channels,
respectively. First year life premiums and deposits increased $261.9 million to
$586.6 million primarily due to higher sales of interest sensitive life products
principally in the wholesale channel.
Surrenders and Withdrawals. Total policy and contract surrenders and withdrawals
increased $1.35 billion to $8.13 billion during 2006 compared to $6.78 billion
in 2005 with increases of $1.34 billion, $7.7 million and $3.8 million for
individual annuity, traditional life and variable and interest-sensitive life
products, respectively. The annuity surrender rate increased from 8.4% in 2005
to 8.8% in 2006. The individual life surrender rate decreased to 3.8% in 2006
from 3.9% in the prior year. The trends in surrenders and withdrawals continue
to fall within the range of expected experience.
7-4
INVESTMENT MANAGEMENT.
The table that follows presents the operating results of the Investment
Management segment, consisting principally of AllianceBernstein's operations.
INVESTMENT MANAGEMENT - RESULTS OF OPERATIONS
(IN MILLIONS)
2006 2005
--------------- ----------------
Revenues:
Investment advisory and services fees (1)............................. $ 2,890.2 $ 2,259.4
Distribution revenues................................................. 421.0 397.8
Institutional research services....................................... 375.1 352.8
Other revenues........................................................ 132.3 163.8
--------------- ----------------
Commissions, fees and other income................................. 3,818.6 3,173.8
Gross investment income............................................... 322.0 145.0
Less: interest expense to finance trading activities.................. (187.8) (95.9)
--------------- ----------------
Net investment income.............................................. 134.2 49.1
Investment gains, net................................................. 49.9 42.1
--------------- ----------------
Total revenues.................................................... 4,002.7 3,265.0
--------------- ----------------
Expenses:
Compensation and benefits............................................. 1,570.1 1,280.3
Distribution plan payments............................................ 292.9 292.0
Amortization of deferred sales commissions............................ 100.4 132.0
Interest expense...................................................... 22.8 23.5
Rent expense.......................................................... 155.7 113.9
Amortization of other intangible assets, net.......................... 23.6 23.5
Other operating costs and expenses.................................... 647.2 475.6
--------------- ----------------
Total expenses.................................................... 2,812.7 2,340.8
--------------- ----------------
Earnings from Continuing Operations before
Income Taxes and Minority Interest................................... $ 1,190.0 $ 924.2
=============== ================
(1) Includes fees earned by AllianceBernstein totaling $32.2 million and $31.6
million in 2006 and 2005, respectively, for services provided to the
Insurance Group.
Revenues. The Investment Management segment's pre-tax earnings from continuing
operations for 2006 were $1.19 billion, an increase of $265.8 million from the
prior year. Revenues totaled $4.00 billion in 2006, an increase of $737.7
million from 2005, primarily due to a $630.8 million increase in investment
advisory and services fees and the $92.9 million higher investment results.
Investment advisory and services fees include base fees and performance fees.
The 2006 increase in investment advisory and services fees primarily resulted
from higher average AUM in all three distribution channels, a favorable asset
mix, reflected by global and international AUM increases where base-fee rates
are generally higher than domestic rates, and the $103.8 increase in performance
fees from $131.9 million in 2005 to $235.7 million in 2006. These increases were
partially offset by the effects of the disposition of its cash management
services in the retail channel in 2005. Net investment income consists
principally of dividend and interest income, offset by interest expense related
to customer accounts and collateral received for securities loaned, and realized
and unrealized gains on investments related to deferred compensation plan
obligations and other investments. The $85.1 million increase in 2006 was
primarily due to higher mutual fund dividends and increased stock borrowed
income as a result of higher average customer credit balances and interest rates
in 2006 as well as higher mark to market gains on investments related to
deferred compensation plan obligations. Investment gains, net includes non-cash
gains resulting from the issuance of AllianceBernstein units to employees in
connection with their long-term incentive plans and to the gains and income from
the dispositions of the AllianceBernstein cash management services, Indian
mutual funds and South African joint venture interest in 2005. The 2006 increase
of $7.8 million principally resulted from the $28.0 million non-cash gain in
2006 as compared to the $12.2 million in 2005 offset by the effect of the
disposition gains recognized in 2005 as compared to 2006.
7-5
Expenses. The segment's total expenses were $2.81 billion in 2006, compared to
$2.34 billion in 2005, an increase of $471.9 million principally due to the
$289.9 million and $171.6 million increases in compensation and benefits and
other operating costs and expenses, respectively. The increase in
AllianceBernstein employee compensation and benefits in 2006 as compared to 2005
was due to increases in all components of compensation and benefits. Base
compensation, fringe benefits and other employment costs increased $84.4 million
in 2006 primarily due to annual merit increases, additional headcount and higher
fringe benefits reflecting increased compensation levels. Incentive compensation
in 2006 increased $111.1 million due to higher short-term incentive compensation
reflecting higher earnings and higher amortization of deferred compensation, due
to vesting of prior year awards. Commission expense increased $89.9 million in
2006 reflecting higher revenues or sales across all distribution channels and
for Institutional Research Services. The other operating expenses increase of
$171.6 million included the $56.0 million fourth quarter 2006 charge
AllianceBernstein recorded relating to the estimated cost of reimbursing certain
clients for losses arising out of an error related to processing claims for
class action settlement proceeds on behalf of these clients as well as higher
travel and entertainment, advertising and promotional material costs, higher
litigation costs and higher market data services and data processing costs. Rent
expense increased $41.8 million due to higher occupancy costs due to office
expansion at AllianceBernstein. The 2006 decease of $31.6 million in
amortization of deferred sales commissions was a result of lower sales of
back-end load shares.
ASSETS UNDER MANAGEMENT
A breakdown of the Company and AXA Financial's assets under management ("AUM")
follows:
ASSETS UNDER MANAGEMENT
(IN MILLIONS)
DECEMBER 31,
--------------------------------------
2006 2005
------------------ ------------------
Third party (1)............................................................. $ 651,562 $ 513,499
AXA Equitable General Account, AXA Financial and its other affiliates (2)... 54,688 55,389
Insurance Group Separate Accounts........................................... 88,758 74,552
------------------ ------------------
Total Assets Under Management........................................... $ 795,008 $ 643,440
================== ==================
(1) Includes $29.46 billion and $24.08 billion of assets managed on behalf of
AXA affiliates at December 31, 2006 and 2005, respectively. Also included
in 2006 and 2005 are $17.83 billion and $13.30 billion, respectively, in
assets related to an Australian joint venture between AllianceBernstein and
an AXA affiliate.
(2) Includes invested assets of the Company, AXA Financial and its other
affiliates (including the MONY Companies) not managed by AllianceBernstein,
principally cash and short-term investments and policy loans, totaling
approximately $11.33 billion and $9.39 billion at December 31, 2006 and
2005, respectively, as well as mortgages and equity real estate totaling
$5.42 billion and $5.71 billion at December 31, 2006 and 2005,
respectively.
Third party AUM increased $138.06 billion to $651.56 billion in 2006 primarily
due to increases at AllianceBernstein. AXA Equitable General Account, AXA
Financial and its other affiliates AUM decreased $701 million from the total
reported in 2005 primarily due to the effect the rising interest rate
environment in 2006 had on the fair value of the bond portfolio. The $14.21
billion increase in Insurance Group Separate Accounts AUM in 2006 resulted from
market appreciation and net new deposits.
AllianceBernstein's AUM increased $138.35 billion to $716.90 billion in 2006
from $578.55 billion at December 31, 2005, with $90.1 billion of the increase
resulting from market appreciation due to equity market gains and $47.8 billion
due to net asset inflows. Active equity growth and active equity value account
AUM, which made up 71.1% of AllianceBernstein's total AUM at December 31, 2006,
increased by 24.6%. Net inflows in 2006 were $27.3 million, $12.1 million and
$8.4 million, respectively, in the institutional investment, retail and private
client channels. Non-U.S. clients accounted for 35.8% of AllianceBernstein's
December 31, 2006 AUM total.
7-6
DISCONTINUED OPERATIONS - WIND-UP ANNUITIES
Wind-up Annuities. Earnings from Wind-up Annuities of $30.2 million in 2006 as
compared to $15.2 million in 2005 reflect releases of the allowance for future
losses due primarily to improved actual and projected investment results.
LIQUIDITY AND CAPITAL RESOURCES
AXA EQUITABLE
The principal sources of AXA Equitable's cash flows are premiums, deposits and
charges on policies and contracts, investment income, repayments of principal
and proceeds from sales of fixed maturities, sales of other General Account
Investment Assets, borrowings from affiliates and dividends and distributions
from subsidiaries.
AXA Equitable's liquidity requirements principally relate to the liabilities
associated with its various life insurance, annuity and group pension products
in its continuing operations; the liabilities of discontinued operations;
shareholder dividends to AXA Financial; and operating expenses, including debt
service. AXA Equitable's liabilities include the payment of benefits under life
insurance, annuity and group pension products, as well as cash payments in
connection with policy surrenders, withdrawals and loans.
Sources of Liquidity. AXA Equitable's primary source of short-term liquidity to
support continuing and discontinued insurance operations is a pool of liquid,
high quality short-term instruments structured to provide liquidity in excess of
the expected cash requirements.
In December 2005, AXA Equitable issued a $325.0 million Surplus Note to AXA
Financial. This borrowing has an interest rate of 6% and matures in 2035. The
proceeds from this note were used to repay the $400.0 million 6.95% Surplus
Note.
Other liquidity sources include dividends and distributions from
AllianceBernstein. In 2006, AXA Equitable received cash distributions from
AllianceBernstein and AllianceBernstein Holding of $469.9 million as compared to
$369.6 million in 2005.
Liquidity Requirements. The Company's liquidity needs are affected by
fluctuations in mortality, other benefit payments and policyholder directed
transfers from General Account to Separate Account investment options and in the
level of surrenders and withdrawals previously discussed in "Results of
Continuing Operations by Segment - Insurance," as well as by dividends to its
shareholder. In 2006 and 2005, respectively, AXA Equitable paid shareholder
dividends totaling $600.0 million and $500.0 million.
Management from time to time explores selective acquisition opportunities in
insurance and investment management businesses.
Management believes the Insurance Group has adequate internal sources of funds
for its presently anticipated needs.
Bernstein Put. In connection with AllianceBernstein's acquisition of Bernstein,
AXA Financial agreed to provide liquidity to the former Bernstein shareholders
after a two-year lockout period that ended October 2002. In fourth quarter 2002,
a subsidiary of AXA Equitable, as designee of AXA Financial, acquired 8.16
million of these AllianceBernstein Units at the aggregate market price of $249.7
million; there were no additional acquisitions in 2003. On March 5, 2004, a
subsidiary of AXA Equitable acquired 8.16 million AllianceBernstein Units for an
aggregate market price of $308.7 million. On December 21, 2004, AXA Financial
and a subsidiary of AXA Equitable acquired 5.61 million and 2.55 million
additional AllianceBernstein units for aggregate market price of $225.0 million
and $102.0 million, respectively. At December 31, 2006, the Company's
consolidated economic interest in AllianceBernstein was 45.6% while AXA
Financial Group's total consolidated economic interest in AllianceBernstein was
approximately 60.3%. There were no acquisitions in calendar year 2006. On
February 23, 2007, AXA Financial acquired an additional 8.2 million
AllianceBernstein Units for an aggregate market price of approximately $745.7
million thereby increasing AXA Financial Group's total consolidated economic
interest in AllianceBernstein to 63.3%. The Company's percentage interest was
unchanged. The remaining 8.2 million private AllianceBernstein Units still held
by the former Bernstein shareholders at February 23, 2007 may be sold to AXA
Financial at the prevailing market price not sooner than nine months after the
February 2007 purchase or over the following period ending October 2, 2009.
7-7
ALLIANCEBERNSTEIN
AllianceBernstein's principal sources of liquidity have been cash flows from
operations, commercial paper borrowings and proceeds from the issuance, both
publicly and privately, of debt and AllianceBernstein Units. AllianceBernstein
requires financial resources to fund commissions paid on certain back-end load
mutual fund sales, to fund distributions to Unitholders, to fund capital
expenditures and for general working capital purposes. On January 4, 2007 and
2006, respectively, AllianceBernstein deposited an additional $245.0 million and
$49.1 million in U.S. Treasury Bills in a special reserve account pursuant to
Rule 15c3-3 requirements. AllianceBernstein repaid its $400 million 5.625%
Senior Notes in August 2006. It currently has $200.0 million available under a
shelf registration statement for future issuances.
In 2006 and 2005, AllianceBernstein completed several transactions involving its
domestic and foreign services. In May 2006, AllianceBernstein purchased the
remaining 50% interest in its Hong Kong joint venture at a cost of $16.1 million
net of cash acquired. During 2005, AllianceBernstein received net proceeds of
$18.8 million related to the transfer of its cash management services business
and $8.1 million from its transfer of certain Indian mutual funds and related
servicing rights. During 2006, AllianceBernstein received $12.8 million in
contingent payments related to the cash management services transaction and net
proceeds of $8.8 million related to the 2005 sale of its interest in a South
African subsidiary. The 2006 acquisition and three 2005 dispositions are not
expected to have a material impact on the Investment Management segment's future
results of operations, cash flow or liquidity.
In February 2006, AllianceBernstein entered into an $800.0 million five-year
revolving credit facility with a group of commercial banks and other lenders. It
is intended to provide back-up liquidity for AllianceBernstein's commercial
paper program, which was increased from $425 million to $800 million in May
2006. Under the revolving credit facility, the interest rate, at
AllianceBernstein' option, is a floating rate generally based upon a defined
prime rate, a rate related to LIBOR or the Federal Funds rate. The revolving
credit facility contains covenants that, among other things, require
AllianceBernstein to meet certain financial ratios. AllianceBernstein was in
compliance with the covenants at December 31, 2006. AllianceBernstein also
maintains a $100 million ECN program as a supplement to its commercial paper
program. ECNs are short-term uncommitted debt instruments that do not require
back-up liquidity support. At December 31, 2006, $334.9 million in commercial
paper was outstanding; no amounts were outstanding under any of the other
programs at that date.
Certain of AllianceBernstein's deferred and other compensation plans provide for
the election by participants to notionally invest in AllianceBernstein Holding
units or AllianceBernstein sponsored mutual funds. From time to time,
AllianceBernstein will fund participant elections. In 2006 and 2005,
respectively, subsidiaries of AllianceBernstein purchased AllianceBernstein
Holding units totaling $22.3 million and $33.3 million for such plans.
Management believes AllianceBernstein's substantial equity base and its access
to public and private debt at competitive terms should provide adequate
liquidity for its general business needs and its cash flows from operations and
the issuance of debt and AllianceBernstein Units will provide AllianceBernstein
with the resources to meet its financial obligations. For further information,
see AllianceBernstein's Annual Report on Form 10-K for the year ended December
31, 2006.
SUPPLEMENTARY INFORMATION
The Company is involved in a number of ventures and transactions with AXA and
certain of its affiliates. At December 31, 2006, AXA Equitable had outstanding a
$400.0 million, 5.89% loan to AXA Insurance Holding Co., Ltd., a Japanese
subsidiary of AXA. All payments, including interest, are guaranteed by AXA.
AllianceBernstein provides investment management and related services to AXA,
AXA Financial and AXA Equitable and certain of their subsidiaries and
affiliates. In 2001, AllianceBernstein entered into joint ventures with AXA Asia
Pacific Holdings, Limited, an AXA affiliate, and recognized management fees of
$61.1 million, $44.6 million and $33.3 million in 2006, 2005 and 2004,
respectively, of which approximately $21.3 million, $19.9 million and $17.6
million, respectively, were from AXA affiliates and $8.8 million, $5.9 million
and $3.7 million, respectively, were attributed to minority interest. AXA
Financial, AXA Equitable and AllianceBernstein, along with other AXA affiliates,
participate in certain cost sharing and servicing agreements that include
technology and professional development arrangements. Payments by AXA Equitable
and AllianceBernstein to AXA under such agreements totaled approximately $28.8
million, $32.8 million and $30.2 million in 2006, 2005 and 2004, respectively.
Payments by AXA and AXA affiliates to AXA Equitable under such agreements
totaled $27.9 million, $30.4
7-8
million and $38.9 million in 2006, 2005 and 2004, respectively. Included in the
payments by AXA and AXA affiliates to the Company are $12.6 million, $12.7
million and $12.7 million from AXA Tech, which represent the net amount of
payments resulting from services and facilities provided by the Company to AXA
Tech of $111.0 million, $110.9 million and $106.4 million less the payments for
services provided from AXA Tech to the Company of $98.4 million, $98.2 million
and $93.7 million for 2006, 2005 and 2004, respectively. See Notes 11 and 18 of
Notes to the Consolidated Financial Statements and AllianceBernstein's Report on
Form 10-K for the year ended December 31, 2006 for information on related party
transactions.
A schedule of future payments under certain of the Company's consolidated
contractual obligations follows:
CONTRACTUAL OBLIGATIONS - DECEMBER 31, 2006
(IN MILLIONS)
Payments Due by Period
-----------------------------------------------------------
Less than Over
Total 1 year 1 - 3 years 4 - 5 years 5 years
------------ ------------ ------------- ------------- --------------
Contractual obligations:
Policyholders liabilities -
policyholders' account
balances, future policy
benefits and other
policyholders liabilities (1)... $ 78,295.1 $ 3,106.5 $ 5,781.3 $ 5,340.5 $ 64,066.8
Long-term debt.................... 448.3 248.3 - - 200.0
Operating leases.................. 2,322.4 178.6 337.3 306.4 1,500.3
Employee benefits (2)............. 41.2 3.6 4.5 7.1 26.0
------------ ------------ ------------- ------------- --------------
Total Contractual
Obligations................... $ 81,107.0 $ 3,537.0 $ 6,123.1 $ 5,653.8 $ 65,793.1
============ ============ ============== ============= ==============
(1) Policyholders liabilities represent estimated cash flows out of the General
Account related to the payment of death and disability claims, policy
surrenders and withdrawals, annuity payments, minimum guarantees on
Separate Account funded contracts, matured endowments, benefits under
accident and health contracts, policyholder dividends and future renewal
premium-based and fund-based commissions offset by contractual future
premiums and deposits on in-force contracts. These estimated cash flows are
based on mortality, morbidity and lapse assumptions comparable with the AXA
Financial Group's experience and assume market growth and interest
crediting consistent with assumptions used in amortizing DAC and VOBA.
These amounts are undiscounted and, therefore, exceed the Policyholders'
account balances and Future policy benefits and other policyholder
liabilities included in the consolidated balance sheet included elsewhere
herein. They do not reflect projected recoveries from reinsurance
agreements. Due to the use of assumptions, actual cash flows will differ
from these estimates (see "Critical Accounting Estimates - Future Policy
Benefits"). Separate Accounts liabilities have been excluded as they are
legally insulated from General Account obligations and will be funded by
cash flows from Separate Accounts assets.
(2) Excludes AXA Equitable's qualified pension plan for which no payments to
the plan are expected to be required for the next five years or longer.
Interest on long-term debt will be approximately $15.4 million per annum in
years 2007 through 2011, while interest on loans from affiliates will be
approximately $19.5 million per annum in years 2007 through 2011.
Certain of AllianceBernstein's deferred compensation plans provide for election
by participants to have their deferred compensation awards invested notionally
in AllianceBernstein Holding units and in company-sponsored mutual funds. Since
January 1, 2007, AllianceBernstein made purchases of mutual funds totaling
$272.3 million to fund its future obligations resulting from participant
elections with respect to 2006 awards. AllianceBernstein also allocated
AllianceBernstein Holding units with an aggregate value of approximately $36.8
million; these units were held in a deferred compensation trust at December 31,
2006 to fund its future obligations that resulted from participant elections
with respect to 2006 awards. At year-end 2006, AllianceBernstein had a $360.6
million accrual for compensation and benefits, of which $215.8 million is
expected to be paid in 2007, $79.4 million in 2008-2009, $42.7 million in
2010-2011 and the rest thereafter. Further, AllianceBernstein expects to make
contributions to its qualified profit sharing plan of approximately $25.0
million in each of the next four years. AllianceBernstein
7-9
currently expects to contribute an estimated $3.7 million to its qualified,
noncontributory, defined benefit plan during 2007.
In addition, the Company has obligations under contingent commitments at
December 31, 2006, including: AllianceBernstein's revolving credit facility and
commercial paper program; AllianceBernstein's $100.0 million ECN program; the
Insurance Group's $60.5 million undrawn letters of credit; AllianceBernstein's
$125.0 million guarantee on behalf of SCB LLC; and the Company's guarantees or
commitments to provide equity financing to certain limited partnerships of
$618.3 million. Information on these contingent commitments can be found in
Notes 11, 18 and 19 of Notes to Consolidated Financial Statements.
Further, the Company is exposed to potential risk related to its own ceded
reinsurance agreements with other insurers and to insurance guaranty fund laws
in all 50 states, the District of Columbia and Puerto Rico. Under these laws,
insurers doing business in these states can be assessed amounts up to prescribed
limits to protect policyholders of companies that become impaired or insolvent.
CRITICAL ACCOUNTING ESTIMATES
The Company's management narrative is based upon the Company's consolidated
financial statements that have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires management to make estimates and
assumptions (including normal, recurring accruals) that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. On an on-going basis, the
Company evaluates its estimates, including those related to investments,
recognition of insurance income and related expenses, DAC, future policy
benefits, recognition of Investment Management revenues and related expenses and
pension cost. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. The results of such factors form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from those estimates
under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Investments - The Company records an investment impairment charge when it
believes an investment has experienced a decline in fair value that is other
than temporary. Identifying those situations requires management's careful
consideration of the facts and circumstances including, but not limited to, the
duration and extent to which the fair value has been depressed, the financial
condition, cash flows, and near-term earnings potential of the issuer, as well
as the Company's ability and intent to retain the investment to allow sufficient
time for any anticipated recovery in fair value. The basis for measuring fair
value may require utilization of investment valuation methodologies, such as
discounted cash flow analysis, if quoted market prices are not readily
available.
Recognition of Insurance Income and Related Benefits - Profits on
non-participating traditional life policies and annuity contracts with life
contingencies emerge from the matching of benefits and other expenses against
the related premiums. Profits on participating traditional life, universal
life-type and investment-type contracts emerge from the matching of benefits and
other expenses against the related contract margins. This matching is
accomplished by means of the provision for liabilities for future policy
benefits and the deferral, and subsequent amortization, of policy acquisition
costs. Trends in the general population and the Company's own mortality,
morbidity, persistency and claims experience have a direct impact on the
benefits and expenses reported in any given period.
DAC- For universal life-type and investment-type contracts and participating
traditional life policies, DAC amortization may be affected by changes in
estimated gross profits and margins principally related to investment results,
Separate Account fees, mortality and expense margins, lapse rates and
anticipated surrender charges. Should revisions to estimated gross profits or
margins be required, the effect is reflected in earnings in the period such
estimated gross profits are revised. Additionally, the level of deferrable
Insurance Group operating expenses is another significant factor in that
business' reported profitability in any given period.
7-10
Future Policy Benefits - Future policy benefit liabilities for traditional
policies are based on actuarial assumptions as to such factors as mortality,
morbidity, persistency, interest and expenses and, in the case of participating
policies, expected annual and terminal dividends. Determination of the GMDB/GMIB
liabilities is based on models that involve numerous estimates and subjective
judgments, including those regarding expected market rates of return and
volatility, contract surrender rates, mortality experience and, for GMIB, GMIB
election rates. Premium deficiency reserves are based upon estimates of future
gross premiums, expected policy benefits and other expenses. The allowance for
future losses for the discontinued Wind-up Annuities business is based upon
numerous estimates and subjective judgments regarding the expected performance
of the related investment assets, future asset reinvestment rates and future
benefit payments.
Recognition of Investment Management Revenues and Related Expenses - The
Investment Management segment's revenues are largely dependent on the total
value and composition of assets under management. The most significant factors
that could affect this segment's results include, but are not limited to, the
performance of the financial markets and the investment performance and
composition of sponsored investment products and separately managed accounts.
Performance fees are recorded as revenue at the end of the specified period and
will generally be higher in favorable markets and lower in unfavorable markets,
which may increase the volatility of the segment's revenues and earnings.
Capitalized sales commissions paid to financial intermediaries in connection
with the sale of shares of open-end mutual funds sold without a front-end sales
charge are expected to be recovered from distribution plan payments received
from those funds and from contingent deferred sales charges received from
shareholders of those funds upon redemption of their shares. The recoverability
of these commissions is estimated based on management's assessment of these
future revenue flows.
Pension Cost - Net periodic pension cost is the aggregation of the compensation
cost of benefits promised, interest cost resulting from deferred payment of
those benefits, and investment results of assets dedicated to fund those
benefits. Each cost component is based on the Company's best estimate of
long-term actuarial and investment return assumptions. Actual experience
different from that assumed generally is recognized prospectively over future
periods; however, significant variances could result in immediate recognition if
they exceed certain prescribed thresholds or in conjunction with a
reconsideration of the related assumptions.
Share-based and Other Compensation Programs - Prior to the adoption of SFAS No.
123(R) on January 1, 2006, equity settled stock option awards only resulted in
compensation expense if the current market price of the underlying stock
exceeded the option strike price at the grant date. Compensation expense for
cash settled award programs, such as tandem Stock Appreciation Rights and
Performance Units, was recorded based upon changes in the fair value of the AXA
ADRs or AXA shares. In connection with the adoption of SFAS No. 123(R), the
Company began recognizing compensation expense for the unvested portion of
awards outstanding on January 1, 2006 over the balance of the vesting period and
,for new awards after January 1, 2006, for the fair values of the option awards
over the vesting period. Significant factors that could affect results include,
but are not limited to, assumptions incorporated in the option pricing models,
changes in the market price of AXA ADRs and AXA ordinary shares and grants of
additional awards.
Consolidation - The Company includes in its consolidated financial statements
the accounts and activities of AXA Equitable; those of its subsidiaries engaged
in insurance related businesses; other subsidiaries, principally
AllianceBernstein; and those investment companies, partnerships and joint
ventures in which the Company has control and a majority economic interest as
well as those VIEs that meet the requirements for consolidation. All significant
intercompany transactions and balances have been eliminated in consolidation.
7-11
PART II, ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company's businesses are subject to financial, market, political and
economic risks, as well as to risks inherent in its business operations. The
discussion that follows provides additional information on market risks arising
from its insurance asset/liability management and asset management activities.
Such risks are evaluated and managed by each business on a decentralized basis.
Primary market risk exposure results from interest rate fluctuations, equity
price movements and changes in credit quality.
INSURANCE GROUP
Insurance Group results significantly depend on profit margins between
investment results from assets held in the General Account associated with the
continuing operations ("General Account Investment Assets") and Wind-up
Annuities of the Insurance Group and interest credited on individual insurance
and annuity products. Management believes its fixed rate liabilities should be
supported by a portfolio principally composed of fixed rate investments that
generate predictable, steady rates of return. Although these assets are
purchased for long-term investment, the portfolio management strategy considers
them available for sale in response to changes in market interest rates, changes
in prepayment risk, changes in relative values of asset sectors and individual
securities and loans, changes in credit quality outlook and other relevant
factors. See the "Investments" section of Note 2 of Notes to Consolidated
Financial Statements for the accounting policies for the investment portfolios.
The objective of portfolio management is to maximize returns, taking into
account interest rate and credit risks. Insurance asset/liability management
includes strategies to minimize exposure to loss as interest rates and economic
and market conditions change. As a result, the fixed maturity portfolio has
modest exposure to call and prepayment risk and the vast majority of mortgage
holdings are fixed rate mortgages that carry yield maintenance and prepayment
provisions.
Insurance Group assets with interest rate risk include fixed maturities and
mortgage loans that make up 75.0% of the carrying value of General Account
Investment Assets at December 31, 2006. As part of its asset/liability
management, quantitative analyses are used to model the impact various changes
in interest rates have on assets with interest rate risk. The table that follows
shows the impact an immediate 100 basis point increase in interest rates at
December 31, 2006 and 2005 would have on the fair value of fixed maturities and
mortgage loans:
INTEREST RATE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2006 December 31, 2005
----------------------------------------- ------------------------------------
BALANCE AFTER Balance After
FAIR +100 BASE Fair +100 Basis
VALUE POINT CHANGE Value Point Change
-------------------- -------------------- ---------------- -------------------
Continuing Operations:
Fixed maturities:
Fixed rate................... $ 29,137.4 $ 27,656.5 30,180.7 28,560.4
Floating rate................ 260.5 259.9 254.1 253.3
Mortgage loans................. 3,285.6 3,144.1 3,329.0 3,191.5
Wind-up Annuities:
Fixed maturities:
Fixed rate................... $ 764.8 $ 735.6 $ 823.5 $ 787.0
Mortgage loans................. 3.0 3.0 7.1 6.9
A 100 basis point fluctuation in interest rates is a hypothetical rate scenario
used to demonstrate potential risk; it does not represent management's view of
future market changes. While these fair value measurements provide a
representation of interest rate sensitivity of fixed maturities and mortgage
loans, they are based on various portfolio exposures at a particular point in
time and may not be representative of future market results. These exposures
will change as a result of ongoing portfolio activities in response to
management's assessment of changing market conditions and available investment
opportunities.
7A-1
The investment portfolios also have direct holdings of public and private equity
securities. The following table shows the potential exposure from those equity
security investments, measured in terms of fair value, to an immediate 10% drop
in equity prices from those prevailing at December 31, 2006 and 2005:
EQUITY PRICE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2006 December 31, 2005
----------------------------------------- ------------------------------------
BALANCE AFTER Balance After
FAIR -10% EQUITY Fair -10% Equity
VALUE PRICE CHANGE Value Price Change
------------------- --------------------- -------------- ---------------------
Insurance Group:
Continuing operations.......... $ 232.5 $ 209.3 $ 159.2 $ 143.3
Wind-up Annuities.............. - - .1 .1
A 10% decrease in equity prices is a hypothetical scenario used to calibrate
potential risk and does not represent management's view of future market
changes. The fair value measurements shown are based on the equity securities
portfolio exposures at a particular point in time and these exposures will
change as a result of ongoing portfolio activities in response to management's
assessment of changing market conditions and available investment opportunities.
At years end 2006 and 2005, the aggregate carrying values of policyholders
liabilities were $41,312.6 million and $42,009.0 million, respectively,
including $17,092.5 million and $17,985.2 million of liabilities, respectively,
related to the General Account's investment contracts. The aggregate fair value
of those investment contracts at years end 2006 and 2005 were $17,106.0 million
and $18,244.5 million, respectively. The impact of a relative 1% decrease in
interest rates would be an increase in the fair value of those investment
contracts to $17,504.0 million and $18,683.3 million, respectively. Those
investment contracts represent only a portion of total policyholders
liabilities. As such, meaningful assessment of net market risk exposure cannot
be made by comparing the results of the invested assets sensitivity analyses
presented herein to the potential exposure from the policyholders liabilities
quantified in this paragraph.
Asset/liability management is integrated into many aspects of the Insurance
Group's operations, including investment decisions, product development and
determination of crediting rates. As part of its risk management process,
numerous economic scenarios are modeled, including cash flow testing required
for insurance regulatory purposes, to determine if existing assets would be
sufficient to meet projected liability cash flows. Key variables include
policyholder behavior, such as persistency, under differing crediting rate
strategies. On the basis of these more comprehensive analyses, management
believes there is minimal solvency risk to AXA Equitable from interest rate
movements of 100 basis points and from equity price changes of 10% from year-end
2006 levels.
The Insurance Group primarily uses derivatives for asset/liability risk
management, for hedging individual securities and to reduce the Insurance
Group's exposure to equity market decline and interest rate fluctuations. As
more fully described in Notes 2 and 4 of Notes to Consolidated Financial
Statements, various traditional derivative financial instruments are used to
achieve these objectives, including interest rate floors to hedge crediting
rates on interest-sensitive individual annuity contracts, interest rate futures
to protect against declines in interest rates between receipt of funds and
purchase of appropriate assets, and interest rate swaps to modify the duration
and cash flows of fixed maturity investments and long-term debt. In addition,
the Company periodically enters into forward and futures contracts to provide an
economic hedge for certain equity exposures, including the program to hedge
certain risks associated with the GMDB/GMIB features of certain annuity
products. To minimize credit risk exposure associated with its derivative
transactions, each counterparty's credit is appraised and approved and risk
control limits and monitoring procedures are applied. Credit limits are
established and monitored on the basis of potential exposures that take into
consideration current market values and estimates of potential future movements
in market values given potential fluctuations in market interest rates.
While notional amount is the most commonly used measure of volume in the
derivatives market, it is not used by the Insurance Group as a measure of risk
because the notional amount greatly exceeds the possible credit and market loss
that could arise from such transactions. Mark to market exposure is a
point-in-time measure of the value of a derivative contract in the open market.
A positive value indicates existence of credit risk for the Insurance Group
because the counterparty would owe money to the Insurance Group if the contract
were closed. Alternatively, a negative value indicates the Insurance Group would
owe money to the counterparty if the contract were closed. If
7A-2
there is more than one derivative transaction outstanding with a counterparty, a
master netting arrangement exists with the counterparty. In that case, the
market risk represents the net of the positive and negative exposures with the
single counterparty. In management's view, the net potential exposure is the
better measure of credit risk.
At years end 2006 and 2005, the fair values of the Insurance Group's derivatives
were $8.7 million and $12.3 million, respectively. The table that follows shows
the interest rate or equity sensitivities of those derivatives, measured in
terms of fair value. These exposures will change as a result of ongoing
portfolio and risk management activities.
INSURANCE GROUP - DERIVATIVE FINANCIAL INSTRUMENTS
(IN MILLIONS, EXCEPT FOR WEIGHTED AVERAGE TERM)
INTEREST RATE SENSITIVITY
------------------------------------------------------
WEIGHTED
AVERAGE BALANCE AFTER BALANCE AFTER
NOTIONAL TERM -100 BASIS FAIR +100 BASIS
AMOUNT (YEARS) POINT CHANGE VALUE POINT CHANGE
-------------- ------------- ---------------- -------------- ------------------
DECEMBER 31, 2006
Options:
Floors.............. $ 32,000.0 2.88 $ 30.2 $ 8.7 $ 4.3
Futures............... 565.8 .22 40.5 - (40.5)
-------------- ---------------- -------------- ------------------
Total................... $ 32,565.8 $ 70.7 $ 8.7 $ (36.2)
============== ================ ============== ==================
December 31, 2005
Options:
Floors.............. $ 24,000.0 2.55 $ 43.9 $ 12.3 $ 7.0
Futures............... 286.6 0.22 17.0 0.0 (17.0)
-------------- ---------------- -------------- ------------------
Total.................... $ 24,286.6 $ 60.9 $ 12.3 $ (10.0)
============== ================ ============== ==================
EQUITY SENSITIVITY
----------------------------------
BALANCE AFTER
FAIR -10% EQUITY
VALUE PRICE SHIFT
-------------- ------------------
DECEMBER 31, 2006
Futures............... $ (2,970.5) .22 $ - $ 297.0
============== ============== ==================
December 31, 2005
Futures............... $ (1,921.3) .21 $ - $ 192.1
============== ============== ==================
In addition to the traditional derivatives discussed above, the Insurance Group
has entered into reinsurance contracts to mitigate the risk associated with the
impact of potential market fluctuations on future policyholder elections of GMIB
features contained in certain annuity contracts. These reinsurance contracts are
considered derivatives under SFAS No. 133 and were reported at their fair values
of $117.8 million and $132.6 million at December 31, 2006 and 2005,
respectively. The potential fair value exposure to an immediate 10% drop in
equity prices from those prevailing at December 31, 2006 and 2005, respectively,
would increase the balances of these reinsurance contracts to $186.7 million and
$211.8 million.
7A-3
At the end of 2006 and of 2005, the aggregate fair values of long-term debt
issued by AXA Equitable were $229.7 million and $232.6 million, respectively.
The table below shows the potential fair value exposure to an immediate 100
basis point decrease in interest rates from those prevailing at the end of 2006
and of 2005.
INTEREST RATE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2006 December 31, 2005
----------------------------------- ----------------------------------
BALANCE AFTER Balance After
FAIR -100 BASIS Fair -100 Basis
VALUE POINT CHANGE Value Point Change
---------------- ----------------- -------------- ------------------
Continuing Operations:
Fixed rate........................ $ 229.7 $ 245.6 $ 232.6 $ 250.0
INVESTMENT MANAGEMENT
AllianceBernstein's investments consist of investments, trading and
available-for-sale, and other investments. AllianceBernstein's trading and
available-for-sale investments include U.S. Treasury bills and equity and fixed
income mutual funds investments. Trading investments are purchased for
short-term investment, principally to fund liabilities related to deferred
compensation plans. Although available-for-sale investments are purchased for
long-term investment, the portfolio strategy considers them available-for-sale
from time to time due to changes in market interest rates, equity prices and
other relevant factors. Other investments include investments in hedge funds
sponsored by AllianceBernstein
The table below provides AllianceBernstein's potential exposure, measured in
terms of fair value, to an immediate 100 basis point increase in interest rates
at all maturities from the levels prevailing at December 31, 2006 and 2005:
INTEREST RATE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2006 December 31, 2005
------------------------------------- -------------------------------------
BALANCE AFTER Balance After
FAIR +100 BASIS POINT Fair +100 Basis Point
VALUE CHANGE Value Change
--------------- -------------------- --------------- ------------------
Fixed Income Investments:
Trading.......................... $ 31.7 $ 30.2 $ 30.5 $ 29.1
Available-for-sale and other
investments................... 32.0 30.5 2.5 2.4
Such a fluctuation in interest rates is a hypothetical rate scenario used to
calibrate potential risk and does not represent AllianceBernstein management's
view of future market changes. While these fair value measurements provide a
representation of interest rate sensitivity of fixed income mutual funds and
fixed income hedge funds, they are based on AllianceBernstein's exposures at a
particular point in time and may not be representative of future market results.
These exposures will change as a result of ongoing changes in investments in
response to AllianceBernstein management's assessment of changing market
conditions and available investment opportunities.
7A-4
The following table presents AllianceBernstein's potential exposure from its
equity investments, including equity mutual funds and equity hedge funds,
measured in terms of fair value, to an immediate 10% drop in equity prices from
those prevailing at December 31, 2006 and 2005:
EQUITY PRICE RISK EXPOSURE (IN MILLIONS)
DECEMBER 31, 2006 December 31, 2005
-------------------------------------- -------------------------------------
BALANCE AFTER Balance After
FAIR -10% EQUITY PRICE Fair -10% Equity Price
VALUE CHANGE Value Change
------------------- ----------------- --------------- --------------------
Equity Investments:
Trading.......................... $ 432.1 $ 388.9 $ 282.7 $ 254.4
Available-for-sale and other
investments................... 251.8 226.7 115.7 104.1
A 10% decrease in equity prices is a hypothetical scenario used to calibrate
potential risk and does not represent AllianceBernstein management's view of
future market changes. While these fair value measurements provide a
representation of equity price sensitivity of equity mutual funds and equity
hedge funds, they are based on AllianceBernstein's exposure at a particular
point in time and may not be representative of future market results. These
exposures will change as a result of ongoing portfolio activities in response to
AllianceBernstein management's assessment of changing market conditions and
available investment opportunities.
At December 31, 2006 and 2005, respectively, AllianceBernstein's fixed rate debt
had an aggregate fair value of $335.0 million and $409.7 million. The table
below provides the potential fair value exposure to an immediate 100 basis point
decrease in interest rates at all maturities and a ten percent decrease in
exchange rates from those prevailing at year-end 2006 and 2005:
INTEREST RATE RISK EXPOSURE
(IN MILLIONS)
DECEMBER 31, 2006 December 31, 2005
------------------------------------------- ---------------------------------------
Balance Balance
BALANCE AFTER BALANCE AFTER After -100 After -10%
-100 BASIS -10% EXCHANGE Basis Point Exchange
FAIR VALUE POINT CHANGE RATE CHANGE Fair Value Change Rate Change
------------ --------------- -------------- ------------ ------------- -------------
Debt..................... $335.0 $349.4 $335.0 $409.7 $427.9 $410.4
For further information on AllianceBernstein's market risk, see
AllianceBernstein and AllianceBernstein Holding's Annual Reports on Form 10-K
for the year ended December 31, 2006.
7A-5
PART II, ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
AXA EQUITABLE LIFE INSURANCE COMPANY
Reports of Independent Registered Public Accounting Firms:
Report of PricewaterhouseCoopers LLP on AXA Equitable Life Insurance Company........................... F-1
Report of KPMG LLP on AllianceBernstein L.P............................................................ F-2
Report of KPMG LLP on AllianceBernstein Holding L.P.................................................... F-3
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 2006 and 2005................................................. F-4
Consolidated Statements of Earnings, Years Ended December 31, 2006, 2005 and 2004....................... F-5
Consolidated Statements of Shareholder's Equity and Comprehensive Income, Years Ended
December 31, 2006, 2005 and 2004...................................................................... F-6
Consolidated Statements of Cash Flows, Years Ended December 31, 2006, 2005 and 2004..................... F-7
Notes to Consolidated Financial Statements.............................................................. F-9
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules.................. F-59
Consolidated Financial Statement Schedules:
Schedule I - Summary of Investments - Other than Investments in Related Parties,
December 31, 2006..................................................................................... F-60
Schedule II - Balance Sheets (Parent Company), December 31, 2006 and 2005.............................. F-61
Schedule II - Statements of Earnings (Parent Company), Years Ended
December 31, 2006, 2005 and 2004...................................................................... F-62
Schedule II - Statements of Cash Flows (Parent Company), Years Ended
December 31, 2006, 2005 and 2004...................................................................... F-63
Schedule III - Supplementary Insurance Information, Years Ended
December 31, 2006, 2005 and 2004...................................................................... F-64
Schedule IV - Reinsurance, Years Ended December 31, 2006, 2005 and 2004................................ F-67
FS-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholder of
AXA Equitable Life Insurance Company
In our opinion, based on our audits and the reports of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of earnings, of shareholder's equity and comprehensive income and of cash flows
present fairly, in all material respects, the financial position of AXA
Equitable Life Insurance Company and its subsidiaries ("AXA Equitable") at
December 31, 2006 and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of AXA Equitable's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
AllianceBernstein L.P. and AllianceBernstein Holding L.P., subsidiaries of AXA
Equitable, as of and for the year ended December 31, 2005, whose statements
reflect total assets of seven percent of the related consolidated total as of
December 31, 2005, and total revenues of thirty-six percent of the related
consolidated total for the year ended December 31, 2005. Those statements were
audited by other auditors whose reports thereon have been furnished to us, and
our opinion expressed herein, insofar as it relates to the amounts included for
AllianceBernstein L.P. and AllianceBernstein Holding L.P., is based solely on
the reports of the other auditors. We conducted our audits of these statements
in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a reasonable
basis for our opinion.
As discussed in Note 2 of the Notes to Consolidated Financial Statements, the
Company changed its method of accounting for share-based compensation on
January 1, 2006, for defined benefit pension and other postretirement plans on
December 31, 2006 and for certain nontraditional long-duration contracts and
Separate Accounts on January 1, 2004.
PricewaterhouseCoopers LLP
New York, New York
March 15, 2007
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The General Partner and Unitholders
AllianceBernstein L.P.
We have audited the accompanying consolidated statement of financial condition
of AllianceBernstein L.P. and subsidiaries ("AllianceBernstein"), formerly
Alliance Capital Management L.P., as of December 31, 2005, and the related
consolidated statements of income, changes in partners' capital and
comprehensive income and cash flows for each of the years in the two-year period
ended December 31, 2005. These consolidated financial statements are the
responsibility of the management of the General Partner. Our responsibility is
to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AllianceBernstein as
of December 31, 2005, and the results of their operations and their cash flows
for each of the years in the two-year period ended December 31, 2005, in
conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
February 24, 2006
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The General Partner and Unitholders
AllianceBernstein Holding L.P.
We have audited the accompanying statement of financial condition of
AllianceBernstein Holding L.P. ("AllianceBernstein Holding"), formerly Alliance
Capital Management Holding L.P., as of December 31, 2005, and the related
statements of income, changes in partners' capital and comprehensive income and
cash flows for each of the years in the two-year period ended December 31, 2005.
These financial statements are the responsibility of the management of the
General Partner. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AllianceBernstein Holding as of
December 31, 2005, and the results of its operations and its cash flows for each
of the years in the two-year period ended December 31, 2005, in conformity with
U.S. generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
February 24, 2006
F-3
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
2006 2005
--------------- --------------
(IN MILLIONS)
ASSETS
Investments:
Fixed maturities available for sale, at estimated fair value.............. $ 29,031.1 $ 30,034.8
Mortgage loans on real estate............................................. 3,240.7 3,233.9
Equity real estate, held for the production of income..................... 569.6 616.2
Policy loans.............................................................. 3,898.1 3,824.2
Other equity investments.................................................. 1,562.1 1,208.5
Trading securities........................................................ 465.1 314.3
Other invested assets..................................................... 891.6 890.2
--------------- --------------
Total investments....................................................... 39,658.3 40,122.1
Cash and cash equivalents................................................... 1,268.0 1,112.1
Cash and securities segregated, at estimated fair value..................... 1,864.0 1,720.8
Broker-dealer related receivables........................................... 3,481.0 2,929.1
Deferred policy acquisition costs........................................... 8,316.5 7,557.3
Goodwill and other intangible assets, net................................... 3,738.6 3,758.8
Amounts due from reinsurers................................................. 2,689.3 2,604.4
Loans to affiliates......................................................... 400.0 400.0
Other assets................................................................ 3,068.8 3,787.6
Separate Accounts' assets................................................... 84,801.6 69,997.0
--------------- --------------
TOTAL ASSETS................................................................ $ 149,286.1 $ 133,989.2
=============== ==============
LIABILITIES
Policyholders' account balances............................................. $ 26,439.0 $ 27,194.0
Future policy benefits and other policyholders liabilities.................. 14,085.4 13,997.8
Broker-dealer related payables.............................................. 950.3 1,226.9
Customers related payables.................................................. 3,980.7 2,924.3
Amounts due to reinsurers................................................... 1,070.8 1,028.3
Short-term and long-term debt............................................... 783.0 855.4
Loans from affiliates....................................................... 325.0 325.0
Income taxes payable........................................................ 2,974.2 2,895.6
Other liabilities........................................................... 1,815.8 1,735.0
Separate Accounts' liabilities.............................................. 84,801.6 69,997.0
Minority interest in equity of consolidated subsidiaries.................... 2,289.9 2,096.4
Minority interest subject to redemption rights.............................. 288.0 271.6
--------------- --------------
Total liabilities....................................................... 139,803.7 124,547.3
--------------- --------------
Commitments and contingent liabilities (Notes 2, 5, 9, 18 and 19)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value, 2.0 million shares authorized,
issued and outstanding................................................... 2.5 2.5
Capital in excess of par value.............................................. 5,139.6 4,976.3
Retained earnings........................................................... 4,507.6 4,030.8
Accumulated other comprehensive (loss) income............................... (167.3) 432.3
--------------- --------------
Total shareholder's equity.............................................. 9,482.4 9,441.9
--------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................................. $ 149,286.1 $ 133,989.2
=============== ==============
See Notes to Consolidated Financial Statements.
F-4
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004
--------------- --------------- ---------------
(IN MILLIONS)
REVENUES
Universal life and investment-type product
policy fee income........................................... $ 2,252.7 $ 1,889.3 $ 1,595.4
Premiums...................................................... 817.8 881.7 879.6
Net investment income......................................... 2,397.0 2,491.8 2,500.8
Investment gains, net......................................... 46.9 55.4 65.0
Commissions, fees and other income............................ 4,373.0 3,626.2 3,384.1
--------------- --------------- ---------------
Total revenues.......................................... 9,887.4 8,944.4 8,424.9
--------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits....................................... 1,960.5 1,859.8 1,867.1
Interest credited to policyholders' account balances.......... 1,082.5 1,065.5 1,038.1
Compensation and benefits..................................... 2,090.4 1,802.9 1,604.9
Commissions................................................... 1,394.4 1,128.7 1,017.3
Distribution plan payments.................................... 292.9 292.0 374.2
Amortization of deferred sales commissions.................... 100.4 132.0 177.4
Interest expense.............................................. 70.4 76.3 76.8
Amortization of deferred policy acquisition costs............. 689.3 601.3 472.9
Capitalization of deferred policy acquisition costs........... (1,363.4) (1,199.4) (1,015.9)
Rent expense.................................................. 204.1 165.2 185.0
Amortization of other intangible assets....................... 23.6 23.5 22.9
Other operating costs and expenses............................ 1,262.6 952.4 928.4
--------------- --------------- ---------------
Total benefits and other deductions..................... 7,807.7 6,900.2 6,749.1
--------------- --------------- ---------------
Earnings from continuing operations before
income taxes and minority interest.......................... 2,079.7 2,044.2 1,675.8
Income taxes.................................................. (427.3) (519.2) (396.9)
Minority interest in net income of consolidated subsidiaries.. (599.9) (466.9) (384.0)
--------------- --------------- ---------------
Earnings from continuing operations........................... 1,052.5 1,058.1 894.9
Earnings from discontinued operations, net of income taxes.... 26.2 15.7 6.8
(Losses) gains on disposal of discontinued operations,
net of income taxes........................................ (1.9) - 31.1
Cumulative effect of accounting changes, net of
income taxes............................................... - - (2.9)
--------------- --------------- ---------------
Net Earnings.................................................. $ 1,076.8 $ 1,073.8 $ 929.9
=============== =============== ===============
See Notes to Consolidated Financial Statements.
F-5
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004
--------------- -------------- --------------
(IN MILLIONS)
SHAREHOLDER'S EQUITY
Common stock, at par value, beginning and end of year............. $ 2.5 $ 2.5 $ 2.5
--------------- -------------- --------------
Capital in excess of par value, beginning of year................. 4,976.3 4,890.9 4,848.2
Changes in capital in excess of par value......................... 163.3 85.4 42.7
--------------- -------------- --------------
Capital in excess of par value, end of year....................... 5,139.6 4,976.3 4,890.9
--------------- -------------- --------------
Retained earnings, beginning of year.............................. 4,030.8 3,457.0 3,027.1
Net earnings...................................................... 1,076.8 1,073.8 929.9
Dividends on common stock......................................... (600.0) (500.0) (500.0)
--------------- -------------- --------------
Retained earnings, end of year.................................... 4,507.6 4,030.8 3,457.0
--------------- -------------- --------------
Accumulated other comprehensive income, beginning of year......... 432.3 874.1 892.8
Other comprehensive loss ......................................... (150.1) (441.8) (18.7)
Adjustment to initially apply SFAS No.158, net of income taxes ... (449.5) - -
--------------- -------------- --------------
Accumulated other comprehensive (loss) income, end of year........ (167.3) 432.3 874.1
--------------- -------------- --------------
TOTAL SHAREHOLDER'S EQUITY, END OF YEAR........................... $ 9,482.4 $ 9,441.9 $ 9,224.5
=============== ============== ==============
COMPREHENSIVE INCOME
Net earnings...................................................... $ 1,076.8 $ 1,073.8 $ 929.9
--------------- -------------- --------------
Change in unrealized losses, net of reclassification
adjustments.................................................... (150.1) (441.8) (31.1)
Cumulative effect of accounting changes........................... - - 12.4
--------------- -------------- --------------
Other comprehensive loss.......................................... (150.1) (441.8) (18.7)
--------------- -------------- --------------
COMPREHENSIVE INCOME.............................................. $ 926.7 $ 632.0 $ 911.2
=============== ============== ==============
See Notes to Consolidated Financial Statements.
F-6
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004
--------------- --------------- ---------------
(IN MILLIONS)
Net earnings.................................................. $ 1,076.8 $ 1,073.8 $ 929.9
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Interest credited to policyholders' account balances........ 1,082.5 1,065.5 1,038.1
Universal life and investment-type product
policy fee income......................................... (2,252.7) (1,889.3) (1,595.4)
Net change in broker-dealer and customer related
receivables/payables...................................... 117.2 (347.4) 379.6
Investment gains, net....................................... (46.9) (55.4) (65.0)
Change in deferred policy acquisition costs................. (674.1) (598.1) (543.0)
Change in future policy benefits............................ 52.7 64.4 129.3
Change in income tax payable................................ 425.9 340.5 349.6
Change in accounts payable and accrued expenses............. 85.5 23.7 (27.4)
Change in segregated cash and securities, net............... (143.2) (231.8) (203.2)
Minority interest in net income of consolidated subsidiaries 599.9 466.9 384.1
Change in fair value of guaranteed minimum income
benefit reinsurance contracts............................. 14.8 (42.6) (61.0)
Amortization of deferred sales commissions.................. 100.4 132.0 177.4
Other depreciation and amortization......................... 144.9 149.6 210.3
Amortization of other intangible assets, net................ 23.6 23.6 22.9
Losses (gains) on disposal of discontinued operations ...... 1.9 - (31.1)
Other, net.................................................. 363.5 (134.6) 14.3
--------------- --------------- ---------------
Net cash provided by (used in) operating activities........... 972.7 40.8 1,109.4
--------------- --------------- ---------------
Cash flows from investing activities:
Maturities and repayments................................... 2,962.2 2,926.2 3,341.9
Sales of investments........................................ 1,536.9 2,432.9 2,983.6
Purchases of investments.................................... (4,262.3) (5,869.1) (7,052.5)
Change in short-term investments............................ 65.6 13.8 (18.4)
Purchase of minority interest in consolidated subsidiary ... - - (410.7)
Increased in capitalized software, leasehold improvements
and EDP equipment ....................................... (146.1) (101.2) (69.3)
Other, net.................................................. (390.4) (116.3) 173.2
--------------- --------------- ---------------
Net cash used in investing activities......................... (234.1) (713.7) (1,052.2)
--------------- --------------- ---------------
F-7
AXA EQUITABLE LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004
----------------- ----------------- -----------------
(IN MILLIONS)
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................. $ 3,865.2 $ 3,816.8 $ 4,029.4
Withdrawals from and transfers to Separate Accounts....... (3,569.1) (2,779.1) (2,716.0)
Net change in short-term financings......................... 327.7 - -
Repayments of long-term debt ............................... (400.0) (400.0) -
Proceeds in loans from affiliates........................... - 325.0 -
Shareholder dividends paid.................................. (600.0) (500.0) (500.0)
Other, net.................................................. (206.5) (417.3) (130.1)
----------------- ----------------- -----------------
Net cash (used in) provided by financing activities........... (582.7) 45.4 683.3
----------------- ----------------- -----------------
Change in cash and cash equivalents........................... 155.9 (627.5) 740.5
Cash and cash equivalents, beginning of year.................. 1,112.1 1,739.6 999.1
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year........................ $ 1,268.0 $ 1,112.1 $ 1,739.6
================= ================= =================
Supplemental cash flow information:
Interest Paid............................................... $ 59.9 $ 74.5 $ 86.2
================= ================= =================
Income Taxes (Refunded) Paid................................ $ (40.8) $ 146.5 $ 154.4
================= ================= =================
See Notes to Consolidated Financial Statements.
F-8
AXA EQUITABLE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
AXA Equitable Life Insurance Company ("AXA Equitable," and collectively
with its consolidated subsidiaries the "Company") is an indirect, wholly
owned subsidiary of AXA Financial, Inc. ("AXA Financial," and
collectively with its consolidated subsidiaries, "AXA Financial Group").
AXA Financial is a wholly owned subsidiary of AXA, a French holding
company for an international group of insurance and related financial
services companies.
The Company conducts operations in two business segments: the Insurance
and Investment Management segments. The Company's management evaluates
the performance of each of these segments independently and allocates
resources based on current and future requirements of each segment.
Insurance
---------
The Insurance segment offers a variety of traditional, variable and
interest-sensitive life insurance products, variable and fixed-interest
annuity products, mutual funds and other investment products and asset
management to individuals and small and medium size businesses and
professional and trade associations. This segment includes Separate
Accounts for individual insurance and annuity products.
The Company's insurance business is conducted principally by AXA
Equitable and its wholly owned life insurance subsidiary, AXA Life and
Annuity Company ("AXA Life"), formerly The Equitable of Colorado.
Investment Management
---------------------
The Investment Management segment (formerly the Investment Services
segment) is principally comprised of the investment management business
of AllianceBernstein L.P., a Delaware limited partnership, and its
subsidiaries ("AllianceBernstein"). AllianceBernstein provides research,
diversified investment management and related services globally to a
broad range of clients. Its principal services include: (a)
institutional investments, including unaffiliated corporate and public
employee pension funds, endowment funds, domestic and foreign
institutions and governments, by means of separately managed accounts,
sub-advisory relationships, structured products, group trusts, mutual
funds and other investment vehicles, (b) retail, servicing individual
investors, primarily by means of retail mutual funds, sub-advisory
relationships in respect of mutual funds sponsored by third parties,
separately managed account programs that are sponsored by various
financial intermediaries worldwide, and other investment vehicles, (c)
private clients, including high-net-worth individuals, trusts and
estates, charitable foundations, partnerships, private and family
corporations and other entities, by means of separately managed
accounts, hedge funds, mutual funds, and other investment vehicles, and
(d) institutional research by means of in-depth independent, fundamental
research, portfolio strategy, trading and brokerage-related services.
Principal subsidiaries of AllianceBernstein include: SCB Inc., formally
known as Sanford C. Bernstein, Inc. ("Bernstein"), Sanford C. Bernstein
& Co. LLC ("SCB LLC"), Sanford C. Bernstein Limited ("SCBL") and SCB
Partners, Inc. ("SCB Partners"). This segment includes institutional
Separate Accounts principally managed by AllianceBernstein that provide
various investment options for large group pension clients, primarily
defined benefit and contribution plans, through pooled or single group
accounts.
In October 2000, AllianceBernstein acquired substantially all of the
assets and liabilities of SCB Inc (the "Bernstein Acquisition"). AXA
Financial agreed to provide liquidity to these former Bernstein
shareholders after a two-year lockout period that ended October 2002.
Since 2002, the Company acquired 18.9 million units in AllianceBernstein
L.P. ("AllianceBernstein Units") at the aggregate market price of $660.4
million from SCB Inc and SCB Partners under a preexisting agreement and
recorded additional goodwill of $217.9 million and other intangible
assets of $26.9 million. Minority interest subject to redemption rights
represents the remaining 16.3 million of private AllianceBernstein Units
issued to former Bernstein shareholders in connection with
AllianceBernstein's acquisition of Bernstein. At December 31, 2006 and
2005, the Company's consolidated economic interest in AllianceBernstein
was 45.6% and 46.3%, respectively. At December 31, 2006 and 2005,
AXA Financial Group's consolidated economic interest in
AllianceBernstein was approximately 60.3% and 61.1%, respectively. On
F-9
February 23, 2007, AXA Financial purchased another tranche of 8.16
million AllianceBernstein Units pursuant to an exercise of the
AllianceBernstein put at a purchase price of approximately $745.7
million. After the purchase, together with its ownership with other AXA
Financial Group companies, the beneficial ownership in AllianceBernstein
L.P. increased by approximately 3% to 63.3%. The remaining 8.16 million
AllianceBernstein Units may be sold to AXA Financial at the prevailing
market price no sooner than nine months after the February 23, 2007
purchase or over the following period ending October 2, 2009.
2) SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
-----------------------------------------------------
The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles in the United
States of America ("GAAP") requires management to make estimates and
assumptions (including normal, recurring accruals) that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. The
accompanying consolidated financial statements reflect all adjustments
necessary in the opinion of management to present fairly the
consolidated financial position of the Company and its consolidated
results of operations and cash flows for the periods presented.
The accompanying consolidated financial statements include the accounts
of AXA Equitable and its subsidiary engaged in insurance related
businesses (collectively, the "Insurance Group"); other subsidiaries,
principally AllianceBernstein; and those investment companies,
partnerships and joint ventures in which AXA Equitable or its
subsidiaries has control and a majority economic interest as well as
those variable interest entities ("VIEs") that meet the requirements for
consolidation.
All significant intercompany transactions and balances have been
eliminated in consolidation. The years "2006," "2005" and "2004" refer
to the years ended December 31, 2006, 2005 and 2004, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods to the current presentation. The
consolidated statements of cash flows for 2005 and 2004 have been
revised to reflect cash outflows related to capitalized software,
leasehold improvements and EDP equipment as cash used in investing
activities rather than cash used by operating activities to be
consistent with the 2006 presentation.
Accounting Changes
------------------
On December 31, 2006, the Company implemented SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans,"
requiring employers to recognize the over or under funded status of such
benefit plans as an asset or liability in the balance sheet for
reporting periods ending after December 15, 2006 and to recognize
subsequent changes in that funded status as a component of other
comprehensive income. The funded status of a plan is measured as the
difference between plan assets at fair value and the projected benefit
obligation for pension plans or the benefit obligation for any other
postretirement plan. SFAS No. 158 does not change the determination of
net periodic benefit cost or its presentation in the statement of
earnings. However, its requirements represent a significant change to
previous accounting guidance that generally delayed recognition of
certain changes in plan assets and benefit obligations in the balance
sheet and only required disclosure of the complete funded status of the
plans in the notes to the financial statements.
As required by SFAS No. 158, the $449.5 million, net of income tax and
minority interest, impact of initial adoption has been reported as an
adjustment to the December 31, 2006 balance of accumulated other
comprehensive income in the accompanying consolidated financial
statements. The consequent recognition of the funded status of its
defined benefit pension at December 31, 2006 reduced total assets by
approximately $684.2 million, due to the reduction of prepaid pension
cost of $684.2 million and decreased total liabilities by approximately
$234.7 million. The change in liabilities principally resulted from the
decrease in income taxes payable of $242.7 million partially offset by
an increase in benefit plan liabilities of $12.0 million. See Note 12
of Notes to Consolidated Financial Statements for further information.
SFAS No. 158 imposes an additional requirement, effective for fiscal
years ending after December 15, 2008, to measure plan assets and benefit
obligations as of the date of the employer's year-end balance sheet,
F-10
thereby eliminating the option to elect an earlier measurement date
alternative of not more than three months prior to that date, if used
consistently each year. This provision of SFAS No. 158 will have no
impact on the Company as it already uses a December 31 measurement date
for all of its plan assets and benefits obligations.
On January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based
Payment". To effect its adoption, the Company elected the "modified
prospective method" of transition. Under this method, prior-period
results were not restated. Prior to the adoption of SFAS No. 123(R), The
Company had elected to continue to account for stock-based compensation
in accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," 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 the Company'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 2006
and consolidated net earnings for 2006 were $46.9 million and $29.9
million lower, respectively, than if these plans had continued to be
accounted for under APB No. 25.
Under the modified prospective method, the Company 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 No. 123(R) would have been reflected by the Company
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), the Company elected the
"short-cut" transition alternative for approximating the historical pool
of windfall tax benefits available in shareholder's equity at January 1,
2006 as provided by the Financial Accounting Standards Board (the
"FASB") in FASB Staff Position ("FSP") No. 123(R)-3, "Transition
Election Related to Accounting For the Tax Effects of Share-Based
Payment Awards". 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 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 2006, additional
windfall tax benefits resulted from employee exercises of stock option
awards.
On January 1, 2006, the Company adopted the provisions of SFAS No. 154,
"Accounting Changes and Error Corrections," a replacement of APB No. 20,
"Accounting Changes," and SFAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements". SFAS No. 154 applies to all voluntary
changes in accounting principle as well as to changes required by an
accounting pronouncement that does not include transition provisions. To
enhance comparability, this statement requires retrospective application
to prior periods' financial statements of changes in accounting
principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. The
cumulative effect of the change is reported in the carrying value of
assets and liabilities as of the first period presented, with the offset
applied to opening retained earnings. Each period presented is adjusted
to show the period specific effects of the change. Only direct effects
of the change will be retrospectively recognized; indirect effects will
be recognized in the period of change. SFAS No. 154 carries forward
without change APB No. 20's guidance for reporting the correction of an
error and a change in accounting estimate as well as SFAS No. 3's
provisions governing reporting accounting changes in interim financial
statements. The adoption of SFAS No. 154 did not have an impact on the
Company's results of operations or financial position.
In third quarter 2004, the Company began to implement FSP No. 106-2,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug Improvement and Modernization Act of 2003", that
F-11
provides guidance on employers' accounting for the effects of the
Medicare Prescription Drug, Improvement and Modernization Act of 2003
("MMA") signed into law in December 2003. The MMA introduced a
prescription drug benefit under Medicare Part D that would go into
effect in 2006 as well as a Federal subsidy to employers whose plans
provide an "actuarially equivalent" prescription drug benefit. FSP No.
106-2 required the effects of the MMA to be reflected in measurements of
the accumulated postretirement benefits obligation and net periodic
postretirement benefit cost made on or after the date of enactment. As
permitted by FSP No. 106-2, the Company initially elected to defer these
remeasurements and to provide required disclosures pending regulations
regarding the determination of eligibility for the Federal subsidy under
the MMA. Following consideration of regulations and guidance issued by
the Center for Medicare and Medicaid Services in fourth quarter 2005,
management and its actuarial advisors concluded that the prescription
drug benefits provided under the Company's retiree medical plans are
actuarially equivalent to the new Medicare prescription drug benefits.
Consequently, the estimated subsidy has been reflected in measurements
of the accumulated postretirement benefits obligations for these plans
as of January 1, 2005, and the resulting aggregate reduction of $51.9
million was accounted for prospectively as an actuarial experience gain
in accordance with FSP No. 106-2. The impact of the MMA, including the
effect of the subsidy, resulted in a decrease in the annual net periodic
postretirement benefits costs for 2005 of approximately $7.4 million.
At March 31, 2004, the Company completed its transition to the
consolidation and disclosure requirements of FASB Interpretation ("FIN")
46(R), "Consolidation of Variable Interest Entities, Revised".
At December 31, 2006 and 2005, the Insurance Group's General Account
held $5.8 million of investment assets issued by VIEs and determined to
be significant variable interests under FIN 46(R). At December 31, 2006
and 2005, as reported in the consolidated balance sheet, these
investments included $4.7 million of fixed maturities (collateralized
debt and loan obligations) and $1.1 million of other equity investments
(principally investment limited partnership interests) and are subject
to ongoing review for impairment in value. These VIEs do not require
consolidation because management has determined that the Insurance Group
is not the primary beneficiary. These variable interests at December 31,
2006 represent the Insurance Group's maximum exposure to loss from its
direct involvement with the VIEs. The Insurance Group has no further
economic interest in these VIEs in the form of related guarantees,
commitments, derivatives, credit enhancements or similar instruments and
obligations.
Management of AllianceBernstein has reviewed its investment management
agreements and its investments in and other financial arrangements with
certain entities that hold client assets under management to determine
the entities that AllianceBernstein is required to consolidate under FIN
46(R). These include certain mutual fund products domiciled in
Luxembourg, India, Japan, Singapore and Australia (collectively, the
"Offshore Funds"), hedge funds, structured products, group trusts and
joint ventures.
AllianceBernstein derived no direct benefit from client assets under
management of these entities other than investment management fees and
cannot utilize those assets in its operations.
AllianceBernstein has significant variable interests in certain other
VIEs with approximately $226.4 million in client assets under
management. However, these VIEs do not require consolidation because
management has determined that AllianceBernstein is not the primary
beneficiary. AllianceBernstein's maximum exposure to loss in these
entities is limited to its investments in and prospective investment
management fees earned in these entities.
Effective January 1, 2004, the Company adopted the American Institute of
Certified Public Accountants ("AICPA") Statement of Position ("SOP")
03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts." SOP
03-1 required a change in the Company's accounting policies relating to
(a) general account interests in separate accounts, (b) assets and
liabilities associated with market value adjusted fixed rate investment
options available in certain variable annuity contracts, (c) liabilities
related to group pension participating contracts, and (d) liabilities
related to certain mortality and annuitization benefits, such as the no
lapse guarantee feature contained in variable and interest-sensitive
life policies.
The adoption of SOP 03-1 required changes in several of the Company's
accounting policies relating to separate account assets and liabilities.
The Company now reports the General Account's interests in separate
accounts as trading account securities in the consolidated balance
sheet; prior to the adoption of SOP 03-1, such interests were included
in Separate Accounts' assets. Also, the assets and liabilities of two
Separate Accounts are now presented and accounted for as General Account
assets and liabilities.
F-12
Investment assets in these Separate Accounts principally consist of
fixed maturities that are classified as available for sale in the
accompanying consolidated financial statements. These two Separate
Accounts hold assets and liabilities associated with market value
adjusted fixed rate investment options available in certain variable
annuity contracts. In addition, liabilities associated with the market
value adjustment feature are now reported at the accrued account
balance. Prior to the adoption of SOP 03-1, such liabilities had been
reported at market adjusted value.
Prior to the adoption of SOP 03-1, the liabilities for group pension
participating contracts were adjusted only for changes in the fair value
of certain related investment assets that were reported at fair value in
the balance sheet (including fixed maturities and equity securities
classified as available for sale, but not equity real estate or mortgage
loans) with changes in the liabilities recorded directly in Accumulated
other comprehensive income to offset the unrealized gains and losses on
the related assets. SOP 03-1 required an adjustment to the liabilities
for group pension participating contracts to reflect the fair value of
all the assets on which those contracts' returns are based, regardless
of whether those assets are reported at fair value in the balance sheet.
Changes in the liability related to fluctuations in asset fair values
are now reported as Interest credited to policyholders' account balances
in the consolidated statements of earnings.
In addition, the adoption of SOP 03-1 resulted in a change in the method
of determining liabilities associated with the no lapse guarantee
feature contained in variable and interest-sensitive life contracts.
While both the Company's previous method of establishing the no lapse
guarantee reserve and the SOP 03-1 method are based on accumulation of a
portion of the charges for the no lapse guarantee feature, SOP 03-1
specifies a different approach for identifying the portion of the fee to
be accrued and establishing the related reserve.
The adoption of SOP 03-1 as of January 1, 2004 resulted in a decrease in
2004 net earnings of $2.9 million and an increase in other comprehensive
income of $12.4 million related to the cumulative effect of the required
changes in accounting. The determination of liabilities associated with
group pension participating contracts and mortality and annuitization
benefits, as well as related impacts on deferred acquisition costs, is
based on models that involve numerous estimates and subjective
judgments. There can be no assurance that the ultimate actual experience
will not differ from management's estimates.
New Accounting Pronouncements
-----------------------------
On September 15, 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements". SFAS No. 157 establishes a single authoritative
definition of fair value, sets out a framework for measuring fair value,
and requires additional disclosures about fair value measurements. It
applies only to fair value measurements that are already required or
permitted by other accounting standards, except for measurements of
share-based payments and measurements that are similar to, but not
intended to be, fair value. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007,
with earlier application encouraged. Management is currently assessing
the potential impacts of adoption of SFAS No. 157.
On July 13, 2006, the FASB issued FIN 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 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 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 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 tax positions
of AXA Financial Group at January 1, 2007. The cumulative effect of
applying FIN 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 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 is currently assessing the potential impacts of
adoption of FIN 48.
On September 19, 2005, the AICPA released SOP 05-1, "Accounting by
Insurance Enterprises for Deferred Acquisition Costs in Connection with
Modifications or Exchanges of Insurance Contracts". The SOP requires
identification of transactions that result in a substantial change in an
insurance contract. Transactions subject to review include internal
contract exchanges, contract modifications via amendment, rider or
F-13
endorsement and elections of benefits, features or rights contained
within the contract. If determined that a substantial change has
occurred, the related deferred policy acquisition costs ("DAC")/VOBA and
other related balances must be written off. The SOP is effective for
transactions occurring in fiscal years beginning after December 15,
2006, with earlier adoption encouraged. Restatement of previously issued
annual financial statements is not permitted, and disclosure of the pro
forma effects of retroactive application or the pro forma effect on the
year of adoption is not required. The adoption of SOP 05-1 is not
expected to have a material impact on the Company's results of
operations or financial position.
Closed Block
------------
As a result of demutualization, the Closed Block was established in 1992
for the benefit of certain individual participating policies that were
in force on that date. Assets, liabilities and earnings of the Closed
Block are specifically identified to support its participating
policyholders.
Assets allocated to the Closed Block inure solely to the benefit of the
Closed Block policyholders and will not revert to the benefit of AXA
Equitable. No reallocation, transfer, borrowing or lending of assets can
be made between the Closed Block and other portions of AXA Equitable's
General Account, any of its Separate Accounts or any affiliate of AXA
Equitable without the approval of the New York Superintendent of
Insurance (the "Superintendent"). Closed Block assets and liabilities
are carried on the same basis as similar assets and liabilities held in
the General Account.
The excess of Closed Block liabilities over Closed Block assets
(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, the Company has
developed an actuarial calculation of the expected timing of the Closed
Block earnings.
If the actual cumulative earnings from the Closed Block are greater than
the expected cumulative earnings, only the expected earnings will be
recognized in net income. Actual cumulative earnings in excess of
expected cumulative earnings at any point in time are recorded as a
policyholder dividend obligation because they will ultimately be paid to
Closed Block policyholders as an additional policyholder dividend unless
offset by future performance that is less favorable than originally
expected. If a policyholder dividend obligation has been previously
established and the actual Closed Block earnings in a subsequent period
are less than the expected earnings for that period, the policyholder
dividend obligation would be reduced (but not below zero). If, over the
period the policies and contracts in the Closed Block remain in force,
the actual cumulative earnings of the Closed Block are less than the
expected cumulative earnings, only actual earnings would be recognized
in income from continuing operations. If the Closed Block has
insufficient funds to make guaranteed policy benefit payments, such
payments will be made from assets outside the Closed Block.
Many expenses related to Closed Block operations, including amortization
of DAC, are charged to operations outside of the Closed Block;
accordingly, net revenues of the Closed Block do not represent the
actual profitability of the Closed Block operations. Operating costs and
expenses outside of the Closed Block are, therefore, disproportionate to
the business outside of the Closed Block.
Investments
-----------
The carrying values of fixed maturities identified as available for sale
are reported at estimated fair value. Changes in estimated fair value
are reported in comprehensive income. The amortized cost of fixed
maturities is adjusted for impairments in value deemed to be other than
temporary. The redeemable preferred stock investments reported in fixed
maturities include real estate investment trusts ("REIT") perpetual
preferred stock, other perpetual preferred stock and redeemable
preferred stock. These securities may not have a stated maturity, may
not be cumulative and do not provide for mandatory redemption by the
issuer.
Mortgage loans on real estate are stated at unpaid principal balances,
net of unamortized discounts and valuation allowances. Valuation
allowances are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or on its
collateral value if the loan is collateral dependent. However, if
foreclosure is or becomes probable, the collateral value measurement
method is used.
Impaired mortgage loans without provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
F-14
investment. Interest income earned on loans where the collateral value
is used to measure impairment is recorded on a cash basis. Interest
income on loans where the present value method is used to measure
impairment is accrued on the net carrying value amount of the loan at
the interest rate used to discount the cash flows. Changes in the
present value attributable to changes in the amount or timing of
expected cash flows are reported as investment gains or losses.
Real estate held for the production of income, including real estate
acquired in satisfaction of debt, is stated at depreciated cost less
valuation allowances. At the date of foreclosure (including in-substance
foreclosure), real estate acquired in satisfaction of debt is valued at
estimated fair value. Impaired real estate is written down to fair value
with the impairment loss being included in investment gains (losses),
net.
Depreciation of real estate held for production of income is computed
using the straight-line method over the estimated useful lives of the
properties, which generally range from 40 to 50 years.
Valuation allowances are netted against the asset categories to which
they apply.
Policy loans are stated at unpaid principal balances.
Partnerships, investment companies and joint venture interests in which
the Company has control and a majority economic interest (that is,
greater than 50% of the economic return generated by the entity) or
those that meet FIN 46(R) requirements for consolidation are
consolidated; those in which the Company does not have control and a
majority economic interest and those that do not meet FIN 46(R)
requirements for consolidation are reported on the equity basis of
accounting and are included either with equity real estate or other
equity investments, as appropriate.
Equity securities include common stock and non-redeemable preferred
stock classified as either trading or available for sale securities, are
carried at estimated fair value and are included in other equity
investments.
Trading securities, which include equity securities and fixed
maturities, are carried at estimated fair value.
Short-term investments are stated at amortized cost, which approximates
fair value, and are included with other invested assets.
Cash and cash equivalents includes cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity
of three months or less.
All securities owned as well as United States government and agency
securities, mortgage-backed securities, futures and forwards
transactions are recorded in the consolidated financial statements on a
trade date basis.
Derivatives
-----------
The Company primarily uses derivatives for asset/liability risk
management, for hedging individual securities and certain equity
exposures and to reduce its exposure to interest rate fluctuations on
its long-term debt obligations. Various derivative instruments are used
to achieve these objectives, including interest rate floors, futures and
interest rate swaps. None of the derivatives were designated as
qualifying hedges under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities".
The Insurance Group issues certain variable annuity products with
Guaranteed Minimum Death Benefit ("GMBD") and Guaranteed Minimum Income
Benefit ("GMIB") features. The risk associated with the GMDB feature is
that under-performance of the financial markets could result in GMDB
benefits, in the event of death, being higher than what accumulated
policyholder account balances would support. The risk associated with
the GMIB feature is that under-performance of the financial markets
could result in GMIB benefits, in the event of election, being higher
than what accumulated policyholders account balances would support. For
both GMDB and GMIB, the Company retains basis risk and risk associated
with actual versus expected assumptions for mortality, lapse and
election rate. The Company regularly enters into futures contracts to
hedge such risks. The futures contracts are managed to correlate with
changes in the value of the GMDB and GMIB feature that result from
financial markets movements. In addition, the Company has purchased
reinsurance contracts to mitigate the risks associated with the impact
of potential market fluctuations on future policyholder elections of
GMIB features contained in certain annuity contracts issued by the
Company. Reinsurance contracts covering GMIB exposure are considered
derivatives under SFAS No. 133, and, therefore, are required to be
reported in the balance sheet at their fair value. GMIB reinsurance fair
F-15
values are reported in the consolidated balance sheets in Other assets.
Changes in GMIB reinsurance fair values are reflected in Commissions,
fees and other income in the consolidated statements of earnings. Since
there is no readily available market for GMIB reinsurance contracts, the
determination of their fair values is based on models which involve
numerous estimates and subjective judgments including those regarding
expected market rates of return and volatility, GMIB election rates,
contract surrender rates and mortality experience. There can be no
assurance that ultimate actual experience will not differ from
management's estimates. See Note 8 of Notes to Consolidated Financial
Statements.
Margins on individual insurance and annuity contracts are affected by
interest rate fluctuations. If interest rates fall, crediting interest
rates and dividends would be adjusted subject to competitive pressures.
In addition, policies are subject to minimum rate guarantees. To hedge
exposure to lower interest rates, the Company has used interest rate
floors.
The Company is exposed to equity market fluctuations through investments
in Separate Accounts. The Company enters into exchange traded equity
futures contracts to minimize such risk.
The Company is exposed to counterparty risk attributable to hedging
transactions entered into with counterparties. Exposure to credit risk
is controlled with respect to each counterparty through a credit
appraisal and approval process. Each counterparty is currently rated 1
by the National Association of Insurance Commissioners ("NAIC").
All derivatives outstanding at December 31, 2006 and 2005 are recognized
on the balance sheet at their fair values and all outstanding
equity-based and treasury futures contracts were exchange-traded and are
net settled daily. All gains and losses on derivative financial
instruments are reported in earnings.
Net Investment Income, Investment Gains (Losses), Net and Unrealized
--------------------------------------------------------------------
Investment Gains (Losses)
-------------------------
Net investment income and realized investment gains (losses), net
(together, "investment results") related to certain participating group
annuity contracts which are passed through to the contractholders are
offset by amounts reflected as interest credited to policyholders'
account balances.
Realized investment gains (losses) are determined by identification with
the specific asset and are presented as a component of revenue. Changes
in the valuation allowances are included in investment gains or losses.
Realized and unrealized holding gains (losses) on trading securities are
reflected in net investment income.
Unrealized investment gains and losses on fixed maturities and equity
securities available for sale held by the Company are accounted for as a
separate component of accumulated comprehensive income, net of related
deferred income taxes, amounts attributable to certain pension
operations principally consisting of group non-participating wind-up
annuity products ("Wind-up Annuities"), Closed Block policyholders
dividend obligation and DAC related to universal life and
investment-type products and participating traditional life contracts.
Fair Value of Other Financial Instruments
-----------------------------------------
The Company defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases
where quoted market prices are not available, fair values are estimated
using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument,
including estimates of the timing and amount of expected future cash
flows and the credit standing of counterparties. Such estimates do not
reflect any premium or discount that could result from offering for sale
at one time the Company's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates
cannot be substantiated by comparison to independent markets, nor can
the disclosed value be realized in immediate settlement of the
instrument.
Certain financial instruments are excluded from fair value disclosures,
particularly insurance liabilities other than financial guarantees and
investment contracts. Fair market values of off-balance-sheet financial
instruments of the Insurance Group were not material at December 31,
2006 and 2005.
F-16
Fair values for mortgage loans on real estate are estimated by
discounting future contractual cash flows using interest rates at which
loans with similar characteristics and credit quality would be made.
Fair values for foreclosed mortgage loans and problem mortgage loans are
limited to the estimated fair value of the underlying collateral if
lower.
Fair values of policy loans are estimated by discounting the face value
of the loans from the time of the next interest rate review to the
present, at a rate equal to the excess of the current estimated market
rates over the current interest rate charged on the loan.
The estimated fair values for the Company's association plan contracts,
supplementary contracts not involving life contingencies ("SCNILC") and
annuities certain, which are included in policyholders' account
balances, and guaranteed interest contracts are estimated using
projected cash flows discounted at rates reflecting expected current
offering rates.
The fair values for variable deferred annuities and single premium
deferred annuities, included in policyholders' account balances, are
estimated as the discounted value of projected account values. Current
account values are projected to the time of the next crediting rate
review at the current crediting rates and are projected beyond that date
at the greater of current estimated market rates offered on new policies
or the guaranteed minimum crediting rate. Expected cash flows and
projected account values are discounted back to the present at the
current estimated market rates.
Fair values for long-term debt are determined using published market
values, where available, or contractual cash flows discounted at market
interest rates. The estimated fair values for non-recourse mortgage debt
are determined by discounting contractual cash flows at a rate that
takes into account the level of current market interest rates and
collateral risk. The estimated fair values for recourse mortgage debt
are determined by discounting contractual cash flows at a rate based
upon current interest rates of other companies with credit ratings
similar to the Company. The Company's carrying value of short-term
borrowings approximates their estimated fair value.
Recognition of Insurance Income and Related Expenses
----------------------------------------------------
Premiums from universal life and investment-type contracts are reported
as deposits to policyholders' account balances. Revenues from these
contracts consist of amounts assessed during the period against
policyholders' account balances for mortality charges, policy
administration charges and surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the
period in excess of related policyholders' account balances.
Premiums from participating and non-participating traditional life and
annuity policies with life contingencies generally are recognized as
income when due. Benefits and expenses are matched with such income so
as to result in the recognition of profits over the life of the
contracts. This match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period
over which benefits are provided, premiums are recorded as revenue when
due with any excess profit deferred and recognized in income in a
constant relationship to insurance in-force or, for annuities, the
amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
DAC
---
Acquisition costs that vary with and are primarily related to the
acquisition of new and renewal insurance business, including
commissions, underwriting, agency and policy issue expenses, are
deferred. DAC is subject to recoverability testing at the time of policy
issue and loss recognition testing at the end of each accounting period.
For universal life products and investment-type products, DAC is
amortized over the expected total life of the contract group as a
constant percentage of estimated gross profits arising principally from
investment results, Separate Account fees, mortality and expense margins
and surrender charges based on historical and
F-17
anticipated future experience, updated at the end of each accounting
period. The effect on the amortization of DAC of revisions to estimated
gross profits is reflected in earnings in the period such estimated
gross profits are revised. A decrease in expected gross profits would
accelerate DAC amortization. Conversely, an increase in expected gross
profits would slow DAC amortization. The effect on the DAC asset that
would result from realization of unrealized gains (losses) is recognized
with an offset to accumulated comprehensive income in consolidated
shareholder's equity as of the balance sheet date.
A significant assumption in the amortization of DAC on variable and
interest-sensitive life insurance and variable annuities relates to
projected future Separate Account performance. Management sets expected
future gross profit assumptions related to Separate Account performance
using a long-term view of expected average market returns by applying a
reversion to the mean approach. In applying this approach to develop
estimates of future returns, it is assumed that the market will return
to an average gross long-term return estimate, developed with reference
to historical long-term equity market performance and subject to
assessment of the reasonableness of resulting estimates of future return
assumptions. For purposes of making this reasonableness assessment,
management has set limitations as to maximum and minimum future rate of
return assumptions, as well as a limitation on the duration of use of
these maximum or minimum rates of return. Currently, the average gross
long-term annual return estimate is 9.0% (6.8% net of product weighted
average Separate Account fees), and the gross maximum and minimum annual
rate of return limitations are 15.0% (12.8% net of product weighted
average Separate Account fees) and 0% (-2.2% net of product weighted
average Separate Account fees), respectively. The maximum duration over
which these rate limitations may be applied is 5 years. This approach
will continue to be applied in future periods. If actual market returns
continue at levels that would result in assuming future market returns
of 15% for more than 5 years in order to reach the average gross
long-term return estimate, the application of the 5 year maximum
duration limitation would result in an acceleration of DAC amortization.
Conversely, actual market returns resulting in assumed future market
returns of 0% for more than 5 years would result in a required
deceleration of DAC amortization. As of December 31, 2006, current
projections of future average gross market returns assume a 0.5% return
for 2007, which is within the maximum and minimum limitations, and
assume a reversion to the mean of 9% after 7 quarters.
In addition, projections of future mortality assumptions related to
variable and interest-sensitive life products are based on a long-term
average of actual experience. This assumption is updated quarterly to
reflect recent experience as it emerges. Improvement of life mortality
in future periods from that currently projected would result in future
deceleration of DAC amortization. Conversely, deterioration of life
mortality in future periods from that currently projected would result
in future acceleration of DAC amortization. Generally, life mortality
experience has been improving in recent years.
Other significant assumptions underlying gross profit estimates relate
to contract persistency and general account investment spread.
For participating traditional life policies (substantially all of which
are in the Closed Block), DAC is amortized over the expected total life
of the contract group as a constant percentage based on the present
value of the estimated gross margin amounts expected to be realized over
the life of the contracts using the expected investment yield. At
December 31, 2006, the average rate of assumed investment yields,
excluding policy loans, was 6.0% grading to 6.5% over 10 years.
Estimated gross margin includes anticipated premiums and investment
results less claims and administrative expenses, changes in the net
level premium reserve and expected annual policyholder dividends. The
effect on the amortization of DAC of revisions to estimated gross
margins is reflected in earnings in the period such estimated gross
margins are revised. The effect on the DAC asset that would result from
realization of unrealized gains (losses) is recognized with an offset to
accumulated comprehensive income in consolidated shareholder's equity as
of the balance sheet date.
For non-participating traditional life policies, DAC is amortized in
proportion to anticipated premiums. Assumptions as to anticipated
premiums are estimated at the date of policy issue and are consistently
applied during the life of the contracts. Deviations from estimated
experience are reflected in earnings in the period such deviations
occur. For these contracts, the amortization periods generally are for
the total life of the policy.
Contractholder Bonus Interest Credits
-------------------------------------
Contractholder bonus interest credits are offered on certain deferred
annuity products in the form of either immediate bonus interest credited
or enhanced interest crediting rates. The interest crediting expense
F-18
associated with these contractholder bonus interest credits is deferred
and amortized over the lives of the underlying contracts in a manner
consistent with the amortization of DAC. Unamortized balances are
included in Other assets.
Policyholders' Account Balances and Future Policy Benefits
----------------------------------------------------------
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account
values represent an accumulation of gross premium payments plus credited
interest less expense and mortality charges and withdrawals.
AXA Equitable issues certain variable annuity products with a GMDB
feature, guaranteed minimum accumulation benefits ("GMAB") and
guaranteed minimum withdrawal benefits for life ("WBL"). AXA Equitable
also issues certain variable annuity products that contain a GMIB
feature which, if elected by the policyholder after a stipulated waiting
period from contract issuance, guarantees a minimum lifetime annuity
based on predetermined annuity purchase rates that may be in excess of
what the contract account value can purchase at then-current annuity
purchase rates. This minimum lifetime annuity is based on predetermined
annuity purchase rates applied to a guaranteed minimum income benefit
base. Reserves for GMDB and GMIB obligations are calculated on the basis
of actuarial assumptions related to projected benefits and related
contract charges generally over the lives of the contracts using
assumptions consistent with those used in estimating gross profits for
purposes of amortizing DAC. The determination of this estimated
liability is based on models which involve numerous estimates and
subjective judgments, including those regarding expected market rates of
return and volatility, contract surrender rates, mortality experience,
and, for GMIB, GMIB election rates. Assumptions regarding Separate
Account performance used for purposes of this calculation are set using
a long-term view of expected average market returns by applying a
reversion to the mean approach, consistent with that used for DAC
amortization. There can be no assurance that ultimate actual experience
will not differ from management's estimates.
For reinsurance contracts other than those covering GMIB exposure,
reinsurance recoverable balances are calculated using methodologies and
assumptions that are consistent with those used to calculate the direct
liabilities.
For participating traditional life policies, future policy benefit
liabilities are calculated using a net level premium method on the basis
of actuarial assumptions equal to guaranteed mortality and dividend fund
interest rates. The liability for annual dividends represents the
accrual of annual dividends earned. Terminal dividends are accrued in
proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy
benefit liabilities are estimated using a net level premium method on
the basis of actuarial assumptions as to mortality, persistency and
interest established at policy issue. Assumptions established at policy
issue as to mortality and persistency are based on the Insurance Group's
experience that, together with interest and expense assumptions,
includes a margin for adverse deviation. When the liabilities for future
policy benefits plus the present value of expected future gross premiums
for a product are insufficient to provide for expected future policy
benefits and expenses for that product, DAC is written off and
thereafter, if required, a premium deficiency reserve is established by
a charge to earnings. Benefit liabilities for traditional annuities
during the accumulation period are equal to accumulated contractholders'
fund balances and, after annuitization, are equal to the present value
of expected future payments. Interest rates used in establishing such
liabilities range from 2.0% to 10.9% for life insurance liabilities and
from 2.25% to 8.7% for annuity liabilities.
Individual health benefit liabilities for active lives are estimated
using the net level premium method and assumptions as to future
morbidity, withdrawals and interest. Benefit liabilities for disabled
lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
While management believes its disability income ("DI") reserves have
been calculated on a reasonable basis and are adequate, there can be no
assurance reserves will be sufficient to provide for future liabilities.
F-19
Policyholders' Dividends
------------------------
The amount of policyholders' dividends to be paid (including dividends
on policies included in the Closed Block) is determined annually by AXA
Equitable's board of directors. The aggregate amount of policyholders'
dividends is related to actual interest, mortality, morbidity and
expense experience for the year and judgment as to the appropriate level
of statutory surplus to be retained by AXA Equitable.
At December 31, 2006, participating policies, including those in the
Closed Block, represent approximately 4.4% ($9.1 billion) of directly
written life insurance in-force, net of amounts ceded.
Separate Accounts
-----------------
Generally, Separate Accounts established under New York State Insurance
Law are not chargeable with liabilities that arise from any other
business of the Insurance Group. Separate Accounts assets are subject to
General Account claims only to the extent Separate Accounts assets
exceed Separate Accounts liabilities. Assets and liabilities of the
Separate Accounts represent the net deposits and accumulated net
investment earnings less fees, held primarily for the benefit of
contractholders, and for which the Insurance Group does not bear the
investment risk. Separate Accounts' assets and liabilities are shown on
separate lines in the consolidated balance sheets. Assets held in the
Separate Accounts are carried at quoted market values or, where quoted
values are not readily available, at estimated fair values as determined
by the Insurance Group. The assets and liabilities of three Separate
Accounts are presented and accounted for as General Account assets and
liabilities due to the fact that not all of the investment performance
in those Separate Accounts is passed through to policyholders. Two of
those Separate Accounts were reclassified to the General Account in
connection with the adoption of SOP 03-1 as of January 1, 2004.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate
Accounts liabilities and are not reported in revenues in the
consolidated statements of earnings. For 2006, 2005 and 2004, investment
results of such Separate Accounts were gains of $5,689.1 million,
$3,409.5 million and $2,191.4 million, respectively.
Deposits to Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges on all policies including those
funded by Separate Accounts are included in revenues.
Recognition of Investment Management Revenues and Related Expenses
------------------------------------------------------------------
Commissions, fees and other income principally include Investment
Management advisory and service fees. Investment Management advisory and
service base fees, generally calculated as a percentage, referred to as
basis points ("BPs"), of assets under management, are recorded as
revenue as the related services are performed; they include brokerage
transactions charges received by SCB LLC, for certain retail, private
client and institutional investment client transactions. Certain
investment advisory contracts provide for a performance-based fee, in
addition to or in lieu of a base fee, that is calculated as either a
percentage of absolute investment results or a percentage of the related
investment results in excess of a stated benchmark over a specified
period of time. Performance-based fees are recorded as revenue at the
end of each measurement period. Institutional research services revenue
consists of brokerage transaction charges received by SCB LLC and SCBL,
for in-depth research and other services provided to institutional
investors. Brokerage transaction charges earned and related expenses are
recorded on a trade date basis. Distribution revenues and shareholder
servicing fees are accrued as earned.
Commissions paid to financial intermediaries in connection with the sale
of shares of open-end AllianceBernstein mutual funds sold without a
front-end sales charge are capitalized as deferred sales commissions and
amortized over periods not exceeding five and one-half years, the
periods of time during which the deferred sales commissions are
generally recovered from distribution services fees received from those
funds and from contingent deferred sales commissions ("CDSC") received
from shareholders of those funds upon the redemption of their shares.
CDSC cash recoveries are recorded as reductions of unamortized deferred
sales commissions when received.
AllianceBernstein's management tests the deferred sales commission asset
for recoverability quarterly. AllianceBernstein's management determines
recoverability by estimating undiscounted future cash flows to be
realized from this asset, as compared to its recorded amount, as well as
the estimated remaining life of the deferred sales commission asset over
which undiscounted future cash flows are expected to be received.
F-20
Undiscounted future cash flows consist of ongoing distribution services
fees and CDSC. Distribution services fees are calculated as a percentage
of average assets under management related to back-end load shares. CDSC
is based on the lower of cost or current value, at the time of
redemption, of back-end load shares redeemed and the point at which
redeemed during the applicable minimum holding period under the mutual
fund distribution system.
Significant assumptions utilized to estimate future average assets under
management and undiscounted future cash flows from back-end load shares
include expected future market levels and redemption rates. Market
assumptions are selected using a long-term view of expected average
market returns based on historical returns of broad market indices.
Future redemption rate assumptions are determined by reference to actual
redemption experience over the one-year, three-year and five-year
periods ended December 31, 2006. These assumptions are updated
periodically. Estimates of undiscounted future cash flows and the
remaining life of the deferred sales commission asset are made from
these assumptions and the aggregate undiscounted cash flows are compared
to the recorded value of the deferred sales commission asset. If
AllianceBernstein's management determines in the future that the
deferred sales commission asset is not recoverable, an impairment
condition would exist and a loss would be measured as the amount by
which the recorded amount of the asset exceeds its estimated fair value.
Estimated fair value is determined using AllianceBernstein's
management's best estimate of future cash flows discounted to a present
value amount.
Goodwill and Other Intangible Assets
------------------------------------
Goodwill represents the excess of the purchase price over the fair value
of identifiable assets of acquired companies, and relates principally to
the Bernstein Acquisition and purchases of AllianceBernstein units.
Goodwill is tested annually for impairment.
Intangible assets related to the Bernstein Acquisition and purchases of
AllianceBernstein units include costs assigned to contracts of
businesses acquired. These costs continue to be amortized on a
straight-line basis over estimated useful lives of twenty years.
Other Accounting Policies
-------------------------
Capitalized internal-use software is amortized on a straight-line basis
over the estimated useful life of the software.
AXA Financial and certain of its consolidated subsidiaries, including
the Company, file a consolidated Federal income tax return. Current
Federal income taxes are charged or credited to operations based upon
amounts estimated to be payable or recoverable as a result of taxable
operations for the current year. Deferred income tax assets and
liabilities are recognized based on the difference between financial
statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
Discontinued operations include real estate held-for-sale.
Real estate investments meeting the following criteria are classified as
real estate held-for-sale:
o Management having the authority to approve the action commits the
organization to a plan to sell the property.
o The property is available for immediate sale in its present
condition subject only to terms that are usual and customary
for the sale of such assets.
o An active program to locate a buyer and other actions required
to complete the plan to sell the asset have been initiated and
are continuing.
o The sale of the asset is probable and transfer of the asset is
expected to qualify for recognition as a completed sale within
one year.
o The asset is being actively marketed for sale at a price that
is reasonable in relation to its current fair value.
o Actions required to complete the plan indicate that it is
unlikely that significant changes to the plan will be made or
that the plan will be withdrawn.
Real estate held-for-sale is stated at depreciated cost less valuation
allowances. Valuation allowances on real estate held-for-sale are
computed using the lower of depreciated cost or current estimated fair
value, net of disposition costs. Depreciation is discontinued on real
estate held-for-sale.
F-21
Real estate held-for-sale is included in the Other assets line in the
consolidated balance sheets. The results of operations for real estate
held-for-sale in each of the three years ended December 31, 2006 were
not significant.
3) INVESTMENTS
Fixed Maturities and Equity Securities
--------------------------------------
The following tables provide additional information relating to fixed
maturities and equity securities:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------------- -------------- --------------- --------------
(IN MILLIONS)
DECEMBER 31, 2006
-----------------
Fixed Maturities:
Available for Sale:
Corporate..................... $ 23,023.3 $ 690.4 $ 264.5 $ 23,449.2
Mortgage-backed............... 1,931.1 2.7 38.3 1,895.5
U.S. Treasury, government
and agency securities....... 1,284.3 29.9 10.4 1,303.8
States and political
subdivisions................ 170.2 17.3 .9 186.6
Foreign governments........... 219.2 38.1 .3 257.0
Redeemable preferred stock.... 1,879.8 78.8 19.6 1,939.0
--------------- -------------- --------------- --------------
Total Available for Sale.... $ 28,507.9 $ 857.2 $ 334.0 $ 29,031.1
=============== ============== =============== ==============
Equity Securities:
Available for sale.............. $ 95.7 $ 2.2 $ .9 $ 97.0
Trading securities.............. 408.0 35.4 9.9 433.5
--------------- -------------- --------------- --------------
Total Equity Securities........... $ 503.7 $ 37.6 $ 10.8 $ 530.5
=============== ============== =============== ==============
December 31, 2005
-----------------
Fixed Maturities:
Available for Sale:
Corporate..................... $ 23,222.8 $ 977.4 $ 190.7 $ 24,009.5
Mortgage-backed............... 2,386.3 8.3 39.3 2,355.3
U.S. Treasury, government
and agency securities....... 1,448.7 37.5 7.6 1,478.6
States and political
subdivisions................ 193.4 19.1 .3 212.2
Foreign governments........... 238.2 40.9 .1 279.0
Redeemable preferred stock.... 1,605.5 104.9 10.2 1,700.2
--------------- -------------- --------------- --------------
Total Available for Sale.... $ 29,094.9 $ 1,188.1 $ 248.2 $ 30,034.8
=============== ============== =============== ==============
Equity Securities:
Available for sale.............. $ 45.7 $ 2.1 $ .4 $ 47.4
Trading securities.............. 262.5 24.5 3.2 283.8
--------------- -------------- --------------- --------------
Total Equity Securities........... $ 308.2 $ 26.6 $ 3.6 $ 331.2
=============== ============== =============== ==============
At December 31, 2006 and 2005 respectively, the Company had trading
fixed maturities with a amortized cost of $30.5 million and $30.5
million and carrying value of $31.6 million and $30.5 million. Gross
unrealized gains on trading fixed maturities were $.5 million and zero
for 2006 and 2005 respectively.
For publicly traded fixed maturities and equity securities, estimated
fair value is determined using quoted market prices. For fixed
maturities without a readily ascertainable market value, the Company
determines estimated fair values using a discounted cash flow approach,
including provisions for credit risk, generally based on the assumption
such securities will be held to maturity. Such estimated fair values do
not
F-22
necessarily represent the values for which these securities could have
been sold at the dates of the consolidated balance sheets. At December
31, 2006 and 2005, securities without a readily ascertainable market
value having an amortized cost of $4,417.0 million and $4,307.8 million,
respectively, had estimated fair values of $4,518.5 million and $4,492.4
million, respectively.
The contractual maturity of bonds at December 31, 2006 is shown below:
AVAILABLE FOR SALE
-------------------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
----------------- -----------------
(IN MILLIONS)
Due in one year or less.............................................. $ 988.0 $ 994.9
Due in years two through five........................................ 5,654.5 5,838.3
Due in years six through ten......................................... 10,604.3 10,653.5
Due after ten years.................................................. 7,450.2 7,709.9
----------------- -----------------
Subtotal......................................................... 24,697.0 25,196.6
Mortgage-backed securities........................................... 1,931.1 1,895.5
----------------- -----------------
Total................................................................ $ 26,628.1 $ 27,092.1
================= =================
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities may differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Company's management, with the assistance of its investment
advisors, monitors the investment performance of its portfolio. This
review process includes a quarterly review of certain assets by the
Insurance Group's Investments Under Surveillance Committee that
evaluates whether any investments are other than temporarily impaired.
Based on the analysis, a determination is made as to the ability of the
issuer to service its debt obligations on an ongoing basis. If this
ability is deemed to be other than temporarily impaired, then the
appropriate provisions are taken.
The following table discloses fixed maturities (1,769 issues) that have
been in a continuous unrealized loss position for less than a twelve
month period and greater than a twelve month period as of December 31,
2006:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
------------------------------- ---------------------------- ----------------------------
GROSS GROSS GROSS
ESTIMATED UNREALIZED ESTIMATED UNREALIZED ESTIMATED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
-------------- -------------- ------------- ------------- ------------- -------------
(IN MILLIONS)
Fixed Maturities:
Corporate............. $ 3,081.0 $ 36.9 $ 5,999.7 $ 227.6 $ 9,080.7 $ 264.5
Mortgage-backed....... 189.2 1.3 1,529.0 37.0 1,718.2 38.3
U.S. Treasury,
government and
agency securities... 98.7 .2 447.0 10.2 545.7 10.4
States and political
subdivisions........ - - 25.9 .9 25.9 .9
Foreign governments... 6.6 .1 9.5 .2 16.0 .3
Redeemable
preferred stock..... 174.0 2.4 495.9 17.2 669.9 19.6
-------------- -------------- ------------- ------------- ------------- -------------
Total Temporarily
Impaired Securities .. $ 3,549.5 $ 40.9 $ 8,507.0 $ 293.1 $ 12,056.4 $ 334.0
============== ============== ============= ============= ============= =============
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting primarily of public high
yield bonds. These corporate high yield securities are classified as
other than investment grade by the various rating agencies, i.e., a
rating below Baa3/BBB- or NAIC designation of 3 (medium grade), 4 or 5
(below investment grade) or 6 (in or near default). At December 31,
2006,
F-23
approximately $656.0 million or 2.3% of the $28,507.9 million aggregate
amortized cost of fixed maturities held by the Company was considered to
be other than investment grade.
At December 31, 2006, the carrying value of fixed maturities which are
non-income producing for the twelve months preceding the consolidated
balance sheet date was $3.1 million.
Mortgage Loans
--------------
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage
loans on real estate, based on amortized cost, amounted to $65.0 and
$65.3 million at December 31, 2006 and 2005, respectively. Gross
interest income on these loans included in net investment income
aggregated $4.1 million, $5.0 million and $6.9 million in 2006, 2005 and
2004, respectively. Gross interest income on restructured mortgage loans
on real estate that would have been recorded in accordance with the
original terms of such loans amounted to $4.8 million, $6.0 million and
$8.5 million in 2006, 2005 and 2004, respectively.
Impaired mortgage loans along with the related investment valuation
allowances for losses follow:
DECEMBER 31,
----------------------------------------
2006 2005
------------------ -------------------
(IN MILLIONS)
Impaired mortgage loans with investment valuation allowances....... $ 76.8 $ 78.3
Impaired mortgage loans without investment valuation allowances.... .1 4.5
------------------ -------------------
Recorded investment in impaired mortgage loans..................... 76.9 82.8
Investment valuation allowances.................................... (11.3) (11.8)
------------------ -------------------
Net Impaired Mortgage Loans........................................ $ 65.6 $ 71.0
================== ===================
During 2006, 2005 and 2004, respectively, the Company's average recorded
investment in impaired mortgage loans was $78.8 million, $91.2 million
and $148.3 million. Interest income recognized on these impaired
mortgage loans totaled $4.5 million, $8.9 million and $11.0 million for
2006, 2005 and 2004, respectively.
Mortgage loans on real estate are placed on nonaccrual status once
management believes the collection of accrued interest is doubtful. Once
mortgage loans on real estate are classified as nonaccrual loans,
interest income is recognized under the cash basis of accounting and the
resumption of the interest accrual would commence only after all past
due interest has been collected or the mortgage loan on real estate has
been restructured to where the collection of interest is considered
likely. At December 31, 2006 and 2005, respectively, the carrying value
of mortgage loans on real estate that had been classified as nonaccrual
loans was $65.5 million and $71.1 million.
Equity Real Estate
------------------
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At
December 31, 2006 and 2005, the Company owned $204.8 million and $217.8
million, respectively, of real estate acquired in satisfaction of debt.
During 2006, 2005 and 2004, no real estate was acquired in satisfaction
of debt.
Accumulated depreciation on real estate was $232.1 million and $214.1
million at December 31, 2006 and 2005, respectively. Depreciation
expense on real estate totaled $21.6 million, $22.6 million and $20.8
million for 2006, 2005 and 2004, respectively.
F-24
Investment valuation allowances for mortgage loans and equity real
estate and changes thereto follow:
2006 2005 2004
--------------- --------------- --------------
(IN MILLIONS)
Balances, beginning of year........................ $ 11.8 $ 11.3 $ 20.5
Additions charged to income........................ 10.1 3.6 3.9
Deductions for writedowns and
asset dispositions............................... (.9) (3.1) (13.1)
--------------- --------------- --------------
Balances, End of Year.............................. $ 21.0 $ 11.8 $ 11.3
=============== =============== ==============
Balances, end of year comprise:
Mortgage loans on real estate.................... $ 11.3 $ 11.8 $ 11.3
Equity real estate............................... 9.7 - -
--------------- --------------- --------------
Total.............................................. $ 21.0 $ 11.8 $ 11.3
=============== =============== ==============
Equity Method Investments
-------------------------
Included in other equity investments, are interests in limited
partnership interests and investment companies accounted for under the
equity method with a total carrying value of $1,272.2 million and
$1,028.6 million, respectively, at December 31, 2006 and 2005. Included
in equity real estate are interests in real estate joint ventures
accounted for under the equity method with a total carrying value of
$70.9 million and $119.6 million, respectively, at December 31, 2006 and
2005. The Company's total equity in net earnings (losses) for these real
estate joint ventures and limited partnership interests was $169.6
million, $157.2 million and $66.2 million, respectively, for 2006, 2005
and 2004.
Summarized below is the combined financial information only for those
real estate joint ventures and for those limited partnership interests
accounted for under the equity method in which the Company has an
investment of $10.0 million or greater and an equity interest of 10% or
greater (6 and 8 individual ventures at December 31, 2006 and 2005,
respectively) and the Company's carrying value and equity in net
earnings for those real estate joint ventures and limited partnership
interests:
DECEMBER 31,
-------------------------------------
2006 2005
----------------- -----------------
(IN MILLIONS)
BALANCE SHEETS
Investments in real estate, at depreciated cost........................ $ 421.7 $ 527.4
Investments in securities, generally at estimated fair value........... 94.6 118.4
Cash and cash equivalents.............................................. 9.7 27.5
Other assets........................................................... 22.3 18.6
----------------- -----------------
Total Assets........................................................... $ 548.3 $ 691.9
================= =================
Borrowed funds - third party........................................... $ 278.1 $ 282.7
Other liabilities...................................................... 6.8 12.4
----------------- -----------------
Total liabilities...................................................... 284.9 295.1
----------------- -----------------
Partners' capital...................................................... 263.4 396.8
----------------- -----------------
Total Liabilities and Partners' Capital................................ $ 548.3 $ 691.9
================= =================
The Company's Carrying Value in These Entities Included Above.......... $ 78.7 $ 135.6
================= =================
F-25
2006 2005 2004
--------------- --------------- --------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures............. $ 88.5 $ 98.2 $ 95.2
Net revenues of other limited
partnership interests............................ (1.3) 6.3 19.8
Interest expense - third party..................... (18.5) (18.2) (16.9)
Other expenses..................................... (53.7) (62.2) (64.0)
--------------- --------------- --------------
Net Earnings....................................... $ 15.0 $ 24.1 $ 34.1
=============== =============== ==============
The Company's Equity in Net Earnings of These
Entities Included Above.......................... $ 14.4 $ 11.6 $ 11.0
=============== =============== ==============
Derivatives
-----------
At December 31, 2006, the Company had open exchange-traded futures
positions on the S&P 500, Russell 1000, NASDAQ 100 and European,
Australasia, Far East ("EAFE") indices, having initial margin
requirements of $140.7 million. Contracts are net settled daily. At
December 31, 2006, the Company had open exchange-traded futures
positions on the 10-year U.S. Treasury Note, having initial margin
requirements of $4.2 million.
The outstanding notional amounts of derivative financial instruments
purchased and sold at December 31, 2006 and 2005 were:
DECEMBER 31,
-------------------------------------
2006 2005
----------------- -----------------
(IN MILLIONS)
Notional Amount by Derivative Type:
Options:
Floors......................................................... $ 32,000 $ 24,000
Exchange traded U.S. Treasuries and equity index futures....... 3,536 2,208
----------------- -----------------
Total.............................................................. $ 35,536 $ 26,208
================= =================
At December 31, 2006 and 2005 and during the years then ended, there
were no financial instruments that contained implicit or explicit terms
that met the definitions of an embedded derivative component that needed
to be separated from the host contract and accounted for as a derivative
under the provisions of SFAS No. 133.
4) GOODWILL AND OTHER INTANGIBLE ASSETS
The carrying value of goodwill related to the AllianceBernstein totaled
$3.4 billion at December 31, 2006 and 2005.
The gross carrying amount of AllianceBernstein related intangible assets
were $563.7 million and $564.1 million at December 31, 2006 and 2005,
respectively and the accumulated amortization of these intangible assets
were $232.1 million and $208.5 million at December 31, 2006 and 2005,
respectively. Amortization expense related to the AllianceBernstein
intangible assets totaled $23.6 million, $23.5 million and $22.9 million
for 2006, 2005 and 2004, respectively.
At December 31, 2006 and 2005, respectively, net deferred sales
commissions totaled $194.9 million and $196.6 million and are included
within the Investment Management segment's Other assets. The estimated
amortization expense of deferred sales commissions based on the December
31, 2006 net balance for each of the next five years is $77.8 million,
$54.1 million, $39.3 million, $18.3 million and $4.9 million.
F-26
5) FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS
The carrying value and estimated fair value for financial instruments
not otherwise disclosed in Notes 3, 6, 10 and 16 of Notes to
Consolidated Financial Statements are presented below:
DECEMBER 31,
--------------------------------------------------------------------
2006 2005
-------------------------------- ---------------------------------
CARRYING ESTIMATED Carrying Estimated
VALUE FAIR VALUE Value Fair Value
--------------- --------------- --------------- ----------------
(IN MILLIONS)
Consolidated:
------------
Mortgage loans on real estate.......... $ 3,240.7 $ 3,285.7 $ 3,233.9 $ 3,329.0
Other limited partnership interests.... 1,262.6 1,262.6 1,015.2 1,015.2
Policy loans........................... 3,898.1 4,252.9 3,824.2 4,245.6
Policyholders liabilities:
Investment contracts................. 17,092.5 17,106.0 18,021.0 18,289.1
Long-term debt......................... 199.8 229.7 207.4 240.2
Closed Block:
------------
Mortgage loans on real estate.......... $ 809.4 $ 827.8 $ 930.3 $ 957.7
Other equity investments............... 2.2 2.2 3.3 3.3
Policy loans........................... 1,233.1 1,372.8 1,284.4 1,454.1
SCNILC liability....................... 10.4 10.3 11.4 11.6
Wind-up Annuities:
-----------------
Mortgage loans on real estate.......... $ 2.9 $ 3.0 $ 6.7 $ 7.1
Other equity investments............... 2.3 2.3 3.1 3.1
Guaranteed interest contracts.......... 5.8 6.0 6.5 6.4
Long-term debt......................... 101.7 101.7 101.7 101.7
F-27
6) CLOSED BLOCK
Summarized financial information for the Closed Block follows:
DECEMBER 31, December 31,
2006 2005
---------------- -----------------
(IN MILLIONS)
CLOSED BLOCK LIABILITIES:
Future policy benefits, policyholders' account balances and other.... $ 8,759.5 $ 8,866.1
Policyholder dividend obligation..................................... 3.2 73.7
Other liabilities.................................................... 29.1 28.6
---------------- -----------------
Total Closed Block liabilities....................................... 8,791.8 8,968.4
---------------- -----------------
ASSETS DESIGNATED TO THE CLOSED BLOCK:
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $5,967.6 and $5,761.5).......................... 6,019.4 5,908.7
Mortgage loans on real estate........................................ 809.4 930.3
Policy loans......................................................... 1,233.1 1,284.4
Cash and other invested assets....................................... 6.8 56.2
Other assets......................................................... 286.2 304.4
---------------- -----------------
Total assets designated to the Closed Block.......................... 8,354.9 8,484.0
---------------- -----------------
Excess of Closed Block liabilities over assets designated to
the Closed Block.................................................. 436.9 484.4
Amounts included in accumulated other comprehensive income:
Net unrealized investment gains, net of deferred income tax
expense of $17.0 and $25.7 and policyholder dividend
obligations of $3.2 and $73.7................................... 31.6 47.8
---------------- -----------------
Maximum Future Earnings To Be Recognized From Closed Block
Assets and Liabilities............................................ $ 468.5 $ 532.2
================ =================
Closed Block revenues and expenses as follow:
2006 2005 2004
------------ ------------ -----------
(IN MILLIONS)
REVENUES:
Premiums and other income............................ $ 428.1 $ 449.3 $ 471.0
Investment income (net of investment
expenses of $0.1, $0, and $0.3)................... 520.2 525.9 554.8
Investment gains, net................................ 1.7 1.2 18.6
------------ ------------ -----------
Total revenues....................................... 950.0 976.4 1,044.4
------------ ------------ -----------
BENEFITS AND OTHER DEDUCTIONS:
Policyholders' benefits and dividends................ 852.2 842.5 883.8
Other operating costs and expenses................... 3.0 3.4 3.5
------------ ------------ -----------
Total benefits and other deductions.................. 855.2 845.9 887.3
------------ ------------ -----------
Net revenues before income taxes..................... 94.8 130.5 157.1
Income tax expense................................... (31.1) (45.6) (56.4)
------------ ------------ -----------
Net Revenues......................................... $ 63.7 $ 84.9 $ 100.7
============ ============ ===========
F-28
Reconciliation of the policyholder dividend obligation follows:
DECEMBER 31,
------------------------------
2006 2005
--------------- ------------
(IN MILLIONS)
Balance at beginning of year........................................ $ 73.7 $ 264.3
Unrealized investment losses........................................ (70.5) (190.6)
--------------- -----------
Balance at End of Year ............................................. $ 3.2 $ 73.7
=============== ===========
Impaired mortgage loans along with the related investment valuation
allowances follow:
DECEMBER 31,
-----------------------------
2006 2005
-------------- ------------
(IN MILLIONS)
Impaired mortgage loans with investment valuation allowances........ $ 17.8 $ 59.1
Impaired mortgage loans without investment valuation allowances..... .1 4.0
--------------- -----------
Recorded investment in impaired mortgage loans...................... 17.9 63.1
Investment valuation allowances..................................... (7.3) (7.1)
--------------- -----------
Net Impaired Mortgage Loans......................................... $ 10.6 $ 56.0
=============== ===========
During 2006, 2005 and 2004, the Closed Block's average recorded
investment in impaired mortgage loans was $59.9 million, $61.0 million
and $62.6 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $3.3 million, $4.1 million and $4.7
million for 2006, 2005 and 2004, respectively.
Valuation allowances amounted to $7.3 million and $7.1 million on
mortgage loans on real estate at December 31, 2006 and 2005,
respectively. Writedowns of fixed maturities amounted to $1.4 million,
$7.7 million and $10.8 million for 2006, 2005 and 2004, respectively.
7) CONTRACTHOLDER BONUS INTEREST CREDITS
Changes in the deferred asset for contractholder bonus interest credits
are as follows:
DECEMBER 31,
------------------------------
2006 2005
--------------- -----------
(IN MILLIONS)
Balance, beginning of year.......................................... $ 555.0 $ 461.0
Contractholder bonus interest credits deferred ..................... 155.4 142.4
Amortization charged to income ..................................... (59.7) (48.4)
--------------- ------------
Balance, End of Year ............................................... $ 650.7 $ 555.0
=============== ============
F-29
8) GMDB, GMIB AND NO LAPSE GUARANTEE FEATURES
A) Variable Annuity Contracts - GMDB and GMIB
------------------------------------------
The Company has certain variable annuity contracts with GMDB and GMIB
features in-force 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 January 1, 2004......................... $ 69.3 $ 85.6 $ 154.9
Paid guarantee benefits.......................... (46.8) - (46.8)
Other changes in reserve......................... 45.1 32.0 77.1
--------------- ------------ ------------
Balance at December 31, 2004....................... 67.6 117.6 185.2
Paid guarantee benefits.......................... (39.6) (2.2) (41.8)
Other changes in reserve......................... 87.2 58.2 145.4
--------------- ------------ ------------
Balance at December 31, 2005....................... 115.2 173.6 288.8
Paid guarantee benefits.......................... (31.6) (3.3) (34.9)
Other changes in reserve......................... 80.1 58.0 138.1
--------------- ------------ ------------
Balance at December 31, 2006....................... $ 163.7 $ 228.3 $ 392.0
=============== ============ ============
Related GMDB reinsurance ceded amounts were:
GMDB
-----------------
Balance at January 1, 2004......................... $ 17.2
Paid guarantee benefits.......................... (12.9)
Other changes in reserve......................... 6.0
-----------------
Balance at December 31, 2004....................... 10.3
Paid guarantee benefits.......................... (12.1)
Other changes in reserve......................... 24.5
-----------------
Balance at December 31, 2005....................... 22.7
Paid guarantee benefits.......................... (9.1)
Other changes in reserve......................... 10.0
-----------------
Balance at December 31, 2006....................... $ 23.6
=================
The December 31, 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 exclusive:
F-30
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
RETURN
OF
PREMIUM RATCHET ROLL-UP COMBO TOTAL
-------------- ---------------- ------------- ------------- ---------------
(DOLLARS IN MILLIONS)
GMDB:
-----
Account values invested in:
General Account.................. $ 11,331 $ 408 $ 319 $ 646 $ 12,704
Separate Accounts................ $ 25,633 $ 7,856 $ 7,653 $ 23,165 $ 64,307
Net amount at risk, gross........... $ 302 $ 234 $ 1,447 $ 41 $ 2,024
Net amount at risk, net of
amounts reinsured................ $ 302 $ 164 $ 883 $ 41 $ 1,390
Average attained age of
contractholders.................. 49.5 61.0 64.3 61.2 52.6
Percentage of contractholders
over age 70....................... 7.5% 22.6% 33.6% 21.2% 11.8%
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 $ 87 $ 882 $ 969
Separate Accounts................ N/A N/A $ 5,248 $ 31,736 $ 36,984
Net amount at risk, gross........... N/A N/A $ 277 $ - $ 277
Net amount at risk, net of
amounts reinsured................ N/A N/A $ 71 $ - $ 71
Weighted average years remaining
until earliest annuitization..... N/A N/A 2.4 8.4 7.4
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:
F-31
INVESTMENT IN VARIABLE INSURANCE TRUST MUTUAL FUNDS
DECEMBER 31, December 31,
2006 2005
------------- -------------
(IN MILLIONS)
GMDB:
Equity............................................................. $ 42,885 $ 35,857
Fixed income....................................................... 4,438 4,353
Balanced........................................................... 14,863 9,121
Other.............................................................. 2,121 1,813
-------------- -------------
Total.............................................................. $ 64,307 $ 51,144
============== =============
GMIB:
Equity............................................................. $ 22,828 $ 17,540
Fixed income....................................................... 2,727 2,608
Balanced........................................................... 10,439 5,849
Other.............................................................. 990 680
-------------- -------------
Total.............................................................. $ 36,984 $ 26,677
============== =============
C) Hedging Programs for GMDB and GMIB Features
-------------------------------------------
In 2003, the Company initiated a program intended to provide an economic
hedge against certain risks associated with the GMDB feature of the
Accumulator(R) series of variable annuity products sold beginning April
2002. In 2004, the program was expanded to provide an economic hedge
against certain risks associated with the GMIB feature of the
Accumulator(R) series of variable annuity products sold beginning 2004.
This program currently utilizes exchange-traded futures contracts that
are dynamically managed in an effort to reduce the economic impact of
unfavorable changes in GMDB and GMIB exposures attributable to movements
in the equity and fixed income markets. At December 31, 2006, the total
account value and net amount at risk of the hedged Accumulator(R) series
of variable annuity contracts were $41,597 million and $52 million,
respectively, with the GMDB feature and $24,409 million and zero
million, respectively, with the GMIB feature.
Although these programs are designed to provide economic protection
against the impact adverse market conditions may have with respect to
GMDB and GMIB guarantees, they do not qualify for hedge accounting
treatment under SFAS No. 133. Therefore, SFAS No. 133 requires gains or
losses on the futures contracts used in these programs, including
current period changes in fair value, to be recognized in investment
income in the period in which they occur, and may contribute to earnings
volatility.
D) Variable and Interest-Sensitive Life Insurance Policies - No Lapse
------------------------------------------------------------------
Guarantee
---------
The no lapse guarantee feature contained in variable and
interest-sensitive life insurance policies keeps them in force in
situations where the policy value is not sufficient to cover monthly
charges then due. The no lapse guarantee remains in effect so long as
the policy meets a contractually specified premium funding test and
certain other requirements.
The following table summarizes the no lapse guarantee liabilities
reflected in the General Account in future policy benefits and other
policyholders liabilities, and related reinsurance ceded:
F-32
DIRECT REINSURANCE
LIABILITY CEDED NET
------------ -------------- ------------
(IN MILLIONS)
Balance at January 1, 2004......................... $ 37.4 $ - $ 37.4
Impact of adoption of SOP 03-1................... (23.4) (1.7) (25.1)
Other changes in reserve......................... 6.5 (4.4) 2.1
------------ -------------- -------------
Balance at December 31, 2004....................... 20.5 (6.1) 14.4
Other changes in reserve......................... 14.3 (14.3) -
------------ -------------- -------------
Balance at December 31, 2005....................... 34.8 (20.4) 14.4
Other changes in reserve......................... 32.0 (27.5) 4.5
------------ -------------- -------------
Balance at December 31, 2006....................... $ 66.8 $ (47.9) $ 18.9
============ ============== =============
9) REINSURANCE AGREEMENTS
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Ceded reinsurance does not relieve the originating insurer
of liability.
The Insurance Group reinsures most of its new variable life, universal
life and term life policies on an excess of retention basis. The
Insurance Group maintains a maximum retention on single life policies of
$25 million and on second-to-die policies of $30 million with the excess
100% reinsured. For certain segments of its business, the Insurance
Group ceded 40% of the business underwritten by AXA Equitable on a
guaranteed or simplified issue basis was ceded on a yearly renewable
term basis. The Insurance Group also reinsures the entire risk on
certain substandard underwriting risks and in certain other cases.
Likewise, certain risks that would otherwise be reinsured on a
proportional basis have been retained.
At December 31, 2006, the Company had reinsured in the aggregate
approximately 31.3% of its current exposure to the GMDB obligation on
annuity contracts in-force and, subject to certain maximum amounts or
caps in any one period, approximately 74% of its current liability
exposure resulting from the GMIB feature. See Note 8 of Notes to
Consolidated Financial Statements.
Based on management's estimates of future contract cash flows and
experience, the estimated fair values of the GMIB reinsurance contracts,
considered derivatives under SFAS No. 133, at December 31, 2006 and 2005
were $117.8 million and $132.6 million, respectively. The (decrease)
increase in estimated fair value was $(14.8) million, $42.6 million and
$61.0 million for 2006, 2005 and 2004, respectively.
At December 31, 2006 and 2005, respectively, reinsurance recoverables
related to insurance contracts amounted to $2.69 billion and $2.60
billion. Reinsurance payables related to insurance contracts totaling
$54.2 million and $39.7 million are included in other liabilities in the
consolidated balance sheets.
The Insurance Group cedes substantially all of its group life and health
business to a third party insurer. Insurance liabilities ceded totaled
$262.6 million and $288.4 million at December 31, 2006 and 2005,
respectively.
The Insurance Group also cedes a portion of its extended term insurance
and paid up life insurance and substantially all of its individual
disability income business through various coinsurance agreements.
In addition to the sale of insurance products, the Insurance Group acts
as a professional retrocessionaire by assuming life reinsurance from
professional reinsurers. The Insurance Group has also assumed accident,
health, aviation and space risks by participating in or reinsuring
various reinsurance pools and arrangements. Reinsurance assumed reserves
at December 31, 2006 and 2005 were $644.4 million and $624.6 million,
respectively.
F-33
The following table summarizes the effect of reinsurance (excluding
group life and health):
2006 2005 2004
-------------- -------------- ----------
(IN MILLIONS)
Direct premiums.................................... $ 854.6 $ 901.0 $ 828.9
Reinsurance assumed................................ 196.1 170.1 191.2
Reinsurance ceded.................................. (232.9) (189.4) (140.5)
--------------- ------------ -----------
Premiums $ 817.8 $ 881.7 $ 879.6
=============== ============ ===========
Universal Life and Investment-type Product
Policy Fee Income Ceded.......................... $ 152.8 $ 169.3 $ 134.8
=============== ============ ===========
Policyholders' Benefits Ceded...................... $ 379.2 $ 300.2 $ 361.0
=============== ============ ===========
Interest Credited to Policyholders' Account
Balances Ceded................................... $ 53.8 $ 50.9 $ 50.2
=============== ============ ===========
Individual Disability Income and Major Medical
----------------------------------------------
Claim reserves and associated liabilities net of reinsurance ceded for
individual DI and major medical policies were $92.9 million and $91.2
million at December 31, 2006 and 2005, respectively. At December 31,
2006 and 2005, respectively, $1,032.4 million and $1,043.9 million of DI
reserves and associated liabilities were ceded through indemnity
reinsurance agreements with a singular reinsurance group. Incurred
benefits (benefits paid plus changes in claim reserves) and benefits
paid for individual DI and major medical policies are summarized as
follows:
2006 2005 2004
------------ ------------ ------------
(IN MILLIONS)
Incurred benefits related to current year......... $ 35.8 $ 35.6 $ 35.0
Incurred benefits related to prior years.......... 9.9 50.3 12.8
------------ ------------ ------------
Total Incurred Benefits........................... $ 45.7 $ 85.9 $ 47.8
============ ============ ============
Benefits paid related to current year............. $ 14.0 $ 14.8 $ 12.9
Benefits paid related to prior years.............. 30.0 44.7 33.1
------------ ------------ ------------
Total Benefits Paid............................... $ 44.0 $ 59.5 $ 46.0
============ ============ ============
F-34
10) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
DECEMBER 31,
-----------------------------
2006 2005
------------- ------------
(IN MILLIONS)
Short-term debt:
Current portion of long-term debt................................... $ - $ 399.7
Promissory note, 5.27% ............................................. 248.3 248.3
AllianceBernstein commercial paper ................................. 334.9 -
------------ -----------
Total short-term debt............................................... 583.2 648.0
------------ -----------
Long-term debt:
AXA Equitable:
Surplus Notes, 7.70%, due 2015.................................... 199.8 199.8
------------ -----------
Total AXA Equitable........................................... 199.8 199.8
------------ -----------
AllianceBernstein:
Other............................................................. - 7.6
------------ -----------
Total AllianceBernstein....................................... - 7.6
------------ -----------
Total long-term debt................................................ 199.8 207.4
------------ -----------
Total Short-term and Long-term Debt................................. $ 783.0 $ 855.4
============ ===========
Short-term Debt
---------------
On July 9, 2004, AXA and certain of its subsidiaries, including AXA
Financial, entered into a (euro)3.5 billion global revolving credit
facility which matures July 9, 2009, with a group of 30 commercial banks
and other lenders. Under the terms of the revolving credit facility, up
to $500.0 million is available to AXA Financial for general corporate
purposes.
AXA Equitable has a $350.0 million, one-year promissory note, of which
$101.7 million is included within Wind-up Annuities. The promissory
note, which matures in March 2007, is related to wholly owned real
estate. Certain terms of the promissory note, such as interest rate and
maturity date, are negotiated annually.
At December 31, 2006 and 2005, the Company had pledged real estate of
$326.0 million and $320.8 million, respectively, as collateral for
certain short-term debt.
In August 2001, AllianceBernstein issued $400.0 million 5.625% notes
pursuant to a shelf registration statement that originally permitted
AllianceBernstein to issue up to $600.0 million in senior debt
securities. AllianceBernstein currently has $200.0 million available
under the shelf registration statement for future issuances. The
proceeds from the AllianceBernstein notes were used to reduce commercial
paper and credit facility borrowings and for other general partnership
purposes. The AllianceBernstein notes matured in August 2006.
AllianceBernstein used cash flow from operations as well as proceeds
from the issuance of commercial paper to retire the notes at maturity.
In February 2006, AllianceBernstein entered into an $800.0 million
five-year revolving credit facility with a group of commercial banks and
other lenders. The revolving credit facility is intended to provide
back-up liquidity for AllianceBernstein's commercial paper program,
which increased from $425.0 million to $800.0 million in May 2006. Under
the revolving credit facility, the interest rate, at the option of
AllianceBernstein, is a floating rate generally based upon a defined
prime rate, a rate related to the London Interbank Offered Rate
("LIBOR") or the Federal Funds rate. The revolving credit facility
contains covenants that, among other things, require AllianceBernstein
to meet certain financial ratios. AllianceBernstein was in compliance
with the covenants as of December 31, 2006.
F-35
As of December 31, 2006, AllianceBernstein maintained a $100.0 million
extendible commercial notes ("ECN") program as a supplement to
AllianceBernstein's commercial paper program. ECNs are short-term
uncommitted debt instruments that do not require back-up liquidity
support.
In 2006, SCB LLC entered into four separate uncommitted credit facility
agreements with various banks, each for $100.0 million. As of December
31, 2006, there were no amounts outstanding under these credit
facilities. During the first quarter 2007, SCB LLC increased three of
the agreements to $200.0 million each and entered into an additional
agreement for $100.0 million with a new bank.
Long-term Debt
--------------
At December 31, 2006, the Company was not in breach of any debt
covenants.
11) RELATED PARTY TRANSACTIONS
The Company reimburses AXA Financial for expenses relating to the Excess
Retirement Plan, Supplemental Executive Retirement Plan and certain
other employee benefit plans that provide participants with medical,
life insurance, and deferred compensation benefits. Such reimbursement
was based on the cost to AXA Financial of the benefits provided which
totaled $53.5 million, $57.2 million and $55.0 million, respectively,
for 2006, 2005 and 2004.
The Company paid $767.2 million, $695.0 million and $658.8 million,
respectively, of commissions and fees to AXA Distribution and its
subsidiaries for sales of insurance products for 2006, 2005 and 2004.
The Company charged AXA Distribution's subsidiaries $352.9 million,
$324.4 million and $293.1 million, respectively, for their applicable
share of operating expenses for 2006, 2005 and 2004, pursuant to the
Agreements for Services.
In September 2001, AXA Equitable loaned $400.0 million to AXA Insurance
Holding Co. Ltd., a Japanese subsidiary of AXA. This investment has an
interest rate of 5.89% and matures on June 15, 2007. All payments,
including interest payable semi-annually, are guaranteed by AXA.
In 2005, AXA Financial issued a note to AXA Equitable in the amount of
$325.0 million with an interest rate of 6.00% and a maturity date of
December 1, 2035. Interest on this note is payable semi-annually.
In 2003, AXA Equitable entered into a reinsurance agreement with AXA
Financial Reinsurance Company (Bermuda), LTD ("AXA Bermuda"), an
indirect, wholly owned subsidiary of AXA Financial, to cede certain term
insurance policies written after December 2002. AXA Equitable ceded
$91.9 million, $57.9 million and $28.6 million of premiums and $49.1
million, $26.3 million and $16.4 million of reinsurance reserves to AXA
Bermuda in 2006, 2005 and 2004, respectively.
Various AXA affiliates cede a portion of their life and health insurance
business through reinsurance agreements to AXA Cessions, an AXA
affiliated reinsurer. AXA Cessions, in turn, retrocedes a quota share
portion of these risks to AXA Equitable on a one-year term basis.
Premiums earned in 2006 under this arrangement totaled approximately
$1.1 million.
Both AXA Equitable and AllianceBernstein, along with other AXA
affiliates, participate in certain intercompany cost sharing and service
agreements that include technology and professional development
arrangements. Payments by AXA Equitable and AllianceBernstein to AXA
under such agreements totaled approximately $28.8 million, $32.8 million
and $30.2 million in 2006, 2005 and 2004, respectively. Payments by AXA
and AXA affiliates to AXA Equitable under such agreements totaled $27.9
million, $30.4 million and $38.9 million in 2006, 2005 and 2004,
respectively. Included in the payments by AXA and AXA affiliates to the
Company are $12.6 million, $12.7 million and $12.7 million from AXA
Tech, which represent the net amount of payments resulting from services
and facilities provided by the Company to AXA Tech of $111.0 million,
$110.9 million and $106.4 million less the payments for services
provided from AXA Tech to the Company of $98.4 million, $98.2 million
and $93.7 million for 2006, 2005 and 2004, respectively.
Commissions, fees and other income includes certain revenues for
services provided to mutual funds managed by AllianceBernstein. These
revenues are described below:
F-36
2006 2005 2004
----------------- ---------------- ------------------
(IN MILLIONS)
Investment advisory and services fees.............. $ 840.5 $ 728.5 $ 744.7
Distribution revenues.............................. 421.0 397.8 447.3
Other revenues - shareholder servicing fees........ 97.2 99.3 116.0
Other revenues - other............................. 6.9 8.0 8.8
Institutional research services.................... 1.4 3.5 5.3
12) EMPLOYEE BENEFIT PLANS
The Company (other than AllianceBernstein) sponsors qualified and
non-qualified defined benefit plans covering substantially all employees
(including certain qualified part-time employees), managers and certain
agents. These pension plans are non-contributory and their benefits are
based on a cash balance formula and/or, for certain participants, years
of service and final average earnings over a specified period in the
plans. AllianceBernstein maintains a qualified, non-contributory,
defined benefit retirement plan covering current and former employees
who were employed by AllianceBernstein in the United States prior to
October 2, 2000. AllianceBernstein's benefits are based on years of
credited service, average final base salary and primary social security
benefits. The Company uses a December 31 measurement date for its
pension and postretirement plans.
Generally, the Company's funding policy is to make the minimum
contribution required by the Employee Retirement Income Security Act of
1974 ("ERISA"). The Company made cash contributions of $4.3 million in
2006. No significant cash contributions to the Company's qualified plans
are expected to be required to satisfy their minimum funding
requirements for 2007.
Components of net periodic pension expense for the Company's qualified
and non-qualified plans were as follows:
2006 2005 2004
----------------- ----------------- -----------------
(In Millions)
Service cost....................................... $ 37.6 $ 36.0 $ 34.6
Interest cost on projected benefit obligations..... 122.1 123.7 121.9
Expected return on assets.......................... (184.8) (173.7) (170.9)
Net amortization and deferrals..................... 81.0 78.8 64.7
----------------- ----------------- -----------------
Net Periodic Pension Expense....................... $ 55.9 $ 64.8 $ 50.3
================= ================= =================
F-37
The plans' projected benefit obligations under the Company's qualified
and non-qualified plans were comprised of:
DECEMBER 31,
-------------------------------------
2006 2005
----------------- -----------------
(IN MILLIONS)
Benefit obligations, beginning of year................................. $ 2,365.5 $ 2,212.0
Service cost........................................................... 30.6 30.0
Interest cost.......................................................... 122.1 123.7
Actuarial (gains) losses .............................................. (64.7) 128.7
Benefits paid.......................................................... (159.2) (128.9)
----------------- -----------------
Benefit Obligations, End of Year....................................... $ 2,294.3 $ 2,365.5
================= =================
At December 31, 2006, the Company adopted SFAS No. 158, requiring
recognition, in the consolidated balance sheet, of the funded status of
its defined benefit pension plans, measured as the difference between
plan assets at fair value and the projected benefit obligations. The
following table discloses the change in plan assets and the
reconciliation of the funded status of the Company's qualified plans to
amounts included in the accompanying consolidated balance sheets:
DECEMBER 31,
-----------------------------------
2006 2005
---------------- -----------------
(IN MILLIONS)
Plan assets at fair value, beginning of year.............................. $ 2,278.5 $ 2,126.7
Actual return on plan assets.............................................. 282.0 208.9
Contributions............................................................. 4.3 78.5
Benefits paid and fees.................................................... (168.8) (135.6)
---------------- -----------------
Plan assets at fair value, end of year.................................... 2,396.0 2,278.5
Projected benefit obligations............................................. 2,294.3 2,365.5
---------------- -----------------
Overfunding (underfunding) of plan assets over
projected benefit obligations........................................... 101.7 (87.0)
Unrecognized prior service cost........................................... - (24.4)
Unrecognized net loss from past experience different
from that assumed....................................................... - 957.3
Unrecognized net asset at transition...................................... - (1.0)
---------------- -----------------
Prepaid Pension Cost, Net................................................. $ 101.7 $ 844.9
================ =================
Prepaid and accrued pension costs were $133.1 million and $31.4 million,
respectively, at December 31, 2006 and $868.3 million and $23.4 million,
respectively, at December 31, 2005. The aggregate projected benefit
obligations and fair value of plan assets for pension plans with
projected benefit obligations in excess of plan assets were $84.7
million and $53.3 million, respectively, at December 31, 2006, and
$2,365.5 million and $2,278.5 million, respectively, at December 31,
2005. The aggregate accumulated benefit obligation and fair value of
plan assets for pension plans with accumulated benefit obligations in
excess of plan assets were $68.4 million and $53.3 million,
respectively, at December 31, 2006, and $66.9 million and $47.4 million,
respectively, at December 31, 2005. The accumulated benefit obligations
for all defined benefit pension plans were $2,226.8 million and $2,290.0
million at December 31, 2006 and 2005, respectively.
F-38
The following table illustrates the incremental line-by-line effect of
applying SFAS No. 158 for the pension plans in the December 31, 2006
consolidated balance sheet:
Before After
Application Application
of SFAS of SFAS
No.158 Adjustments No.158
----------------- ----------------- -----------------
(In Millions)
Other assets ...................................... $ 3,753.0 $ (684.2) $ 3,068.8
Total assets....................................... 149,970.3 (684.2) 149,286.1
Income taxes payable............................... 3,216.9 (242.7) 2,974.2
Other liabilities.................................. 1,803.8 12.0 1,815.8
Minority interest in equity of consolidated
subsidiaries................................... 2,293.9 (4.0) 2,289.9
Total liabilities.................................. 140,038.4 (234.7) 139,803.7
Accumulated other comprehensive income............. 282.2 (449.5) (167.3)
Total shareholder' equity.......................... 9,931.9 (449.5) 9,482.4
The following table discloses the amounts included in accumulated other
comprehensive income at December 31, 2006 that have not yet been
recognized as components of net periodic pension cost:
DECEMBER 31,
2006
--------------------
(IN MILLIONS)
Unrecognized net actuarial loss .................................................... $ 710.7
Unrecognized prior service cost (credit)............................................ (18.8)
Unrecognized net transition obligation (asset)...................................... (.8)
--------------------
Total ......................................................................... $ 691.1
====================
The estimated net loss, prior service cost, and net transition asset to
be reclassified from accumulated other comprehensive income and
recognized as components of net periodic pension cost over the next year
are $59.7 million, $(5.6) million, and zero, respectively. The following
table discloses the estimated fair value of plan assets and the
percentage of estimated fair value to total plan assets for the
qualified plans of the Company at December 31, 2006 and 2005.
DECEMBER 31,
----------------------------------------------------------
2006 2005
----------------------------------------------------------
(IN MILLIONS)
ESTIMATED Estimated
FAIR VALUE % Fair Value %
--------------------- ----- --------------- ------
Corporate and government debt securities........ $ 429.8 18.0 $ 452.3 19.9
Equity securities............................... 1,720.7 71.8 1,526.5 67.0
Equity real estate ............................. 245.5 10.2 221.8 9.7
Short-term investments.......................... - - 77.9 3.4
Other........................................... - - - -
--------------------- ----- --------------- -----
Total Plan Assets............................... $ 2,396.0 100.0 $ 2,278.5 100.0
===================== ===== =============== =====
The primary investment objective of the plans of the Company is to
maximize return on assets, giving consideration to prudent risk. The
asset allocation is designed with a long-term investment horizon, based
on target investment of 65% equities, 25% fixed income and 10% real
estate. Emphasis is given to equity investments, given their higher
expected rate of return. Fixed income investments are included to
provide less volatile return. Real estate investments offer diversity to
the total portfolio and long-term inflation protection.
A secondary investment objective of the plans of the Company is to
minimize variation in annual net periodic pension cost over the long
term and to fund as much of the future liability growth as practical.
Specifically, a
F-39
reasonable total rate of return is defined as income plus realized and
unrealized capital gains and losses such that the growth in projected
benefit obligation is less than the return on investments plus
contributions.
The assumed discount rates for measurement of the benefit obligations at
December 31, 2006 and 2005 each reflect the rates at which pension
benefits then could be effectively settled. Specifically at December 31,
2006, projected nominal cash outflows to fund expected annual benefits
payments under the Company's qualified and non-qualified pension and
postretirement benefit plans were discounted using a published
high-quality bond yield curve. The discount rate of 5.75% disclosed
below as having been used to measure the benefits obligation at December
31, 2006 represents the level equivalent discount rate that produces the
same present value measure of the benefits obligation as the
aforementioned discounted cash flow analysis. The following table
discloses the weighted-average assumptions used to measure the Company's
pension benefit obligations and net periodic pension cost at and for the
years ended December 31, 2006 and 2005.
AXA FINANCIAL GROUP
--------------------------------
2006 2005
---- ----
Discount rate:
Benefit obligation............................................... 5.75% 5.25%
Periodic cost.................................................... 5.25% 5.75%
Rate of compensation increase:
Benefit obligation and periodic cost............................. 6.00% 6.00%
Expected long-term rate of return on plan assets (periodic cost)... 8.50% 8.50%
As noted above, the pension plans' target asset allocation is 65%
equities, 25% fixed maturities, and 10% real estate. Management reviewed
the historical investment returns and future expectations of returns
from these asset classes to conclude that a long-term expected rate of
return of 8.5% is reasonable.
Prior to 1987, the pension plan funded participants' benefits through
the purchase of non-participating annuity contracts from AXA Equitable.
Benefit payments under these contracts were approximately $20.3 million,
$21.7 million and $23.2 million for 2006, 2005 and 2004, respectively.
The following table sets forth an estimate of future benefits expected
to be paid in each of the next five years, beginning January 1, 2007,
and in the aggregate for the five years thereafter. These estimates are
based on the same assumptions used to measure the respective benefit
obligations at December 31, 2006 and include benefits attributable to
estimated future employee service.
PENSION BENEFITS
----------------
(IN MILLIONS)
2007..................... $ 165.1
2008..................... 174.1
2009..................... 177.2
2010..................... 179.2
2011..................... 180.3
Years 2012 -2016......... 914.4
AllianceBernstein maintains several unfunded deferred compensation plans
for the benefit of certain eligible employees and executives. The
AllianceBernstein Capital Accumulation Plan was frozen on December 31,
1987 and no additional awards have been made. For the active plans,
benefits vest over a period ranging from 3 to 8 years and are amortized
as compensation and benefit expense. ACMC, Inc. ("ACMC"), a subsidiary
of the Company, is obligated to make capital contributions to
AllianceBernstein in amounts equal to benefits paid under the
AllianceBernstein Capital Accumulation Plan and the contractual unfunded
deferred compensation arrangements. In connection with the acquisition
of Bernstein, AllianceBernstein adopted SCB Deferred Compensation Award
Plan ("SCB Plan") and agreed to invest $96.0 million per annum for three
years to fund purchases of AllianceBernstein Holding L.P.
("AllianceBernstein Holding") units or an AllianceBernstein sponsored
money market fund in each case for the benefit of certain individuals
F-40
who were stockholders or principals of Bernstein or hired to replace
them. The Company has recorded compensation and benefit expenses in
connection with these deferred compensation plans totaling $243.8
million, $186.2 million and $146.7 million for 2006, 2005 and 2004,
respectively.
13) SHARE-BASED COMPENSATION
AXA and AXA Financial sponsor various share-based compensation plans for
eligible employees and associates of AXA Financial and its subsidiaries,
including the Company. AllianceBernstein also sponsors its own unit
option plans for certain of its employees. Activity in these share-based
plans in the discussions that follow relates to awards granted to
eligible employees and associates of AXA Financial and its subsidiaries
under each of these plans in the aggregate, except where otherwise
noted.
For 2006, the Company recognized $24.8 million of compensation costs
under SFAS No. 123(R) for employee stock options, including $16.9
million resulting from unvested awards at January 1, 2006. On March 31,
2006, 3.8 million nonstatutory stock options to purchase AXA ordinary
shares were awarded under The AXA Stock Option Plans for AXA Financial
Employees and Associates, of which approximately 2.6 million have a four
year graded vesting schedule, with one-third vesting on each of the
second, third and fourth anniversaries of the grant date and
approximately 1.2 million have a 4-year cliff-vesting term. The cost of
that award is attributed over the shorter of the employees' four 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. All of the options granted on March 31, 2006 have
a 10-year contractual term. Information about options outstanding and
exercisable at December 31, 2006 also is presented. The number of AXA
ADRs authorized to be issued pursuant to option grants and, as further
described below, restricted stock grants under The AXA Financial, Inc.
1997 Stock Incentive Plan (the "Stock Incentive Plan") is 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). A summary of the activity in the AXA,
AXA Financial and AllianceBernstein option plans during 2006 follows:
F-41
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
January 1, 2006..... 3.5 (euro) 20.87 38.6 $ 24.06 7.5 $ 40.45
Options granted ....... 4.0 (euro) 28.40 .7 23.26 - (2) $ 65.02
Options exercised...... - - (9.1) $ 22.08 (2.6) $ 38.40
Options forfeited...... (.1) (euro) - (3.4) $ 33.57 (.1) $ 38.19
Options expired........ - - - -
-------------- -------------- --------------
Options Outstanding at
December 31, 2006... 7.4 (euro) 24.82 26.8 $ 23.40 4.8 $ 41.62
============== =============== ============== ============== ============== ==============
Aggregate Intrinsic (euro) 43.2 $ 463.1 $ 186.9
Value (1)........... =============== ============== ==============
Weighted Average
Remaining
Contractual Term
(in years).......... 8.9 4.4 4.37
============== ============== ==============
Options Exercisable at - 20.2 $ 23.40 4.4 $ 42.24
December 31, 2006... ============== ============== ============== ============== ==============
Aggregate Intrinsic - $ 342.4 $ 169.3
Value (1)........... =============== ============== ==============
Weighted Average
Remaining
Contractual Term
(in years)......... - 3.39 4.30
============== ============== ==============
(1) Intrinsic value, presented in millions, is calculated as the excess
of the closing market price on December 31, 2006 of the respective
underlying shares over the strike prices of the option awards.
(2) AllianceBernstein grants totaled 9,712 units in 2006.
Cash proceeds received from employee exercises of options to purchase
AXA ADRs in 2006 were $201.3 million. The intrinsic value related to
employee exercises of options to purchase AXA ADRs during 2006, 2005 and
2004 were $132.1 million, $68.3 million and $18.8 million, respectively,
resulting in amounts currently deductible for tax purposes of $44.9
million, $22.9 million and $6.2 million, respectively, for the periods
then ended. Under SFAS No. 123(R), $34.8 million windfall tax benefits
resulted from employee stock option exercises during 2006.
At December 31, 2005, AXA Financial held 9.3 million AXA ADRs in
treasury at a weighted average cost of approximately $24.00 per ADR, of
which approximately 9.0 million were designated to fund future exercises
of outstanding employee stock options and the remainder of approximately
.3 million units was available for general corporate purposes, including
funding other stock-based compensation programs. These AXA ADRs were
obtained primarily by exercise of call options that had been purchased
by AXA Financial beginning 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 December 31, 2006 are call options to purchase 8.9
million AXA ADRs at strike prices ranging from $30.41 to $32.37, 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 2006, AXA Financial utilized
approximately 5.6 million AXA ADRs from treasury to fund exercises of
employee stock options. Employee options outstanding at December 31,
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), the Company 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 2005 and 2004. The following
table illustrates the effect on net
F-42
income had compensation expense for employee stock option awards been
measured and recognized by the Company under the fair-value-based method
of SFAS No. 123, "Accounting for Stock-Based Compensation". 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.
2005 2004
------------------- -----------------
(In Millions)
Net earnings as reported.......................................... $ 1,073.8 $ 929.9
Less: Total stock-based employee compensation expense
determined under fair value method, net of income tax benefit.. (23.2) (21.4)
----------------- -----------------
Pro Forma Net Earnings............................................ $ 1,050.6 $ 908.5
================= =================
For the purpose of estimating the fair value of employee stock option
awards granted on or after January 1, 2006, the Company 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 2006, 2005 and 2004, respectively. For employee stock options
with graded vesting terms and service conditions granted on or after
January 1, 2006, the Company 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.
AXA Ordinary AllianceBernstein
Shares AXA ADRs Holding Units
------------------- -------------------- -----------------------------
2006 2005 2005 2004 2006 2005 2004
-------- --------- ---------- --------- --------- ---------- --------
Dividend yield............ 3.48% 3.15% 3.01% 2.24% 6% 6.2% 3.5%
Expected volatility....... 28% 25% 25% 43% 31% 31% 32%
Risk-free interest rate... 3.77% 3.09% 4.27% 2.86% 4.9% 3.7% 4.0%
Expected life in years.... 5.0 5.0 5.0 5.0 6.5 3.0 5.0
Weighted average fair
value per option at
grant date.............. $7.45 $4.30 $4.85 $6.94 $12.35 $7.04 $8.00
As of December 31, 2006, approximately $19.0 million of unrecognized
compensation cost related to unvested employee stock option awards, net
of estimated pre-vesting forfeitures, is expected to be recognized by
the Company over a weighted average period of 1.8 years.
Under the Stock Incentive Plan, AXA Financial grants restricted AXA ADRs
to employees of its subsidiaries, including AXA Equitable. Generally,
all outstanding restricted AXA ADR grants have a 7-year vesting schedule
with potential accelerated vesting based on performance. Under The
Equity Plan for Directors ("the Equity Plan"), AXA Financial grants
non-officer directors restricted AXA ADRs and unrestricted AXA ADRs
annually. Similarly, AllianceBernstein awards restricted
AllianceBernstein Holding units to independent directors of its General
Partner. In addition, under its Century Club Plan, awards of restricted
AllianceBernstein 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 2006, 2005 and 2004 AXA Financial Group recognized
compensation costs of $5.6 million, under SFAS No. 123(R) and $10.1
million and $9.5 million, respectively, under APB No. 25 for awards
outstanding under these plans. Consistent with existing practice of the
Company 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.
F-43
At December 31, 2006, approximately 60,692 restricted AllianceBernstein
Holding Units outstanding under the Century Club Plan remain unvested.
At December 31, 2006, approximately $2.1 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 2006, 2005
and 2004 had aggregate vesting-date fair values of approximately $13.5
million, $19.2 million and $12.7 million, respectively. In 2005 244,790
restricted AXA ADRs were granted having an aggregate grant-date fair
value of $6.6 million. The following table summarizes unvested
restricted AXA ADR activity for 2006.
WEIGHTED
SHARES OF AVERAGE
RESTRICTED GRANT DATE
STOCK FAIR VALUE
-------------- ---------------
Unvested as of January 1, 2006.......................................... 867,387 $ 19.94
Granted................................................................. 78,865 $ 35.16
Vested.................................................................. 381,836 $ 16.98
Forfeited............................................................... 50,381
--------------
Unvested as of December 31, 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
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 2006, 2005 and 2004 the Company recognized compensation costs of
$25.9 million, under SFAS No. 123(R) and $7.2 million and $.7 million,
respectively, under APB No. 25 for performance units earned to date.
Substantially similar to existing practice of the Company prior to
adoption of SFAS No. 123(R), the change in fair value of these awards in
2006 was measured by the closing price of the underlying the Company
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 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 December 31, 2006 and
2005 was $45.8 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. The Company recorded compensation expense for these
fully-vested awards of $6.1 million, $28.9 million and $14.2 million for
2006, 2005 and 2004, 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 December 31 2006 and
2005 was $24.9 million and $57.5 million, respectively. At December 31,
2006, 1.6 million tandem SARs/NSOs were outstanding, having weighted
average remaining expected and contractual terms of 1.11 and 2.22 years,
respectively, and for which the SARs component had maximum value of
$24.9 million. During 2006, 2005 and 2004, respectively, approximately
2.8 million, .7 million and zero million of these awards were exercised
at an aggregate cash-settlement value of $41.2 million $7.5 million and
zero million.
On March 31, 2006, 59,644 Stock Appreciation Rights ("SARs") with a
4-year cliff-vesting schedule were granted to certain associates of AXA
Financial subsidiaries. These SARs entitle the holder to a cash payment
F-44
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 December 31, 2006, .2 million SARs were outstanding,
having weighted average remaining contractual term of 6.03 years. The
accrued value of SARs at December 31, 2006 and 2005 was $2.9 million and
$1.0 million, respectively, and recorded as liabilities in the
consolidated balance sheets. For 2006, the Company recorded compensation
expense for SARs of $1.9 million, 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 2005 and 2004, the
Company recorded compensation expense of $.6 million and $.03 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 SARs.
In fourth quarter 2006, eligible employees of AXA Financial's
subsidiaries participated in AXA's global offering to purchase newly
issued AXA stock, subject to plan limits, under the terms of AXA
Shareplan 2006. Similar to the AXA Shareplan programs previously offered
in 2001 through 2005, the plan offered two investment alternatives that,
with limited exceptions, restrict the sale or transfer of the purchased
shares for a period of five years. "Investment Option A" permitted
participants to purchase AXA ADRs at a 20% formula discounted price.
"Investment Option B" permitted participants to purchase AXA ordinary
shares at a 15.21% formula discounted price on a leveraged basis with a
guaranteed return of initial investment plus 75.0% of any appreciation
in the value of the total shares purchased. Under SFAS No. 123(R), AXA
Equitable recognized compensation expense of $22.1 million in
connection with AXA Shareplan 2006, representing the aggregate discount
provided to participants for their purchase of AXA stock, as adjusted
for the post-vesting, five-year holding period. No compensation expense
was recorded in 2006, 2005 and 2004, respectively, in connection with
shares subscribed under previous years' AXA Shareplan offerings.
Participants in AXA Shareplans 2005 and 2004 primarily invested under
Investment Option B for the purchase of approximately 5.7 million and
6.8 million AXA ordinary shares, respectively. The discounted pricing
offered to participants in those programs for the purchase of AXA
ordinary shares under Investment Option B was 17.5% and 20%,
respectively, and the appreciation percentage was 86.1% and 79.0%,
respectively.
Under SFAS No. 123(R), the Company recognized compensation expense for
payroll deductions authorized and applied in 2006 under the terms of the
AXA Financial, Inc. Qualified Stock Purchase Plan to purchase AXA ADRs
of 182,225, at an aggregate discount of $1.1 million, 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 with this plan. Under
the terms of the AXA Financial, Inc. Non-Qualified Stock Purchase Plan,
total AXA ADRs of 340,083, 381,302 and 407,715 were purchased during
2006, 2005 and 2004, respectively, including those purchased with
employer matching contributions for which AXA Financial Group recorded
compensation expense of $1.6 million, $1.3 million and $1.2 million in
2006, 2005 and 2004, respectively.
F-45
14) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income follow:
2006 2005 2004
----------------- ----------------- -----------------
(IN MILLIONS)
Fixed maturities................................... $ 1,848.6 $ 1,870.0 $ 1,880.0
Mortgage loans on real estate...................... 245.9 238.2 249.6
Equity real estate................................. 114.9 125.3 124.2
Other equity investments........................... 181.2 155.2 162.1
Policy loans....................................... 249.8 248.8 251.0
Short-term investments............................. 55.2 25.1 19.1
Derivative investments............................. (302.4) (85.5) (88.0)
Broker-dealer related receivables.................. 226.5 124.8 45.5
Trading securities................................. 53.4 28.6 14.5
Other investment income............................ 43.9 16.2 28.9
----------------- ----------------- -----------------
Gross investment income.......................... 2,717.0 2,746.7 2,686.9
Investment expenses................................ (132.2) (159.0) (153.3)
Interest expenses.................................. (187.8) (95.9) (32.8)
----------------- ----------------- -----------------
Net Investment Income.............................. $ 2,397.0 $ 2,491.8 $ 2,500.8
================= ================= =================
For 2006, 2005 and 2004, respectively, investment results on derivative
positions, which were included in net investment income, included gross
gains of $155.5 million, $84.2 million and $26.2 million and gross
losses of $457.9 million, $169.7 million and $114.2 million. For 2006
and 2005, respectively, net unrealized losses of $15.2 million and $3.7
million were recognized from floor contracts. For 2006 and 2005, net
realized gains (losses) of $(249.5) million and $(140.9) million and net
unrealized gains (losses) of $(37.7) million and 59.2 million were
recognized from futures contracts utilized in the GMDB and GMIB
programs.
Investment gains (losses), net by including changes in the valuation
allowances, follow:
2006 2005 2004
----------------- ----------------- -----------------
(IN MILLIONS)
Fixed maturities................................... $ (11.5) $ 11.1 $ 26.3
Mortgage loans on real estate...................... .2 (2.2) .2
Equity real estate................................. 8.8 3.9 11.6
Other equity investments........................... 20.1 30.7 24.4
Other(1)........................................... 29.3 11.9 2.5
----------------- ----------------- -----------------
Investment Gains (Losses), Net..................... $ 46.9 $ 55.4 $ 65.0
================= ================= =================
(1) In 2006, AllianceBernstein issued units to its employees under
long-term incentive plans. As a result of this transaction, the
company recorded a non-cash $29.7 million realized gain.
Writedowns of fixed maturities amounted to $27.4 million, $31.2 million
and $36.4 million for 2006, 2005 and 2004, respectively. Writedowns of
mortgage loans on real estate were $.4 million for 2006, $1.7 million,
for 2005 and $10.1 million for 2004. There were no writedown on equity
real estate for 2006, 2005 and 2004, respectively.
For 2006, 2005 and 2004, respectively, proceeds received on sales of
fixed maturities classified as available for sale amounted to $1,281.9
million, $2,220.0 million and $2,908.3 million. Gross gains of $33.9
million, $53.2 million and $47.7 million and gross losses of $24.5
million, $31.1 million and $9.7 million, respectively, were realized on
these sales. The change in unrealized investment gains (losses) related
to fixed maturities classified as available for sale for 2006, 2005 and
2004 amounted to $(416.7) million, $(1,004.8) million and $0.8 million,
respectively.
F-46
For 2006, 2005 and 2004, investment results passed through to certain
participating group annuity contracts as interest credited to
policyholders' account balances amounted to $57.8 million, $68.6 million
and $70.4 million, respectively.
Changes in unrealized gains (losses) reflect changes in fair value of
only those fixed maturities and equity securities classified as
available for sale and do not reflect any changes in fair value of
policyholders' account balances and future policy benefits. The net
unrealized investment gains (losses) included in the consolidated
balance sheets as a component of accumulated other comprehensive income
and the changes for the corresponding years, including Wind-up Annuities
on a line-by-line basis, follow:
2006 2005 2004
----------------- ----------------- -----------------
(IN MILLIONS)
Balance, beginning of year......................... $ 432.3 $ 874.1 $ 892.8
Changes in unrealized investment gains (losses).... (431.4) (1,008.1) (12.8)
Changes in unrealized investment (gains) losses
attributable to:
Participating group annuity contracts,
Closed Block policyholder dividend
obligation and other........................ 90.9 186.3 (1.5)
DAC............................................ 85.8 146.2 (2.5)
Deferred income taxes.......................... 104.6 233.8 (1.9)
----------------- ----------------- -----------------
Balance, End of Year............................... $ 282.2 $ 432.3 $ 874.1
================= ================= =================
Balance, end of year comprises:
Unrealized investment gains (losses) on:
Fixed maturities............................... $ 535.4 $ 966.5 $ 2,003.2
Other equity investments....................... 1.4 1.7 1.2
Other.......................................... - - (28.1)
----------------- ------------------- -----------------
Subtotal..................................... 536.8 968.2 1,976.3
Amounts of unrealized investment (gains) losses
attributable to:
Participating group annuity contracts,
Closed Block policyholder dividend
obligation and other....................... 1.4 (89.4) (275.7)
DAC.......................................... (110.4) (196.0) (342.2)
Deferred income taxes........................ (145.6) (250.5) (484.3)
----------------- ------------------- -----------------
Total.............................................. $ 282.2 $ 432.3 $ 874.1
================= =================== =================
15) INCOME TAXES
A summary of the income tax expense in the consolidated statements of
earnings follows:
2006 2005 2004
----------------- ----------------- -----------------
(IN MILLIONS)
Income tax expense:
Current expense ................................. $ 438.6 $ 237.5 $ 359.0
Deferred expense................................. (11.3) 281.7 37.9
----------------- ----------------- -----------------
Total.............................................. $ 427.3 $ 519.2 $ 396.9
================= ================= =================
F-47
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings before
income taxes and minority interest by the expected Federal income tax
rate of 35%. The sources of the difference and their tax effects follow:
2006 2005 2004
----------------- ----------------- -----------------
(IN MILLIONS)
Expected income tax expense........................ $ 727.9 $ 715.5 $ 586.5
Minority interest.................................. (224.1) (175.9) (134.7)
Separate Account investment activity............... (45.4) (87.2) (63.3)
Non-taxable investment income...................... (23.1) (19.7) (22.6)
Adjustment of tax audit reserves................... (86.2) 11.1 7.7
Non-deductible goodwill and other
intangible assets.............................. 5.0 2.8 2.7
State income taxes................................. 38.0 28.3 3.3
AllianceBernstein income and foreign taxes......... 32.9 41.4 24.3
Other.............................................. 2.3 2.9 (7.0)
----------------- ----------------- -----------------
Income Tax Expense................................. $ 427.3 $ 519.2 $ 396.9
================= ================= =================
The components of the net deferred income taxes are as follows:
DECEMBER 31, 2006 December 31, 2005
-------------------------------- ---------------------------------
ASSETS LIABILITIES Assets Liabilities
--------------- --------------- --------------- ----------------
(IN MILLIONS)
Compensation and related benefits...... $ 54.6 $ - $ - $ 285.3
Reserves and reinsurance............... 1,160.3 - 929.2 -
DAC and VOBA........................... - 2,433.5 - 2,200.6
Unrealized investment gains............ - 129.8 - 250.7
Investments............................ - 865.7 - 813.5
Other.................................. 13.2 - 107.2 -
--------------- --------------- --------------- ----------------
Total.................................. $ 1,228.1 $ 3,429.0 $ 1,036.4 $ 3,550.1
=============== =============== =============== ================
The Company recognized a net tax benefit in third quarter 2006 of
$117.7 million. This benefit was related to the settlement of an IRS
audit of the 1997-2001 tax years, partially offset by additional tax
reserves established for subsequent tax periods. Of the net tax benefit
of $117.7 million, $111.9 million related to the continuing operations
and $5.8 million to the discontinued Wind-up Annuities. In 2005, the
Internal Revenue Service ("IRS") began an examination of the Company's
2002 and 2003 returns. Management believes this audit will have no
material adverse effect on the Company's consolidated results of
operations or financial position.
16) DISCONTINUED OPERATIONS
The Company's discontinued operations include Wind-up Annuities, equity
real estate held-for-sale and Enterprise. The following table reconciles
the Earnings (losses) from discontinued operations, net of income taxes
and (Losses) gains on disposal of discontinued operations, net of income
taxes to the amounts reflected in the consolidated statements of
earnings for the three years ended December 31, 2006:
F-48
2006 2005 2004
------------- ------------ ------------
(IN MILLIONS)
EARNINGS FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES:
Wind-up Annuities............................................. $ 30.2 $ 15.2 $ 7.9
Real estate held-for-sale..................................... (4.0) .6 .4
Disposal of business - Enterprise............................. - (.1) (1.5)
------------- ------------ ------------
Total......................................................... $ 26.2 $ 15.7 $ 6.8
============= ============ ============
(LOSSES) GAINS ON DISPOSAL OF DISCONTINUED OPERATIONS,
NET OF INCOME TAXES:
Real estate held for sale..................................... $ - $ - $ 31.1
Disposal of business - Enterprise............................. (1.9) - -
------------- ------------ ------------
Total......................................................... $ (1.9) $ - $ 31.1
============= ============ ============
Disposal of Businesses
----------------------
In October 2006, AXA Financial and its subsidiaries, AXA Equitable,
Enterprise Capital Management, Inc. ("Enterprise Capital") and
Enterprise Fund Distributors, Inc., ("EFD") entered into an agreement
contemplating the transfer to Goldman Sachs Asset Management L.P.
("GSAM") of assets of the business of serving as sponsor of and
investment manager to 27 of the 31 funds of AXA Enterprise Multimanager
Funds Trust, AXA Enterprise Funds Trust and The Enterprise Group of
Funds, Inc. (collectively, the "AXA Enterprise Funds") and the
reorganization of such funds to corresponding mutual funds managed by
GSAM. These 27 funds have approximately $4.2 billion in assets under
management as of December 31, 2006. The reorganization of the 27 funds
is subject to regulatory and fund shareholder approvals and is expected
to close in the second quarter of 2007. Of the remaining four funds not
included in the GSAM reorganization, which together have approximately
$700 million in assets under management as of December 31, 2006, one
fund is being liquidated and AXA Financial is considering possible
alternatives for the dispositions of the other three funds, which
alternatives include a possible transaction with another investment
advisor or liquidation. Proceeds from the transaction with GSAM are
dependant upon assets under management at the time of the
reorganization. A permanent impairment writedown of $4.1 million pre-tax
($2.7 million post-tax) on the AXA Enterprise Funds investment
management contracts intangible asset and $3.0 million pre-tax of costs
($1.9 million post-tax) to sell were recorded by the Company in 2006. As
a result of management's disposition plan, AXA Enterprise Funds advisory
contracts are now reported in Discontinued Operations. At December 31,
2006, assets and liabilities related to these contracts of $26.5 million
and $9.3 million were included in Other assets and Other liabilities,
respectively.
The gross carrying amount of Enterprise related intangible asset was
$26.5 million at December 31, 2006, and the accumulated amortization of
this intangible asset was $4.1 million. Amortization expense related to
the Enterprise intangible asset totaled $4.1 million for 2006.
Wind-up Annuities
-----------------
In 1991, management discontinued the business of Wind-up Annuities, the
terms of which were fixed at issue, which were sold to corporate
sponsors of terminated qualified defined benefit plans, for which a
premium deficiency reserve has been established. Management reviews the
adequacy of the allowance for future losses each quarter and makes
adjustments when necessary. Management believes the allowance for future
losses at December 31, 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 ("Discontinued Operations
Investment Assets"). There can be no assurance the losses provided for
will not differ from the losses ultimately realized. To the extent
actual results or future projections of 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.
F-49
Summarized financial information for Wind-up Annuities follows:
DECEMBER 31,
--------------------------------------
2006 2005
---------------- -----------------
(IN MILLIONS)
BALANCE SHEETS
Fixed maturities, available for sale, at estimated fair value
(amortized cost of $752.7 and $796.9).............................. $ 764.8 $ 823.5
Equity real estate................................................... 169.5 197.5
Mortgage loans on real estate........................................ 2.9 6.7
Other invested assets................................................ 2.6 3.2
---------------- -----------------
Total investments.................................................. 939.8 1,030.9
Cash and cash equivalents............................................ .1 -
Other assets......................................................... 13.7 13.6
---------------- -----------------
Total Assets......................................................... $ 953.6 $ 1,044.5
================ =================
Policyholders liabilities............................................ $ 788.2 $ 817.2
Allowance for future losses.......................................... 1.0 60.1
Other liabilities.................................................... 164.4 167.2
---------------- -----------------
Total Liabilities.................................................... $ 953.6 $ 1,044.5
================ =================
2006 2005 2004
----------------- ----------------- -----------------
(IN MILLIONS)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $19.0, $18.4 and $17.2).............. $ 71.3 $ 70.0 $ 68.5
Investment gains (losses), net..................... 6.0 (.3) 3.6
------------- ------------- --------------
Total revenues..................................... 77.3 69.7 72.1
------------- ------------- --------------
Benefits and other deductions...................... 84.7 87.1 99.4
(Losses charged) to allowance
for future losses................................ (7.4) (17.4) (27.3)
----------------- ----------------- -----------------
Pre-tax loss from operations....................... - - -
Pre-tax earnings from releasing the allowance
for future losses................................ 37.1 23.2 12.0
Income tax expense................................. (6.9) (8.0) (4.1)
----------------- ----------------- -----------------
Earnings from Wind-up Annuities.................... $ 30.2 $ 15.2 $ 7.9
================= ================= =================
The Company'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. Additionally, as part of the Company's annual planning
process, investment and benefit cash flow projections are prepared.
These updated assumptions and estimates resulted in a release of
allowance in each of the three years presented above.
During 2004, Wind-up Annuities' average recorded investment in impaired
mortgage loans was $8.4 million; and interest income recognized on these
impaired mortgage loans totaled $1.0 million. There were no related
amounts reported in 2006 and 2005.
Income tax expense for Wind-up Annuities in 2006 included a $5.8 million
tax benefit in connection with the settlement of an IRS audit of the
1997-2001 tax years.
Real Estate Held-For-Sale
-------------------------
In 2006, one real estate property with a total book value of $34.3
million that had been previously reported in equity real estate was
reclassified as real estate held-for-sale. Prior periods have been
restated to reflect these properties as discontinued operations. At
December 31, 2006 and 2005, equity real estate held-for-sale was $32.2
million and $42.1 million, respectively, and was included in Other
assets.
F-50
17) ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Accumulated other comprehensive (loss) income represents cumulative
gains and losses on items that are not reflected in earnings. The
balances for the past three years follow:
2006 2005 2004
----------------- ----------------- -----------------
(IN MILLIONS)
Unrealized gains on investments.................... $ 282.2 $ 432.3 $ 874.1
Defined benefit pensions plans..................... (449.5) - -
----------------- ----------------- -----------------
Total Accumulated Other
Comprehensive (Loss) Income...................... $ (167.3) $ 432.3 $ 874.1
================= ================= =================
The components of other comprehensive loss for the past three years
follow:
2006 2005 2004
----------------- ----------------- -----------------
(IN MILLIONS)
Net unrealized (losses) gains on investments:
Net unrealized (losses) gains arising during
the period..................................... $ (416.6) $ (966.2) $ 69.4
Losses reclassified into net earnings
during the period.............................. (14.8) (41.9) (82.2)
----------------- ----------------- -----------------
Net unrealized (losses) gains on investments....... (431.4) (1,008.1) (12.8)
Adjustments for policyholders liabilities,
DAC and deferred income taxes.................. 281.3 566.3 (5.9)
----------------- ----------------- -----------------
Change in unrealized losses, net of
adjustments.................................... (150.1) (441.8) (18.7)
----------------- ----------------- -----------------
Total Other Comprehensive Loss..................... $ (150.1) $ (441.8) $ (18.7)
================= ================= =================
18) COMMITMENTS AND CONTINGENT LIABILITIES
Debt Maturities
---------------
At December 31, 2006, aggregate maturities of the long-term debt,
including any current portion of long-term debt, based on required
principal payments at maturity were $248.3 million for 2007, zero for
2008-2011 and $200.0 million thereafter.
Leases
------
The Company has entered into operating leases for office space and
certain other assets, principally information technology equipment and
office furniture and equipment. Future minimum payments under
non-cancelable operating leases for 2007 and the four successive years
are $178.6 million, $175.0 million, $162.3 million, $156.7 million,
$149.5 million and $1,500.3 million thereafter. Minimum future sublease
rental income on these non-cancelable operating leases for 2007 and the
four successive years is $6.0 million, $5.2 million, $5.0 million, $5.0
million, $4.8 million and $16.4 million thereafter.
At December 31, 2006, the minimum future rental income on non-cancelable
operating leases for wholly owned investments in real estate for 2007
and the four successive years is $106.7 million, $116.0 million, $114.8
million, $114.7 million, $114.9 million and $896.1 million thereafter.
The Company has entered into capital leases for certain information
technology equipment. Future minimum payments under non-cancelable
capital leases for 2007 and the four successive years are $.3 million,
$.3 million, $.2 million, and zero for the following two years.
F-51
Guarantees and Other Commitments
--------------------------------
The Company provides certain guarantees or commitments to affiliates,
investors and others. At December 31, 2006, these arrangements included
commitments by the Company to provide equity financing of $618.3 million
to certain limited partnerships under certain conditions. Management
believes the Company will not incur material losses as a result of these
commitments.
AXA Equitable is the obligor under certain structured settlement
agreements it had entered into with unaffiliated insurance companies and
beneficiaries. To satisfy its obligations under these agreements, AXA
Equitable owns single premium annuities issued by previously wholly
owned life insurance subsidiaries. AXA Equitable has directed payment
under these annuities to be made directly to the beneficiaries under the
structured settlement agreements. A contingent liability exists with
respect to these agreements should the previously wholly owned
subsidiaries be unable to meet their obligations. Management believes
the need for AXA Equitable to satisfy those obligations is remote.
The Company had $63.8 million of undrawn letters of credit related to
reinsurance at December 31, 2006. AXA Equitable had $46.3 million in
commitments under existing mortgage loan agreements at December 31,
2006. In February 2002, AllianceBernstein signed a $125.0 million
agreement with a commercial bank under which it guaranteed certain
obligations of SCB LLC incurred in the ordinary course of its business
in the event SCB LLC is unable to meet these obligations. At December
31, 2006, AllianceBerstein was not required to perform under the
agreement and had no liability outstanding in connection with the
agreement.
19) LITIGATION
A putative class action entitled STEFANIE HIRT, ET AL. V. THE EQUITABLE
RETIREMENT PLAN FOR EMPLOYEES, MANAGERS AND AGENTS, ET AL. was filed in
the District Court for the Southern District of New York in August 2001
against The Equitable Retirement Plan for Employees, Managers and Agents
(the "Retirement Plan") and The Officers Committee on Benefit Plans of
Equitable Life, as Plan Administrator. The action was brought by five
participants in the Retirement Plan and purports to be on behalf of "all
Plan participants, whether active or retired, their beneficiaries and
Estates, whose accrued benefits or pension benefits are based on the
Plan's Cash Balance Formula". The complaint challenged the change,
effective January 1, 1989, in the pension benefit formula from a final
average pay formula to a cash balance formula. Plaintiffs alleged that
the change to the cash balance formula violated ERISA by reducing the
rate of accruals based on age, failed to comply with ERISA's notice
requirements and improperly applied the formula to retroactively reduce
accrued benefits. The relief sought includes a declaration that the cash
balance plan violated ERISA, an order enjoining the enforcement of the
cash balance formula, reformation and damages. In April 2002, plaintiffs
filed a motion seeking to certify a class of "all Plan participants,
whether active or retired, their beneficiaries and Estates, whose
accrued benefits or pension benefits are based on the Plan's Cash
Balance Formula". Also in April 2002, plaintiffs agreed to dismiss with
prejudice their claim that the change to the cash balance formula
violated ERISA by improperly applying the formula to retroactively
reduce accrued benefits. That claim was dismissed. In March 2003,
plaintiffs filed an amended complaint elaborating on the remaining
claims in the original complaint and adding additional class and
individual claims alleging that the adoption and announcement of the
cash balance formula and the subsequent announcement of changes in the
application of the cash balance formula failed to comply with ERISA. By
order dated May 2003, the District Court, as requested by the parties,
certified the case as a class action, including a sub-class of all
current and former Plan participants, whether active, inactive or
retired, their beneficiaries or estates, who were subject to a 1991
change in application of the cash balance formula. In September 2006,
the district court granted summary judgment in favor of the defendants.
The court ruled that (a) the cash balance provisions of the Equitable
Plan do not violate the age discrimination provisions of ERISA, (b)
while the notice of plan changes provided to participants in 1990 was
not adequate, the notice of plan changes provided to participants in
1992 satisfied the ERISA notice requirements regarding delivery and
content, and (c) the claims of the named plaintiffs are barred by
statute of limitations. The Court found that other individual class
members were not precluded from asserting claims for additional benefit
accruals from January 1991 through January 1993 to the extent that such
individuals could show that the statute of limitations did not bar their
claims. In October 2006, plaintiffs filed a notice of appeal. Defendants
have cross-appealed.
In April 2004, a purported nationwide class action lawsuit was filed in
the Circuit Court for Madison County, Illinois entitled MATTHEW
WIGGENHORN V. EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES. The
lawsuit alleges that AXA Equitable uses stale prices for the foreign
securities within the investment divisions of its variable insurance
products. The complaint further alleges that AXA Equitable's use of
stale pricing diluted
F-52
the returns of the purported class. The complaint also alleges that AXA
Equitable breached its fiduciary duty to the class by allowing market
timing in general within AXA Equitable's variable insurance products,
thereby diluting the returns of the class. In June 2005, this case was
transferred by the Judicial Panel on Multidistrict Litigation to the
U.S. District Court in Maryland, where other market-timing related
litigation is pending. In June 2005, plaintiff filed an amended
complaint. In July 2005, AXA Equitable filed a motion to dismiss the
amended complaint. In June 2006, AXA Equitable's motion to dismiss the
amended complaint was granted. The plaintiff filed a notice of appeal in
June 2006.
In June 2006, AXA Equitable received a demand for arbitration from
Centre Life Insurance Company ("Centre Life") seeking to rescind the
100% quota share reinsurance agreement, effective July 1, 2000 between
Centre Life and AXA Equitable, under which Centre Life reinsures
portions of AXA Equitable's individual disability income insurance
business. The arbitration demand alleges that AXA Equitable provided
Centre Life with inaccurate and incomplete data upon which Centre Life
relied in order to establish the reinsurance premium paid by AXA
Equitable as consideration in the transaction. The demand alternatively
seeks damages for the increase in reserves Centre Life alleges it was
caused to record as a result of the difference in the data it originally
relied upon and its present assessment of the data. The demand further
alleges that Centre Life has paid expenses relating to the business in
excess of its liability under the reinsurance agreement. Discovery is
ongoing.
Beginning with the first action commenced in July 2006, there are two
putative class actions pending in Federal court, MEOLA V. AXA ADVISORS,
ET AL., in the District Court for the Northern District of California
and BOLEA V. AXA ADVISORS, LLC, ET. AL., in the District Court for the
Western District of Pennsylvania, against AXA Equitable, alleging
certain wage and hour violations. Each of the cases seek substantially
the same relief under essentially the same theories of recovery (i.e.,
violation of the Fair Labor Standards Act ("FLSA") for failure to pay
minimum wage and overtime and violation of similar provisions under
state labor laws in the respective states). Plaintiffs in MEOLA and
BOLEA seek certification of nationwide collection action under the FLSA,
and certification of statewide class actions under the respective
California and Pennsylvania state labor laws covering all "securities
brokers" from 2002 to 2006. In addition, plaintiffs seek compensatory
damages, restitution of all wages improperly withheld or deducted,
punitive damages, penalties, and attorneys' fees. In January 2007, AXA
Equitable filed an answer in MEOLA.
ALLIANCEBERNSTEIN LITIGATION
In April 2002, a consolidated complaint entitled IN RE ENRON CORPORATION
SECURITIES LITIGATION ("Enron Complaint") was filed in the United States
District Court for the Southern District of Texas, Houston Division,
against numerous defendants, including AllianceBernstein, alleging that
AllianceBernstein violated Sections 11 and 15 of the Securities Act of
1933, as amended ("Securities Act"), with respect to a registration
statement filed by Enron Corp. In January 2007, the Court issued a final
judgment dismissing the Enron Complaint as the allegations therein
pertained to AllianceBernstein. The parties have agreed that there will
be no appeal.
Market Timing-Related Matters
In October 2003, a purported class action complaint entitled HINDO, ET
AL. V. ALLIANCEBERNSTEIN GROWTH & INCOME FUND, ET AL. ("Hindo
Complaint") was filed against AllianceBernstein, AllianceBernstein
Holding, AllianceBernstein Corporation, AXA Financial, certain
investment company funds (the "U.S. Funds") distributed by
AllianceBernstein Investments, Inc., a wholly-owned subsidiary of
AllianceBernstein, the registrants and issuers of those funds, certain
officers of AllianceBernstein (the "AllianceBernstein defendants"), and
certain other unaffiliated defendants, as well as unnamed Doe
defendants. The Hindo Complaint was filed in the United States District
Court for the Southern District of New York by alleged shareholders of
two of the U.S. Funds. The Hindo Complaint alleges that certain of the
AllianceBernstein defendants failed to disclose that they improperly
allowed certain hedge funds and other unidentified parties to engage in
"late trading" and "market timing" of U.S. Fund securities, violating
Sections 11 and 15 of the Securities Act, Sections 10(b) and 20(a) of
the Exchange Act, and Sections 206 and 215 of the Investment Advisers
Act of 1940 (the "Advisers Act"). Plaintiffs seek an unspecified amount
of compensatory damages and rescission of their contracts with
AllianceBernstein, including recovery of all fees paid to
AllianceBernstein pursuant to such contracts.
Since October 2003, additional lawsuits making factual allegations
generally similar to those in the Hindo Complaint were filed in various
Federal and state courts against AllianceBernstein and certain other
defendants. All state court actions against AllianceBernstein either
were voluntarily dismissed or removed to Federal court.
F-53
In February 2004, the Judicial Panel on Multidistrict Litigation ("MDL
Panel") transferred all Federal actions to the United States District
Court for the District of Maryland ("Mutual Fund MDL"). All of the
actions removed to the Federal court also were transferred to the Mutual
Fund MDL. In September 2004, plaintiffs filed consolidated amended
complaints with respect to four claim types: mutual fund shareholder
claims; mutual fund derivative claims; derivative claims brought on
behalf of AllianceBernstein Holding; and claims brought under ERISA by
participants in the Profit Sharing Plan for Employees of
AllianceBernstein. All four complaints included substantially identical
factual allegations, which appear to be based in large part on the SEC
Order and the NYAG Assurance of Discontinuance ("NYAG AoD").
In April 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 ("MOU")
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 settlement amount was disbursed. The
derivative claims brought on behalf of AllianceBernstein Holding, in
which plaintiffs seek an unspecified amount of damages, remain pending.
In April 2005, a complaint entitled THE ATTORNEY GENERAL OF THE STATE OF
WEST VIRGINIA V. AIM ADVISORS, INC., ET AL. ("WVAG Complaint") was filed
against AllianceBernstein, AllianceBernstein Holding, and various other
unaffiliated defendants. The WVAG Complaint was filed in the Circuit
Court of Marshall County, West Virginia by the Attorney General of the
State of West Virginia. The WVAG Complaint makes factual allegations
generally similar to those in the Hindo Complaint. In October 2005, the
WVAG Complaint was transferred to the Mutual Fund MDL. In August 2005,
the WV Securities Commissioner signed a Summary Order to Cease and
Desist, and Notice of Right to Hearing ("Summary Order") addressed to
AllianceBernstein and AllianceBernstein Holding. The Summary Order
claims that AllianceBernstein and AllianceBernstein Holding violated the
West Virginia Uniform Securities Act and makes factual allegations
generally similar to those in the SEC Order and NYAG AoD. In September
2006, AllianceBernstein and AllianceBernstein Holding filed an answer
and moved to dismiss the Summary Order with the WV Securities
Commission.
Revenue Sharing-Related Matters
In June 2004, a purported class action complaint entitled AUCOIN, ET AL.
V. ALLIANCE CAPITAL MANAGEMENT L.P., ET AL. ("Aucoin Complaint") was
filed against AllianceBernstein, AllianceBernstein Holding,
AllianceBernstein Corporation, AXA Financial, AllianceBernstein
Investments, Inc., certain current and former directors of the U.S.
Funds, and unnamed Doe defendants. The Aucoin Complaint names the U.S.
Funds as nominal defendants. The Aucoin Complaint was filed in the
United States District Court for the Southern District of New York by an
alleged shareholder of the AllianceBernstein Growth & Income Fund. The
Aucoin Complaint alleges, among other things, (i) that certain of the
defendants improperly authorized the payment of excessive commissions
and other fees from U.S. Fund assets to broker-dealers in exchange for
preferential marketing services, (ii) that certain of the defendants
misrepresented and omitted from registration statements and other
reports material facts concerning such payments, and (iii) that certain
defendants caused such conduct as control persons of other defendants.
The Aucoin Complaint asserts claims for violation of Sections 34(b),
36(b) and 48(a) of the Investment Company Act, Sections 206 and 215 of
the Advisers Act, breach of common law fiduciary duties, and aiding and
abetting breaches of common law fiduciary duties. Plaintiffs seek an
unspecified amount of compensatory damages and punitive damages,
rescission of their contracts with AllianceBernstein, including recovery
of all fees paid to AllianceBernstein pursuant to such contracts, an
accounting of all U.S. Fund-related fees, commissions and soft dollar
payments, and restitution of all unlawfully or discriminatorily obtained
fees and expenses.
In February 2005, plaintiffs filed a consolidated amended class action
complaint (the "Aucoin Consolidated Amended Complaint") that asserts
claims substantially similar to the Aucoin Complaint and the nine
additional subsequently filed lawsuits. In October 2005, the District
Court dismissed each of the claims set forth in the Aucoin Consolidated
Amended Complaint, except for plaintiffs' claim under Section 36(b) of
the Investment Company Act. In January 2006, the District Court granted
defendants' motion for reconsideration and dismissed the remaining claim
under Section 36(b) of the Investment Company Act. 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, which was
subsequently withdrawn subject to plaintiffs right to reinstate it at a
later date.
-----------------------------------
F-54
Although the outcome of litigation generally cannot be predicted with
certainty, management intends to vigorously defend against the
allegations made by the plaintiffs in the actions described above and
believes that the ultimate resolution of the litigations described above
involving AXA Equitable and/or its subsidiaries should not have a
material adverse effect on the consolidated financial position of the
Company. Management cannot make an estimate of loss, if any, or predict
whether or not any of the litigations described above will have a
material adverse effect on the Company's consolidated results of
operations in any particular period.
In addition to the type of matters described above, a number of lawsuits
have been filed against life and health insurers in the jurisdictions in
which AXA Equitable and its respective insurance subsidiaries do
business involving insurers' sales practices, alleged agent misconduct,
alleged failure to properly supervise agents, contract administration
and other matters. Some of the lawsuits have resulted in the award of
substantial judgments against other insurers, including material amounts
of punitive damages, or in substantial settlements. In some states,
juries have substantial discretion in awarding punitive damages. AXA
Equitable and AXA Life, like other life and health insurers, from time
to time are involved in such litigations. Some of these actions and
proceedings filed against AXA Equitable and its subsidiaries have been
brought on behalf of various alleged classes of claimants and certain of
these claimants seek damages of unspecified amounts. While the ultimate
outcome of such matters cannot be predicted with certainty, in the
opinion of management no such matter is likely to have a material
adverse effect on the Company's consolidated financial position or
results of operations. However, it should be noted that the frequency of
large damage awards, including large punitive damage awards that bear
little or no relation to actual economic damages incurred by plaintiffs
in some jurisdictions, continues to create the potential for an
unpredictable judgment in any given matter.
20) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
AXA Equitable is restricted as to the amounts it may pay as dividends to
AXA Financial. Under the New York Insurance Law, a domestic life insurer
may, without prior approval of the Superintendent, pay a dividend to its
shareholders not exceeding an amount calculated based on a statutory
formula. This formula would permit AXA Equitable to pay shareholder
dividends not greater than $649.6 million during 2007. Payment of
dividends exceeding this amount requires the insurer to file notice of
its intent to declare such dividends with the Superintendent who then
has 30 days to disapprove the distribution. For 2006, 2005 and 2004, the
Insurance Group statutory net income totaled $532.3 million, $780.4
million and $571.4 million, respectively. Statutory surplus, capital
stock and Asset Valuation Reserve ("AVR") totaled $7,907.5 million and
$6,241.7 million at December 31, 2006 and 2005, respectively. In 2006,
2005 and 2004, respectively, AXA Equitable paid shareholder dividends of
$600.0 million, $500.0 million and $500.0 million.
At December 31, 2006, the Insurance Group, in accordance with various
government and state regulations, had $32.2 million of securities
deposited with such government or state agencies.
At December 31, 2006 and for the year then ended, there were no
differences in net income and capital and surplus resulting from
practices prescribed and permitted by the State of New York Insurance
Department ("NYID") and those prescribed by NAIC Accounting Practices
and Procedures effective at December 31, 2006.
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The differences between statutory surplus and
capital stock determined in accordance with Statutory Accounting
Principles ("SAP") and total shareholder's equity under GAAP are
primarily: (a) the inclusion in SAP of an AVR intended to stabilize
surplus from fluctuations in the value of the investment portfolio; (b)
future policy benefits and policyholders' account balances under SAP
differ from GAAP due to differences between actuarial assumptions and
reserving methodologies; (c) certain policy acquisition costs are
expensed under SAP but deferred under GAAP and amortized over future
periods to achieve a matching of revenues and expenses; (d) under SAP,
income taxes are provided on the basis of amounts currently payable with
provisions made for deferred amounts that reverse within one year while
under GAAP, deferred taxes are recorded for temporary differences
between the financial statements and tax basis of assets and liabilities
where the probability of realization is reasonably assured; (e) the
valuation of assets under SAP and GAAP differ due to different
investment valuation and depreciation methodologies, as well as the
deferral of interest-related realized capital gains and losses on fixed
income investments; (f) the valuation of the investment in
AllianceBernstein and
F-55
AllianceBernstein Holding under SAP reflects a portion of the market
value appreciation rather than the equity in the underlying net assets
as required under GAAP; (g) the provision for future losses of the
discontinued Wind-Up Annuities business is only required under GAAP; (h)
reporting the surplus notes as a component of surplus in SAP but as a
liability in GAAP; (i) computer software development costs are
capitalized under GAAP but expensed under SAP; and (j) certain assets,
primarily pre-paid assets, are not admissible under SAP but are
admissible under GAAP.
The following reconciles the Insurance Group's statutory change in
surplus and capital stock and statutory surplus and capital stock
determined in accordance with accounting practices prescribed by the
NYID with net earnings and equity on a GAAP basis.
2006 2005 2004
----------------- ----------------- -----------------
(IN MILLIONS)
Net change in statutory surplus and
capital stock.................................... $ 1,386.5 $ 779.6 $ 196.8
Change in AVR...................................... 279.3 260.6 528.1
----------------- ----------------- -----------------
Net change in statutory surplus, capital stock
and AVR.......................................... 1,665.8 1,040.2 724.9
Adjustments:
Future policy benefits and policyholders'
account balances............................... (126.0) (51.9) (398.8)
DAC.............................................. 674.1 598.0 529.2
Deferred income taxes............................ 517.3 227.6 122.5
Valuation of investments......................... 2.6 40.0 10.1
Valuation of investment subsidiary............... (2,122.7) (1,278.3) (460.3)
Change in fair value of guaranteed minimum
income benefit reinsurance contracts........... (14.8) 42.6 61.0
Shareholder dividends paid...................... 600.0 500.0 500.0
Changes in non-admitted assets................... (57.4) .5 (74.7)
Other, net....................................... (90.9) (75.8) (98.9)
GAAP adjustments for Wind-up Annuities .......... 28.8 30.9 14.9
----------------- ----------------- -----------------
Consolidated Net Earnings ...................... $ 1,076.8 $ 1,073.8 $ 929.9
================= ================= =================
DECEMBER 31,
---------------------------------------------------------
2006 2005 2004
----------------- ----------------- ------------------
(IN MILLIONS)
Statutory surplus and capital stock................ $ 6,497.6 $ 5,111.1 $ 4,331.5
AVR................................................ 1,409.9 1,130.6 870.0
----------------- ----------------- ------------------
Statutory surplus, capital stock and AVR........... 7,907.5 6,241.7 5,201.5
Adjustments:
Future policy benefits and policyholders'
account balances............................... (1,926.0) (1,934.0) (1,882.1)
DAC.............................................. 8,316.5 7,557.3 6,813.9
Deferred income taxes............................ (627.1) (1,294.6) (1,770.4)
Valuation of investments......................... 867.9 1,281.6 2,237.6
Valuation of investment subsidiary............... (5,374.3) (3,251.6) (1,973.3)
Fair value of guaranteed minimum income
benefit reinsurance contracts.................. 117.8 132.6 90.0
Non-admitted assets.............................. 994.5 1,056.0 1,055.5
Issuance of surplus notes........................ (524.8) (524.8) (599.7)
Adjustment to initially apply SFAS No.158,
net of income taxes............................ (449.5) - -
Other, net....................................... 239.8 258.3 147.9
GAAP adjustments for Wind-up Annuities .......... (59.9) (80.6) (96.4)
----------------- ----------------- ------------------
Consolidated Shareholder's Equity.................. $ 9,482.4 $ 9,441.9 $ 9,224.5
================= ================= ==================
F-56
21) BUSINESS SEGMENT INFORMATION
The following tables reconcile segment revenues and earnings from
continuing operations before income taxes to total revenues and earnings
as reported on the consolidated statements of earnings and segment
assets to total assets on the consolidated balance sheets, respectively.
2006 2005 2004
----------------- ----------------- ------------------
(IN MILLIONS)
SEGMENT REVENUES:
Insurance.......................................... $ 5,974.7 $ 5,764.1 $ 5,447.7
Investment Management (1).......................... 4,002.7 3,265.0 3,060.0
Consolidation/elimination.......................... (90.0) (84.7) (82.8)
----------------- ----------------- ------------------
Total Revenues..................................... $ 9,887.4 $ 8,944.4 $ 8,424.9
================= ================= ==================
(1) Intersegment investment advisory and other fees of approximately
$120.8 million, $123.7 million and $118.4 million for 2006, 2005
and 2004, respectively, are included in total revenues of the
Investment Management segment.
SEGMENT EARNINGS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND MINORITY INTEREST:
Insurance.......................................... $ 889.7 $ 1,120.0 $ 947.9
Investment Management.............................. 1,190.0 924.2 728.8
Consolidation/elimination.......................... - - (.9)
----------------- ----------------- ------------------
Total Earnings from Continuing Operations
before Income Taxes and Minority Interest....... $ 2,079.7 $ 2,044.2 $ 1,675.8
================= ================= ==================
DECEMBER 31,
------------------------------------
2006 2005
----------------- -----------------
(In Millions)
SEGMENT ASSETS:
Insurance.......................................... $ 133,047.0 $ 118,825.8
Investment Management.............................. 16,239.4 15,161.4
Consolidation/elimination.......................... (.3) 2.0
----------------- -----------------
Total Assets....................................... $ 149,286.1 $ 133,989.2
================= =================
In accordance with SEC regulations, securities with a fair value of
$1.86 billion and $1.72 billion have been segregated in a special
reserve bank custody account at December 31, 2006 and 2005, respectively
for the exclusive benefit of securities broker-dealer or brokerage
customers under Rule 15c3-3 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
F-57
22) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 2006 and 2005 are summarized
below:
THREE MONTHS ENDED
------------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------- ----------------- ------------------ ------------------
(IN MILLIONS)
2006
----
Total Revenues................ $ 2,244.5 $ 2,609.6 $ 2,415.3 $ 2,618.0
================= ================= ================== ==================
Earnings from Continuing
Operations.................. $ 234.4 $ 316.7 $ 282.0 $ 219.4
================= ================= ================== ==================
Net Earnings.................. $ 235.2 $ 314.2 $ 308.6 $ 218.8
================= ================= ================== ==================
2005
----
Total Revenues................ $ 2,212.6 $ 2,223.1 $ 2,149.5 $ 2,359.2
================= ================= ================== ==================
Earnings from
Continuing Operations....... $ 265.5 $ 278.3 $ 281.6 $ 232.7
================= ================= ================== ==================
Net Earnings.................. $ 265.0 $ 278.6 $ 296.8 $ 233.4
================= ================= ================== ==================
F-58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholder of
AXA Equitable Life Insurance Company:
Our audits of the consolidated financial statements referred to in our report
dated March 15, 2007 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the financial statement schedules listed in Item
15(a)2 of this Form 10-K. In our opinion, based on our audits and the reports of
other auditors, these financial statement schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 15, 2007
F-59
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2006
ESTIMATED CARRYING
TYPE OF INVESTMENT COST (A) FAIR VALUE VALUE
----------------- ---------------- ---------------
(IN MILLIONS)
Fixed maturities:
U.S. government, agencies and authorities.............. $ 1,284.3 $ 1,303.8 $ 1,303.8
State, municipalities and political subdivisions....... 170.2 186.6 186.6
Foreign governments.................................... 219.2 257.0 257.0
Public utilities....................................... 2,881.9 2,963.1 2,963.1
All other corporate bonds.............................. 22,072.5 22,381.6 22,381.6
Redeemable preferred stocks............................ 1,879.8 1,939.0 1,939.0
----------------- ---------------- ---------------
Total fixed maturities.................................... 28,507.9 29,031.1 29,031.1
----------------- ---------------- ---------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other................. 95.7 97.0 97.0
Mortgage loans on real estate............................. 3,240.7 3,285.7 3,240.7
Real estate............................................... 293.9 xxx 293.9
Real estate acquired in satisfaction of debt.............. 204.8 xxx 204.8
Real estate joint ventures................................ 70.9 xxx 70.9
Policy loans.............................................. 3,898.1 4,252.9 3,898.1
Other limited partnership interests and
equity investments...................................... 1,465.1 1,465.1 1,465.1
Trading securities........................................ 438.5 465.1 465.1
Other invested assets..................................... 891.6 891.6 891.6
----------------- ---------------- ---------------
Total Investments......................................... $ 39,107.2 $ 39,488.5 $ 39,658.3
================= ================ ===============
(A) Cost for fixed maturities represents original cost, reduced by repayments
and writedowns and adjusted for amortization of premiums or accretion of
discount; for equity securities, cost represents original cost reduced by
writedowns; for other limited partnership interests, cost represents
original cost adjusted for equity in earnings and distributions.
F-60
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE II
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 2006 AND 2005
2006 2005
----------------- -----------------
(IN MILLIONS)
ASSETS
Investment:
Fixed maturities:
Available for sale, at estimated fair value (amortized
cost of $28,192.9 and $28,806.0, respectively)........................ $ 28,714.3 $ 29,741.3
Mortgage loans on real estate............................................. 3,240.7 3,233.9
Equity real estate........................................................ 632.6 658.1
Policy loans.............................................................. 3,651.8 3,605.0
Investments in and loans to affiliates.................................... 1,735.4 1,717.1
Other equity investments.................................................. 1,316.2 1,122.0
Other invested assets..................................................... 865.7 820.4
----------------- -----------------
Total investments..................................................... 40,156.7 40,897.8
Cash and cash equivalents................................................... 478.9 366.6
Deferred policy acquisition costs........................................... 8,286.3 7,523.1
Amounts due from reinsurers................................................. 1,614.5 1,554.7
Other assets................................................................ 2,323.5 2,400.0
Loans to affiliates......................................................... 400.0 400.0
Prepaid pension asset....................................................... 114.9 821.6
Separate Accounts assets.................................................... 84,801.6 69,997.0
----------------- -----------------
TOTAL ASSETS................................................................ $ 138,176.4 $ 123,960.8
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 26,021.8 $ 26,787.9
Future policy benefits and other policyholders liabilities.................. 13,959.2 13,878.6
Short-term and long-term debt............................................... 773.1 773.1
Income taxes payable........................................................ 2,066.7 2,087.5
Other liabilities........................................................... 1,071.6 994.8
Separate Accounts liabilities............................................... 84,801.6 69,997.0
----------------- -----------------
Total liabilities..................................................... 128,694.0 114,518.9
----------------- -----------------
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value, 2.0 million shares authorized, issued
and outstanding........................................................... 2.5 2.5
Capital in excess of par value.............................................. 5,139.6 4,976.3
Retained earnings........................................................... 4,507.6 4,030.8
Accumulated other comprehensive (loss) income............................... (167.3) 432.3
----------------- -----------------
Total shareholder's equity............................................ 9,482.4 9,441.9
----------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................................. $ 138,176.4 $ 123,960.8
================= =================
The financial information of AXA Equitable Life Insurance Company ("Parent
Company") should be read in conjunction with the Consolidated Financial
Statements and Notes thereto.
F-61
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE II
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2006, 2005, 2004
2006 2005 2004
----------------- ----------------- ---------------
(IN MILLIONS)
REVENUES
Universal life and investment-type product policy fee
income...................................................... $ 2,252.6 $ 1,888.1 $ 1,594.1
Premiums...................................................... 813.9 877.2 873.5
Net investment income......................................... 2,239.9 2,427.2 2,435.9
Investment (losses) gains , net............................... (4.0) 14.1 62.8
Equity in earnings of subsidiaries ........................... 308.7 236.2 183.9
Commissions, fees and other income............................ 576.4 501.1 427.7
----------------- ----------------- ----------------
Total revenues.......................................... 6,187.5 5,943.9 5,577.9
----------------- ----------------- ----------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits....................................... 1,956.0 1,862.8 1,847.0
Interest credited to policyholders' account balances.......... 1,061.3 1,044.5 1,017.2
Compensation and benefits..................................... 690.5 535.8 490.7
Commissions................................................... 1,474.9 1,243.9 1,068.6
Interest expense.............................................. 47.6 52.8 54.5
Amortization of deferred policy acquisition costs............. 684.5 596.7 466.7
Capitalization of deferred policy acquisition costs........... (1,363.0) (1,198.9) (1,015.3)
Rent expense.................................................. 41.3 45.2 71.0
Amortization and depreciation................................. 70.4 67.6 122.4
Premium taxes................................................. 37.2 35.3 34.6
Other operating costs and expenses............................ 266.8 289.9 251.8
----------------- ----------------- ----------------
Total benefits and other deductions..................... 4,967.5 4,575.6 4,409.2
----------------- ----------------- ----------------
Earnings from continuing operations before
income taxes................................................ 1,220.0 1,367.8 1,169.8
Income tax expense ........................................... (167.5) (309.7) (274.9)
----------------- ----------------- ----------------
Earnings from continuing operations........................... 1,052.5 1,058.1 894.9
Earnings from other discontinued operations,
net of income taxes......................................... 26.2 15.7 6.8
(Losses) gains on sale of discontinued operations
net of income taxes......................................... (1.9) - 31.1
Cumulative effect of accounting changes,
net of income taxes......................................... - - (2.9)
----------------- ----------------- ----------------
Net Earnings.................................................. $ 1,076.8 $ 1,073.8 $ 929.9
================= ================= ================
F-62
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE II
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005 2004
----------------- ----------------- ----------------
(IN MILLIONS)
Net earnings.................................................. $ 1,076.8 $ 1,073.8 $ 929.9
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Interest credited to policyholders' account balances........ 1,061.3 1,044.5 1,017.2
Universal life and investment-type policy fee income........ (2,252.6) (1,888.1) (1,594.1)
Investment losses (gains), net.............................. 4.0 (14.1) (62.8)
Equity in net earnings of subsidiaries...................... (309.5) (236.2) (183.9)
Dividends from subsidiaries................................. 277.1 232.1 32.9
Change in deferred policy acquisition costs................. (678.5) (602.2) (548.6)
Change in future policy benefits and other policyholder
funds.................................................... 52.0 75.7 55.6
Change in prepaid pension asset............................. 51.6 (16.9) 33.6
Change in fair value of guaranteed minimum income
benefit reinsurance contract............................. 14.8 (42.6) (61.0)
Change in amounts due to (from) affiliates.................. 125.1 (32.1) 23.7
Change in income tax payable................................ 314.4 266.6 271.9
Amortization and depreciation............................... 95.7 94.6 157.2
Other, net.................................................. 490.2 59.2 (195.7)
----------------- ----------------- ----------------
Net cash provided (used) by operating activities.............. 322.4 14.3 (124.1)
----------------- ----------------- ----------------
Cash flows from investing activities:
Maturities and repayments................................... 2,906.1 2,868.5 3,313.6
Sales....................................................... 1,543.6 2,450.9 3,025.5
Purchases................................................... (3,983.3) (5,827.2) (7,002.1)
Change in short-term investments............................ 65.6 13.8 (34.4)
Change in policy loans...................................... (46.7) (0.2) 65.8
Other, net.................................................. (445.4) (238.3) 17.9
----------------- ----------------- ----------------
Net cash used by investing activities......................... 39.9 (732.5) (613.7)
----------------- ----------------- ----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................. 3,897.7 3,821.9 4,079.8
Withdrawals and transfers to Separate Accounts............ (3,552.2) (2,757.6) (2,690.8)
Shareholder dividends paid.................................. (600.0) (500.0) (500.0)
Repayment of long-term debt................................. - (400.0) -
Increase in loans from affiliates........................... - 325.0 -
Other, net.................................................. 4.5 (1.9) 43.8
----------------- ----------------- ----------------
Net cash provided by financing activities..................... (250.0) 487.4 932.8
----------------- ----------------- ----------------
Change in cash and cash equivalents........................... 112.3 (230.8) 195.0
Cash and cash equivalents, beginning of year.................. 366.6 597.4 402.4
----------------- ----------------- ----------------
Cash and Cash Equivalents, End of Year........................ $ 478.9 $ 366.6 $ 597.4
================= ================= ================
Supplemental cash flow information:
Interest Paid............................................... $ 15.4 $ 43.2 $ 43.2
================= ================= ================
Income Taxes Paid (Refunded)................................ $ 77.3 $ 90.0 $ 110.6
================= ================= ================
F-63
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2006
FUTURE POLICY POLICY
DEFERRED BENEFITS CHARGES (1)
POLICY POLICYHOLDERS' AND OTHER AND NET
ACQUISITION ACCOUNT POLICYHOLDERS' PREMIUM INVESTMENT
SEGMENT COSTS BALANCES FUNDS REVENUE INCOME
- -------------------------------- --------------- ------------------ ----------------- -------------- ---------------
(IN MILLIONS)
Insurance....................... $ 8,316.5 $ 26,439.0 $ 14,085.4 $ 3,070.5 $ 2,244.9
Investment Management........... - - - - 134.2
Consolidation/elimination....... - - - - 17.9
--------------- ------------------ ----------------- -------------- ---------------
Total........................... $ 8,316.5 $ 26,439.0 $ 14,085.4 $ 3,070.5 $ 2,397.0
=============== ================== ================= ============== ===============
AMORTIZATION
POLICYHOLDERS' OF DEFERRED (2)
BENEFITS AND POLICY OTHER
INTEREST ACQUISITION OPERATING
SEGMENT CREDITED COSTS EXPENSE
- -------------------------------- ----------------- ----------------- ---------------
(In Millions)
Insurance....................... $ 3,043.0 $ 689.3 $ 1,352.7
Investment Management........... - - 2,812.7
Consolidation/elimination....... - - (90.0)
----------------- ----------------- ---------------
Total........................... $ 3,043.0 $ 689.3 $ 4,075.4
================= ================= ===============
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-64
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 2005
Future Policy Policy
Deferred Benefits Charges (1)
Policy Policyholders' And Other and Net
Acquisition Account Policyholders' Premium Investment
Segment Costs Balances Funds Revenue Income
- -------------------------------- -------------- ---------------- ---------------- ------------- ---------------
(In Millions)
Insurance....................... $ 7,557.3 $ 27,194.0 $ 13,997.8 $ 2,771.0 $ 2,425.1
Investment Management........... - - - - 49.1
Consolidation/elimination....... - - - - 17.6
-------------- ---------------- ---------------- ------------- ---------------
Total........................... $ 7,557.3 $ 27,194.0 $ 13,997.8 $ 2,771.0 $ 2,491.8
============== ================ ================ ============= ===============
Amortization
Policyholders' of Deferred (2)
Benefits and Policy Other
Interest Acquisition Operating
Segment Credited Costs Expense
- -------------------------------- ------------------ ---------------- ---------------
(In Millions)
Insurance....................... $ 2,925.3 $ 601.3 $ 1,117.5
Investment Management........... - - 2,340.8
Consolidation/elimination....... - - (84.7)
----------------- ---------------- ---------------
Total........................... $ 2,925.3 $ 601.3 $ 3,373.6
================= ================ ===============
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-65
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEAR ENDED DECEMBER 31, 2004
Policy
Charges (1) Policyholders'
and Net Benefits and
Premium Investment Interest
Segment Revenue Income Credited
- --------------------------------------------------------------- --------------- ----------------- ----------------------
(IN MILLIONS)
Insurance................................................... $ 2,475.0 $ 2,436.6 $ 2,905.2
Investment Management....................................... - 37.7 -
Consolidation/Elimination................................... - 26.5 -
--------------- ----------------- ----------------------
Total....................................................... $ 2,475.0 $ 2,500.8 $ 2,905.2
=============== ================= ======================
Amortization
of Deferred (2)
Policy Other
Acquisition Operating
Segment Costs Expense
- ------------------------------------------------------------ --------------------- --------------------
(IN MILLIONS)
Insurance................................................... $ 472.9 $ 1,122.6
Investment Management....................................... - 2,331.2
Consolidation/Elimination................................... - (82.8)
-------------------- --------------------
Total....................................................... $ 472.9 $ 3,371.0
==================== ====================
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are principally incurred directly by a segment.
F-66
AXA EQUITABLE LIFE INSURANCE COMPANY
SCHEDULE IV
REINSURANCE (A)
AT AND FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------------- ---------------- ----------------- --------------- ---------------
(DOLLARS IN MILLIONS)
2006
- ----
Life Insurance In-Force...... $ 297,114.1 $ 113,545.9 $ 39,347.2 $ 222,915.4 17.66%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 728.5 $ 143.5 $ 171.4 $ 756.4 22.66%
Accident and health.......... 126.1 89.4 24.7 61.4 40.23%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 854.6 $ 232.9 $ 196.1 $ 817.8 23.98%
================= ================ ================= ===============
2005
- ----
Life Insurance In-Force...... $ 280,180.3 $ 100,893.7 $ 41,273.9 $ 220,560.5 18.71%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 767.3 $ 101.1 $ 151.4 $ 817.6 18.52%
Accident and health.......... 133.7 88.3 18.7 64.1 29.17%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 901.0 $ 189.4 $ 170.1 $ 881.7 19.29%
================= ================ ================= ===============
2004
- ----
Life Insurance In-Force...... $ 270,858.1 $ 93,682.5 $ 42,322.6 $ 219,498.2 19.28%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 691.9 $ 44.0 $ 165.8 $ 813.7 20.38%
Accident and health.......... 137.0 96.5 25.4 65.9 38.54%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 828.9 $ 140.5 $ 191.2 $ 879.6 21.74%
================= ================ ================= ===============
(A) Includes amounts related to the discontinued group life and health business.
F-67
PART II, ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
9-1
PART II, ITEM 9A.
CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
management, including the Chief Executive Office and the Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of December 31, 2006. Based on that
evaluation, management, including the Chief Executive Officer and Chief
Financial Officer, concluded that the Company's disclosure controls and
procedures are effective. There has been no change in the Company's internal
control over financial reporting that occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
9A-1
PART II, ITEM 9B.
OTHER INFORMATION
None.
9B-1
PART III, ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted pursuant to General Instruction I to Form 10-K.
10-1
PART III, ITEM 11.
EXECUTIVE COMPENSATION
Omitted pursuant to General Instruction I to Form 10-K.
11-1
PART III, ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Omitted pursuant to General Instruction I to Form 10-K.
12-1
PART III, ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to General Instruction I to Form 10-K.
13-1
PART III, ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for professional audit services rendered by
PricewaterhouseCoopers LLP ("PwC") for the audit of AXA Equitable's annual
financial statements for 2006 and 2005, and fees for other services rendered by
PwC:
2006 2005
---------------- ---------------
(IN THOUSANDS)
Principal Accounting Fees and Services:
Audit fees.......................................................... $ 21,325 $ 8,851
Audit related fees.................................................. 2,187 1,234
Tax fees............................................................ 1,845 993
All other fees...................................................... 78 52
---------------- ---------------
Total................................................................. $ 25,435 $ 11,130
================ ===============
Audit fees for AXA Financial and AXA Equitable are paid pursuant to a single
engagement letter with PwC.
Audit related fees in both years principally consist of fees for Sarbanes-Oxley
Section 404 implementation and internal control reviews.
Tax fees consist of fees for tax preparation and tax consultation services.
All other fees consist of fees for miscellaneous non-audit services.
PwC began serving as the independent registered accounting firm for
AllianceBernstein and AllianceBernstein Holding in 2006 and audited
AllianceBernstein's and AllianceBernstein Holding's annual financial statements
for 2006. The fee table above includes audit fees and fees for other services
rendered to AllianceBernstein and AllianceBernstein Holding in 2006.
AXA Equitable's audit committee has determined that all services to be provided
by its independent registered public accounting firm must be reviewed and
approved by the audit committee on a case-by-case basis; provided, however, that
the audit committee has delegated to its chairperson the ability to pre-approve
any non-audit engagement where the fees are expected to be less than or equal to
$100,000 per engagement. Any exercise of this delegated authority by the audit
committee chairperson is required to be reported at the next audit committee
meeting.
The AllianceBernstein and AllianceBernstein Holding audit committees have
adopted policies to pre-approve audit and non-audit service engagements with
their independent registered public accounting firm. The independent registered
public accounting firm is to provide annually a comprehensive and detailed
schedule of each proposed audit and non-audit service to be performed. The audit
committee then affirmatively indicates its approval of the listed engagements.
Engagements that are not listed, but that are of similar scope and size to those
listed and approved, may be deemed to be approved, if the fee for such service
is less than $100,000. In addition, each audit committee has delegated to its
chairman the ability to approve any permissible non-audit engagement where the
fees are expected to be less than $100,000.
All services provided by PwC in 2006 were pre-approved in accordance with the
procedures described above.
14-1
PART IV, ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Consolidated
Financial Statements and Schedules on page FS-1.
2. Consolidated Financial Statement Schedules
The consolidated financial statement schedules are listed in the Index
to Consolidated Financial Statements and Schedules on page FS-1.
3. Exhibits
The exhibits are listed in the Index to Exhibits that begins on
page E-1.
15-1
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, AXA Equitable Life Insurance Company has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 15, 2007 AXA EQUITABLE LIFE INSURANCE COMPANY
By: /s/ Christopher M. Condron
------------------------------------------
Name: Christopher M. Condron
Chairman of the Board, President and Chief
Executive Officer, Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Christopher M. Condron Chairman of the Board, President and Chief March 15, 2007
- -------------------------------------------- Executive Officer, Director
Christopher M. Condron
/s/ Richard S. Dziadzio Executive Vice President and March 15, 2007
- -------------------------------------------- Chief Financial Officer
Richard S. Dziadzio
/s/ Alvin H. Fenichel Senior Vice President and Controller March 15, 2007
- --------------------------------------------
Alvin H. Fenichel
/s/ Henri de Castries Director March 15, 2007
- --------------------------------------------
Henri de Castries
/s/ Bruce W. Calvert Director March 15, 2007
- --------------------------------------------
Bruce W. Calvert
/s/ Denis Duverne Director March 15, 2007
- --------------------------------------------
Denis Duverne
/s/ Charlynn Goins Director March 15, 2007
- --------------------------------------------
Charlynn Goins
/s/Anthony J. Hamilton Director March 15, 2007
- --------------------------------------------
Anthony J. Hamilton
/s/ Mary R. Henderson Director March 15, 2007
- --------------------------------------------
Mary R. Henderson
/s/ James F. Higgins Director March 15, 2007
- --------------------------------------------
James F. Higgins
/s/ Scott D. Miller Director March 15, 2007
- --------------------------------------------
Scott D. Miller
/s/ Joseph H. Moglia Director March 15, 2007
- --------------------------------------------
Joseph H. Moglia
/s/ Lorie A. Slutsky Director March 15, 2007
- --------------------------------------------
Lorie A. Slutsky
/s/ Ezra Suleiman Director March 15, 2007
- --------------------------------------------
Ezra Suleiman
/s/ Peter J. Tobin Director March 15, 2007
- --------------------------------------------
Peter J. Tobin
INDEX TO EXHIBITS
Tag
Number Description Method of Filing Value
- ---------- ----------------------------------------- --------------------------------------------- ----------
2.1 Stock Purchase Agreement dated as of Filed as Exhibit 2.1 to AXA
Financial's August 30, 2000 among CSG, Current Report on Form 8-K dated
AXA, Equitable Life, AXA Participations November 14, 2000 and incorporated herein
Belgium and AXA Financial by reference
2.2 Letter Agreement dated as of October 6, Filed as Exhibit 2.2 to AXA Financial's
2000 to the Stock Purchase Agreement Current Report on Form 8-K dated
among CSG, AXA, Equitable Life, AXA November 14, 2000 and incorporated herein
Participations Belgium and AXA by reference
Financial
3.1 Restated Charter of Equitable Life, as Filed as Exhibit 3.1(a) to registrant's
amended January 1, 1997 Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated
herein by reference
3.2 Restated Charter of AXA Equitable, as Filed as Exhibit 3.2 to registrant's Annual
amended December 6, 2004 Report on Form 10-K for the year ended
December 31, 3004 and incorporated herein
by reference
3.3 Restated By-laws of Equitable Life, as Filed as Exhibit 3.2(a) to registrant's
amended November 21, 1996 Annual Report on Form 10-K for the year
ended December 31, 1996 and incorporated
herein by reference
10.1 Cooperation Agreement, dated as of July Filed as Exhibit 10(d) to AXA Financial's
18, 1991, as amended among Equitable Form S-1 Registration Statement (No.
Life, AXA Financial and AXA 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.2 Letter Agreement, dated May 12, 1992, Filed as Exhibit 10(e) to AXA Financial's
among AXA Financial, Equitable Life and Form S-1 Registration Statement (No.
AXA 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.3 Amended and Restated Reinsurance Filed as Exhibit 10(o) to AXA Financial's
Agreement, dated as of March 29, 1990, Form S-1 Registration Statement (No.
between Equitable Life and First 33-48115), dated May 26, 1992 and
Equicor Life Insurance Company incorporated herein by reference
10.4 Fiscal Agency Agreement between Filed as Exhibit 10.5 to registrant's
Equitable Life and The Chase Manhattan Annual Report on Form 10-K for the year
Bank, N.A. ended December 31, 1995 and incorporated
herein by reference
10.5(a) Lease, dated as of July 20, 1995, Filed as Exhibit 10.26(a) to AXA
between 1290 Associates, L.L.C. and Financial's Annual Report on Form 10-K
Equitable Life for the year ended December 31, 1996 and
incorporated herein by reference
10.5(b) First Amendment of Lease Agreement, Filed as Exhibit 10.26(b) to AXA
dated as of December 28, 1995, between Financial's Annual Report on Form 10-K
1290 Associates, L.L.C. and Equitable for the year ended December 31, 1996 and
Life incorporated herein by reference
Tag
Number Description Method of Filing Value
- ---------- ----------------------------------------- --------------------------------------------- ----------
10.5(c) Amended and Restated Company Lease Filed as Exhibit 10.26(c) to AXA
Agreement (Facility Realty), made as of Financial's Annual Report on Form 10-K
May 1, 1996, by and between Equitable for the year ended December 31, 1996 and
Life and the IDA incorporated herein by reference
10.5(d) Amended and Restated Company Lease Filed as Exhibit 10.26(d) to AXA
Agreement (Project Property), made and Financial's Annual Report on Form 10-K
entered into as of May 1, 1996, by and for the year ended December 31, 1996 and
between the IDA, Equitable Life and incorporated herein by reference
EVLICO
10.6 Distribution and Servicing Agreement Filed as Exhibit 10.7 to the registrant's
between AXA Advisors (as successor to Annual Report on Form 10-K for the year
Equico Securities, Inc.) and Equitable ended December 31, 1999 and incorporated
Life dated as of May 1, 1994 herein by reference
10.7 Agreement for Cooperative and Joint Use Filed as Exhibit 10.8 to the registrant's
of Personnel, Property and Services Annual Report on Form 10-K for the year
between Equitable Life and AXA ended December 31, 1999 and incorporated
Advisors dated as of September 21, 1999 herein by reference
10.8 General Agent Sales Agreement Filed as Exhibit 10.9 to the registrant's
between Equitable Life and AXA Annual Report on Form 10-K for the year
Network dated as of January 1, 2000 ended December 31, 1999 and incorporated
herein by reference
10.9 Agreement for Services by Equitable Filed as Exhibit 10.10 to the registrant's
Life to AXA Network dated as of January Annual Report on Form 10-K for the year
1, 2000 ended December 31, 1999 and incorporated
herein by reference
13.1 AllianceBernstein Risk Factors Filed herewith EX-13.1
21 Subsidiaries of the registrant Omitted pursuant to General Instruction I
of Form 10-K
31.1 Section 302 Certification made by the Filed herewith EX-31.1
registrant's Chief Executive Officer
31.2 Section 302 Certification made by the Filed herewith EX-31.2
registrant's Chief Financial Officer
32.1 Section 906 Certification made by the Filed herewith EX-32.1
registrant's Chief Executive Officer
32.2 Section 906 Certification made by the Filed herewith EX-32.2
registrant's Chief Financial Officer