SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999 Commission File No. 1-11166
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AXA Financial, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 13-3623351
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
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The Equitable Companies Incorporated
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(Former name, former address, and former fiscal year if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days.
Yes |X| No | |
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at November 10, 1999
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Common Stock, $.01 par value 450,191,189
Page 1 of 40
AXA FINANCIAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page #
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
o Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998... 3
o Consolidated Statements of Earnings for the Three Months and Nine
Months Ended September 30, 1999 and 1998...................................... 4
o Consolidated Statements of Shareholders' Equity for the Nine Months
Ended September 30, 1999 and 1998............................................. 5
o Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998................................................... 6
o Notes to Consolidated Financial Statements.................................... 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 17
Item 3: Quantitative and Qualitative Disclosures About Market Risk...................... 37
PART II OTHER INFORMATION
Item 1: Legal Proceedings............................................................... 38
Item 6: Exhibits and Reports on Form 8-K................................................ 39
SIGNATURES................................................................................... 40
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PART I FINANCIAL INFORMATION
ITEM 1: UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
AXA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
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(IN MILLIONS)
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value................... $ 19,666.7 $ 19,449.3
Held to maturity, at amortized cost........................... 251.8 250.9
Investment banking trading account securities, at market value.. 20,023.1 13,195.1
Securities purchased under resale agreements.................... 24,735.0 20,063.3
Mortgage loans on real estate................................... 3,184.4 2,809.9
Equity real estate.............................................. 1,470.0 1,676.9
Policy loans.................................................... 2,209.0 2,086.7
Other equity investments........................................ 1,523.4 1,234.7
Other invested assets........................................... 1,007.0 809.6
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Total investments............................................ 74,070.4 61,576.4
Cash and cash equivalents......................................... 2,428.8 2,335.4
Broker-dealer related receivables................................. 47,724.8 34,589.9
Deferred policy acquisition costs................................. 3,843.4 3,563.8
Other assets...................................................... 6,070.2 5,500.9
Closed Block assets............................................... 8,603.9 8,632.4
Separate Accounts assets.......................................... 46,235.4 43,302.3
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TOTAL ASSETS...................................................... $ 188,976.9 $ 159,501.1
============= =============
LIABILITIES
Policyholders' account balances................................... $ 21,325.2 $ 20,857.5
Future policy benefits and other policyholders liabilities........ 4,776.2 4,726.4
Securities sold under repurchase agreements....................... 51,390.1 35,775.6
Broker-dealer related payables.................................... 34,194.0 26,418.3
Short-term and long-term debt..................................... 7,805.3 6,300.1
Other liabilities................................................. 8,596.5 7,441.8
Closed Block liabilities.......................................... 9,040.6 9,077.0
Separate Accounts liabilities..................................... 46,125.0 43,211.3
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Total liabilities............................................ 183,252.9 153,808.0
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Commitments and contingencies (Notes 7 and 13)
SHAREHOLDERS' EQUITY
Series D convertible preferred stock.............................. 532.5 598.4
Stock employee compensation trust................................. (532.5) (598.4)
Common stock, at par value........................................ 4.5 2.2
Capital in excess of par value.................................... 3,729.6 3,662.1
Treasury stock.................................................... (414.9) (247.1)
Retained earnings................................................. 2,727.0 1,926.1
Accumulated other comprehensive (loss) income..................... (322.2) 349.8
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Total shareholders' equity................................... 5,724.0 5,693.1
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........................ $ 188,976.9 $ 159,501.1
============= =============
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
1999 1998 1999 1998
------------- ------------ ------------ -------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
REVENUES
Universal life and investment-type
product policy fee income................. $ 314.3 $ 270.3 $ 918.8 $ 787.4
Premiums.................................... 140.0 147.1 405.6 436.2
Net investment income....................... 1,094.4 1,110.4 3,257.4 3,468.4
Investment banking principal transactions,
net....................................... 185.2 (183.5) 605.9 63.9
Investment (losses) gains, net.............. (33.6) (5.6) 152.6 120.3
Commissions, fees and other income.......... 1,464.5 1,010.9 4,247.4 3,327.3
Contribution from the Closed Block.......... 23.7 24.0 65.6 66.4
------------ ------------ ------------ -------------
Total revenues......................... 3,188.5 2,373.6 9,653.3 8,269.9
------------ ------------ ------------ -------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account
balances.................................. 267.2 289.5 807.0 872.8
Policyholders' benefits..................... 262.0 244.1 756.7 764.5
Other operating costs and expenses.......... 2,203.9 1,573.6 6,548.4 5,376.2
------------ ------------ ------------ -------------
Total benefits and other deductions.... 2,733.1 2,107.2 8,112.1 7,013.5
------------ ------------ ------------ -------------
Earnings from continuing operations before
Federal income taxes and minority interest 455.4 266.4 1,541.2 1,256.4
Federal income taxes........................ 136.0 86.0 437.1 414.8
Minority interest in net income of
consolidated subsidiaries................. 84.4 41.3 260.4 188.9
------------ ------------ ------------ -------------
Earnings from continuing operations......... 235.0 139.1 843.7 652.7
Discontinued operations, net of Federal
income taxes.............................. (3.4) .7 (10.0) 2.5
------------ ------------ ------------ -------------
Net Earnings................................ $ 231.6 $ 139.8 $ 833.7 $ 655.2
============ ============ ============ =============
Per Common Share:
Basic:
Earnings from continuing operations...... $ .54 $ .31 $ 1.93 $ 1.47
Discontinued operations, net of Federal
income taxes........................... (.01) .01 (.03) -
------------ ------------ ------------ -------------
Net Earnings............................. $ .53 $ .32 $ 1.90 $ 1.47
============ ============ ============ =============
Diluted:
Earnings from continuing operations...... $ .52 $ .31 $ 1.84 $ 1.42
Discontinued operations, net of Federal
income taxes........................... (.01) - (.02) -
------------ ------------ ------------ -------------
Net Earnings............................. $ .51 $ .31 $ 1.82 $ 1.42
============ ============ ============ =============
Cash Dividends Per Common Share $ .025 $ .025 $ .075 $ .075
============ ============ ============ =============
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1999 1998
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(IN MILLIONS)
SHAREHOLDERS' EQUITY
Series D convertible preferred stock, beginning of year....... $ 598.4 $ 514.4
Exchange of Series D convertible preferred stock.............. (45.0) -
Change in market value of shares.............................. (20.9) (86.6)
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Series D convertible preferred stock, end of period........... 532.5 427.8
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Stock employee compensation trust, beginning of year.......... (598.4) (514.4)
Exchange of Series D convertible preferred stock in the
employee compensation trust................................. 45.0 -
Change in market value of shares.............................. 20.9 86.6
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Stock employee compensation trust, end of period.............. (532.5) (427.8)
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Common stock, at par value, beginning of year................. 2.2 2.2
Additional common stock issued, at par value.................. 2.3 -
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Common stock, at par value, end of period 4.5 2.2
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Capital in excess of par value, beginning of year............. 3,662.1 3,627.5
Additional capital in excess of par value..................... 67.5 31.2
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Capital in excess of par value, end of period................. 3,729.6 3,658.7
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Treasury stock, beginning of year............................. (247.1) -
Purchase of shares for treasury............................... (167.8) (145.0)
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Treasury stock, end of period................................. (414.9) (145.0)
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Retained earnings, beginning of year.......................... 1,926.1 1,137.4
Net earnings.................................................. 833.7 655.2
Dividends on common stock..................................... (32.8) (33.4)
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Retained earnings, end of period.............................. 2,727.0 1,759.2
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Accumulated other comprehensive income, beginning of year..... 349.8 506.4
Other comprehensive (loss) income............................. (672.0) 7.0
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Accumulated other comprehensive (loss) income, end of period.. (322.2) 513.4
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TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD..................... $ 5,724.0 $ 5,788.5
============== ==============
See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
1999 1998
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(IN MILLIONS)
Net earnings.................................................. $ 833.7 $ 655.2
Adjustments to reconcile net earnings to net cash used
by operating activities:
Interest credited to policyholders' account balances....... 807.0 872.8
Universal life and investment-type policy fee income....... (918.8) (787.4)
Net change in trading activities and broker-dealer related
receivables/payables..................................... (12,297.4) (2,365.7)
Increase in matched resale agreements...................... (11,586.3) (2,317.8)
Increase in matched repurchase agreements.................. 11,586.3 2,317.8
Investment gains, net of dealer and trading gains.......... (238.4) (253.2)
Change in clearing association fees and regulatory deposits 308.3 41.9
Change in accounts payable and accrued expenses............ 760.8 323.5
Change in Federal income tax payable....................... 230.9 61.3
Other, net................................................. (633.2) (605.1)
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Net cash used by operating activities......................... (11,147.1) (2,056.7)
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Cash flows from investing activities:
Maturities and repayments................................... 1,487.9 1,869.1
Sales....................................................... 6,969.7 13,849.8
Purchases................................................... (10,229.4) (16,106.7)
Decrease in loans to discontinued operations................ - 300.0
Other, net.................................................. (305.0) (323.2)
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Net cash used by investing activities......................... (2,076.8) (411.0)
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Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................. 1,997.4 1,066.8
Withdrawals............................................... (1,460.6) (1,314.2)
Increase in short-term financings........................... 11,423.5 1,977.6
Additions to long-term debt................................. 1,336.2 1,970.8
Repayments of long-term debt................................ (169.0) (495.5)
Payment of obligation to fund accumulated deficit of
discontinued operations.................................... - (87.2)
Purchase of treasury stock.................................. (167.8) (145.0)
Other, net.................................................. 357.6 253.2
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Net cash provided by financing activities..................... 13,317.3 3,226.5
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Change in cash and cash equivalents........................... 93.4 758.8
Cash and cash equivalents, beginning of year.................. 2,335.4 597.4
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Cash and Cash Equivalents, End of Period...................... $ 2,428.8 $ 1,356.2
============== ==============
Supplemental cash flow information
Interest Paid............................................... $ 3,836.0 $ 3,520.9
============== ==============
Income Taxes Paid........................................... $ 160.0 $ 312.2
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See Notes to Consolidated Financial Statements.
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AXA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
On September 3, 1999, The Equitable Companies Incorporated changed its name
to AXA Financial, Inc. (the "Holding Company"). Reports and filings with
the SEC made before September 3 can be found under The Equitable Companies
Incorporated's name.
The accompanying consolidated financial statements are prepared in
conformity with GAAP which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. These statements should be read in conjunction
with the consolidated financial statements of the Holding Company and its
consolidated subsidiaries (together, "AXA Financial") for the year ended
December 31, 1998. The results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of the results to be
expected for the full year.
The terms "third quarter 1999" and "third quarter 1998" refer to the three
months ended September 30, 1999 and 1998, respectively. The terms "first
nine months of 1999" and "first nine months of 1998" refer to the nine
months ended September 30, 1999 and 1998, respectively.
Certain reclassifications have been made in the amounts presented for prior
periods to conform those periods with the current presentation.
2) CAPITAL STOCK
In September 1999, the Board of Directors declared a two-for-one stock
split (the "Stock Split") of the Holding Company's Common Stock. The Stock
Split was effected in the form of a 100% stock dividend to shareholders of
record on September 27, 1999 and was paid on October 1, 1999. The par value
of the Common Stock remains at $0.01 per share. To reflect the par value of
the shares after the split, an adjustment was made from Capital in excess
of par value to Common stock. In the accompanying consolidated financial
statements and footnotes, all Common Stock, per share and option data have
been restated for the effect of the Stock Split.
In December 1993, the Holding Company established a SECT to provide a
source of funding for a portion of obligations arising from various
employee compensation and benefits programs of subsidiaries. At that time,
the Holding Company sold 60,000 shares of Series D Preferred Stock to the
SECT. Periodically, the SECT is required to distribute an amount of Series
D Preferred Stock (or Common Stock issued on conversion thereof) based on a
predetermined formula. In April 1996, the Holding Company had registered
with the SEC approximately 11.9 million shares (on a pre-Stock Split basis)
of Common Stock issuable upon conversion of shares of Series D Preferred
Stock held by the SECT. In September 1999, the SECT released 4,020 shares
of Series D Preferred Stock which were converted into 1.6 million shares of
Common Stock. AXA purchased 146,100 shares directly, the Holding Company
purchased 1,356,500 shares in connection with its treasury stock repurchase
program while the remaining shares were sold through an agent to the
public. The net proceeds of the sale after the repurchase of treasury
shares of $7.4 million increased shareholders' equity.
3) NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which amends SFAS No. 133 to defer its effective date
by one year to all fiscal years beginning after June 15, 2000. AXA
Financial expects to adopt SFAS No. 133 effective January 1, 2001.
-7-
4) DEFERRED POLICY ACQUISITION COSTS
As part of its asset/liability management process, in second quarter 1999,
management initiated a review of the matching of invested assets to
Insurance product lines given their different liability characteristics and
liquidity requirements. As a result of this review, management reallocated
the current and prospective interests of the various product lines in the
invested assets. These asset reallocations and the related changes in
investment yields by product line, in turn, triggered a review of and
revisions to the estimated future gross profits used to determine the
amortization of DAC for universal life and investment-type products. The
revisions to estimated future gross profits resulted in an after-tax
writedown of DAC of $85.6 million (net of a Federal income tax benefit of
$46.1 million) or $.20 per basic and $.19 per diluted share for the nine
months ended September 30, 1999.
5) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
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(IN MILLIONS)
Balances, beginning of year.................................. $ 230.6 $ 384.5
Additions charged to income.................................. 34.5 72.6
Deductions for writedowns and asset dispositions............. (107.7) (173.8)
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Balances, End of Period...................................... $ 157.4 $ 283.3
============ ============
Balances, end of period:
Mortgage loans on real estate.............................. $ 32.3 $ 28.5
Equity real estate......................................... 125.1 254.8
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Total........................................................ $ 157.4 $ 283.3
============ ============
For the third quarter and first nine months of 1999 and of 1998, investment
income is shown net of investment expenses (including interest expense to
finance short-term trading instruments) of $848.5 million, $2,456.7
million, $858.2 million and $2,551.9 million, respectively.
As of September 30, 1999 and December 31, 1998, fixed maturities classified
as available for sale had amortized costs of $19,837.4 million and
$18,907.9 million, fixed maturities in the held to maturity portfolio had
estimated fair values of $260.8 million and $270.4 million and investment
banking trading account securities had amortized costs of $20,452.9 million
and $13,385.6 million, respectively. Other equity investments included
equity securities with carrying values of $887.4 million and $672.1 million
and costs of $826.2 million and $574.2 million at September 30, 1999 and
December 31, 1998, respectively.
On January 1, 1999, investments in publicly-traded common equity securities
in the General Account and Holding Company Group portfolios within other
equity investments amounting to $149.8 million were transferred from
available for sale securities to trading securities. As a result of this
transfer, unrealized investment gains of $87.3 million ($45.7 million net
of related DAC and Federal income taxes) were recognized as realized
investment gains in the consolidated statements of earnings. In the third
quarter and first nine months of 1999, net unrealized holding losses of
$3.8 million and $3.7 million were included in net investment income in the
consolidated statements of earnings. These trading securities had a
carrying value of $18.4 million and costs of $22.1 million at September 30,
1999.
For the first nine months of 1999 and of 1998, proceeds received on sales
of fixed maturities classified as available for sale amounted to $6,362.4
million and $13,271.1 million, respectively. Gross gains of $49.9 million
and $116.1 million and gross losses of $118.5 million and $72.7 million
were realized on these sales for the first nine months of 1999 and of 1998,
respectively. Unrealized investment gains (losses) related to fixed
maturities classified as available for sale decreased by $1,021.0 million
in the first nine months of 1999, resulting in a balance of $479.6 million
of unrealized investment losses at September 30, 1999.
-8-
Impaired mortgage loans along with the related provision for losses were as
follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
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(IN MILLIONS)
Impaired mortgage loans with provision for losses.......... $ 158.5 $ 125.4
Impaired mortgage loans without provision for losses....... 10.9 8.6
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Recorded investment in impaired mortgage loans............. 169.4 134.0
Provision for losses....................................... (27.1) (29.0)
============= =============
Net Impaired Mortgage Loans................................ $ 142.3 $ 105.0
============= =============
During the first nine months of 1999 and of 1998, respectively, AXA
Financial's average recorded investment in impaired mortgage loans was
$139.1 million and $177.1 million. Interest income recognized on these
impaired mortgage loans totaled $9.6 million and $9.5 million ($.1 million
and $.9 million recognized on a cash basis) for the first nine months of
1999 and 1998, respectively.
6) SALE OF SUBSIDIARY STOCK
During second quarter 1999, DLJ completed its offering of a new class of
its common stock to track the financial performance of DLJdirect, its
online brokerage business. As a result of this offering, AXA Financial
recorded a non-cash pre-tax realized gain of $212.3 million.
7) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are treated as financing
transactions and carried at the amounts at which the securities
subsequently will be reacquired per the respective agreements. These
agreements with counterparties were collateralized principally by U.S.
government securities. The weighted average interest rates on securities
sold under repurchase agreements were 5.02% and 4.89% at September 30, 1999
and December 31, 1998, respectively.
8) CLOSED BLOCK
Summarized financial information for the Closed Block is as follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(IN MILLIONS)
ASSETS
Fixed maturities:
Available for sale, at estimated fair value (amortized
cost of $4,009.5 and $4,149.0)........................ $ 3,967.5 $ 4,373.2
Mortgage loans on real estate............................. 1,722.5 1,633.4
Policy loans.............................................. 1,603.1 1,641.2
Cash and other invested assets............................ 295.5 86.5
Deferred policy acquisition costs......................... 840.4 676.5
Other assets.............................................. 174.9 221.6
-------------- --------------
Total Assets.............................................. $ 8,603.9 $ 8,632.4
============== ==============
LIABILITIES
Future policy benefits and other policyholders' account
balances................................................ $ 9,005.5 $ 9,013.1
Other liabilities......................................... 35.1 63.9
-------------- --------------
Total Liabilities......................................... $ 9,040.6 $ 9,077.0
============== ==============
-9-
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
(IN MILLIONS)
REVENUES
Premiums and other income......... $ 147.9 $ 155.1 $ 460.3 $ 488.1
Investment income (net of
investment expenses of $3.1,
$4.7, $13.1 and $15.5).......... 142.3 143.3 429.5 425.0
Investment (losses) gains, net.... (6.6) .3 (5.1) (1.6)
------------ ------------ ------------- ------------
Total revenues.................... 283.6 298.7 884.7 911.5
------------ ------------ ------------- ------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits and
dividends....................... 238.6 252.8 765.5 797.6
Other operating costs and expenses 21.3 21.9 53.6 47.5
------------ ------------ ------------- ------------
Total benefits and other deductions 259.9 274.7 819.1 845.1
------------ ------------ ------------- ------------
Contribution from the Closed Block $ 23.7 $ 24.0 $ 65.6 $ 66.4
============ ============ ============= ============
Investment valuation allowances amounted to $8.7 million and $11.1 million
on mortgage loans and $13.9 million and $15.4 million on equity real estate
at September 30, 1999 and December 31, 1998, respectively.
Impaired mortgage loans along with the related provision for losses were as
follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(IN MILLIONS)
Impaired mortgage loans with provision for losses......... $ 39.3 $ 55.5
Impaired mortgage loans without provision for losses...... 4.4 7.6
-------------- --------------
Recorded investment in impaired mortgages................. 43.7 63.1
Provision for losses...................................... (7.7) (10.1)
-------------- --------------
Net Impaired Mortgage Loans............................... $ 36.0 $ 53.0
============== ==============
During the first nine months of 1999 and of 1998, respectively, the Closed
Block's average recorded investment in impaired mortgage loans was $45.0
million and $97.5 million. Interest income recognized on these impaired
mortgage loans totaled $2.6 million and $4.0 million ($1.5 million
recognized on a cash basis for the first nine months of 1998) for the first
nine months of 1999 and 1998, respectively.
-10-
9) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(IN MILLIONS)
ASSETS
Mortgage loans on real estate............................. $ 471.9 $ 553.9
Equity real estate........................................ 563.1 611.0
Other equity investments.................................. 66.0 115.1
Other invested assets..................................... 53.9 24.9
-------------- --------------
Total investments....................................... 1,154.9 1,304.9
Cash and cash equivalents................................. 47.9 34.7
Other assets.............................................. 222.0 219.0
-------------- --------------
Total Assets.............................................. $ 1,424.8 $ 1,558.6
============== ==============
LIABILITIES
Policyholders liabilities................................. $ 1,002.5 $ 1,021.7
Allowance for future losses............................... 291.9 305.1
Other liabilities......................................... 130.4 231.8
-------------- --------------
Total Liabilities......................................... $ 1,424.8 $ 1,558.6
============== ==============
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
(IN MILLIONS)
REVENUES
Investment income (net of
investment expenses of $12.8,
$15.8,$ 38.3 and $53.3)......... $ 30.2 $ 46.3 $ 72.7 $ 124.8
Investment (losses) gains, net.... (6.2) 1.5 (16.7) 34.7
Other income, net................. .1 - .1 (.1)
------------ ------------ ------------- ------------
Total revenues.................... 24.1 47.8 56.1 159.4
BENEFITS AND OTHER DEDUCTIONS..... 26.5 35.3 80.9 109.9
(Losses charged) earnings credited
to allowance for future losses.. (2.4) 12.5 (24.8) 49.5
------------ ------------ ------------- ------------
Pre-tax loss from operations...... - - - -
Pre-tax (loss from strengthening)
earnings from releasing the
allowance for future losses..... (4.6) 1.2 (14.7) 3.9
Federal income tax benefit
(expense)....................... 1.2 (.5) 4.7 (1.4)
------------ ------------ ------------- ------------
(Loss) Earnings from Discontinued
Operations...................... $ (3.4) $ .7 $ (10.0) $ 2.5
============ ============ ============= ============
AXA Financial's quarterly process for evaluating the allowance for future
losses applies the current period's results of discontinued operations
against the allowance, re-estimates future losses, and adjusts the
allowance, if appropriate. The evaluations performed as of September 30,
1999 and 1998 resulted in management's decision to strengthen the allowance
by $14.7 million and release the allowance by $3.9 million for the nine
months ended September 30, 1999 and 1998, respectively. This resulted in
after-tax losses of $10.0 million for the first nine months of 1999 and
after-tax earnings of $2.5 million for the first nine months of 1998.
-11-
Management believes the allowance for future losses at September 30, 1999
is adequate to provide for all future losses; however, the determination of
the allowance involves numerous estimates and subjective judgments
regarding the expected performance of Discontinued Operations Investment
Assets. There can be no assurance the losses provided for will not differ
from the losses ultimately realized. To the extent actual results or future
projections of discontinued operations differ from management's current
estimates and assumptions underlying the allowance for future losses, the
difference would be reflected in the consolidated statements of earnings in
discontinued operations. In particular, to the extent income, sales
proceeds and holding periods for equity real estate differ from
management's previous assumptions, periodic adjustments to the allowance
are likely to result.
Investment valuation allowances amounted to $3.6 million and $3.0 million
on mortgage loans and $40.3 million and $34.8 million on equity real estate
at September 30, 1999 and December 31, 1998, respectively.
Impaired mortgage loans along with the related provision for losses were as
follows:
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(IN MILLIONS)
Impaired mortgage loans with provision for losses......... $ 11.1 $ 6.7
Impaired mortgage loans without provision for losses...... .4 8.5
-------------- --------------
Recorded investment in impaired mortgages................. 11.5 15.2
Provision for losses...................................... (2.7) (2.1)
-------------- --------------
Net Impaired Mortgage Loans............................... $ 8.8 $ 13.1
============== ==============
During the first nine months of 1999 and of 1998, discontinued operations'
average recorded investment in impaired mortgage loans was $15.3 million
and $95.0 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $.5 million and $4.6 million ($3.4 million
recognized on a cash basis for the first nine months of 1998) in the first
nine months of 1999 and 1998, respectively.
Benefits and other deductions included $5.8 million and $21.7 million of
interest expense related to amounts borrowed from continuing operations for
the third quarter and first nine months of 1998.
10) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary, at
the end of each successive interim period to reflect the current estimate
of the annual effective tax rate.
11) RESTRUCTURING COSTS
At September 30, 1999, restructuring liabilities included costs related to
employee termination and exit costs, the termination of operating leases
and the consolidation of insurance operations' service centers and amounted
to $10.3 million. The amounts paid during the first nine months of 1999
totaled $14.1 million.
-12-
12) COMPUTATION OF PER SHARE EARNINGS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
(IN MILLIONS)
Net earnings applicable to common
shares - Basic.................. $ 231.6 $ 139.8 $ 833.7 $ 655.2
Less - effect of assumed exercise
of options of publicly held
subsidiaries.................... (7.2) (1.5) (28.4) (13.4)
------------ ------------ ------------- ------------
Net Earnings Applicable to Common
Shares - Diluted................ $ 224.4 $ 138.3 $ 805.3 $ 641.8
============ ============ ============= ============
Weighted average common shares
outstanding - Basic............. 437.0 443.9 437.8 444.7
Add - assumed exercise of stock
options......................... 4.9 6.3 5.4 6.0
------------ ------------ ------------- ------------
Weighted Average Shares
Outstanding - Diluted........... 441.9 450.2 443.2 450.7
============ ============ ============= ============
13) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in AXA Financial's
Notes to Consolidated Financial Statements for the year ended December 31,
1998, except as follows:
Equitable Life's settlement has become effective with respect to the
previously disclosed cases brought by persons insured under Major Medical
insurance policies. The parties have obtained dismissal of the actions
pending in each of the relevant jurisdictions.
In Rickel, the complaint was dismissed in April 1999 by the Court.
Plaintiff has filed an appeal. Although there can be no assurance, DLJ's
management does not believe that the ultimate outcome of this litigation
will have a material adverse effect on DLJ's consolidated financial
condition or DLJ's results of operations in any particular period.
The Dayton Monetary Associates and Mid-American Waste Systems actions have
been settled without a material adverse effect on DLJ's consolidated
financial condition or results of operation in any particular period.
In November 1998, three purported class actions (Gillet v. Goldman, Sachs &
Co. et al., Prager v. Goldman, Sachs & Co. et al. and Holzman v. Goldman,
Sachs & Co. et al.) were filed in the U.S. District Court for the Southern
District of New York against more than 25 underwriters of initial public
offering securities, including DLJSC. The complaints allege that defendants
conspired to fix the "fee" paid for underwriting initial public offering
securities by setting the underwriters' discount or "spread" at 7%, in
violation of the federal antitrust laws. The complaints seek treble damages
in an unspecified amount and injunctive relief as well as attorneys' fees
and costs. On March 15, 1999, the plaintiffs filed a Consolidated Amended
Complaint captioned In re Public Offering Fee Antitrust Litigation. A
motion by all defendants to dismiss the complaints on several grounds is
pending. Separately, the U.S. Department of Justice has issued a Civil
Investigative Demand to several investment banking firms, including DLJSC,
seeking documents and information relating to "alleged" price-fixing with
respect to underwriting spreads in initial public offerings. The government
has not made any charges against DLJSC or the other investment banking
firms. DLJSC is cooperating with the Justice Department in providing the
requested information and believes that no violation of law by DLJSC has
occurred. Although there can be no assurance, DLJ's management does not
believe that the ultimate outcome of these matters will have a material
adverse effect on DLJ's consolidated financial condition. Based upon the
information currently available to it, DLJ's management cannot predict
whether or not these matters will have a material adverse effect on DLJ's
results of operations in any particular period.
-13-
In addition to the matters previously reported and the matters described
above, the Holding Company and its subsidiaries are involved in various
legal actions and proceedings in connection with their businesses. Some of
the actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on AXA Financial's consolidated
financial position or results of operations.
14) BUSINESS SEGMENT INFORMATION
INVESTMENT ASSET
INSURANCE BANKING MANAGEMENT ELIMINATION TOTAL
------------ -------------- -------------- ------------- --------------
(IN MILLIONS)
THREE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
Segment revenues.. $ 1,076.9 $ 1,704.8 $ 445.0 $ (3.5) $ 3,223.2
Non-DLJ investment
(losses) gains
and other....... (35.0) - .3 - (34.7)
------------ -------------- -------------- ------------- --------------
Total Revenues.... $ 1,041.9 $ 1,704.8 $ 445.3 $ (3.5) $ 3,188.5
============ ============== ============== ============= ==============
Pre-tax operating
earnings........ $ 207.2 $ 114.0 $ 57.4 $ - $ 378.6
Investment (losses)
gains, net of
related DAC and
other charges... (30.9) - .2 - (30.7)
Pre-tax minority
interest........ - 58.5 49.0 - 107.5
------------ -------------- -------------- ------------- --------------
Earnings from
Continuing
Operations...... $ 176.3 $ 172.5 $ 106.6 $ - $ 455.4
============ ============== ============== ============= ==============
THREE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
Segment revenues.. $ 983.8 $ 1,073.7 $ 325.8 $ (4.1) $ 2,379.2
Non-DLJ investment
(losses) gains
and other....... (6.6) .6 .4 - (5.6)
------------ -------------- -------------- ------------- --------------
Total Revenues.... $ 977.2 $ 1,074.3 $ 326.2 $ (4.1) $ 2,373.6
============ ============== ============== ============= ==============
Pre-tax operating
earnings........ $ 157.0 $ 21.1 $ 48.0 $ - $ 226.1
Investment (losses)
gains, net of
related DAC and
other charges.. (9.8) .5 .2 - (9.1)
Pre-tax minority
interest........ - 15.5 33.9 - 49.4
------------ -------------- -------------- ------------- --------------
Earnings from
Continuing
Operations...... $ 147.2 $ 37.1 $ 82.1 $ - $ 266.4
============ ============== ============== ============= ==============
-14-
INVESTMENT ASSET
INSURANCE BANKING MANAGEMENT ELIMINATION TOTAL
------------ -------------- -------------- ------------- --------------
(IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30, 1999
--------------------
Segment revenues..... $ 3,207.1 $ 5,012.5 $ 1,282.9 $ (10.8) $ 9,491.7
Non-DLJ investment
(losses) gains
and other.......... (77.8) 236.4 3.0 - 161.6
------------ -------------- -------------- ------------- --------------
Total Revenues....... $ 3,129.3 $ 5,248.9 $ 1,285.9 $ (10.8) $ 9,653.3
============ ============== ============== ============= ==============
Pre-tax operating
earnings........... $ 630.1 $ 395.5 $ 159.7 $ - $ 1,185.3
Investment (losses)
gains, net of
related DAC and
other charges...... (85.9) 236.4 2.5 - 153.0
Non-recurring DAC
adjustments........ (131.7) - - - (131.7)
Pre-tax minority
interest........... - 191.7 142.9 - 334.6
------------ -------------- -------------- ------------- --------------
Earnings from
Continuing
Operations......... $ 412.5 $ 823.6 $ 305.1 $ - $ 1,541.2
============ ============== ============== ============= ==============
NINE MONTHS ENDED
SEPTEMBER 30, 1998
--------------------
Segment revenues..... $ 3,053.8 $ 4,129.5 $ 976.6 $ (10.3) $ 8,149.6
Non-DLJ investment
gains and other.... 68.6 34.7 17.0 - 120.3
------------ -------------- -------------- ------------- --------------
Total Revenues....... $ 3,122.4 $ 4,164.2 $ 993.6 $ (10.3) $ 8,269.9
============ ============== ============== ============= ==============
Pre-tax operating
earnings........... $ 496.4 $ 305.4 $ 125.0 $ - $ 926.8
Investment gains,
net of related
DAC and other 40.6 34.4 9.2 - 84.2
charges
Pre-tax minority
interest........... - 140.9 104.5 - 245.4
------------ -------------- -------------- ------------- --------------
Earnings from
Continuing
Operations......... $ 537.0 $ 480.7 $ 238.7 $ - $ 1,256.4
============ ============== ============== ============= ==============
TOTAL ASSETS:
September 30, 1999... $ 80,340.4 $ 97,774.6 $ 11,159.2 $ (297.3) $ 188,976.9
============ ============== ============== ============= ==============
December 31, 1998.... $ 76,109.4 $ 71,970.9 $ 11,602.5 $ (181.7) $ 159,501.1
============ ============== ============== ============= ==============
-15-
15) COMPREHENSIVE INCOME
The components of comprehensive income for the third quarters of 1999 and
1998 and the first nine months of 1999 and 1998 are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
(IN MILLIONS)
Net earnings...................... $ 231.6 $ 139.8 $ 833.7 $ 655.2
------------ ------------ ------------- ------------
Change in unrealized (losses)
gains, net of reclassification
adjustment...................... (148.7) (33.0) (672.0) 7.0
------------ ------------ ------------- ------------
Other comprehensive (loss) income. (148.7) (33.0) (672.0) 7.0
------------ ------------ ------------- ------------
Comprehensive Income.............. $ 82.9 $ 106.8 $ 161.7 $ 662.2
============ ============ ============= ============
-16-
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
On September 3 1999, The Equitable Companies Incorporated changed its name to
AXA Financial, Inc. ("AXA Financial"). The following analysis of the
consolidated operating results and financial condition of AXA Financial should
be read in conjunction with the Consolidated Financial Statements and the
related Notes to Consolidated Financial Statements included elsewhere herein,
and with the Management's Discussion and Analysis ("MD&A") section included in
AXA Financial's 1998 Report on Form 10-K. Reports and filings with the SEC made
prior to September 3 can be found under The Equitable Companies Incorporated's
name.
COMBINED OPERATING RESULTS
The combined and segment level discussions in this MD&A are on an operating
results basis; amounts reported in the GAAP financial statements have been
adjusted to exclude the effect of unusual or non-recurring events and
transactions and to exclude certain revenue and expense categories. The
following table presents the combined operating results outside of the Closed
Block combined on a line-by-line basis with the contribution of the Closed
Block. The Insurance analysis, which begins on page 19 likewise reflects the
Closed Block amounts on a line-by-line basis. The Investment Banking and Asset
Management discussions begin on pages 22 and 24, respectively. The MD&A
addresses the combined operating results unless noted otherwise.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------- ------------ -------------
(IN MILLIONS)
Operating Results:
Policy fee income and premiums....... $ 601.7 $ 572.0 $ 1,780.2 $ 1,711.2
Net investment income................ 1,237.8 1,253.7 3,681.5 3,893.4
Investment banking principal
transactions....................... 185.2 (159.2) 605.9 63.9
Commissions, fees and other income... 1,458.4 987.4 4,243.2 3,326.2
------------ ------------- ------------ -------------
Total revenues...................... 3,483.1 2,653.9 10,310.8 8,994.7
Total benefits and other deductions. 2,997.0 2,378.4 8,790.9 7,822.5
------------ ------------- ------------ -------------
Pre-tax operating earnings before
minority interest.................. 486.1 275.5 1,519.9 1,172.2
Minority interest.................... (107.5) (49.4) (334.6) (245.4)
------------ ------------- ------------ -------------
Pre-tax operating earnings........... 378.6 226.1 1,185.3 926.8
Pre-tax Adjustments:
Investment (losses) gains, net of
related DAC and other charges...... (30.7) (9.1) 153.0 84.2
Non-recurring DAC adjustments........ - - (131.7) -
Minority interest.................... 107.5 49.4 334.6 245.4
----------- ----------- ----------- ------------
GAAP Reported:
Earnings from continuing operations
before Federal income taxes and
minority interest.................. 455.4 266.4 1,541.2 1,256.4
Federal income taxes................. 136.0 86.0 437.1 414.8
Minority interest in net income of
consolidated subsidiaries.......... 84.4 41.3 260.4 188.9
------------ ------------- ------------ -------------
Earnings from Continuing Operations.... $ 235.0 $ 139.1 $ 843.7 $ 652.7
============ ============= ============ =============
-17-
On a GAAP reported basis, Federal income taxes increased as lower Insurance
earnings from continuing operations were more than offset by higher earnings by
Investment Banking and Asset Management. Insurance reported earnings for the
first nine months of 1999 declined, as compared to the 1998 period, principally
due to the effect of the non-recurring DAC adjustments in second quarter 1999
(discussed below) and to realized investment losses in 1999 as compared to gains
in 1998. Minority interest in net income of consolidated subsidiaries was higher
due to increased earnings at both DLJ and Alliance.
Adjustments to GAAP reported earnings to calculate operating earnings in the
first nine months of 1999 excluded net investment gains of $152.1 million
(excluding related DAC and other charges totaling $0.9 million) as compared to
net investment gains of $112.5 million (excluding related DAC, and other charges
and credits totaling $28.3 million) in the first nine months of 1998. The 1999
gains were primarily due to the $212.3 million gain related to the sale of an
approximately 18% interest in DLJdirect's financial performance through the sale
of a new class of DLJ common stock in second quarter 1999. In addition, $87.3
million of gains were recognized upon reclassification of publicly-traded common
equities to a trading portfolio (see page 31) and $26.4 million of gains
resulted from the exercise of subsidiaries' options and conversion of DLJ
restricted stock Unit ("RSU"). Losses of $196.8 million on writedowns and sales
of General Account fixed maturities partially offset these 1999 gains. The 1998
gains principally resulted from gains of $63.2 million on General Account
Investment Assets and from gross gains of $53.3 million on the exercise of
Alliance Unit and DLJ stock options and on RSU conversions. Also in second
quarter 1999, there was a $131.7 million non-recurring DAC adjustment resulting
from the revisions to estimated future gross profits related to the investment
asset reallocation (see Note 4 of Notes to the Consolidated Financial Statements
included elsewhere herein).
CONTINUING OPERATIONS
Compared to the first nine months of 1998, the higher pre-tax operating results
for the first nine months of 1999 were due to increased earnings in all
segments. The $1.32 billion increase in revenues for the first nine months of
1999 from the first nine months of 1998 was attributed primarily to a $917.0
million increase in commissions, fees and other income principally due to
increased business activity within the Investment Banking and Asset Management
segments and to a $542.0 million increase in Investment Banking principal
transactions. These increases were partially offset by a $211.9 million decrease
in net investment income for the first nine months of 1999 principally in
Investment Banking primarily from the decrease in emerging markets proprietary
trading.
For the first nine months of 1999, total benefits and other deductions increased
by $968.4 million from the comparable period in 1998, reflecting increases in
other operating costs and expenses of $1.07 billion partially offset by
decreases in interest credited to policyholders' accounts and policyholder
benefits. The increase in other operating costs and expenses principally
resulted from higher costs associated with increased revenues primarily in the
Investment Banking and Asset Management segments.
-18-
COMBINED OPERATING RESULTS BY SEGMENT
INSURANCE
The following table combines the Closed Block amounts with the reported results
of operations outside of the Closed Block on a line-by-line basis.
INSURANCE - COMBINED OPERATING RESULTS
(IN MILLIONS)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------
1999
----------------------------------------
INSURANCE CLOSED 1998
OPERATIONS BLOCK COMBINED COMBINED
----------- ----------- ----------- -----------
Operating Results:
Policy fee income and premiums....... $ 1,320.8 $ 459.4 $ 1,780.2 $ 1,711.2
Net investment income................ 1,656.0 429.5 2,085.5 2,076.5
Commissions, fees and other income... 164.7 (4.2) 160.5 111.2
Contribution from the Closed Block... 65.6 (65.6) - -
----------- ----------- ----------- -----------
Total revenues...................... 3,207.1 819.1 4,026.2 3,898.9
Total benefits and other deductions. 2,577.0 819.1 3,396.1 3,402.5
----------- ----------- ----------- -----------
Pre-tax operating earnings............. 630.1 - 630.1 496.4
Pre-tax Adjustments:
Investment gains (losses), net of DAC
and other charges................... (85.9) - (85.9) 40.6
Non-recurring DAC adjustments........ (131.7) - (131.7) -
----------- ----------- ----------- -----------
GAAP Reported:
Earnings from Continuing Operations
before Federal Income Taxes and
Minority Interest................... $ 412.5 $ - $ 412.5 $ 537.0
=========== =========== =========== ===========
For the first nine months of 1999, Insurance pre-tax operating earnings
reflected an increase of $133.7 million from the year earlier period. Higher
policy fees on variable and interest-sensitive life and individual annuities
contracts, higher margins between investment income and interest credited on
policyholders' account balances and improved life insurance mortality margins
all contributed to the improved operating earnings.
Total revenues increased by $127.3 million primarily due to a $69.0 million
increase in policy fee income and premiums, $49.3 million higher commissions,
fees and other income and a $9.0 million increase in net investment income.
Policy fee income rose $127.8 million to $915.2 million due to higher insurance
and annuity account balances while premiums declined $58.8 million to $865.0
million. Net investment income increased slightly as higher income on other
equity investments and mortgages was offset by lower income on fixed maturities
and equity real estate and by lower income from the Holding Company Group's
investment portfolio.
Total benefits and other deductions for the first nine months of 1999 decreased
$6.4 million from the comparable 1998 period primarily resulting from a decrease
in interest credited on policyholders' account balances due to lower crediting
rates and lower policyholders' benefits due to lower life insurance mortality,
partially offset by an increase in operating expenses due to the timing of
strategic initiative expenses and higher corporate benefits.
-19-
Premiums, Deposits and Mutual Fund Sales - The following table lists gross
premiums and deposits, including universal life and investment-type contract
deposits, as well as mutual fund sales for Insurance distribution channels and
major product lines.
PREMIUMS, DEPOSITS AND MUTUAL FUND SALES
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------- ------------
Retail:
Annuities
First year.......................... $ 833.9 $ 724.8 $ 2,553.9 $ 2,262.3
Renewal............................. 407.6 392.5 1,365.1 1,299.0
------------- ------------ ------------- ------------
1,241.5 1,117.3 3,919.0 3,561.3
Life(1)
First year......................... 90.7 107.2 301.5 331.9
Renewal............................. 542.6 535.2 1,671.4 1,623.8
------------- ------------ ------------- ------------
633.3 642.4 1,972.9 1,955.7
Other(2)
First year.......................... 2.9 2.4 8.1 9.2
Renewal............................. 97.0 103.9 280.6 299.4
Mutual fund sales................... 706.1 605.4 2,111.1 1,863.5
------------- ------------ ------------- ------------
806.0 711.7 2,399.8 2,172.1
------------- ------------ ------------- ------------
Total retail....................... 2,680.8 2,471.4 8,291.7 7,689.1
------------- ------------ ------------- ------------
Wholesale:
Annuities
First year.......................... 592.3 464.3 1,503.2 1,202.9
Renewal............................. 14.2 3.4 32.0 6.7
------------- ------------ ------------- ------------
Total wholesale.................... 606.5 467.7 1,535.2 1,209.6
------------- ------------ ------------- ------------
Total Premiums, Deposits
and Mutual Fund Sales............... $ 3,287.3 $ 2,939.1 $ 9,826.9 $ 8,898.7
============= ============ ============= ============
<FN>
(1) Includes variable, interest-sensitive and traditional life products.
(2) Includes health insurance and reinsurance assumed.\
</FN>
First year premiums and deposits for insurance and annuity products for the
first nine months of 1999 increased from prior year levels by $560.4 million
primarily due to higher sales of individual annuities by both the retail and
wholesale distribution channels, partially offset by a $30.4 million decline in
life sales. Renewal premiums and deposits increased by $120.2 million during the
first nine months of 1999 over the prior year period as increases in the larger
block of individual annuities and variable life business were partially offset
by decreases in traditional life policies. During second quarter 1999, a new
series of variable life products began to be introduced which management
believes will result in increased sales beginning in the first quarter of 2000.
-20-
Surrenders and Withdrawals - The following table presents surrenders and
withdrawals, including universal life and investment-type contract withdrawals,
for major individual insurance and annuity product lines.
SURRENDERS AND WITHDRAWALS
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------- ------------
Annuities............................. $ 874.4 $ 626.1 $ 2,704.8 $ 2,067.8
Variable and interest-sensitive life.. 142.7 120.1 458.8 952.5
Traditional life...................... 83.2 83.5 265.5 272.7
------------- ------------ ------------- ------------
Total................................. $ 1,100.3 $ 829.7 $ 3,429.1 $ 3,293.0
============= ============ ============= ============
Policy and contract surrenders and withdrawals increased $136.1 million during
the first nine months of 1999 compared to the same period in 1998. The prior
year total included the first quarter 1998 surrender of $561.8 million related
to a single large COLI contract. Since there were outstanding policy loans on
the surrendered contract, there were no cash outflows. Excluding the effect of
this one surrender, the $697.9 million increase in the first nine months of 1999
compared to the first nine months of 1998 primarily resulted from $705.1 million
higher surrenders and withdrawals due to the larger book of individual annuities
and variable and interest-sensitive life policies, as well as an increase in the
individual annuities' surrender rate from 8.8% in the first nine months of 1998
to 9.5% in the first nine months of 1999.
-21-
INVESTMENT BANKING
The following table summarizes the results of continuing operations for
Investment Banking.
INVESTMENT BANKING - OPERATING RESULTS
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------- -------------
Operating Results:
Commissions, underwritings and fees.... $ 963.3 $ 658.2 $ 2,821.5 $ 2,281.8
Net investment income.................. 537.4 577.5 1,514.0 1,732.6
Principal transactions - net:
Dealer and trading gains (losses)..... 127.7 (228.2) 520.2 (69.3)
Investment gains (losses)............. 57.5 44.7 85.7 133.2
Other income........................... 18.9 21.0 71.1 50.7
------------- ------------ ------------- -------------
Total revenues........................ 1,704.8 1,073.2 5,012.5 4,129.0
Total costs and expenses.............. 1,532.3 1,036.6 4,425.3 3,682.7
------------- ------------ ------------- -------------
Pre-tax operating earnings before
minority interest..................... 172.5 36.6 587.2 446.3
Minority interest...................... (58.5) (15.5) (191.7) (140.9)
------------- ------------ ------------- -------------
Pre-tax operating earnings............. 114.0 21.1 395.5 305.4
Pre-tax Adjustments:
Investment gains (losses), net of DAC.. - .5 236.4 34.4
Minority interest........................ 58.5 15.5 191.7 140.9
------------- ------------ ------------- -------------
GAAP Reported:
Earnings from Continuing Operations
before Federal Income Taxes and
Minority Interest..................... $ 172.5 $ 37.1 $ 823.6 $ 480.7
=========== =========== ============ ===========
Investment Banking's operating earnings for the first nine months of 1999 were
$395.5 million, up $90.1 million from the comparable prior year period. Revenues
increased by $883.5 million as dealer and trading gains as compared to losses in
the 1998 period and higher commissions, underwritings and fees more than offset
lower net investment income and investment gains. Higher commission revenues of
$215.5 million were due to increased business in virtually all areas and was
consistent with the overall growth in listed share volume on major equity
exchanges. The primary areas of growth were in DLJ's international equities
group and correspondent and on-line brokerage businesses. The fee income
increase of $177.3 million reflected DLJ's continuing market share growth in
global merger and acquisition advisory transactions. Fees related to increased
customer demand for a variety of portfolio advisory and technology services at
DLJ's correspondent brokerage and online brokerage business also increased from
the prior year. The $146.9 million increase in underwriting revenues primarily
resulted from increases in domestic and international equity underwriting,
offset by decreases in underwriting of high yield and mortgage-backed
securities. The $542.0 million net increase in gains on principal transactions
principally resulted from increases in equity and fixed income trading gains, as
well as the elimination in 1999 of trading losses in the emerging markets and
high yield areas partially offset by a reduction in realized gains on investment
sales. Lower net investment income of $218.6 million resulted from the decrease
in emerging markets proprietary trading. In most other areas, there were
increases in the balances of lending activity which were partially offset by
reductions in interest rates charged. Investment Banking's expenses were $4.43
billion for the first nine months of 1999, up $742.6 million from the prior
year's period primarily due to $493.1 million higher compensation and benefits,
$64.1 million higher occupancy, equipment and communication costs both related
to DLJ's geographic expansion and $23.1 million higher brokerage, clearing and
exchange fees resulting from increased trading volume and transaction fee
payments partially offset by $14.5 million lower interest principally due to the
reduction in proprietary trading in emerging markets partially offset by overall
increased borrowings. Compensation costs in the first nine months of 1998
included a $29.0 million one-time provision for costs associated primarily with
DLJ's expansion in Europe.
-22-
The 1999 earnings before minority interest included $8.9 million of earnings
from DLJdirect as compared to a $0.3 million loss in the 1998 period.
DLJ enters into certain contractual agreements referred to as derivatives or
off-balance-sheet financial instruments involving futures, forwards and options.
DLJ has focused its derivative activities on writing OTC options to accommodate
its customers' needs, trading in forward contracts in U.S. government and agency
issued or guaranteed securities, foreign currencies and trading in futures
contracts on equity based indices, interest rate instruments and currencies, and
entering into swap transactions. DLJ's involvement in commodity derivatives
instruments is not significant. As part of DLJ's trading activities, including
trading activities in the related cash market instruments, DLJ enters into
forward and futures contracts primarily involving securities, foreign
currencies, indices and forward rate agreements as well as options on futures
contracts. Such forward and futures contracts are entered into as part of DLJ's
covering transactions and are generally not used for speculative purposes. DLJ
enters into swap agreements to manage foreign currency, interest rate and equity
risk. Trading revenues from writing option contracts (net of related interest
expense) were approximately $78.8 million and $84.9 million for the first nine
months of 1999 and 1998, respectively. Option writing revenues are primarily
from the amortization of option premiums. The notional value of written options
contracts outstanding was approximately $12.9 billion and $5.14 billion at
September 30, 1999 and December 31, 1998, respectively. The overall increase in
the notional value of all options was primarily due to increases in customer
activity related to equities and other securities partially offset by decreases
related to U.S. government securities. Such written options contracts are
substantially covered by various financial instruments that DLJ had purchased or
sold as principal.
Net trading losses on forward contracts were $126.5 million and $21.9 million
and net trading gains (losses) on futures contracts were $106.6 million and
$(64.7) million for the first nine months of 1999 and 1998, respectively. The
notional contract and market values of the forward and futures contracts at
September 30, 1999 and December 31, 1998 were as follows:
SEPTEMBER 30, 1999 DECEMBER 31, 1998
---------------------------- ----------------------------
PURCHASES SALES PURCHASES SALES
------------- ------------ ------------ ------------
(IN MILLIONS)
Forward Contracts
(Notional Contract Value)....... $ 48,869 $ 53,028 $ 41,254 $ 39,767
============= ============ ============ ============
Futures Contracts and Options on
Futures Contracts (Market Value) $ 2,837 $ 4,022 $ 1,184 $ 1,607
============= ============ ============ ============
The notional (contract) values of swap agreements, consisting primarily of
interest rate and equity swaps, were $22.4 billion and $8.0 billion at September
30, 1999 and December 31, 1998, respectively.
-23-
ASSET MANAGEMENT
The following table summarizes operating results for Asset Management.
ASSET MANAGEMENT - OPERATING RESULTS
(IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------- -------------
Operating Results:
Investment advisory and service fees... $ 307.0 $ 230.7 $ 903.7 $ 704.0
Distribution revenues.................. 115.5 79.7 314.3 222.0
Other revenues......................... 22.5 18.8 64.9 50.6
------------- ------------ ------------- -------------
Total revenues........................ 445.0 329.2 1,282.9 976.6
------------- ------------ ------------- -------------
Promotion and servicing................ 156.8 120.9 447.1 337.1
Employee compensation and benefits..... 113.5 81.8 334.5 251.9
All other operating expenses........... 68.3 44.6 198.7 158.1
------------- ------------ ------------- -------------
Total expenses........................ 338.6 247.3 980.3 747.1
------------- ------------ ------------- -------------
Pre-tax earnings before minority
interest............................. 106.4 81.9 302.6 229.5
Minority interest...................... (49.0) (33.9) (142.9) (104.5)
------------- ------------ ------------- -------------
Pre-tax operating earnings............. 57.4 48.0 159.7 125.0
Pre-tax Adjustments:
Investment gains (losses), net of DAC.. .2 .2 2.5 9.2
Minority interest........................ 49.0 33.9 142.9 104.5
------------- ------------ ------------- -------------
GAAP Reported:
Earnings from Continuing Operations
before Federal Income Taxes and
and Minority Interest................. $ 106.6 $ 82.1 $ 305.1 $ 238.7
============= ============ ============= =============
Asset Management's operating earnings for the first nine months of 1999 were
$159.7 million, an increase of $34.7 million from the prior year's comparable
period. Revenues totaled $1.28 billion for the first nine months of 1999, an
increase of $306.3 million from the comparable period in 1998, due to a $199.7
million increase in investment advisory and service fees and $92.3 million
higher distribution revenues. The increase in investment advisory and service
fees primarily resulted from increases in average assets under management which
were due to market appreciation and to $15.2 million higher performance fees,
primarily from certain hedge funds. The growth in distribution revenues was
principally due to higher average mutual fund assets under management from
strong sales and from market appreciation. Asset Management's costs and expenses
increased $233.2 million for the first nine months of 1999 primarily due to
increases in mutual fund promotional expenditures and employee compensation and
benefits. Promotion and servicing increased 32.6% primarily due to increased
distribution plan payments resulting from higher average domestic, non-U.S. and
cash management mutual fund assets under management and higher amortization of
deferred sales commissions, as well as higher travel, entertainment and
promotional expenses incurred in connection with mutual fund sales initiatives.
Higher compensation and benefits were due to higher incentive compensation from
increased operating earnings, increased base compensation and commissions
reflecting increased headcount in the mutual fund and technology areas and
overall salary increases. The 1998 expenses included a $10.0 million provision
for the estimated buyout price of the minority interest in Cursitor.
-24-
FEES AND ASSETS UNDER MANAGEMENT
As the following table illustrates, third party clients represent the primary
source of fees from assets under management.
FEES AND ASSETS UNDER MANAGEMENT
(IN MILLIONS)
AT OR FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
1999 1998 1999 1998
-------------- ------------- ------------ -------------
FEES:
Third parties......................... $ 329.9 $ 248.2 $ 946.0 $ 743.4
Equitable Life Separate Accounts...... 27.4 23.0 79.2 71.5
Equitable Life General Account and
other............................... 10.6 10.8 32.7 36.0
------------ ----------- ------------ -------------
Total Fees............................ $ 367.9 $ 282.0 $ 1,057.9 $ 850.9
============ =========== ============ =============
ASSETS UNDER MANAGEMENT:
Assets by Manager
Alliance:
Third Party......................... $ 256,423 $ 188,641
Equitable Life General Account
and Holding Company Group.......... 25,299 25,287
Equitable Life Separate Accounts.... 35,552 27,937
------------ -------------
Total................................. 317,274 241,865
------------ -------------
DLJ:
Third Party......................... 32,537 23,828
DLJ Invested Assets................. 20,866 17,317
------------ -------------
Total DLJ............................. 53,403 41,145
------------ -------------
Equitable Life:
Equitable Life (non-Alliance) General
Account............................ 13,047 14,603
Equitable Life Separate
Accounts - EQ Advisors Trust....... 4,838 2,139
Equitable Life real estate related
Separate Accounts.................. 3,825 4,488
Equitable Life Separate Accounts -
other............................. 2,020 1,758
------------ -------------
Total Equitable Life.................. 23,730 22,988
------------ -------------
Total by Account:
Third Party......................... 288,960 212,469
General Account and other........... 59,212 57,207
Separate Accounts................... 46,235 36,322
------------ -------------
Total Assets Under Management......... $ 394,407 $ 305,998
============ =============
Fees from assets under management increased 24.3% for the first nine months of
1999 from the comparable 1998 period primarily as a result of growth in assets
under management for third parties principally at Alliance. The Alliance growth
in the first nine months of 1999 was primarily due to market appreciation and
net sales of mutual funds and other products. DLJ's third party assets under
management increased in the first nine months of 1999 by $8.2 billion as
compared to December 31, 1998 principally due to new business in its Asset
Management Group and Merchant Banking Funds.
-25-
CONTINUING OPERATIONS INVESTMENT PORTFOLIO
The continuing operations investment portfolio is composed of the General
Account investment portfolio and investment assets of the Holding Company Group.
GENERAL ACCOUNT INVESTMENT PORTFOLIO
This discussion of the General Account portfolio analyzes the results of major
investment asset categories, including the Closed Block's investments. The
following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Assets.
GENERAL ACCOUNT INVESTMENT ASSET CARRYING VALUES
SEPTEMBER 30, 1999
(IN MILLIONS)
GENERAL
HOLDING ACCOUNT
BALANCE CLOSED COMPANY INVESTMENT
BALANCE SHEET CAPTIONS: SHEET BLOCK OTHER GROUP ASSETS(1)
- ------------------------------ ------------ ----------- ------------- ------------ ------------
Fixed maturities:
Available for sale.......... $ 19,666.7 $ 3,967.5 $ (131.5) $ 397.4 $ 23,368.3
Held to maturity............ 251.8 - - 120.6 131.2
Trading account securities.... 20,023.1 20,023.1 - -
Securities purchased under
resale agreements........... 24,735.0 - 24,735.0 - -
Mortgage loans on real estate 3,184.4 1,722.5 - - 4,906.9
Equity real estate............ 1,470.0 99.1 (3.3) - 1,572.4
Policy loans.................. 2,209.0 1,603.1 - 3,812.1
Other equity investments...... 1,523.4 37.6 856.2 7.0 697.8
Other invested assets......... 1,007.0 .6 395.9 1.2 610.5
-------------- ----------- ------------- ------------ ------------
Total investments........... 74,070.4 7,430.4 45,875.4 526.2 35,099.2
Cash and cash equivalents..... 2,428.8 157.5 1,939.3 198.4 448.6
Equitable Life debt and
other(2).................... - - 692.4 - (692.4)
-------------- ----------- ------------- ------------ ------------
Total......................... $ 76,499.2 $ 7,587.9 $ 48,507.1 $ 724.6 $ 34,855.4
============== =========== ============= ============ ============
<FN>
(1) General Account Investment Assets are computed by adding the Balance Sheet
and Closed Block and deducting the Other and Holding Company Group amounts.
(2) Includes Equitable Life debt and other miscellaneous assets and liabilities
related to General Account Investment Assets and reclassified from various
balance sheet lines.
</FN>
The General Account Investment Assets presentation set forth in the following
pages includes the investments of the Closed Block on a line-by-line basis.
Management believes it is appropriate to discuss the information on a combined
basis.
-26-
INVESTMENT RESULTS OF GENERAL ACCOUNT INVESTMENT ASSETS
INVESTMENT RESULTS BY ASSET CATEGORY
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------- ------------------------------------------
1999 1998 1999 1998
------------------- --------------------- -------------------- --------------------
(1) (1) (1) (1)
YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------- ----------- -------- ------------ ------- ------------ -------- -----------
FIXED MATURITIES:
Income.......... 8.01% $ 465.2 8.08% $ 467.4 7.90% $ 1,362.1 8.09% $ 1,394.8
Investment
Gains/(Losses). (0.84)% (47.5) (0.70)% (39.5) (1.17)% (196.8) (0.01)% (2.8)
------- ----------- -------- ------------ ------- ------------ -------- -----------
Total........... 7.17% $ 417.7 7.38% $ 427.9 6.73% $ 1,165.3 8.08% $ 1,392.0
Ending Assets(2) $ 24,337.4 $ 24,169.0 $24,337.4 $24,169.0
MORTGAGES:
Income.......... 8.30% $ 99.3 9.30% $ 90.4 8.71% $ 301.5 9.54% $ 273.8
Investment
Gains/(Losses). (0.07)% (.8) 0.14% 1.3 (0.11)% (3.4) (0.12)% (3.1)
------- ----------- -------- ------------ ------- ------------ -------- -----------
Total........... 8.23% $ 98.5 9.44% $ 91.7 8.60% $ 298.1 9.42% $ 270.7
Ending Assets(3) $ 4,942.3 $ 4,157.9 $ 4,942.3 $ 4,157.9
EQUITY REAL
ESTATE:
Income(4)....... 8.35% $ 27.1 9.25% $ 42.1 7.61% $ 75.3 7.38% $ 104.1
Investment
Gains/(Losses). (0.41)% (1.3) 6.01% 25.9 1.69% 16.2 2.37% 32.3
------- ----------- -------- ------------ ------- ------------ -------- -----------
Total........... 7.94% $ 25.8 15.26% $ 68.0 9.30% $ 91.5 9.75% $ 136.4
Ending Assets(4) $ 1,318.5 $ 1,853.4 $ 1,318.5 $ 1,853.4
OTHER EQUITY
INVESTMENTS:
Income.......... 11.53% $ 23.1 (5.69)% $ (17.1) 26.73% $ 153.3 10.40% $ 97.7
Investment
Gains/(Losses). 5.40% 10.2 1.08% 3.3 17.25% 86.4 4.12% 36.8
------- ----------- -------- ------------ ------- ------------ -------- -----------
Total........... 16.93% $ 33.3 (4.61)% $ (13.8) 43.98% $ 239.7 14.52% $ 134.5
Ending Assets(5) $ 807.2 $ 834.6 $ 807.2 $ 834.6
POLICY LOANS:
Income.......... 6.90% $ 63.3 6.81% $ 60.6 6.77% $ 184.8 6.95% $ 188.1
Ending Assets... $ 3,812.1 $ 3,702.6 $ 3,812.1 $ 3,702.6
CASH AND SHORT-TERM
INVESTMENTS:
Income.......... 7.80% $ 15.8 8.18% $ 5.3 7.38% $ 51.8 13.80% $ 32.4
Ending Assets(6) $ 982.0 $ 382.8 $ 982.0 $ 382.8
EQUITABLE LIFE
DEBT AND OTHER:
Interest expense
and other...... 7.18% $ (11.2) 5.08% $ (10.0) 8.40% $ (38.6) 6.55% $ (34.5)
Ending
Liabilities..... $ (692.4) $ (724.8) $ (692.4) $ (724.8)
TOTAL:
Income(7)....... 8.03% $ 682.6 7.72% $ 638.7 8.28% $ 2,090.2 8.27% $ 2,056.4
Investment
Gains/(Losses). (0.47)% (39.4) (0.11)% (9.0) (0.40)% (97.6) 0.26% 63.2
------- ----------- -------- ------------ ------- ------------ -------- -----------
Total(8)........ 7.56% $ 643.2 7.61% $ 629.7 7.88% $ 1,992.6 8.53% $ 2,119.6
Ending Net Assets $ 35,507.1 $ 34,375.5 $35,507.1 $34,375.5
<FN>
(1) Yields have been calculated on a compound annual effective rate basis using
the quarterly average asset carrying values excluding unrealized gains
(losses) in fixed maturities and adjusted for the current periods' income,
gains and fees. Annualized yields are not necessarily indicative of a full
year's results.
-27-
(2) Fixed maturities investment assets are shown net of securities purchased
but not yet paid for of $139.0 million and $1,312.3 million, and include
accrued income of $399.0 million and $405.2 million, amounts due from
securities sales of $50.9 million and $695.9 million and other assets of
$19.7 million and $32.5 million as of September 30, 1999 and 1998,
respectively.
(3) Mortgage investment assets include accrued income of $61.2 million and
$54.4 million and are adjusted for related liability balances of $(25.8)
million and $(26.0) million as of September 30, 1999 and 1998,
respectively.
(4) Equity real estate investment assets are shown net of third party debt and
minority interest in real estate of $280.8 million and $396.5 million, and
include accrued income of $28.5 million and $32.4 million and are adjusted
for related liability balances of $(1.6) million and $(24.4) million as of
September 30, 1999 and 1998, respectively. Equity real estate income is
shown net of operating expenses, depreciation, third party interest expense
and minority interest. Third party interest expense and minority interest
totaled $(3.9) million, $(8.9) million, $(15.0) million and $(29.4) million
for the third quarter and first nine months of 1999 and of 1998,
respectively.
(5) Other equity investment assets include adjustment for accrued income and
pending settlements of $1.2 million and $(4.8) million as of September 30,
1999 and 1998, respectively.
(6) Cash and short-term investments are shown net of financing arrangements of
$(107.1) million and $(409.8) million and other adjustments for accrued
income and cash in transit of $30.0 million and $3.0 million as of
September 30, 1999 and 1998, respectively.
(7) Total investment income includes non-cash income from amortization,
payments-in-kind distributions and undistributed equity earnings of $14.2
million, $11.1 million, $47.5 million and $43.0 million for the third
quarters and first nine months of 1999 and of 1998, respectively.
Investment income is shown net of depreciation of $6.2 million, $5.9
million, $16.8 million and $25.3 million for the same respective periods.
(8) Total yields are shown before deducting investment fees paid to its
investment advisors. These fees include asset management, acquisition,
disposition, accounting and legal fees. If investment fees had been
deducted, total yields would have been 7.29% and 7.35%, 7.62% and 8.25% for
the third quarter and the first nine months of 1999 and of 1998,
respectively.
</FN>
ASSET VALUATION ALLOWANCES AND WRITEDOWNS
The following table shows asset valuation allowances and additions to and
deductions from such allowances for mortgages and equity real estate for the
first nine months of 1999 and 1998.
GENERAL ACCOUNT INVESTMENT ASSETS
VALUATION ALLOWANCES
(IN MILLIONS)
EQUITY REAL
MORTGAGES ESTATE TOTAL
------------- ------------- -----------
SEPTEMBER 30, 1999
Beginning balances................................. $ 45.4 $ 211.8 $ 257.2
Additions.......................................... 6.8 31.7 38.5
Deductions(1)...................................... (11.2) (104.5) (115.7)
------------- ------------- -----------
Ending Balances.................................... $ 41.0 $ 139.0 $ 180.0
============= ============= ===========
SEPTEMBER 30, 1998
Beginning balances................................. $ 74.3 $ 345.5 $ 419.8
Additions.......................................... 14.5 55.1 69.6
Deductions(1)...................................... (51.3) (122.4) (173.7)
------------- ------------- -----------
Ending Balances.................................... $ 37.5 $ 278.2 $ 315.7
============= ============= ===========
<FN>
(1) Primarily reflected releases of allowances due to asset dispositions and
writedowns.
</FN>
Writedowns on fixed maturities were $138.2 million and $70.3 million for the
first nine months of 1999 and 1998, respectively, principally on high yield and
emerging market securities.
-28-
GENERAL ACCOUNT INVESTMENT ASSETS
The following table shows the major categories of General Account Investment
Assets by amortized cost, valuation allowances and net amortized cost at
September 30, 1999 and by net amortized cost at December 31, 1998.
GENERAL ACCOUNT INVESTMENT ASSETS
(IN MILLIONS)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
---------------------------------------- -------------------
NET NET
AMORTIZED VALUATION AMORTIZED AMORTIZED
COST ALLOWANCES COST COST
------------- ------------ ------------- -------------------
Fixed maturities(1)............... $ 24,006.8 $ - $ 24,006.8 $ 22,805.8
Mortgages......................... 4,947.9 (41.0) 4,906.9 4,443.3
Equity real estate................ 1,711.4 (139.0) 1,572.4 1,774.1
Other equity investments.......... 806.0 - 806.0 859.1
Policy loans...................... 3,812.1 3,812.1 3,727.9
Cash and short-term investments... 1,059.1 1,059.1 1,619.7
Corporate debt and other.......... (692.4) (692.4) (598.1)
------------- ------------ ------------- -------------------
Total............................. $ 35,650.9 $ (180.0) $ 35,470.9 $ 34,631.8
============= ============ ============= ===================
<FN>
(1) Excludes unrealized losses of $507.3 million and unrealized gains of $814.3
million in fixed maturities classified as available for sale at September
30, 1999 and December 31, 1998, respectively. At September 30, 1999 and
December 31, 1998, the amortized cost of the available for sale and held to
maturity portfolios was $23.88 billion, $131.2 million, $22.68 billion and
$125.0 million, respectively, compared to estimated market values of $23.37
billion, $131.2 million, $23.49 billion and $125.0 million, respectively.
</FN>
Fixed Maturities. Fixed maturities consist of publicly-traded debt and privately
placed debt securities and small amounts of redeemable preferred stock, which
represented 75.9%, 22.9% and 1.2%, respectively, of the amortized cost of this
asset category at September 30, 1999. The $196.8 million of investment losses in
the first nine months of 1999 were due to $138.2 million of writedowns primarily
on high yield and emerging market securities and $58.6 million of losses on
sales.
FIXED MATURITIES BY CREDIT QUALITY
(IN MILLIONS)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------------------- --------------------------------
RATING AGENCY
NAIC EQUIVALENT AMORTIZED ESTIMATED AMORTIZED ESTIMATED
RATING DESIGNATION COST FAIR VALUE COST FAIR VALUE
- ------------ ------------- ------------- -------------- ---------------- --------------
1-2 Aaa/Aa/A and Baa.. $ 20,868.2 $ 20,681.8 $ 19,588.1 $ 20,712.6
3-6 BBa and lower..... 3,138.6 2,817.7 3,217.7 2,907.5
-------------- -------------- ---------------- --------------
Total Fixed Maturities......... $ 24,006.8 $ 23,499.5 $ 22,805.8 $ 23,620.1
============== ============== ================ ==============
At September 30, 1999, AXA Financial held mortgage pass-through securities with
an amortized cost of $2.72 billion, $2.47 billion of CMOs, including $2.14
billion in publicly-traded CMOs, and $1.52 billion of public and private asset
backed securities, primarily backed by home equity, mortgage, airline and other
equipment, and credit card receivables.
The amortized cost of problem and potential problem fixed maturities was $119.3
million (0.5% of the amortized cost of this category) and $46.8 million (0.2%)
at September 30, 1999, respectively, compared to $94.9 million (0.4%) and $74.9
million (0.3%) at December 31, 1998, respectively.
-29-
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At September 30, 1999, commercial mortgages totaled $2.98 billion (60.2% of the
amortized cost of the category), agricultural loans were $1.97 billion (39.8%)
and residential loans were $0.6 million.
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED MORTGAGES
AMORTIZED COST
(IN MILLIONS)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- --------------
COMMERCIAL MORTGAGES............................................ $ 2,981.5 $ 2,660.7
Problem commercial mortgages(1)................................. 0.5 0.4
Potential problem commercial mortgages.......................... 140.4 170.7
Restructured commercial mortgages(2)............................ 152.7 116.4
AGRICULTURAL MORTGAGES.......................................... $ 1,965.8 $ 1,826.9
Problem agricultural mortgages.................................. 15.3 11.7
<FN>
(1) Includes delinquent mortgage loans of $0.4 million at December 31, 1998.
(2) Excludes $0.9 million and $19.9 million of restructured commercial
mortgages that are shown as potential problems at September 30, 1999 and
December 31, 1998, respectively.
</FN>
The original weighted average coupon rate on the $152.7 million of restructured
mortgages was 9.0%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.2% and the restructured weighted average cash
payment rate was 8.1%.
At September 30, 1999 and 1998, respectively, management identified impaired
mortgage loans with carrying values of $178.1 million and $161.8 million. The
provisions for losses for these impaired mortgage loans were $34.8 million and
$32.5 million at September 30, 1999 and 1998, respectively. For the first nine
months of 1999 and of 1998, respectively, income accrued on these loans was
$11.6 million and $13.1 million, including cash received of $11.6 million and
$12.9 million.
For the first nine months of 1999, scheduled principal amortization payments and
prepayments on commercial mortgage loans received aggregated $105.0 million. In
addition, $53.2 million of commercial mortgage loan maturity payments were
scheduled, of which $50.5 million were paid as due. Of the amount not paid, $1.6
million were granted short-term extensions; none was in default.
Equity Real Estate. As of September 30, 1999, on the basis of amortized cost,
the equity real estate category included $1.13 billion (66.1%) acquired as
investment real estate and $580.5 million (33.9%) acquired through or in lieu of
foreclosure (including in-substance foreclosures).
During the first nine months of 1999 and 1998, respectively, proceeds from the
sale of equity real estate totaled $257.6 million and $483.2 million, and gains
of $36.9 million and $86.8 million were recognized. The carrying value of the
equity real estate at the date of sale reflected total writedowns and additions
to valuation allowances on the properties taken in periods prior to their sale
of $95.7 million and $122.4 million, respectively.
At September 30, 1999, the vacancy rate for AXA Financial's office properties
was 7.3% in total, with a vacancy rate of 6.1% for properties acquired as
investment real estate and 17.5% for properties acquired through foreclosure.
The national commercial office vacancy rate was 9.7% (as of June 30, 1999) as
measured by CB Commercial.
-30-
Other Equity Investments. Other equity investments consist of private equity,
LBO, mezzanine, venture capital and other limited partnership interests ($466.5
million or 57.8% of the amortized cost of this portfolio at September 30, 1999),
alternative limited partnerships ($198.9 million or 24.6%) and common stock and
other equity securities, including the excess of Separate Account assets over
Separate Account liabilities ($141.8 million or 17.6%). Alternative funds
utilize trading strategies that may be leveraged; they attempt to protect
against market risk through a variety of methods, including short sales,
financial futures, options and other derivative instruments. Effective January
1, 1999, AXA Financial designated all direct investments in publicly-traded
common equity securities in the General Account and Holding Company Group
portfolios as "trading securities" as defined by SFAS No. 115. Investment gains
of $83.5 million and $3.8 million, respectively, were recognized at that date on
the two portfolios. The net unrealized holding gains (losses) for the first nine
months of 1999 totaled $3.9 million and $(7.6) million, respectively, and are
included in investment income. Other equity investments can produce significant
volatility in investment income since these investments are accounted for using
the estimated fair value of the underlying assets (or allocable portion thereof,
in the case of partnerships), and increases and decreases in fair value, whether
realized or unrealized, on substantially all of the portfolio are reflected as
investment income or loss to AXA Financial. Returns on all equity investments
are very volatile and investment results for any period are not representative
of any other period.
YEAR 2000
Equitable Life, DLJ and Alliance continue their Year 2000 compliance efforts;
related costs are being funded by operating cash flows with costs being expensed
as incurred.
Equitable Life - Equitable Life began addressing the Year 2000 issue in 1995. In
addition to significant internal resources, third parties have been assisting in
renovating and testing computer hardware and software ("computer systems") and
embedded systems and in overall project control. The following process has been
undertaken:
(1) Equitable Life established a Year 2000 project office, which developed a
strategic approach and created broad awareness of the Year 2000 issues at
Equitable Life through meetings with the Audit Committee of the Board of
Directors, the Board of Directors and executive and senior management,
presentations to business areas and articles in employee newsletters.
(2) Corporate-developed computer systems were inventoried and assessed for Year
2000 compliance. Third party providers of computer systems and services,
including embedded systems, were contacted and all have responded.
(3) The renovation or replacement of all corporate-developed computer systems
was completed by June 30, 1999. After renovation or replacement, management
subjects these systems to Year 2000 compliance testing as described in the
following paragraph, and continues to monitor Year 2000 compliance by third
party providers of computer systems, including embedded systems, and
services. All such systems and services, including those considered
mission-critical, have been confirmed as either Year 2000 compliant or the
subject of a satisfactory plan for compliance. With respect to real estate
investment properties owned by Equitable Life and managed by third parties,
substantially all building operation systems (e.g., elevators, escalators,
fire, security and heating, ventilation and air conditioning) have been
confirmed as Year 2000 compliant. Five systems remain to be confirmed (one
system in each of five properties) and management expects that such systems
will be confirmed as Year 2000 compliant by November 30, 1999. Contingency
plans have been developed for each property. Additionally, Equitable Life
has completed the nationwide upgrade of its personal computer workstations
and local area network servers with the latest release of compliant
versions of third party hardware and software.
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(4) Year 2000 compliance testing is an ongoing three-part process: after a
system has been renovated, it is tested to determine if it still performs
its intended business function correctly; next, it undergoes a simulation
test using dates occurring after December 31, 1999; last, integrated
systems tests are conducted to verify that the systems continue to work
together with the computers' internal clocks set to post December 31, 1999
dates. The first two phases of the process have been completed and all
systems have been confirmed through such testing as Year 2000 compliant.
Integrated systems testing will continue throughout 1999 as needed. All
significant automated data interfaces with third parties have been tested
for Year 2000 compliance, including those with Lend Lease, Alliance, The
Chase Manhattan Bank, Sunguard, Pershing and Computer Science Corporation,
who provide, among other services, material investment management,
accounting, banking, annuity processing and securities clearance services
for Equitable Life's General and certain of its Separate Accounts.
Equitable Life has retained third parties to assist with selective
verification of the Year 2000 renovation of certain systems.
(5) Existing business continuity and disaster recovery plans cover certain
categories of contingencies that could arise as a result of Year 2000
related failures. These plans have been supplemented to address
contingencies unique to the millennium change. Equitable Life retained a
consulting firm to assist with planning for Year 2000 contingencies.
Equitable Life's Year 2000 compliance project is currently estimated to cost $35
million through the end of 1999, of which approximately $31.1 million was
incurred through September 30, 1999. Equitable Life's new computer application
development and procurement have not been subject to any delay caused in whole
or part by Year 2000 efforts that is expected to have a material adverse effect
on AXA Financial's financial condition or results of operations.
Investment Subsidiaries - DLJ and Alliance's Year 2000 related activities and
progress to date are summarized below. For further information, see their
respective filings on Form 10-K for the year ended December 31, 1998.
DLJ - DLJ's plans for preparing for Year 2000 are in writing and address all
mission critical computer systems globally. Such systems have been remediated,
tested and implemented. DLJ has also remediated, implemented and tested all
non-mission critical systems. DLJ has a reasonable basis to believe all
applications, both mainframe and non-mainframe, are Year 2000 compliant. The
post implementation process will ensure continued compliance of the
applications. This process includes redundant vendor testing, correspondent
testing, extended point-to-point testing and integrated systems testing through
year end. Throughout the Year 2000 process, none of DLJ's major technology
projects have been significantly impacted.
DLJ currently estimates its Year 2000 costs at approximately $90 million, with
$89 million incurred through September 30, 1999. DLJ has assessed Year 2000
contingency requirements and has developed a formal contingency plan. The
contingency plan addresses procedures to be implemented in the event of problems
concerning mission-critical systems, electronic interfaces and third parties.
This plan includes written Year 2000 specific contingency plans that will
address DLJ-wide shared services (i.e., communications systems and physical
facilities), as well as its mission critical business units.
Alliance - During 1997, Alliance began a formal Year 2000 initiative, managed by
a Year 2000 project office and focusing on both IT and non-IT systems. Alliance
has retained a number of consulting firms with expertise in advising and
assisting clients with regard to Year 2000 issues. By June 30, 1998, Alliance
had completed an inventory and assessment of its domestic and international
computer systems, identified its mission-critical and non-mission-critical
systems, and determined which of these systems were not Year 2000 compliant. All
third party suppliers of mission-critical systems and services and
non-mission-critical systems were contacted and their responses have been
evaluated. All of those contacted have responded that their systems are or will
be Year 2000 compliant. All mission critical and non-mission critical systems
supplied by third parties have been tested. Alliance expects all testing will be
completed before the end of 1999. Alliance has remediated, replaced or retired
all of its non-compliant mission-critical and non-mission-critical systems and
applications. Alliance has completed the business functionality and the
post-December 31, 1999 testing for all of its mission-critical systems and
non-mission-critical systems. Integrated systems tests were then conducted to
verify that the systems would continue to work together. Full integration
testing of all remediated systems have been completed. Testing of interfaces
with third party suppliers will be completed by the end of the year. Alliance
has completed an inventory of its technical infrastructure and facilities and
has begun to evaluate and test these systems. Alliance expects these systems to
be fully operable in the Year 2000. Certain other planned IT projects have been
deferred until after the Year 2000 initiative is completed. Such delay is not
expected to have a material adverse effect on Alliance's financial condition or
results of operations. Assisted by a consulting firm, Alliance has developed its
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Year 2000 specific contingency plans with emphasis on mission-critical
functions. These plans seek to provide alternative methods of processing in the
event of a failure that is within or outside of Alliance's control.
Alliance estimates its cost of the Year 2000 initiative will range between $41
million and $45 million. Such costs consist principally of remediation costs and
costs to develop formal Year 2000 specific contingency plans. Through September
30, 1999, Alliance has incurred approximately $41 million of those costs.
Risks - There are many risks associated with Year 2000 issues, including the
risk that AXA Financial's computer systems will not operate as intended. There
can be no assurance that the systems, services and products of third parties
will be Year 2000 compliant. Likewise, there can be no assurance the compliance
schedules outlined above will be met.
Any significant unresolved difficulties related to the Year 2000 compliance
initiatives could result in an interruption in, or a failure of, normal business
activities or operations, or the incurrence of unanticipated expenses related to
resolving such difficulties, regulatory actions, damage to AXA Financial's
franchise, and legal liabilities and, accordingly, could have a material adverse
effect on AXA Financial's business operations and financial results. Due to the
pervasive nature, the external as well as internal interdependencies and the
inherent risks and uncertainties of Year 2000 issues, AXA Financial cannot
determine which risks are most reasonably likely to occur, if any, nor the
effects of any particular failure to be Year 2000 compliant.
The forward-looking statements under "Year 2000" should be read in conjunction
with the disclosure set forth under "Forward-Looking Statements" on page 35. To
the fullest extent permitted by law, the foregoing Year 2000 discussion is a
"Year 2000 Readiness Disclosure" within the meaning of The Year 2000 Information
and Readiness Disclosure Act.
LIQUIDITY AND CAPITAL RESOURCES
On September 16, 1999, the AXA Financial Board of Directors declared a
two-for-one stock split for shareholders of record at the close of business on
September 27, 1999. The stock dividend was paid on October 1, 1999. Quarterly
dividends following the split would be $.025 per share. All share and per share
amounts have been restated to reflect the effect of this Common Stock Split.
In September 1999, the Holding Company received a cash dividend of $150.0
million from Equitable Life, the first since Equitable Life's demutualization in
1992.
Also in September 1999, the SECT converted 4,020 shares of Series D Convertible
Preferred Stock equivalent to 1.6 million shares of Common Stock. The Holding
Company, as part of its stock repurchase program, purchased 1,356,500 shares for
$37.6 million. Of the remaining shares, AXA, AXA Financial's principal
stockholder, purchased 146,100 shares in order to maintain its current ownership
percentage. The remaining shares were sold to the public. As a result of these
transactions, the Holding Company's equity increased by $7.4 million, the net
proceeds of the sales and repurchases.
Under the stock repurchase program authorized by its Board of Directors, the
Holding Company repurchased approximately 5.7 million shares of Common Stock at
a cost of approximately $167.8 million during the first nine months of 1999. The
aforementioned SECT share repurchase is included in these totals. Of the Common
Stock originally subject to put options sold in connection with the repurchase
program, the Holding Company purchased none during the first nine months of
1999; 1,200,000 of such options expired unexercised during the first nine months
of 1999, and none remain outstanding at September 30, 1999.
In July 1999, the Board of Directors authorized an increase in Equitable Life's
commercial paper program to a maximum of $1.00 billion up from $500.0 million.
This program is available for general corporate purposes. The Board also
authorized increasing Equitable Life's existing $350.0 million bank credit
facility to $700.0 million. Equitable Life uses this program from time to time
in its liquidity management. At September 30, 1999, $95.0 million was
outstanding under the commercial paper program; there were no amounts
outstanding under the revolving credit facility.
In late May 1999, DLJ issued a new class of its common stock to track the
financial performance of DLJdirect, its online brokerage business, selling
shares representing an approximately 18% interest in DLJdirect's financial
performance to the public. The offering raised more than $343 million of equity
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and resulted in AXA Financial recognizing a non-cash pre-tax gain of $212.3
million ($116.5 million by the Holding Company and $95.8 million by Equitable
Life).
In March 1999, DLJ filed a registration statement with the SEC, establishing a
$2.0 billion shelf of senior or subordinated debt securities or preferred stock.
As of September 30, 1999, $650 million 5 7/8% Senior Notes due 2002 and an
aggregate of $685.2 million medium term notes with various rates and maturities
having been issued. In addition, during the nine months ended September 30,
1999, commercial paper outstanding under DLJ's $1.0 billion commercial paper
program increased from $30.9 million to $253.5 million.
On October 29, 1999 Alliance transferred its business to a newly-formed private
limited partnership in connection with the reorganization approved by
Unitholders at the special meeting of Unitholders on September 22, 1999 and
expiration of the related exchange offer on October 28, 1999. Equitable Life and
its subsidiaries exchanged substantially all of their Alliance Units for limited
partnership interests and a general partnership interest in the new private
limited partnership. The new partnership is conducting Alliance's business
without change in management or employee responsibilities. Alliance's principal
asset is its interest in the new partnership, and it is functioning as a holding
company through which its Unitholders own an indirect interest in the new
partnership. Effective October 29, 1999, Alliance changed its name to Alliance
Capital Management Holding L.P. and the new private partnership assumed the name
Alliance Capital Management L.P. (For information about a lawsuit related to
this transaction, and the resolution thereof, see "Legal Proceedings" in Part
II, Item 1 of this Report.) As a result of the reorganization and exchange,
Equitable Life and its subsidiaries' share of the private partnership's income
will not be subject to the 3.5% Federal tax on publicly traded partnerships. In
1998, the impact of this Federal tax on Equitable Life and its subsidiaries was
approximately $18 million.
In July 1999, Alliance entered into a new $200.0 million three-year revolving
credit facility, increasing its borrowing capacity to $625.0 million. The new
credit facility will be used to fund commission payments to financial
intermediaries for certain mutual fund sales and for general working capital
purposes. At September 30, 1999, Alliance had $398.6 million principal amount
outstanding under its $425.0 million commercial paper program. Proceeds are
being used to fund commission payments and for capital expenditures. There were
no amounts outstanding under Alliance's revolving credit facilities.
The exposure of four money market mutual funds sponsored by Alliance to General
American Life Insurance Company's August 1999 announcement of its inability to
meet substantial demands for surrenders arising from its funding agreement
business had been reported in the Holding Company's Form 10-Q for the quarter
ended June 30, 1999. This matter has been resolved with no material adverse
effect on Alliance's, Equitable Life's or AXA Financial's consolidated financial
positions.
In March 1998, the NAIC approved its Codification project. Equitable Life will
be subject to Codification to the extent and in the form adopted in New York
State, which would require action by both the New York legislature and the New
York Insurance Department. It is not possible to predict whether, in what form,
or when Codification will be adopted in New York, and accordingly it is not
possible to predict the effect of Codification on Equitable Life.
CONSOLIDATED CASH FLOWS
The net cash used by operating activities was $11.1 billion for the first nine
months of 1999 compared to $2.06 billion for the first nine months of 1998. Cash
used by operating activities in 1999 principally was attributable to the $12.3
billion net change in trading activities and broker-dealer related
receivables/payables at DLJ reflecting an increase in operating assets,
partially offset by the $760.8 million change in accounts payable and accrued
expenses and the $308.3 million change in clearing association fees and
regulatory deposits. The 1998 cash used by operations principally was due to the
$2.37 billion net change in trading activities and broker-dealer related
receivables/payables at DLJ as increases in operating assets more than offset
increases in operating liabilities, partially offset by the $323.5 million
change in accounts payable and accrued expenses.
Net cash used by investing activities was $2.08 billion for the first nine
months of 1999 as compared to $411.0 million for the same period in 1998. Cash
used by investing activities during the first nine months of 1999 primarily was
attributable to the increase in invested assets as purchases exceeded investment
sales, maturities and repayments by approximately $1.77 billion. In 1998,
investment purchases exceeded sales, maturities and repayments by $387.8
million. Loans to discontinued operations were reduced by $300.0 million during
the first nine months of 1998.
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Net cash provided by financing activities totaled $13.32 billion for the first
nine months of 1999 as compared to $3.23 billion in the first nine months of
1998. Net cash provided by financing activities during the first nine months of
1998 primarily resulted from a $11.42 billion increase in short-term financings,
principally due to net repurchase agreement activity. Net additions to long-term
debt provided $1.17 billion of additional cash in the first nine months of 1999.
Deposits to policyholders' account balances exceeded withdrawals by $536.8
million during the first nine months of 1999. During the first nine months of
1998, cash provided by net additions to long-term debt of $1.48 billion and the
net increase of $1.98 billion in short-term financing, principally at DLJ, were
partially offset by withdrawals from policyholders' accounts exceeding additions
by $247.4 million.
The operating, investing and financing activities described above resulted in a
increase in cash and cash equivalents during the first nine months of 1999 of
$93.4 million to $2.43 billion.
FORWARD-LOOKING STATEMENTS
AXA Financial's management has made in this report, and from time to time may
make in its public filings and press releases as well as in oral presentations
and discussions, forward-looking statements concerning AXA Financial's
operations, economic performance and financial condition. Forward-looking
statements include, among other things, discussions concerning AXA Financial's
potential exposure to market risks, as well as statements expressing
management's expectations, beliefs, estimates, forecasts, projections and
assumptions, as indicated by words such as "believes," "estimates," "intends,"
"anticipates," "expects," "projects," "should," "probably," "risk," "target,"
"goals," "objectives," or similar expressions. AXA Financial claims the
protection afforded by the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and assumes no duty to
update any forward-looking statement. Forward-looking statements are based on
management's expectations and beliefs concerning future developments and their
potential effects and are subject to risks and uncertainties. Actual results
could differ materially from those anticipated by forward-looking statements due
to a number of important factors including those discussed elsewhere in this
report and in AXA Financial's other public filings, press releases, oral
presentations and discussions. The following discussion highlights some of the
more important factors that could cause such differences.
MARKET RISK. AXA Financial's businesses are subject to market risks arising from
insurance asset/liability management, asset management and trading activities.
Primary market risk exposures exist in the insurance and investment banking
segments and result from interest rate fluctuations, equity price movements,
changes in credit quality and, at DLJ, foreign currency exchange exposure.
Returns on equity securities are very volatile. Effective January 1, 1999,
management designated all direct investments in publicly-traded common equity
securities in Equitable Life's General Account and the Holding Company Group
portfolios as "trading securities" and all subsequent changes in fair value of
such investments are being reported through earnings. Each of these risks is
discussed under the captions "Investment Results of General Account Investment
Assets - Other Equity Investments" and "Market Risk, Risk Management and
Derivative Financial Instruments" as well as in Note 16 of Notes to Consolidated
Financial Statements in AXA Financial's 1998 report on Form 10-K.
YEAR 2000. Equitable Life, DLJ and Alliance continue to address Year 2000
compliance issues. There can be no assurance that compliance schedules will be
met; that AXA Financial's computer systems will operate as intended; that the
systems, services and products of third parties will be Year 2000 compliant or
that cost estimates will be met. Any significant unresolved difficulties related
to the Year 2000 compliance initiatives could result in an interruption in, or a
failure of, normal business activities or operations, or the incurrence of
unanticipated expenses related to resolving such difficulties, regulatory
actions, damage to AXA Financial's franchise, and legal liabilities and,
accordingly, could have a material adverse effect on AXA Financial's business
operations and financial results. See "Year 2000" for a detailed discussion of
AXA Financial's compliance initiatives.
STRATEGIC INITIATIVES. AXA Financial continues to implement strategic
initiatives identified after a comprehensive review of its organization and
strategy conducted in late 1997. These initiatives are designed to make AXA
Financial a premier provider of financial planning, insurance and asset
management products and services. The "branding" initiative, which consists in
part of a reorganization of wholly owned subsidiaries engaged in providing
financial advisory services and distributing relationship-based products and
services and changes to the names of these subsidiaries and the Holding Company,
is designed to separate product manufacturing under the "Equitable" name from
product distribution under the "AXA Advisors" name. On September 21, 1999, EQ
Financial, a subsidiary of Equitable Life, was merged into AXA Advisors, LLC and
was sold to AXA Distribution Holding Corporation, a wholly-owned indirect
subsidiary of the Holding Company, beginning the process of separating the
product development from product distribution functions. Implementation of these
strategic initiatives is subject to various uncertainties, including those
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relating to timing and expense, and the results of the implementation of these
initiatives could be other than what management intends. AXA Financial may, from
time to time, explore selective acquisition opportunities in its core insurance
and asset management businesses.
INSURANCE. The Insurance Group's future sales of life insurance and annuity
products are dependent on numerous factors including successful implementation
of the strategic initiatives referred to above, the intensity of competition
from other insurance companies, banks and other financial institutions, the
strength and professionalism of distribution channels, the continued development
of additional channels, the financial and claims paying ratings of Equitable
Life, its reputation and visibility in the market place, its ability to develop,
distribute and administer competitive products and services in a timely,
cost-effective manner and its investment management performance. In addition,
the markets for products sold by the Insurance Group may be materially affected
by changes in laws and regulations, including changes relating to savings,
retirement funding and taxation. The Administration's year 2000 budget proposals
contain provisions which, if enacted, could have a material adverse impact on
sales of certain insurance products and would adversely affect the taxation of
insurance companies. See "Business - Segment Information - Insurance" and
"Business - Regulation - Federal Initiatives" in AXA Financial's 1998 report on
Form 10-K. In addition, legislation under discussion in Congress contains
provisions which could negatively impact sales of life insurance and annuities,
and other provisions which could beneficially impact sales of qualified plans.
The profitability of Insurance depends on a number of factors, including levels
of operating expenses, secular trends and AXA Financial's mortality, morbidity,
persistency and claims experience, and profit margins between investment results
from General Account Investment Assets and interest credited on individual
insurance and annuity products. The performance of General Account Investment
Assets depends, among other things, on levels of interest rates and the markets
for equity securities and real estate, the need for asset valuation allowances
and writedowns, and the performance of equity investments which have, and in the
future may, create significant volatility in investment income. See "Investment
Results of General Account Investment Assets" in this report and in the 1998
Form 10-K. The ability of Equitable Life to continue its accelerated real estate
sales program during 1999 without incurring net losses will depend on real
estate markets for the remaining properties held for sale and the negotiation of
transactions which confirm management's expectations regarding property values.
For further information, including information concerning the writedown in the
fourth quarter of 1997 in connection with management's decision to accelerate
the sale of certain real estate assets, see "Investment Results of General
Account Investment Assets - Equity Real Estate" in the 1998 Form 10-K. AXA
Financial's disability income ("DI") and group pension businesses produced
pre-tax losses in 1995 and 1996. In late 1996, loss recognition studies for the
DI and group pension businesses were completed. As a result, $145.0 million of
unamortized DAC on DI policies at December 31, 1996 was written off; reserves
for directly written DI policies and DI reinsurance assumed were strengthened by
$175.0 million; and a Pension Par premium deficiency reserve was established
which resulted in a $73.0 million pre-tax charge to results of continuing
operations at December 31, 1996. Based on the experience that emerged on these
two books of business since 1996, management continues to believe the
assumptions and estimates used to develop the 1996 DI and Pension Par reserve
strengthenings are reasonable. However, there can be no assurance that they will
be sufficient to provide for all future liabilities. Equitable Life no longer
underwrites new DI policies. Equitable Life is exploring its ability to dispose
of the DI business through reinsurance. See "Combined Operating Results by
Segment - Insurance" in the 1998 Form 10-K.
INVESTMENT BANKING. DLJ's business activities are subject to risks, including
volatile trading markets and fluctuations in the volume of market activity.
Consequently, DLJ's net income and revenues have been, and may continue to be,
subject to wide fluctuations, reflecting the impact of many factors beyond DLJ's
control, including securities market conditions, the level and volatility of
interest rates, competitive conditions and the size and timing of transactions.
Over the last several years DLJ's results have been at historically high levels.
See "Combined Operating Results by Segment - Investment Banking" in the 1998
Form 10-K for a discussion of the negative impact on DLJ in the second half of
1998 of global economic problems, particularly in Japan and in emerging markets
including Russia and Asia. Potential losses could result from DLJ's merchant
banking activities as a result of their capital intensive nature.
ASSET MANAGEMENT. Alliance's revenues are largely dependent on the total value
and composition of assets under its management and are therefore affected by
market appreciation or depreciation, additions and withdrawals of assets,
purchases and redemptions of mutual funds and shifts of assets between accounts
or products with different fee structures. A substantial decline in assets under
management would adversely affect AXA Financial's results of operations. See
"Combined Operating Results by Segment - Asset Management" and "- Fees and
Assets Under Management" in this report and in the 1998 Form 10-K.
DISCONTINUED OPERATIONS. The determination of the allowance for future losses
for the discontinued Wind-Up Annuities and GIC lines of business continues to
involve numerous estimates and subjective judgments including those
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regarding expected performance of investment assets, ultimate mortality
experience and other factors which affect investment and benefit projections.
There can be no assurance that the losses provided for will not differ from the
losses ultimately realized. To the extent actual results or future projections
of discontinued operations differ from management's current best estimates
underlying the allowance, the difference would be reflected as earnings or loss
from discontinued operations within the consolidated statements of earnings. In
particular, to the extent income, sales proceeds and holding periods for equity
real estate differ from management's previous assumptions, periodic adjustments
to the allowance are likely to result. See "Discontinued Operations" in the 1998
Form 10-K for further information including discussion of significant reserve
strengthening in 1997 and 1996 and the assumptions used in making cash flow
projections.
TECHNOLOGY AND INFORMATION SYSTEMS. AXA Financial's information systems are
central to, among other things, designing and pricing products, marketing and
selling products and services, processing policyholder and investor
transactions, client recordkeeping, communicating with agents, employees and
clients, and recording information for accounting and management information
purposes. Any significant difficulty associated with the operation of such
systems, or any material delay or inability to develop needed system
capabilities, could have a material adverse effect on AXA Financial's results of
operations and, ultimately, its ability to achieve its strategic goals.
LEGAL ENVIRONMENT. A number of lawsuits have been filed against life and health
insurers involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents and other matters. Some of the lawsuits have
resulted in the award of substantial judgments against other insurers, including
material amounts of punitive damages, or in substantial settlements. In some
states, juries have substantial discretion in awarding punitive damages. AXA
Financial's insurance subsidiaries, like other life and health insurers, are
involved in such litigation. While no such lawsuit has resulted in an award or
settlement of any material amount against AXA Financial to date, its results of
operations and financial condition 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 its other subsidiaries. In
addition, examinations by Federal and state regulators could result in adverse
publicity, sanctions and fines. For further information see "Business -
Regulation" and "Legal Proceedings" in the 1998 Form 10-K and "Legal
Proceedings" in Part II, Item 1 of this report.
FUTURE ACCOUNTING PRONOUNCEMENTS. In the future, new accounting pronouncements
may have material effects on AXA Financial's consolidated statements of earnings
and shareholders' equity. See Note 2 of Notes to Consolidated Financial
Statements in the 1998 Form 10-K for pronouncements issued but not implemented.
In addition, the NAIC approved its Codification project providing regulators and
insurers with uniform statutory guidance, addressing areas where statutory
accounting previously was silent and changing certain existing statutory
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. It is not possible to
predict whether, in what form, or when Codification will be adopted in New York,
and accordingly it is not possible to predict the effect of Codification on
Equitable Life.
REGULATION AND STATUTORY CAPITAL AND SURPLUS. The businesses conducted by AXA
Financial's subsidiaries are subject to extensive regulation and supervision by
state insurance departments and Federal and state agencies regulating, among
other things, insurance and annuities, securities transactions, investment
banking, investment companies and investment advisors. Changes in the regulatory
environment could have a material impact on operations and results. The
activities of the Insurance Group are subject to the supervision of the
insurance regulators of each of the 50 states. Such regulators have the
discretionary authority, in connection with the continual licensing of members
of the Insurance Group, to limit or prohibit new issuances of business to
policyholders within their jurisdiction when, in their judgment, such regulators
determine that such member is not maintaining adequate statutory surplus or
capital. See "Liquidity and Capital Resources - Insurance" in the 1998 Form
10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
See "MD&A - Combined Operating Results by Segment - Investment
Banking."
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no new material legal proceedings and no material developments
in matters which were previously reported in the Registrant's Form 10-K for the
year ended December 31, 1998, except as described below:
Equitable Life's settlement has become effective with respect to the previously
disclosed cases (Golomb, Malvin, Bowler, Bachman and Fletcher) brought by
persons insured under the Policies. The parties have obtained dismissal of the
actions pending in each of the relevant jurisdictions.
In Bradley, a hearing on plaintiff's motions to compel discovery and for class
certification, and on EVLICO's and EOC's motion for summary judgment, has been
re-scheduled.
In Hallabrin, the parties entered into an agreement settling on an individual
basis, with prejudice, all claims against Equitable Life and EQ Financial. The
court has dismissed all claims against Equitable Life and EQ Financial with
prejudice.
In Greenwald, Equitable Life's motion to dismiss the complaint was denied
without prejudice.
In Hill, in April 1999, Equitable Life and EVLICO filed a motion to dismiss the
complaint.
In Franze, in May 1999, the Magistrate Judge issued a Report and Recommendation
recommending that the District Judge deny Equitable Life's motion for summary
judgment and grant plaintiffs' motion for class certification. In July,
Equitable Life filed Objections to the Report and Recommendation and urged that
the District Judge reject the Magistrate's recommendations and grant Equitable
Life's motion for summary judgment and deny plaintiffs' motion for class
certification.
In Duncan, pursuant to court order, the parties submitted supplemental briefing
in October 1999.
In Rickel, the complaint was dismissed in April 1999 by the Court. Plaintiff has
filed an appeal. Although there can be no assurance, DLJ's management does not
believe that the ultimate outcome of this litigation will have a material
adverse effect on DLJ's consolidated financial condition or DLJ's results of
operations in any particular period.
In National Gypsum, the plaintiffs have filed an appeal.
The Dayton Monetary Associates and Mid-American Waste Systems actions have been
settled without a material adverse effect on DLJ's consolidated financial
condition or results of operation in any particular period.
In November 1998, three purported class actions (Gillet v. Goldman, Sachs & Co.
et al., Prager v. Goldman, Sachs & Co. et al. and Holzman v. Goldman, Sachs &
Co. et al.) were filed in the U.S. District Court for the Southern District of
New York against more than 25 underwriters of initial public offering
securities, including DLJSC. The complaints allege that defendants conspired to
fix the "fee" paid for underwriting initial public offering securities by
setting the underwriters' discount or "spread" at 7%, in violation of the
federal antitrust laws. The complaints seek treble damages in an unspecified
amount and injunctive relief as well as attorneys' fees and costs. On March 15,
1999, the plaintiffs filed a Consolidated Amended Complaint captioned In re
Public Offering Fee Antitrust Litigation. A motion by all defendants to dismiss
the complaints on several grounds is pending. Separately, the U.S. Department of
Justice has issued a Civil Investigative Demand to several investment banking
firms, including DLJSC, seeking documents and information relating to "alleged"
price fixing with respect to underwriting spreads in initial public offerings.
The government has not made any charges against DLJSC or the other investment
banking firms. DLJSC is cooperating with the Justice Department in providing the
requested information and believes that no violation of law by DLJSC has
occurred. Although there can be no assurance, DLJ's management does not believe
that the ultimate outcome of these matters will have a material adverse effect
on DLJ's consolidated financial condition. Based upon the information currently
available to it, DLJ's management cannot predict whether or not these matters
will have a material adverse effect on DLJ's results of operations in any
particular period.
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In connection with the reorganization of Alliance and the related exchange
offer, on September 29, 1999, a purported class action complaint was filed in
the Court of Chancery of the State of Delaware in and for New Castle County
against Alliance (now named Alliance Capital Management Holding L.P.), Alliance
Capital Management L.P. (the new private partnership formed in connection with
the reorganization), Alliance Capital Management Corporation (the general
partner of both partnerships) and certain other defendants affiliated with
Alliance which sought, among other things, to enjoin the consummation of the
reorganization and related exchange offer and alleged, among other things, the
amended and restated Alliance partnership agreement adversely affected Alliance
Unitholders. On October 29, 1999, the parties to this litigation entered into a
memorandum of understanding setting forth the parties' agreement in principle to
the terms of a proposed settlement of the action. Alliance's management does not
believe that the resolution of this matter will have a material adverse effect
on Alliance's results of operations or financial condition.
In addition to the matters previously reported and the matters described above,
the Holding Company and its subsidiaries are involved in various legal actions
and proceedings in connection with their businesses. Some of the actions and
proceedings have been brought on behalf of various alleged classes of claimants
and certain of these claimants seek damages of unspecified amounts. While the
ultimate outcome of such matters cannot be predicted with certainty, in the
opinion of management no such matter is likely to have a material adverse effect
on AXA Financial's consolidated financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On September 17, 1999, the Holding Company filed a Current Report
on Form 8-K relating to the Stock Split (Item 5: Other Events).
On November 3, 1999, the Holding Company filed a Current Report on
Form 8-K relating to the reorganization of Alliance (Item 5: Other
Events).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, AXA
Financial, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: November 10, 1999 AXA FINANCIAL, INC.
By: /s/Stanley B. Tulin
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Name: Stanley B. Tulin
Title: Executive Vice President and
Chief Financial Officer
Date: November 10, 1999 /s/Alvin H. Fenichel
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Alvin H. Fenichel
Senior Vice President and Controller
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