UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2000 Commission File No. 1-11166
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AXA Financial, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3623351
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
--------------------------
None
- --------------------------------------------------------------------------------
(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 August 9, 2000
- ----------------------------------------- -----------------------------------
Common Stock, $.01 par value 433,353,108
Page 1 of 41
AXA FINANCIAL, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
TABLE OF CONTENTS
Page #
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and
December 31, 1999................................................ 3
Consolidated Statements of Earnings for the Three
Months and Six Months Ended June 30, 2000 and 1999............... 4
Consolidated Statements of Shareholders' Equity for
the Six Months Ended June 30, 2000 and 1999...................... 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999.............................. 6
Notes to Consolidated Financial Statements........................ 7
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................18
Item 3: Quantitative and Qualitative Disclosures About Market Risk........35
PART II OTHER INFORMATION
Item 1: Legal Proceedings.................................................36
Item 4: Submission of Matters to a Vote of Security Holders...............39
Item 6: Exhibits and Reports on Form 8-K..................................40
SIGNATURES...................................................................41
2
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
AXA FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
2000 1999
----------------- -----------------
(In Millions)
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 17,880.1 $ 18,849.1
Held to maturity, at amortized cost..................................... 254.2 253.4
Investment banking trading account securities, at market value............ 27,398.4 27,982.4
Securities purchased under resale agreements.............................. 28,281.8 29,538.1
Mortgage loans on real estate............................................. 3,120.2 3,270.0
Equity real estate........................................................ 1,046.0 1,160.2
Policy loans.............................................................. 2,381.0 2,257.3
Other equity investments.................................................. 2,308.3 2,106.2
Other invested assets..................................................... 975.8 914.7
----------------- -----------------
Total investments..................................................... 83,645.8 86,331.4
Cash and cash equivalents................................................... 3,959.9 2,816.5
Broker-dealer related receivables........................................... 56,281.1 45,519.4
Deferred policy acquisition costs........................................... 4,266.0 4,033.0
Other assets................................................................ 7,567.1 6,321.4
Closed Block assets......................................................... 8,670.3 8,607.3
Separate Accounts assets.................................................... 55,599.9 54,453.9
----------------- -----------------
Total Assets................................................................ $ 219,990.1 $ 208,082.9
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 20,259.5 $ 21,351.4
Future policy benefits and other policyholders' liabilities................. 4,834.3 4,777.6
Securities sold under repurchase agreements................................. 52,086.2 56,474.4
Broker-dealer related payables.............................................. 48,916.9 37,378.1
Short-term and long-term debt............................................... 12,792.0 9,165.9
Other liabilities........................................................... 10,220.2 9,739.1
Closed Block liabilities.................................................... 9,060.9 9,025.0
Separate Accounts liabilities............................................... 55,493.3 54,332.5
----------------- -----------------
Total liabilities..................................................... 213,663.3 202,244.0
----------------- -----------------
Commitments and contingencies (Notes 5 and 11)
SHAREHOLDERS' EQUITY
Series D convertible preferred stock........................................ 648.7 648.7
Stock employee compensation trust........................................... (648.7) (648.7)
Common stock, at par value.................................................. 4.5 4.5
Capital in excess of par value.............................................. 3,762.3 3,739.1
Treasury stock.............................................................. (548.6) (490.8)
Retained earnings........................................................... 3,576.6 3,008.6
Accumulated other comprehensive loss........................................ (468.0) (422.5)
----------------- -----------------
Total shareholders' equity............................................ 6,326.8 5,838.9
----------------- -----------------
Total Liabilities and Shareholders' Equity.................................. $ 219,990.1 $ 208,082.9
================= =================
See Notes to Consolidated Financial Statements.
3
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- ---------------- --------------- ---------------
(In Millions, Except Per Share Amounts)
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 348.6 $ 307.8 $ 689.0 $ 604.5
Premiums............................................. 137.6 130.7 270.6 265.6
Net investment income................................ 1,655.2 1,109.6 3,092.8 2,163.0
Investment banking principal transactions, net....... 233.7 243.6 748.4 420.7
Investment (losses) gains, net....................... (61.6) 190.5 (181.6) 186.2
Commissions, fees and other income................... 1,709.0 1,502.2 3,470.6 2,782.9
Contribution from the Closed Block................... 29.1 23.0 45.8 41.9
--------------- ---------------- --------------- ---------------
Total revenues................................. 4,051.6 3,507.4 8,135.6 6,464.8
--------------- ---------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account
balances........................................... 250.6 269.6 512.7 539.8
Policyholders' benefits.............................. 263.4 253.9 545.4 494.7
Other operating costs and expenses................... 2,923.9 2,362.4 5,807.2 4,344.5
--------------- ---------------- --------------- ---------------
Total benefits and other deductions............ 3,437.9 2,885.9 6,865.3 5,379.0
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
Federal income taxes and minority interest......... 613.7 621.5 1,270.3 1,085.8
Federal income taxes................................. 202.7 144.4 403.6 301.1
Minority interest in net income of
consolidated subsidiaries.......................... 118.4 94.8 270.6 176.0
--------------- ---------------- --------------- ---------------
Earnings from continuing operations.................. 292.6 382.3 596.1 608.7
Discontinued operations, net of Federal income
taxes.............................................. (1.5) (1.3) (6.4) (6.6)
--------------- ---------------- --------------- ---------------
Net Earnings......................................... $ 291.1 $ 381.0 $ 589.7 $ 602.1
=============== ================ =============== ===============
Per Common Share:
Basic:
Earnings from continuing operations.............. $ .68 $ .87 $ 1.38 $ 1.39
Discontinued operations, net of Federal
income taxes................................... (.01) - (.02) (.02)
--------------- ---------------- --------------- ---------------
Net Earnings..................................... $ .67 $ .87 $ 1.36 $ 1.37
=============== ================ =============== ===============
Diluted:
Earnings from continuing operations.............. $ .65 $ .83 $ 1.30 $ 1.32
Discontinued operations, net of Federal
income taxes................................... (.01) - (.01) (.01)
--------------- ---------------- --------------- ---------------
Net Earnings..................................... $ .64 $ .83 $ 1.29 $ 1.31
=============== ================ =============== ===============
Cash Dividends Per Common Share $ .025 $ .025 $ .05 $ .05
=============== ================ =============== ===============
See Notes to Consolidated Financial Statements.
4
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2000 and 1999
(UNAUDITED)
2000 1999
----------------- -----------------
(In Millions)
SHAREHOLDERS' EQUITY
Series D convertible preferred stock, beginning of year..................... $ 648.7 $ 598.4
Change in market value of shares............................................ - 94.4
----------------- -----------------
Series D convertible preferred stock, end of period......................... 648.7 692.8
----------------- -----------------
Stock employee compensation trust, beginning of year........................ (648.7) (598.4)
Change in market value of shares............................................ - (94.4)
----------------- -----------------
Stock employee compensation trust, end of period............................ (648.7) (692.8)
----------------- -----------------
Common stock, at par value, beginning of year and end of period............. 4.5 2.2
----------------- ---------------
Capital in excess of par value, beginning of year........................... 3,739.1 3,662.1
Additional capital in excess of par value................................... 23.2 21.1
----------------- -----------------
Capital in excess of par value, end of period............................... 3,762.3 3,683.2
----------------- -----------------
Treasury stock, beginning of year........................................... (490.8) (247.1)
Purchase of shares for treasury............................................. (57.8) (1.7)
----------------- -----------------
Treasury stock, end of period............................................... (548.6) (248.8)
----------------- -----------------
Retained earnings, beginning of year........................................ 3,008.6 1,926.1
Net earnings................................................................ 589.7 602.1
Dividends on common stock................................................... (21.7) (21.8)
----------------- -----------------
Retained earnings, end of period............................................ 3,576.6 2,506.4
----------------- -----------------
Accumulated other comprehensive (loss) income, beginning of year............ (422.5) 349.8
Other comprehensive loss.................................................... (45.5) (523.3)
----------------- -----------------
Accumulated other comprehensive loss, end of period......................... (468.0) (173.5)
----------------- -----------------
Total Shareholders' Equity, End of Period................................... $ 6,326.8 $ 5,769.5
================= =================
See Notes to Consolidated Financial Statements.
5
AXA FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2000 and 1999
(UNAUDITED)
2000 1999
----------------- -----------------
(In Millions)
Net earnings................................................................ $ 589.7 $ 602.1
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Interest credited to policyholders' account balances.................... 512.7 539.8
Universal life and investment-type product policy fee income............ (689.0) (604.5)
Net change in trading activities and broker-dealer related
receivables/payables.................................................. 1,131.1 (3,188.2)
Increase in matched resale agreements................................... (3,907.3) (2,818.9)
Increase in matched repurchase agreements.............................. 3,907.3 2,818.9
Investment (gains) losses, net of dealer and trading gains.............. 32.2 (214.5)
Change in clearing association fees and regulatory deposits............. 41.9 817.8
Change in accounts payable and accrued expenses......................... (691.4) 109.6
Change in Federal income tax payable.................................... (107.6) 73.5
Other, net.............................................................. (475.3) (381.0)
----------------- -----------------
Net cash provided (used) by operating activities............................ 344.3 (2,245.4)
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 1,065.8 1,091.7
Sales.................................................................... 3,449.9 4,973.7
Purchases................................................................. (3,680.2) (7,296.2)
Other, net................................................................ (122.2) (170.8)
----------------- -----------------
Net cash provided (used) by investing activities............................ 713.3 (1,401.6)
----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 1,309.2 1,191.1
Withdrawals and transfers to Separate Accounts.......................... (2,286.1) (806.3)
Net (decrease) increase in short-term financings.......................... (948.5) 1,796.9
Additions to long-term debt............................................... 2,493.6 1,056.2
Repayments of long-term debt.............................................. (295.2) (9.3)
Purchase of treasury stock................................................ (57.8) -
Other, net................................................................ (129.4) 353.8
----------------- -----------------
Net cash provided by financing activities................................... 85.8 3,582.4
----------------- -----------------
Change in cash and cash equivalents......................................... 1,143.4 (64.6)
Cash and cash equivalents, beginning of year................................ 2,816.5 2,335.4
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 3,959.9 $ 2,270.8
================= =================
Supplemental cash flow information
Interest Paid............................................................. $ 3,460.5 $ 2,259.7
================= =================
Income Taxes Paid......................................................... $ 492.5 $ 132.7
================= =================
See Notes to Consolidated Financial Statements.
6
AXA FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
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, 1999. The results of operations for the six
months ended June 30, 2000 are not necessarily indicative of the results
to be expected for the full year.
The terms "second quarter 2000" and "second quarter 1999" refer to the
three months ended June 30, 2000 and 1999, respectively. The terms "first
half of 2000" and "first half of 1999" refer to the six months ended June
30, 2000 and 1999, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
2) 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 $.39 per basic and diluted share for the three and six
months ended June 30, 1999.
3) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
Six Months Ended
June 30,
-----------------------------------
2000 1999
--------------- ---------------
(In Millions)
Balances, beginning of year............................................... $ 148.6 $ 230.6
Additions charged to income............................................... 31.0 23.9
Deductions for writedowns and asset dispositions.......................... (65.2) (74.6)
--------------- ---------------
Balances, End of Period................................................... $ 114.4 $ 179.9
=============== ===============
Balances, end of period:
Mortgage loans on real estate........................................... $ 29.2 $ 31.3
Equity real estate...................................................... 85.2 148.6
--------------- ---------------
Total..................................................................... $ 114.4 $ 179.9
=============== ===============
For the second quarter and first half of 2000 and 1999, investment income
is shown net of investment expenses (including interest expense to finance
short-term trading instruments) of $1,136.2 million, $842.7 million,
$2,163.8 and $1,608.2 million, respectively.
As of June 30, 2000 and December 31, 1999, fixed maturities classified as
available for sale had amortized costs of $18,736.1 million and $19,627.1
million, fixed maturities in the held to maturity portfolio had estimated
fair values of $259.5 million and $259.3 million and investment banking
trading account securities had costs of $27,657.2 million and $27,983.9
million, respectively. Other equity investments included equity securities
with carrying values of $1,509.3 million and $1,458.3 million and costs of
$1,399.7 million and $1,399.5 million as of June 30, 2000 and December 31,
1999, respectively.
7
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 statement of
earnings. In the second quarter and first half of 2000 and 1999,
respectively, net unrealized holding gains of $.2 million, $36.0 million,
$3.6 million and $98.5 million were included in net investment income in
the consolidated statements of earnings. These trading securities had a
carrying value of $9.2 million and $16.4 million and costs of $9.5 million
and $14.3 million at June 30, 2000 and December 31, 1999, respectively.
For the first half of 2000 and of 1999, proceeds received on sales of
fixed maturities classified as available for sale amounted to $2,625.7
million and $4,679.0 million, respectively. Gross gains of $56.2 million
and $40.6 million and gross losses of $110.0 million and $91.0 million
were realized on these sales for the first half of 2000 and of 1999,
respectively. Unrealized investment losses related to fixed maturities
classified as available for sale increased by $77.9 million during the
first half of 2000, resulting in a balance of $(855.9) million at June 30,
2000.
Impaired mortgage loans along with the related provision for losses were as
follows:
June 30, December 31,
2000 1999
--------------- -----------------
(In Millions)
Impaired mortgage loans with provision for losses....................... $ 131.5 $ 142.4
Impaired mortgage loans without provision for losses.................... 2.8 2.2
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 134.3 144.6
Provision for losses.................................................... (24.9) (23.0)
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 109.4 $ 121.6
=============== =================
During the first half of 2000 and of 1999, respectively, AXA Financial's
average recorded investment in impaired mortgage loans was $140.3 million
and $129.0 million. Interest income recognized on these impaired mortgage
loans totaled $6.1 million and $4.5 million for the first half of 2000 and
of 1999, respectively.
4) PURCHASE AND SALE OF INTERESTS IN SUBSIDIARIES
During second quarter 2000, the Holding Company purchased 32.6 million
newly issued Alliance Units for approximately $1.60 billion. At June 30,
2000, AXA Financial's ownership percentage in Alliance was 63.25%.
Alliance plans to use the cash proceeds primarily to fund the cash portion
of the consideration of its planned fourth quarter acquisition of the
assets and liabilities of Sanford C. Bernstein Inc.
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.
5) 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 6.43% and 4.38% at June 30, 2000 and
December 31, 1999, respectively.
8
6) CLOSED BLOCK
Summarized financial information for the Closed Block is as follows:
June 30, December 31,
2000 1999
----------------- -----------------
(In Millions)
BALANCE SHEETS
Fixed maturities available for sale, at estimated fair value
(amortized cost of $4,233.3 and $4,144.8)............................ $ 4,091.7 $ 4,014.0
Mortgage loans on real estate.......................................... 1,628.4 1,704.2
Policy loans........................................................... 1,574.2 1,593.9
Cash and other invested assets......................................... 306.0 194.4
DAC.................................................................... 881.5 895.5
Other assets........................................................... 188.5 205.3
----------------- -----------------
Total Assets........................................................... $ 8,670.3 $ 8,607.3
================= =================
Future policy benefits and other policyholders' account balances....... $ 8,998.9 $ 9,011.7
Other liabilities...................................................... 62.0 13.3
----------------- -----------------
Total Liabilities...................................................... $ 9,060.9 $ 9,025.0
================= =================
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
(In Millions)
STATEMENTS OF EARNINGS
Premiums and other income................ $ 150.4 $ 156.4 $ 303.4 $ 312.4
Investment income (net of investment
expenses of $3.3, $4.8, $6.7 and
$10.0)................................. 146.6 145.2 289.6 287.2
Investment gains (losses), net........... 2.0 3.4 (1.0) 1.5
--------------- --------------- --------------- ---------------
Total revenues........................ 299.0 305.0 592.0 601.1
--------------- --------------- --------------- ---------------
Policyholders' benefits and dividends.... 254.5 260.5 511.8 526.9
Other operating costs and expenses....... 15.4 21.5 34.4 32.3
--------------- --------------- --------------- ---------------
Total benefits and other deductions... 269.9 282.0 546.2 559.2
--------------- --------------- --------------- ---------------
Contribution from the Closed Block....... $ 29.1 $ 23.0 $ 45.8 $ 41.9
=============== =============== =============== ===============
Investment valuation allowances amounted to $5.9 million and $4.6 million
on mortgage loans and $17.3 million and $24.7 million on equity real
estate at June 30, 2000 and December 31, 1999, respectively.
9
Impaired mortgage loans along with the related provision for losses were as
follows:
June 30, December 31,
2000 1999
----------------- -------------------
(In Millions)
Impaired mortgage loans with provision for losses...................... $ 26.5 $ 26.8
Impaired mortgage loans without provision for losses................... 4.3 4.5
----------------- -------------------
Recorded investment in impaired mortgages.............................. 30.8 31.3
Provision for losses................................................... (5.4) (4.1)
----------------- -------------------
Net Impaired Mortgage Loans............................................ $ 25.4 $ 27.2
================= ===================
During the first half of 2000 and of 1999, respectively, the Closed
Block's average recorded investment in impaired mortgage loans was $31.2
million and $45.4 million.
7) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
June 30, December 31,
2000 1999
----------------- -------------------
(In Millions)
BALANCE SHEETS
Mortgage loans on real estate.......................................... $ 373.7 $ 454.6
Equity real estate..................................................... 396.7 426.6
Fixed maturities available for sale, at estimated fair value
(amortized cost of $251.5 and 85.3)................................. 253.6 85.5
Other equity investments............................................... 50.5 55.8
Other invested assets.................................................. 1.9 1.6
----------------- -------------------
Total investments.................................................... 1,076.4 1,024.1
Cash and cash equivalents.............................................. 79.6 164.5
Other assets........................................................... 213.7 213.0
----------------- -------------------
Total Assets........................................................... $ 1,369.7 $ 1,401.6
================= ===================
Policyholders' liabilities............................................. $ 982.1 $ 993.3
Allowance for future losses............................................ 257.5 242.2
Other liabilities...................................................... 130.1 166.1
----------------- -------------------
Total Liabilities...................................................... $ 1,369.7 $ 1,401.6
================= ===================
10
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
(In Millions)
STATEMENTS OF EARNINGS
Investment income (net of investment
expenses of $9.4, $12.4, $19.8 and
and $25.5)............................. $ 23.3 $ 22.9 $ 52.3 $ 42.5
Investment (losses) gains, net........... 4.3 (3.5) 2.0 (10.5)
Policy fees, premiums and
other income.......................... .2 - .2 -
--------------- --------------- --------------- ---------------
Total revenues........................... 27.8 19.4 54.5 32.0
Benefits and other deductions............ 27.8 29.0 54.5 54.4
Losses charged to allowance for
future losses.......................... - (9.6) - (22.4)
--------------- --------------- --------------- ---------------
Pre-tax results from operations.......... - - - -
Pre-tax loss from strengthening the
allowance for future losses............ (2.2) (1.9) (9.8) (10.1)
Federal income tax benefit............... .7 .6 3.4 3.5
--------------- --------------- --------------- ---------------
Loss from Discontinued
Operations............................. $ (1.5) $ (1.3) $ (6.4) $ (6.6)
=============== =============== =============== ===============
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 June 30, 2000
and 1999 resulted in management's decision to strengthen the allowance by
$9.8 million for the first half of 2000 and $10.1 million for the first
half of 1999. This resulted in after-tax losses of $6.4 million for first
half of 2000 and after-tax losses of $6.6 million for the first half of
1999.
Management believes the allowance for future losses at June 30, 2000 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 loss
allowance are likely to result.
Investment valuation allowances amounted to $.6 million and $1.9 million
on mortgage loans and $31.7 million and $54.8 million on equity real
estate at June 30, 2000 and December 31, 1999, respectively.
8) 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.
9) RESTRUCTURING COSTS
At June 30, 2000, the 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 $7.3 million. The amounts paid during the first half of 2000
totaled $2.9 million.
11
10) COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
(In Millions)
Net earnings applicable to common
shares - Basic......................... $ 291.1 $ 381.0 $ 589.7 $ 602.1
Less - effect of assumed exercise of
options of publicly held
subsidiaries........................ (9.1) (12.5) (25.3) (21.1)
--------------- --------------- --------------- ---------------
Net Earnings Applicable to Common
Shares - Diluted....................... $ 282.0 $ 368.5 $ 564.4 $ 581.0
=============== =============== =============== ===============
Weighted average common shares
outstanding - Basic.................... 432.6 438.7 432.8 438.3
Add - assumed exercise of stock
options................................ 5.9 5.7 5.3 5.7
--------------- --------------- --------------- ---------------
Weighted Average Shares
Outstanding - Diluted.................. 438.5 444.4 438.1 444.0
=============== =============== =============== ===============
The 1999 weighted average common shares outstanding, option data and per
share earnings have been restated to reflect the 2-for-1 stock split in
September 1999.
11) LITIGATION
There have been no new material legal proceedings and no material
developments in matters which were previously reported in AXA Financial's
Notes to Consolidated Financial Statements for the year ended December 31,
1999, except as described below:
In June 2000, an action was brought against Equitable Life, AXA Advisors
and EDI (the defendants) alleging that the defendants engaged in
fraudulent and deceptive practices in connection with the marketing and
sale of deferred annuity products to fund tax-qualified contributory
retirement plans. The named plaintiff purports to act as a private
attorney general on behalf of the general public of the State of
California. On behalf of the named plaintiff and in certain instances also
on behalf of the general public, the complaint asserts claims for
unlawful, unfair or fraudulent business acts and practices and for false
or misleading advertising and for fraud, fraudulent concealment and
deceit, negligent misrepresentation and negligence. The complaint seeks
injunctive relief, restitution for members of the general public of the
State of California who have been harmed by defendants' conduct,
compensatory and punitive damages on behalf of the named plaintiff, and
attorneys' fees, costs and expenses. In July 2000, the defendants removed
the case to Federal court and filed a motion to dismiss the complaint.
Equitable Life is a defendant in a purported class action commenced in
March 2000 on behalf of persons who purchased variable annuities from
Equitable Life from January 1989 to the present. The complaint alleges
various improper sales practices including misrepresentations in
connection with the use of variable annuities in a qualified retirement
plan or similar arrangement, charging inflated or hidden fees, and failure
to disclose unnecessary tax deferral fees. The plaintiff seeks damages
including punitive damages. In May 2000, Equitable Life filed a motion to
dismiss the complaint and plaintiff moved to remand the case to state
court.
In January 2000, the California Supreme Court denied Equitable Life's
petition for review of an October 1999 decision by the California Court of
Appeal. Such decision reversed the dismissal by the Superior Court of
Orange County, California of an action which was commenced in 1995 by a
real estate developer in connection with a limited partnership formed in
1991 with Equitable Life on behalf of Prime Property Fund ("PPF").
Equitable Life serves as investment manager for PPF, an open-end,
commingled real estate separate account of Equitable Life for pension
clients. Plaintiff alleges, among other claims, that Equitable Life
breached its fiduciary duty as general partner of the limited partnership
principally in connection with the 1995 purchase and subsequent
foreclosure by Equitable Life on behalf of PPF of the loan which financed
the partnership's property. In reversing the Superior Court's dismissal of
the plaintiff's claims, the Court of Appeal held that a general partner
who acquires a partnership obligation breaches its fiduciary duty by
foreclosing on partnership assets. The case was remanded to the Superior
Court for further proceedings, and in May 2000, the court scheduled a jury
trial for February 2001. The plaintiff seeks compensatory and punitive
damages.
12
Although the outcome of litigation cannot be predicted with certainty, AXA
Financial's management believes that the ultimate resolution of the
matters described above should not have a material adverse effect on the
consolidated financial position of AXA Financial. AXA Financial's
management cannot make an estimate of loss, if any, or predict whether or
not such litigations will have a material adverse effect on AXA
Financial's consolidated results of operations in any particular period.
On July 21, 2000, in the consolidated action captioned In re Public
Offering Fee Antitrust Litigation pending in the U.S. District Court for
the Southern District of New York, plaintiffs filed a motion for leave to
file a second amended complaint. The principal proposed amendment to the
previously filed Consolidated Amended Complaint is the addition of an
issuer company as a plaintiff. On August 3, 2000, another purported class
action was filed in the U.S. District Court for the Southern District of
Florida against 18 securities firms, including DLJ. The complaint makes
allegations substantially similar to those advanced in In re Public
Offering Fee Antitrust Litigation, and seeks treble damages in an
unspecified amount and injunctive relief as well as attorney's fees and
costs. To date, DLJ has not been served in the action filed in Florida.
DLJ and DLJSC intend to vigorously defend themselves against all the
allegations contained in the complaints.
Over a period of several years, DLJSC provided investment banking
services, to an entity and its related corporations, including
participating in the distribution of its securities. In addition, a DLJ
merchant banking affiliate was for a time an investor in one of the
companies, and an employee of DLJSC and an employee of a DLJ merchant
banking affiliate were members of the board of directors of that company.
In January 2000, these companies filed Chapter 11 petitions in the U.S.
Bankruptcy Court for the District of Delaware. In the Bankruptcy Court
proceedings discovery has been sought from DLJ and its affiliates in
connection with their relationships with these companies. In addition, the
staff of the Securities and Exchange Commission has issued an informal
request for information, and the U.S. Attorney's Office for the Eastern
District of New York has issued a grand jury subpoena requesting
information. DLJ and its affiliates are cooperating with these discovery
requests. No claim has been brought against DLJ or its affiliates to date.
Between September 1995 and October 1998, DLJSC was named as a defendant in
six separate actions filed by institutional investors who invested and
lost approximately $300 million in three hedge funds, which filed for
bankruptcy in April 1994. All six complaints have been consolidated for
discovery purposes and are currently pending in the U.S. District Court
for the Southern District of New York. The only claim against DLJSC that
has survived a motion to dismiss is aiding and abetting common law fraud.
The complaints allege that DLJSC aided and abetted an alleged fraud of the
investors by two of the defendants by selling securities that were
inconsistent with the funds' investment objectives and by providing
inaccurate monthly mark-to-market prices for securities purchased by the
funds. The actions seek joint and several recovery of rescissionary,
compensatory, and punitive damages. DLJSC's motion for summary judgment on
the plaintiffs' claims is currently pending. DLJSC intends to defend
itself vigorously against all of the allegations contained in the
complaints.
In August 1997, DLJSC was named as a defendant in another action arising
out of the bankruptcy of the funds. This action was brought by an entity
created by the funds' plan of liquidation to pursue all unresolved claims
held by the funds. The action is currently pending in the U.S. District
Court for the Southern District of New York. The only claims against DLJSC
that have survived a motion to dismiss are for breach of contract.
Generally, the lawsuit alleges that the funds were damaged when DLJSC
issued allegedly improper margin calls and liquidated the funds' reverse
repurchase positions at less than fair market value. The complaint alleges
that the funds' investors lost over $400 million in equity, but does not
specify the amount of damages that the funds themselves claim to have
suffered as a result of the allegations made in this complaint. DLJSC
intends to defend itself vigorously against all of the allegations
contained in the complaint.
Although there can be no assurance, DLJ's management does not believe that
the ultimate outcome of the matters described above related to DLJSC 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 such matters will have a material adverse
effect on DLJ's results of operations in any particular period.
13
In September 1999, an action was brought on behalf of a purported class of
owners of limited partnership units of Alliance Holding challenging the
then-proposed reorganization of Alliance Holding. Named defendants include
Alliance Holding, Alliance, four Alliance Holding executives and the
general partner of Alliance Holding and Alliance. Equitable Life is
obligated to indemnify the defendants for losses and expenses arising out
of the litigation. Plaintiffs allege inadequate and misleading
disclosures, breaches of fiduciary duties, and the improper adoption of an
amended partnership agreement by Alliance Holding and seek payment of
unspecified money damages and an accounting of all benefits alleged to
have been improperly obtained by the defendants. Although the outcome of
any litigation cannot be predicted with certainty, AXA Financial's
management believes that the ultimate resolution of this matter should not
have a material adverse effect on the financial position of AXA Financial.
AXA Financial's management cannot make an estimate of loss, if any, or
predict whether or not such matter will have a material adverse effect on
AXA Financial's results of operations in any particular period.
In the Alliance North American Government Income Trust action, a
Stipulation and Agreement of Settlement has been signed with the lawyers
for the plaintiffs settling this action. Under the Stipulation and
Agreement of Settlement, the Operating Partnership will permit
shareholders of the fund to invest up to $250 million in Alliance mutual
funds free of initial sales charges. On August 3, 2000, the court signed
an order approving the Stipulation and Agreement of Settlement.
Shareholders of the fund have thirty days from the date the order becomes
final to appeal the order.
In addition to the matters previously reported and those described above,
the Holding Company and its subsidiaries are involved in various legal
actions and proceedings in connection with their businesses. Some of the
actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on AXA Financial's consolidated
financial position or results of operations.
14
12) BUSINESS SEGMENT INFORMATION
Financial Investment
Advisory/ Banking Investment
Insurance and Brokerage Management Elimination Total
--------------- ----------------- ----------------- --------------- -----------------
(In Millions)
Three Months Ended
June 30, 2000
-----------------------
Segment revenues....... $ 1,201.1 $ 2,377.1 $ 566.6 $ (31.6) $ 4,113.2
Non-DLJ investment
(losses) gains and
other................ (60.2) (2.5) 1.1 - (61.6)
--------------- ----------------- ----------------- --------------- -----------------
Total Revenues......... $ 1,140.9 $ 2,374.6 $ 567.7 $ (31.6) $ 4,051.6
=============== ================= ================= =============== =================
Pre-tax operating
earnings............. $ 284.2 $ 165.4 $ 73.8 $ - $ 523.4
Investment (losses)
gains, net of related
DAC and other
charges.............. (55.8) (2.5) .2 - (58.1)
Pre-tax minority
interest............. - 81.8 66.6 - 148.4
--------------- ----------------- ----------------- --------------- -----------------
Pre-tax Earnings from
Continuing
Operations........... $ 228.4 $ 244.7 $ 140.6 $ - $ 613.7
=============== ================= ================= =============== =================
Three Months Ended
June 30, 1999
-----------------------
Segment revenues....... $ 1,082.7 $ 1,815.0 $ 418.8 $ (3.7) $ 3,312.8
Non-DLJ investment
(losses) gains and
other................ (21.5) 214.6 1.5 - 194.6
--------------- ----------------- ----------------- --------------- -----------------
Total Revenues......... $ 1,061.2 $ 2,029.6 $ 420.3 $ (3.7) $ 3,507.4
=============== ================= ================= =============== =================
Pre-tax operating
earnings............. $ 220.2 $ 163.0 $ 54.1 $ - $ 437.3
Investment (losses)
gains, net of related
DAC and other
charges.............. (22.2) 214.6 1.3 - 193.7
Non-recurring DAC
adjustments.......... (131.7) - - - (131.7)
Pre-tax minority
interest............. - 75.6 46.6 - 122.2
--------------- ----------------- ----------------- --------------- -----------------
Pre-tax Earnings from
Continuing
Operations........... $ 66.3 $ 453.2 $ 102.0 $ - $ 621.5
=============== ================= ================= =============== =================
15
Financial Investment
Advisory/ Banking Investment
Insurance and Brokerage Management Elimination Total
--------------- ----------------- ----------------- --------------- -----------------
(In Millions)
Six Months Ended
June 30, 2000
-----------------------
Segment revenues....... $ 2,391.8 $ 4,872.3 $ 1,116.1 $ (63.0) $ 8,317.2
Non-DLJ investment
(losses) gains and
other................ (190.9) 5.4 3.9 - (181.6)
--------------- ----------------- ----------------- --------------- -----------------
Total Revenues......... $ 2,200.9 $ 4,877.7 $ 1,120.0 $ (63.0) $ 8,135.6
=============== ================= ================= =============== =================
Pre-tax operating
earnings............. $ 534.9 $ 407.5 $ 160.9 $ - $ 1,103.3
Investment (losses)
gains, net of related
DAC and other
charges.............. (179.3) 5.4 2.7 - (171.2)
Pre-tax minority
interest............. - 196.2 142.0 - 338.2
--------------- ----------------- ----------------- --------------- -----------------
Pre-tax Earnings from
Continuing
Operations........... $ 355.6 $ 609.1 $ 305.6 $ - $ 1,270.3
=============== ================= ================= =============== =================
Six Months Ended
June 30, 1999
-----------------------
Segment revenues....... $ 2,130.2 $ 3,307.7 $ 837.9 $ (7.3) $ 6,268.5
Non-DLJ investment
(losses) gains and
other................ (42.8) 236.4 2.7 - 196.3
--------------- ----------------- ----------------- --------------- -----------------
Total Revenues......... $ 2,087.4 $ 3,544.1 $ 840.6 $ (7.3) $ 6,464.8
=============== ================= ================= =============== =================
Pre-tax operating
earnings............. $ 422.9 $ 281.5 $ 102.3 $ - $ 806.7
Investment (losses)
gains, net of related
DAC and other
charges.............. (55.0) 236.4 2.3 - 183.7
Non-recurring DAC
adjustments.......... (131.7) - - - (131.7)
Pre-tax minority
interest............. - 133.2 93.9 - 227.1
--------------- ----------------- ----------------- --------------- -----------------
Pre-tax Earnings from
Continuing
Operations........... $ 236.2 $ 651.1 $ 198.5 $ - $ 1,085.8
=============== ================= ================= =============== =================
Total Assets:
June 30, 2000.......... $ 89,126.3 $ 118,036.9 $ 12,976.8 $ (149.9) $ 219,990.1
=============== ================= ================= =============== =================
December 31, 1999...... $ 87,213.9 $ 109,039.1 $ 11,902.4 $ (72.5) $ 208,082.9
=============== ================= ================= =============== =================
16
13) COMPREHENSIVE INCOME
The components of comprehensive income for second quarters 2000 and 1999
and the first half of 2000 and of 1999 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
(In Millions)
Net earnings............................. $ 291.1 $ 381.0 $ 589.7 $ 602.1
--------------- --------------- --------------- ---------------
Change in unrealized (losses) gains,
net of reclassification adjustment..... (49.9) (276.4) (45.5) (523.3)
--------------- --------------- --------------- ---------------
Other comprehensive (loss) income........ (49.9) (276.4) (45.5) (523.3)
--------------- --------------- --------------- ---------------
Comprehensive Income..................... $ 241.2 $ 104.6 $ 544.2 $ 78.8
=============== =============== =============== ===============
14) SUBSEQUENT EVENTS
In July 2000, Equitable Life transferred, at no gain or loss, all the risk
of its directly written DI business for years 1993 and prior to Centre
Life Insurance Company, a subsidiary of Zurich Financial Services. The
transfer of risk to Centre Life Insurance was accomplished through an
indemnity reinsurance contract. The cost of the arrangement will be
amortized over the expected lives of the contracts reinsured and will not
have a significant impact on the results of operations in any specific
period.
In June 2000, the Holding Company borrowed $1.45 billion from Bank of
America N.A. at 7.06% for a 3 month period. These funds were used by the
Holding Company to purchase newly issued Alliance Units (see Note 4). In
July 2000, the Holding Company issued $480.0 million 7.75% Senior Notes
due 2010. These notes pay interest semi-annually. The proceeds were used
to partially repay the short-term borrowing.
17
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 Annual Report on Form 10-K for the
year ended December 31, 1999 ("1999 Form 10-K").
COMBINED OPERATING RESULTS
The combined and segment level discussions in this MD&A are presented on an
adjusted 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 Financial Advisory/Insurance analysis, which begins on page 20,
likewise reflects the Closed Block amounts on a line-by-line basis. The MD&A
addresses the combined operating results unless noted otherwise. The Investment
Banking and Brokerage and Investment Management discussions begin on pages 22
and 24, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
(In Millions)
Operating Results:
Policy fee income and premiums................ $ 636.6 $ 591.4 $ 1,263.0 $ 1,178.5
Net investment income......................... 1,801.8 1,254.3 3,382.4 2,443.7
Investment banking principal transactions..... 233.7 243.6 748.4 420.7
Commissions, fees and other income............ 1,711.0 1,510.2 3,469.6 2,784.8
--------------- --------------- --------------- ---------------
Total revenues.............................. 4,383.1 3,599.5 8,863.4 6,827.7
Total benefits and other deductions......... 3,711.3 3,040.0 7,421.9 5,793.9
--------------- --------------- --------------- ---------------
Pre-tax operating earnings before
minority interest........................... 671.8 559.5 1,441.5 1,033.8
Minority interest............................. (148.4) (122.2) (338.2) (227.1)
--------------- --------------- --------------- ---------------
Pre-tax operating earnings.................... 523.4 437.3 1,103.3 806.7
Pre-tax Adjustments:
Investment (losses) gains, net of related
DAC and other charges....................... (58.1) 193.7 (171.2) 183.7
Non-recurring DAC adjustments................. - (131.7) - (131.7)
Minority interest............................. 148.4 122.2 338.2 227.1
--------------- --------------- --------------- ---------------
GAAP Reported:
Earnings from continuing operations
before Federal income taxes and
minority interest........................... 613.7 621.5 1,270.3 1,085.8
Federal income taxes.......................... 202.7 144.4 403.6 301.1
Minority interest in net income of
consolidated subsidiaries................... 118.4 94.8 270.6 176.0
--------------- --------------- --------------- ---------------
Earnings from Continuing Operations............. $ 292.6 $ 382.3 $ 596.1 $ 608.7
=============== =============== =============== ===============
18
Adjustments to GAAP pre-tax reported earnings in the first half of 2000 resulted
in the exclusion of $171.2 million in investment losses (net of DAC and other
charges totaling $11.6 million). The 2000 losses included $104.0 million of
writedowns and $61.1 million of realized losses on fixed maturities sold from
the General Account's portfolio. Adjustments in the first half of 1999 resulted
in the exclusion of investment gains of $183.7 million (net of DAC and other
charges totaling $(2.1) million). 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 in first quarter 1999 upon reclassification of publicly-traded common
equities to a trading portfolio and $25.4 million of gains resulted from the
exercise of subsidiaries' options and the conversion of DLJ RSUs. Losses of
$104.3 million on writedowns and $45.0 million on sales of General Account fixed
maturities partially offset these 1999 gains. Also in the first half of 1999,
there was a $131.7 million non-recurring DAC adjustment that resulted from the
revisions to estimated future gross profits related to the investment asset
reallocation in second quarter 1999.
Continuing Operations
The $1.10 billion of pre-tax operating earnings for the first half of 2000 was
$296.6 million higher than in the comparable 1999 period due to increased
operating earnings in all three business segments. The increase in Federal
income taxes was attributed to these higher earnings from continuing operations.
Minority interest in net income of consolidated subsidiaries was also higher due
to increased earnings at both DLJ and Alliance.
The $2.04 billion increase in revenues for the first half of 2000 as compared to
1999 revenues was attributed primarily to a $684.8 million increase in
commissions, fees and other income principally due to increased business
activity within the Investment Banking and Brokerage and Investment Management
segments and a $327.7 million increase in investment banking principal
transactions at DLJ, while the $938.7 million increase in net investment income
for the first half of 2000 was principally due to increases of $883.9 million
and $59.3 million, respectively, for the Investment Banking and Brokerage and
Financial Advisory/Insurance segments.
For the first six months of 2000, total benefits and other deductions increased
by $1.63 billion from the comparable period in 1999, reflecting increases in
other operating costs and expenses of $1.67 billion. The increase in other
operating costs and expenses principally resulted from higher costs associated
with increased revenues in the three business segments and with expenditures
related to their strategic initiatives.
19
COMBINED OPERATING RESULTS BY SEGMENT
Financial Advisory/Insurance
The following table combines the Closed Block amounts with the operating results
of operations outside of the Closed Block on a line-by-line basis.
Financial Advisory/Insurance - Combined Operating Results
(In Millions)
Six Months Ended June 30,
------------------------------------------------------------------
2000
------------------------------------------------
Insurance Closed 1999
Operations Block Combined Combined
------------- -------------- ------------- --------------
Operating Results:
Policy fee income and premiums................ $ 959.6 $ 303.4 $ 1,263.0 $ 1,178.5
Net investment income......................... 1,176.5 289.6 1,466.1 1,406.8
Commissions, fees and other income............ 209.9 (1.0) 208.9 104.1
Contribution from the Closed Block............ 45.8 (45.8) - -
------------- -------------- ------------- -------------
Total revenues.............................. 2,391.8 546.2 2,938.0 2,689.4
Total benefits and other deductions......... 1,856.9 546.2 2,403.1 2,266.5
------------- -------------- ------------- -------------
Pre-tax operating earnings...................... 534.9 - 534.9 422.9
Pre-tax Adjustments:
Investment gains (losses), net of DAC
and other charges........................... (179.3) - (179.3) (55.0)
Non-recurring DAC adjustments................. - - - (131.7)
------------- -------------- ------------- -------------
GAAP Reported:
Earnings from Continuing Operations
before Federal Income Taxes and
Minority Interest........................... $ 355.6 $ - $ 355.6 $ 236.2
============= ============== ============= =============
For the first half of 2000, Financial Advisory/Insurance pre-tax operating
earnings reflected an increase of $112.0 million from the year earlier period.
Higher policy fees on variable and interest-sensitive life and individual
annuities contracts, and higher margins between investment income and interest
credited on policyholders' account balances contributed to the improved
earnings. Segment revenues were up $248.6 million (9.2%) due to a $59.3 million
increase in investment income, a $104.8 million increase in commissions, fees
and other income and a $84.5 million net increase in policy fee income and
premiums. Commissions, fees and other income in the first half of 2000 more than
doubled as compared to the 1999 period principally due to higher gross
investment management fees received from the EQ Advisors Trust and higher mutual
fund and investment product sales. The increase in gross investment management
fees was partially offset by an increase in subadvisory fees included in total
benefits and other deductions. Higher yields on General Account Investment
Assets principally related to other equity investments and fixed maturities
contributed to the increase in investment income. Policy fee income rose $88.1
million to $689.0 million due to higher insurance and annuity account balances
while premiums declined $3.6 million to $574.0 million.
Total benefits and other deductions for the first half of 2000 increased $136.6
million from the comparable 1999 period reflecting higher subadvisory fees of
$60.6 million, higher operating expenses and commissions (net of DAC
capitalization) amounting to $59.6 million and higher policyholder benefits of
$43.0 million partially offset by a $27.6 million decrease in interest credited.
Operating expenses and commissions increased due to higher product sales and
compensation and benefits, which were partially offset by higher DAC
capitalization, and to higher strategic initiative related expenditures. Higher
policyholder benefits for the first half of 2000 were primarily due to higher DI
and reinsurance assumed benefits principally in first quarter 2000.
20
During July 2000, Equitable Life transferred, at no gain or loss, all the risk
of its directly written DI business for years 1993 and prior to Centre Life
Insurance Company, a subsidiary of Zurich Financial Services. The transfer of
risk to Centre Life Insurance was accomplished through an indemnity reinsurance
contract. The cost of the arrangement will be amortized over the expected lives
of the contracts reinsured and will not have a significant impact on the results
of operations in any specific period. Equitable Life discontinued writing DI
business in 1997.
Premiums, Deposits and Mutual Fund Sales - The following table lists sales for
major insurance product lines and mutual funds. Premiums and deposits are
presented net of internal conversions (1999 data have been restated to conform
to this presentation) and are presented gross of reinsurance ceded.
Premiums, Deposits and Mutual Fund Sales
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- ---------------- --------------- ---------------
Retail:
Annuities
First year.................................. $ 806.0 $ 861.3 $ 1,644.7 $ 1,616.6
Renewal..................................... 489.3 480.5 974.7 957.5
--------------- ---------------- --------------- ---------------
1,295.3 1,341.8 2,619.4 2,574.1
Life(1)
First year ................................. 104.0 127.6 210.5 210.8
Renewal..................................... 527.1 565.3 1,149.1 1,128.8
--------------- ---------------- --------------- ---------------
631.1 692.9 1,359.6 1,339.6
Other(2)
First year.................................. 2.0 3.3 4.6 5.2
Renewal..................................... 91.8 86.6 181.9 183.6
Mutual fund sales(3)........................ 905.2 734.6 1,914.2 1,405.0
--------------- ---------------- --------------- ---------------
999.0 824.5 2,100.7 1,593.8
--------------- ---------------- --------------- ---------------
Total retail.............................. 2,925.4 2,859.2 6,079.7 5,507.5
--------------- ---------------- --------------- ---------------
Wholesale:
Annuities
First year.................................. 622.7 506.2 1,303.4 910.8
Renewal..................................... 15.6 11.1 34.1 17.8
--------------- ---------------- --------------- ---------------
638.3 517.3 1,337.5 928.6
Life
First Year 3.1 - 5.2 .1
--------------- ---------------- --------------- ---------------
Total wholesale........................... 641.4 517.3 1,342.7 928.7
--------------- ---------------- --------------- ---------------
Total Premiums, Deposits
and Mutual Fund Sales....................... $ 3,566.8 $ 3,376.5 $ 7,422.4 $ 6,436.2
=============== ================ =============== ===============
<FN>
(1) Includes variable and interest-sensitive and traditional life products.
(2) Includes health insurance and reinsurance assumed.
(3) Includes sales through AXA Advisors' brokerage accounts.
</FN>
First year premiums and deposits for life and annuity products for the first
half of 2000 increased from prior year levels by $425.5 million primarily due to
higher sales of individual annuities by both the wholesale and retail
distribution channels and higher variable and interest-sensitive life sales
(excluding COLI sales which declined). Renewal premiums and deposits increased
by $53.8 million during the first half of 2000 over the prior year period as
increases in the larger block of annuity and variable life business were
partially offset by decreases in other products and in traditional life
policies.
21
Surrenders and Withdrawals - The following table presents surrenders and
withdrawals, including universal life and investment-type contract withdrawals,
for major insurance and annuity product lines. Annuity surrenders and
withdrawals are presented net of internal replacements; the 1999 data have been
restated to conform to this presentation.
Surrenders and Withdrawals
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
--------------- ---------------- --------------- ---------------
Annuities..................................... $ 1,166.2 $ 861.4 $ 2,412.1 $ 1,727.1
Variable and interest-sensitive life.......... 169.4 148.0 357.8 316.1
Traditional life.............................. 92.6 89.4 175.9 182.3
--------------- ---------------- --------------- ---------------
Total......................................... $ 1,428.2 $ 1,098.8 $ 2,945.8 $ 2,225.5
=============== ================ =============== ===============
Policy and contract surrenders and withdrawals increased $720.3 million during
the first half of 2000 compared to the same period in 1999 principally due to
the growing size and maturity of the book of annuities and variable and
interest-sensitive life business. There was an increase in the annuities'
surrender rate from 9.0% in the first half of 1999 to 10.1% in the 2000 period
while the surrender rate declined to 9.7% for second quarter 2000 from 10.5% in
first quarter 2000.
Investment Banking and Brokerage.
The following table summarizes the results of continuing operations for
Investment Banking and Brokerage.
Investment Banking and Brokerage - Operating Results
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Operating Results:
Commissions..................................... $ 369.5 $ 291.1 $ 841.5 $ 572.1
Underwritings................................... 191.3 409.4 441.9 666.4
Fees............................................ 514.8 332.7 936.8 619.7
Net investment income........................... 1,027.2 499.9 1,840.8 976.6
Principal transactions - net:
Dealer and trading gains...................... 214.3 218.4 599.0 392.5
Investment gains.............................. 19.5 25.2 149.4 28.2
Other income.................................... 40.5 38.3 62.9 52.2
--------------- --------------- --------------- ---------------
Total revenues................................ 2,377.1 1,815.0 4,872.3 3,307.7
Total costs and expenses...................... 2,129.9 1,576.4 4,268.6 2,893.0
--------------- --------------- --------------- ---------------
Pre-tax operating earnings before
minority interest............................. 247.2 238.6 603.7 414.7
Minority interest............................... (81.8) (75.6) (196.2) (133.2)
--------------- --------------- --------------- ---------------
Pre-tax operating earnings...................... 165.4 163.0 407.5 281.5
Pre-tax Adjustments:
Investment gains (losses), net of DAC........... (2.5) 214.6 5.4 236.4
Minority interest................................. 81.8 75.6 196.2 133.2
--------------- --------------- --------------- ---------------
GAAP Reported:
Earnings from Continuing Operations
before Federal Income Taxes and
Minority Interest............................. $ 244.7 $ 453.2 $ 609.1 $ 651.1
=============== =============== =============== ===============
22
Investment Banking and Brokerage's operating earnings for the first half of 2000
were $407.5 million, up $126.0 million from the comparable prior year period.
The 2000 earnings before minority interest included $7.0 million of earnings
from DLJdirect as compared to $12.2 million in 1999. This decline in DLJdirect's
contribution to DLJ's earnings, as well as DLJdirect's $6.6 million net loss in
second quarter 2000, were principally due to continued international expansion
as reflected in higher advertising, technology and personnel expenses. Total
segment revenues increased $1.56 billion as $864.2 million higher net investment
income, increased fees of $317.1 million, higher commissions of $269.4 million,
higher dealer and trading gains of $206.5 million and $121.2 million higher
gains on the corporate development portfolios were partially offset by lower
underwriting revenues of $224.5 million. The growth in commissions was due to
increased business in virtually all areas. Commissions generated
internationally, primarily in London and Hong Kong equities, increased nearly
threefold in 2000 compared to the prior year's period. The fee income increase
reflected DLJ's continuing market share growth in global merger and acquisition
advisory transactions and, in DLJ's correspondent and online brokerage
businesses, customer demand for a variety of portfolio advisory and technology
services. The $327.7 million net increase in gains on principal transactions was
primarily as a result of increases in customer order flow, trading volumes in
both the equities and fixed income markets and increased realized and unrealized
gains on merchant banking and venture capital investments. Higher net investment
income resulted primarily in customer-driven activities such as securities
lending/borrowing and margin lending and, to a lesser extent, increased interest
rates charged. The decline in underwriting revenues reflected the overall
decline in domestic new issuances of stocks and bonds, particularly in the high
yield market. Investment Banking and Brokerage's expenses were $4.27 billion for
the first half of 2000, up $1.38 billion from the prior year's period primarily
due to $690.2 million higher interest expense, $478.6 million higher
compensation and benefits and $75.0 million higher occupancy, equipment and
communication costs which resulted from the expansion of DLJ's international
operations, the implementation and development of new systems, and the overhaul
of the online customer trading and information systems for DLJ's correspondent
brokerage network. Incentive and production-related compensation increased 33.8%
in the 2000 period while base compensation increased by 32.1% primarily due to
DLJ's significant international expansion. The $45.1 million increase in
brokerage, clearing and exchange fees resulted from increased trading volume and
transaction fee payments.
DLJ enters into various transactions involving derivatives primarily for trading
purposes or to provide products for its clients. These transactions involve
options, futures, forwards and swaps. DLJ also enters into interest rate and
cross currency swaps to modify the characteristics of periodic interest payments
associated with some of its long-term debt obligations. The majority of DLJ's
derivatives are short-term in duration.
The notional (contract) amounts for outstanding derivatives at June 30, 2000 and
December 31, 1999 were as follows:
Notional (Contract) Amounts for Outstanding Derivatives
(In Billions)
June 30, 2000 December 31, 1999
---------------------------------- -----------------------------------
Purchases Sales Purchases Sales
--------------- --------------- --------------- ----------------
Forward contracts........................ $ 49.5 $ 55.3 $ 35.6 $ 41.1
Futures contracts........................ 5.2 2.4 2.9 4.3
Options.................................. 15.7 16.2 7.4 15.1
Swaps.................................... 37.6 - 24.5 -
--------------- --------------- --------------- ----------------
Total:................................. $ 108.0 $ 73.9 $ 70.4 $ 60.5
=============== =============== =============== ================
At June 30, 2000 and December 31, 1999, the notional amounts of interest rate
swaps related to DLJ's long-term debt obligations were $4.4 billion and $3.3
billion, respectively.
23
Investment Management.
The following table summarizes operating results for Investment Management.
Investment Management - Operating Results
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
Operating Results:
Investment advisory and service fees............ $ 377.6 $ 291.3 $ 751.8 $ 596.7
Distribution revenues........................... 155.4 105.2 302.7 198.8
Other revenues.................................. 33.6 22.3 61.6 42.4
--------------- --------------- --------------- ---------------
Total revenues................................ 566.6 418.8 1,116.1 837.9
--------------- --------------- --------------- ---------------
Promotion and servicing......................... 209.3 151.0 407.8 290.3
Employee compensation and benefits.............. 131.4 102.7 260.1 221.0
All other operating expenses.................... 85.5 64.4 145.3 130.4
--------------- --------------- --------------- ---------------
Total expenses................................ 426.2 318.1 813.2 641.7
--------------- --------------- --------------- ---------------
Pre-tax earnings before minority interest....... 140.4 100.7 302.9 196.2
Minority interest............................... (66.6) (46.6) (142.0) (93.9)
--------------- --------------- --------------- ---------------
Pre-tax operating earnings...................... 73.8 54.1 160.9 102.3
Pre-tax Adjustments:
Investment gains (losses), net of DAC........... .2 1.3 2.7 2.3
Minority interest................................. 66.6 46.6 142.0 93.9
--------------- --------------- --------------- ---------------
GAAP Reported:
Earnings from Continuing Operations
before Federal Income Taxes and
and Minority Interest......................... $ 140.6 $ 102.0 $ 305.6 $ 198.5
=============== =============== =============== ===============
Investment Management's operating earnings for the first half of 2000 were
$160.9 million, an increase of $58.6 million from the prior year's comparable
period. The resolution of a class action lawsuit resulted in the recognition of
a one-time, non-cash gain of $23.9 million in first quarter 2000, which reduced
all other operating expenses for the 2000 period. Revenues totaled $1.12 billion
for the first half of 2000, an increase of $278.2 million from the comparable
period in 1999, principally due to a $155.1 million increase in investment
advisory and service fees and $103.9 million higher distribution revenues. The
increase in investment advisory and service fees primarily resulted from
increases in average assets under management due to market appreciation and net
new client and existing client accounts partially offset by a decline in
performance fees of $34.5 million to $16.1 million for the first half of 2000.
These lower performance fees were principally due to a refinement of procedures
for estimating these fees implemented in fourth quarter 1999. The growth in
distribution revenues was principally due to higher average equity mutual fund
assets under management from strong sales and from market appreciation. When the
one-time gain mentioned above is excluded, Investment Management's total
expenses increased $195.4 million for the first half of 2000 primarily due to
increases in mutual fund promotional expenditures and employee compensation and
benefits. Promotion and servicing increased 40.4% primarily due to increased
distribution plan payments related to the higher average domestic, offshore and
cash management 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 increased incentive and base compensation
and commissions reflecting increased headcounts in the mutual fund area along
with salary increases. Commissions increased primarily due to higher mutual fund
and institutional sales.
24
On June 20, 2000, Alliance Holding, Alliance and Sanford C. Bernstein Inc.
("Bernstein") announced they had entered into a definitive agreement whereby
Alliance will acquire substantially all of the assets and liabilities of
Bernstein for an aggregate current value of approximately $3.5 billion ($1.48
billion in cash and 40.8 million newly issued Alliance Units). The consideration
may be adjusted downward if a base level of Bernstein client revenues is not
achieved at closing. The closing of the Bernstein acquisition is also subject to
various regulatory approvals, the maintenance of a minimum Bernstein client
revenue base and unaffiliated unitholder approval. On July 20, 2000, the
Bernstein shareholders approved and adopted the acquisition agreement. The
transaction is expected to close in fourth quarter 2000. The Holding Company
provided Alliance with the cash portion of the consideration by purchasing
approximately 32.6 million newly issued Alliance Units for $1.60 billion on June
21, 2000. At June 30, 2000, AXA Financial's consolidated economic interest in
Alliance was approximately 63%. Upon completion of the transaction, the economic
interest in the newly combined entity is expected to decrease to 53%.
Additionally, the Holding Company has agreed to provide liquidity to former
Bernstein shareholders after a two-year lock-out period to allow the 40.8
million private Units to be sold to the Holding Company over the following eight
years, but generally not more than 20% of such Units in any one annual period.
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 Six Months Ended
June 30, June 30,
---------------------------------- -------------------------------
2000 1999 2000 1999
----------------- --------------- --------------- --------------
FEES:
Third parties................................. $ 419.9 $ 300.0 $ 827.1 $ 616.1
Equitable Life Separate Accounts.............. 28.6 26.6 59.3 51.8
Equitable Life General Account and other...... 12.0 11.8 22.7 22.1
----------------- --------------- --------------- --------------
Total Fees.................................... $ 460.5 $ 338.4 $ 909.1 $ 690.0
================= =============== =============== ===============
ASSETS UNDER MANAGEMENT:
Assets by Manager
Alliance:
Third party................................................................... $ 321,682 $ 257,935
Equitable Life Separate Accounts.............................................. 41,570 37,716
Equitable Life General Account and Holding Company Group...................... 24,507 25,355
--------------- ---------------
Total Alliance.................................................................. 387,759 321,006
--------------- ---------------
DLJ:
Third party................................................................... 40,110 27,352
DLJ invested assets........................................................... 28,891 18,720
--------------- ---------------
Total DLJ....................................................................... 69,001 46,072
--------------- ---------------
Equitable Life:
Equitable Life (non-Alliance) General Account................................. 12,882 13,025
Equitable Life Separate Accounts - EQ Advisors Trust.......................... 7,858 4,294
Equitable Life real estate related Separate Accounts.......................... 3,137 4,044
Equitable Life Separate Accounts - other...................................... 3,298 2,386
--------------- ---------------
Total Equitable Life (non-Alliance)............................................. 26,912 23,749
--------------- ---------------
Total by Account:
Third party................................................................... 361,792 285,287
General Account and other..................................................... 66,280 57,100
Separate Accounts............................................................. 55,600 48,440
--------------- ---------------
Total Assets Under Management................................................... $ 483,672 $ 390,827
=============== ===============
25
Fees from assets under management increased 31.8% for the first half of 2000
from the comparable 1999 period principally as a result of growth in assets
under management for third parties principally at Alliance. The Alliance assets
under management growth in the first half of 2000 was primarily due to market
appreciation, good investment performance and net sales of mutual funds and
other products. DLJ's third party assets under management increased in the first
half of 2000 by $12.76 billion as compared to the comparable 1999 period
principally due to new business in its Asset Management Group.
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
Management discusses the Closed Block assets and the assets outside of the
Closed Block on a combined basis as General Account Investment Assets. The
following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Assets.
General Account Investment Asset Carrying Values
June 30, 2000
(In Millions)
General
Holding Account
Balance Closed Company Investment
Balance Sheet Captions: Sheet Block Other Group Assets(1)
- ---------------------------------------------------- ------------- --------------- -------------- -------------
Fixed maturities:
Available for sale(2)........... $ 17,880.1 $ 4,091.7 $ (63.1) $ 185.6 $ 21,849.3
Held to maturity................ 254.2 - - 116.5 137.7
Trading account securities........ 27,398.4 - 27,398.4 - -
Securities purchased under
resale agreements............... 28,281.8 - 28,281.8 - -
Mortgage loans on real estate..... 3,120.2 1,628.4 - - 4,748.6
Equity real estate................ 1,046.0 62.5 (2.7) - 1,111.2
Policy loans...................... 2,381.0 1,574.2 .5 - 3,954.7
Other equity investments.......... 2,308.3 31.8 1,493.2 .3 846.6
Other invested assets............. 975.8 1.1 376.2 1.3 599.4
---------------- ------------- --------------- -------------- -------------
Total investments............... 83,645.8 7,389.7 57,484.3 303.7 33,247.5
Cash and cash equivalents......... 3,959.9 209.5 3,288.6 140.0 740.8
Corporate debt and other(3)....... - - 601.6 - (601.6)
---------------- ------------- --------------- -------------- -------------
Total............................. $ 87,605.7 $ 7,599.2 $ 61,374.5 $ 443.7 $ 33,386.7
================ ============= =============== ============== =============
<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) At June 30, 2000, the amortized cost of the General Account's available
for sale and held to maturity fixed maturities portfolios were $22.84
billion and $137.7 million, respectively, compared with estimated market
values of $21.85 billion and $137.7 million, respectively.
(3) Includes Equitable Life debt and other miscellaneous assets and
liabilities related to General Account Investment Assets and reclassified
from various balance sheet lines.
</FN>
26
Asset Valuation Allowances and Writedowns
Writedowns on fixed maturities were $104.0 million and $104.3 million for the
first six months of 2000 and 1999, respectively. The following table shows asset
valuation allowances and additions to and deductions from such allowances for
the periods indicated.
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
--------------- --------------- --------------
Balances at January 1, 2000................................... $ 32.1 $ 145.8 $ 177.9
Additions..................................................... 6.1 30.3 36.4
Deductions(1)................................................. (3.1) (73.6) (76.7)
--------------- --------------- --------------
Ending Balances at June 30, 2000.............................. $ 35.1 $ 102.5 $ 137.6
=============== =============== ==============
Balances at January 1, 1999................................... $ 45.4 $ 211.8 $ 257.2
Additions..................................................... 3.7 21.6 25.3
Deductions(1)................................................. (9.3) (71.1) (80.4)
--------------- --------------- --------------
Ending Balances at June 30, 1999.............................. $ 39.8 $ 162.3 $ 202.1
=============== =============== ==============
<FN>
(1) Primarily reflected releases of allowances due to asset dispositions.
</FN>
General Account Investment Assets
The following table shows amortized cost, valuation allowances and net amortized
cost of major categories of General Account Investment Assets at June 30, 2000
and net amortized cost at December 31, 1999.
General Account Investment Assets
(In Millions)
June 30, 2000 December 31, 1999
------------------------------------------------ ----------------------
Net Net
Amortized Valuation Amortized Amortized
Cost Allowances Cost Cost
--------------- ------------- --------------- ----------------------
Fixed maturities(1)...................... $ 22,975.4 $ - $ 22,975.4 $ 23,719.1
Mortgages................................ 4,783.7 35.1 4,748.6 4,974.2
Equity real estate....................... 1,213.7 102.5 1,111.2 1,251.2
Other equity investments................. 846.6 - 846.6 826.2
Policy loans............................. 3,954.7 - 3,954.7 3,851.2
Cash and short-term investments.......... 1,340.2 - 1,340.2 1,220.6
--------------- ------------- --------------- ----------------------
Total.................................... $ 35,114.3 137.6 $ 34,976.7 $ 35,842.5
=============== ============= =============== ======================
<FN>
(1) Excludes unrealized losses of $988.4 million and $896.4 million in fixed
maturities classified as available for sale at June 30, 2000 and December
31, 1999, respectively.
</FN>
27
Investment Results of General Account Investment Assets
Investment Results by Asset Category
(Dollars In Millions)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------------------------------- ----------------------------------------------------
2000 1999 2000 1999
----------------------- ------------------------- ------------------------- -------------------------
(1) (1) (1) (1)
Yield Amount Yield Amount Yield Amount Yield Amount
--------- ------------- ---------- -------------- --------- --------------- ---------- --------------
Fixed Maturities:
Income.............. 8.07% $ 460.5 7.78% $ 447.9 8.02% $ 922.3 7.84% $ 896.9
Investment
gains/(losses).... (.99)% (54.6) (0.49)% (27.2) (1.47)% (165.1) (1.34)% (149.3)
--------- ------------- ---------- -------------- --------- --------------- ---------- --------------
Total............... 7.08% $ 405.9 7.29% $ 420.7 6.55% $ 757.2 6.50% $ 747.6
Ending assets(2).... $ 23,537.2 $ 23,937.9 $ 23,537.2 $ 23,937.9
Mortgages:
Income.............. 8.29% $ 96.1 8.98% $ 104.7 8.50% $ 199.6 8.92% $ 202.2
Investment
gains/(losses).... .11% 1.2 (0.39)% (4.4) (.07)% (1.5) (0.12)% (2.6)
--------- ------------- ---------- -------------- --------- --------------- ---------- --------------
Total............... 8.40% $ 97.3 8.59% $ 100.3 8.43% $ 198.1 8.80% $ 199.6
Ending assets(3).... $ 4,739.9 $ 5,018.2 $ 4,739.9 $ 5,018.2
Equity Real
Estate:
Income(4)........... 8.66% $ 19.5 7.65% $ 25.3 8.41% $ 39.3 7.25% $ 48.2
Investment
gains/(losses).... (.87)% (1.9) 2.82% 9.0 (.53)% (2.4) 2.73% 17.5
--------- ------------- ---------- -------------- --------- --------------- ---------- --------------
Total............... 7.79% $ 17.6 10.47% $ 34.3 7.88% $ 36.9 9.98% $ 65.7
Ending assets(4).... $ 873.4 $ 1,384.3 $ 873.4 $ 1,384.3
Other Equity
Investments:
Income.............. 38.50% $ 75.6 34.38% $ 66.4 46.13% $ 170.7 34.85% $ 130.2
Investment
gains/(losses).... (1.77)% (3.1) 0.52% 0.9 (6.93)% (22.8) 24.22% 76.2
--------- ------------- ---------- -------------- --------- --------------- ---------- --------------
Total............... 36.73% $ 72.5 34.90% $ 67.3 39.20% $ 147.9 59.07% $ 206.4
Ending assets(5).... $ 958.1 $ 896.1 $ 958.1 $ 896.1
Policy Loans:
Income.............. 6.74% $ 64.0 6.78% $ 61.6 6.73% $ 126.9 6.70% $ 121.5
Ending assets....... $ 3,954.7 $ 3,775.4 $ 3,954.7 $ 3,775.4
Cash and Short-term
Investments:
Income.............. 13.74% $ 21.9 8.29% $ 16.0 10.97% $ 44.3 7.21% $ 36.0
Ending assets(6).... $ 537.7 $ 701.6 $ 537.7 $ 701.6
Equitable Life
Debt and Other:
Interest expense
and other......... 8.18% $ (12.8) 10.74% $ (16.2) 8.26% $ (27.5) 9.02% $ (27.4)
Ending liabilities $ (601.6) $ (600.1) $ (601.6) $ (600.1)
Total:
Income(7)........... 8.79% $ 724.8 8.40% $ 705.7 8.86% $ 1,475.6 8.40% $ 1,407.6
Investment
gains/(losses).... (.73)% (58.4) (0.27)% (21.7) (1.18)% (191.8) (0.36)% (58.2)
--------- ------------- ---------- -------------- --------- --------------- ---------- --------------
Total(8)............ 8.06% $ 666.4 8.13% $ 684.0 7.68% $ 1,283.8 8.04% $ 1,349.4
Ending net assets... $ 33,999.4 $ 35,113.4 $ 33,999.4 $ 35,113.4
28
<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.
(2) Fixed maturities investment assets are shown net of securities purchased
but not yet paid for of $134.5 million and $235.0 million, and include
accrued income of $386.9 million and $379.1 million, amounts due from
securities sales of $293.1 million and $59.7 million and other assets of
$16.4 million and $25.6 million as of June 30, 2000 and 1999,
respectively.
(3) Mortgage investment assets include accrued income of $58.1 million and
$63.6 million and are adjusted for related liability balances of $(66.8)
million and $(24.4) million as of June 30, 2000 and 1999, respectively.
(4) Equity real estate investment assets are shown net of third party debt and
minority interest in real estate of $251.4 million and $274.4 million, and
include accrued income of $19.0 million and $25.4 million and are adjusted
for related liability balances of $(5.4) million and $(0.8) million as of
June 30, 2000 and 1999, 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 $4.5 million, $5.1 million, $7.9 million and $11.1 million for the
second quarter and first half of 2000 and of 1999, respectively.
(5) Other equity investment assets include adjustment for accrued income and
pending settlements of $(8.0) million and $(0.1) million as of June 30,
2000 and 1999, respectively.
(6) Cash and short-term investments are shown net of financing arrangements of
$708.2 million and $388.5 million and other adjustments for accrued income
and cash in transit of $47.1 million and $1.3 million as of June 30, 2000
and 1999, respectively.
(7) Total investment income includes non-cash income from amortization,
payments-in-kind distributions and undistributed equity earnings of $16.0
million, $18.8 million, $31.9 million and $33.3 million for the second
quarters and first half of 2000 and of 1999, respectively. Investment
income is shown net of depreciation of $5.3 million, $5.1 million, $10.7
million and $7.8 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 7.80%, 7.87%, 7.45% and 7.78% for
the second quarter and the first half of 2000 and of 1999, respectively.
</FN>
Fixed Maturities. Fixed maturities consist largely of investment grade corporate
debt securities, including significant amounts of U.S. government and agency
obligations. At June 30, 2000 and December 31, 1999, respectively, 76.9% and
76.9% of total fixed maturities were publicly traded; 83.3% and 87.4% of below
investment grade securities were also publicly traded. The $165.1 million of
investment losses in the first half of 2000 were due to $104.0 million of
writedowns on private structured and public high yield securities and $61.1
million of losses on sales. The $149.3 million of investment losses in the first
half of 1999 were due to $104.3 million of writedowns primarily on high yield
and emerging market securities and $44.9 million of losses on sales.
Fixed Maturities By Credit Quality
(Dollars In Millions)
June 30, 2000 December 31, 1999
-------------------------------------- -------------------------------------
Rating Agency
NAIC Equivalent Amortized Estimated Amortized Estimated
Rating Designation Cost Fair Value Cost Fair Value
- -------------- ---------------------- ------------------- ----------------- ------------------ ----------------
1-2 Aaa/Aa/A and Baa...... $ 20,134.5 $ 19,525.2 $ 20,561.4 $ 19,973.0
3-6 Ba and lower.......... 2,840.9 2,461.8 3,157.7 2,849.7
------------------- ----------------- ------------------ ----------------
Total Fixed Maturities............... $ 22,975.4 $ 21,987.0 $ 23,719.1 $ 22,822.7
=================== ================= ================== ================
29
At June 30, 2000, AXA Financial held mortgage pass-through securities with an
amortized cost of $2.63 billion, $2.42 billion of CMOs, including $1.99 billion
in publicly-traded CMOs, and $1.34 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 $215.2
million (.9% of the amortized cost of this category) and $155.9 million (.7%) at
June 30, 2000, respectively, compared to $154.0 million (0.6%) and $42.7 million
(0.2%) at December 31, 1999, respectively.
Mortgages. Mortgages consist principally of commercial and agricultural loans.
At June 30, 2000, commercial mortgages totaled $2.83 billion (59.2% of the
amortized cost of the category) and agricultural loans were $1.95 billion
(40.8%).
Problem, Potential Problem and Restructured Mortgages
Amortized Cost
(Dollars In Millions)
June 30, December 31,
2000 1999
--------------- -----------------
COMMERCIAL MORTGAGES.......................................................... $ 2,831.5 $ 3,048.2
Potential problem commercial mortgages........................................ 110.1 120.6
Restructured commercial mortgages............................................. 126.7 130.7
AGRICULTURAL MORTGAGES........................................................ $ 1,951.7 $ 1,957.4
The original weighted average coupon rate on the $126.7 million of restructured
mortgages was 8.9%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.1% and the restructured weighted average cash
payment rate was 8.6%.
At June 30, 2000 and 1999, respectively, management identified impaired mortgage
loans with carrying values of $129.1 million and $122.7 million. The provisions
for losses for these impaired mortgage loans were $30.3 million and $33.4
million at June 30, 2000 and 1999, respectively. For the first half of 2000 and
of 1999, respectively, income accrued on these loans was $7.3 million and $5.9
million, including cash received of $6.9 million and $5.9 million.
For the first half of 2000, scheduled principal amortization payments and
prepayments on commercial mortgage loans received aggregated $396.2 million. In
addition, $12.6 million of commercial mortgage loan maturity payments were
scheduled: $10.1 million were paid as due and $2.5 million were granted short
term extensions of up to six months.
Equity Real Estate. As of June 30, 2000, on the basis of amortized cost, the
equity real estate category included $722.3 million (59.6%) acquired as
investment real estate and $488.8 million (40.4%) acquired through or in lieu of
foreclosure (including in-substance foreclosures).
During the first half of 2000 and of 1999, respectively, proceeds from the sale
of equity real estate totaled $148.0 million and $180.8 million, with gains of
$28.0 million and $32.3 million. 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 $71.7
million and $64.3 million, respectively.
At June 30, 2000, the vacancy rate for AXA Financial's office properties was
7.3% in total, with a vacancy rate of 5.9% for properties acquired as investment
real estate and 17.9% for properties acquired through foreclosure. The national
commercial office vacancy rate was 9.0% (as of March 31, 2000) as measured by CB
Richard Ellis.
Other Equity Investments. Other equity investments consist of LBO, mezzanine,
venture capital and other limited partnership interests ($633.2 million or 66.1%
of the amortized cost of this portfolio at June 30, 2000), alternative limited
partnerships ($189.7 million or 19.8%) and common stock and other equity
securities ($135.2 million or 14.1%), including the excess of Separate Account
assets over Separate Account liabilities. Alternative funds utilize trading
strategies that may be leveraged. These funds attempt to protect against market
risk through a variety of methods including short sales, financial futures,
options and other derivative instruments. Other equity investments can produce
significant volatility in investment income since they predominantly are
30
accounted for in accordance with the equity method which treats increases and
decreases in the estimated fair value of the underlying assets (or allocable
portion thereof, in the case of partnerships), whether realized or unrealized,
as investment income or loss to the General Account. Effective January 1, 1999,
all investments in publicly-traded common equity securities in the General
Account and Holding Company Group portfolios were designated as "trading
securities" for purposes of classification under SFAS No. 115. Investment gains
of $83.5 million and $3.8 million, respectively, were recognized at that date on
the two portfolios. Changes in the investments' fair value are included in
investment income. Returns on equity investments are very volatile and
investment results for any period are not representative of any other period.
LIQUIDITY AND CAPITAL RESOURCES
Under the stock repurchase program authorized by its Board of Directors, the
Holding Company repurchased approximately 2.0 million shares of Common Stock at
a cost of approximately $57.5 million during first quarter 2000; no repurchases
were made in second quarter 2000.
Prior to September 30, 2000, the SECT is required to convert a minimum of an
amount of Series D Convertible Preferred Stock equivalent to approximately
1,568,160 shares of Common Stock. However, the amount of Common Stock converted
may not exceed a maximum value of approximately $253.5 million. This Common
Stock may be repurchased by the Holding Company or sold.
On June 21, 2000, the Holding Company borrowed $1.45 billion from Bank of
America N.A. pursuant to a promissory note with an interest rate of 7.06% and
maturing on September 22, 2000. The proceeds from the borrowing and available
cash were used by the Holding Company to purchase 32.6 million new Alliance
Units. Alliance plans to use the cash proceeds primarily to fund the cash
portion of the consideration of its planned fourth quarter acquisition of the
assets and liabilities of Bernstein (see Combined Operating Results by Segment -
Investment Management). In July 2000, the Holding Company issued $480.0 million
7.75% Senior Notes due 2010 under its March 1998 shelf registration.
Substantially all of the net proceeds of $472.7 million was used to repay a
portion of the $1.45 billion borrowing incurred in connection with the Bernstein
acquisition. The Holding Company intends to refinance the balance outstanding on
the promissory note prior to its maturity.
At June 30, 2000, Alliance had $217.3 million of commercial paper and ECNs,
borrowings under the revolving credit facilities of $48.0 million and a $3.1
million note outstanding. The $121.7 million decrease in debt since December 31,
1999 was attributed to repayments made from a portion of the cash proceeds from
the sale of new Alliance Units to the Holding Company.
In February 2000, DLJ filed a shelf registration with the SEC which enables DLJ
to issue $3.1 billion of senior debt, subordinated debt securities, preferred
stock and warrants. During first quarter 2000, DLJ issued $500 million 8% senior
notes due 2005 and $485.0 million of medium-term notes due through 2007.
In April 2000, DLJ established a Euro medium-term note program which enables DLJ
to issue up to $1.0 billion of notes. During second quarter 2000, DLJ issued
$890.4 million medium-term notes with various maturity dates through 2005 from
this program. In addition, DLJ issued another $354.0 million medium-term notes
with various maturity dates through 2002 under its shelf registration statement.
At June 30, 2000, DLJ had $1.7 billion outstanding under its $2.0 billion
commercial paper program.
In July 2000, DLJ amended it's $2.5 billion revolving credit facility,
increasing the aggregate commitment to $2.8 billion, of which $2.38 billion may
be unsecured. There were no borrowings outstanding under this agreement at June
30, 2000.
In May 2000, Equitable Life paid a $150.0 million shareholder dividend.
Management expects to discuss further dividends with the NYID in third quarter
2000.
Equitable Life has a commercial paper program with an issue limit of up to $1.00
billion. This program is available for general corporate purposes. On June 30,
2000, Equitable Life renewed its $350.0 million 5-year credit facility and its
$350.0 million 364-day credit facility. These credit facilities support the
commercial paper program. Equitable Life uses this program from time to time in
its liquidity management. At June 30, 2000, no amounts were outstanding under
either the commercial paper program or the revolving credit facility.
31
Consolidated Cash Flows
The net cash provided by operating activities was $25.4 million for the first
half of 2000 compared to net cash used by operating activities of $2.25 billion
for the first half of 1999. Cash provided by operations in the 2000 period
principally was due to the $1.13 billion net change in trading activities and
broker-dealer related receivables/payables at DLJ as increases in operating
liabilities more than offset increases in operating assets during the 2000
period. Cash used by operating activities in the comparable 1999 period
principally was attributable to the $3.19 billion net change in trading
activities and broker-dealer related receivables/payables at DLJ reflecting an
increase in operating assets, partially offset by the $817.8 million change in
clearing association fees and regulatory deposits, principally at DLJ.
Net cash provided by investing activities was $713.3 million for the first half
of 2000 as compared net cash used by investing activities of $1.40 billion for
the comparable period in 1999. During the 2000 period, investment sales,
maturities and repayments exceeded purchases by $835.5 million. Cash used by
investing activities in the 1999 period primarily was attributable to the
increase in invested assets as purchases exceeded investment sales, maturities
and repayments by approximately $1.23 million.
Net cash provided by financing activities totaled $85.8 million for the first
half of 2000 as compared to $3.58 billion in second quarter 1999. During the
2000 period, cash provided by net additions to long-term debt of $2.20 billion,
principally at DLJ and the Holding Company, was partially offset by withdrawals
from policyholders' accounts and transfers to Separate Accounts exceeding
deposits by $976.9 million and a net decrease of $948.5 billion in short-term
financing as the $4.39 billion decrease in DLJ's repurchase agreements more than
offset higher short-term borrowings, including the Holding Company's $1.40
billion promissory note. Net cash provided by financing activities during the
first half of 1999 primarily resulted from a $1.80 billion increase in
short-term financings, principally due to net repurchase agreement activity. Net
additions to long-term debt provided $1.05 billion of additional cash in the
1999 period. Deposits to policyholders' account balances exceeded withdrawals by
$384.8 million during the first half of 1999.
The operating, investing and financing activities described above resulted in a
increase in cash and cash equivalents during the first half of 2000 of $1.14
billion to $3.96 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
its insurance asset/liability management, investment management and trading
activities. Primary market risk exposures exist in the Financial
Advisory/Insurance and Investment Banking and Brokerage segments and result from
interest rate fluctuations, equity price movements, changes in credit quality
and, at DLJ, foreign currency exchange exposure. The nature of each of these
risks is discussed under the caption "Quantitative and Qualitative Disclosures
About Market Risk" and in Note 16 of Notes to Consolidated Financial Statements
in the 1999 Form 10-K.
32
Strategic Initiatives. AXA Financial continues to implement certain 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 investment
management products and services. These strategic initiatives include the
training of financial professionals to provide fee-based and other financial
planning services, the creation of the "AXA Advisors" brand and the launching of
an expanded e-commerce platform. Implementation of these strategic initiatives
could affect certain historic trends in the Financial Advisory/Insurance
segment. Implementation is subject to various uncertainties, including those
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 investment management businesses.
Financial Advisory/Insurance. Future sales of life insurance and annuity
products and financial planning services 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. The Insurance Group evaluates the financial condition of
its reinsurers and takes other steps to minimize its exposure to significant
losses from reinsurer insolvencies. Ceded reinsurance, including the book of DI
business recently transferred, does not relieve the originating insurer of
liability. In addition, the nature and extent of competition and the markets for
products sold by the Insurance Group may be materially affected by changes in
laws and regulations, including changes relating to savings, retirement funding
and taxation as well as changes resulting from the Gramm-Leach-Bliley Act. The
Administration's fiscal year 2001 revenue 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 - Financial Advisory/Insurance" and "Business -
Regulation - Federal Initiatives" in the 1999 Form 10-K. The profitability of
the Insurance Group depends on a number of factors, including levels of
operating expenses after DAC, secular trends and the Insurance Group'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 created, and in the future may create, significant
volatility in investment income. See "Investment Results of General Account
Investment Assets" in the 1999 Form 10-K and herein. The ability of AXA
Financial to continue its real estate sales program 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 on
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 1999 Form 10-K
and herein. AXA Financial's group pension business produced pre-tax losses in
1995 and 1996. In late 1996, a loss recognition study for the group pension
business was completed. As a result, 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 this book of business since 1996, management continues to believe the Pension
Par reserve has been calculated on a reasonable basis and is adequate. However,
there can be no assurance that it will be sufficient to provide for all future
liabilities.
33
Investment Banking and Brokerage. For the years ended December 31, 1999, 1998
and 1997, Investment Banking and Brokerage accounted for approximately 53.0%,
36.7% and 54.8%, respectively, of AXA Financial's consolidated earnings from
continuing operations before Federal income taxes and minority interest. DLJ's
business activities include securities underwriting, sales and trading, merchant
banking, financial advisory services, investment research, venture capital,
correspondent brokerage services, online interactive brokerage services and
asset management. These activities are subject to various 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 and
Brokerage" in the 1999 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.
Investment 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 and depreciation, additions and withdrawals of
assets, purchases and redemptions of mutual funds and shifts of assets between
accounts or products with different fee structures. See "Combined Operating
Results by Segment - Investment Management" in the 1999 Form 10-K and herein.
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 regarding
expected performance of investment assets, ultimate mortality experience and
other factors which affect investment and benefit projections. There can be no
assurance the losses provided for will not differ from the losses ultimately
realized. To the extent actual results or future projections of 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 1999
Form 10-K for further information including a discussion of significant reserve
strengthening in 1997 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 retail sales associates,
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 affect 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
consolidated 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 the
Holding Company and its subsidiaries. In addition, examinations by Federal and
state regulators could result in adverse publicity, sanctions and fines. For
further information, see "Business - Regulation" in the 1999 Form 10-K and
"Legal Proceedings" in the 1999 Form 10-K and herein.
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 1999 Form 10-K for pronouncements issued but not implemented.
In addition, members of 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. In February
2000, the Superintendent indicated the New York Insurance Department intends to
proceed with implementation of Codification rules, subject to any provisions in
New York statutes which conflict with particular points in the Codification
rules. It is not possible to predict 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.
34
Regulation. The businesses conducted by AXA Financial's subsidiaries are subject
to extensive regulation and supervision by state insurance departments and
Federal and state agencies regulating, among other things, insurance and
annuities, securities transactions, investment banking, investment companies,
investment advisors and customer privacy. 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Quantitative and Qualitative Disclosures About Market Risk" in the 1999
Form 10-K and "MD&A - Combined Operating Results by Segment - Investment Banking
and Brokerage" herein.
35
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, 1999, except as described below:
In Cole, in April 2000, the Appellate Division, First Department unanimously
affirmed, with costs, the decisions of the lower court dismissing all of
plaintiffs' claims and denying plaintiffs' motion for class certification. In
June 2000, the Appellate Division denied plaintiffs' motion for reargument or,
in the alternative, leave to appeal to the New York Court of Appeals.
In R.S.M., in April 2000, following confirmatory discovery pursuant to the
Memorandum of Understanding, plaintiffs have indicated that they will proceed
with the litigation.
In March 2000, an action entitled Brenda McEachern v. The Equitable Life
Assurance Society of the United States and Gary Raymond, Jr. was commenced
against Equitable Life and one of its associates in Circuit Court, Mobile
County, Alabama, and asserts claims under state law. The action was brought by
an individual who alleges that she purchased a variable annuity from Equitable
Life in 1997. The action purports to be on behalf of a class consisting of she
persons who from January 1, 1989 (i) purchased a variable annuity from Equitable
Life to fund a qualified retirement plan, (ii) were charged allegedly
unnecessary fees, for tax deferral for variable annuities held in qualified
retirement accounts, or (iii) were sold a variable annuity while owning a
qualified retirement plan from Equitable Life. The complaint alleges various
improper sales practices, including misrepresentations in connection with the
use of variable annuities in a qualified retirement plan or similar arrangement,
charging inflated or hidden fees, and failure to disclose unnecessary tax
deferral fees. Plaintiff seeks damages, including punitive damages, in an
unspecified amount and attorneys' fees and expenses. In May 2000, Equitable Life
removed the case to the United States District Court for the Southern District
of Alabama and filed a motion to dismiss the complaint, and the plaintiff has
filed a motion to remand the case to state court. Although the outcome of
litigation cannot be predicted with certainty, particularly in the early stages
of an action, AXA Financial's management believes that the ultimate resolution
of this litigation should not have a material adverse effect on the consolidated
financial position of AXA Financial. AXA Financial's management cannot make an
estimate of loss, if any, or predict whether or not any such litigation will
have a material adverse effect on AXA Financial's consolidated results of
operations in any particular period.
In Kane, the plaintiff's claims have been settled on an individual basis and the
action has been dismissed.
In June 2000, an action entitled Raymond Patenaude v. The Equitable Life
Assurance Society of the United States, AXA Advisors, LLC and Equitable
Distributors, Inc. was commenced in the Superior Court of California, County of
San Diego. The complaint alleges that the defendants engaged in fraudulent and
deceptive practices in connection with the marketing and sale of deferred
annuity products to fund tax-qualified contributory retirement plans. The named
plaintiff purports to act as a private attorney general on behalf of the general
public of the State of California under California consumer protection statutes
and also asserts individual common-law claims. On behalf of the named plaintiff
and the general public, the complaint asserts claims for unlawful, unfair or
fraudulent business acts and practices and for false or misleading advertising.
On behalf of the named plaintiff alone, the complaint alleges claims for fraud,
fraudulent concealment and deceit, negligent misrepresentation and negligence.
The complaint seeks injunctive relief, restitution for members of the general
public of the State of California who have been harmed by defendants' conduct,
compensatory and punitive damages on behalf of the named plaintiff, and
attorneys' fees, costs and expenses. In July 2000, the defendants removed the
case to the United States District Court for the Southern District of California
and filed a motion to dismiss the complaint. Although the outcome of litigation
cannot be predicted with certainty, particularly in the early stages of an
action, AXA Financial's management believes that the ultimate resolution of this
litigation should not have a material adverse effect on the consolidated
financial position of AXA Financial. AXA Financial's management cannot make an
estimate of loss, if any, or predict whether or not any such litigation will
have a material adverse effect on AXA Financial's consolidated results of
operations in any particular period.
36
In January 2000, the California Supreme Court denied Equitable Life's petition
for review of an October 1999 decision by the California Court of Appeal which
reversed the dismissal by the Superior Court of Orange County, California of an
action entitled BT-I v. The Equitable Life Assurance Society of the United
States. The action was commenced in 1995 by a real estate developer in
connection with a limited partnership formed in 1991 with Equitable Life on
behalf of Prime Property Fund ("PPF"). Equitable Life serves as investment
manager for PPF, an open-end, commingled real estate separate account of
Equitable Life for pension clients. Plaintiff alleges, among other claims, that
Equitable Life breached its fiduciary duty as general partner of the limited
partnership principally in connection with the 1995 purchase and subsequent
foreclosure by Equitable Life on behalf of PPF of the loan which financed the
partnership's property. In reversing the Superior Court's dismissal of the
plaintiff's claims, the Court of Appeal held that a general partner who acquires
a partnership obligation breaches its fiduciary duty by foreclosing on
partnership assets. The case was remanded to the Superior Court for further
proceedings, and in May 2000, the court scheduled a jury trial for February
2001. The plaintiff seeks compensatory and punitive damages. Although the
outcome of litigation cannot be predicted with certainty, AXA Financial's
management believes that the ultimate resolution of this matter should not have
a material adverse effect on the consolidated financial position of AXA
Financial. AXA Financial's management cannot make an estimate of loss, if any,
or predict whether or not this matter will have a material adverse effect on AXA
Financial's consolidated results of operations in any particular period.
In the Alliance North American Government Income Trust action, on August 3,
2000, the court signed an order approving the Stipulation and Agreement of
Settlement. Shareholders of the fund have thirty days from the date the order
becomes final to appeal the order.
On July 21, 2000, in the consolidated action captioned In re Public Offering Fee
Antitrust Litigation pending in the U.S. District Court for the Southern
District of New York, plaintiffs filed a motion for leave to file a second
amended complaint. The principal proposed amendment to the previously filed
Consolidated Amended Complaint is the addition of an issuer company as a
plaintiff. On August 3, 2000, another purported class action, captioned CHS
Electronics, Inc. v. Credit Suisse First Boston Corporation, et al., was filed
in the U.S. District Court for the Southern District of Florida against 18
securities firms, including DLJ. The complaint makes allegations substantially
similar to those advanced in In re Public Offering Fee Antitrust Litigation,
asserting 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 complaint seeks
treble damages in an unspecified amount and injunctive relief as well as
attorney's fees and costs. To date, DLJ has not been served in the action filed
in Florida. DLJ and DLJSC intend to vigorously defend themselves against all the
allegations contained in the complaints.
On or about January 31, 2000, Ameriserve Food Distribution, Inc. ("Ameriserve"),
its parent company, Nebco Evans Holding Company ("NEHC"), and related
corporations, filed Chapter 11 petitions in the U.S. Bankruptcy Court for the
District of Delaware. Over a period of several years, Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJSC") provided investment banking services
to Ameriserve and NEHC, including participating in the distribution of their
securities. A Donaldson, Lufkin & Jenrette, Inc. ("DLJ") merchant banking
affiliate was for a time an investor in Ameriserve, and an employee of DLJSC and
an employee of a DLJ merchant banking affiliate were members of the board of
directors of Ameriserve. In the Bankruptcy Court proceedings discovery has been
sought from DLJ and its affiliates in connection with their relationships with
these companies. In addition, the staff of the Securities and Exchange
Commission has issued an informal request for information, and the U.S.
Attorney's Office for the Eastern District of New York has issued a grand jury
subpoena requesting information. DLJ and its affiliates are cooperating with
these discovery requests. No claim has been brought against DLJ or its
affiliates to date.
Between September 1995 and October 1998, DLJSC was named as a defendant in six
separate actions filed by institutional investors who invested and lost
approximately $300 million in three hedge funds (the "funds") managed by David
Askin ("Askin"). The funds filed for bankruptcy in April 1994. All six
complaints have been consolidated for discovery purposes and are currently
pending in the U.S. District Court for the Southern District of New York. The
defendants are Askin, Askin Capital Management ("ACM", Askin's management
company), and two securities dealers (including DLJSC) that sold collateralized
mortgage obligations to the funds. The only claim against DLJSC that has
survived a motion to dismiss is aiding and abetting common law fraud. The
complaints allege that DLJSC aided and abetted an alleged fraud of the investors
by Askin and ACM by selling securities that were inconsistent with the funds'
investment objectives and by providing inaccurate monthly mark-to-market prices
for securities purchased by the funds. The actions seek joint and several
recovery of rescissionary, compensatory, and punitive damages. DLJSC's motion
for summary judgment on the plaintiffs' claims is currently pending. DLJSC
itends to defend itself vigorously against all of the allegations contained in
the complaints.
37
In August 1997, DLJSC was named as a defendant in another action arising out of
the bankruptcy of the funds described in the prior paragraph. This action was
brought by the "Litigation Advisory Board," an entity created by the funds' plan
of liquidation to pursue all unresolved claims held by the funds. The action is
currently pending in the U.S. District Court for the Southern District of New
York. The only claims against DLJSC that have survived a motion to dismiss are
for breach of contract. Generally, the lawsuit alleges that the funds were
damaged when DLJSC issued allegedly improper margin calls and liquidated the
funds' reverse repurchase positions at less than fair market value. The
complaint alleges that the funds' investors lost over $400 million in equity,
but does not specify the amount of damages that the funds themselves claim to
have suffered as a result of the allegations made in this complaint. DLJSC
intends to defend itself vigorously against all of the allegations contained in
the complaint.
Although there can be no assurance, DLJ's management does not believe that the
ultimate outcome of the matters described above relating to DLJSC 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.
38
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of the Holding Company's shareholders held on May 17,
2000, the 19 nominees listed below were elected as directors of the Holding
Company to hold office until the 2001 annual meeting and until their successors
shall have been elected and qualified. In addition, at such meeting, the Holding
Company's shareholders ratified the appointment of PricewaterhouseCoopers LLP as
the Holding Company's independent accountants and approved an amendment to the
Holding Company's restated certificate of incorporation to increase the number
of authorized shares of Common Stock to 2 billion.
The number of votes with respect to each of these matters was as follows.
(a) Election of Directors:
Name Votes For Votes Withheld
Claude Bebear 375,725,685 988,614
John S. Chalsty 373,800,158 2,914,141
Francoise Colloc'h 375,727,843 986,456
Henri de Castries 375,729,356 984,943
Claus-Michael Dill 374,959,973 1,754,326
Joseph L. Dionne 375,712,678 1,001,621
Jean-Rene Fourtou 375,725,223 989,076
Donald J. Greene 373,787,583 2,926,716
Anthony J. Hamilton 375,557,980 1,156,319
John T. Hartley 375,683,846 1,030,453
John H. F. Haskell, Jr. 375,537,696 1,176,603
Michael Hegarty 375,737,228 977,071
Mary R. (Nina) Henderson 375,726,047 988,252
W. Edwin Jarmain 375,711,641 1,002,658
Edward D. Miller 375,728,552 985,747
Didier Pineau-Valencienne 375,518,541 1,195,758
George J. Sella, Jr. 375,679,047 1,035,252
Peter J. Tobin 375,735,958 978,341
Dave H. Williams 375,728,245 986,054
(b) Ratification of the Appointment of PricewaterhouseCoopers LLP as
Independent Accountants:
Votes For Votes Against Abstentions
--------- ------------- -----------
376,210,708 267,847 235,744
(c) Approval of an amendment to the Holding Company's restated certificate of
incorporation to increase the number of authorized shares of Common Stock
from 500 million to 2 billion:
Votes For Votes Against Abstentions
--------- ------------- -----------
323,121,779 52,971,727 620,793
This amendment became effective in May 2000.
39
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 3.4 Amendment to the Restated Certificate of
Incorporation dated May 19, 2000.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On July 24, 2000 the Holding Company filed a Current Report
on Form 8-K reporting recent developments.
On August 1, 2000, the Holding Company filed a Current
Report on Form 8-K attaching certain exhibits relating to
the July 2000 Senior Debt offering.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, AXA
Financial, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: August 10, 2000 AXA FINANCIAL, INC.
By: /s/Stanley B. Tulin
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Name: Stanley B. Tulin
Title:Vice Chairman of the Board and
Chief Financial Officer
Date: August 10, 2000 /s/Alvin H. Fenichel
------------------------------------
Name: Alvin H. Fenichel
Title:Senior Vice President and
Controller
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